Turkey - Eighth Industrial Development Bank (TSKB) Project

Report No. 829 CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT PERFORMANCE AUDIT REPORT on TURKEY EIGHTH DFC LOAN (589-TU) August 6, 1975 Operations Evaluation Department  PREFACE This report covers an audit of achievements accomplished under Loan 589-TU, made to the Turkiye Sinai Kalkinma Bankasi A.S. (TSKB) in March 1969 and closed in April 1974. The report integrates, in one document, the findings of the Project Completion Report (PCR) prepared by the EMENA, IC & DFC Division and observations made by the Operations Evaluation Department on the basis of loan files, country and sector economic analyses, DFCD Special Study of TSKB, and discussions with the Bank staff. The report concentrates mainly on a few specific and impor- tant issues which arose in the utilization of the proceeds of the loan. These issues were highlighted either because they were expected to be resolved during the period under review, or because of their wider signif- icance to Bank's lending to the DFC. Important elements of the Completion Report, prepared by the EMENA Regional Office,were integrated in the present report. Although no separate field trip to Turkey has taken place, a fruitful discussion with TSKB was carried during a brief stopover of an OED staff member in Istanbul. CURRENCY EQUIVALENTS US$ 1 LT Prior to August 9, 1970 9LT $0.11 August 10, 197Q - December 22, 1971 15LT $0.067 December 23, 1971 - May 14, 1974 14LT $0.07 May 15, 1974 - September 20, 1974 13.50LT $0.074 After September 20, 1974 13.85LT $0.072  TABLE OF CONTENTS Page Summary i I. General Background 1 II. Size of the Loah 2 III. Objectives and Expectations 2 IV. Attainment of Goals: Realization of Expectations 3 A. Resource Mobilization 3 i. The Interest Rate Issue 3 ii. Domestic Resources iii. Foreign Resources 5 iv. Conriibution Eo the Capitd1 Market 7 B. Resource Allocation 8 Ii. Expbrt Generatibh 8 ii. Geographical Distribution 8 iii. ProjecL Appraisal and Selection 8 a. by the uovernment 9 b. By TSKB 9 c. By the Bank 12 iv. The Allocative Pattern and Capacity Utilization br TSKB Bbrrowers 12 v. Project Identification an6d Sectoral Analysis 13 C. Administrative and Managerial Issues 14 i. Loan Arrears 14 ii. Admihistrationi and Administrative Expehditures 14 V. Conclusiohs 14 List of Tbles 1. Ierest Rate Spread 4 2. TSKB Resburce Base 6 List of Ah'ex Thbles 1. Balance Sheets, Year-End 1968-1971 2. Income Stateineits, 1968-1971 3. Summary of Operations, 1968-1971, January-September 1972 4. Composition of Domestic Currency Borrowing, by Source and Cost Table of Contents, page 2 5. Comparison of Foreign Debt, by Source and Cost 6. Relative Movement of Domestic and Import Prices 7. Estimate of Economic Viability of Projects Financed from Loan 589-TU 8. Comments of the Bank Staff on Projects, Financed from Loan 589-TU 9. Sub-Projects by Industry 10. Capital Labor and Capital Output Ratios SUMMARY The TSKB is the first private development finance company the Bank Group helped to establish. It was founded in 1950, and received during the quarter of a century of its existence, $245 million of finan- cial assistance from the Bank Group, in seven IBRD loans, four IDA credits, and five IFC investments and one loan. TSKB is instrumental in providing finance to almost one-fifth of private sector projects in the manufacturing industry, an impressive task, considering the rapid growth of this sector and its sizeable relative share in the country's GDP. The audited Loan 589-TU for $25 million was the Bank's eighth operation with TSKB. It was signed in March 1969, was fully committed in December 1971, and fully disbursed and closed in April 1974. The loan was expected to be used for creation, expansion and modernization of private industrial enterprises, in accordance with the broader policy statements governing TSKB activity, in which such targets as priority for export-oriented projects and desirability of broader geographical distribution of investment are clearly stipulated. The Bank also expected TSKB to contribute to the development of a capital market in Turkey through its participation in equity of industrial enterprises, rotation of its equity portfolio and by guaranteeing bond issues of its clients. It also expected TSKB to diversify its resource base, by issuing its own debentures and by seeking foreign exchange from other sources than the international aid agencies. Finally, TSKB payment arrears were to be reduced. Although not as fully and not as early as the Bank expected it, all these objectives were met. The proceeds of the loan were allocated to a variety of projects, with no single sub-sector predominating. More than one-half of industries benefitting from TSKB loans were metal products and transport equipment, which could be classified as modern compared with the past pattern of TSKB lending, favoring consumer goods industries and construction materials. TSKB-financed projects accounted for about one-third of total industrial exports of Turkey. Considering that food and beverages accounted for about one-half of Turkish industrial exports and that TSKB's lending to food and beverage industries was rather small, less than one-tenth of its loan portfolio, the relative contribution of TSKB-supported projects to exports was quite considerable, especially since the beginning of the 1970s. TSKB was also successful, beginning from 1971, in deconcentrating its lending away from the already well-developed Istanbul area. Although the above positive elements underscore a positive economic impact of TSKB-supported projects, actual economic returns on projects financed from the Loan 589-TU were never clearly calculated. When these projects were appraised and screened by TSKB and by the Bank, with the help of a method of economic appraisal considered valid at that time, - ii - they promised to yield a highly positive economic impact. In retrospect, the method itself, by its generous treatment of excessive profitability and resulting high prices to the consumer,was prone to give an upward bias to economic impact. Also, some basic project data, to which the projects' economic results were particularly sensitive, in particular capacity utiliza- tion and unit prices, diverged considerably from what was originally forecasted. As a result, it is difficult to guess what would have been the economic rates of return had these been calculated for these projects when they were already in operation, but they would certainly differ from what has been anticipated. TSKB contribution to the capital market in Turkey was considerable. It was quite active in building up its equity portfolio. While the size of this portfolio was growing rather slowly, TSKB managed to rotate it success- fully, by selling and replenishing annually at least one-tenth of it. TSKB was also the first financial institution in Turkey to recognize the need for guaranteeing corporate bonds and took a lead in guaranteeing these bonds in 1968. This experience was followed by commercial banks. TSKB has been less successful, however, in mobilizing resources in the domestic market and had begun to float its own bonds only in 1973, at a negative interest spread. The shortage of domestic currency resources which it experienced during the particularly buoyant period of the Second Five-Year Plan 1968-72, somewhat undermined TSKB efforts to meet fully the demand for financing of industrial investment in Turkey and this despite the TSKB borrowing from the Bank increasing rapidly and despite it having been quite successful in recent years in obtaining loans from other inter- national agencies. A low ceiling on the interest rate on long-term loans, imposed by the Governmenthas been a formidable obstacle to any TSKB efforts to mobilize domestic resources. In the conditions of Turkish inflation, the effective long-term interest rate has been hovering around 2 percent p.a., considerably below what TSKB would have to pay on the market. Neither was the low interest rate justified as an incentive to investors, who bene- fitted from substantial protection from imports, and as a consequence, had a rather high financial return on their investment. Finally, TSKB was successful in