Turkey - Third Livestock Development Project

Report No. 1027-TU FILE COPY Appraisal of Third Livestock Development Project Turkey May 10, 1976 Projects Department Europe, Middle East and North Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank 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 EQUIVALENTS US$1 = Turkish Lira (LT) 15.0 LT 1 = US$0.0666 LT 1,000,000 = US$66,667 WEIGHTS AND MEASURES 1 kilogram (kg) = 2.20 pounds 1 metric ton = 1,000 kilograms 1 metric ton = 0.98 long ton 1 meter (m) = 1.09 yards 1 kilometer (km) = 0.62 mile 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 decare = 0.1 ha 2 : = 0.25 acre 1 square kilometer (km )=100 ha = 0.386 square mile 1 liter (1) = 0.264 gallon ABBREVIATIONS DANB - Directorate of Artificial and Natural Breeding and Record Keeping of MFA DVS - Directorate of Veterinary Services of MFA EDLD - Encouragement and Development Loans Division of TCZB GOT - Government of Turkey IDPD - Intensive Dairy Production Division of LDP LDP - Directorate for Livestock Development Projects of MFA MFA - Ministry of Food and Agriculture SPO - State Planning Organization TCZB - Agricultural Bank of Turkey TSEK - Milk Corporation FISCAL YEAR (GOT) March 1 - February 28 FISCAL YEAR (TCZB) January 1 - December 31  FOR OMCIAL USE ONLY APPRAISAL OF THIRD LIVESTOCK DEVELOPMENT PROJECT TURKEY Table of Contents Page No. SUMMARY AND CONCLUSIONS ................................ i-iii I. INTRODUCTION ........................................... 1 II. THE AGRICULTURAL SECTOR ..... ...................... 2 A. General ....... ........................... . 2 B. Agriculture in the Economy ..... .................... 4 C. The Milk Industry ...... ....................... 6 D. Agricultural Credit ..... ....................... 9 E. Government Policy .................................. 11 III. THE PROJECT ............................................ 12 A. Objectives ......................................... 12 B. Description ........................................ 13 C. Detailed Features . ..................... . 14 D. Cost Estimates . . . .................................. 18 EF. Financing .................. .................... . 20 F. Procurement ........................................ 21 G. Disbursements ...................................... 21 H. Environmental Impact ............................... 22 IV. PROJECT IMPLEMENTATION ............... .. ................ 22 A. Organization and Management .......... .. ............ 22 B. Lending Policies and Procedures ........ .. .......... 24 C. Technical Services ................................. 26 D. Technical Studies/Training ........... .. ............ 26 E. Accounting and Auditing ............ .. .............. 27 F. Monitoring . ...... ............. .................... 28 V. BENEFITS AND JUSTIFICATION ............................. 28 A. Production ..................... .................... 28 B. Prices ....................... ...................... 29 C. Marketing .......................................... 29 D. Producer Income ................ .. .................. 30 E. Benefits and Beneficiaries .......... .. ............. 30 VI. AGREEMENTS REACHED AND RECOMMENDATIONS ....... .. ........ 32 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.  TABLE OF CONTENTS (Cont'd) ANNEXES 1. The Agricultural Sector with Special Reference to the Livestock Subsector 2. Milk Production 3. The Agricultural Bank of Turkey 4. Development and Financial Projections 5. Total Project Cost and Cash Flow 6. Estimated Schedule of Disbursements 7. Staffing Requirements for Technical Services 8. Rate of Return to the Economy 9. Terms of Reference for Technical Specialists 10. Terms of Reference for Technical Studies and Training 11. Terms of Reference for the Special Operational Fund ChIARTS 15657R Project Organization 15658(2R) Implementation Schedule MAP S IBRD 2764R Relief, Climate and Agricultural Regions IBRD 12037R Location of Project Area  APPRAISAL OF THIRD LIVESTOCK DEVELOPMENT PROJECT TURKEY Summary and Conclusions i. This report appraises a follow-up project for intensive dairy pro- duction in Turkey. There are good possibilities for expanding dairying and the Government of Turkey has given it high priority in its Third Five-Year Development Plan (1973-77). The earlier project, (the Intensive Dairy Pro- duction Project -- Credit 236-TU -- for US$4.5 million), which became effec- tive in 1971 during Turkey's Second Five-Year Development Plan (1968-72), was a first attempt on the part of the Government to modernize its dairy industry. The project, after a slow start due to staffing constraints, organizational difficulties, problems of collateral and conservatism on the part of farmers has been successful in establishing a nucleus of some 3,500 high-quality im- ported dairy animals in Turkey, in setting up about 152 demonstration farms, and in building infrastructure and promoting modernized dairying through pro- vision of credit and technical services to farmers. Although the appraisal target of 250-300 beneficiaries was not reached due mainly to increases in input costs, and the technical studies and training components did not develop fully, overall the project is considered to be satisfactory. Currently, all funds are committed and the project is expected to be completed in June 1976. ii. Although a satisfactory start has been made, the need for strength- ening infrastructure still exists, and this would be a central thrust of the proposed project along with pilot lending to small village farmers. The pres- ent project, which is one of several comprising Government's Third Plan (1973- 77), will represent a second stage of dairy development in Ankara, Istanbul, Izmir, Adana and Konya and a first stage in Balikesir, Denizli, Kayseri, Malatya and Adiyaman. The project will include a five-year lending program by the Agricultural Bank of Turkey (TCZB) for on-farm investment in improved dairy stock, buildingsi tractors and machinery. The project will also provide for technical studies for further development of dairy production and milk marketing, and for training of technicians and farmers in modern production and management. Some 750 subborrowers would participate. All will be small dairy producers initially. About 250 will develop 40-cow herds, 200 will develop 12-cow herds, and 300 will develop 5-cow herds. Pilot lending to the latter two categories will provide credit and extension agencies with preliminary and practical experience in servicing small village farmers, the main milk producers of Turkey, who must subsequently be reached in big num- bers in any large program of dairy modernization. The appraisal mission examined the possibility of involving a higher proportion of smaller units at this stage but concluded it would prejudice the long-term development of the industry to do so. On technical grounds, the proposed number of larger  - ii - farmers is considered necessary to ensure a sufficient supply of good quality replacement heifers and breeding bulls to the industry in the future. The project will also make a small but significant contribution to milk production (about 1% of national production amounting to some 45,000 tons p.a.), particu- larly in ten urban areas of high population growth where supplies are now scarce or non-existent. iii. The project will be executed by the Intensive Dairy Projects Divi- sion (IDPD) of the Directorate of Livestock Development Projects (LDP) of the Ministry of Food and Agriculture (MFA), whose staff will be approximately doubled for the purpose. Credit will be provided by TCZB for farm plans drawn up by IDPD staff, which will include three internationally recruited technical specialists. Supervision of the plans on individual farms will be the respon- sibility of the same IDPD staff. The credit channel will be the Encouragement and Development Loans Division (EDLD) of TCZB, which is considered adequate. Successful execution will be dependent on the expected continued close coop- eration between officers of IDPD and EDLD which developed in the first project. Overall organization and management will be similar to the first project, which is satisfactory. iv. The Bank and IDA have already made seven loans and seven credits to Turkey for agricultural development totaling some US$350 million. The pres- ent project is estimated to cost US$34.7 million equivalent. A Bank loan equivalent to US$21.5 million, equal to the foreign exchange cost (62% of total project cost), is proposed. The loan will be made to the Government of Turkey for 17 years with a grace period of 5 years. Government will on- lend the Turkish lira equivalent of US$18.5 million to TCZB on the same terms. TCZB will make these funds, along with about LT 104 million (US$6.9 million) from its own resources, available to eligible subborrowers to finance some 80% of the cost of on-farm investments for 10 - 12 years with 2 - 4 years of grace at 11% interest per annum. This is the maximum effective lending rate (by Government Decree) for loans to farmers for agricultural development and the current rate charged by TCZB for such loans. This rate and other lending terms and conditions will be subject to review by Government and the Bank if, in the opinion of either party, such review is warranted. v. Some 10,500 purebred Holstein and Brown Swiss heifers and bulls will be imported. Procurement will be organized by IDPD on the basis of at least three bids from not less than two countries. Because animals will be procured in 12 - 15 shipments averaging about 800 head each, and would have to be selected in small groups, ICB is impracticable. Tractors, sowing and harvesting equipment, and milking machines will be procured through ICB under current Bank guidelines. Orders from individual farmers will be bulked by IDPD who will organize procurement and distribution to farmers.  - iii - vi. Proceeds of the Bank loan will be disbursed against: (a) 100% of foreign expenditures on cattle; (b) 100% 'of foreign expenditures, or 100% of local expenditures ex-factory, on tractors, sowing and harvesting equipment, and milking machines; (c) 100% of foreign expenditures on technical specialists; and (d) 100% of foreign expenditures on training and group study tours. vii. The direct beneficiaries would be the approximately 750 families (about 4,500 persons) who would have a higher and more evenly distributed in- come. Also, full-time farm jobs would be created for about 1,200 workers. Incremental milk production of some 45,000 tons per annum will provide milk for an additional 400,000 indirect beneficiaries (most of whom will be in urban areas where milk is now short) at the present level of per capita milk consumption (110 liters p.a.). viii. Direct economic benefits include the above milk (valued at some US$10 million p.a.) and annual production of over 10,000 head of cattle for dairying and breeding (valued at around US$3.3 million p.a.). The great- est benefits to the economy, which are difficult to quantify, would be in- direct and long-term and include: (a) improvement of the national dairy herd through upgrading with exotic blood; (b) improved land utilization and herd output through applica- tion of modern technology and better management; (c) establishment of infrastructure in central Government insti- tutions, including upgrading of staff through training and provision of technical services and long-term credit to farm- ers, especially for dairy development; and (d) increased supplies of milk to existing and projected Govern- ment processing plants which are expected to operate for several years with excess capacity. ix. Excluding these non-quantifiable benefits, the rate of return to the economy over a 20-year project life is estimated at 22%. x. On the basis of the satisfactory assurances received on all major matters during negotiations, the project is suitable for a Bank loan of US$21.5 million to the Government of Turkey for a term of 17 years with a grace period of 5 years.   