Turkey - South Antalya Tourism Infrastructure Project

Document of FILE CDPX The World Bak FOR OFFICIAL USE ONLY IReport No. P-1882-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR THE SOUTH ANTALYA TOURISM INFRASTRUCTURE PROJECT June 22, 1976i This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Unit Turkish Lira (TL) US$ 1 TL 15.00-/ TL 1 us$ 0.0625 TL 1,000 US$ 62.50 TL 1,000,000 us$ 62,500 Turkish Fiscal Year = March 1 to February 28 ABBREVIATIONS TEK - Turkiye Elektrik Kurumu MTI - Ministry of Tourism and Information TBI - Tourism Bank, Inc. MRR - Ministry of' Reconstruction and Resettlement SEE - State Economic Enterprise MNE - Ministry of National Education PRD - Regional Tourism Project Execution Directorate PTT - Post, Telegraph and Telephone 'THY - Turkish Airlines l' Appraisal Report is based on a rate of exchange of US$1 = TL 15.00; as a result of several recent adjustments the rate stood at US$1 = TL 16.00 as of April 2, 1976.  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTI]ON AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR THE SOUTH ANTALYA TOURISM INFRASTRUCTURE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Turkey for the equivalent of US$26 million to help fi- nance the foreign exchange cost of the South Antalya Tourism Project. The loan would have a term of 25 years, including 6 years of grace, with interest at 8.85 percent per annum. US$2.6 million wouLd be relent to Kepez A.S., a private power company, at 11 percent per annum, with a repayment period of 10 years, including 3 years of grace; and US$1.8 million to Post, Telegraph and Telephone (PTT) on the same terms. PART I - THE ECONOMY 1/ 2. An economic updating mission visited Turkey in November 1974 and its report (No. 71la-TU) entitled "Current Economic Position and Prospects of Turkey" dated June 9, 1975, was circulated to ithe Executive Directors on June 17, 1975. The economic situation of Turkey was reviewed anew by a Bank mission in April 1976; its findings are being analyzed. A country data sheet is at- tached as Annex I. 3. Despite an uncertain domestic political situation resulting in fre- quent changes of Government since 1971 and, more recently, the international recession, Turkey has maintained an impressive rate of economic growth. GNP grew rapidly in the last decade, averaging an impressive 7 percent annual growth in real terms in the period 1962-72. Industry, power, transport and construction were the sectors contributing most to this growth rate. Due largely to a decrease in agricultural production reflecting poor weather con- ditions, the growth rate dropped to 5.5 percent in 1973, but reccvered to 7.4 percent in 1974, and reached an estimated 7.9 percent in 1975, ccmpared to the Third Plan (1973-77) target of an average of 7.9 percent per annum. Despite some difficult problems that the economy faces, this relatively high growth rate underlines the basic vitality of the Turkish economy. The main issues facing the Government, which require the establishment of priorities as well as of corrective measures, are: (a) high rate of inflation; (b) insufficient mobilization of public resources; (c) employment generation problems; (d) deter- ioration in the balance of payments; and (e) inadequate coordination among Government agencies in project implementation (discussed in para 13 below). 4. The budgetary situation in the last decade was dominated by the relatively rapid growth of public expenditures. Although tax revenues also grew rapidly, the increase was more than offset by the rise in Gcivernment 1/ This section is the same as that contained in the President's Report (P-1847-TU) for the Third Livestock Development Project, dated May 12, 1976. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 2 - expenditures and transfers. As a result, the overall budget deficit widened and the Treasury borrowed increasingly from the Central Bank. In 1972 and 1973, the Treasury introduced a stricter control of current expenditures and succeeded to some degree in shifting the sources of finance for the budget deficit from the CentraL Bank to the sale of Government bonds to the public. However, partly due to a shortfall in tax revenues and partly due to increased current expenditures resulting from inflation and the Cyprus operations, the budget deficit rose again in 1974 to TL 7.3 billion (compared to TL 5.4 bil- lion in 1973). Central Bank financing of the Treasury rose by TL 4 billion and became a major factor in monetary expansion at a time when stricter mone- tary controls were needed. The deficit in 1975 was originally estimated at TL 9 billion, but will more likely be significantly larger. 5. Over the years, the State Economic Enterprises (SEEs) have general- ly earned low profits, necessitating an increase in budgetary transfers from public resources to meet their operating and investment needs. A significant portion of the SEEs' deficits are accounted for by the Turkish Railways and the Coal Corporation. Other SEEs have shown either small profits or small losses. During 1974, the prices of several SEE products were raised sub- stantially (ranging from 20% to 167%) to improve their respective financial situations. In addition, railway tariffs were increased by an average 56 per- cent in 1975. The savings performance of the SEEs showed some improvement in 1973 and 1974, and they were able to finance an increased proportion of their investment from their own resources. However, because of delays in implement- ation resulting from poor managerial and limited technical capabilities, and because of difficulties in the procurement of imported materials, gains are still below Third Plan targets. Consequently, many SEEs continue to rely on substantial budgetary transfers. The reform of the SEEs--in organization, management, executive and labor skills and pricing policies--remains crucial, especially if Turkish industry is to be prepared for competition from the EEC. Realistically, these basic reforms can only be initiated by a strong and stable Government which commands significant and coherent parliamentary support. 