eliminating most of the arrears in its clients' payments. The results of TSKB activity in using the proceeds of the Loan 589-TU were, therefore, mixed, but with positive elements clearly prevailing. The two principal shortcomings observed during the period under review -- the doubtful method of economic appraisal of projects, which might have led to financing of uneconomic projects; and a low interest rate, which prevented it from borrowing in the domestic market -- were not of its own making. Also, when a longer time perspective is introduced in assessment of TSKB activity, some notable improvements could be observed in most recent years, both with respect to the method to appraise the economic effects of projects, which has been now rectified, and with respect to the interest rate ceiling, which has been raised. PROJECT PERFORMANCE AUDIT REPORT TURKEY EIGHTH DFC LOAN (589-TU) The Bank Group has made, in all, seventeen loans, credits and equity investments to the TSKB, totalling $245 million and accounting for 63% of its foreign resources. The Loan 589-TU for $25 million, the Bank's eighth lending operation to TSKB, was signed on March 4, 1969 and became effective on May 29, 1969. The last date for commitment and disbursemnt was, originally, March 31, 1971 and March 31, 1973. They were extended, respectively, to December 31, 1971 and April 30. 1974, on which date the loan was closed. I. GENERAL BACKGROUND Industrial growth in Turkey has been impressive. Value added in industry grew in real terms at an average of 9.8% annually during the Second Plan (1968-1972), lagging somewhat behind the ambitious 12% p.a. industrial growth target set by the Plan. The share of industry in GDP rose from about 20% in 1968 to almost 23% in 1972 in which the manufacturing industry represented almost nine-tenths, or about $ 1 billion equivalent and mining and power accounted for the remainder. Fixed investment in manufacturing was growing during this period by 15% annually in real terms (30% p.a. in current prices) and its total attained some $3 billion equiva- lent for the five years of the Second Plan. Private fixed capital forma- tion in manufacturing accounted for two-thirds of manufacturing investment in 1973. During 1963-67, the period immediately preceding the Loan -- and for that matter, also the Second Plan -- the TSKB financed 10.9% of the private manufacturing investment, but its contribution declined somewhat to 8.6% during 1968-73, because its resources, especially in domestic currency, were not capable of meeting in full the rapidly increasing demand for investment finances. Thus, the TSKB commitments were growing at 23% p.a. and its disbursements at 18% p.a., compared with the 26% p.a. growth of investment in the private manufacturing sector during 1968-72. Despite trailing behind the overall investment, the TSKB, by contributing through its loans about one-half of resources needed to finance new projects, was supporting about 20% of all new projects in the private sector of the Turkish manufacturing industry. TSKB was established in 1950. It is the first private develop- ment finance company which the Bank Group helped to establish. It has made a major contribution to the industrial development of Turkey. During the quarter of a century of its existence, its assets increased from LT 200 million to LT 3.4 billion and its loan and equity portfolio reaches now LT 3 billion, 75% of which is in foreign exchange. The Bank Group has been closely identified with TSKB not only by helping to create it and providing it with most of its foreign exchange resources, but also in helping to shape its investment policies and appraisal methods. The Bank and the Turkish Government were, from the beginning, the two main - 2 - financial supporters of the new company and have remained so throughout. The Bank Group's share 1/ in total TSKB liabilities, including its share capital and reserves, increased from 30% in December 1968 to 41 % in December 1973. TSKB is a private institution. Both its Chairman and its Vice- Chairman are also managers of Turkish commercial banks. About 40 per- cent of TSKB shares are held by Turkish commercial banks and another 16 percent by the insurance companies. Almost 11 percent of shares are held by IFC. Individual shareholders do not hold more than 20 percent of shares. The TSKB lends exclusively to the private sector of the manufacturing indus- try of Turkey. II. SIZE OF THE LOAN The loan was originally requested in February 1967 in order to meet TSKB's foreign exchange approvals for the coming two years. TSKB was asking for a $50 million loan divided into $25 million from IBRD and $25 million from IDA funds. It requested for a mission to be sent during the spring of 1967. The Bank's answer was that no IDA funds were to be granted to TSKB and that a $50 million loan was too big a commitment; it came up with a proposed loan of $35 million. This was further reduced to $25 million by the Loan Committee, given Turkey's heavy debt service obligations and the commitments to other projects within the 1969 lending program to Turkey. In addition to the Bank loan, TSKB expected to receive $35 million from the EIB, KfW and USAID. In reality, it managed, during 1969-70, to obtain only $12.5 million (equivalent) from KfW. It also expected to obtain, during the same period, 100 million LT from the Turkish Government, compared with the 60 million LT actually received. As a result of diffi- culties encountered in mobilizing additional domestic and foreign re- sources, together with the reduced size of the Bank loan, TSKB's actual commitments for the period 1969-71 totaled only 0.9 billion LT, considerably less than the 1.7 billion LT which TSKB had planned to commit for that per- iod. The degree of achievement of commitment targets was 45 percent for domestic currency loans and 53 percent for foreign currency loans. III. OBJECTIVES AND EXPECTATIONS A certain number of objectives and expectations related to TSKB activity was formulated before and during loan negotiations and could be reasonably applied as a yardstick to check the effectiveness of Loan 589-TU. These expectations could be grouped under three general headings. 1/ Including IDA credits and IFC equity investment. -5- The increase in domestic prices in Turkey was of the order of 6.3 percent p.a. during 1967-70, and 16.1 percent p.a.during 1970-73, compared with the interest rates charged by TSKB, which were about 8 percent in the former period and about 12 percent in the latter. Thus, while with an increasing inflation the effective rate of interest became negative during the period after 1970, the devaluation of 1970 increased the borrowers' obligations to TSKB by about 67 percent. At the average repayment term of 10 years, such devaluation added about 5 percent p.a. to the cost of the loan. The effective interest rate was therefore back in the positive area. Nonetheless, even considering all these factors, the positive effective interest rate never exceeded 2 percent. Interest rates were kept low by the Government, whose assumption was that, in order to industrialize the country, industrialists not only need to be protected from foreign competition, but also should have an easy access to relatively cheap, long-term funds. These two measures tended, probably unnecessarily, to compound the advantages reaped by local industrialists, whose rate of return on equity was in excess of 30 percent. ii. Domestic Resources The Government has been TSKB's principal source of local currency resources. Since the Government funds managed by TSKB were converted into a subordinated loan in 1966, new loans extended by the Government have been relatively small, and TSKB had to rely mainly on internal cash gene- ration to finance its local currency operations. The only fresh currency borrowing from the Government during 1969-73 was some 25 million LT, in five separate loans, mainly consisting of Turkish Lira equivalents of loans received from the AID and the European Investment Bank, the former in 1969 and the latter in 1971. This amount represented about 15 percent of what the TSKB had originally planned to commit during 1969-73 and was clearly insufficient (Annex Tables 1 and 4). In December 