APPRAISAL OF THIRD LIVESTOCK DEVELOPMENT PROJECT TURKEY I. INTRODUCTION 1.01 The Government of Turkey has requested a Bank loan to assist in fi- nancing further modernization of dairy farming and expand credit and technical services for dairying. The project would comprise part of Turkey's Third Five-Year Plan (1973-77) for modernizing the livestock sub-sector. IDA Credit 236-TU (the Intensive Dairy Production Project) for US$4.5 million was approved in 1971 to help finance the first phase of dairy intensification, on a pilot basis. That project became effective in December 1971 and, after a slow start due mainly to staffing difficulties, has been successful in introducing modern dairying concepts on about 152 farms around the four main milk consuming cen- ters (Ankara, Istanbul, Izmir and Adana). The present project would build on the gains of the first phase in these regions and in Konya (in the original project area) and extend benefits to two additional regions (Kayseri and Malatya). 1.02 The Bank and IDA have previously made seven loans and seven credits to Turkey for agriculture as follows: Grain Storage, Loan 27-TU (US$3.9 mil- lion); Seyhan Irrigation, Loan 63-TU (US$25.2 million), Credit 38-TU (US$20.0 million), Credit 143-TU (US$12.0 million), Loan 587-TU (US$12.0 million); Fresh Fruit and Vegetable Export, Loan 762-TU (US$10.0 million), Credit 257-TU (US$15.0 million); Intensive Dairy Production, Credit 236-TU (US$4.5 million); Irrigation Rehabilitation Completion, Credit 281-TU (US$18.0 million); Second Livestock Development, Credit 330-TU (US$16.0 million); Ceyhan Aslantas Multi- purpose, Loan 883-TU (US$44.0 million), Credit 360-TU (US$30 million); Corum- Cankiri Rural Development, Loan 1130-TU (US$75.0 million); Agricultural Credit and Agroindustries, Loan 1248-TU (US$63.0 million). 1.03 The present project includes a supervised farm credit component for about 750 individual farmers who would invest in imported and local dairy animals, farm buildings, tractors, equipment and forage production. It would also involve an expansion of technical and extension services to dairy farmers, and training of farmers and professional staff. 1.04 The project was prepared by the General Directorate of Livestock Development Projects (LDP) of the Ministry of Food and Agriculture (MFA) with the assistance of an FAO/IBRD Cooperative Program (CP) mission which visited Turkey in July/August 1975. This report is based on the findings of an ap- praisal mission which was in Turkey in October-November 1975 consisting of Messrs. N.A. Worker, F.J. Tellez. G. Donovan (Bank), end J. Graff (Consulta.t).  - 2 - II. THE AGRICULTURAL SECTOR A. General 2.01 Turkey is located in the Middle East between latitudes 360 and 420 N and longitudes 260 and 440 E. It shares boundaries with the USSR, Iran Iraq, Syria, Greece and Bulgaria, an over 70% borders the Black, Marmara, Aegean, and Mediterranean Seas. The total land area is about 78 million hec- tares of which roughly 3% is in Europe and 97% in Asia. Total population (1975) exceeds 40 million and is growing at about 2.6% p.a. The proportion of urban population is 42% and rising at around 4.4% p.a. against 1.3% in- crease in rural areas. GNP per capita is estimated at US$785 at 1974 prices and current exchange rate or US$480 at average 1965-1971 prices and exchange rates. The current poverty income level is estimated at US$240. Relief 2.02 Turkey comprises a series of mountain ranges extending from the Balkans to Iran and relief is, for the most part, undulating to mountainous (Map 2764R). Only-about 10%, mostly in the coastal regions, is level or gently sloping. Mean altitude is over 1,000 m, with most areas in the east being over 2,000 m. Climate 2.03 Climate is extremely variable. Coastal areas are usually humid and the interior semiarid. The former receives rainfall varying between 600 - 2,000 mm per year, and the latter between 250 - 500 mm per year (Map 2764R). Most coastal areas have a reasonable distribution of rainfall, relatively high summer temperatures, and mild winters. With irrigation, many such areas have a continuous growing season. Central and eastern areas have poorly dis- tributed rainfall, warm summers and freezing winter temperatures with snow for one to four months, depending on location and altitude. The growing season is only three to four months under rainfed conditions and five to six months with irrigation. Soils 2.04 The country has a range of soils determined by differences in cli- mate, vegetation, and geology. Most of the interior is covered with alkaline brown and reddish-brown steppe soils alternating in the driest parts with desert gray and saline soils. In the north and south coastal regions, red and reddish-brown podzolic soils predominate. Strongly acid red soils are common in the wetter eastern Black Sea coast and slightly acid brown and yellowish-brown podzols cover much of the northwest. In the Mlediterranean area, red clayey soils are common. The transitional regions between the dry interior and the humid coastal areas are occupied by brown forest soils. Phosphate deficiency in soils is widespread and responses to potassium and calcium are common. Little is known of micro-element deficiencies.  -3- Production Patterns 2.05 Due to variations in relief, climate and soil, agricultural prac- tices tend to vary with region. At least five regional patterns are generally recognized (Map 2764R). (a) The Black Sea coast region in the north is mountainous with abundant and well distributed rainfall, warm summers and mild winters. It is densely forested and contains about one-third of the country's woodlands. It is an important area for tea, corn, wheat, hazelnuts, tobacco, and livestock. (b) The Mediterranean region, along the south coast, is dominated by the Taurus Mountains. It experiences hot, dry summers and cool, moist winters. The area produces 90% of the country's citrus and two-thirds of its cotton; also, vegetables and livestock. (c) The Marmara and Aegean region is the most heavily urbanized and industrialized area. The climate is essentially Mediter- ranean and its agricultural importance rests on the production of several export crops including tobacco (50% of total Turkish production), cotton (30% of total), and oranges (50% of total). It also produces grapes, figs, rice, sunflower, and livestock. (d) Central Anatolia, the largest region, has a continental steppe climate with cold moist winters and hot dry summers. The area produces some 40% of the country's wheat. Over one-third of the country's sheep and goats are found in the region. (e) Eastern Anatolia is composed of high mountains and rugged ter- rain with mostly warm moist summers and very severe winters. Coniferous forests and alpine pastures predominate in the northeast and wooded steppes in the south. Summer wheat and barley are the dominant crops. The northeast is an important dairy and beef cattle area. Sheep and goats predominate in the south. Land Tenure 2.06 Information on land tenure is incomplete. Not all land has been surveyed, and titles are not always available. Again, many titles have not been formally registered. Of the total land area, only about 21 million ha (27%) are titled and registered. Statistics on this sample indicate that about 25% of holdings are less than 1 ha, about 70% are 5 ha or less, and 96% are 20 ha or less. Often these areas are fragmented in several parcels whiich acts as a constraint in farming them effectively. Large holdings are comparatively uncommon, only 0.1% of registered property being over 100 ha.  -4- Statistics on tenancy arrangements are sketchy, but probably about 95% of units are farmed either by owners, or by owners in partnership with tenants. Only some 5% of units are farmed by tenant farmers, share farmers and the like. B. Agriculture in the Economy 2.07 The contribution of agriculture to GNP has declined from around 50%' in the early '50s and 40% in the early '60s to 26% at present, a trend shared by many countries in the process of developing their economies. Nevertheless, agriculture is still significant in the Turkish economy as it not only pro- duces the total food needs of the nation but earns about 57% of export in- come and employs about 63% of the total work force. It also supplies raw materials for industry, serves as a labor pool for industrial expansion, and provides an important market for local manufacturers of fertilizer, herbi- cides, tractors, equipment and consumer goods. 2.08 Cereal, industrial and horticultural crops account for about two- thirds of the value of agricultural output. Livestock products account for about 30%, and forestry and fishing make minor contributions. During the '50s, agricultural growth in real terms averaged about 5% p.a. due principal- ly to steady increase in the area under crop, particularly under wheat. This growth slowed in the '60s and output fell short of targets set in the First (1963-1967) and Second (1968-1972) Development Plans. Throughout the '60s, agricultural growth averaged about 3% compared with about 6.5% for the economy as a whole. Over the last five years, growth has slowed further despite an increase of about 0.6 million ha (2.4%) in the area cropped and about 0.8 million ha (30%) in the area of horticultural crops. Bad weather for cereals in 1973 and 1974, low world prices and insect damage in cotton, and negligi- ble growth in livestock numbers (para 2.11) will probably result in little more than half the 4.5% p.a. targeted increase of the Third Development Plan (1973-1977) being attained. Cropping Patterns 2.09 Of Turkey's total land area, about 25 million ha are cropped, 3 mil- lion ha are devoted to horticulture, 26 million ha are meadowlands, and 19 million ha are forested. Of the area cropped, over one-third is fallow at any time. Principal crops include wheat and barley (11 million ha), cotton (0.7 million ha), pulses (0.6 million ha), sunflower (0.5 million) tobacco (0. million ha), potatoes (0.18 million ha) and sugarbeet (0.15 million ha). 