6. The rate of domestic inflation has been high in recent years. The average rate of increase in wholesale prices rose from about 20 percent per annum in 1973 to nearly 30 percent in 1974. Inflationary pressures have been partly fueled by growth in domestic liquidity, which averaged about 25 percent per year during 1970-74. Other contributing factors include increases in agricultural support prices for domestic and export products as well as in minimum wages, and substantial increases in import prices. Measures to re- duce the growth of domestic liquidity, without discouraging investment and growth, are essential to ease inflationary pressures. The trend towards rapid increases in Central Bank financing of the public sector needs to be reexamined. In late 1974, the Government raised interest rates to encourage private savings and long-term lending. The interest rate on medium-term credit was raised from 12 to 14 percent and rates on time deposits up to one year from 4 to 6 percent. The present Government of Prime Minister Demirel regards the restoration of domestic price stability as one of the key prob- lems on which Government policy must be focused. There has in fact been a  significant reduction in the rate of inflation in the last year. The whole- sale price index rose by only 11.0 percent in 1975 compared to 30 percent in 1974; and the Government estimates an average rate of inflation (as measured by their GNP deflator) of only around 16 percent in 1975, compared to 27 per- cent in 1974. 7. Turkey's development strategy places greater emphasis on growth of output through higher labor productivity than on increased employment. As a result, the labor surplus, including that in agriculture, rose from an esti- mated 1 million in 1962 to 1.6 million in 1973, representing about 10 percent of the labor force. Until 1973, emigration, especially to Germany, partially eased the pressure on employment. Between 1965 and 1973, net emigration totaled about 450,000. The economic slowdown in Europe has, however, con- siderably reduced labor emigration from Turkey from 136,000 in 1973 to only 20,000 in 1974 and 5,000 in 1975. Nevertheless the Third Plan continues to emphasize investment in capital-intensive industries, and estimates the non-agricultural labor surplus to grow to 300,000 by 1977. With prospects of further emigration of Turkish labor to Europe reduced, at least in the medium- term, unemployment should be a major concern of economic policy. A pilot land reform program is currently underway in Urfa province in the southeast where most of the larger farms are located; expropriation of land was started in November 1974. Speedy implementation of rural development programs would also help to slow migration and ease unemployment in rural and urban areas. In addition, labor intensive production methods need to be emphasized, where appropriate, in the formulation of projects. liowever, even with these measures, and faster growth than planned in construction and services, unemployment is likely to remain a significant problem. 8. The Third Plan constitutes the first phase of Turkey's long-term strategy for the period 1973-95. The ultimate objective is to raise stand- ards of living in 1995 to those of Italy in 1970 through rapid industraliza- tion and decreasing dependence on external resources. The Plan aims at an- nual growth rates of 8 percent in GDP, 12.7 percent in fixed inve!stment, a marginal national savings ratio of 38 percent (compared with about 18 per- cent in the Second Plan), an annual increase in commodity imports and exports of 9.4 percent and 7.1 percent respectively, wlhich, taken together with pro- jected growth in invisible earnings (mainly workers' remittances), is ex- pected to result in a decline in gross inflows of official external assis- tance. 9. Prospects for continued high economic growth remain good, although in view of the shortfall of the first two years of the Third Plan, achieve- ment of the 7.9 percent average rate of annual growth during the Plan period seem unlikely. The Plan's projections also seem to be overly optimistic on prospects of an increased savings level and balanced external accounts with reduced levels of external assistance. Experience during the last two years suggests that present efforts to mobilize greater domestic savings to sup- port a rapid growth of investment, especially in the public sector, need to be greatly intensified. The Plan anticipates that two-thirds of the increase in national savings will come from the public sector, through in- creases both in surpluses of the SEEs and in tax revenue. Given the past  performance of SEEs and delays in implementing a general reform, (see para- graph 5 above), the expected rapid growth in their surpluses is not likely to be realized. Given the present domestic political outlook, it will also be most difficult to raise tax revenues to the extent envisaged by the Plan. There is nevertheless scope for increases if appropriate policies are pursued more vigorously, e.g. improving tax administration, widening tax coverage to include agricultural incomes and service incomes, increasing the rate of property taxation, and introducing a value added tax. Domestic resource mobilization in the public sector is, in any case, likely to continue to be a significant constraint in the growth of public investment. Besides improved financial performance from the SEEs, increased borrowing abroad as well as increased long-term borrowing from the domestic private sector will be neces- sary to achieve the ambitious public sector investment targets. As Turkey's development program requires funds in excess of savings that can be mobilized domestically, and these cannot be provided in adequate amounts if foreign finance is limited to foreign exchange cost of high-priority projects, some local cost financing by foreign lenders will be required. 10. The balance of payments projections of the Plan have not taken into account recent developments on the international scene. The sharp increase in the price of petroleum and other imports during 1974, and the prospects of further increases in import prices in the next several years, indicate that foreign exchange needs for financing imports will be much higher than projected. Commodity imports and exports in 1973 were already above the level projected for 1977. Workers' remittances in 1972 were higher than the 1977 target and continued to grow until recently. However, they decreased by 8.0 percent in 1975 as compared to 1974, and their future is uncertain, due to the temporary restriction on further entry of foreign workers into the major labor-importing countries of Europe. On the other hand, recent agreements between Turkey and Libya to send Turkish workers to Libya, and the possibility of similar arrange- ments with other oil-producing countries, should help alleviate the situation. II. After substantial surpluses in 1972 and 1973, Turkey's overall bal- ance of payments experienced a deficit in 1974, with net reserves declining by about $360 million. This was due partly to a sharp increase in the trade deficit and a slowdown in the growth