Report No. 529a-TU FILE COPY Appraisal of Turkiye Sinai Kalkinma Bankasi A.S. Turkey December 20, 1974 Industrial Credit and-Development Finance Companies Division Regional Projects Department Europe, Middle East, and North Africa Region Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS Prior to Auggst 9,1970 US $1.00 = LT 9.00 LT 1.00 US $0.11 August 9, 1970 to December 22, 1971 US $1.00 LT 15.00 LT 1.00 = US $0.067 December 22, 1971 to May 14,, 1974 US $1.00 = LT 14.00 LT 1.00 US $0.07 May 14 - September 20, 1974 US $1.00 = LT 13.50 LT 1.00 - US $0.074 After September 20, 1974 US $1.00 = LT 13.85 LT 1.00 = US $0.072 LIST OF ACRONIMS AND ABBREVIATIONS TSKB Turkiye SinaiKalkcinma Bankasi (Industrial Development Bank of Turkey) SYKB Sinai Yatirim ve Kredi Bankasi (Industrial Investment and Credit Bank) DYB Devlet Yatirim Bankasi (State Investment Bank) SPO State Planning Organization SEE State Economic Enterprises EIB European Investment Bank KfW Kreditanstalt fuer Wiederaufbau US AID United States Agency for International Development APPRAISAL O(F TUkKIYE SINAI KALKINMA BANKASI A.S. TURKEY TABLE OF CONTENTS Page No. BASIC DATA ........ ............................... a - e SUMMARY AMD CONCLUSIONS ............ .. ............ i-ii I. INTRODUCTION ..................................... II. 'lE ENVIRONIENT ...................................1 A. The Economy ... .. 1 B. The Industrial Sector .. ............ 2 C. Financial Community ................... ...... 3 D. The Development Plan (1973-77) and Prospects. 5 III. TSKB'S STRUCTURE . .................... ........ .... 7 A. Ownership and Control ....................... 7 B. Management and Staff ........................ 7 C. Policies and Procedures ..................... 8 D. Promotion and Research Program .... .......... 10 IV. TSKB'S OPERATIONS ................................ 10 A. Summary ..................................... 10 B. Lending Operations ..... ..................... 11 C. Interest Rate ...... ......................... 12 D. Equity Investments ............ .. ............ 14 E. Economic Impact ...... ....................... 14 V. TSKB'S FINANCIAL SITUATION ....................... 15 A. Resource Position ............. .. ............ 15 B. Quality of Portfolio ........... .. ........... 17 C. Financial Performance and Position ......... . 18 VI. TSKB'S PROSPECTS ...... ........................... 19 A. The Environment ............................. 19 B. TSKB's Strategy and Forecast of Resources and Operations ............. . 20 C. Projected Financial Situation ............... 22 This report is based on the findings of an appraisal mission to TSKB in May-June 1974, composed of Messrs. Edgar Su, Hans Griesshaber and Philippe Lietard, and subsequent information obtained. TABLE OF CONTENTS (Continued) Page No. VII. THE PROPOSED LOAN - OBJECTIVES AND JUSTIFICATION 23 VIII. RECOMMENDATIONS AND UNDERSTANDINGS REACHED ........ 24 LIST OF ANNEXES 1. Incentives to Industry 2. Cost of Capital to Industry in Turkey 3. Map of Turkey 4. List of Shareholders as of March 15, 1974 5. List of Board tiembers, April 1974 6. Organization Chart 7. Statements of Policies 8. Summary of Operations, 1970-73 and Jan.-March 1974 9. Loan Approvals by Industry, 1970-1973 and Jan.-March 1974 10. Gross Approvals of Loans by Size, 1970-1973 and Jan.-March 1974 (with breakdown of new and old clients) 11. Geographical Distribution of Loan Approvals, 1970-1973 and Jan.-March 1974 12. Resources as of March 31, 1974 13. Outstanding Loan Portfolio by Industry, March 31, 1974 14. Equity Portfolio, March 31, 1974 15. Arrears, December 31, 1970-1973 and March 31, 1974 16. Income Statements, 1970-1973 and Jan.-March 1974 17. Balance Sheets, December 31, 1970-1973, and March 31, 1974 17a. TSKB's Strategy, 1975-1976 18. Forecast of Operations, 1974-1979 19. Projected Income Statements, 1974-1979 20. Projected Balance Sheets, 1974-1979 21. Projected Cash-Flow Statements, 197h-1979 22. Projection Assumptions 23. Schedule of Estimated Disbursements of the Proposed Loan -a- BASIC DATA ON TURKIYE SINAI KAIthMA BANKASI A.S. TURKEY Year of Establishment: 1950 Ownership (as of March 31, 1974) LT million % of total Domestic 167.7 86.7 IFC 20.9 10.8 Other Foreign 4.8 2.5 Total 193.4 100.0 Resources Positions (as of March 31, 1974) LT million Domestic Currency (net of repayments) - --- Equity 4I1.7 Quasi-Equity 368.1 Government Loans 111.0 Bond issues 50.0 Total Domestic Currency Resources 940.8 Outstanding Portfolio (before provisions) LT Loans 564.5 Equity Investments 169.1 Temporary, Investments 58.9 Total 792.5 Balance available on disbursement basis 148.3 on commitment basis 69.7 Foreign Currency (net of repayments) IBRD/IDA/IFC Loans 1,722.0 Other Foreign Borrowings 990.7 Total Foreign Currency Resources 2,712.7 Outstanding Foreign Currency Portfolio (before 2,214.8 provisions) Balance available on disbursement basis 497.9 on commitment basis 153.9 -b- Jan.-March Unit 1972 1973 1974 *.......(million of units),,,,,,, Commi.tments of Loans and Investments Local. currency loans LT million 187.4 155.6 7.9 Foreign currency loans US$ million 28.9 59.3 10.6 Equity investments LT million 41.2 50.8 5.8 Total $ equivalent 44374o- _11_. Loans and Investments Disbursed US$ million 38.7 69.4 14.3 Earnings Records Profits before tax to average total assets % 3.2 3.7 'Profits after tax to average equity % -18.2 20.7 Net profit to year-end capital % 26.3 37.4 Dividends paid to year-end share capital % 15 15 Financial Position (as of March 31, 1974) Total debt/equity ratio 7.8 Debt/equity ratio, as defined in last Bank Loan Agreement (agreed maximum 5:1) 4. Reserves and provisions to loan and investment portfolio 7.0 % Interest Rates and Charges Interest rate on all loans (effective as of Oct.1, 19714) (another 3.5%-25% transaction tax on interest- is borne by borrowers) 14% Commitment charge 1% Service charge on bond issues 2% Bond guarantee fee 1% -c- BASIC DATA ON BANK GROUP LOANS AND INVESTMENTS I. Bank Loans and IDA Credits A. Status of Loans and Credits Status as of Sept. 30, 1974 Loan or Credit Date of Rate of Amorti Amount Amount Amount Amount Number Effectiveness Interest zation of Author- Disbursed Outstand- for Loan ized ing TSKB or ~recL1t-- l.Loans/credits fully authorized .....o..*. (US$ million) .......... Credit No. 33-TU Feb. 27,1963 5 std* 5 5.858 5.858 5.773 66-TU Dec. 1,1964 5P std 5 5.966 5.966 5.966 75-Tu July 9,1965 5- std 10 12.006 12.006 12.006 91-TU Nov. 10,1966 5--62 std 15 18.016 18.016 18.016 Loan No. 34-TU Feb. 28,1951 3-3/L std 9 8.676 8.676 - 85-TU Feb. 17,1954 4-7/6 std 9 8.967 8.967 - 461-T' Nov. 101966 5 -6-- std 10 9.995 9.995 9.243 589-TU May 29,1969 6z std 25 25.o0o 25.000 19.216 713-TU Feb. 9,1971 7% std 40 39.821 39.229 38.237 2.Loans still available for credit Loan No. 873-MU Mar. 21,1973 7^ std 40 38.707 PC.306 25.306 Total 168 173.012 139.019 129.763 B. Summary of Special Features of Loan 873-TU 25% of the spread on Loan No. 873-TU is earmarked in for Special Account for TSKB's Promotional Program. TSKB is required to mobilize Turkish lira resources from the private market either in direct borrowing or in guaranteeing bonds, amounting to at least LT 350 million by December 31, 1974. * Standard, i.e. amortization corresponds to the sum of amortizations of sub-projects. The IDA Credit Amounts shown in this column are original amounts before Dollar devaluations. -d- II. IFC Investments Interest No. of Rate Loan Equity Shares Investment No. Date Approved (%) - - - - US$ No. 64 TU 9/19/63 916,667 15,000 No.122 TU 3/28/67(exercise of rights) - 337,500 4,500 No.149 -'U 3/4/69 (exercise of rights) - 417,222 7,510 No.220 TUJ 4/18,/72(exercise of rights) - 425,607 11,917 No.245 TU 4/26/73 8-7/8 10,000,000 - - Stock Dividends - 4,479 8,962.5 Total commitments 10,000,000 2,101,475 47,889.5 Less : Participations and Sales Fidelity International Corporation - 93,050 1,700 Turkish Market - 273,778 4,480 The Industrial Bank of Japan 5,000,000 - 5,000,000 366,828 6,180 Net IFC Commitments 5,000,000 1,73h,647 41,709.5 Less : Repayments -_- - Held by IFC at September 30, 1974 5,W0,0 1,734,647 41,709.5 Amounts undisbursed at September 30, 1974 Nil Nil Return of IFC Investment to 9/30/74 (US$) Profit on equity investrent Sale of equity 251,324 Cash dividend received 904,240 Commitment fee received to 8/31/74 6,500 Interest to 8/31/74 (including accrued interest from last interest date) 25,_744 1,l190 808 Average annual percentage return on IFC investment to 9/30/74 on equity investment 10.64% on loan(excluding commitment charges) 9.00% on total investment (excluding commitment charges) 10.60% Unpaid amount due to IFC at 9/30/74: None. APPRAISAL OF TURKIYE SINAI KALKINMA BANKASI A.S. TURKEY SUMMARY AND CONCLUSIONS i. Turkiye Sinai Kalkinma Bankasi A.S. (TSKB), the first private devel- opment finance company which the Bank Group helped to establish, has made a major contribution to the industrial development of Turkey. It has effective- ly channelled sizeable local and foreign currency funds to the private indus- trial sector, on the basis of a careful and sophisticated appraisal process. It has already made a great impact on the industries which are concentrated in and around the industrial centers of Istanbul, Izmir and Adana. TSKB has shown continuous growth, at times in a difficult environment, during its 24- year history. At the end of March 1974, TSKB's total assets had reached LT 3.4 billion, with its loan and equity portfolio amounting to LT 2.9 billion. TSKB has an experienced management team and a competent staff. ii. During the First Economic Plan period (1963-67), TSKB financed an average of 10.9% of the private manufacturing investment each year, but its contribution declined to 8.6% during 1968-73, mainly due to limited resources, especially lira funds. In 1968, TSKB started to guarantee bonds issued by industrial enterprises. This has contributed, in some measure, to a broaden- ing of the corporate bond market in Turkey. iii. Since the last Bank loan to TSKB (873-TU) was signed in 1972, TSKB has taken further steps toward achieving geographical diversification of its operations in line with the Government policy of reducing the geographical im- balance in income and employment opportunities. It has opened two additional branch offices - one in Eastern Anatolia and one on the Black Sea. TSKB's Board approved new policy guidelines with a view to intensifying its activities in those regions, and broadening its scope of work nationwide. In January 1974, TSKB was reorganized. Four Regional Departments were set up each having the responsibility for planning and executing TSKB's investment programs in the respective regions. As agreed upon with the Bank, TSKB earmarked 25% of its gross spread on the proceeds of the loan to finance its promotional pro- gram in the underdeveloped regions. While TSKB has taken a little longer than expected to reorient and reorganize itself for diversifying its activities, progress during the first half of 1974 has been impressive. Having gained momentum, its promotional work in the underdeveloped regions is expected to accelerate. iv. TSKB's portfolio is sound. However, under