2.10 Turkish agriculture is mainly rainfed and thus subject to large variations in yield, depending on season. Some 2 million ha is irrigated, but production from this area is substantially below the potential because of inefficient and/or incomplete irrigation and drainage systems. Government is proceeding as quickly as possible in expanding public irrigation facilities  -5- and current plans call for a doubling of the irrigated area by 1985. Crop production is reasonably well mechanized and annual consumption of fertili- zers, herbicides, improved seeds, and other inputs is increasing. In 1973, tractors numbered about 160,000, (or one to approximately 160 ha of culti- vated land), up substantially from some 60,000 in 1962 and around 80,000 in 1969. Currently, about 25,000 new units are being added annually, of which some 80% are of domestic manufacture. There is a strong demand for both tractors and equipment, and their use is likely to increase, along with that of other inputs. Their greater use is constrained at present mainly by avail- ability and credit. Government is aware of such constraints and the strategy of the Third Development Plan (1973-1977) is largely directed to overcoming them. Livestock Production 2.11 There are currently estimated to be some 13 million cattle (about 4.5 million of which are dairy cows), 40 million sheep, 19 million goats and 3 million horses, donkeys and mules in Turkey. Statistics on livestock num- bers and production are imprecise, however, as accurate census figures are not available. Livestock numbers are based on sampling techniques and total pro- duction figures are derived from applying average production coefficients. There is room for large discrepancies in judgment and interpretation. Pub- lished figures indicate little increase in total livestock since the mid '60s. Sheep numbers appear to have increased, cattle have remained about stable, and goats have decreased. 2.12 The First and Second Five Year Plans called for a growth of live- stock output of 5.6% and 4.8% p.a., but actual rates achieved were only 2.6% and 3.2%, respectively. The Third Plan target is 5% p.a., but present indi- cations are that a growth of not more than 2.5% will be achieved. Thus, growth of livestock production over the past 15 years has barely matched human population increase. Government hopes for an increase in cattle num- bers throughout the rest of the '70s to some 14 million by 1980. This, how- ever, will be difficult. Present cattle, sheep and goat numbers are in equi- librium with the available feed supplies which come mainly from the 26 mil- lion ha of meadowland and some relatively small amounts of forage crops (e.g., alfalfa grown under irrigation) and prepared feeds. The area of meadowland is already being fully utilized. Its area cannot be extended due to pres- sure from cropping and forestry. The only way its carrying capacity and output can be increased is by intensification. However, the principal live- stock rearing regions are in eastern Turkey where land for the most part is only marginally fertile and is extensively farmed, and terrain and climate preclude very intensive exploitation. Much can be done to improve this land, but it: will be slow as farmers there are conservative and farming patterns are traditional. A more immediate possibility for increasing national --ro- duction lies in integrating livestock with cropping in central and west, m Anatolia, particularly in the fertile coastal regions. The wider adoption of mixed farming using fallow land (some 9 million ha) to expand the forage base to intensify fattening and dairy production in those regions is a sotend  -6- strategy given the country's present natural resource base. This is es- sentially the approach Government is emphasizing in its present agricultural planning. C. The Milk Industry Present Status 2.13 Milk and milk products are traditional in the Turkish diet. They are consumed mainly as yogurt, ayran (diluted yogurt), and cheese; also as liquid milk, butter and ice cream. While accurate statistics are not avail- able, it is estimated that total milk production is around 4.3 million tons p.a. of which 2.5 million tons (58%) is cows' milk and 1.8 million tons is from sheep, goats, and buffalo (0.9, 0.6 and 0.3 million tons respectively). Annual per capita consumption of milk and milk products is estimated at about 110 liters,l/ although intake of rural families is considerably higher than that of urban families, particularly the poorer ones. Present rapid growth in the population is aggravating this disparity. 2.14 To maintain supplies to the population and, in particular, to the rapidly expanding urban sector, Government is faced with the difficulty that neither total milk production nor cow milk production has increased signifi- cantly over recent years. Each has averaged less than one percent increase p.a. from 1962 through 1973 as illustrated hereunder: No. Cows Cow Milk Production/Cow Total Milk Year ('000 head) ('000 tons) (kg/head) ('000 tons) 1962 4,010 2,349 590 4,067 1963 5,024 2,351 470 4,059 1964 4,157 2,437 590 4,135 1965 4,180 2,446 590 4,158 1966 4,423 2,590 590 4,322 1967 4,564 2,666 580 4,426 1968 4,528 2,664 590 4,451 1969 4,485 2,609 580 4,381 1970 4,402 2,551 580 4,293 1971 4,382 2,535 580 4,280 1972 4,541 2,558 560 4,358 1973 4,591 2,747 590 4,536 Sourte: State Statistical Institute: Abstracted by LDP. 2.15 To improve milk availability, total animals in milk and, particular- ly, total cows in milk must be expanded. Total milking animals are limited by food supplies, and increases in the latter can only occur through the intro- duction of newer technology (para 2.12). The quality of locai milk cattle 1/ Considerably less than Ireland's annual milk consumption of 218 liters per capita but more than Greece's 56 liters per capita (FAO "World Dairy Economy in Figures", 1969).  -7- is generally poor and needs improving. Average annual milk production is less than 600 liters per cow, about one-fifth of imported dairy animals. Standards of housing, veterinary care and management, in general, also need raising. 2.16 The potential for increasing dairy production particularly in humid coastal regions and irrigated areas is good. Adequate rainfall or irrigation is important for cheap and reliable forage, which is essential for low-cost milk production. Many forages grow well in such areas, including alfalfa, corn, sorghum, oats and vetch. With carefully planned rotations and double cropping of fallow lands, forages need not necessarily be produced at the expense of cereal and industrial crops, but as a complement to them. Milk Marketing 2.17 The marketing of milk and its products follows traditional patterns. Sources of milk are widely scattered and few producers are specialized dairy- men. Apart from a limited number of public sector farms, the only modern dairy farms are those established under Credit 236-TU. The present milk mar- keting system's major deficiency is its inability to provide for the rapid- ly expanding urban centers, where there is chronic scarcity which is particu- larly severe in winter. 2.18 Most milk comes from small farmers who produce principally for their own need and that of neighbors. They either convert any small surpluses to yogurt or cheese, or sell it in liquid form to intermediaries who dispose of it fresh or processed. There are no reliable figures indicating relative quantities of milk processed to different products, but yogurt is by far the most common. Milk production throughout Turkey is seasonal, with peak sup- plies in spring and summer and minimum in winter. There is generally keen competition for all milk produced, except in the summer peak or in very iso- lated localities. Recent improvement in farmgate prices of the order of 50%, due to increased floor prices offered by government processing plants and to shortages, has greatly increased farmer interest in dairying. Floor prices for cows' milk now vary between LT 3.25-3.75/liter, with an average of around LT 3.50/liter (US$0.23/liter). Prices paid by intermediaries are frequently higher, depending on season and locality. Overall market prospects for milk producers, therefore, appear good. 2.19 The activities of intermediaries are generally unregulated and their standards of milk handling and hygiene are low. Adulteration of milk is common. Their function in the marketing chain, however, is critical as they distribute over 90% of total milk marketed and they are likely to con- tinue to play a dominant role in the industry in the foreseeable future. Strong'ier government control of marketing is undoubtedly needed but, given Bile trC . ional and fragmented structurc of the milk industry, and the fact that Qouxernment milk plants can presently handle only a small fraction of to il irGduction, it is not easy to achieve. Nevertheless, government strucegy is to -"ert more control with time (para 2.34).  -8- 2.20 Incremental production from the proposed project, estimated at about 45,000 tons of milk p.a. at full development in project year 6 (1982), is expected to be easily absorbed, as has been production from Credit 236-TU. Private peddlars and buyers for small processors and Government plants are active in all project areas. As most farms involved in the project will be in and around large centers of consumption, this increased production is expected to assist in alleviating acute shortages in those centers. Much of the incremental production is expected to be procured by processing plants. Technical Services 2.21 MFA offers extension assistance to livestock farmers through several of its technical directorates (e.g., LDP, Agriculture, Veterinary Services, (DVS), Artificial and Natural Breed and Record Keeping (DANB)). However, such services are thinly spread and are staffed by professionals who often lack practical skills, as university courses in agriculture and veterinary science in Turkey tend to be highly theoretical. Yearly output of students with spe- cialized training in agriculture and veterinary science from the country's universities 1/ and high schools number some 750 at the degree level and 700 at sub-degree level. Mot of these-enter government, the best being employed in various semi-autonomous State Economic Enterprises which offer better remu- neration, particularly-side benefits. The standard of staff of the various directorates of MFA is variable and difficulty is experienced in recruiting capable staff due to low basic salaries, side benefits and per diem allowances. Slow recruitment delayed the early development of Credit 236-TU and the Second Livestock Development Project (Credit 330-TU) and is still limiting the execu- tion of the village development component of the latter project. Adequate staffing of the proposed project is considered essential to ensure its timely implementation (para 4.04). Provision for a strong program of in-service training in modern dairying techniques is also considered necessary (paras 4.15, 4.16). Such training is not otherwise available in Turkey. 