of workers' remittances, as well as to a reduction in official capital aid inflows. The large trade deficit resulted mainly from an 80 percent increase in the import bill (in particular, petro- leum, wheat, iron and steel), due mainly to higher prices. Imports continued to rise at a rather rapid rate in 1975, and totaled about $4.7 billion during the year. On the other hand, export earnings, which totaled about $1.4 bil- lion in 1975, registered a decline because of the recession in major importing countries, agricultural supply constraints, restrictions on exports to relieve domestic shortages, relatively inflexible export pricing policies, diversion of some goods to Cyprus, and deteriorating terms of trade. As a result, gross reserves declined to about $1.8 billion at the end of 1974, and further to about S1.0 billion at end of December 1975 (the equivalent of about 2.7 months of imports at the present rate). In the medium-term, Turkey's balance of payments is likely to come under significant pressure. Such pressure could, however, be partly eased, by lifting quantitative restrictions in certain  exports, e.g. cement and olive oil, designed to accommodate domestic supply. The Government should also avoid fixing commodity prices at levels above those prevailing in international markets. Even more important are deliberate measures to contain the growth of imports. Without such measures, and in the absence of a resurgence of growth in Europe, Turkey faces the prospect of continued, perhaps intensified, pressures on its balance of payments and its reserves. In May 1974, the Turkish lira was revalued vis-a-vis the dollar from TL 14.00 per US$ to TL 13.50 per US$, without a change in parity with other currencies. In September 1974, the exchange rate per US$ was readjusted to TL 13.85, and in April 1975, it was restored to the previous parity of TL 14.00. As a result of subsequent small devaluations, the rate per US$ stood at TL 16.00 as of April 2, 1976. 12. At the end of 1974, total external debt outstanding anc disbursed was estimated at $3.1 billion, of which all but 3 percent was public or pub- licly guaranteed. The share of the Bank Group was about 11 percent of total debt outstanding and about 8 percent of total debt service in 1974. The average terms of new credits made available to Turkey have been hardening in recent years, and this trend is expected to continue. Debt service as a ratio of exports of goods and non-factor services plus workers' remittances was about 6.5 percent in 1974, compared to 12 percent in 1971. Despite the deterioration in the balance of payments in 1975, the debt service ratio is expected to remain within acceptable limits in the medium term, if proper policies are pursued. In view of the decline in foreign reserves and anti- cipated pressures on its balance of payments in the medium term, Turkey should continue to exercise considerable care in its external debt manage- ment, and its resort to suppliers' credit financing should be also kept within closely monitored limits. Meanwhile, Turkey continues to be crecditworthy for Bank financing. PART II - BANK GROUP OPERATIONS IN TURKEY 13. The 1970 economic stabilization program and devaluation of the Turkish lira, which improved the balance of payments, enabled Bank Group lending, which had previously been intermittent, to be established on a continuing basis at a high level. As of June 14, 1976, and inclusive of the $56 million TEK II loan signed on that date, the Bank Group has lent $1,295.2 million to Turkey through 46 lending operations (or 41 projects, since both loans and credits were provided for some projects). Fourteen of these opera- tions have been in agriculture and rural development (including multipurpose), sixteen in industry (including DFCs), ten in power and the rest in urban development, transportation, and education. Agriculture and rural develop- ment account for 26 percent of the funds lent, industry and DFCs for about 38 percent and power for about 26 percent. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of May 31, 1976 respectively, with notes on the execution of ongoing projects. Implementation of projects has been satisfactory in the private sector, but less so in the public sector where significant delays have resulted from pclitical uncertainty, limited coordination among agencies, staffing problems and related administrative  - 6 - delays. Disbursements have consequently been slower than expected. To im- prove this situation, the Government has recently established a ministerial coordinating committee, supported by a new secretariat located in the Ministry of Finance, which is responsible for coordinating all aspects of Bank Group operations. In connection with this new framework, the Government and the Bank initiated in June 1975, joint quarterly reviews to identify and resolve key bottlenecks impeding satisfactory project implementation. The results so far have been encouraging, considering that these reviews were only recently initiated, and the rate of commitments and disbursements in the last few months has begun to improve. 14. The serious issue besetting the Elbistan power project (Loan No. TU-1023) has been resolved. As a condition of effectiveness of the loan, the Government had undertaken to raise electricity tariffs by about 30 percent to enable the power authority (TEK) to earn the 8 percent rate of return prescribed by the TEK law and set forth in the loan agreement with the Bank. Because of serious inflationary pressures faced in 1974-75 and in recognition of the Government's anti-inflationary policies, agreement was subsequently reached on a tariff increase that would enable TEK to earn 6 percent in 1976. An appropriate increase, which the Government estimates will enable TEK to earn a 6 percent return in 1976, was recently decreed by the Government. The Bank has therefore made this loan effective as of June 1, 1976. This will also enable Turkey to utilize loans provided by EIB amd KfW for this project. 15. Bank lending to Turkey is mainly directed at supporting Turkish ef- forts to improve: (a) lagging public sector saving, through gradual improve- ment in the SEEs; (b) better income distribution and improvement in the level of living standards, through rural development efforts, better urban planning and increased employment and incomes; and (c) long-term capacity to earn fo- reign exchange, through promotion of industrial and agroindustrial exports and tourism. While the Bank continues to support gradual institutional and structural changes in the sectors in which lending is provided, continued substantial external financial assistance is equally important, in view of the increase in projected capital import requirements and the pressures on the balance of payments and overall fiscal resources, mentioned in paragraphs 9-11 above. 