the present tight credit situation, TSKB has encountered mounting difficulties in loan collections: some companies have liquidity problems; also, because of the rigid interest ceiling, TSKB is unable to charge any penalty interest on delinquent loans and a number of its clients are taking advantage of this and delaying repay- ment. TSKB is tightening its collection procedures and hopes that the arrears can be reduced considerably. - ii - v. TSKB's financial performance has been good. After paying a 15% dividend, it has been able to retain more than half of its earnings. Trading of TSKB's shares both in the Securities Exchange and over the counter has been inactive and the average price was at 150% of par value in 1973. vi. As in the past, TSKB's volume of business will primarily be a func- tion of available resources, particularly as regards lira lending. TSKB ex- pects to mobilize, up to December 1976, around US$300 million equivalent in foreign exchange and about LT 1.3 billion in lira. Based on these resource forecasts, TSKB expects to reach a commitment level of LT 1.4 billion in 1974, LT 2.2 billion in 1975 and LT 2.8 billion in 1976. Its anticipated foreign exchange loans from Kreditanstalt fuer Wiederaufbau and the European Invest- ment Bank are likely to total about US$100 million, leaving about US$200 million to be raised from other sources (including IBRD) during the same period. TSKB obtained Government permission in September, 1974 to raise $25 million in the international capital markets and expects to raise an additional $100 million from the same market sources during 1975-76. With respect to TSKB's local currency requirements, it is assumed that it would be able to finance the projected lending and equity investments with self- generated cash flow, together with additional share capital and bond issues of LT 200 million in 1975 and LT 335 million in 1976. These projections are conservative, compared with potential demand. vii. TSKB remains a suitable and creditworthy borrower for Bank funds. The prospects for expanding its volume of business are good, and its role in developing and financing projects in the underdeveloped regions will be in- creasing. It is recommended that the Bank make a loan to TSKB in the amount of US$65 million equivalent, which would enable TSKB to meet approximately one-third of its foreign exchange resource gap in the two-year period ending December 31, 1976. TSKB needs to borrow continually in the international capital markets to meet its remaining resource gap. Under the present mar- ket conditions, IFC's assistance in organizing a consortium for lending to TSKB will be very useful. viii. The terms of the loan should be those normally applied to loans to development finance companies, including the standard commitment charge. ix. Although the interest rate ceilings on lending were revised by the Government in October 1974 and the ceiling on corporate bonds was raised in December 1974, it is still not possible for TSKB to raise funds in the domes- tic capital markets at a positive spread. The Bank should continue its dia- logue with the Government concerning the need to allow sufficient flexibility in the lending rates charged by financial institutions so as to reduce the negative spread on domestic borrowing. APPRAISAL OF TURKIYE SINAI KALKINMA BANKASI A.S. TURKEY I. INTRODUCTION 1.01 Turkiye Sinai Kalkinma Bankasi A.S. (TSKB, Industrial Development Bank of Turkey) was established in 1950. It is the oldest client among the development finance companies (dfcs) associated with the Bank Group, and has received six loans and four credits, totalling US$168 million. IFC became a shareholder in 1963, and presently holds 10.8% of TSKB's share capital. A loan of US$10 million was made to TSKB in 1973 by IFC together with the Industrial Bank of Japan. 1.02 This report appraises TSKB for a new loan. It focuses on TSKB's overall performance and new developments since the previous Bank loan was made in December 1972. Because of the Bank's familiarity with TSKB, history and description are kept to a minimum. A detailed review of the economy of Turkey can be found in "The Economic Development of Turkey", 316a-TU, dated April 22, 1974. The present report is primarily based on the findings of the appraisal mission to TSKB in May-June 1974, composed of Messrs. Edgar Su, Hans Griesshaber and Philippe Lietard. II. THE ENVIRONMENT A. The Economy 2.01 The Turkishi economy has grown at a high rate in recent years. GNl in real terms increased by 10.7% in 1971, 7.6% in 1972, 5.5% in 1973 and an estimated 8.1% in 1974. A low growth in 1973 was caused by severe drought. Lxpansion was particularly rapid in the industrial sector, where annual growth averaged 11.5% during the four-year period. Other sectors recording high growth rates in 1973 included trade, construction, transport and communication. Fixed investment rose in real terms by 14%o in 1973 and an estimated 16% in 1974. 2.02 This favorable development was mainly due to a large increase in domestic demand, stimulated by high levels of investment, workers' remittances and exports--including industrial exports. In 1973, workers' remittances increased by 58%, reaching US$1.2 billion, while total exports expanded at a rate of 49%. Althougii tilis trend has continued in 1974, the growthi rates appear to be muchi lower than in 1973. Workers' remittances are expected to be around 71.5 biilion, only 262. growth over the previous year, and exports around $1.7 billion, only 29% increase over the 1973 level. The rise in ex- ports was due to price increases--export volume actually declined during 1974. (It should be noted, however, that exports still play a minor role in Turkey's economy--about US$1.3 billion or 6% of GNP in 1973.) 2.03 Imports also grew rapidly, resulting in a widening of the foreign trade deficit. Imports grew by 33% in 1973 but are projected to grow by about 70% in 1974, resulting in a large trade deficit in 1974. However, due to the large workers' remittances and tourism earnings in 1973 the current account balance showed a positive amount and in 1974 it is projected to show a small negative amount. Foreign exchange reserves reached an all time high of $2.3 billion in March 1974 compared with $1.4 billion in 1972, but this level was expected to decline by about $400 million by the end of 1974. 2.04 Growth in demand, however, has been more rapid than growth in out- put. As a result, the rate of inflation increased sharply to about 20% in 1973, and continued at a high rate in 1974. To take the pressure off domestic demand, the Government liberalized imports of certain foodstuffs and consumer goods. At the same time, it curbed the export of machinery and some essential raw materials (e.g. cotton yarn, cement, logs). In addition, the Government set up a Price Control Board which must approve all proposed price increases by industrial firms. In May 1974, the lira was revalued against the dollar by 4%Z, the new exchange rate being US$1 - LT 13.50. In September 1974, the exchange rate was changed again, this time to US$1 = LT 13.85. 2.05 In the monetary sector, the Central Bank increased reserve require- ents twice during 1973, from 20% to finally 30%, and suspended its rediscount facilities to commercial banks until April 1974. Furthermore, the new Gov- ernment restricted the approval of suppliers' credits. Commercial banks have fulfilled the requirement that 10% of their portfolio should be in the form of medium-term loans to industry, leaving little scope for fresh funds from this source. These developments and a reduction in budgetary deficits have resulted in a tightening of the money supply in 1974 to an extent unprecedent- ed during the last few years. With a view to enabling the banking sector to mobilize savings more effectively, the Government increased the interest rate ceiling on demand and time deposits by 1/2-2%, effective as of Octo- ber 1, 1974, and allowed the rate on deposits of more than two years to be determined by the banks and depositors. At the same time, the ceiling rate on short-term loans was increased from 10.5% to 11.5%' and that on medium- and long-terni loans from 12% to 14%. The ceiling rate on corporate bond issues was subsequently increased from 15%' to 18,%. B. The Industrial Sector 2.06 Industrial growth has been impressive. Value added in industry grew at an average of 9.8% annually during the Second Plan (1968-72) and an estimated 15% in 1973. The share of industry in GDP rose from about 20% in 1968 to 23% in 1973. More spectacular has been the rise of industrial invest- ment in the private sector. Private fixed capital formation in manufacturing increased in real terms by 8.7% in 1971, 21% in 1972, and an estimated 41% in 1973. In current prices, private industrial investment increased from LT 6.5 billion in 1972 to an estimated LT 10.9 billion in 1973, whereas public in- vestment in mLanufacturing stagnated in 1973 at a level of LT 5.9 billion 1/. 1/ The share of the State Investment Bank (DYB) in financing public indus- trial investment increased, however, by 15% in 1973. 2.07 The acceleration of private investment in the industrial sector was stimulated by relatively high protection 1/ and generous incentives (Annex 1). As an associate member of EEC, Turkey agreed to eliminate customs duties over 12 years for a list of goods amounting to about 55% of total imports from EEC and consisting largely of raw and intermediate materials. For the remaining list of goods, which includes most industrial products, tariffs wil be elimi- nated over a period of 22 years (beginning 1970), so that the effect on Turkish industry will be small in the short run. C. Financial Community 2.08 Industrial Finance. TSKB was the only institutional source of medium- and long-term finance for private industrial investment until 1963, when the Industrial Investment and Credit Bank (SYKB) was established by, six major private commercial banks. SYKB provides primarily medium-term finance to meet working capital needs. In recent years, an increasing por- tion of its resources has been used for investment credit, though compared with TSKB it plays only a limited role, especially as a source of foreign exchange (obtained from USAID). 2.09 Resource mobilization for the development of private investment in industry has continued to be a major problem, which has been aggravated since 1973 by the sharp rise of inflation. TSKB will find it more difficult to meet demands for its funds unless it is allowed to have access to suffi- cient resources both in the domestic and the international markets and to re- lend such resources at interest rates which can cover their costs. Further discussions on TSKB's resource problem are in paras. 4.07-4.09 and 5.01-5.05. 2.10 A major part of private investment in manufacturing is financed by increase in equity. The financing pattern for private fixed investment in industry has roughly the following structure: internal resources and un- organized money market 65%, long-term loans from TSKB and SYKb 10-12%, for- eign direct investment and suppliers' credits 10-15%, commercial banks 6-8%, and corporate bonds 3-5%. 