2.22 Technical back-stopping for professionals working in livestock development in Turkey is not strong. Funds for research are limited, staff- ing is a constraint and little coordination of research effort exists. Weak links between research and extension staffs preclude efficient dissemination of research findings and there is limited feedback of field problems to research centers. Capable extension staff are scarce and much of their time is involved with routine duties not connected with their extension responsi- bilities. In-service and advanced professional training is rarely available to extension staff and high-calibre individuals tend not to be attracted to the service. Low morale and high staff turnover sap its efficiency. Govern- ment is aware of these problems and is desirous of correcting them, but has not yet instituted the necessary programs. 1/ There are three colleges of Veterinary Science and four colleges of Agri- culture in Turkey.  -9- 2.23 Dairy processing and manufacturing also lack adequate technical support. Professional courses are deficient in practical training and graduates are not adequately prepared for positions in industry. This defi- ciency is recognized by the Milk Corporation (TSEK) which requires increasing numbers of dairy technologists over the coming years to staff its expanding efforts (para 2.33). Programs offered by the University of Ankara are cur- rently being upgraded to meet this need with assistance from UNDP and the Swedish Government. 2.24 Livestock health is covered by DVS of MFA, one of the strongest arms of the Ministry. DVS has a staff of some 4,000, about half of whom are professionals, working in health, management, breeding and food inspection. DVS has a well-developed diagnostic service backed by over 20 laboratories located throughout the country. Vaccines, drugs and medicines are available and livestock health in general is under good control. Close cooperation was developed between the staffs of DVS and LDP in the implementation of Credit 236-TU. Serious animal health problems have not constrained the project. A continued close relationship is expected in the proposed project. 2.25 Recently the Directorate of Artificial and Natural Breeding and Record Keeping (DANB) was created within MFA, with responsibility for develop- ing a national artificial insemination (Al) service for upgrading local live- stock. Programs are being developed for sheep, goats and cattle and priority is being accorded to dairy breeding. The main thrust in dairying will be in the areas of Samsun, Istanbul, Ankara, Izmir, Adana and Kayseri. It will take time for the program to become fully operational, but some farmers parti- cipating in the proposed project are expected to benefit from the scheme. D. Agricultural Credit 2.26 Over 90% of institutional credit for agricultural and livestock development in Turkey is provided by the Agricultural Bank of Turkey (TCZB). It and the Central Bank and 41 other banks and financial agencies make up the banking system of the country. TCZB is the largest credit institution in Turkey, and accounts for over 25% of deposits of the banking system. It is a semi-autonomous body owned by Government and controlled by a six-man Board of Directors appointed by the Council of Ministers. It functions as a com- mercial Bank engaging in all types of banking transactions. Its function is to provide credit for agricultural, fishery and forestry development. At least 80% of its lending is for this purpose. Of total loans to agriculture, the majority are short-term. About 55% of agricultural loans are to market- ing or credit cooperatives and some 15% are annual production loans to indi- vidual producers; other loans include long- and medium-term credits for tractors, machinery, equipment, livestock and buildings. 2.27 Creditworthiness of borrowers is evaluated on the basis of col- lateral offered by borrowers and their repayment record. Property title is  - 10 - the preferred collateral and is normally obligatory for loans over TL 100,000. Up to this limit, a chattel mortgage over movable assets (e.g., machinery, livestock) and a cosigner's guarantee are acceptable. Over this limit, a property title is needed along with chattel mortgage and/or cosigner's guarantee, depending on circumstances. The requirement of a property title for collateral purposes is not always an easy one for borrowers to meet. Surveys in some areas of Turkey are not complete; and not all surveyed land is titled (para 2.06). 2.28 TCZB has over 855 branches throughout Turkey and is well represented in the proposed project area. Loans up to LT 150,000 can be approved by divi- sion heads, provincial managers and managers of main branches. Loans of LT 50,000-100,000 can be approved by managers of first-and second-class branches. All loans over LT 150,000 must be approved by TCZB's Board of Directors in Ankara. 2.29 Interest rates are set by the Central Bank and enforced by Govern- ment Decree and loans vary depending on their purpose and term from 8% p.a. effective interest rate (after charges, fees, taxes and rebates) for agricul- tural credit cooperatives to a maximum of 14.4% p.a. for agroindustries proj- ects in developed regions. Loans to farmers for agricultural development are currently 11% p.a., including charges. TCZB policy is to charge maximum legal interest rates. These are, however, generally below current private market rates in line with Government policy to stimulate the agricultural sector; and consequently demand for credit tends to exceed available loan funds. This necessitates a rationing of credit, which TCZB does through standard credit limits which depend on the type and area of crop or the nature of the agricul- tural enterprise. Cash credits are supplemented with credits in kind (e.g., fuel, seeds, fertilizers), but together they seldom adequately cover producer needs. Lending for livestock development tends to be based on even more arbi- trary limits and the relative shortage of medium- and long-term funds makes long-term investment in the sub-sector (e.g., in herd or flock build-up) dif- ficult, if not impossible, for all but the biggest farmers. 2.30 The effectiveness of TCZB as an agricultural development institu- tion was recently evaluated by a Bank mission and some weaknesses were identi- fied. The mission found the need for strengthening TCZB's management and organization, for improving the equity base, for strengthening its financial structure by reducing overdue accounts, for reorganizing the accounting system and streamlining loan procedures. Despite these shortcomings in its institu- tional effectiveness, the mission concluded TCZB has the potential and com- petence.-to meet the need of the country's developing agricultural sector if some appropriate remedial measures are taken. It is intended that the mea- sures would be instituted in the course of execution of the Agricultural Credit RlXd Agroindustries Project (Loan 1248-TU). 2.31 As a channel for the poposed second stage dairy loan, TCZB is ade- quate. It is expected that the credit aspects of the project would be admin- Lstered through the Encouragement and Development Loans Division (EDLD) of TCZ3 (para 4.05), as was Credit 236-TU.  - 11 - E. Government Policy 2.32 Government's policy toward agriculture in its First, Second and Third Five-Year Development Plans has been to emphasize increased production to satisfy both rising demands of domestic consumers and to expand exports and thereby earnings of foreign currency. Its main policy instruments have been price control of inputs, price incentives for products, exchange control and export/import regulation, export incentives, public-sector investments and credit regulation. In its Third Plan (1973-77), Government is according high- est priority to development of livestock and, within the sub-sector, to poultry and dairying. It aims to increase dairying through a strategy of: (a) providing assured outlets for incremental production by expanding collection and processing facilities; (b) increasing profitability through price incentives; and (c) improving technology at the farm level by provision of adequate investment-credit and better technical services. 2.33 Through TSEK, Government is currently expanding its milk collection and processing facilities. The program provides for the construction of over 150 cooling/collecting stations, most of which are built, and involves con- struction of some 40 processing plants. Ten plants are already built and operating, five are under construction and twenty-five are to be built du- ring 1976 and 1977. 1/ These, together with five other plants owned jointly with private interests, will provide the country with a potential processing capacity of over 460,000 tons p.a. at full development in 1978, providing processing capability for about 20% of milk marketed. It is probable that many of these plants will not run at full capacity for a number of years and will make losses in the foreseeable future. Government is aware of this and has budgeted funds to cover current operating deficits. It appears that in- sufficient planning has gone into the siting of cooling/collecting stations and processing plants. The capacity of many of the latter are also too small to be operated at optimum financial efficiency. Some economies can be ef- fected by their more rational coordination and this and other aspects would be studied in the proposed project (para 3.15, 4.14). 2.34 Floor milk prices paid by Government milk plants have recently been increased (para 2.18). Plants are also paying incentives for large-quantity pick-up.s and premiums for fat content and cleanliness. An extra premium is paid- for winter milk. These measures are designed not only to increase pro- duction, particularly of winter milk, but to improve overall quality and encourage milk to enter regulated channels (para 2.19) and permit stricter government regulation. 1/ Contracts for-construction and equipment have already been awarded.  - 12 - 2.35 The Intensive Dairy Production Project (Credit 236-TU) initiated during the Second Five-Year Development Plan (1968-1972), was the first attempt by Government to provide investment credit facilities and technical expertise to dairy producers. The project had a slow start, due mainly to staffing constraints, organizational difficulties, problems of collateral, an4 the conservative attitudes of farmers. At the end of 1975, the last of available credits were committed and about 152 farmers are expected to be- nefit under the Project. This number is less than the 250-300 beneficiaries anticipated at appraisal, due mainly to price increases. Imported cattle have performed well. Calving rates and milk production have, on the aver- age, exceeded appraisal estimates. Animal diseases have been well control- led and have not created problems except in isolated cases where individual farmers failed to follow recommendations. Calf mortality was higher than expected in the early stages of the project, but later improved to an ac- ceptable level in line with appraisal estimates. Overall, the project has been successful in establishing a valuable nucleus of over 3,500 high- quality dairy animals in Turkey, setting up demonstration farms, building infrastructure, and in promoting dairy modernization through provision of credit and supporting technical services to dairymen. Government wishes to expand these efforts through the present project. III. THE PROJECT A. Objectives 3.01 As noted, the main impact of the First Project was to establish infrastructure through which the dairy potential of Turkey could be subse- quently developed. Virtually all lending was to larger (30-40 cow) units which was essential to introduce technology and establish nucleus herds of a size and type from which superior cattle could be produced for upgrading of local herds whose dairy merit was low. Despite progress so far, there is a need to develop infrastructure further before dairy modernization can be widely applied at the village level in small herds where most of the milk in Turkey is produced. Accordingly, the present project will involve mainly technical lending to develop this necessary infrastructure. At the same time, a pilot program of lending to small village dairy producers will be introduced to provide credit and extension institutions with preliminary experience in servicing such farmers who must, in the years to come, be the cornerstone of any large effort to modernize dairying in the country. In addition, the project will make a small but significant contribution to milk production, particularly in ten large urban areas where, due to rapid popula- tion increase, milk is scarce, and in some cases unobtainable. Specifically, the objectives of the Third Livestock Development Project will be to:  - 13 - (a) increase the nucleus of genetically superior dairy animals to provide heifers and breeding bulls for upgrading local herds; (b) continue the introduction of modern techniques of dairy cow management and nutrition commenced under the First Project; (c) develop a pilot program for lending to small village dairy producers; (d) strengthen extension services for dairying; (e) provide training in modern dairying; (f) finance studies and surveys for further development of dairy production and milk marketing; and (g) expand milk production in five large milk-consuming centers-Ankara, Istanbul, Izmir, Adana and Konya--and in the regions of Kayseri and Malatya which have high potential and rapidly expanding populations. B. Description 3.02 The project will be the second phase of intensive dairy development in the Ankara, Istanbul, Izmir, Adana and Konya regions and a first phase in Kayseri and Malatya (Map 12037R). It will include a 5-year lending program by TCZB for on-farm investments. Planning, extension and supervisory services, emphasizing modern production practices, will be provided by the Intensive Dairy Production Division (IDPD) of LDP. Training of local technicians in modern management, feeding, breeding and health care will be provided both locally and in various countries with developed dairy industries. Training will be provided for farmers through study tours, field days and extension activities. The project will also include production and marketing studies for subsequent development of the dairy industry. 3.03 About 10,500 selected Holstein and Brown Swiss in-calf heifers and bulls will be imported to increase the nucleus of similar animals distributed under the first project. This expanded nucleus, totaling over 14,000 animals, in all, will serve as an important source of genetically superior stock for upgrad'ing the national herd, which is of mixed background and generally low dairy merit. 3.04 Herds will vary in size from about 5 to 40 milking cows at full development plus dry stock. It is anticipated that the project will com- prise approximately  14 - 300 5-cow herds; 200 12-cow herds; and 250 40-cow herds 1/. 3.05 Milking animals will be housed; they will not normally graze out- doors, but be fed under cover on purchased concentrates and home-grown for- ages. 2/ The latter will include greenfeed (alfalfa, green maize, oats and vetch), silage (maize, sorghum-sudan hybrid, oats and vetch), and hay (alfalfa, oats and vetch) grown under irrigated or rainfed conditions. Proj- ect farmers, most of whom would be mixed farmers, will invest in barns and buildings, imported and local cattle, farm machinery and forage production (including land preparation, seed and fertilizer), on the basis of plans pre- pared by technicians of IDPD of LDP. They would apply the inputs under close supervision of these technicians. C. Detailed Features 3.06 The project area comprises essentially that of the first project 3/ plus the provinces of Balikesir, Denizli, Kayseri, Malatya and Adiyaman (Map 12037R). The latter provinces have considerable areas of irrigated land and good dairy potential. In the project area there is a chronic shortage of milk of the order of some 130,000 tons/year, a shortage which cannot be met by transporting milk from adjacent areas, all of which are in deficit. 3.07 To expedite implementation, additional IDPD offices will be estab- lished in'Konya, Kayseri and Malatya which, with the existing offices in Ankara, Istanbul, Izmir, and Adana, would provide adequate coverage of the project area (para 4.01). Assurances that the three additional offices will be provided were obtained at negotiations. Initially, project staff will concentrate on the existing project area serving the five centers of Ankara, Istanbul, Izmir, Adana and Konya to allow time for recruiting and training staff to service subsequent expansion into the Kayseri and Malatya regions (paras 3.14, 4.04). 1/ Model size is for illustrative purposes only. Individual models would be expected in practice to vary somewhat above and below the indicated herd size. 2/ - ERceptions include the dry and young stock (and sometimes the milking animals) of very small farmers with limited land which are usually sent each day to common grazing (para 3.08). 3/ Including parts of seven provinces excluded from the first project.  - 15 - 3.08 Credit will be extended to eligible subborrowers by TCZB (paras 4.05, 4.08, 4.09) for up to 80% of the cost of on-farm investments in live- stock, farm buildings, tractors and equipment, based on individual dairy development plans drawn up by technical staff of IDPD, who will-be responsi- ble for supervising implementation of the plans on individual farms (para 4.02). Successful execution of the project will depend on the expected continuation of the close coordination established between staff of IDPD and TCZB under the first project. Three models are presented (Annex 4) repre- senting the different farmers expected to participate in the project. All will be small dairy producers initially, at least 50% of whom will be in the target group. It is anticipated that some 20% of farmers in each model will be phased in each year (Annex 5, Table 1) although it is likely that the pro- portion of larger units will be higher early in the project and lower in the later stages. The first model, of which there will be about 300 units, is that of a very small farmer with an initial herd of 3 indigenous cows devel- oping in 3 years to an exotic herd of 5 cows. The second model, of which there will be about 200 units, represents a small producer with 6 indigenous cows before the project, increasing to 12 exotic cows by year four. The third model, of which there will be about 250 units, is that of a farmer expanding from 10 indigenous cows before the project to a herd of 40 exotics by year four. The latter will also have 5 to 6 surplus in-calf heifers and about 4 breeding bulls to sell each year at full development which will represent an important source of superior replacement cattle for smaller producers. The possibility of including a larger proportion of very small units was examined by the appraisal mission, but it was concluded it would prejudice the long- term development of the industry to do so at this stage. The proposed larger units are important because of the surplus high quality heifers and breeding bulls they generate. Village farmers with small herds and limited land for forage usually send their dry stock and young stock (and sometimes their milk- ing animals) daily to common pasture with other village cattle. There is a health hazard in this. There is also a mating risk, as few male animals in village herds are castrated and better cows may easily be mated with non- descript bulls. In larger units herds are invariably segregated and these hazards do not exist to the same degree. Thus, a reasonable proportion (33%) of larger herds in the proposed project is considered essential to ensure maintenance of a nucleus of purebred animals and a supply of superior replace- ment heifers and breeding bulls to the industry. 3.09 Imported heifers and bulls will be registered purebreds of the Holstein and Brown Swiss breeds. The latter breed is known to be well adapted to conditions in central and eastern Turkey and is expected to be the main breed. dIstributed to farmers in Ankara, Kayseri, and Malatya. Of the total animals imported (approximately 10,000 heifers and 450 bulls), some 70% will be Holsteins and 30% Brown Swiss. Heifer selections will be made from Holstein dams avetaging not less than 5,000 kg milk/year or Brown Swiss dams averaging not less than 4,000 kg milk/year. All imported heifers will be in calf to proven sires or sons of such sires. All imported bulls will be sons of  - 16 - proven sires and out of dams with a certified average milk production of 6,000 kg/ year for Holsteins and 5,000 kg/year for Brown Swiss. Before export, all cattle will be certified as in calf, in good general health and free from tuberculosis, brucellosis, leptospirosis, trichomoniasis and vibriosis, and vaccinated against foot and mouth disease (Types A and C). During negotia- tions assurances were obtained that only animals meeting the above conditions would be imported. 