16. In support of these objectives, it is proposed to continue to devote the Bank's development efforts to certain key sectors, of which agriculture is the most important. In this sector, emphasis is being put on rural develop- ment, the strengthening of agricultural credit mechanisms, and livestock, as for example the Agricultural Credit and Agroindustries Project (loan 1248-TU), and the Third Livestock Development project (loan 1265-TU), both signed in May 1976. Industry (including mining and DFCs) and power, where the gradual strengthening of the SEEs is the key task, will also receive significant sup- port. This program is supplemented by projects such as the proposed tourism project and future ones in selected sectors including urban development and  transport. Until recently, Bank lending was ailso focused in two geographical areas: (i) the Istanbul region, with emphasis on urban planning, water supply, power distribution and industrial finance; and (ii) the Cukurova region around Adana on the southern coast, with emphasis on power, irrigation, and fruit and vegetable production. Lately the focus has been gradually broadened, especially to include the Anatolian plateau and eastern Turkey in support of efforts to widen the geographical base of development, develop rainfed agriculture, improve the distribution of income, and discourage rapid urban migration and encourage tourism development. The latter will be sup- ported through the proposed project. Other projects under preparation and being processed towards appraisal include wastewater disposal in Istanbul, a hydroelectric project, a second DFC operation with the State Investment Bank (DYB), and a second railways project. 17. IFC has invested in the production cf nylon yarns, pulp and paper, glass, aluminum steel pipes and tourism. As of May 31, 1976, gross commit- ments totaled $142.97 million, of which $75.72 million were stilL held by IFC. IFC is currently investigating investment opportunities in the industrial sector, including textiles, synthetic fibers and inorganic chemicals. PART III - THE TOURISM SECTOR 18. Turkey stands out in the Mediterranean as a country which offers an impressive array of tourism resources: a vast coastline with unspoiled beaches and a pleasant climate, mountain scenery, and the archeo:Logical remains of some of the oldest civilizations of the world. Further, Turkey is within three to four hours flying time from northern and central Europe and, unlike other developing countries, is easily accessible by car and train. Despite such striking advantages, tourism was not given a significant role in Turkish development strategy until the last few years. 19. Despite the lack of a major tourism development effort, Turkey's inherent attractions resulted in a steady and rapid increase in foreign tourist arrivals in the 1960's and early 70's. However, the absolute numbers of arrivals still remain below those of most other Mediterranean countries, and well below Turkey's potential. During the period 1963-73, the number of foreign tourists increased from 155,000 to 776,000. Following the energy crisis, the economic recession in Europe and the Cyprus war, arrivals dropped to 662,000 in 1974. However, between 1968 and 1974, the annual rate of in- crease was 14.1 percent. The number of excursionists (i.e., foreigners visiting the country for less than 24 hours) jumped from 44,000 in 1963 to 562,000 in 1973, and tapered off to 370,000 in 1974. In recent years approxi- mately 60 percent of the tourists have come from France, United IKingdom, Germany, Italy and the USA. The average length of stay of foreign tourists was seven days for 1973-74. In the last 10 years, foreign tourist traffic has followed a seasonal pattern, with the summer months accounting for about 57 percent of total annual arrivals.  20. Tourism in Turkey is, however, not limited to foreigners. Because of Turkey's large population and rising living standards, domestic tourism is significant. The Ministry of Tourism and Information (MTI) estimates that domestic tourism has increased at the rate of about 10 percent annually be- tween 1965 and 1974, and in 1974, accounted for nearly 3 million hotel visits. 21. The country's hDtel capacity has, however, not kept up with the grow- ing number of tourist arrivals and constitutes a bottleneck to future tourism expansion. In June 1975, there were 42,733 beds in registered tourism es- tablishments. The annual rate of increase of these accommodations averaged about 8.5 percent in the 1963-1975 period. In 1975, there was also an addi- tional 214,000 beds in unregistered establishments. The majority of Turkey's accommodations are privately owned and are concentrated in the country's largest cities. The Government owns and operates 13 hotels and holiday vil- lages, comprising 12 percent of total registered capacity. Many of the exist- ing luxury and class A hotels and vacation villages are owned by nationals, but managed by foreign operators under contract. Room occupancy patterns vary according to location. In major cities, occupancy rates are high throughout the year, averaging about 75 percent. In contrast, Antalya follows the seasonal pattern of other Mediterranean beach resorts, with a June-to-September rate of 80-90 percent, and an annual average of 45 percent. 22. The gross foreign exchange receipts from tourists represented 13 percent of the country's total foreign exchange earnings from the export of goods and non-factor services in 1974. In the season, about 38,000 Turks are directly employed in the hotel industry. Another 40,000 jobs in res- taurants, shops, tour agencies, handicrafts, transport and agriculture are indirectly dependent on the hotel industry. 