2.11 In 1973, TSKB's disbursements corresponded to about 9% of the total private fixed industrial investment of some LT 11 billion in that year, and this share has tended to drop slightly over time from a level of over 10% during 1963-1968. As a source of foreign exchange, TSKB is more prominent, its share amounting to 18% in 1973 with a high of 21% in 1970. 1/ In 1972 the average import taxes and duties amounted to approximately 40% of import value. -4- 2.12 Institutional Arrangements. Maximum interest rates have been fixed by the Government both for credits and deposits. For medium- and long-term loans in domestic as well as foreign currency, the interest rate ceiling, which had been 12% since the lira devaluation in 1970, was increased to 14% as of October 1, 1974 (see Annex 2 for information on the cost of capital to industry after the increase). On the other hand, in tapping local resources, financial institutions (and corporations) may now pay up to 18% interest on bond issues. Costs rise to 18.7% if all expenses related to bond issues are included, re- sulting in a minimum negative spread of 4.7%. The net yield (after withholding tax of 20%) to bond buyers amounts to 14.4%. This is still not considered a very attractive yield to the general public, but TSKB expects to be able to place a very substantial volume of its bonds with institutional investors. 2.13 Since inter-bank transactions are subject to a transaction tax of 25%, the costs of any borrowings by TSKB from the banking system would also be higher than the new maximum lending rate of 14%. 2.14 Borrowings from commercial sources abroad are subject to a 20%. with- holding tax and 3% fiscal equilibrium tax. Depending on the conditions pre- vailing on the international capital markets, these taxes at times must be absorbed by the Turkish borrowing institution. At the present high interest level abroad and given the lending rate ceiling, it may not be possible for TSKB to maintain a significant positive spread. 2.15 The Capital Market. Apart from Government bonds, the only long- term, fixed interest financial instrument available in Turkey is corporate bonds. TSKB took a lead in guaranteeing bonds in 1968 and the following few years when it was recognized that this new market would only be successful in attracting capital if corporate bonds were guaranteed by prestigious fi- nancial institutions. 2.16 The total value of annual issues of corporate bonds has grown rapidly since 1968, reaching LT 560 million in 1973 and LT 282 million dur- ing the first five months of 1974. The market, however, is still fairly thin. TSKB started to issue bonds itself (at the previous maximum interest rate of 15%), with an issue of LT 50 million (9% of the value of total issues) in 1973 and LT 50 million in April 1974. Another LT 100 million will be issued by TSKB by the end of 1974, in line with the understanding reached for the 1973 Bank loan. 2.17 The share of bond issues guaranteed by TSKB, other banks and hold- ing companies has declined noticeably since 1968. While in 1968, virtually all bond issues were guaranteed, the share of guaranteed bonds dropped to 68% in 1973 and 57% in the first five months of 1974 in terms of value, with a similar development in terms of number of issues. This is apparently due to a growing public confidence in the large and well established corporations making use of the bond market as well as to the high guaranteeing and under- writing costs to the borrower. - 5- 2.18 Government bonds yield an interest of only 11%, but have the advan- tage that interest payments are tax-free. Government bonds further enjoy a captive market with banks and social security organizations. In 1972, long- term Government bonds issued totalled about LT 4 billion, the bulk of which was issued by the public sector dfc, DYB. 2.19 The market for corporate stock is not yet well developed. Most of the capital of joint stock companies is controlled by families or by a small number of shareholders. Fresh capital is usually raised from existing owners. TSKB, which attempts to revolve its equity portfolio, was the main supply of private corporate stock for individual savers until 1973. 2.20 The situation changed when the bond market started to suffer from the tight money policy and the rising inflation. In view of the interest ceiling on bonds, the public shifted to higher yielding securities, i.e. shares in holding companies and others. In the first five months of 1974, share issues offered to the public exceeded LT 1.2 billion. Not all issues, however, could be sold, the successful issues amounting to about two-thirds of total issues in terms of value. D. The Development Plan (1973-77) and Prospects 2.21 Major Goals. Like its predecessors, the Third Plan places heavy emphasis on industrialization, particularly on the promotion of intermediate and capital goods industries. A restrictive attitude is taken with respect to foreign direct investment, which would be allowed only when it provides new technology. 1/ The Plan assigns a substantial role to the private sec- tor within a gradually less protected environment, as the country moves to- ward full membership in the EEC. To narrow the regional imbalances, the Plan proposes the development of 36 provinces and 50 districts identified as the poorest ones (see map, Annex 3), mainly through modernization of agricultural production, expanded public investment, and promotion of private investment. 2.22 The Plan provides for a GNP growth of 8% annually. Industry is expected to grow at 11.3% per annum, raising its share in GDP from the present 23% to 27% by 1977. Total investment is projected to grow at a target rate of 12.7% per annum and private investment at 12.1%, with the share of public in- vestment in the total rising from 52% in 1972 to 56% in 1977. The basic prin- ciple in investment policy set out in the Plan is that the State will undertake high priority investments (mostly those introducing new technology or providing substantial external economies) in areas where, because of long gestation pe- riods, high capital requirements, or high risks, the private sector does not venture, even when provided with reasonable inducements. On the other hand, the Plan specifies that State Economic Enterprises (SEEs) will not invest in new activities where the private sector has been successful. 1/ In 1973, foreign investment amounted to US$83 million or 10% of private industrial investment. - 6 - 2.23 The Plan continues to emphasize the growth of output and labor pro- ductivity rather than employment. As a result, the labor surplus, including underemployment in agriculture (estimated at 11 to 12% of the labor force in 1973) will further increase. This trend is aggravated by the recent ban on emigration of workers to Germany. 2.24 Exports are projected to grow at 10% annually and industrial exports at 21%. But in the light of recent experience indicating a growth in indus- trial exports of more than 90% in 1973, exports of manufactures probably will increase faster. The major increases in industrial exports are expected in textiles, processed forest products, petrochemicals, leather products, elec- trical machinery, and non-ferrous metals. 2.25 Prospects. On the whole, the targets of the Third Plan are realis- tic. But there are several snags. The supply of power has not kept pace with the fast growing demand. Even with the additional capacities expected, the system will be strained until 1978. The shortage of skilled labor and man- agerial staff could also become a constraint in the fulfillment of the Plan's industrial targets. Also, the need to contain the increasing inflationary pressure may necessitate restrictive monetary and fiscal policies on public and private investment. The comfortable foreign exchange position affords the Government flexibility in combating inflation. However, the rise in oil prices may increase Turkey's net oil import bill by US$300 million in 1974 alone. Furthermore, the German ban on additional immigration may slow down exchange earnings from this source. Finally, the financing of the Plan's ambitious public investment program will require fiscal reforms and a substantial im- provement in the financial performance of the SEEs, which is difficult to achieve. 2.26 The coalition Government formed in January 1974 did not change the overall growth targets of the Development Plan. The Government did not define its policy towards the private industrial sector, aside from placing high priority on correcting regional disparities. Lately the issue of investment incentives has in principle been limited to industrial projects in the less developed regions. Moreover, the Ministry of Industry is in the process of establishing a Research and Planning Department with a view to identifying investment opportunities for medium-sized projects. For their financing, it is intended to mobilize savings of returning migrant workers and funds from compensation for Government expropriation of land in Eastern Anatolia in connection with the construction of the Keban Dam. Furthermore, in April 1974, the Central Bank started rediscounting industrial bills (up to five years), again under a new scheme which is expected to help ease the tight credit sit- uation. An amount of LT 1.5 billion has been earmarked for 1974. The com- mercial banks and dfcs can utilize the rediscount facilities, withi the former limited to their total equity and no limit for the latter. The Central Bank rediscounts the bills up to 50% for projects located in less developed regions and 30% for those in developed regions. In the short run, this would make it possible for TSLB to roll over part of its portfolio. -7- III. TSKB'S STRUCTURE A. Ownership and Control 3.01 Shareholders. Since TSKB's share capital increase in 1972, there has been no major change in the ownership structure. A list of TSKB's share- holders is in Annex 4. Turkiye Is Bankasi remains the largest shareholder, holding 20.8% of the total. The five registered foreign shareholders hold 13.3% of the total. IFC is the second biggest shareholder with 10.8% of the total. 3.02 Board. A list of Board members is shown in Annex 5. In March 1974, Mr. Ferid Basmaci, Chairman of the Board since February 1969, resigned and Mr. Selahattin Karahan, General M4anager of Turkiye Is Bankasi, was elected as the new Chairman. He is considered to be a highly competent banker. The terms of all Board members will expire in MIarch 1975. B. Management and Staff 3.03 With a view to broadening its scope of activities, particularly in less developed areas, TSKB's organizational structure underwent a major change on January 1, 1974. TSKB's organization chart is attached as Annex 6. 3.04 The new structure establishes four Regions: (1) Northwestern Anatolia, (2) Southwestern Anatolia, (3) Central Anatolia, and (4) Eastern Anatolia. Their geographical boundaries are shown in Annex 3. Each Regional Department is headed by a Department Manager, under whom two Project Managers supervise the financial analysts. The Regional Department Managers are re- sponsible for planning and executing TSKB's investment programs in their re- spective areas. The engineers and economists are grouped separately in the Engineering and Research Departments, and are assigned temporarily to the Regions for appraisal or end-use work. Most of the other departments have remained unchanged. Experience in the first half of 1974 indicates that the reorganization had been effective and beneficial, but it is too early for a full assessment (see para 3.11). 