3.10 Dairy buildings will be of simple and inexpensive construction appropriate to the area in which they are to be located. Experience in the first project indicated that many farmers tend to invest more than is neces- sary and build structures too elaborate for small dairy farms--this will be discouraged and controlled in the present project. In Istanbul, Izmir and Adana, barns of open construction with portable shelter against cold winter winds (e.g., baled straw) have proved serviceable. In Ankara, Kayseri and Malatya barns will need enclosing, but will not be over-capitalized. It is envisaged that farmers with 5 cows will not need much additional barn space, as many small producers already have it available. Where additional space was needed, it will be as an extension to an existing structure built at minimumm cost by the farmer with family labor. Farmers with 12 cows will, in most cases, need some additional barn space. Again, this will, wherever possible, be provided as an addition to existing barn space, using family labor to the maximum. Farmers with 40 cows will nearly all need extra buil- dings. Farmers will be expected to provide not less than 75% of the cost of buildings and structures (built to specifications acceptable to IDPD). This will be their principal contribution to the subproject cost. 3.11 A key aspect of the project will be on-farm production of feed- stuffs. These will include greenfeed (usually alfalfa under irrigation, maize, and oats and vetch), silage (mainly from maize or sorghum-sudan hybrids, also from oats and vetch), and hay (mainly from alfalfa but also from oats and vetch). Experience in the first project showed that high pro- duction and profits were closely related to the farmer's ability to produce adequate homegrown forages and keep purchased feeds (e.g., concentrates) to a minimum. Land used for forage production can reduce output of another crop (e.g., wheat, maize, or cotton). However, this need not necessarily be serious if forages are double cropped and the cropping pattern carefully planned to avoid or minimize fallow, e.g., maize or sorghum-sudan hybrid grown in summer under irrigation following winter wheat, or oats and vetch grown in winter before summer cotton. Double cropping is particularly adapted to conditions in Istanbul, Izmir and Adana and to a lesser extent in Kayseri and Malatya. In Ankara, forage will be based almost entirely on alfalfa under' irrigation. In all project calculations, some cash crop is assumed to be sac'rificed and has been allowed for in the projections. Concentrate feed- ing will be kept to a minimum. Intake by young stock will be restricted to 1 - 2 kg per day depending on stage of growth. Milking cows will be fed at 1 kg concentrate per 2.5 liters of milk produced. The prepared feed industry in Turkey is well organized and adequate supplies of concentrates of acceptable quality and price are assured.  - 17 - 3.12 Some farmers already have a tractor and machinery. However, it will probably be necessary for larger units to buy a further tractor and additional cultivating machinery, depending on farm size and enterprise mix.' Most 40-cow units will need a tractor-mower, side rake, pick-up baler or, forage harvester, trailer, foreloader and milking machines. Similarly, most 12-cow units will require a small tractor (about 12 HP.), mower and trailer. Minor provision for mechanization of the 5-cow unit is anticipated. 3.13 Al services are currently being expanded in Turkey by DANB of MFA (para 2.25). It will be some time, however, before the scheme becomes fully effective; and probably only a few project subborrowers will obtain imme- diate benefit from it. Therefore, all the 40- and 12-cow units will have a herd bull (two in the case of the largest herds), which will be replaced every second or third year. Some bulls will be imported and some will be available from herds established under the first project. Farmers with 5-cow units will not normally be expected to maintain a bull, and project tech- nicians will assume responsibility for coordinating service for these farm- ers through Al (where it is available) or arranging use of bulls of 12-cow and 40-cow farmers (which would, in many cases, be underutilized). Where this were impracticable, a group of 5 or 6 small farmers might form a group and buy a bull for cooperative use. It is assumed they will finance this themselves as it represents a continuation of an existing service they have without the project and financing for it will not be provided by the Proj- ect. 3.14 The technical capability of IDPD, developed under the first project, will be further strengthened to assure subborrowers of farm planning services, supervision and extension support on a continuing basis. An effective nucleus of 18 Turkish professional and 10 middle level staff, together with 2 technical specialists, was formed during the first project under the direction of an ex- perienced project manager. This will need supplementing by about 23 profes- sionals, 13 middle-level technicians and 1 technical specialist to execute the proposed project. Assurances were given that in Turkey's fiscal year 1976 an additional 18 staff and in 1977 an additional 16 staff will be appointed. Furthermore, general veterinary assistance will be required from veterinarians of DVS of MFA, at not less than the level of the first project. Assurances were obtained during negotiations that the Borrower will employ, on a full time basis a qualified and experienced project manager for IDPD and not less than 41 professional and 23 middle level local staff will be employed by IDPD. Assurances were obtained that, if appointment of a new project manager was necessary for any reason, such appointment would be undertaken in consultation with the Bank. Assurances were also obtained that all necessary veterinary assistance will be made available to the project by DVS. 3.15 Government is assigning priority to livestock development and, par- ticularly, dairying. Consequently, a technical studies component is included in the project (para 4.14). It will include surveys and practical research and demonstration, particularly in forage production and utilization and im- proved livestock management (paras 2.12, 2.15, 2.16). Milk marketing studies  - 18 - will also be carried out in the project areas aimed at improving coordination of production, cooling/collecting, transportation and processing (para 2.33), and standards of handling of milk at all stages of the marketing chain to im- prove hygiene and nutrition (para 2.19). Terms of Reference are in Annex 10. The recommendations of the studies will be discussed by the Bank and the Turkish authorities and any agreed course of action implemented as expedi- tiously as possible. It is expected that the studies component would also provide the basis for the preparation of a subsequent livestock development project. 3.16 Training will be given particular emphasis in the present project (paras 2.21, 4.15, 4.16). Due to shortage of staff in the early stages of the first project, it was difficult to spare staff for training, and this aspect was not fully developed. It is important, in this context that most staff needed to execute the present project be appointed at an early date (para 4.04). Terms of Reference for training are in Annex 10. D. Cost Estimates 3.17 Estimated total project costs, based on current input prices, and including price increases, are about LT 520 million (equivalent to US$34.7 million), of which US$21.5 million (62%) is the foreign exchange component. The estimated foreign exchange cost will be largely for imported cattle, tractors, machinery, technical studies, overseas training and technical spe- cialists. Price increases were estimated at US$8.1 million (29.9%) over the 5 years of the project. They allow for annual increases in equipment costs of 10% in 1976, 8% in 1977-79 and 7% in 1980. They also allow for annual increases in the costs of civil works of 14% in 1976, 12% in 1977-79 and 10% in 1980. Physical contingencies are not included, as inputs for the project were able to be quite precisely estimated and are directly related to the number of expected subloans. Summarized costs are given in the following table; detailed estimates are in Annex 5.  - 19 - % Local Foreign Total/I Local Foreign Total Foreign ---- LT million ---- ---- US$ million ---- Livestock Imported Cattle 12.6 169.2 181.8 0.8 11.2 12.0 93 Bulls local 7.0 - 7.0 0.5 - 0.5 0 Subtotal 19.6 169.2 188.8 1.3 11.2 12.5 90 Buildings 72.2 12.7 84.9 4.8 0.8 5.6 15 Equipment Tractors 7.6 17.8 25.4 0.5 1.2 1.7 70 Agricultural machinery 42.3 45.4 87.7 2.9 3.0 5.9 52 Subtotal 49.9 63.2 113.1 3.4 4.2 7.6 56 Technical Services Technical Specialists 3.6 5.4 9.0 0.2 0.4 0.6 60 Technical Studies/ Training 0.9 3.6 4.5 0.1 0.2 0.3 80 Total Base Costs 146.2 254.1 400.3 9.8 16.8 26.6 Price increases (29.9%) 52.0 68.0 120.0 3.4 4.7 8.1 Total Project Costs 198.2 322.1 520.3 13.2 21.5 34.7 62 /1 Discrepancies due to rounding.  - 20 - E. Financing 3.18 The project will be financed on the basis of a farmer contribution of 18% (equivalent to US$6.3 million), a TCZB contribution of 20% (equivalent to US$6.9 million), and an IBRD contribution of 62% (equivalent to US$21.5 million) equal to the foreign exchange cost. Investment costs will be shared as follows: Subborrower TCZB IBRD Total Amount % Amount % Amount % Amount % -----------------US$ millions-------------- Project Component /_ On-Farm Investments Livestock 0.5 3 1.1 7 14.9 90 16.5 100 Buildings 5.6 75 1.8 25 - 0 7.4 100 Equipment 0.2 2 4.0 48 5.7 58 9.9 100 Subtotal 6.3 18 6.9 20 20.6 60 33.8 100 Technical Services - 0 - 0 0.5 100 0.5 100 Technical Studies/Training - 0 - 0 0.4 100 0.4 100 Total Project Cost 6.3 18 6.9 20 21.5 62 34.7 100 /1 Price increases added to each component. 3.19 The Bank Loan of US$21.5 million will be made to Government, which will bear the foreign exchange risk. Government will on-lend to TCZB in Turkish lira the equivalent of US$18.5 million at not less than 8.50% interest p.a., which, with a further LT 104 million contribution from TCZB 's own re- sources (equivalent to US$6.9 million), will comprise the funds for on-farm lending (equal to some LT 380 million). With subloans being made by TCZB over a 5-year period, the final repayments by subborrowers are not expected until 16 years from the commencement of the project. The project cash flow (Annex 5, Table 2) indicates that, allowing for contingent delays, a repay- ment to Government by TCZB over 12 years following 5 years' grace will be appropriate. Assurances were obtained during negotiations that Government will on-lend project funds equivalent to US$18.5 million to TCZB at not less than 8.50% interest p.a. for 17 years with a grace of 5 years and that TCZB will make an additional LT 104 million (equivalent to US$6.9 million) available from its own resources for on-lending to farmers.  - 21 - F. Procurement 3.20 Dairy cattle will be procured in 12-15 shipments averaging about 800 head. For this reason, and because shipments would be made up of small selected groups of animals, ICB is impracticable. Purchase of individual shipments will be on the basis of not less than three quotations from at least two countries. Orders of individual subborrowers will be obtained by regional managers of IDPD and sent to the project manager, who will organize bulk pro- curement of animals with the assistance of the project consultants. This procedure was followed in the earlier project and is satisfactory. Suppliers will offer for selection only cattle which equalled or exceeded the minimum performance and health specifications in para 3.09; and suitable documentation verifying standards will be required. Individual selection will be undertaken in the supplier country by the project manager, one project technical special- ist and a veterinary officer of DVS. Purchase contracts will require the sup- plier to insure the cattle against loss in transit, to make satisfactory ar- rangements for delivery, and to assume responsibility for them until received by project farmers. Suppliers will also be responsible for ensuring that cat- tle meet all veterinary and other standards of both the exporting and import- ing countries and those countries through which the cattle will travel in transit. Assurances were obtained from Government during negotiations that: (a) full support and cooperation of DVS would be provided at all stages during procurement to assist veterinary and production clearances; and (b) Turkish border entry will be expedited. 