23. Since the early 1960's, the Government has financed much needed in- vestment to support tourism in a number of functional areas and geographic locations. Nevertheless, tourism infrastructure, especially outside the main cities, as well as tralning school capacity for hotel personnel, remain as key bottlenecks to further private investment in hotels and related superstruc- ture, which is urgently7 needed to enable Turkey to benefit from the great tourism potential it possesses. Between 1962 and 1975, the Government in- vested nearly $180 mil:Lion in the tourism sector. These expenditures com- prised investments in infrastructure (45 percent), hotels (30 percent), tour- ism promotion and hote:L training schools (12 percent) and archeological resto- ration activities (13 percent). Various incentives are also available to stim- ulate private investment in the sector: (i) long-term loans at preferential terms (8 percent interest rate, 15-year maturity, three-year grace period) through the Tourism Bank (TBI); (ii) favorable selling and leasing terms for hotel or resort development sites; (iii) tax relief, including partial rebate of corporate taxes, and five years' exemption from real estate taxes; (iv) exemption from custom luties on imported materials and equipment required for hotel construction. These incentives are in line with those offered in other 'lediterranean countries. However, the administration of the incentive package  - 9 - is cumbersome and it is not clear to what extent a different "mix" of incen- tives would improve resource allocation in the sector. In the circumstances, the Government has agreed, as part of the proposed project, to undertake a study of the incentives program and its possible need of modification (draft Loan Agreement, Section 3.11). 24. The Ministry of Reconstruction and Resettlement (MRR) and MTI are cooperating in preparing and implementing the physical plans for tourism development. Within the tourism sector, MTI is responsible for defining development objectives, establishing policies, preparing regional plans for development, publicizing abroad the country's tourist attractions and over- seeing the operations of the Tourism Bank (TBI). TBI, established under corporate law in 1960 as a State Economic Enterprise (SEE), has twD main responsibilities: (a) providing credit for tourism investments, particularly for hotel development; and (b) participating directly in hotel construction, leasing and management. Between 1971 and 1974, TBI lent US$18 million to help finance 109 projects in the tourism sector. With 770 rooms in hotels and vacation villages under its management, TBI is now also one of the biggest hotel operating companies in Turkey. 25. MTI and the Ministry of National Education (MNE), share jointly the responsibility for hotel training. MTI operates four vocational training centers, located in Ankara, Antalya, Istanbul, and Izmir, and a fifth in Urgup in historic Cappadocia southeast of Ankara, is planned for 1976. Since 1967, these centers have trained about 2,200 students in basic trade skills required in the tourism sector. The MNE has three high schools which provide three- year training programs in hotel middle management, located in Ankara, Istanbul, and Kusadasi on the Aegean coast. A fourth school, to be located in Antalya, is planned for 1976. These high schools have produced about 2,000 graduates since the program was established in 1964. 26. To help Turkey increase foreign exchange earnings and also benefit from the significant employment stimulated by the tourism industry, recent governments have accorded high priority to the development of the tourism sector. The Third Five-year Development Plan (1973-77) envisages a total investment in the tourism sector of $300 million ($80 million more than the figure in the previous plan). Planned development of priority regions for mass tourism is stressed. About a third of the planned investments will be spent on infrastructure, and the balance on hotels and tourism related facil- ities. While the private sector is expected to continue to play a major role in the development of accommodations, direct government participation is envisaged to supplement private initiative, should the latter prove inade- quate. According to the Development Plan, the number of foreign tourists (including excursionists) in Turkey is expected to increase by 13 percent a year and gross tourist receipts by 20 percent by 1977. These estimates are in line with the long-term projections of Mediterranean tourism markets, which anticipate that Turkey will double its market share by 1985 and that 52,000 additional beds will be needed by 1980. Given l'urkey's vast tourist potential and the Government's new commitment to develop it, these targets sesem realis- tic and merit support and encouragement.  - 10 - PART IV - THE PROJECT Project History 27. In 1969, the Government established as a priority "Tourism Develop- ment Region", the entire coastal strip (three kilometers wide) from the Dardanelles near the northern end of the Aegean Sea to Antalya near the middle of Turkey's Mediterranean shore. In 1971, the MTI began preparing tourism development plans for three major coastal sub-regions in this belt: the North Aegean, the South Aegean (Mugla), and the Mediterranean (Antalya). In 1973, the Government and a Bank mission selected the proposed project area south of Antalya, as the most promising of a number of alternative locations for a possible tourism infrastructure project in Turkey. A feasibility study was subsequently prepared by MTI's Planning Department, with the assistance of consultants financed under a UNDP project, with the Bank as executing agent. The project was appraised in November 1975. Negotiations were held in Washington between May 27 and June 4, 1976. The Turkish Delegation was led by Mr. Muammer Akinci, Chief Economic and Financial Counselor of the Turkish Embassy, and included Mr. Ozkan, Deputy Undersecretary of MTI. Project Setting and Area 28. The proposed project, which is the first Bank-financed tourism project in Turkey, is also Turkey's first integrated planned effort in the tourism sector. Its objective is to assist Turkey in developing South Antalya into a major tourism resort aimed primarily at the European mass market. 29. The proposed project is situated on the Antalya Bay, about 50 kms south of the city of Antalya, which is the small but rapidly growing center of an important truck gardening and fruit growing region. Infrastructure for tourism development will be provided in four selected priority sites located along about 15 kms of the coastline at: Kiziltepe, Tekerlektepe, Guneydeniz and Kemer (see map). This area is endowed with great natural beauty, excellent beaches, heavily wooded foothills and a typical Mediterranean climate. The extensive ruins of the ancient colony of Phaselis, established by the Kingdom of Rhodes in the 7th Century BC, are located nearby. Several other major archeological sites are located within daytime excursion distance. Antalya airport is being expanded to accommodate large jets. Under the proposed loan, the Government has undertaken to open this airport to regular international and foreign charter flights, which would supplement air connections provided by the Turkish carrier THY (draft Loan Agreement Section 4.05(b)). The old port of Antalya regularly receives cruise ships, and a new harbor west of the city serves cargo ships. 