3.05 In May 1974, three new Assistant General Managers were appointed to exercise supervision over (1) Resources, Accounting and Disbursements; (2) Research; and (3) Loans and Investments, respectively. Mr. Eroguz was promoted to Senior Assistant General Manager, having broad responsibilities in the new management structure. Mr. R. Egeli, who has been associated with TSKB since its founding, continues to serve as the General Manager. With the participation of the three new Assistant General Managers in high-level dis- cussions on policy and operational matters, the decision-making process of the management team is expected to be strengthened and accelerated. To reinforce the regionalization work, TSKB has opened two new regional branches in addition to the existing branches in Adana and Izmir: in Elazig (March 1973) and Samsun - 8 - (February 1974). At present, the staff strength of the regional branch offices is inadequate. Based on the needs of each branch office, additional staff should be assigned on a permanent basis. TSKB is reviewing the need, and will take the necessary action to strengthen its branch offices. 3.06 TSKB has a staff of about 265, of whom 38 are managers, 78 "pro- fessionals", 92 administrative and clerical staff, and 57 general services personnel. This represents an increase of 18% over the staff strength at the end of 1972. The recent organizational and personnel changes are expected to boost morale and keep the staff turnover at its past low level. TSKB has built up a highly competent staff, with a degree of professionalism that many other dfcs have yet to attain. The relatively high level of TSKB's administrative expenses (1.4% of average total assets in 1973) is partly explained by the competitive salaries paid to its staff members. C. Policies and Procedures 3.07 Policy Statement. TSKB's Statement of Policies is in Annex 7. TSKB operates almost exclusively in the industrial sector. Until recently, it has interpreted its policy limits conservatively. It accepts applications above US$50,000 for foreign currency loans and above LT 200,000 for local currency loans and gives careful consideration to economic merits as well as the financial soundness and profitability of the projects it finances. On September 21, 1973, TSKB's Board amended the Policy Resolution adopted in March 1963, and stated that TSKB's maximum equity investments could be in- creased from the previously established LT 175 million up to its paid-in share capital and reserves (LT 376 million as of March 31, 1974). 3.08 A major change since last appraisal was the adoption on October 19, 1973 of the new Operational Policies, which resulted in the reorganization described in paragraph 3.04. The new policy guidelines focus mainly on: (a) the promotion of investments in less developed areas of Turkey, and assistance to potential entrepreneurs in project identification, preparation, and financ- ing (including joint financing); (b) the close follow-up of sector and sub- sector developments and the making of investment estimates for these sectors; and (c) a broadening of TSKB's scope of financing to include tourism and serv- ices. Further elaborations of these policy guidelines were approved by TSKB's Board on June 7, 1974, assigning priority in TSKB's resource allocation to industrial investment in the underdeveloped regions, and limiting its lending operations in the developed areas to enterprises which have no other means of securing resources domestically or abroad. 3.09 TSKB has expressed firmly to the Bank, both before and during nego- tiations, its objective of allocating, during 1975-1976, as much of its re- sources in the less developed regions as that invested in the developed re- gions. A formal policy resolution to this effect was adopted by TSKB's Board on December 12, 1974 (Annex 7). - 9 - 3.10 Relations with Government. TSKB's relations with the Government center on contacts with the State Planning Organization (SPO), the Ministry of Industry and Technology, and the Ministry of Finance. SPO is closely in- volved with overall industrial investment in the public and private sectors. The Ministry of Industry and Technology's approval is required for incentives available for industrial projects. TSKB's assistance in securing the incen- tives for its clients has not been necessary, since the sponsors of industrial projects have been able to obtain it directly. In the future, TSKB's role is expected to increase with regard to the projects identified and/or designed by its promotional staff in underdeveloped regions. 3.11 Project Appraisal. Since the reorganization in January 1974, appraisal teams have been constituted for each project, under the supervi- sion of the Project Manager of the relevant Region. Each team consists of one engineer from the Engineering Department, one economist from the Research Department, and one financial analyst from the Regional Department. Under the old structure, all appraisal staff belonged to one department, called "Project Appraisal Department." The efficiency of the decentralization of team work has not yet been clearly demonstrated, but is being closely watched by the management. Moreover, the recent series of promotions left a vacuum at the working team level, which may affect the efficiency and quality of work until new staff are recruited and corrective steps are taken. 3.12 The quality of project appraisal remains high. TSKB makes in-depth assessments of the economic, marketing, technical and financial aspects of the projects; technology, type of equipment, financial plan and economic vi- ability are carefully checked by the relevant team members. In January 1974, TSKB started to calculate the economic rate of return on all new projects, and on large expansion projects. This replaced the calculation of effective rate of protection which TSKB had been using in evaluating the economic merit of its projects for the past three years (see paras 4.17-4.21). TSKB helpF entrepreneurs to overcome problems encountered in loan application, planning, implementation and operation of the projects. In the past, TSKB has not focussed on the employment effects of its projects, since most of them are in industrialized regions and are capital intensive. As TSKB moves to the underdeveloped areas, it should try to consider this factor. 3.13 Rapid increases in prices of imported machinery and in local con- struction costs have resulted in frequent cost overruns. TSKB's appraisal takes into account recent price trends in its cost estimates. But contin- gencies are often inadequate. Given the present inflationary situation, this matter deserves more attention by TSKB than in the past. 3.14 Procurement and Disbursement. TSKB's procedures for guiding and controlling procurement by its clients seem appropriate and contribute to the overall quality of TSKB projects. In many cases, TSKB provides sponsors with information on the best sources of procurement, which has resulted in significant savings. Overall, disbursement procedures are satisfactory. - 10 - 3.15 Project Supervision. The Follow-Up Department under the old set- up had been considered a useful tool to TSKB's management, and its end-use reports were an important source of information about TSKB's clients and operations. As a result of the recent reorganization, the Follow-Up Depart- ment has been dismantled and the responsibility for end-use work distributed among the four Regional Departments. The end-use procedures followed by TSKB during the past eight years are being revised. TSKB will attempt to collect additional information from its clients to facilitate its future sector studies. While the reorganization was taking effect, TSKB's end-use work appeared to be weakened. TSKB's management has recognized this and is making a great effort to put the end-use system on a sounder and more efficient basis. Preliminary plans are satisfactory but the Bank will continue to press TSKB in the direc- tion of a thorough supervision of its clients. D. Promotion and Research Program 3.16 Under the last Bank loan, TSKB undertook to strengthen its promo- tional efforts in the less developed regions. Progress was slow at first but gained momentum after TSKB's reorganization in January 1974. As agreed upon with the Bank, TSKB has been assigning 25% of the spread on the last Bank loan to a Special Promotion Account to finance its promotional activities. As of July 31, 1974, approximately LT 3 million had been allocated to the Account, against which LT 700,000 had been committed and LT 312,000 disbursed. This has been used to finance pre-investment studies, special research and sub- sector studies. For 1974 as a whole, TSKB expects to spend LT 1.6 million under the Special Promotion Account, to identify 15 to 20 new projects which require pre-feasibility studies, most of which are under preparation. 3.17 TSKB is continuing to expand its promotional operations in the under- developed regions of Turkey. The comprehensive 1974-1977 promotion program consists of sector studies, research on various subjects including agriculturai wastes, and feasibility studies on agro-based and other types of projects. Arrangements for the studies and research are under way, and foreign consultants will be engaged when local expertise is unavailable. According to TSKB's es- timates, promotional expenditures will amount to about LT 29 million (US$2.1 million equivalent) in the four-years 1974-1977. The allocation provided under the last Bank loan would amount to $1.76 million during the same period, and TSKB can cover the balance from its ordinary administrative funds. The Bank will review TSKB's promotion program and its funding from time to time. IV. TSKB'S OPERATIONS A. Summary 4.01 A summary of operations for 1970-1973 and the first three months of 1974 is given in Annex 8. TSKB's overall operations reached a record peak in 1973, but declined sharply in the first quarter of 1974. Since local cur- rency resources could not be replenished, TSKB decided to stop all its lira lending in the developed regions toward the end of 1973. - 11 - 4.02 TSKB's total commitments in 1973 including bond guarantees (para 5.03) amounted to LT 1.1 billion, representing an increase of 64% over 1972 and 198% over 1971. The commitments amounted to LT 172.1 million equivalent in the first quarter of 1974, representing a decline of 36% on an annual basis. Lira lending reached the lowest level in many years. In the period from January 1, 1973 through March 31, 1974, foreign currency loans represented the bulk of the commitments (78.2%) while local currency loans accounted for 13.1% of the total. Equity investments and guarantee of bond issues accounted for 4.5% and 4.2% of the total operations, respectively. Disbursements reached LT 979.2 million in 1973, a record level, but in the first quarter of 1974, total amount disbursed corresponded to only 20% of the total disbursements in 1973. Tentative data on TSKB's operations for the first eight months showed that the declining trend continued. The foreign currency loan commitments in January-August 1974 amounted to $28.8 million, compared with $59.3 million for the entire year 1973, a decline of 27% on an annual basis. Local currency loan commitments dropped more sharply, 55%, from LT 155.6 million in 1973 to LT 46.8 million in the first eight months of 1974. Equity investments amounted to LT 53.6 million, which approximated the level reached during the entire year 1973. B. Lending Operations 4.03 TSKB's foreign exchange lending reached LT 830 million on commit- ment basis in 1973, which was more than twice the level for 1972 and four times the level for 1971. Local currency loans, however, amounting to LT 155.6 million in 1973, declined to 17% from the previous year. Lending operations for the first three months of 1974 show an even further decline. 