3.21 Several international tractor and agricultural machinery manufac- turers are represented in Turkey, but tractors and equipment are scarce and there are long delays for major items. Service is acceptable for major brands and spare parts are usually available. To ensure timely implementa- tion of the project, tractors, sowing and harvesting equipment, and milking machines will be procured by ICB in accordance with current Bank guidelines and assurances to this effect were obtained during negotiations. Up to 15% domestic preference or the level of import duties, whichever is the lower, will be allowed local manufacturers. Orders&from individual farmers would be bulked and procured by IDPD as in the first project and assurances on this will be obtained during negotiations. Bidding documents will state that suppliers will guarantee adequate servicing and spare parts for both tractors and major equipment in the seven project centers. G. Disbursements 3.22 The proposed Bank Loan of US$21.5 million will be disbursed over a 5-year period as follows:  - 22 - (a) 100% of foreign expenditures on cattle; (b) 100% of foreign expenditures, or 100% of local expendi- tures ex-factory, on tractors, sowing and harvesting equipment and milking machines; (c) 100% of foreign expenditures on consultants; (d) 100% of foreign expenditures on training and group study tours. 3.23 The schedule of disbursements is in Annex 6. H. Environmental Impact 3.24 Use of chemical fertilizers, pesticides and herbicides in forage production, under technical supervision of IDPD field staff, is not expected to pollute water supplies through runoff as levels of chemicals applied under the project would be the minimum necessary for satisfactory crop production. Effluent from project dairies, which are small by standards in many parts of the world and fairly scattered, is not expected to have any deleterious en- virodimental effect. In the majority of cases, solid residues would be spread back on the land as fertilizer which would be beneficial. IV. PROJECT IMPLEMENTATION A. Organization and Management 4.01 The project will be administered similarly to Credits 236-TU and 330-TU (the Second Livestock Development Project). General management of the project will be the responsibility of LDP. Detailed execution of technical and financial aspects will be undertaken, as in the case of Credit 236-TU, by IDPD of LDP. IDPD is headed by a project manager responsible to the Gen- eral Director of LDP. Regional control will be through offices in Ankara, Istanbul, Izmir, Adana, Konya, Kayseri, and Malatya, each headed by a man- ager 1/ responsible to the project manager, and staffed with a deputy man- ager,l/ and at least one agronomist, one veterinarian and 2-3 field assistants, along wLth supporting staff (Chart 15657R). 4.02 Specifically, IDPD field staff will: 1/ In organizing the staffing of such branches, LDP's practice is to fill one of the top two posts by a senior agronomist, the other by a senior veterinarian.  - 23 - (a) promote the project to farmers; (b) provide an initial screening of those farmers requesting subloans; (c) assist successful applicants prepare dairy development plans; (d) supervise implementation and provide general extension assistance; (e) encourage farmers to maintain records; and (f) maintain records of overall project performance. 4.03 Three technical specialists acceptable to the Bank will be employed by LDP under terms and conditions acceptable to the Bank for the duration of the project (equivalent to 15 man-years), and assurances of this were obtained at negotiations. 1/ They will be responsible to the project manager. Terms of reference are summarized in Annex 9. One each will cover Istanbul/Izmir, Ankara/Adana/Konya, and Kayseri/Malatya. They will provide technical advice to managers (particularly on planning and implementation of farm development), and training of field staff (paras 4.15, 4.16). They would also assist in design and supervision of technical studies (para 4.14). This will generally parallel the organization under the first project, which worked satisfactorily. All three technical specialists will begin their duties under the present project no later than January 1, 1977, and the two existing technical special- ists under Credit 236-TU will also be assigned to the present project until December 31, 1976, it being understood that such assignment should not prevent them from satisfactorily discharging their duties and responsibilities under Credit 236-TU. Assurances on this were obtained at negotiations. The cost of technical specialists is estimated at US$40,000 per man year at present costs, of which US$28,000 is basic salary and US$12,000 represents allowances and miscellaneous expenses. 4.04 Prior to 1975, LDP faced considerable difficulty in recruiting staff, and as a result both Credit 236-TU (First Livestock Development Proj- ect) and Credit 330-TU (Second Livestock Development Project) encountered extended delays, although now they are being implemented satisfactorily. The Village Development Sub-Project of Credit 330-TU is still moving slowly, but a major recruitment in the past six months, supported by use of recently authorized special staff incentives, has now brought actual staff close to full cotmplement and, as a result, accelerated implementation is hoped for this year (paras 3.14, 4.13). Improvements in salary and per diem supple- ments became effective in LDP's 1976 fiscal year which together with assur- ances, received during negotiations, on staff increases should overcome the staffing constraints of Credit 236-TU. 1/ Two of these positions were established under Credit 236-TU and will continue in the present project and a third post will be created to provide adequate technical coverage (para 3.14).  - 24 - 4.05 The credit aspects of the project will be handled through EDLD of TCZB (para 2.31). The role of EDLD will involve establishing the credit- worthiness of individual subborrowers and credit limits (para 4.08), providing subloans, and supervising subloan disbursements and repayments. Close coordi- nation was developed between EDLD and IDPD during the first project and a good working relationship currently exists between them. The relationship is gov- e&rned by an existing protocol which is satisfactory. LDP proposes to amend this protocol slightly for the purposes of the proposed project. The signing of the amended protocol is a condition of effectiveness. B. Lending Policies and Procedures 4.06 Total lending to farmers by TCZB will be around LT 380 million, equivalent to US$25.4 million, derived from US$18.5 million equivalent of the Bank Loan on-lent to TCZB by Government and US$6.9 million equivalent from TCZB's own resources (paras 3.18, 3.19). 4.07 To be eligible for a dairy loan, a farmer will: (a) have had experience in dairying; (b) occupy, or have access to, an appropriate area of till- able land (approximately 0.5 ha/milking cow) suitable for forage crop production; and (c) meet the creditworthiness criteria of TCZB. Assurances were obtained during negotiations that only farmers meeting the above criteria would qualify for dairy loans. 4.08 Farmers will make application for a dairy loan to the nearest of- fice of TCZB or IDPD. After determination of the farmer's creditworthiness and credit limit by TCZB, an appropriate development plan will be prepared by an IDPD technician who will subsequently submit the plan to the regional manager and consultant for review. In accord with TCZB's existing delegation of authority, plans for less than LT 150,000 credit will be reviewed by the regional technical specialist, approved on the authority of the IDPD regional manager and sent to the local TCZB branch manager for credit approval and funding, with copies to IDPD and TCZB head offices. Plans for credit in ex- cess of LT 150,000, after review by the regional technical specialist and re- gional manager, will be forwarded by the regional manager to IDPD headquarters and approved by the project manager. Applications will then be submitted through the EDLD to the board of TCZB for credit approval. This procedure was followed in Credit 236-TU and is considered satisfactory.  - 25 - 4.09 Of total on-farm investments, farmers will contribute up to 20%, according to their means (para 3.18). Farmers, in general, and particularly larger (40-cow) farmers, are expected to finance the major part (at least 75%) of the cost of dairy buildings and associated structures (e.g., silage pits, hay barns) as their contribution. Credit in excess of 25% for build- ings will be provided only to small farmers (20 cows or less at full de'velop- ment) on the specific recommendation of field staff preparing individual farm plans and on the approval of the project manager. Most farmers will also be expected to provide for labor (either through family or hired labor) and for forage crop production from their own resources. Farmers entering the project will already have a functional dairy operation with a labor complement and will, in most cases, be producing some forage crops. Incremental labor and forage crop costs associated with expanding dairy numbers will be expected to be minor, as utilization of labor for dairying and land for forage cropping is now relatively inefficient. With technical assistance and better planning, the productivity of labor and yield of crops could be considerably increased at little extra cost. Credit will thus be provided for incremental costs of labor and forage cropping only in exceptional cases where so recommended in writing by technical staff preparing individual plans and with the written approval of the project manager. Assurances to this effect were obtained from Government and TCZB during negotiations. 4.10 Lack of adequate collateral was a problem which constrained the first dairy project and prevented its benefits reaching smaller farmers. TCZB prefers a land title to secure its loans, but titles are not always available (para 2.06). In the present project, TCZB will secure loans up to LT 100,000 with chattel mortgages on livestock and machinery plus the guarantee of creditworthy cosigners. Loans over LT 100,000 would be secured partially by land title, and partially by a chattel mortgage on livestock and machinery, and/or guarantees of cosigners. Assurances on the acceptability of these conditions to TCZB were obtained at negotiations. 