Turkey - Balikesir Newsprint Project

Doment of The World Bank FOR OMFCIAL USE ONLY Reprt No. 5664 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) May 21, 1985 Industry Department This document as a resricted dislb* o ad ma be used by recpiets omy in the performance o terofficia duties lbs contents may not otherwi be discosed withou World Dank authenoriain.  CURRENCY EQUIVALENTS Currency unit - Turkish Lira Appraisal Year - US$1 = TL 14.0 Investment Period - US$1 = TL 14.0-91.0 Completion Year - US$1 = TL 91.0 Closing Date - US$1 = TL 186.8 GOVERNMENT OF TURKEY FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES mW - Megawatts m. p.a. - cubic meters per annum m2 - square meters tpy - tons per year ABBREVIATIONS The Establishment - The Balikesir Establishment Government - Government of Turkey MOF - Ministry of Forestry SEKA - State Enterprise for Pulp and Paper TEK - Turkish Electric Authority UNDP - United Nations Development Programme FAO - Food and Agricultural Organization  FOR OFFICIUL USE ONLY PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRrNT PROJECT (LOAN 1258-TU) (LOAN 1258-TU) TABLE OF CONTENTS Page No. PREFACE . .......................................................... i BASIC DATA ....................................................... ii HIGHLIGHTS ....................................................... iv I. INTRODUCTION ................................................ 1 II. PROJECT BACKGROUND .......................................... 1 A. Project Preparation, Appraisal and Loan Approval .... ..... 1 B. Project Description and Objectives ....................... 2 III. PROJECT IMPLEMENTATION AND MANAGEMENT ................. 3 A. Achievement of Objectives ................................ 3 B. Project Scope Changes .................................... 3 C. Project Management ....................................... 4 D. Employment and Training .................................. 4 E. Use and Performance of Consultants ....................... 4 F. Procurement .............................................. 4 G. Implementation Schedule ...............5................ 5 H. Ecology .................................................. 5 I. Capital Costs, Financing and Loan Disbursement .... ....... 6 IV. OPERATING PERFORMANCE ....................................... 8 A. Production Buildup ....................................... 8 B. Market Developments ...................................... 8 V. FINANCIAL PERFORMANCE ....................... 9 A. Value of Sales and Production Costs ...................... 9 B. Financial Analysis ....................................... 10 VI. ECONOMIC PERFORMANCE .................... .................... 10 VII. BANK ROLE AND LESSONS LEARNED ............................... 11 | 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 (contd.) Page No. ANNEXES 3.1 Frocurement by Country of Origin ..................... 12 3.2 Implementation Schedule ..... ........ 13 3.3 Capital Costs and Financing Required . ..................... 14 3.4 Estimated and Actual Disbursements ..... 15 3.5 Annual Capital Expenditures .. ................0....... 16 4.1 Estimated and Actual Production ................... ....... 17 4.2 Demand and Supply Balance for Newsprint .................. 18 5.1 Estimated end Actual Manufacturing Costs .................. 19 5.2 Financial Projections ...... .............................. 20 5.3 Historical Development of Newsprint Prices ...o ........... 21 5.4 Actual Inflation Indices ................................. 22 5.5 Financial Rate of Return ................................. 23 6.1 World Newsprint Capacity ............... ..24 6.2 Economic Rate of Return ................................ 25 Attachment Comments From the Borrower ..................................... 26  PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) PREFACE Loan 1258-TU for the Balikesir Pulp and Paper Project for US$70.0 million was signed May 21, 1976 and was closed on September 13, 1983, the full amount of the loan having been disbursed. Thet main objective of the Loan was to finance the construction of a pulp mill, a newsprint paper mill, a sawmill, pollution abatement facilities and ancillary installations. In addition to help meet the growing dea-nd for newsprint in the country, the project would generate substantial foreign exchange savings. The Project Completion Report has been prepared by the Industry Department based on a draft prepared by the Borrower and the findings of an Industry Department mission in October 1983. Comments received from the Borrower are reproduced in the Attachment. This project has not been audited by the Operations Evaluation Department.  - ii - PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) PROJECT DATA As of March 31, 1985 Original Disbursed Cancelled Repaid Outstanding Loan amount (US$ M) 70.0 70.0 - 21.2 48.8 Cumulative Loan Disbursement 1977 1978 1979 1980 1981 1982 Planned 20.0 44.0 67.0 70.0 - - Actual 12.8 32.1 49.0 57.8 63.7 70.0 Z of Planned 64 73 73 83 91 100 Appraisal Estimate Actual Start of Implementation 03/75 03/75 Apppraisal Date - 10/75 Board Approval - 05/18/76 Loan Signing - 05/21/76 Effectiveness - 10/15/76 Loan Closing 12/31/81 12/31/82 Date of Physical Completion a/ 01179 09/80 Completion Time (in months) 36 57 Time Overrun (in months) - 21 Date of Start-up of Operations: Sawmill 04/79 07/80 Papermill 07/79 02/81 Fixed Cost b/ (US$ million) 164.7 159.2 Cost Underrun - 5.5 Total Financing Required (US$ million) 200.3 197.8 Financial Rate of Return (Z) 5.0 7.7 Economic Rate of Return (%) 16.1 15.3 a/ Loan funds were also used for financing operational assistance and training following physical completion of the mill. b/ Excluding working capital and interest during construction.  - iii - PROJECT COMPLETICN REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) MISSION DATA Month/ No. of No. of Report Missions Year at Daysb/ Persons Date Preappraisal 09/75 3 4 10/10175 Appraisal 11/75 23 4 11/24/75 Supervision I 06/76 3 1 06117/76 Supervision II 07/76 2 1 08/30/76 Supervision III 10/76 15 3 11/12/76 Supervision IV 05/77 13 2 05/18/77 Supei.vision V 10/77 6 3 12/20/77 Supervision VI 04/78 12 2 05/12/78 Supervision VII 01/79 13 2 03/02/79 Supervision VIII 09/79 12 2 10/22/79 Supervision IX 03/80 20 1 04/08/80 Supervision x 11/80 9 3 01/12/81 Supervision XI 06/81 14 3 06/30/81 Supervision XII 05/82 14 3 07/02/82 Completion 10/83 8 1 11/04/83 at During 1975-78, a number of visits to the Bank were also carried out by the Canadian consultants. b/ In most cases, the Balikesir supervision mission was combined with the supervision of the Akdeniz Forest Utilization Project and preparation work on the next SEKA project.  - iv - PROJECT COMPLETION REPORT TURK - BALIKEsnSR NEWSPRINT PROJECT (LOAN 1258-TLU) HIGHLIGHTS i. Implementation of the entire project was completed about 24 months behind schedule, with slight cost underrun (1.1Z in US$ terms). The main reason for the implementation delay was slow construction progress during a period of general economic difficulties which resulted in a shortage of local materials and local currency financing. In addition to these local delays, SEKA was unable to open letters of credit on time thus resulting in delays of shipments from foreign suppliers (para 3.10). During the implementation period, Balikesir was under the direction of five different mill managers (one of which held the post on two separate occasions). While impossible to quantify, this instability in top management undoubtedly had a detrimeutal effect on project implementation and in the coordination between SEKA management and the consultant (para 3.11). On the other hand, technical assistance arrangements, including training, during implementation and start-up were judged satisfactory by both SEKA and the Bank (para 3.06). ii. The sawmill component of the project was commissioned in mid-1980 without incident about one year behind schedule and operated briefly at design capacity shortly thereafter. The production of sawnwood, however, has been well below appraisal estimates not as a result of any physical deficiency in the plant or lack of operating capability by SEKA, but rather due to the severe depression in the construction industry of the country %para 4.01). Although the sawmill represents a small part of the total investment (6%), sawmilling residues are important in the operating cost structure of newsprint production. After initial technical difficulties due t3 equipment failure, production performance of the newsprint mill has been good, reaching 80% of design capacity in its 31st month of operation which is close to the appraisal estimates (paras 4.02-4.03). Operating costs have been higher than foreseen, mostly as a result of increases in the cost of pulplogs, fuel oil, labor, imported chemicals and the previously mentioned low volume of sawmilling residues (para 5.01). iii. As a result of delayed start-up of the project, and slow and partial adjustment of product prices to offset increasing input costs, Balikesir's financial performance has progressed more slowly than estimated at appraisal. Provided that more timely price increases are granted should production costs increase, the company is expected to make a profit in its fifth year of operation or about two years later than foreseen at appraisal. The project is now expected to achieve a financial rate of return of 5% compared to 7.7% estimated at appraisal. However, if the  sawnwood market should recover earlier than anticipated and the company could improve the present profit margin, by say 5%, the return would be higher than the appraisal estimate (para 5.03). The economic rate of return is presently estimated at 15.3% (para 6.02). iv. The Bank was involved since the early stages of project preparation and played an important role in assisting SEKA and the Turkish authorities in adequate preparation and implementation of the project. Given the introduction of new technology in the country, the Bank was also instrumental in defining technical assistance arrangements for the project (para 7.03). By Increasing the size of the loan to allow procurement of the whole technology package under Bank guidelines, the Bank also ensured strong Bank influence in project implementation. The lessons that can be learned from this project are: (a) With suitable training and adequate technical assistance, introduction of new technology which has clear technical and financial advantages can be appropriate (para 7.03); *b) The Bank should not underestimate the potential difficulties in coordinating action between public sector enterprises and related government agencies particularly if this action requires the abolishment of traditional operating practices (para 7.01); and Cc) Stability and competence of top management are of paramount importance, particularly for their effect on the implementation schedule (para 3.04).  PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) I. INTRODUCTION 1.01 Since the early 1960s with financial assistance from United Nations Development Programme (UNDP), and with the help of the Food and Agricultural Organization (FAO), Turkey had been systematically surveying its forest resources (the fourth largest forests in Europe) and studying ways of introducing more intensive utilization. The Akdeniz Forest Utilization Project, which utilized wood resources along the Southern Mediterranean coast was the first result of these surveys, as well as the first attempt in Turkey to integrate closely industrial and forest development. In 1974, the Bank approved a US$40.0 million loan to the Gover mnt of Turkey for the construrtion of the Akdeniz integrated sawmill and pulp and paper mill for linerboard and sackkraft. This project started commercial operations on January 1984, and preparation of the PCR has been initiated. 