4.04 Analyses of the characteristics of loans approved in terms of type of industry, size and geographical distribution are included in Annexes 9, 10 and 11. The following facts are significant: (a) TSKB's lending operations in 1973 and the first quarter of 1974 were well diversified among various industries. From January 1970 to March 1974, the four largest beneficiaries of TSKB's loans were the textile industry (34%), the chemical industry (14%), the food and beverage industry (10%), and metal products (7%). Twenty-one other industrial categories received less than 5% of TSKB's total financing. (b) The average size of TSKB's loans approved continued to increase, from LT 4.8 million in 1970 to LT 11.7 million in 1973, partly due to the rapid growth in size of the industrial projects im- plemented by the private sector. Only 18% of all loans were under LT 5 million in 1973, compared with 27.7% in 1970. This is partly attributable to the fact that industrial firms are now able to obtain some foreign exchange from Government allocations for replacement of worn-out equipment, instead of relying entirely on TSKB for foreign exchange financing, as was the case in previous years. - 12 - (c) In 1973, 70% of TSKB's loans were for financing of expansion or modernization projects, compared with 37% in 1971 and 1972. Conversely, 31% of TSKB's loans were extended to 40 new companies or existing clients for initiating new products, compared with an average of 63% in 1971 and 1972. While the future trend is not accurately predictable, it is clear that the number of new companies and new projects will increase as the promotion pro- gram is accelerated. (d) Concentration of investments in the Marmara Sea region, includ- ing Istanbul, had been a characteristic of TSKB's business in past years; this has been changing gradually. Loans approved in the Marmara Sea region accounted for 85% of the total in 1970, and 64% in 1973. 4.05 The 1974 Annual Program prepared by SPO includes a list of provinces or districts designated as "underdeveloped", the remaining part of Turkey being considered as "developed." The definition is based on a composite index of social and economic development. Moreover, four provinces (Edirne, Elazig, Gaziantep and Malatya), though "developed," will continue to be regarded as "underdeveloped" provinces for the applications for incentives to be submitted before the end of 1976. The map of Turkey in Annex 3 shows the underdeveloped areas of Turkey as defined by SPO. Though geographical distribution does not exactly coincide with the four TSKB regions, TSKB Regions III and IV (Central and Eastern Anatolia) are largely less developed. 4.06 In 1972, 14% of commitments of loans and equity participations were in regions considered by SPO as underdeveloped or eligible for incentives. In. 1973, the share of TSKB's involvement in the underdeveloped regions dropped to 9.7% due to its financing of a number of large projects in the developed regions. In the first quarter of 1974, the situation changed radically: 32% of loans and equity participations already committed were in the underdeveloped areas, and this percentage is estimated to reach 47% for the entire year of 1974; TSKB's share in the total cost of the projects is higher in the under- developed than in the developed areas--47.4X0 versus 27.4%; 51% of the projects financed by TSKB in underdeveloped areas are in the food or textile sectors. C. Interest Rate 4.07 TSKB has always charged the maximum interest rate on long-term lend- ing allowed by the Turkish Government. From November 1970 through September 1974, TSKB charged interest at 12% p.a. on both foreign and local currency loans. On October 1, 1974, TSKB increased its lending rate to 14%, following the Government's new decree on interest rates. TSKB's sub-borrowers of foreign currency funds have been assuming the foreign exchange risk and this arrange- ment is not likely to change in the near future. While the regulated interest rate on long-term loans in Turkey has always been below the equilibrium market rate, the subsidy element in TSKB's lending rate on foreign currency loans, which constituted 78% of its overall lending operations during 1970-1973, is - 13 - substantially smaller than the subsidization implied in its local currency lending. TSKB has been allowed to maintain a spread of 4-1/2% on the subordi- nated loan from the Government and a 2-1/2% spread on funds from the European Investment Bank (EIB), Kreditanstalt fur Wiederaufbau (KfW), and the United States Agency for International Development (USAID). The Government has set no limit on the spread on Bank funds. In view of the large spread on the last Bank loan (4-3/4%), TSKB and the Bank had agreed that TSKB would set aside 25% of the spread on loan for promotional expenses, and that TSKB would float domestic bond issues of LT 200 million at negative spreads in 1973-1974. As a result, TSKB's spread on all its resources has been reduced from 3.9% to around 3.6%. Taking into account all new loans obtained in 1974, the average spread is around 3.2%. 4.08 Impact of New Rate on Lira Borrowing.- TSKB has been unable to raise sufficient lira funds to meet the investment demand (paras 2.12, 2.16 and 5.03). The increase in TSKB's lending rate from 12% to 14% in October enhanced TSKB's ability to support higher cost of floating lira bonds. On the other hand, the recent increase from 15% to 18% for domestic bond issues should have a positive effect. This still involves, however, a negative spread on lira transactions. While TSKB agreed to issue bonds at a negative spread during 1973 and 1974 as one of the conditions of the last Bank loan, this was a stop-gap measure. Bank loans should not become a means of subsidizing TSKB's floating of lira bonds at negative spreads. The net spread accruing to TSKB under the proposed Bank loan will be limited to 2-1/2% and the balance (3-1/2%) will be paid to the Government as guarantee fee. Should TSKB continue to incur losses in raising funds by bond issues, the average spread on all resources in use must nevertheless continue to be a "reasonable" one, without over-reliance on one particular source of funds, such as Bank loans. An "average-spread" formula can be justified if there are no excessive distortions between borrowing and lending rates. TSKB is planning to raise bond issues for about LT 535 million in 1975 and 1976 and is hopeful that the Government will make further changes in its lending rate possible. Until this happens, however, TSKB will continue to incur a negative spread in relending the pro- ceeds of its lira bond issues. 4.09 Impact of New Rate on Foreign Exchange Borrowing. On foreign ex- change loans extended against resources from EIB and KfW, TSKB's spread was not affected by the change in lending rate because it has been allowed to earn a fixed net spread of 2-1/2%. And, since a very small balance was left in the last Bank loan when the new interest rate of 14% was put into effect, TSKB's additional gain on Bank funds is negligible. With respect to funds to be raised in the international capital markets, the cost is now so high that TSKB may only be able to borrow in these markets at a zero spread or at a negligible positive spread, given the lending rate ceiling of 1b%. As detailed in para 6.06, TSKB would in any event have to seek foreign exchange financing from as yet unidentified sources to meet part of the financing de- mand over the next two years. In September 1974, the Government gave TSKB permission to raise $25 million equivalent in the international capital markets, subject to the Government's agreement on terms and conditions. IFC has been asked by TSKB to organize a consortium with financial institu- tions to raise the above amount. Finding lenders willing to make relatively - 14 - long-term loans at a fixed interest rate is extremely difficult. TSKB may therefore have to accept loans at a floating rate, to some limited extent. This imposes a risk upon TSKB, given the interest rate ceiling fixed by the Government. However, the risk is acceptable at least for the period of the proposed loan since the amount of borrowing in foreign capital markets would be relatively limited. Still, it is far from an ideal solution and it would be desirable to have a different arrangement for the long term. During the next two years, TSKB will endeavor to raise an additional $100 million in the international capital markets. Should the average total cost of the new foreign resources raised in international capital markets exceed the current ceiling rate for lending (14%), it would further erode TSKB's profitability. Thus, continued close consultation between TSKB, the Government and the Bank on this matter is imperative. D. Equity Investments 4.13 In 1973, TSKB committed equity investments in five new companies and exercised its preemptive rights in five existing companies for a total of LT 50.8 million compared with LT 41.2 million in 1972. In the first quarter of 1974, the commitment was in two new companies and one old client for a total LT 5.8 million. As of March 31, 1974, TSKB's equity portfolio amounted to LT 169.1 million of shares in 34 firms. 4.14 In 1973, TSKB sold all its shares in three companies and some of its shares in another one, totalling LT 44.9 million, at an average 169.7% of par value. The total capital gain was LT 18.4 million. During the first quarter of 1974, no share sales have taken place. 4.15 TSKB's equity portfolio is not as diversified as its loan port- folio: the metal industry accounts for the biggest part of the total (42.0%). The construction materials industry and the plastics industry are second and third, with 12.3% and 12.0% of its portfolio, respectively. TSKB's equity in- vestment in the textile industry is low (less than 1%) compared with the per- centage in its loan portfolio (33.6%). 