1972, under an informal understanding with the Bank, the TSKB declared its willingness to mobilize at least LT 350 million -- equivalent to about 10 percent of its total funds available -- from the mar- ket in direct bond issues or in guaranteed bonds during 1973 and 1974. It was understood that TSKB would float its own bonds for Lr200 million at a negative interest rate spread. Of this amount, LT 50 million was issued and fully subscribed in 1973, LT 50 million in 1974, and LT 100 million in the first half of 1975. TSKB obtained in 1975 its shareholders'approval for reissue LT 500 million worth of bonds. There is an interest rate ceiling on corporate bonds in Turkey -- 15% in the past and 18% at present, three to five percentage points above TSKB's lending rate. During 1970-74, TSKB has been guaranteeing and underwriting about 45 million TL wolth of indus- trial bonds annually. iii. Foreign Resources The TSKB was successful in obtaining foreign exchange although this was obtained exclusively from international lending agencies. The foreign component of its resources grew at a rate almost threefold that of its - 6 - domestic resources, although this difference is partly attributable to changes in currency values. The me.thod of calculating the long-term relation between foreign and domestic currency resources in a situation where a steep devalua- tion occurred during the period analysed is quite arbitrary and open to inter- pretations. TABLE 2 TSKB Resource Base Resource base (as of Dec. 31) 1968 1973 Growth 1968-73 Value Share in Value Share in (% p.a.) (in m1n) total (in m1n) total in original % % currencies i. Domestic currency (LT) - Equity 132.1 8 411.7 8 26 - Turkish Lira bonds 25.0 1 75.0 1 25 - Long-term subordinated Government loans 368.1 22 368.1 7 0 - Other loans from the Government 48.5 3 142.0 3 24 Sub-total 573.7 34 996.8 19 12 ii. Foreign currency ($) - Bank Group 63.0 34 178.0 52 23 - Other international aid agencies (AID, EIB, KfW, DLF) 54.9 32 100.3 29 13 Sub-total (in $) 117.9 278.3 19 (in LT equiv.) 1,061.1 a/ 66 4,174.5 b/ 81 32 iii. Total resources (in LT) 1,634.8 100 5,171.3 100 26 a/ at $1 - 9 LT b/ -at $1 =15 LT The improvements in Turkey's balance of payments,which followed devaluation of the Lira and were supported by increase of workers' remit- tances, opened another possibility of borrowing directly from the inter- national capital market. The TSKB intended to do so since 1972. It had a mild success in mobilizing $10 million in 1973 through the Industrial Bank of Japan, with assistance of the IFC. In 1974 no efforts could be undertaken, as the foreign exchange reserves of Turkey were high and the Government did - 7 - not permit contracting of new foreign loans on non-concessionary terms. In 1975 TSKB borrowed $25 million from Arab banks, 1/ again with IFC assistance. iv. The Contribution to the Capital Market TSKB endeavored to expand the Turkish capital market on the basis of its role in guaranteeing corporate bonds, and in equity financing. Apart from Government bonds, the only long-term, fixed interest financial instrument available in Turkey is the corporate bond. TSKB was the first to recognize that corporate bonds would not gain wide acceptability unless they were guaranteed by prestigious financial institutions. It took a lead in guaranteeing bonds in 1968 and in the following few years this practice was quickly adopted by commercial banks as well. The value of bond issues guaranteed by the TSKB tripled during 1969-1971, more or less as predicted. Over time the practice of enterprises mobilizing capital through bond issues has taken root and the public has acquired more confidence in the bonds themselves, whether guaranteed or not. Thus, the total value of annual issues of corporate bonds has grown rapidly since 1968, reaching LT 560 million in 1973 and LT 282 million during the first five months of 1974, although the share of bond issues guaranteed by TSKB, other banks and holding companies has declined noticeably. While in 1968, virtually all bond issues were guaranteed, the share of guaranteed bonds dropped to 68 percent in 1973 and 57 percent in the first five months of 1974. This permits the borrower to save on high guaranteeing and underwriting costs. TSKB has been mainly in the business of guaranteeing blue chip bonds and was less successful in introducing new clients to the bond market. The average size of the issue guaranteed by TSKB has been subject to a minimum of LT 5 million, and because of this self-imposed limitation, TSKB has guaranteed the bonds only of relatively large and well-established firms. TSKB has been also quite active in its early days in building up its equity portfolio, investing mainly in the financial capital of its client,enterprises. In mid-1972, 24 of the 31 companies in which TSKB owned equity also had loans outstanding from TSKB. However, TSKB was more dynamic in revolving its equity portfolio than in building it up, and itsequity portfolio remained virtually on an unchanged level since the early 1960s. This could be largely attributed to the TSKB becoming increasingly short of domestic currency resources. When the TSKB acquired new domestic resources in 1973 and 1974, it began to increase its total equity portfolio by about 50 million LT in each of these years, toughly equal to the amount.of domestic resources it was mobilizing by issuing bonds. The primary objective of TSKB equity activities, namely the regular sale of part of its portfolio to the general public, was fulfilled, and TSKB was turning over a significant proportion of its portfolio each year, at times as much as one-fourth of its entire value. This practice was different from that of Turkish commercial banks, which are reluctant to sell shares fromtheir portfolios. 1/ Libyan-Arab Foreign Bank and the Union de Banques Arabes et Franpaises. - 8 - B. Resource Allocation i. Export Generation Turkish exports of industrial products remained, for a long time, quite low, hovering around $80-100 million during 1960-1970, of which approximately one-half was in food and beverages. 1/ Export value never accounted for more than 3 percent of the industrial value added, compared with about 12 percent share of industrial imports in total indus- trial consumption. This situation has notably improved in subsequent years, with exports of industrial goods growing by 54 percent in 1971 and by 67 percent in 1972. Exports from TSKB-financed firms were growing at a comparable rate of 57 percent annually in these years, and TSKB clients accounted for about 30 percent of the total exports, more than the share of TSKB-related clients in total investment. ii. Geographical Distribution Until 1971, over 80 percent of TSKB loans were concentrated in the Marmara Sea area (Northwestern Anatolia), with Istanbul as its hub. As a result of TSKB's efforts to seek a wider geographical impact, this concentration declined to 63 percent in 1971 and remained at this level during 1972-73. It declined further to 36 percent in 1974. The region whose share has increased from 8 to 20 percent during this period was that of the Aegean Sea (Southwestern Anatolia), with loans concentrated in and around Izmir. This deconcentration of loans probably helped in creating new outlets for increasing labor force of the Aegean Sea region. The population of Izmir was increasing by more than 5 percent annually, compared with the all-country average of 3 percent during the*last decade.