1.02 The Balikesir Pulp and Paper Project, which uses forest resources along the northern and western areas of the country, was thus the second Bank loan in support of Turkey's forest industry. The project represented not only an important industrial investment in the country aimed at meeting the growing demand for paper products but an equally important measure to utilize more effectively and more fully Turkey's valuable renewable natural resources. II. PROJECT BACKGROU-ND A. Project Preparation, Appraisal and Loan Approval 2.01 Using preliminary results of a detailed Turkish study of the North Aegean, Marmara and Black Sea Regions (North Turkey Forest Study), a prefeasibility study and, subsequently, a full feasibility study were commissioned by UNDP, with FAO as executing agency, and the Bank involved as an observer, for the Balikesir Pulp and Paper Project. The feasibility study was prepared by consulting engineers of Vancouver, Canada and a first draft was completed in January 1975. In March 1975, the Government and the State Pulp and Paper Enterprise (SEKA) requested Bank financing for the Project. 2.02 The Project was appraised in September 1975 on the basis of this study. At the time of appraisal, the mission focussed mainly on financial and pricing issues. The appraisal mission also discussed in detail the  size of the Bank loan and recommended that the proposed loan be substantially increased to allow procurement of the whole paper machine and pulp-making equipment under Bank guidelines, an action that could lead to significant savings and stronger Bank influence in project implementation. 2.03 In April 1976, negotiations between the Turkish authorities and the Bank took place and on May 18, 1976, the Bank's Executive Directors approved a loan of US$70.0 million jointly to SEKA and the Balikesir Establishment for 15 years, including 4 years of grace, at an interest rate of 8.5Z per annum plus a fee of one and one half percentage points that would be due to the Government. The loan became effective on October 15, 1976. B. Project Description and Objectives 2.04 The Project's primary objectives were to provide for Turkey's growing need for newsprint to support an expanding newspaper industry and to make more intensive use of the available forest resources. An integrated mill was chosen to permit processing of both sawlogs and pulp logs and use the sawmilling residues in the pulping operation. A newsprint capacity was chosen consistent with market demand, the available raw material, and SEKA's operating capability with adequate training and operating assistance. 2.05 The Balikesir Pulp ana Paper Project comprises: (a) a sawmill to produce about 105,000 m3 per year of air-dried sawnwood; (b) a wood preparation plant to produce about 86,000 m' of wood chips; (c) a thermomechanical wood pulp mill to produce about 79,100 bone-dry tons per year of thermomechanical wood pulp; (d) a newsprint mill to produce about 100,000 tons per year of newsprint at the standard basis weight of 52 g per m2; (e) pollution abatement facilities, including a system tor effluent treatment and disposal; and (f) ancillary facilities, including a 9 MW non-condensing turbogenerator to minimize voltage variations and provide sufficient electric power to the newsprint machine for up to two hours in the event of an outage. 2.06 The Project is located 12 kma southeast of the city of Balikesir, on the main highway to Izmir at an average hauling distance of 150 km of the major forest areas serving the project. Although the site is near the railway network, transport for the project is being entirely done by road since the trucking industry is able to provide fast and reliable services.  - 3 - 2.07 Although the species of pine available to the Project had never been used in newsprint manufacture, laboratory and pilot plant testing carried out in reputable Canadian and American installations showed that the Turkish species were suitable for newsprint manufacturing using newly developed but adequately tested process improvement, i.e., thermomechanical pulping and twin-wire sheet forming on the newsprint machine. The choice of this technology was aimed at obtaining important advantages to the Project both in reducing manufacturing costs and improving product quality. III. PROJECT IHPLEMENTAIION AND MANAGEMEIT A. Achievement of Project Objectives 3.01 The principal objective of the Project, to reduce imports of newsprint through increased domestic product-on, has been achieved, with the mill producing approximately 80Z of its design capacity in 1983, its third year of operations. Production in the first three years of operation, amounting to 168,000 tons, represents a foreign exchange savings of between U$90-100 million. The broader objectives of more efficient use of the main raw material, wood, through integration of a sawmill and pulp mill, plus the significant energy saving resulting from delivering wood with bark intact so that it can be removed in the mill and used as fuel, however, have not been achieved. Failure to achieve this is due to the continuation of forestry practices which provide for hand-barking in the woods,1/ and an apparent disregard for allocating logs for their best use. Thus the mill continues to receive large diameter logs for paper production, so much so that the installed chippers have become a production L-ttle.neck bzause they were designei to handle small dirameter pulplogs -tch it was igreed tbh Project w'o' d receive. In addition, poor quality sawlogs have restric:ed sawmill production thus compounding the existing problem of a depressed sawnwood market. It should be noted that, prior to the implementation of this project, MOF was the only sawmill operator in the public sector and were reluctant to see their role being diminished somewhat by the construction of a large modern sawmill by SEKA. The result has been a deterioration in the relationship between SEKA and KOF, and SEKA has had a continuing problem in obtaining appropriate volume and quality of wood. Finally, the objective of completing the Project in 3 years was not achieved (almost 5 years actual). B. Project Scope Changes 3.02 There have been no significant changes in project scope compared with that agreed at time of appraisal, except for an increase in the training program which was requested by the Bank and agreed to by SEKA. 1/ The MOF has indicated that this procedure is required to prevent tree infections. However. with proper scheduling for prompt delivery from forest to mill, this alleged problem can be circumvented.  