4.16 One factor limiting equity purchases is the lira resources situation. Another one is a result of industrial companies' preference for financing in- vestments by raising funds from family members. TSKB intends to expand its equity investments. In the underdeveloped regions, TSKB's equity participa- tion has a strong promotional impact, since people who have investible funds are usually hesitant to subscribe shares, especially those of a new firm, until they see TSKB participating. Therefore, TSKB plans to play a leading role in helping new projects to raise equity capital in the underdeveloped regions. E. Economic Impact 4.17 A thorough review of the economic impact of TSKB's operations was made by a Special Study Mission in late 1972, using a sample of 23 projects in various sub-sectors. Based on actual project results rather than estimates - 15 - made in the course of TSKB's own appraisals, the quality of these projects was measured by economic rates of return calculations using international prices for all traded and potentially traded goods. The economic rates of return derived in this way for projects in operation in 1971 ranged from negative (4 projects) to almost 50% (2 projects). The median value was 14%. The weighted mean was somewhat lower, at about 10%. Any attempt to group these results into performance categories is bound to be somewhat arbitrary. How- ever, the economic viability of the six projects with returns of 2% or less is doubtful. These account for just over 40% of total fixed investment in the sample of 23 projects. 4.18 There was clearly some room for improvement in appraisal techniques. Since 1970, TSKB had been calculating effective rates of protection as part of its appraisal process. Since the major reason for discrepancies between financial and economic performance of projects in Turkey seems to be the high and variable protection accorded industrial output, the effective rate of protection calculation has proved a helpful screening device. Starting January 1974, TSKB has further strengthened its economic appraisal by calculat- ing the economic rates of return of the projects. During the first quarter of 1974, thirteen projects were evaluated by this method. Eleven projects have economic rates of return ranging from 11% to 39% and the remaining two projects have rates of 44% and 65%, respectively. X 4.19 Since the devaluation of the lira in August 1970, TSKB has financed an increasing proportion of export-oriented projects, mainly sponsored by the established clients. Projected annual net foreign exchange savings or earnings of projects financed by TSKB during 1972 and 1973 amounted to $46.6 million equivalent. These projects belong to various sectors producing textiles, leather, food products, machinery and metals. 4.20 Actual exports by TSKB's borrowers increased from $45.5 million in 1971 to $69.3 million in 1972 and to $112.2 million in 1973, registering an average annual growth of 57% compared with the average of 76% for all exports of industrial products during 1972-73. 4.21 In 1973, some 7,300 new jobs were created by projects financed by TSKB, compared with 7,000 in 1972, and an average of 3,500-4,000 annually during previous years. The average investment per job created amounted to LT 310,000 equivalent per job in 1973, compared with LT 260,000 equivalent in 1972 and an average of LT 210,000-280,000 equivalent per job the years before. In real terms, the average costs per job remained stable. V. TSKBB'S FINANCIAL SITUATION A. Resource Position 5.01 Summary. Annex 12 presents TSKB's resource position as of March 31, 1974, and describes the sources of funds. Since its founding in 1950, TSKB has raised resources totalling LT 5 billion, with equity constituting 8.2%, - 16 - local currency loans 11.2%, and foreign currency loans 80.6% of the total. The Bank Group has provided 51% of TSKB's overall resources. As of March 31, 1974, net funds raised by TSKB were as follows: Funds LT million Percentage Equity 411.7 11.3 Borrowings Local Currency 529.1 14.5 Foreign Currency 2,712.7 74.2 Total Funds Available 3,653.5 100.0% 5.02 Local Currency Resources. The Government remains the principal source of domestic resources. As of March 31, 1974, eight loans from the Government totalling LT 479.1 million were still outstanding, representing soie 51% of local currency resources outstanding. The share capital in- crease, approved in 1972, has been completely paid in by the shareholders. 5.03 In 1973 and in the first part of 1974, resource mobilization in local currency was difficult and remained limited. In an informal under- standing with the Bank in December 1972, TSKB would endeavor to mobilize at least LT 350 million from the market either in direct bond issues or in guaranteed bonds during 1973 and 1974. It was understood that TSKB would float its own bonds for LT 200 million at a negative spread. In 1973, TSKB issued TL 50 million in bonds which were fully subscribed. In 1974, the Board authorized the issue of another LT 150 million, of which LT 50 million was issued in April 1974. Altogether, as of the end of M4ay 1974, TSKB had issued bonds totalling LT 100 million and guaranteed bonds for a total of LT 67.8 million. However, TSKB plans to execute its entire bond issue and guarantee program by the end of 1974 and thereby meet the target. 5.04 Joint Financing with Commercial Banks. To supplement resources needed by its clients, TSKB has initiated a program of joint financing with commercial banks. Under this program, TSKB appraises a project and presents its appraisal report to various commercial banks interested in covering part of the investments. During 1973, TSKB appraised 13 projects for joint fi- nancing. However, many of the commercial banks which were expected to partici- pate were unable to do so because of the tight credit situation (see para. 2.05). Consequently, only four projects benefited from this program. Five companies had to float bonds with TSKB's guarantee, three projects were re- ferred to IFC for financing, and the remaining project purchased Government foreign exchange to finance its equipment imports. TSKB is continuing its dialogue with the commercial banks with a view to accelerating and expanding the program when the credit situation improves. - 17 - 5.05 Foreign Currency Resources. When the last Bank loan of $40 million was extended to TSKB in December 1972, TSKB was expecting to raise funds from the following sources during 1973-74: Source of Funds US$ million EIB (two loans) 30 KfW (two loans) 16 International Capital Markets 32 Since then, TSKB has received one loan each from EIB and KFW amounting to 15 million units of account ($18 million) and DM 25 million ($9.6 million), re- spectively. In addition, IFC in conjunction with the Industrial Bank of Japan extended a loan of $10 million, which paved the way for TSKB to raise funds independently in the international capital markets. Since the beginning of 1974, however, in the light of the increased cost of capital in the interna- tional markets, the Government has not encouraged TSKB's efforts in this direction. As of August 30, 1974, TSKB's foreign exchange commitments have exceeded the available resources by approximately $10 million. TSKB expects further loans from KfW (DM 30 million or $12 million) and EIB (20 million units of account or $24 million) to become effective in the second half of 1974, and has obtained Government permission to raise $25 million in the in- ternational capital markets. B. Quality of Portfolio 5.06 General. As of March 31, 1974, TSKB had a total portfolio of about LT 3 billion, broken down as follows: LT million % Equity Participation 169.1 5.7 Local Currency Loans 564.5 19.2 Foreign Currency Loans 2,214.8 75.1 Total Portfolio 2,948.4 100.0 This represents an increase of 44.5% since December 31, 1972. The outstand- ing loan portfolio by industry and the equity portfolio as of March 31, 1974 are given in Annexes 13 and 14, respectively. Generally, TSKB's portfolio is well diversified and sound. 5.07 Loans in Arrears. Annex 15 shows the arrears situation for the period 1970 through March 31, 1974. As of December 1972, the total out- standing amount of principal on which there were arrears over three months was LT 145.1 million and represented some 7.7% of the loan portfolio. - 18 - 5.08 In 1973 and 1974, the situation gradually worsened and as of March 31, 1974, the total outstanding amount of principal on which there were arrears over three months was LT 276.2 million, about 10% of the loan portfolio. 5.09 Total arrears as of March 31, 1974 reached LT 104.2 million, including LT 55.9 million of principal arrears, and LT 48.3 million of interest arrears. The main explanation for the rate of delinquent loans is related to the rigidity of the interest rate structure in Turkey. Since TSKB has been charging the legal ceiling rate on its loans, any penalty interest on late payments is illegal; this advantageous situation, given the comparatively low cost of money lent by TSKB, is intentionally utilized by clients (a) to delay repay- ments, and (b) to use the money for working capital purposes. 5.10 The mission has discussed this problem with TSKB's management, and has been assured that adequate steps will be taken to tighten the control over collections. 5.11 Provisions for possible losses on loans amounted to LT 23.1 million as of March 31, 1974, compared with LT 27.1 million as of December 31, 1972. At the end of each year, TSKB's management reviews the portfolio closely. At the end of 1973, TSKB's management felt no need to increase the provisions. Since almost all of TSKB's loans are well secured, the provisions can be considered adequate. This judgment is confirmed by the auditors. 5.12 Equity Investments. Of the 34 companies in which TSKB has invested, as of March 31, 1974, eight were under construction, four were operating at a loss, and two were in liquidation. Adequate provisions and guarantees have been made for possible losses. 5.13 Among the 20 companies which were operating profitably, 17 paid dividends in 1973. TSKB's dividend yield on its dividend-earning investments was 23.5% and the overall dividend yield on the entire portfolio was 9.9%. The average book value of TSKB's equity portfolio as of March 31, 1974 was 162% of par value. TSKB has made loans to 26 of the 34 companies, totalling LT 535.4 million as of March 31, 1974, or 24.2% of its loan portfolio. C. Financial Performance and Position 5.14 Audited income statements and balance sheets for 1970-1973 and provisional figures as of March 31, 1974 are in Annexes 16 and 17. 5.15 Income Statements - Profitability. TSKB's earning performance, which historically has been good, improved further in 1973. Profits after tax and provision in 1973 (LT 72.3 million) were 42% higher than in 1972 and yielded 21% of the average net worth, compared with 18% in 1972. 5.16 Administrative expenses have increased rapidly in recent years (27% in 1973), mainly due to the salary bill increase. However, as a percentage of average total assets, administrative expenses decreased from 1.6% in 1971 to 1.4% in 1973. - 19 - 5.17 TSKB paid a 15% dividend in 1972 and 1973, amounting each year to about 44% of net profit. The dividend yield on the average market price of TSKB's shares was 10% in 1973, compared with 6% in 1972. 