- It is, however, also true that Izmir was already relatively industrialized and its industry was equal to one-third that of Istanbul. Both the Marmara and Aegean regions accounted, together, for 30 percent of the population of Turkey, and were receiving 93 percent of TSKB loans before 1971 and about 75 per- cent of TSKB loans afterwards. As the TSKB was aware that the results of its deconcentration efforts, appreciable as they were, were still falling short of the more widely spread regionalization, it decided on a major change in its organizational structure in January 1974. The new structure includes four Regional Departments, for Northwest, Southwest, and Central and Eastern Anatolia. Each Regional Department is headed by a Manager, responsible for planning and executing TSKB's investment programs in his respective area. The first results of this reorganization began to be felt in 1974, when 13 out of the total of 82 projects approved, were located in Eastern Anatolia, the most backward region of Turkey in which, in the past,TSKB financed an average of only 3 projects annually. iii. Project Appraisal and Selection The general orientation of the industrialization process of Turkey was toward import substitution, and its economic policy was geared to this 1/ 1960 - $81 million, of which $42 million in food'and beverages; 1965 - $97 million, of which $47 million in food and beverages; 1970 - $100 million, of which $41 million in food and beverages. - 9 - goal. This has led to a situation where the import price plus import substitution incentives was about 50 percent higher than export price plus export promotion incentives. Therefore, import substitution invest- ment promised muchhigher returns than export-related investment. The 1970 devaluation entailed only minor changes in import regulations. Domestic prices continued to grow, and by 1972, domestic price indices caught up with the index of effective import costs. (Annex Table 6) The Bank was aware of this situation and its analyses consis- tently pointed out that not only was there an excessive attraction of import substitution compared to outward-oriented ventures, but also that there wasa danger that continuing protection could lead to resource allo- cation distortions and to investment going to projects of sub-optimal size. This danger was expected to be removed through: a) screening of projects by the State Planning Organization and, later, by the Ministry of Techno- logy and Industry, prior to investors' applications to TSKB for loans; b) TSKB's screening of the economic viability of projects through calcu- lation of the rate of effective protection; and c) Bank screening of TSKB projects. The free limit for projects under the Loan 589-TU was set at $750 thousand, which implied that about 80% of TSKB project applications would be sent to the Bank for approval. An aggregate limit on projects not requiring Bank approval was set at 30% of the total loan. a. TSKB maintained continuous relations with the State Planning Organization (SPO). The SPO had an important task of project stimulation and identification. The main vehicle has been the "investment certificate" granting incentives for projects considered as priority by SPO. For these projects, SPO was supposed to prepare feasibility studies and was giving advice to investors. However, SPO screening of projects,on and off praised in the Bank's industrial reports, appears to have been a mere formality particularly because SPO staff was changing frequently. By 1970, in its intention to accelerate industrialization in Turkey, SPO issued more certi- ficates than could practically be used by investors. TSKB was entitled to reject loan applications for projects which were screened and approved by the SPO, but could not finance a loan to a project without an SPO certifi- cate of approval. One of the most remarkable features of TSKB's relations with Government has been its ability to prosper, relatively free of Governmental interference, through a number of political and economic crises and changes of government. In large part, this may be attributed to the common tenet of the major political factions in Turkey that the development of private industry is vital to the country's coming of age together with the belief that TSKB is an effective and appropriate means of supporting this development. There was therefore little criticism of private industry, its profitability, the protection and incentives it received from Govern- ment or the favorable terms it receives from TSKB. b. The Bank advised the TSKB on the need to apply to its project appraisal an analytical method to screen projects' economic viability. In practice three such methods had been consecutively applied.The first, which TSKB began to utilize in 1969,was the so- called Bruno method, which yields the domestic cost of foreign exchange - 10 - saved or earned. Projects whose cost by unit of foreign currency saved exceeded the official rate of exchange by more than 65% were rejected. The method was relatively simple and straightforward, and the TSKB in- tended to adopt a more sophisticated economic method of project evaluation, proposed at that time by Professors Little and Mirlees, but the Bank's preferences leaned toward the method of effective protection. 1/ TSKB adopted therefore in 1970, the "net effective protection" criterion, in which shadow values were attached not only to various cost components, but also to profits. Thus, the profit was considered as a factor price and whatever the volume of anti- cipated profit, often due to high unit price made possible under protection, was subtracted from the calculation and replaced by a standard 15% rate of return on capital. 2J Thus, the effective protection method-in the form applied by TSKB was not tooled to pinpoint projects turning out high-priced products, expensive for the consumer and profitable to the investor, but only high-cost projects. Finally, the third method, suggested by the Bank to TSKB in 1974, was the internal economic rate of return on projects. This method appears to 1/ The effective protection measurement is designed as a yardstick to measure viability of a specific line of industrial production in a free-trade situation. It roughly boils down to a comparison, at a given point in time, between the domestic and a world market value added. Even in its pure form, it suffers from oversimplifications. It is applicable to static conditions, and dis- regards evolution of costs and prices over time and depends on often-subjective assumptions and shortcuts, in particular because quality of finished indus- trial goods is rarely comparable because their world prices are unstable and their quotations differ, depending on the origin, and finally, because the share of the value added in these prices is a matter of conjecture. 2/ High profits do not imply inefficiency, but usually a lack of competition. A lack of competition, however, also implies high unit prices. The problem consist therefore, in finding whether an acceptable cost level and high profits yield high prices, what is the effect of high prices and what becomes of profits. For instance, high profits on mass consumption durables could have a negative balance of payment impact if the consumer has to pay, as a result, also a high price on these durables, which might encourage him to buy instead rela- tively cheaper, imported (or exportable) consumer goods such as meat in Latin America or wheat in India. There profits are counterproductive in the macro-economic sense. Neither could high profits on domestically produced agricultural machinery be considered as beneficial because the resulting high prrice would discourage modernization of agriculture. Finally, as far as the use of high profits is concerned, it would be highly beneficial to the country if such jrofits were invested, but there is another quite frequent alternative, namely that profits could leak out from the country and upset the balance of payments. Paradoxically, the notion of the effective rate of protection was designed precisely to detect and to brand the above-described phenomena. However, in practical application, at least in the form used by TSKB, this method was rather blurring than clarifying these anti-economic possibilities. - 11 - have been the most respectable of the three, although it is also liable to suffer from some degree of arbitrariness, especially in the choice of international prices used for the calculation. Given the high sensitivity of results to even small variations in comparative prices, the problem of choice of competitive international prices for countries which, like Turkey, export mainly to the Common Market countries is a difficult one. Differences between prices do occur because some of Turkey's competitors are entitled to enter their products duty-free into the EEC zone while others are not, because some exporters use bulk shipments and others use containers. Each of these reasons may influence prices by as much