4.11 Subloans to project farmers will be made at not less than 11% in- terest p.a.. for 10-12 years with 2-4 years of grace depending on plan size. 1/ Repayment periods and repayment schedules will reflect the cash flow position of the dairy farm investment plan and the capacity of the beneficiary to repay. Grace periods for smaller farmers (i.e., 5-cow and 12-cow) will, in general, be more favorable than for larger farmers (40-cow), but each case will be evaluated individually by project technicians, depending on net income gen- erated in the plan. No subloans to project farmers in excess of the equiva- lent of US$80,000 will be made without the prior approval of the Bank. At least 66% of subloans (i.e., 500 subloans) will be to smaller farmers with 20 cows or less at full development. The 11% effective interest rate is 1/ Subloans in Credit 236-TU were made at 9% p.a. for 12 years with 4 years grace.  - 26 - currently the maximum (under Government Decree) which may be charged on agri- cultural loans and is the present rate charged by TCZB for such loans. The inflation rate for 1975 is estimated to have been.about 15% which results in the above proposed project interest rate being effectively negative, a situation which prevails in public sector operations in the context of the low interest rate regime in Turkey. Government, however, is pursuing an anti- inflationary policy which is meeting with some success, and it is committed to bringing inflation rates down to 10% in the medium-term. Government also recognizes the desirability of ultimately achieving a positive real interest rate structure. However, an abrupt change in the present complex financial and interest rate system could be disruptive. To establish a sound factual and analytical basis for a more responsive system of financial mobilization and allocation in Turkey, the Government has initiated a broad study of the country's financial sector. Depending on the results of this study and the future direction of inflation in the country, the proposed interest rate may need adjustment. The appropriateness of the 11% rate and other lending terms and conditions will therefore be subsequently reviewed by Government and the Bank if, in the opinion of either party, such review is warranted in the light of prevailing conditions. Assurances on these matters were obtained during negotiations. 4.12 As in the first project, TCZB will place 0.5% of the interest re- ceived from farmers in a Special Operational Fund to be made available to LDP for partial payment of miscellaneous expenses incurred in project execu- tion. Expenditures from this fund will be authorized by the General Director of LDP or any other person duly designated by him for such purpose. Assur- ances to this effect were obtained during negotiations. Terms of Reference for the Special Operational Fund are in Annex 11. C. Technical Services 4.13 Technical servicing of the project will rest primarily with IDPD staff. Staff needs are estimated at about 41 professionals and 23 middle- level technicians (paras 3.14, 4.01). They will be supported by 3 inter- nationally recruited technical specialists (para 4.03). The staff will be grouped to work from the 7 field offices under the ultimate direction of the project manager (paras 3.07, 4.01). Also, extra veterinary assistance will be provided to project farmers by veterinarians of DVS (para 3.14). Such assistance would be coordinated by IDPD regional managers. This general pattern of servicing is similar to that in the first project, which proved satisfactory. D. Technical Studies/Training 4.14 Technical studies, particularly in the areas of livestock produc- tion and milk marketing (para 3.15), will be organized under the guidance of the project manager. Terms of Reference are in Annex 10. Such studies t_)?I commence not later Than the beginning of the second year of the project.  - 27 - The three technical specialists will be expected to play a major role in col- laborating with the project manager in planning such studies, in supervising their implementation, and in advising on further development possibilities in the dairy sub-sector (para 4.03). Prior to their implementation, annual plans for such studies will be sent to the Bank for comment; the first of such plans and subsequent annual plans will be submitted not later than the third quarter of the year prior to that of its implementation. During implementation, pro- gress and results from such studies will be reported in the quarterly reports submitted by the project manager on general project execution (para 4.20). Assurances to this effect were obtained from Government at negotiations. 4.15 Terms of Reference for training are in Annex 10. The program will consist of: (a) In-service training of LDP staff at all levels. (b) Training for farmers, particularly through field days and on-farm demonstrations on the most progressive project farms. (c) Group study tours for LDP staff and prominent farmer leaders; such tours to be coordinated as far as possible with trips abroad for cattle procurement. (d) Study leave for individual LDP or Government staff for spe- cialized overseas training in dairy production and technology. Such leave would be for practically-oriented studies. 4.16 It is expected that the technical specialists will play a key role in organizing training programs in consultation with the project manager (para 4.03) who will assume ultimate responsibility for approval of the program and ensuring its timely execution. The project manager will present a draft train- ing program to the Bank for comment within six months of effectiveness. A ances to this effect were obtained from Government during negotiations. E. Accounting and Auditing 4.17 A separate project account will be kept by EDLD. The account will be audited annually by independent auditors acceptable to the Bank, and a copy of the certified account and the audit report would be submitted to the Bank in Engfish within seven months of the end of TCZB's financial year. Assur- ances on this were obtained from TCZB during negotiations. 4.18 The project manager-will be responsible for maintaining accounts of expenditures on the Technical Services and Technical Studies/Training com- ponents of the project. Details of expenditures will be reported in quar- ter-ly reports on the project (para 4.20). The accounts of each component  - 28 will be subject to annual audit by independent auditors acceptable to the Bank and a copy of the certified accounts and the audit reports will be submitted to the Bank in English not later than seven months after the end of LDP's fi- nancial year. Assurances on these arrangements were obtained during negotia- tions. 4-19 The accounts of the Special Operational Fund will be maintained by the General Director, LDP. He will be responsible for arranging an annual audit of the account by independent auditors acceptable to the Bank and for sending a copy of the accounts and the audit report to the Bank within seven months of the end of LDP's financial year. Assurances to this effect were obtained from Government at negotiations. F. Monitoring 4.20 In order to measure progress of the project against the project im- plementation schedule (Chart 15658(2R)), the project manager will submit quarterly progress reports to the Bank through TCZB within two months from the end of each quarter. The fourth quarterly report of each year will, in addi- tion to reporting progress over the preceding three months, contain a compre- hensive summary of progress during the preceding year. Assurances on this were obtained from Government at negotiations. V. BENEFITS AND JUSTIFICATION A. Production 5.01 The project will develop about 750 dairy units around seven large population centers in western and central Turkey, viz., Ankara, Istanbul, Izmir, Adana, Konya, Kayseri and Malatya. Significant production increases are expected in liquid milk, improved dairy animals and forage crops. Addi- tional forage will be made available in rainfed and irrigated areas by utiliz- ing land now in fallow. This will improve the efficiency of land use and the additional forage will allow farmers to raise feeding standards and to decrease their dependence on purchased feeds. Three dairy models (40-, 12- and 5-cow units at full development) have been used to demonstrate the project effects, each one with a particular cropping pattern, farm services and labor utiliza- tion mix (Annex 4). 5.02 Following is a summary of estimated production flows with the proj- ect (Annex 8, Table 1):  -29- Pre- At Full % Product Unit Project Development Increase Whole Milk million 1 5.4 51.0 840 Cattle '000 AU 2.9 10.8 270 Alfalfa hay '000 t 5.6 50.4 800 Oats/Vetch hay '000 t - 13.5 Maize silage '000 t 135.0 B. Prices 5.03 Prices for inputs and outputs of the project are based on current local and farmgate prices collected throughout the project area from farmers and project technicians in Credit 236-TU and commercial houses. These fi- nancial prices are adjusted for the economic analysis, based on projections in real terms provided by the Bank's Economic Analysis and Projects Depart- ment and, where applicable, allowances have been made for transfer payments (Annex 8, Tables 2 and 3). C. Marketing' 5.04 The project will contribute to increasing the supplies of milk in ten main consumption centers where there is currently a shortage of milk for processing of some 130,000 tons p.a., I/ which cannot be supplied from ad- jacent areas which are also in deficit. Incremental milk production from the project, amounting to about 45,000 tons p.a. at full development, is expected to be easily absorbed, as buyers for plants and other processors as well as peddlars are active in the proposed areas. The concentration of supplies will also make it attractive for further milk pick-up routes to be estab- lished thus ensuring outlets for additional output, particularly of summer milk. Over 3,000 high-quality purebred dairy animals and over 7,000 lesser- quality purebred breeding animals 2/ will be made available annually by the project (Annex 4, Tables I and 6).. The former, particularly, will help meet the large unsatisfied demand from small dairy producers anxious to improve their herds, since the project is located in areas where dairying is estab- lished and where good possibilities exit for expansion (paras 2.12, 2.16). 1/ Mission estimates based on 1975 excess capacity of existing processing plants in the project area. 2/ The latter figure assumes that, because of the lack of animals in Turkey of high genetic dairy merit, virtually all surplus purebred animals pro- duced by project farmers will be passed on to other farmers for breed- ing and none slaughtered for meat.  - 30 - D. Producer Income 5.05 Annual net income of the dairy units will increase under the proj- ect as follows: Estimated Net Operating Estimated Net Operating Income Financial Income from Dairying from All Farming Activities Rate of Sensitivity Unit Size at after Income Taxes /2 after Income Taxes /2 Return o3 Test /4 Full DevelopmentId Pre-project Full Development Pre-project Full Development ---------------------------