5.18 Balance Sheets - Financial Position. TSKB's total assets increased by 40% in 1973, due mainly to the increase in loan portfolio. As of March 31, 1974, total assets amounted to LT 3.4 billion. The loan and equity portfolios represented 81% and 5% of the total assets, respectively, and the total liquid funds amounted to LT 0.27 billion, or 8% of the total assets. The long-term borrowings were 80% of the total liabilities and amounted to 7.3 times net worth as of March 31, 1974. 5.19 The debt/equity ratio calculated according to the definition in the last Loan Agreement with the Bank was 4:1 at the end of 1973, against the maximum limit of 5:1. The book value of a TSKB share was 195% of par as of December 31, 1973. VI. TSKB'S PROSPECTS A. The Environment 6.01 There was a slight slowdown in investment in the private sector during 1974, caused in part-by a reduction in available credit as a result of restrictive policies adopted to combat inflation, and in part by price in- creases for imported capital goods and construction materials. At the same time, these higher import prices together with the increased cost of petroleum and a reduction in the volume of Turkey's exports, have put the balance of payments under increasing pressure. The external side is further clouded by reduced prospects of maintaining the high level of foreign exchange remittances by Turkish workers abroad, especially if the recessionary tendencies now evident in Western Europe become stronger. 6.02 Political developments during the past year have also led to some uncertainty and hesitation in the private sector. Business appears to have been affected in part by uncertainty as to the nature of the economic policies towards the private sector of the coalition government headed by Prime Minister Ecevit, which took office in January 1974. The collapse of the coalition in mid-September, 1974, and the subsequent difficulties in forming a new govern- ment, despite pressing economic and foreign policy issues, have contributed to further uncertainty. 6.03 Nevertheless, the overall prospects for investment and business in the private sector remain reasonably good, provided a solution to the political difficulties emerges in the near future and steps are taken to deal with urgent economic problems. In addition, the reactivation of rediscount facilities as well as the relaxing of reserve requirements with the Central Bank at the end of August 1974, and the increase in corporate bond ceiling rate from 15% to 18% in mid-December, 1974, should ease some of the difficulties of financing - 20 - industrial investment which business experienced in the first half of 1974. In light of these developments, private investment in manufacturing can be expected to grow at the rate of some 15-20% a year in real terms during the next two years. B. TSKB's Strategy and Forecast of Resources and Operations 6.04 Over nearly a decade, TSKB has been operating under one major con- straint: it has not had enough resources to meet demand from private entre- preneurs, both for domestic and foreign procurements. If TSKB had the re- sources, it could probably, as a minimum, maintain its recent share in financ- ing, i.e. 18% of imports for private fixed investment in the manufacturing sector and about 9% of local currency investment. Private investment in manufacturing is expected to grow over the next two years (para. 6.03). Demand for TSKB financing will likely remain high and will continue to grow at a rapid pace. TSKB can look to substantial growth in its operations, both in local currency and foreign exchange, without impairing project standards. As before, TSKB's projections over the next two or three years are likely to remain a function of resources. TSKB's Strategy for 1975-1976 6.05 TSKB in consultation with the Bank, has formulated a strategy with a view to accelerating its resource mobilization and strengthening its opera- tions for the next two years. An outline of the strategy is included in Annex 17 a. Forecast of Resources 6.06 TSKB expects to mobilize, during the period September 1974-December 1976, LT 4.1 billion (about $300 million equivalent) in foreign exchange and about LT 1.5 billion in local currency (including retained earnings). The underlying assumptions are summarized and analyzed below: (a) Foreign exchange: As of August 31, 1974, TSKB had overcommitted approximately $10 million. For the remaining four months of 1974, TSKB's foreign currency loan commitments amount to approximately $46 million. Two new loans from EIB and KfW totalling $36 million, together with the resources ($25 million) to be raised in the international capital markets for which Government permission has been obtained, will be used against these commitments. As of the end of 1974, the uncommitted balance of foreign currency funds will be around $5 million. During 1975-1976, TSKB's foreign currency commitments are estimated to be $247 million. TSKB hopes to receive three loans from KfW amounting to $36 million, and two loans from EIB amounting to $30 million. It has also obtained the Government's permission, in principle, to raise $100 million in the international capital markets, subject to terms and conditions being acceptable. To raise - 21 - such a sizeable amount in the foreign markets, IFC's further assistance will probably be needed and solicited. All poten- tial foreign exchange mentioned would add up to $171 million, and the net foreign exchange resource gap will be of the order of $76 million. The proposed Bank loan of $65 million will enable TSKB to close most of the resource gap. (b) Local currency: The uncommitted balance of local funds avail- able as of August 31, 1974 was around LT 5 million. By the end of 1976, TSKB expects to increase its share capital by LT 125 million and to generate cash from its operations for about LT 825 million. TSKB expects its local currency loan and equity commitments during September 1974 - December 1976 to reach LT 1,480 million. The resource gap in local currency will have to be filled by additional bond issues. During loan negotiations, TSKB indicated that it will endeavor to mobilize. LT 1,100 million in 1975-1976 through bond issues, share capital increases and joint financing with commercial banks. At least 60% of the above will be in the form of bond issues and share capital contributions. Forecast of Operations 6.07 Based on the above resource forecasts until the end of 1976, which have been extended through 1979, TSKB expects to reach an overall commitment level of LT 16.8 billion during 1975-79 (Annex 18). Given this projected volume of business, TSKB's contribution to private fixed investment, on disbursement basis, would average 9.3% for the next two years. TSKB's share in the foreign exchange component of the fixed investment would be 16.5%. The yearly rate of increase in loan commitments shows a decline from 30.2% in 1976 to 13.1% in 1979 for foreign currency loans and from 29.7% in 1976 to 14.9% in 1979 for local currency loans. Equity investments are expected to rise at an average of 20% per year and reach LT 149.3 million in 1979, compared with LT 50.8 million in 1973. 6.08 Projected Geographical Distribution of Operations. TSKB tentatively estimates the share of its commitments of loans and equity in the underdevel- oped areas of Turkey 1/ to reach 40% of TSKB's overall operations in 1975 and 60% in 1976, amounting to LT 0.8 billion and LT 1.6 billion, respectively. This represents the maximum possible given the industrial context of these areas and the fact that the pipeline of the projects eligible for TSKB financ- ing is still limited. 6.09 Utilization of the Proposed Loan. TSKB is determined to expand its promotional activities and lending and equity investments in the underdeveloped regions in line with the Government policy, so as to reduce the regional 1/ As defined by SPO in the 1974 Annual Program (see Map in Annex 3). - 22 - imbalance in income and employment opportunities. As TSKB increases its activity in the underdeveloped regions, more resources need to be allocated for projects in these regions. In line with this objective, at least 50% of the proposed Bank loan will be used to finance investments in the underdevelop- ed regions. This target will enable the Bank to perform a useful monitoring role at this stage by reviewing a reasonable number of sub-projects to be financed by TSKB and further encourage TSKB to maintain and accelerate the progress achieved in the past two years in developing projects in the under- developed regions. 6.10 TSKB plans to withhold financing of any projects in the developed regions whose sponsors have access to other sources of funds. For the projects in the developed regions which qualify for TSKB's financing, the Bank should encourag2 TSKB to finance them jointly with other institutions in Turkey and abroad. Therefore, the Bank recommends that the proposed Bank loan be used to finance only a part of the foreign exchange costs of large-size projects in the developed regions. It was agreed that the Bank's participation should be limited to US$1 million plus 30% of the foreign exchange cost over and above this amount. Under this formula, for a project requiring US$5 million foreign exchange, TSKB's contribution would be a maximum of US$2.2 million, or 44% of the total requirement. 6.11 Following the above criteria, the average size of TSKB sub-projects financed with Bank funds is not likely to increase, and may even decrease. In order to enable the Bank to review a sufficient number of TSKB's sub-proj- ects, the present free limit of US$1 million should remain unchanged under the proposed Bank loan. As in the last loan, the aggregate free limit should not exceed 30% of the loan amount. C. Projected Financial Situation 6.12 Projected Profitability. Projected income statements for the years 1974-1979 are included in Annex 19. Assumptions for the projections are in Annex 22. With these assumptions, TSKB's overall spread will be around 3.2% in 1975 and drop to an average of 1.9% in 1976-1979. 6.13 TSKB's profits after tax are expected to grow from LT 86.6 million in 1974 to LT 144.7 million in 1979. Unless the lending rate ceiling is raised,the rate of return on average net worth would decrease from 21.5% in 1974 to 16.9% in 1975 and then to 14.2% in 1979. Administrative expenses are forecast to decrease from 1.6% of average total assets in 1974 to 1.1% in 1979. TSKB proposes to increase its share capital in 1975, 1977 and 1979 by LT 125 million each time. The dividend pay-out ratio will fluctuate between 37.5% and 58.3%. On the basis of the projected dividend policy, the book value of a TSKB share will fluctuate between 192% and 222% of par value. - 23 - 6.14 Financial Position. Projected balance sheets through 1979 (Annex 20) show an increase in TSKB's total assets from LT 4.1 billion at the end of 1974 to LT 15 billion at the end of 1979. TSKB's total portfolio is forecast to increase from LT 3.5 billion in 1974 (86% of total assets) to LT 14.5 billion in 1979 (96% of total assets). Long-term debt will grow from LT 3.3 billion in 1974 to LT 14.0 billion in 1979. The long-term debt to equity ratio (in- cluding guarantees) is projected to fluctuate between 8.0;1 and 12.7:1. The debt/equity ratio as defined in the Loan Agreement will increase from 4.4:1 in 1974 to 6.4:1 in 1976 and to 9.7:1 in 1979, this being due to the fact that TSKB will rely mainly on additional borrowings to meet its demand. TSKB's continuing good record of operations should permit raising of its debt limit, as now defined, to six times equity. Since this limit will be exceeded by the end of 1976, TSKB is prepared to increase its share capital in 1976 instead of 1977 as originally scheduled. Should a 6:1 debt/equity limitation still be in jeopardy, the alternatives are (a) TSKB's curtailing its expected opera- tions, or (b) the Bank's considering whether a more liberal debt/equity limit- ation would be justified. 