30. The project area is at present predominantly rural, with a total population of only 3,100. It has no water distribution, sewerage or power supply systems; the only infrastructure is a small telephone exchange in Kemer. A new highway is being constructed between Antalya, the project area and Finike farther south, to replace the present low-quality road serving the area. A 350-room Valtur Holiday Village (in which IFC holds an equity parti- cipation) is the only existing tourist accommodation facility of any signifi- cance in the project area.  - 11 - Project Description and Features 31. The proposed project is designed to provide the tourism infra- structure needed to support 2,250 additional rooms in hotels and vacation villages which are expected to be built by private investors in thle project area by the completion date of the project in 1981, and a cumulati.ve total of 5,750 additional rooms by 1990. The infrastructure to be provided includes both the essential supporting facilities and a variety of recreation-related investments. 32. The specific components of the proposed project are as follows: (i) completion of the Beldibi-Tekirova section (32 kms) of the new Ant:alya-Finike highway and construction of access roads to the four project sites; (ii) installation of streets, electricity, water, sewerage, drainage, health, recreational and community facilities in Kemer to transform this village into a service center for the project area; (iii) construction in Kemer of a small craft harbor and a commercial/social center and provision of two 4.0-passenger ferry/excursion boats; (iv) installation of improved telecommunication facili- ties consisting of a 300-channel microwave link between Antalya and Kemer, a new telephone exchange at Kemer, upgrading of the existing telephone exchange of Antalya and provision of a 45-km telephone network and 40 telex machines to be leased to hotels in the project area; (v) construction of a water supply and sewerage and solid waste disposal system for the project area; (vi) con- struction of a 154 kv power line from the Kepez power station, a new trans- former substation at Kemer, 31.5 kv lines from there to all project sites, and a stand-by power supply system; (vii) construction and equipping of a hotel training center in Kemer with a dormitory for 250 student places, a practice hotel with a capacity of about 50 rooms and a potential annual output of 375 graduates; (viii) construction of 280 housing unlits in Kemer to hcuse 30 percent of hotel employees expected to work in the project area by 1981; (ix) works to protect and provide easy access to the Phaselis ruins; (x) develop- ment of day use beach facilities for 2,500 visitors, three camp sites for 900 tents, and trails and other recreation facilities in the existing national park in the project area; (xi) provision of teclnical assistance for project administration, small craft harbor management, public utilities operation, promotion of tourism in the area and an economic study on hotel profitability and tourism incentives as well as a conservation study and underwater archae- logical survey of Phaselis. A Loan and Project Summary is provided in Annex III. A report entitled "Appraisal of the South Antalya Tourism Infrastructure Project (TU 1051)" dated June 21, 1976, is being circulated separately to the Executive Directors. 33. At the regional level, the basis for physical planning of the pro- posed project is the 1:25000 scale South Antalya Tourism Master Plan, approved by MRR in April. The detailed land-use regulations related to this Master Plan and the detailed master plan (scale of 1/5000) for the village of Kemer are being finalized; their adoption and issuance by the Government together with satisfactory building regulations, is a condition of loan effectiveness (draft Loan Agreement Sections 6.01(c) and (g)). These plans will help ensure the rational development of tourism in the project area, with optimal use of available land including provision for large undisturbed open spaces and environmental protection, at the, lowest possible infrastructure costs.  - 12 - Land Acquisition 34. Most of the land required for tourism development up to 1981 under the proposed project is already owned by the Government. However, 25 ha needed in the Tekerlektepe and Kiziltepe sites, remain in private hands. Acquisition of these lands is planned in two stages. First, the Government has informed the owners that they would have an adequate opportunity to decide either to develop their lands themselves, or in association with others, in conformity with the tourism development plans for the project, or to sell or lease their lands to private hotel developers. Second, the Government has agreed that as a condition of effectiveness it would initiate expropriation procedures through the appropriate agency (the Land Office of the MRR) for any portion of the 25 ha for which such arrangements have not been concluded (draft Loan Agreement Section 6.01(e)), and acquisition would be completed before November 1, 1978 (draft Loan Agreement Section 3.07(b)). This two-stage approach is designed to give present owners the opportunity to participate in the project, if they wish, while also providing assurance that those lands needed prior to 1981 for hotel development under the project will become available for that purpose on an acceptable schedule at non-speculative prices. In addition, 5 ha of privately owned land within Kemer, is required for pensions and guest houses and 20 ha of privately owned land in the other sites is needed for hotel development after 1981. 1/ For these lands, the Government similarly will notify the owners in advance and give them the option either to develop their land themselves, in conformity with the tourism development plans, or to sell or lease it to private developers by a date to be announced, after which acquisition procedures would be initiated (draft Loan Agreement 3.07(c) and (e)). The Borrower's Land Office is also expected to exercise its preemptive rights in the project area whenever it feels that this is reasonable under the circumstances and notification of the Land Registry of the Project Area by the Borrower through the Land Office of its intention to exercise these rights is a condition of effectiveness (draft Loan Agreement, Section 601(f)). 