as 30%. To a certain extent by suggesting successively various economic methods of project evaluation, often without sufficient clarification as to the details, the Bank used TSKB as a testing ground. This was possible mainly because of a large leverage Bank could use, but also because of good personal relations which were created between the Bank and the TSKB manage- ment and also because TSKB was fortunate to have, among its staff, a number of well trained and capable economists. This notwithstanding, the Bank never discussed nor verified with TSKB the exact nature of statistical inputs it used in calculating the economic results of projects, evaluated in the Bank's Special Study of TSKB. The economic results of these projects, as evaluated in the Special Study, were poorer than those for other DFCs and the enquiry into the reasons of such results might have proven to be of great benefit to the TSKB. It is noteworthy that, at present, the TSKB is using the results of the economic analysis mainly as a signal that some elements of the project might have been incorrectly designed or that some supplies were inappropriately priced. This approach helped TSKB to re- design some projects or to renegotiate prices asked by suppliers of equip- ment and parts. This has become possible in particular because of the strong engineering capacity of TSKB, one of the very few development banks which has 25 fully qualified engineers. The economic-appraisal of projects financed from Loan 589-TU suf- fered from at least four shortcomings due to the nature of statistical inputs which depended largely on the type of analytical method used and also, to some extent, on arbitrariness of the analyst. Both were apt to influence con- siderably the results. These shortcomings were the following! Firstly, depending on whether the profit was fully entered in the domestic value added or replaced by a standard rate of return on capital, or whether -the international value added is calculated to include or to ex- clude-non-ttraded inputs, the--economic resul-te-differed. (Compare versions A and B in Annex Table 7). Secondly, some international prices used in calcUlations were based on quotations of dubious value. Thus, calculations for one of the nine projects for which the Special Study Mission calculated economic return,was based on quotations for world market tile prices less than one-third the domestic price level. This project, Canakkale Seramik, largely because of its domestic prices comparing unfavorably with international prices, is estimated to have a negative economic rate of return. The orice quotation - 12 - and the resulting calculation was contested by TSKB not only because domes- tic prices of tiles are found to be relatively low in Turkey, but also because there is no international market and hence there are no world prices for tiles. Thirdly, actual results, at least in terms of physical output, appear to differ from anticipated results. Thus, another of the nine projects studied, Pimas Plastik, plastic pipe venture, one of the four for which a negative economic rate of return was calculated sometime after they started operating, was clearly an inefficient project, but mainly because its output fell con- siderably short of expectations. This shortfall is attributable to the fault of the supplier of equipment, whose tenders promised a better operational ef- ficiency than it proved to be the case. However, this designed capacity was bona fide accepted in the appraisal and this could not have been spotted -- nor prevented -- by applying an economic analysis. Fourthly, the distinction between an analysis of expansion projects, which involve analysis of a frac- tion of an enterprise, with some general costs and overheads apportioned to it, and an analysis of the entire enterprise, into which the project was integrated was never made clear. Thus, TSKB claims that for the remaining two projects for which a negative e onomic rate of return was calculated, in the Special Study, Metas Izmir and Celik Malat, poor results stand for enterprises only, while economic rates of return for expansion projects, had they been calculated, would have been positive. While most of the above claims are difficult to verify, the mere fact of their existence casts a shadow of doubt on the economic results of &projects financed from the Loan 589-TU. c. Bank staff review of projects financed from Loan 589-TU and submitted for its approval was focussed mainly on the financial and marketing aspects of these projects -- for the four projects above, comments on these aspects were made practically in each case (see Annex Table 8). While comments on economic aspects of these projects were also made in practically all cases, the Bank staff was taking into consideration the effective protection rates -- generally favorable because a large part of profit was excluded therefrom - and its comments expressed mainly the satisfaction with these rates, and consequently the Bank's approval on economic grounds. Comments on technology and equipment were rare, and this despite the fact that the choice of technology and the size of the plant are largely determinant to the economic viability of industrial projects. iv. The Allocative Pattern and Capacity Utilization by TSKB Borrowers The Bank has generally not tried to influence TSKB's selection of projects or its pattern of investments. 1/ 1/ One exception to this rule arose when the exposure ina particular sector threatened to become excessive. Thus, by the time of the second Bank loan in 1953, TSKB was heavily committed in the textile industry and had a substantial backlog of applications for which it proposed to use much of the new Bank loan. As part of the negotiations for this loan TSKB agreed to make a study of the textile sector. It prepared extensive market studies and discussed them with the Bank. As a result, loans to the textile industry were kept down to a mutually agreed level. - 13 - The proc-eds of the Loan 589 were allocated to a variety of projects, with no single sub-sector predominating (see Annex Table 9). The relatively simple a.nd technically homogeneous industries, such as metal products (mainly nuts, bolts and castings) and basic metals (mainly electrolytic copper and steel) as well as simple transport equipment (radiators, motorcycles) received more than one-half of all loans. A relatively small fraction of che loan -- about 10 percent -- went to consumer goods industries, such as food or textiles. This allocative pattern reflects quite closely the evolution of the internal market demand for industrial goods in Turkey, as well as the incentives given to industrialists to start or expand the production of these goods. The relatively small size of the loans, of which only seven exceed $1 million and none exceed $3 million, indicates that they were made either for expansions of already existing plant capacities, or for the creation of rather small plants. About nine-tenths of the borrowers were established business firms. While there is no information on capacity utilization of TSKB- financed projects, a comparative analysis of productivity of capital could shed some light on this issue. Thus, the average capital: value added ratio for a sample of 23 TSKB-financed projects was, in the early 1970s, about 2.0,and for a sample of 9 projects, financed from Loan 589-TU, about 1.7 (see Table 7). This compares favorably with the capital: value added ratio for India, which was about 2.3 in the early 1960s. However, the Indian manufacturing sector is known to be plagued by considerable idle capacity. Moreover,in the Indian case the capital: value added ratio is based on several thousand enterprises in the Indian organized sector, 1/ while for Turkey the ratio is based on a sample of well-screened projects. For comparison, the capital : value added ratio for the U.S. manufacturing sector was 0.8 in the late 1960s and early 1970s. This implies that the U.S. capital productivity in manufacturing was -two-and-a-half times higher than that of Turkey, while Turkish productivity -- at least for the TSKB sample of projects -- was about fifteen to thirty-five percent above the productivity of the whole Indian manufacturing sector. While