6.15 Reserves and provisions for possible losses will grow from LT 271.8 million at the end of 1974 (7.2% of TSKB's portfolio and guarantees) to LT 691.1 million in 1979 (4.7% of portfolio and guarantees). 6.16 Projected cash flow statements for the period September-December 1974 and the entire years 1975 through 1979 are in Annex 21. The average debt service coverage will be 1.14 times in 1975-1979, and interest coverage is forecast to be 1.33 times, which are adequate. VII. THE PROPOSED LOAN - OBJECTIVES AND JUSTIFICATION 7.01 The success of Turkish economic plans in sparking off a rapid growth in the private industrial sector has been impressive. Since the First Five-Year Plan started in 1963, there has been a conscious shift in emphasis towards investment in Turkey's manufacturing industries. The primary economic policy is how to preserve this new dynamism in the economy and focus more on reducing the geographical imbalance in income and employ- ment opportunities. There is also a strong recognition of the need for greater integration with the world economy and the need for Turkish business- men to meet the challenge of external competition. An important input for achieving this will be an adequate supply of medium- and long-term capital, in local currency and foreign exchange, to assure the implementation of industrial projects in developed and underdeveloped regions. TSKB has been an effective intermediary to channel long-term funds to viable projects in the past. Its developmental role in the future is expected to enlarge since it is now geared for deeper involvement in developing and financing projects in the underdeveloped regions. In this context, the loan to TSKB for finan- cing the imports of capital goods needed by industries is justified. How- ever, we should continue to encourage TSKB to achieve more diversification in its resource mobilization. Therefore, in order to induce TSKB to mobilize resources outside the Bank, KfW and EIB, a Bank loan of $65 million is recom- mended, leaving approximately $135 million to be raised from other sources. - 24 - 7.02 However, it should be clear that TSKB cannot meet its role in financing meritorious development projects without access to adequate re- sources which can be raised at a positive spread. A further change in Turkey's interest rate regulations is not a realistic recommendation for this loan; the Bank should continue to have a dialogue with the Government in this respect. VIII. RECOMMENDATIONS AND UNDERSTANDINGS REACHED 8.01 TSKB, despite the previously noted imperfections in Turkey's in- terest rate regime, and the consequences thereof for TSKB's role as an effec- tive mobilizer of resources, continues to be a suitable and creditworthy borrower of the Bank. It is expected to continue to play an important role in financing private industry in Turkey, having financed about 9% of totai private industrial investments and about 18% of imported equipment needed by the private sector from 1967 through 1973. TSKB deserves the Bank's con- tinued support, especially in view of its resolution to vigorously promote industrial development in the underdeveloped regions. A Bank loan to TSKB in the amount of US$65 million, covering approximately one third of TSKB's foreign exchange resource gap over the next two years, is appropriate. Under TSKB's adopted policy of concentrating on investments in the underdeveloped regions of Turkey, about 60% of all its resources will be allocated to projects in such regions in 1975 and 1976. Moreover, TSKB will use at least 50% of the proceeds of the proposed Bank loan for financing projects located in these regions. 8.02 The terms of the loan should be those normally applied to loans to dfcs, including the standard commitment charge. TSKB's continuing good record of operations should permit the raising of its debt/equity ratio from 5:1 to 6:1 (para 6.14). 8.03 During loan negotiations, the following agreements were reached: (a) TSKB's net spread on the proposed Bank loan will be limited to 2-1/2% with the balance to be paid to the Government as guarantee fee (para 4.08); (b) TSKB will limit the use of the proceeds of the Bank loan, in financing the foreign exchange requirements of projects lo- cated in the developed regions, to $1 million plus 30% of the foreign exchange cost of each project over and above this amount (para 6.10). 8.04 In addition to the above, the following informal understanding was reached: TSKB will endeavor to raise in international capital markets an estimatet $100 million equivalent (in addition to the $25 million already - 25 - authorized by the Government) during 1975 and 1976. For local currency resources, TSKB will mobilize at least LT 1,100 million through (i) issuance of bonds, (ii) expansion of share capital, and (iii) joint operations with commercial banks. At least 60% of the above lira resources to be mobilized will be in the form of bond issues and share capital contributions. For raising resources in the international capital markets, TSKB is seeking IFC's assistance (para 6.06). I Annex 1 Page 1 TURKIYE SINAI KAIKINMA BANKASI A.S. Incentives Applied to Investments in Manufacturing Sector 1. Exemption From Customs Duties: According to the Government Decree of 6/12585 dated 10.28.1969 investments which satisfy the conditions given below are exempted from all customs duties. The conditions are: - The investment should enable the production of goods which would be competitive in world markets. - The investment should be set up with a capacity comparable to those in developed countries. - The investment should introduce a new production technology. 2. Customs Tax Deferment: The taxes that are defered are the customs tax, production tax on imports, municipality share on customs and quay duty. Stam,p duty is not defered. According to the 1974 General Promotion Table, the taxes are paid in minimum 2, maximum 5 yearly installments varying according to the sector. In the GPT if a sector is eligible for both customs duty exemption and customs tax deferment the final choice would be made by the Ministry of Industry and Technology. 3. Income and Corporation Tax Rebate on Investments: The basic rebate is equal to 30% of the equity capital. It increases to 40% for agricultural projects and 50% for investments in underdeveloped areas which are included in the list published in the annual programs of deve- lopment plans. According to the Income and Corporation Tax laws, accrued income and corporation taxes are not paid in the first 5 years of the opera- tions till the total accrued tax amount reaches 30 - 50 % (according to the type of operation) of the equity capital. 4. Medium Term Investment Loan and Interest Subsidy: According to the government decree 7/5822 dated 3.1.1973 the commercial banks will extend medium term loans for the duration of 5 years, at 12% rate of interest if supplied by the banks' own resources. In this case borrowers in priority sectors are elegible for a Government interest subsidy at a rate of 6% from the Selective Credit Fund. The rate of interest subsidy for projects in underveloped areas is 7%. Annex 1 Page 2 The banks may apply to the Central Bank for discount. For export- oriented investment projects, ship building and ship-yard projects, the maximum rate of interest to be applied is 10.5% if the credit is met by Central Bank resources. In this case the rate of interest subsidy is 4.5% and 5.5% for projects in underdeveloped areas. 5. Private Foreign Capital: In the 1974 Annual Programme authorization of private foreign capital is listed as an incentive for the first time in the General Promotion Table. According to the decree 7/5399 which is published in The Official Gazette dated January 3, 1974, the Ministry of Finance is authorized to give permissions for private foreign capital. -Only the sectors which are listed in the GPT are permitted to benefit from this incentive. The amount of credit to be obtained may not exceed 60% of the total investment. This ratio is8O% for projects in underdeveloped areas. For shipbuilding the ratio is 95% and 90% for imported vessels. The term of credit may not be less than 2 years. The rate of interest may not be more than 1 above the interest rate applicable in the Euro-Market at the time of procurement of the credit. If the rate of interest of the private foreign capital is less than 12% (the maximum rate applied to credits in Turkey) then the difference of interests is collected by the Central Bank. 6. Exemption from Construction Tax: According to Article 67 of the Law No. 1318 published in the Official Gazette of August 10, 1970, construction of plants is exempted from construction tax. This is a general incentive; so it is not listed as an incentive in the General Promotion Table. EMNA/ICODF6 June 10, 1974 Annex 2 TURKIYE SINAI KALKINMA BANKASI A.S. Cost of Capital to Industry in Turkey The following is a sample of principal rates applying to credits given to individual enterprises in Turkey as of October 1, 1974. Nominal Effective Cost Rate ,% including charges, etc. to Borrowers % Short-term Loans General Interest Rate 11.5 18.54 Loans to small industrialists and artisans 10.5 12.50 General export credits 10.5 13.45 Export credits financed through Central Bank rediscounting facilities and exempt from expenditure tax 9.0 lo.46 Medium- and Long-term Loans LT Loans: General interest rate 14.0 21.3.8 Loans to small industrialists and artisans 10.5 12.78 Loans subject to 6% interest subsidy 114.0 15.38 Loans subject to 6% interest subsid;y and exempt from taxes 14.0 10.91 TSKB loans (general) 14.0 19.13 TSKB loans from equity subject to 6% interest subsidy 14.0 12.53 TSKB loans exempt from taxes 14.0 15.24 TSKB loans from equity subject to 6% interest subsidy and exempt from taxes 14.0 8.79 Bond issues guranteed and underwritten by TSKB 15.0 19.39 Other bond issues 15.0 22.60 Foreign Currency Loans: TSKB loans (general) 14.0 19.22 TSKB loans exempt from taxes 14.0 15.35 Suppliers credits 14.0 23 50 EMENA/IC&fDFC October, 1 974 25
World Bank Group · Staff Appraisal Report
Turkey - Eleventh Industrial Development Bank (TSKB) Project
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World Bank Group
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Staff Appraisal Report
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Türkiye
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World Bank