35. The project would be completed in 1981, providing infrastructure for continued hotel investment thereafter through 1990. Hotel investor in- terest in South Antalya seems strong. Prospective investors, predominantly Turkish (80 percent), have already submitted specific proposals for the construction of 3,600 rooms during the early stages of the project. But the risk remains that satisfactory hotel investment proposals might not be forth- coming from private investors for the number of rooms planned to be supported by the proposed infrastructure. To ensure hotel development in the project area sufficient to obtain an acceptable rate of return on infrastructure outlays, the Government has agreed to take all necessary action to ensure that a minimum of 3,825 rooms would be in operation by end of 1989, provided 1/ Under Turkish law, land expropriated for a specific use must be put to that use within five years or it reverts to its original owner. According- ly, expropriation procedures for land to be used for the project after 1981 would be scheduled no more than five years in advance of prospective use.  - 13 - the Government and the Bank are satisfied that there is adequate tourist demand for such facilities in the project area at such time (draft Loan Agreement, Section 3.10). As mentioned in Part III above, the Government provides several incentives to private investors for hotel investments. Hotel credit requirements in the project area are estimated to peak at a total of about $60 million equivalent in 1979. The Government has provided assurances that it would arrange to provide financing on terms suitable for long-term hotel financing, to complement funds iErom other normal channels, including TBI, should they fall short of requirements. Project Costs and Financing Arrangements 36. The estimated total cost of the project, excluding interest and other charges during construction on the Bank loan, is $66 million, of which $22 million or 33 percent is in foreign exchange. The proposed loan would finance the foreign exchange component, as well as $4 million in respect of interest and other charges, during construction up to April 1980, by which time most of the project construction is expected to have taken place. Local costs would be financed by the Government from budgetary resources. The Gov- ernment would make US$17.6 million of the proceeds of the loan available to MTI for the implementation of all project components except electric power and telecommunications. The electricity component would be executed by KEPEZ A.S., a private power company and the sole concessionaire in the project area, to whom the Government would onlend the equivalent of US$2.6 million at an interest rate of 11 percent per annum, with a repayment period of 10 years, including 3 years of grace. The telecommunications component would be executed by PTT, a State Economic Enterprise to whom the Government would onlend the equivalent of US$1.8 million on the same terms as to Kepez. The signing of two subsidiary loan agreements, satisfactory to the Bank, between the Government and Kepez A.S. and between the Government and PTT, would be a condition of loan effectiveness (draft Loan Agreement Section 6.01(a)). Retroactive financing totalling $300,000 is proposed to cover the foreign exchange cost of the final project design (from December 1, 1975) and of construction of the main highway to the project area (from March 1, 1976) (draft Loan Agreement Schedule I paragraph 4(i)). Project Implementation and Operation 37. The overall responsibility for implementing the project will rest with the MTI, which has created a Regional Tourism Project Execution Directorate (PRD) to serve as project unit. Appointment of a Project Director, with qualifications and experience satisfactory to the Bank, has been made a condition of effectiveness (draft Loan Agreement, Section 601(h)). MTI, through PRD, will supervise project execution and enter into agreements with the ministries and agencies responsible for the final design and execution of specific components. The Ministry of Public Works will build the highway and the small harbor. The PTT will install and operate the telecommunications facilities. The Ministry of Forestry will be responsible for development and maintenance of the National Park. The Ministry of Culture will be responsible for protection and access works at Phaselis. Kepez A.S., as noted, will construct and operate the power facilities.  - 14 - 38. PRD will be directly responsible for the execution of the following components: (i) water supply, sewerage and solid waste disposal facilities; (ii) Kemer infrastructure and urban improvement; (iii) employee housing; and (iv) the Hotel Training School, which, after construction, will be managed by the Vocational Training Department of MTI. TBI, which as noted above in paragraph 24 has experience in superstructure construction and management, will assist PRD in executing the above-mentioned facilities. PRD will also be responsible for prormoting hotel development in the project area, coordi- nating the selling or 'Leasing of land to private investors for that purpose, and operating and maintaining the housing component and the small harbor. In addition PRD will operate and maintain the water, sewerage, and other municipal services until such time as the village of Kemer might be established as a municipality, when it would normally take over these functions. 39. Coordination among the executing agencies will be provided at the working level by two committees established specifically for this project (draft Loan Agreement Section 3.03), and their establishment has been made a condition of effectiveness (draft Loan Agreement, Section 601(b). The first, the South Antalva Tourism Project Coordinating Committee, would be chaired by the Deputy UIndersecretary of the MTI and have responsibility for coordination in Ankara,, The second, the South Antalya Tourism Project Coor- dinating Subcommittee, under the chairmanship of the Governor of Antalya, would coordinate project implementation at the regional level. The national policy level Tourism Coordinating Committee, chaired by the Minister of Tourism and attended by the under-secretaries of state of all ministries involved in tourism, would continue to provide general policy guidance within the tourism sector. Procurement 40. Equipment will be procured under international competitive bidding in accordance with the Bank's guidelines except for equipment which costs less than the equivalent of US$100,000 or which cannot be combined into contracts of at least that amount, for which local competitive bidding will take place. A 15 percent preference margin, or the prevailing customs duty, whichever is