international comparisors are often partly misleading these differences tend nonetheless to indicate that the fixed capital could have been more fully utilized by the TSKB-financed projects. v. Project Identification and Sectoral Analysis. TSKB began its project promotion program in 1971. It approached an identification and promotion of new projects by preparing, first, a general analysis of a subsector. One of the first sectors so approached was the construction materials industry, where the type of output, size of plants and their loc;.tion were determined from a linear programming model. A number of project proposals emerged from such analysis and TSKB engineers prepared, on this basis, technical feasibility studies, for which TSKB investment officers were expected to find investors. As most of such projects were until recently of a relatively small size, investors were found among workers returning from Western Europe, where they managed to save enough capital to begin a small-scale production in Turkey. Currently, TSKB began also to identify larger projects, such as 1/ From G. Horowitz - Capital Ratios and Profit in,Indian Industry, Occasional Paper 44, Cornell University, February, 1971. - 14 - a paper mill and a tinplate venture, where necessary investment may reach $70 million. TSKB uses one-fourth of the interest rate spread obtained on the Bank Group-loan granted in 1972 (Loan 845) to finance its promotional and project identification activities. C. Administrative and Managerial Issues i. Loan Arrears TSKB achieved considerable progress in settlement of arrears. While in 1968 the total prinicipal of loans in arrears exceeding 3 months was at the level of LT 103 million, representing 12 percent of the port- folio, and the loans in court were LT 25 million, representing a further 3 percent of the portfolio, by mid-1970 the amount of principal in arrears over 3 months was reduced to LT 40 million, or 2.5 percent of the TSKB portfolio and the loans in court were reduced to LT 17 million. During the subsequent years, both the amount of loans in court and the arrears over three months increased slightly, and by 1974, the former was LT 28 million, the latter LT 56 million. However, since the TSKB port- folio has almost doubled during 1970-1974, these amounts now represent a relatively small fraction of the portfolio (1.7 percent). ii. Administration and Administrative Expenditures TSKB has a sizeable and highly trained professional staff, which has grown from 67 professionals in 1969 to about 120 in 1974, commensurate with the growth of its portfolio. The administrative expenses, mainly salaries, represented 1.0 percent of average total assets in 1969 and 1.4 percent in 1971, or more than the 1.1 percent forecastedThis percentage remained practically unchanged afterwards. As the average assets have fallen short of the planned target, these percentages might have been lower had the TSKB's activity been as buoyant as expected. But even the actual expense level could be somewhat justified. Firstly, TSKB staff is well trained. TSKB had to maintain a competitive salary level to prevent staff turnover, kept at a low level. Secondly, TSKB handles also some purely banking functions, such as letters of credit. This requires a maintenance of a sizable group of administrators and clerks - 123 of them, compared with 64 professional experts, engineers and economists. Thirdly, Istanbul, where TSKB is located, is an expensive city with rapidly escalating costs. Finally, the level of 1.4 percent of administrative expenses to total assets is roughly within the averages for the largest DFCs. A comparison of fifteenDFCs shows that the arithmetic mean of their administrative expenses hovered around 1.5 percent during V. CONCLUSIONS The proceeds of Loan 589-TU were used to enhance the production capacity of the dynamic private sector of the Turkish manufacturing industry. The projects financed from this loan were in non-traditional industries. This, by itself, signifies a departure from the past pattern of the TSKB lending, which had concentrated on textiles and construction materials. Also, during the period of disbursement of the loan, the TSKB began its effort toward a greater regional dispersion of its loans. - 15 - While the general economic impact of TSKB projects appears to be positive, separate economic justifications of projects financed under Loan 589 are, in retrospect, unclear. The reasons for this lack of clarity are manifold. They include among others, the sometimes arbitrary choice of comparative international prices, a largely unjustifiable elimination of effects of high profits on sales' prices, a deviation between the expected and the actual volume of production and finally, the difficulties which occurred in analysing expansion projects, which sometimes were not reviewed apart from entire enterprises. Although the methods of economic appraisal -- and the Bank suggested successively three such methods, beginning in 1969 -- were at times discussed with TSKB, some important areas of doubt remained unexplored and unexplained. Also, the Bank's own analysis of appraisals submitted by TSKB was formal rather than analytical and did not focus on issues, such as tech- nology or the size of the project, which were determinant to project's economic viability. To check such viability, the Bank relied, probably excessively, on effective protection rates, calculated by the TSKB, and this despite the above ambiguities. The results of the TSKB activity toward broadening and deepening of the capital market in Turkey were mixed. On the positive side, TSKB can pride itself in pioneering corporate bond guarantees and in having built up an equity portfolio, which it rotated regularly. Besides these two achievements, TSKB efforts to mobilize domestic resources were rather shy. The Government-imposed low interest rate ceiling was a predominant obstacle to these efforts. The administration and management issues, which seemed important at the time Loan 589 was signed, were successfully removed. TSKB was -- and is -- a dynamic, well-run development finance company, which enjoys the confidence and respect of both business and Government. The Bank monitored TSKB activity quite closely and does not appear to have overlooked any of the important issues of TSKB and of its business'environment. The Bank's contacts with TSKB leaned, however, too much to the purely operational side. Such crucial issues as the interest rate, protection from imports or the method of economic appraisal of projects do not appear to have been analyzed deeply enough or were not treated as real issues until 1972. Also, they were not related closely enough to the broader context of the Turkish economy. Neither were these issues tested on the basis of economic realities of Turkey so as to prove that, if things remain unchanged, a misuse of resources by the TSKB would or might occur. Such approach would only have been possible as a part of the economic work of the Bank but such was not always as closely interrelated with Bank's analysis of the TSKB as it should have been. In other terms the long-term synthetic inclination of the Bank's economic work on Turkey and the short-term operational inclina- tion of the Bank's work on TSKB were not-lrought closer to each other, at least in the late sixties when Loan 589-TU was appraised and negotiated. - 16 - Recent improvements in the resource mobilization and resource allocation, achieved by the TSKB, permit to augur well for the future. At least four concrete steps, decided in 1974, imply a welcome break- through in some important aspects of TSKB activity. Firstly, Government decided to raise considerably the interest rate ceiling. Secondly, TSKB decided to mobilize additional domestic resources by issuing bonds and began to borrow foreign exchange from capital markets abroad. Thirdly, TSKB moved energetically into regional differentiation of its lending and began a well-organized effort to promote and identify new projects. Fourthly, the Bank decided to suggest to TSKB the use of the simplified and clear economic rate of return method instead of other, rather open to errors,methods to appraise the economic soundness of projects. All these improvements matured slowly, because the process of their gestation depended on many factors ranging from Government decisions to changes in TSKB management convictions. Also, the economic circumstances on which such improvements depended have changed. Whether the Bank could have speeded such processes is now a matter of pure conjecture. TURKIYE SINAI KAUKINMA BANKASI A.S. Balance Sheets. Year-End 1968-1971 (Forecast and Actual (LT million)) 1968 1969 1970 1971 1969 1970 1971 (base)--- Forecast -Actual.