4- C. Project Management 3.03 The Project was implemented by the Balikesir Muessesesi, i.e., the Balikesir Establishment, a legally established subsidiary of Turkiye Seluloz ve Kagit Fabrikalari Mudurlugu (SEKA), which is the Turkish State Economic Enterprise for Pulp and Paper. SEKA retained a Canadian consulting firm to undertake basic engineering and detailed process design, including preparation of tender documents and evaluation of bids, and on-site supervision of erection. Civil design and construction was undertaken by Turkish consultants and contractors. D. Employment and Training 3.04 Balikesir currently employs 1,040 nationals (374 administrative staff and 666 operating and maintenance personnel). This compares with a total of 850 (125 administrative and 725 operating) estimated at appraisal. Most of the increased number of administrative staff over the appraisal estimate is actually assigned to township duties (i.e., maintenance, gardeners, drivers, etc.). The staff have been drawn from other SEKA mills and also recruited locally. Generally, recruitment and training have been satisfactory but somewhat unstable at the higher management levels as demonstrated by the change of four mill managers during the period 1978-1981. Since July 1981, however, the situation has stabilized and there have been no further changes. The situation in Balikesir was similar to SEKA as a whole which for political reasons was also affected by frequent changes in senior management, and high turnover of technical staff as a result of inadequate salaries. 3.05 The consultants conducted training at the mill s-te through classroom teaching and hands-on training during implementation and after start-up. Some key SEKA personnel were also trained in the consultant's headquarters and in operating mills in North America. The achievement of production levels close to appraisal estimates indicates this training has been successful. E. Use and Performance of Consultants 3.06 The main consultant for this project was involved in project identification, preparation, implementation, training and start-up. Their performance was judged satisfactory by both SEKA and the Bank. However, coordination between SEKA management and the consultant was not as effective as desired and contributed to the lengthy implementation period. F. Procurement 3.07 All major machinery and equipment was procured under international competitive bidding (ICB) using Bank guidelines. SEKA report that they experienced no difficulties following these guidelines. The loan was fully disbursed in the original categories with no changes.  -5- 3.08 Foreign procurement through ICB was spread among 11 countries, with 3 of these providing major packages: paper machine and ancillary equipment from Italy, turbo-generator and other electrical equipment from the Federal Republic of Germany and the thermo-mechanical pulping plant and sawmill, as well as consulting services, from Canada. Among foreign suppliers, the most important ones were Canada (26.5Z), Italy (22X), UK (19%) and the FRG (16.3%). Turkish suppliers selected through ICB supplied 1.9% of the Bank-financed goods and services. Full procurement details are shown in Annex 3-1. G. Implementation Schedule 3.09 A comparison of the appraisal and actual implementation schedules is presented in Annex 3-2. At the time of appraisal it was estimated that the sawmill would start up in October 1978 and the newsprint mill in January 1979. These targets were not achieved. The sawmill commissioning was completed about one year late in September 1979, and the newsprint mill two years late in January 1981. 3.10 The major cause of delay was slow construction progress during a period of general economic difficulties in the country which resulted in a shortage of local materials and local currency financing.- Local contractors were not paid on time and work essentially stopped on several occasions. In addition to these local delays there was reluctance on the part of some foreign suppliers to ship materials during this period for fear of not being paid, because SEKA was unable to open letters of credit in a timely fashion. 3.11 During the implementation period, Balikesir was under the direction of five different mill managers, one of which held the post on two separate occasions. While it is impossible to quantify, this inztability in top management undoubtedly had a detrimental effect on project implementation. Coordination between SEKA management and the consultant also suffered. H. Ecology 3.12 Although pulp and paper mills in general can be potentially damaging to the environment, this is not a particularly serious problem in the case of newsprint mills which use mechanical rather than chemical pulping processes. Before Bank involvement, the Balikesir mill was originally planned to be a chemical pulp mill, but primarily because of the low flow in the river which would receive effluent, this was judged to be unacceptable by several consultants and international organizations who advised SEKA and the Government. The Project was therefore switched to produce newsprint. 3.13 The mill is capable of a high level of water recirculation to reduce effluent discharge to a minimum. Effluent is treated in a primary clarifier to reduce suspended fine pulp fibers, followed by secondary treatment in an aerated lagoon where oxygen-demanding dissolved organic  - 6 - material, primarily wood sugars, are oxidized. Treated effluent is then discharged to the Simav River. The system has operated according to design expectations and no detrimental effects on the environment have been experienced. 