less, will be extended to local manufacturers in the evaluation of bids for equipment. With the exception of road construction, and other minor civil works (together not expected to exceed $4 million) which would be on force account, major civil works would be awarded under international competitive bidding in accordance with Bank guidelines. Project items would be grouped to the extent possible in order to encourage such competitive bidding. Local competitive bidding would be used for civil works contracts of less than US$500,000. The total amount of such contracts is estimated not to exceed US$2.0 million. To attract both local and foreign bids, contracts will be broken down into elements which can be tendered individually or combined into bidding groups at the bidders' option. Disbursements 41. The proposed loan, which is expected to be fully disbursed by the end of 1981, would finance: (i) 100 percent of the foreign exchange cost  - 15 - of imported equipment and material or 100 percent of the ex-factory cost of locally manufactured equipment procured under international competitive bidding in accordance with the Bank's guidelines or 80 percent of imported items procured locally; (ii) 100 percent of the foreign exchange cost of consultant services; (iii) 30 percent (representing the estimated foreign exchange component) of the cost of civil works; and (iv) interest and other charges during construction on the proposed loan up to April, 1980. During the final design stage, the Borrower will satisfy the Bank that the proposed stand-by power supply system is technically and economically justified before disbursements estimated at $1.25 million are made on this component (Loan Agreement I, paragraph 9 (iii). Benefits and Risks 42. The proposed project is designed to provide basic infrastructure for a major development of tourism facilities in South Antalya. In estimating the gross benefits that are likely to accrue from the tourism-related activi- ties of the proposed project, only the expenditures which visitors are expected to incur in the area have been taken into account. The relevant costs include the capital and operating costs of the infrastructure to be provided under the project together with the capital and operating costs of hotels and related facilities in the project area. On this basis, and assuming an estimated economic life of the project of 25 years, the economic rate of return on the overall investments program (including superstructure) would be 17 percent. This rate of return would decline to 15.8, if investment costs increased by 10 percent; and to 15 percent if the opening of hotels was delayed by three years. 43. The proposed project would have a favorable impact on Turkey's bal- ance of payments. Incremental annual foreign exchange earnings are expected to amount to US$17.7 millions in 1983 and to rise gradually to US$29.3 million per year by 1993. The project will also have a positive effect onl employment. During implementation there will be a sizeable number of construction workers (an average of 1,500) employed in the project area. When fully operational, the project is expected to generate employment for more than 7,000 workers in hotels and other tourism facilities. Indirect employment generated in con- struction, agriculture, handicrafts, transportation and other services is likely to account for 6,000 additional jobs. 44. Arrangements have been made to minimize the risks associated with the project. As already discussed, these include arrangements to (i) ensure that lands needed for hotel development under the project become available on an acceptable schedule while avoiding undue price speculation (see para- graph 34 above), (ii) provide for sufficient hotel development investment to ensure an adequate rate of return on the project (see paragraph 35 above), and (iii) provide for proper project administration and coordination between agencies concerned with project execution (see paragraphs 37 and 39 above).  - 16 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 45. The draft Loan Agreement between the Republic of Turkey and the Bank, the report of the Committee provided for in Article III Section 4 (iii) of the Articles of Agreement and the text of the resolution approving the proposed loan, are being distributed separately to the Executive Directors. The draft agreement conforms to the normal pattern for loans for tourism infrastructure 6.01) developoment projects. Special conditions of effectiveness (Loan Agreement, Section 6.01) are: (a) signing of subsidiary loan agreements between the Government on one hand and Kepez A.S. and PTT on the other hand; (b) approval by the Government of the detailed land-use regu- lations related to the 1/25000 scale Master Plan, and of the detailed land-use plans for the village of Kemer (scale 1:5000) acceptable to the Bank; (c) employment of engineering consultants, as provided in Section 3.04(a) of the draft Loan Agreement, to assist in the imple- mentation of Part A of the Project, (the Tourism Bank is ex- pected to be selected as consultants for this purpose); (d) initiation of the expropriation of land needed for hotel development prior to 1981, for which no arrangements for hotel development satisfactory to the Bank have been made by the owners; (e) appointment of a Project Director with qualifications and experience satisfactory to the Bank; (f) establishment of the South Antalya Tourism Project Coordinating Committee and Subcommittee; (g) notification of the Land Registry of the Project Area by the Borrower through the Land Office of its intention to exercise its preemptive rights in the project area. 46. A special condition of disbursement with regard to the stand-by power system, is that the Bank be satisfied that the specifications for this system are technically and economically justified. 47. Features of the Loan Agreement of special interest are referred to in paragraphs 23, 29, 32-36, 39 and 41. 48. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 17 - PART VI - RECOMMENDAI'IONS 49. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by J. Burke Knapp Attachments June 22, 1976   ANNEX I Page I of Y Pages TABLE 3A, TURKEY - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU K?2) ----------------------------- ------------------- --------------- TURKEY REFERENCE COUNTRIES (1970) TOTAL 790.6 MOST RECENI_ AGRIC. 51h3.3 1960 19'7 ESTIMATE COLOMMIA IRAN ITALY GNP PEr CAPITA (US$) 25.0 450.0 600.0 330.0 600.0 198.0. POPULA1T.OY AN) VITAL STATISTICS POPULATION (MID-Yr, MILLION) 2r.5 35.2 37.7 21.6 29.1 53.6 POPJLATION 3DNSITY PER SQUARE KM. 35.0 45.C 49.0