-- - ASS ES- Cash & Temporary Investments 60.6 59.3 95.9 115.4 93.5 178.5 203.0 Receivables 43.2 39.1 39.1 39.1 43.2 77.0 85.3 Long-term Portfolios Local Currency Loans 401.2 421.7 461.3 503.7 398.2 362.1 368.5 Foreign Currency Loans 549.6 K92.3 750.2 978.1 616.9 1,172.4 1,306.1 Equity Participations 96.6 137.4 152.4 169.9 116.0 109.8 125.8 Less Provisions (29.1) (29.1) (29.1) (29.1) (28.4) (31.5) (29.6) Net Fixed Asbets 11.2 14.5 22.5 22.5 16.6 33.4 45. Government Bonds Required by Law 18.3 20.6 23.3 26.9 21.7 25.8 31.6 Total 1jlg.6 122.8 5 1,277.7 13 LIABILITIES Current Liabilities 74.4 53.1 60.3 65.6 55.6. 93.7 117.6 Subordinated Government Loan 368.1 368.1 368.1 368.1 368.1 368.1 368.1 Other Lira Debt 26.1 52.6 102.6 152.6 42.6 64.7 89.3 Foreign Currency Loans 50.9 603.7 771.7 1,005.9 627.1 1,192.2 1,331.1 Share Capital 65.0 110.5 110.5 110.5 110.5 110.5 110.5 Reserves 67.1 67.8 92.4 123.8 73.8 98.0 123.2 Total ii16 1,25. jjj .6 la826.5 1,277.7 &972 2,1:39. Guarantees of Bonds 50.0 100.0 150.0 73.9 100.8 148.0 Long-Term Debt & Guarantee/ Equity Ratio 7.5 6.0 6.6 7.2 6.0 8.3 8.3 Debt/Equity Ratio as defined in Loan Agreement 1.5 1.6 2.1 2.6 1.7 2.9 3.1 Book Value as % of Par 203 161 1864 212 167 189 211 FENA /TC&J)FC TURKIYE SINAI KALKINMA BANKASI A.S. Income Statements, 1968-1971 (Forecast and Actual (LT million)) 1968 1961970 1971 1969 1970 1971 (base) ( - - - Forecast - - - - - - - - -Actual- - - 7- INCOME Interest on Liquid Funds 5.8 1.8 1.8 2.0 2.1 5.4 11.3 Interest on Loan Portfolio 77.2 87.6- 107.9 134.2 85.8 123.5 162.5 Dividends 6.1 8.7 13.1 14.6 6.3 6.9' 7.4 Commissions & Other Charges 7.9 8 10.8 12.2 7.9 12.4 15.9 Sub-Total 97.0 T0. 133.6 163.0 102.1 T72 7967 Gross Capital Gains & Other Income 11.7 4.0 5.0 5.0 13.9 15.4 1L.2 Total 108.7 110.4 138.6 168.0 116.0 163.6 211.0 EMrEiZES Personnel Expenses 9.8 10.5 11.3 12.1 11.2 12.6 i5.1 Directors & Staff Bonus 1.9 1.9 2.8 3.3 2.1 2.2 2.8 General Administrative Expenses 1.8 1.8 1.8 1.8 1.8 2.3 3.8 Depreciation 0.2 0.3 0.3 0.3 0.2 0.2 0.6 Sub-Total 13.7 177 7777 Taxes, Dues, Fees 5.6 1.7 2.2 2.7 5.6 7.1 6.4 Interest Charges 43.7 54.5 63.3 79.3 69.9 74.0 103.1 Provisions 6.4 - - - 4.8 16.5 21.0 Total 79. 7. 17 7575611.79 T2.76F Gross Earnings 39.3 39.7 56.9 68.5 40.4 48.7 58.4 Taxation 12.2 11.4 17.2 21.6 10.4 14.5 18.1 Net Profit 27.1 28.3 39.7 46.9 30.0 34.2 40.3 Gross Earnings Before Interest, Tax & Provisions as % of Ave. Total assets 8.4% 7.8% 8.7% 8.9% 7.8% 8.7% 9.0% Profit Before Tax and Provisions As % of Average Total Assets 4.2% 3.3% [.1% 4.1% 3.7% 4.1% 3.9% Profit After Tax & Provisions As % of Average Net Worth 21.9% 18.1% 20.7% 21.3% 19.0% 17.4% 18.2% Administrative Cost as % of Average Total Assets 1.4% 1.2% 1.2% 1.1% 1.h% 1.2% 1.6f IIENA/IC&DFC ANNEX TABLE 3 TURKIYE SINAI KALKINMA BANKASI A.S. Summary of Operations, 1968 -1971, Jan.-Sept. 1972 (millions of units) Jan. -Supt. 1968 1969 1970 1971 1972 Approvals (net of withdrawals) Loans: Foreign currency $ 15.2 $ 13.6 $ 21.4 $ 21.6 $ 24.h Local currency LT 125.0 LT 5.0 LT 16.7 LT 14o.6 LT 170.5 $ equivalent $ 29.1 $ 14.2 $ 23.0 $ 31.0 $. 36.6 Equity Investment LT 60.7 LT 12.7 LT 5.9 LT 24.7 LT 30.5 Guarantee of bond issues LT 25.0 LT 30.0 LT 50.0 LT 35.0 LT 18.0 Total $ equivalent $ 38.6 $ 18.9 $ 29.0 $ 35.0 $ T4.1 Commitments (Contracts Signed) Loans: Foreign currency $ 12.8 $ 22.5 $ 22.1 $ 14.8 $ 25,0 Local currency LT 130.4 LT 26.9 LT 14.7 LT 106.5 LT 135.1 $ equivalent $ 27.2 25.5 $ 23.5 $ 21.9 $ 34.7 Equity Investment LT 60.7 LT 12.6 LT 5.9 LT 24.7 LT 27. 4 Guarantee of bond issues LT 25.0 LT 30.0 LT 50.0 LT 35.0 LT 18.0 Total $ equivalent $ 36.7 $ 30.2 $ 29.5 $ 25.9 $ 37.9 Disbursementsy! Loans: Foreign currency $ 16.4 $ 17.8 $ 21.1 $ 21.8 $ 21.0 Local currency LT 120.6 LT 53.2 LT 19.6 LT 79.7 LT 137.9 $ equivalent $ 29.7 $ 23.7 $ 23.2 $ 27.1 $ 30.9 Equity investment LT 229. LT 30.7 LT 12.6 LT 22.3 LT 20.9 Total $ equivalent $. 33.1 $ 27.1 $ 30.0 $ 28.6 $ 32.6 Number of projects approved 101 73- 62 84 79 Number of equity investments committed 7 9 3 7 6 Number of bond issues guaranteed 5 4 5 3 2 1/ All bond issues are disbursed during the year of issue. EMFNA/DFC October 18, 1972 TSKB: COMPOSITION OF DOMESTIC CURRENCY BORROWING, BY SOURCE AND COST (Outstanding at end year, TL million) Year of Interest Loan Rate (%) 1955 1964 1965 1966 1967 1968 1969 1970 1971 Turkish lira 1951 4.5 12.50 3.22 1.65 - - - bonds 1953 5.0 12.50 7.01 5.74 4.41 3.01 1.54 Managed Funds MPPEF 1/ 1951-66 3.5 58.32 217.18 277.59 - - - - - - CPF 1/ 1961-66 3.5 - 69.38 70.50 - - - - - IBNCF 2/ 1961-66 3.5 - 34.11 34.15 35.72 12.20 9.70 7.50 - - Subordinated 1966 3.5 3/ - - - 368.09 368.09 368.09 368.09 368.09 368.09 Govt. Loan Other- 1967 5.5 4/ - - - - 20.00 24.58 24.58 24.58 24.58 Government 1968 5.5 4/ - - - - - - 10.00 10.00 10.00 Loans 1968 - - - - - - - 4.00 4.00 4.00 1969 - - - - - - - 4.00 4.00 4.00 1969 8.0 4/ - - - - - - - 17.10 35.75 1970 3.0 - - - - - - - 5.00 3.00 1971 9.5 - - - - - - - - 8.00 Total (TL million) 83.32 330.90 389.63 408.22 403.30 403.91 418.17 432.77 457.42 Average Cost of TL Loans (%) 3.89 3.54 3.53 3.52 3.61 3.63 3.60 7.17 7.59 1/ The Marshall Plan Private Enterprise Fund and the Capital Participation Fund, which were converted into a subordinated loan from Government in 1966; 2/ The Capital Participation Fund, which passed to the Industrial Investment and Credit Bank (SYKB) in 1967. Subsequent outstanding balances represent the assets of the Fund less amount due from SYKB; x 3/ Raised to 7.5 percent in 1970; 4/ Raised to 9.5 percent in 1970. TSKB: COPARISON OF FOREIG DEBT, BY SOURCE AND COST (Amaounts outstanding, end year, in million US dollars) Year of Interest 1169 Source Loan Pate (%) 1955 1964 1965 1966 1967 196 1969 1970 1971 IBRD 1950 3.75 ) h7915 - -- 1953 4.875) 3.98 3.05 2.08 1.07 - 1966 6.0 - - - - 5.82 9.65 9.92 9.o 8. 1 1969 6.5 - - - - - - 5.79 19.93 26.Z6 1970 7.25 - - - - - - Me Inu 1962 5.5 - 4.80 4.68 4.25 3.52 2.75 1.96* 1.26 0.71 1964 5.5 - 0.35 4.57 4.56 3.93 3.04 2.19 1.60 1.03 1965 5.5 - - 2.10 9.67 9.79 8.92 7.56 6.12 4.62 1966 6.5 - - 0.93 11.18 14.52 13.86 1191 9.61 IM. 1958 5.0 - 5.36 - - - - - - - AID 1958 5.0 - - 3.46 1.83 0.70 - - - - 1964 5.5 - - o.468 4.6a 4.81 4.29 3.65 2.97 2.25 1968 6.0 - . - - . - 1.9 2.65 u.75 EIS 1966-*68 5.5-6.5 - - - 4.78 10.02 18.90 25.07 27.67 27.57 rw 1969 5.5 & - - . - - - 2.50 2.57 2.66 1970 9.5 - . . - - - - 2.'5 1970 9.5 - - - - - - - 0.13 3.95 Total (US million) 14T.79 15.64 18.34 32.78 50.84 62.07 73.99 87.76 10j.77 (TL equivalent) 41.41 142.0 166.5 297.6 461.6 563.6 671.8 1,316.4 1,467.8 Average cost of foreign 4.21 5.04 5.30 5.56 5.80 5.91 57 0.J 6.80 exchange loans (%) ( Increased to 9.5 porcent in 1970. Souroes TSK Annual Reports 1950-1971; Auditor's Reports on TSKB by Arthur Anders-n & Co., 1962-1971, ANNEX TJALE 6 RELATIVE MOVE:42E;T 0 D1OMESTIC A1D Ii?ORT PRICES (1968-100) ý,~ (:. --?'TIndcy- of lI Jaýtiv.e Averos TjX: OfficiTl 100 Lmport EffCetive Prices 0-urden or Exchonge Rate Effective Price Cost of inports in for Inports Exchange Rate Index Imports GlIP Prices/TL TL (') (TL/US$) for Imports In $ In TL /1 Defl. Cn,t of T. 1952 31.9 2.82 3.72 73.9 18.4 28.2 - 153.3 1953 34; 3 2.82 3.79 70.0 17.7 29.7 167.8 1954 38.4 2.82 3.90 T7.7 20.2 33.1 163.9 1955 39.9 2.82 3.95 93.3 24.6 37.3 151.2 1956 40.3 2.82 3.96 93.3 24.7 39.3 159.1 1957 72.8 2.82 4.87 96.4 31.3 48.4 154.6 1958 105.6 5.41 11.23 93.5 70.1 54.6 77.9 1959 126.5 9.03 20.45 90.9 124.1 65.9 53.1 1960 69.2 9.04 15.30 92.4 94.4 67.8 71.8 1961 34.7 9.04 12.18 94.2 76.6 71.1 92.8 1962 35.8 9.04 12.28 94.3 77.3 74.8 96.8 1963 36.1 9.04 12.30 95.4 78.3 76.3 97.4 1964 52.9 9.08 13.88 10>4.7 97.0 81.5 84.0 1965 58.6 9.08 14.40 98.7 94.5 84.9 89.8 1966 " 53.2 9.08 13.91 100.7 93.5 90.4l 96.7 1967 64.8 9.08 14.96 101.4 101.3 96.2 95.0 1968 65.0 9.08 14.98 100.0 100.0 100.0 100.0 1969 61.3 9.08 14.65 103.6 101.3 103.2 103.8 1970 53.6 11.45 17.59 110.0 129.2 115.6 89.5 1971 39.5 15.00 20.93 116.7 163.1 136.6 83.8 1972. 