1. Capital Costs, Financing and Loan Disbursement 3.14 The total financing required for the Project was US$197.8 million, about 1% lower than the 1976 estimate. The total foreign exchange cost of the Project was US$95.0 million (about 16% higher than the estimate) and the total local currency cost was US$102.8 million equivalent (about 13% below the estimate). Capital cost estimates at the time of appraisal and actual figures are shown in Annex 3-3, and summarized below: Turkey - Capital Cost and Financing Required (US$ million equivalent) a/ Appraisal Estimate b/ Actual Foreign Foreign Exchange Local Total Exchange Local Total Total Fixed Cost 73.4 91.2 164.6 74.7 84.5 159.2 Working Capital 1.3 19.3 20.6 4.1 10.1 14.2 Total Project Cost 74.7 110.5 185.2 78.8 94.6 173.4 Interest during Construction 7.0 7.8 14.8 16.2 8.2 24.4 Total Financing Required 81.7 118.3 200.0 95.0 102.8 197.8 at Converted at the official rates of exchange in force each year during disbursements. The figures are subject to some error since the exact timing of disbursements versus the many devaluations is not precisely known. b/ Price and physical contingencies included in the appraisal estimate are distributed among individual cost items to facilitate comparison with the actual expenditures. 3.15 Despite the lengthy implementation period of the project, the more than two years' delay in commissioning and the massive currency realignments which occurred during the period, actual project costs are very close to the appraisal estimate. The provision of adequate price and physical contingencies (37% of the base cost estimate) and the advanced stage of procurement of the main technology packages at the time of appraisal contributed to the accuracy of the estimates. Expressed in local currency, local costs were about 113% higher than appraisal mainly due to the high domestic inflation and the implementation delays. On account of the maxi-devaluations of the Turkish lira which took place during 1979-81 (the years of heaviest disbursements), when expressed in US dollar equivalent, local costs actually declined by 14%. Total project  - 7 - costs were 6Z below appraisal estimates although given the project delay, actual iuterest during construction expenses increased 1.5 times. 3.16 The original closing date of the Bank loan was December 31, 1981. However, as a result of delays in project implementation, the Bank agreed to a one-year extension of the closing date through December 31, 1982. The loan was fully disbursed and the account closed on September 13, 1983. Compared to the appraisal estimates (Annex 3-4), disbursements were as follows: Turkey - Project Cumulative Disbursements (US$ million) Fiscal Appraisal Year Estimates Actual 1976 10.0 - 1977 30.0 12.8 1978 58.0 32.1 1979 69.5 49.0 1980 70.0 57.8 1981 70.0 65.1 1982 70.0 67.0 1983 70.0 70.0 3.17 The actual allocation of the loan proceeds compared to the appraisal estimates were as follows: Turkey - Allocation of Loan Proceeds (US$ million) Original (Appraisal Disbursed Report) Reallocated (Actual) Category I Imported Machinery & Equipment (100% of Foreign Expenditures) 55.0 3.2 58.2 Category II Foreign & Local Consulting Firms (100% of Foreign Expenditures) 8.0 3.8 11.8 Unallocated 7.0 _ Total 70.0 70.0  IV. OPERATING PERFORMANCE A. Production Build-up 4.01 The sawmill component of the Project was commissioned without incident in mid-1980 and operated briefly at design capacity shortly thereafter. However, the production of sawnwood has been dismal - in 1981, the first full year after completion, the sawmill produced only 900 m3 of sawnwood, less than 1% of its design annual capacity of 105,000 m3. In i982 the production was 3,100 m3 and up to September 1983 it had produced at an annual rate of only 16,500 m3 or about 15X of design. This poor performance is not the result of any physical deficiency in the plant or lack of operating capability of SEKA but simply the collapse of the domestic sawnwood market due to the general recession and resulting severe depression in the construction industry in the country. Some signs of recovery in the construction sector have emerged which are expected to improve the demand for sawnwood products. For the purpose of financial projections and rate of return calculations, however, it has been assumed that full production (90% of capacity utilization) will only be reached in 1989. 4.02 The newsprint mill began commercial production in February 1981 but shortly after start-up, suffered several mechanical problems, including failure of numerous electrical motors and burned out coils on the turbo-generator set. On the paper machine itself, a journal on a main roll in the forming section failed, resulting in a major breakdown of the paper machine. In all of these cases of equipment failure, the warranty period had expired (due to the 2-year delay in project implementation). Newsprint production has also been restricted by the shortage of purchased electric power, exacerbated by the reduced in-plant generating capacity due to the failure of the turbo-generator. 4.03 In spite of these initial difficulties, following repairs by the suppliers, production performance has been good. In the third year of operation the annual operating rate was 80% of design and in the 31st month the mill operated at full capacity during the entire month. Appraisal estimates and actual production figures for both sawnwood and newsprint are shown in Annex 4-1. B. Marker Developments 4.04 Domestic demand for sawnwood products have developed well below appraisal estimates and the future is uncertain (para 4.01). Except for a recent sale of 21,000 m3 to Iran, attempts to export have been largely unsuccessful. Some of the reasons are: (i) SEKA's lack of experience in export marketing for sawnwood; (ii) poor product quality; and (iii) low economic activity due to internal unrest of many neighboring countries which would be natural markets for the Project. However, the sawmills represent a small investment, profits from exports would be small, and sawnwood exports would not likely be a high priority for the company.  - 9 - 4.05 Domestic demand for newsprint during the period 1976-1983 grew at a rate of 6.3Z per annum compared with 8% estimated in the appraisal report. At present, the Project accounts for more than half of the existing newsprint capacity in Turkey. Actual figures for the country's production, consumption and imports of newsprint are shown in full detail in Annex 4-2 and summarized below: TURKEY - Demand and Supply Balance for Newssprint Actual and Projected ('000 tons) Actual Figures and New Projections Appraisal Estimates Apparent Produc- Surplus/ Consump- Produc- Surplus Demand tion (Deficit) tion tion Iprts (Deficit) a/ 1976 110.0 75.8 (34.2) 103.8 79.5 - - 1978 128.0 107.0 (21.0) 129.0 77.6 41.7 (9.7) 1980 149.0 160.0 11.0 157.0 86.0 28.2 (42.8) 1983 188.0 182.5 (5.5) 159.0 154.0 5.0 - 1985 219.0 182.5 (36.5) 179.0 174.0 5.0 - a/ After appropriate inventory adjustments. Even at full production in the Project from 1985 onwards, a deficit situation will exist. V. FINANCIAL PERFORMANCE A. Value of Sales and ; -:tion Costs 5.01 Prese:t Turkish prices for the project products and manufacturing costs per ton of newsprint are shown in Annex 5-1. Sawnwood costs are not being analyzed due to the small production level of the mill. The average price of newsprint in 1983 terms was 10.3% lower than at time of appraisal in 1975. The cost per ton of one of the two main raw materials, pulplogs, increased by 139% while the other, semi-bleached kraft pulp decreased by 23h. The costs of fuel in the same period increased by about four times while the total cost of purchased power decreased by 50%. The decrease in power cost is due to a much lower actual specific consumption than estimated at appraisal. The high appraisal estimate was based on laboratory tests performed on samples of Balikesir wood. Overall production costs, excluding depreciation and financial charges, increased by 4%, while newsprint price decreased by 10%. Historical newsprint prices are shown in Annex 5-3.  - 10 - B. Financial Analysis 5.02 Financial results and projections are shown in Annex 5-2. They are based on actual volume and value of sales through the end of 1983; projections are based on present prices applied to the forecast volume of production and sales and assumes that the sawmill reaches full production (90% of capacity utilization) in 1989. 5.03 The internal financial rate of return in 1983 dollars after sales tax but before corporate income tax is 5.0% compared with 7.72 estimated at the time of appraisal and 7.5Z before sales tax and corporate income tax compared with 11.8% at appraisal. The lower return is due to (i) almost two years' delay in project completion (para 3.10); (ii) slower production build-up (para 4.01); (iii) higher operating costs (para 3.01, 5.01); and (iv) lower price increases. The sensitivity analyses indicate that any combination of increased sawnwood production and sales earlier than projected or 5% decrease in operating costs, e.g. use of tree bark as fuel (para 3.01), and 5% increase in prices, increases the return after sales tax and before corporate income tax to a range between 9.9-10.4%. VI. ECONOMIC PERFORMANCE 6.01 According to the latest FAO estimates, world newsprint capacity is projected to increase through the late 1980s at a rate appreciably lower (2.3%) than the growth during the period 1978-82 (3.7%) (Annex 6-1). During the early 1980s, world-wide recession and excess capacity provided the setting for some of the lowest newsprint prices recorded in the international market. In spite of periodic drops and rises, annual average prices recorded by a major trading house in the UK show a steady long-term increase in the price of newsprint (expressed in US dollars). In order to determine the economic price of newsprint for rate of return calculations, the long-term experience of a major importer has been used. For this purpose the United Kingdom has been used as reference because the country imports more than 1 million tons per year of newsprint from Canada and Scandinavia, largely through long-term contracts. Appropriately adjusted by the differential freight cost between London and Mediterranean ports (about US$30/ton), the estimated long-term order price of newsprint at Turkish ports has been estimated in 1983 at US$622/ton, compared to US$ 611/ton in 1983 prices assumed at appraisal. 6.02 The economic rate of return calculated on the basis of the above plus other applicable adjustments to reflect the economic values of capital and operating costs, is 15.3% (Annex 6-2) compared to 16.1% estimated during appraisal. The lower rate of return is due principally to the completion delay and higher operating costs than forecast at appraisal. 6.03 The domestic production of newsprint, on the basis of the CIF price of US$622/ton generates an annual net foreign exchange savings of US$42.0 million measured at full production which will pay back the foreign exchange cost of the project in about 2 years.  - 11 - VII. BANK ROLE AND LESSONS LEARNED 7.01 The objective of more efficient utilization of the main raw material (wood) through the integration of a sawmill and pulpmill, and the utilization of bark as fuel, has not been achieved (para 3.01). The fundamental mistake was failure to recognize that traditional practices are difficult to change and that MOF itself was not integrated into the project design and its intended benefits. In the proposed SEKA III project for rehabilitation of existing facilities, the technical assistance project would examine SEKA's overall operations, including a review of their export potential and export marketing arrangements (possibly through joint ventures with the private sector. Through this continuous Bank involvement in the sector and dialogue with the Government, some changes have also been promised which will result in higher deliveries of wood of better quality and with the bark not removed. 