39.6 14.oo 19.54 123.7' 161.4 155.3 96.2 Source: IBRU, bascd on various Turkish sources, and If, /1 Import price index ir. US$ X index of efrctive excha,n;e ra-te for i.ýport3. Annex Table 7 ESTIMATE OF ECONOMIC VIABILITY OF PROJECTS FINANCED FROM IDAN 580-TU Synthetic Performance Indicators Statistical Inputs Economic Results Competitive Capital Price Productivity Profitability Wages Domestic Value Added World Market Value Added Effective Protection Rate Economic Rate of Return domestic fixed wages & Version A Version B Version A Version B Appraisal Stage Operetional Stage prine assets profits salaries profit profit domestic domestic Version A Veraton B Versio S f/ internat'l value value value considered considered supplies supplies price added added added factor in full not are price b/ amount c/ subtracted subtracted Type of from cif from cif Product Investment price d/ price a/ (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) Metas Ismir Metaturji steel new project 1.4 2.9 43% 10.4% 17,079 19,324 17,030 14,815 -5% 30.4% neg. w.v.a.* negative Pancar Motor Sanayi diesel engines expansion 1.4 1.8 45% 24.3% 38,529 52,270 68,102 49,615 -43% 5.4% 0 10% Cannakkale Scramik wall tiles expansion 3.5 1.2 90% 2.3% 11,419 27,084 12,065 9,064 -5.4% 199% 363% negative Rabak Elektrolitik aluminum expansion 1.6 1.7 65% 2.6% 164,835 73,826 254,997 119,386 -35% -38% 294% 2% Pimas Plastik plastic pipes expansion 1.6 1.3 65% 7.7% 28,495 18,514 42,224 14,146 -33% 31% 1,060% negative Celik Halat ve tel Sanayii steel wire rope witb local raw materials expansion 2.6 1.1 72% 3.7% 13,439 10,517 11,388 1,383 18% 660% 291% negative Metal Kapak Sanayi ve Ticaret bumper and rime new project 2.7 1.4 73% 17% 2,449 4,306 2,520 1,952 -.03% 120% -11% 12% Tekfen Endustri ve Ticavet bulbs expansion 2.1 8 86% 2.6% 3,592 4,229 5,114 2,606 -29.8% 62% 118% 48% Veril Sanayii barrels expansion 1.5 2.9 48% 13% 8,295 2,345 11,285 4,573 -27% -48% -11% 12% * Neg. W.V.A. - negative world market value added (which makes the rate of effective protection almost infinitely high). a Elements of these inputs were taken from project appraisal files, submitted by the TSKB to the Bank. Version A has been the one calculated by TSKB. Version B has been recomputed by the OED, in order to take account of the full dimension of profit and to reduce the world market value added to its correct dimension (by excluding from ct cost elements related to local procurement, so that it becomes conceptually comparable with domestic value added, from which these cost elements were also excluded). b/ A (impure) version of value added - indirect taxes + depreciation (in local currency) + 15% return on capital + labor costs + adminstration, overhead, etc. + non-tradeable inputs and materials + repairs and maintenance, etc. / N (pure) version of value added = direct taxes + depreciation + full profit + labor costs + administration, overhead, etc. + repairs, maintenance, etc. d/ A (impure) version of world value added = (cif unit price - direct and first round indirect imports) X (physical output) e/ B (pure) version of world value added - Version A (as above) - raw matezhls and other locally procured (non-traded) supplies. / & p/ These calculations were made by the DFCD Special Study Mission, for a report published only in draft form. The Special Study Group used actual costs, prices and output, but its definition of a project (expansion vs. entire enterprise) was somewhat different frot Versions A and B. Therefore the comparison between A, B and Special Study calculations should be made with caution. Source: 1. Sub-project appraisal exports submitted to the IBRD under Loan 589 by TSKB. 2. TSKB Special Study (undated ) by DFCD. 3. DFCD memo Economic Appraisal of DPC Projects, May 15, 1970. pro cces, finncia rom Loan 5L9-TU Equ-pmenr Financial Application of the Project Technoloy Market SMpliers Projections Economic Analysis ,rojects above free limic Metas Ir.afr Metalurji TSKB analysis good. Cost cf equipment Selling price conservative; TSKB is using in its calculation a'kethod (steel) reasonable. profits will be higher. agreed with Bank" giving effective protection equal to -5., which passes the required test. Pancar Motor Sanayi Treatment of marketing EP of -43%; but will be reached only hen 60% (dual engines) aspect not well organized capacity utilization attained. ind. Proj. and unclear. Dept.; concerned with competitiveness of larger engines. Price is Loo high to find a ready market. Zannakkale Seramie Export aspect should have No details of Loan which for medium size tile and -17.7% (wall tiles) been dealt with in more was to be obtained were for smaller tile. Calculation made for the latter detail. provided. type only. Rabak 7lektroliti< Plant antiquated, No Possible competition from Weak manarament. Adequate economic justification. (electrolitic copper) i,plications of tms another producer in aluminum (Appraisal: manageent EP - 357. Quirk generation of profits should finding drawn. - hence copper expansion adequate). be considered of lesser priority than modernization advisable. of equipment. ProfcPts below free limit Piccs Plastik (plastic pipes) Celik Halat ye Tel Sanayi Questioned whether it was Quality or a locally Veracity of calculations Question on marginal costing iwhether totlal (steel wire rape) not more profitable to supplied input ques- questioned, project should be evaluated rather than that produce reinforcing bars tioned. Difficult to part financed by the particular Loam . High rather than wire rods, obtain high quality protection o whole project. wire and therefore theb d s loan may nor be justi- fied. Tekfen Emdamstri ye efarit (bumoeer a rims) Metal Kapok Sanayi (bulbs)' Varil Samayi Analysis too elaborate. (barrels) Source: Eased on the review of subprojectsq files. Note: share spate for comrents blank, no coament was made. 50. loan ay nt be usti TURKIYE SINA': KALKIN'-A BANKASI A.S. Sub-Prejects bY Industry (Foreign Exchange Cor-onent Financed from Loan 589-ILT) A Project B Project Total No. -000 No. O No. '0 % Food - - L 936.0 4 936.0 3,72 Textiles - - 6 1,050.0 6 1,050.0 4.17 Forestry Products - - 2 357.5 2 357.5 1.2 Pulp & Paper 1-- 1,451.5 - - 1 1,451.5 5.77 Leather - - 1' 53.0 1 53.0 0.21 Plastics 1 440.0 4 1,066.2 5 1,506.2 5.98 Chemicals 1 1,611.0 1 88.9 2 1,699.9 6.75 Ceramics 1 1,000.0 2 181.0 3 1,181.0 4.69 Glass 2 1,650.0 1. 72.0 3 1,722.0 6.84 Iron & Steel 1 2,150.0 4 614.0 5 2,764.0 10.98- Metal Other Than Iron 1 2,767.0 - - 1 2,767.0 10.92 Metal Products 5 4,17o.o 13 2,360.4 18 6,530.4 25.93 Machinery - - 2 201.0 2 201.0 .80 Electrical Machineries - - 5 727.3 5 727.3 2.89 Motor Vehicles 2 1,753.0 3 428.5 5 2,181.5 8.66 Other Industries -. - 1 51.6 1 51.6 .20 Total _15 16,992.5 49 8,187.h 64 25,179.9 100.00 Reduction & Cancellations 179.9 Net Amaint Disbursed 25,000.0 EMENA/IC&DF September 19714 A] V: TAPLE 1! Capital Labor, and Capital Output, Ratic _ 1971 ERR Fixed Crnitfl/Labor Fixed Capital/OL'tPut Rank Narme of Firm (TL ll)ons) 1 Esas 0.10 0.4b 2 Tekfen 0.06 0.59 3 Dyo ve Sadolin 0.07 0.22 4 Tat Konserve 0.27 0.'t2 5 Pitelli 0.23 0.77 6 Paktas 0.05 0.44 7 Nuh Cimn3nto 0._J 1.16 8 Bursa Cimento 0.29 1.17 9 Turmika 0.14 0.38 10 Akin Tekstil 0.07 0.71 11 Izocam 0.14 0.58 12 Varil 0.14 0.48 13 Altilar 0.06 0.66 14 Pancar Motor 0.07 0.83 15 Sasa 0.29 0.68 16 Rabak 0.11 0.27 17 Sifas 0.29 0.99 16 Pimas 0.15 0.58 19- Canakkale Seramik 0.07 0.68 20 Celik Halat 0.31 1.16 1/ Capital-Labor and Capital-Output ratios refer to the firm and not to the project. Data for three firms (Metas, Metal Kapak,Demirci) were not useable. Note: Capital stock data were obtained from the balance sheets of the firms. The data were adjusted for price changes, ana are expressed in 1971 prices (TI,). Sales figures are from profit and loss statements. Employnent data refer to total employment in the firms, and are therefore usually larger than project generated employment. Employment data were taken from annual end year reports.