7.02 A common failing seen in other Bank projects was repeated here: we were too optimistic on implementation time and disbursement schedule. However, much of this delay was due to the very difficult financial situation Turkey faced during the implementation period. While much of this difficulty was not foreseeable it does illustrate the importance of sound financing plan and the ready availability of qualified project staff, both foreign and local. 7.03 This project introduced new technology to Turkey (thermomechanical pulping and twin-wire papermaking) which has clear technical and financial advantages, but at the time of project preparation had only relatively recently been introduced even in developed countries where the techniques were considered major technological advances in the production of newsprint. The successful start-up and continuing gDod operational results at Balikesir demonstrate that in certain circumstances, and with suitable training, introduction of new technology to developing countries can be appropriate.  - 12 - ANNEX 3-1 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258 -TU) Procurement of Bank-Financed Goods and Services by Country of Origin Amount (US$ million) Percentage Austria 0.1 - Belgium 0.7 1.0 Canada 18.6 26.5 Finland 0.3 - France 1.3 2.0 FR of Germany 11.9 17.0 Italy 15.4 22.0 Japan 2.0 2.9 Sweden 2.8 4.0 Switzerland 1.3 1.9 Turkey 1.9 2.7 UK 13.3 19.0 USA 0.4 1.0 70.0 100.0 Industry Department June 1984  c! - 13 - ANNEX 3-2 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) Implementation Schedule 1976 1977 1978 1979 1980 1981 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 34 Finalize Financing Major Equipment Awards Detailed Design * ttttttttttttttttttt ttttttttt ltttttt-ttt Itttttt Construction ttttitttttttttttttttttttttttttttttt tttttttt Commissioning and Start-up - Sawmill ttt - Newsprint Mill tt ,t APPRAISAL * ACTUAL tttttttttttt Industry Department June 1984  - 14 - ANNEX 3-3 PROJECT COMPLETION REPORT TURKEY -BALIKESIR UEWSPRINT PROJECT (LOAN 1258-TU) Capital Costs and Financing Required (USS Millions) Local Foreign Total Appr. Actual Appr. Actual Appr. Actual Land 0.20 0.26 - - 0.20 0.26 Civil Works 47.45 46.35 - 1.85 47.45 48.20 Machinery & Equipment 26.73 8.36 55.95 57.79 82.68 66.15 Erection 4.61 14.69 6.85 3.28 11.46 17.97 Construction Overhead 4.13 11.11 0.83 - 4.96 11.11 Engineering/Training 2.11 3.73 9.30 11.80 11.49 15.53 Pre-Operating Assistance 3.21 - - - - - Townsite 2.78 - 0.44 - 3.22 - Subtotal 91.24 84.50 73.37 74.72 164.67 159.22 Working Capital 19.26 10.10 1.30 4.10 20.56 14.20 Interest During Construction 7.80 8.21 7.00 16.20 14.80 24.41 Total Financing Required 118.30 102.81 81.67 95.02 200.30 197.83 Industry Department June 1984  - 15 - ANNEX 3-4 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NE^SPRINT PROJECT (LOAN 1258-TU) Estimated and Actual Disbursement Schedules (USS million) Fiscal Year Appraisal Report Actual and Quarter Quarter Cumulative Quarter Cumulative FY77 I 4.0 4.0 _ _ II 6.0 10.0 4.1 4.1 III 5.0 i5.0 3.3 7.4 IV 5.0 20.0 5.4 12.8 FY78 I 5.0 25.0 2.5 15.3 II 5.0 30.0 6.9 22.2 III 7.0 37.0 4.8 27.0 IV 7.0 44.0 5.1 32.1 FY79 I 7.0 51.0 6.4 38.5 --I 7.0 58.0 3.6 42.1 III 7.0 65.0 3.5 45.6 IV 2.0 67.0 3.4 49.0 FY80 I 1.0 68.5 2.6 51.6 II 1.0 69.5 2.5 54.1 -II 0.5 70.0 2.1 56.2 - - 1.6 57.8 FY81 - - 1.0 58.8 II - - 1.2 60.0 III - - 1.7 61.7 IV - - 2.0 63.7 FY82 I - - 0.7 64.4 II - - 0.9 65.3 III - - 0.6 65.9 IV - - 0.9 66.8 FY83 I - - 1.4 68.2 II - - 1.8 70.0 Industry Department June 1984  - 16 - ANNER 3-5 PRMBr oatim REPW TURKEY - BAL1KSR NEWSPRINr Cr (IOAN 1258-TU) Aunml Capital Expenditunes (1975-1982) (in TL mdfliUos) 1975 1976 1977 1978 1979 1980 1981 1982 Total Ibtal Fixed Cost 88.8 180.1 557.4 1,336.0 2,506.4 4,612.7 2,590.8 1,264.0 13,136.2 (of Which Foreign) (12.5) (81.1) (332.3) (943.6) (1,690.2) (3,402.2) (1,280.2) (764.0) (8,506.1) I&rking Capital 65.1 406.6 456J. 365.8 1,293.5 Inrerest Dadirg 0xston - Local 0.6 37.2 21.8 71.2 104.3 131.6 - 366.7 -Foreign _ _ 76.5 173.5 555.4 569.2 - 1,374.6 Total 88.8 180.7 594.6 1,434.3 2,816.2 5,679.0 3,747.6 1,629.8 16,171.0 (in US$ miUfos equivalt) a/ 1975 1976 1977 1978 1979 1980 1981 1982 Total Total FixBd Cost 1.08 2.18 6.76 16.20 30.38 55.90 31.40 15.32 159.23 Working Capital - - - - 2.50 5.35 4.10 2.25 14.2D Subtotal 1.08 2.18 6.76 16.20 32.88 61.25 35.50 17.57 173.43 Interest During cncstnzctian - local - 0.39 2.07 0.90 2.30 1.37 1.18 - 8.20 - Foreign CIBUB Loan) - 1.00 3.00 4.70 5.60 1.90 - 16.20 Total 1.08 2.57 9.83 20.10 29.88 68.22 38.58 17.57 197.83 Erixange Rates 14.44 16.05 18.00 24.28 31.00 76.00 111.22 162.56 a/ Cbnmerted at the official rates of exchange in force during actual disbursements. 1try Deparqlent Jone 1984  -17 - ANNEX 4-1 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) Estimated and Actual Production 1978 1979 1980 1981 1982 1983 1984 Sawnwood ('000 m3) - Appraisal Estimate 13.0 50.0 79.5 90.0 105.0 105.0 105.0 Actual - - 1.9a/ 0.9 3.1 12.4 30.0c/ Newsprint ('000 tons) Appraisal Estimate - 62.0 80.0 93.9 100.0 100.0 100.0 Actual - - - 42.lb/ 66.8 79.0 90.0c/ a/ From June 1. b/ From February 1. ej Budget estimate. Industry Department June 1984  - 18- AMX4-2 P:Jr c an~ xRcarr - BALEKESIR Di1 PROr (IL 1258-lu) Deamid aod &ly Baae for R3npwlt Atual and Pojected ('000 tns) Appraisal Est e Actual Sarrplus/ Appwen &Srpbis DamaaI Production (Deficit) a/ Proctli Iports (Deficit) a/ 1976 110.0 75.8 (34.2) 103.8 79.5 24.3 - 1977 118.0 105.0 (13.0) 127.7 88.4 48.8 10.4 1978 128.0 107.0 (21.0) 129.0 77.6 41./ (9.7) 1979 138.0 142.5 4.5 136.0 87.6 44.7 (3.7) 1980 149.0 160.0 11.0 157.0 86.0 28.2 (42.8) 1981 161.0 172.5 11.5 138.4 128.2 26.0 15.8 1982 174.0 182.5 8.5 177.7 143.6 32.0 (2.1) 1983 188.0 182.5 (5.5) 159.0 154.0 5.0 - 1984 203.0 182.5 (20.5) 168.0 164.0 4.0 - 1985 219.0 182.5 (36.5) 179.0 174.0 5.0 - a/ After apropriate irwentory adjust.nets. lTx ;sty Deptment Jun 1984  - 19 - ANNEX 5-1 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) Estimated and Actual Manufacturing Costs (At Full Capacity, in 1983 Prices) Newsprint: 100,000 tons per year Appraisal Manufacturing Costs (TLIton) Estimate Actual Pulplogs (delivered) 5,572 13,330 Semi-Bleached Kraft Pulp 17,236 13,330 Fuel Oil 3,353 16,100 .?urchased Power 34,214 17,100 Chemicals & Other Material 8,635 9,150 Labor 3,742 5,983 Administration & Overhead 7,177 2,104 Depreciation & Amortization 1,466 12,220 Total Manufacturing Costs 81,395 89,317 Ex-Factory Newsprint Price 133,036a/ 119,400 a/ Appraisal estimate of TL 8,200/ton in 1975 terms adjusted by domestic inflation through September 1983 (Annex 5-4). Industry Department June 1984  - 20 - ANNEX 5-2 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) Financial Projections (in. TL Million) a/ 1981 1982 1983 1984 1985 1986 Gross Revenues 2,199 6,364 10,297 12,246 14,050 14,840 Sales Tax 164 482 740 884 1,011 1,068 Net Sales 2,035 5,882 9,557 11,362 13,039 13,772 Cost of Goods Sold 2,035 6,152 10,049 9,164 9,622 9,812 Gross Income - (270) (492) 2,198 3,417 3,960 Selling end Admin. - 247 285 339 390 413 Operating Income - (517) 777 1,859 3,027 3,547 Interest & Commission 204 1,621 2,182 2,182 2,182 2,182 Other Expenses 25 522 530 530 530 540 Other Income 21 106 84 110 160 200 Profit/(Loss) (208) (2,554) (2,796) (743) 475 1,025 a/ Actual data for 1981-83, estimated thereafter (in constant 1983 terms). Industry Department June 1984  -21- ANNEX 5-3 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) Historical Development of Newsprint Prices Turkish Domestic Price Year (Month) (Ex-Factory, TL/ton incl. Tax) 1975 4,500 1976 4,500 1977 (September) 10,000 1978 (Hay) 13,000 1979 (February) 17,000 1980 (December) 50,000 1981 (December) 75,000 1982 (March) 88,000 1982 (July) 104,700 1983 (January) 119,400 Industry Department June 1984  - 22 - ANNEX 5-4 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) Actual Inflation Indices World Bank Index Domestic Price Inflation Year Inflation (1983=100) a/ Annual (Z) b/ Index (1983=100) 1975 70.4 9.0 7.1 1976 71.7 17.7 7.7 1977 77.7 24.6 9.1 1978 91.6 43.7 11.3 1979 102.2 70.6 16.3 1980 110.6 102.2 27.8 1981 105.4 42.0 56.1 1982 103.3 25.7 79.6 1983 100.0 30.0 100.0 a/ Industrialized countries -CIF index of US dollar prices of manufactured exports (SITC 508) to developing countries. b/ World Tables, 1983. Industry Department June 1984  - 23 - ANNEX 5-5 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) Cost and Benefits Stream for Financial Rate of Return Calculation (In Millions of Constant 1983 US Dollars) Calendar Capital Working 3perating Year Costs a/ Capital Costs cl Revenues Benefits 1975 1.53 - - - (1.53) 1976 3.04 - - - (3.04) 1977 8.70 - - - (8.70) 1978 17.69 - - - (17.69) 1979 31.05 2.56 - - (33.61) 1980 61.83 5.92 - - (67.75) 1981 33.10 4.32 4.71 20.88 (21.25) 1982 15.82 2.32 26.73 40.70 (4.17) 1983 - - 40.01 45.56 5.55 1984 - 42.99 54.18 11.19 1985 - - 45.24 62.17 16.93 1986 - - 46.23 65.67 19.44 1987 - - 45.36 66.77 21.41 1988 - - 48.00 70.53 22.53 1989 - - 51.15 73.85 22.70 1990-98 - - 51.15 73.85 22.70 1999 (17.28) (15.12)b/ 51,15 73.85 55.10 a/ Excluding interest during construction and assuming a 10% scrap value. b/ Recovery of working capital. c/ Operating costs assume that sawmill reaches full production (90Z of capacity utilization) in 1989 with a concomitant improvement in the newsprint mill as substantially more savmilling waste becomes available. . Industry Department June 1984  - 24- ANNEX 6-1 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) World Newsprint Capacity ('000 metric tons) Average Annual Capacity Increase 977 1992 1987 1977-82 1982-87 World Total 26,064 31,187 J4,933 3.7 2.3 Developed Market Economies 22,297 26,178 28,891 3.2 1.9 N. America 12,702 15,064 15,498 3.6 1.2 Japan 2,602 2,971 3,353 2.7 2.5 W. Europe 6,170 7,080 7,922 2.9 2.3 Oceania 533 695 1,255 2.5 12.6 Other 290 368 413 4.9 2.3 Developing Market Economies 863 1,641 2,466 13.7 8.4 Africa 13 64 98 37.0 8.8 Latin America 366 761 1,240 15.8 10.3 Asia 484 816 1,128 11.1 6.6 Centrally Planned Economies 2,904 3,368 3,576 3.0 1.2 Asia 890 1,050 1,131 3.4 1.6 E. Europe 414 468 495 2.5 1.2 USSR 1,600 1,850 1,950 3.0 1.0 Source: FAO, 1983. Industry Department June 1984  - 25 - ANNEX 6-2 PROJECT COMPLETION REPORT TURKEY - BALIKESIR NEWSPRINT PROJECT (LOAN 1258-TU) Cost and Benefits Stream for Economic Rate of Return Calculation (In Millions of Constant 1983 US Dollars) Calendar Capital Working Operating Year Costs a/ Capital Costs c/ Revenues Benefits 1975 1.36 - - - (1.36) 1976 2.71 - - - (2.71) 1977 7.74 - - - (7.74) 1978 15.74 - - - (15.74) 1979 27.63 2.10 - - (29.73) 1980 55.02 4.80 - - (59.82) 1981 29.46 3.50 3.82 40.20 3.42 1982 14.08 2.07 21.65 40.54 2.74 1983 - - 32.41 51.16 18.75 1984 - - 34.82 59.30 24.48 1985 - - 36.64 66.60 29.96 1986 - - 37.45 68.25 30.80 1987 - - 36.74 69.90 33.16 1988 - - 38.89 72.65 32.71 1989-98 - - 41.43 72.65 31.22 1999 (15.37) (12.47)b/ 41.43 72.65 59.06 ai Excluding inLerest duriag construction and assuiming a 10% scrap value. b, Recovery of zorking capital. cf Operating co:ts assume that sawmill reaches full production (90% of capacity utilization) in 1989 with a concomitant improvement in the newsprint mill as substantially more sawmilling waste becomes available. . Industry Department June 1984  - 26 - Attachment Comments From the Borrower ZCZC 1D1ST4359 R0A2272 GEDOD REF : TCP HC RCA2272 248423 WORLIJBANK 58110 SEND TR GXDR NO'& 1066 PL.ORG3: 227 19.4 1985 THE WtlRL BANK ATT: YUIINUFRI WATANABE DIRECT'R1- O7 ERATE(ONS iv EtVtLUArION DEPARTME NT. RE: DAL1lKESIR NEWSPRING PROJECTUDAN 1258 TU) WE HAVE REVIEWED PROJECr COMPLETXON REPORTf DATED FEBRIJARY, 13 1985 AND AGREE WIT'H YOLIR REPORT COJMPLETEL.Y. WE DON'T HAVE ANY OTHER COMMENBS TO * ADD. BEST REGARDS SEKA BRALIKESIR ltIF SSESESILUIIURL.UGU ZWKU CETIN EEE ZEKI CETIN NECATI IlHAN 248423 WIORLOBANK 58110 SEMB TR Mm =04190928 =04190637 ALT RTD FROr.:OEDM NNNN