Turkey - Cukurova Region Urban Engineering Project

Docum o f The World Bank FOR OMCIL USE ONLY /fl/ ;; 2 7 cJ - tepit No. P-3935--TL REPORT AND RECOMENDAIION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVLOPm TO TEE EXECUTIVE DIRECTORS ON A PROPOSED LIAN IN AN AMOUNT EQUIVALENT TO US$ 9.2 HILLION TO THE REPUBLIC OF TURKEY FOR A CUKUROVA REGION URBAN ENGINEERING PROJECT April 18, 1985 Tbb decumat hm -t mUded distrbUu ad may be used by cipiembt only In th pexfsnm of ubd daIk dUe..L Its conUeub may sm .ibwwlse be ddandem wibout Wedi Bek aatbdzmtIum..  TURKEY CURRENCY EQUIVALENTS Currency Unit Jan.1980 1/ Jan.19il Jan.1982 Jan.1983 Jan.1984 !ar.1985 US Dollar IL 70.00 IL 91.00 TL 139.60 TL 191.15 IL 309.20 TL 490.40 IL I USS 0.014 US$0.01l US$0.007 USSO.005 USS0.003 US$0.002 11 Since January 1980, the rate is being adjusted for the differential inflation between Turkey and its major trading partners. TL420/USt1 (the exchange rate at the time of project appraisal) was used for Parts III and IV of this report. FISCAL YEAR Republic of Turkey January 1 to December 31 LIST OF ABBREVIATIONS CHUPR Cukurova Metropolitan Urban Planning Region CRUDP Cukurova Region Urban Development Projecc DSI State Hydraulic Works MPWS Ministry of Public Works and Settlement PCU Project Coordination Unit PPF Project Preparation Facility SAL Structural Adjustment Loan SEE State Economic Enterprise SPO State Planning Organization TSKB Industrial Development Bank of Turkey UNDP United Nations Development Programe  FOR OFICIAL USE ONLY TRMY CUKUROVA REGION URBAN ENGINEERING PROJECT Loan and Project Summary Borrower: Republic of Turkey Amount: USt9.2 million Terms; Seventeea years including four years grace, at the standard variable interest rate. Project The proposed engineering loan would assist the Government in Description: completing preparation for a Cukurova Region urban development project which involves formulation of an integrated approach to regional and urban development in the Cukurova Region. Technical assistance would be included under the loan for institutional, feasibility and design studies for selected urban investments with emphasis on shelter, water and sewerage, training of municipal and central governmlent staff and improvements in municipal financial management. The loan would also provide technical assistance to establish a Project Coordination Unit responsible for project implementation and equipment to advance completion of cadastral surveys in the Cukurova RegLon. Benefits Ihe proposed project supports the Government's objectives in and Risks: the urban sector to decentralize responsibility for some urban services, improve the management of local governments, provide adequate infrastructure and services, and reduce the housing shortage. The project would assist in formulating appropriate regional and urban development policies which would be replicable on a national basis. The main risk is that the studies under the project may not proceed on schedule. This risk is minimized since consultants for the * main studies have been selected and the Project Coordination Unit has been established with qualified staff. The risk that difficulties would arise in reaching a consensus amongst the various agencies and municipalities involved with regard to the components for implementation in the main project has been minimized by the creation of national and local steering committees. This docuet has a resuricted distn-bution and may be usd by rcpients only Itl the performunce or thi offvidca dutis Its contents may not otherise be disdosed without World Bank authorizatim  - ii - Estimated Project Costs: t Millioc Equivalent Local Foreign Total Project Coordination Unit (PCU) Project Director - 0.10 0.10 Consulting Services 1.43 0.29 1.72 a/ Sub-total 1.43 0.39 1.82 Institutional, Feasibility and Design Studies for the CKUDP Consulting Services 3.21 2.46 5.67 Equipment - 0.06 0.06 Sub-total 3.21 2.52 5.73 Cadastral Survey Componenc Consulting Services 0.14 0.16 0.30 Equipment - 0.69 0.69 Sub-total 0.14 0.85 0.99 Special Studies Consulting Services 0.27 0.27 0.54 Total Base Cost 5.05 4.03 9.08 Physical Contingencies 0.35 0.22 0.57 Price Contingencies 0.65 0.41 1.06 Total Project Cost 6.05 4.66 10.71 ZMEMM - ~ ~ ~ ~ ~ ~ - a/ Partially fiuanced through a $600,000 advance from the Project Preparation Facility.  - iii - Financinz Plan: $ Million Local Foreign Total IBKD 4.6 4.6 9.2 a/ Government 1.4 - 1.4 wnDP - 0.1 0.1 Total 6.0 4.7 10.7 a/ Includes 85 percent of the total cost of local consultants. Estimated Disbursements; S Million IBRD Fiscal Year 1985 1986 1987 1988 1989 Annual 1.7 4.3 2.6 0.4 0.2 Cumulative 1.7 6.0 8.6 9.0 9.2 Staff Appraisal Report: There is no separate appraisal report. Map: No. 17137R.  INTERNATIONAL F1ANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXEC1IfVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR A CUKUROVA REGION URBAN ENGINEERING PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Turkey for the equivalent of US$9.2 million to help fin-ance technical assistance and equipment for a Cukurova Region Urban Engineering Project. The loan would have a term of 17 years including 4 years of grace, with interest at the standard variable rate. PART I - THE ECONOMY 1/ 2. An economic mission visited Turkey in June 1982, and its report entitled "Turkey: Country Economic Memorandum, Recent Economic Developments and Medium-Term Prospects" (No. 4287-TU) was distributed to the Executive Directors in June 1983. The report of a mission to review the financial sector, entitled: "Turkey: Special Economic Report - Policies for the Financial Sector' (No. 4459-TU), was distributed in September 1983. A Bank mission revieweu the Government's Fifth Five-Year Plan (1985-89) in August/September 1984 and its findings are reflected in this section. 3. Turkey is about as large as France and Germany combined, with a population of around 48 million and an estimated GNP per capita of $1230 in 1983. The density of population is low (78 per square kilometer of agricultural land), and about 47 percent live in urban centers. Population growth (2.2 percent per annum) is below the median for middle-income countries. Despite rapid economic growth in the mid-1970s as well as substantial emigration of workers (to Western Europe and more recently, to the Middle East), the employment situation has deteriorated steadily with an unemployment rate currently estimated at about 19 percent. There is, however, little or no absolute poverty, although income distribution is skewed. There are considerable regional differences in income and large rural-urban disparities. Recent data indicate a probable worsening in income distribution, especially of wage and salary earners, and a sharp real decline in average earnings. Educational enrollments have expanded greatly, but the level of adult literacy remains relatively low. Background 4. During the 1970s Turkey did not make the necessary adjustments to the shocks caused by the steep rise in oil prices, stagflation in the OECD economies, and the consequent deterioration of its terms of exLernal trade. 1/ Parts I and II are substantially the same as Parts I and II of the President's Report on che Industrial Schools Project (P-395b-TU), dated April 18, 1985.  Until 1977 Turkey maintained high rates of economic growth by raising the share of public investment in GOP. This was financed initially by workers' remittances and, following the quadrupling of oil prices, increasingly by short-term borrowings. The rapid GNP growth came to an abrupt halt in 1977 as the massive external debt burden led to a sharp deterioration in creditworthiness, severe shortages of imports, and disruptions in industrial production with a rise in unemployment. By the end of 1979, domestic inflation had also become an issue of critical importance. 5. The Turkish authorities' response to the crisis of the late 19708 was a major shift in development strategy in 1980, moving towards outward orientation and giving an increased role to market forces. Policies were adopted to expand exports and increase workers' remittances which, together with liberalization of imports, encouragement of foreign investment and prudent external debt management, were aimed at alleviating the balance of payments constraint and import shortages. On the domestic front, the objectives were a reduction in the inflation rate, reform of the State Economic Enterprises (SEEs), a more efficient financial sector, improved resource mobilization and becter selection of investments, especially in the public sector. 6. The adjustment program, which has been supported by the Bank through five structural adjustment loans, involves far-reaching changes in attitudes, institutions, and the legal and policy framework, all of which require time to put in place. Major structural changes have been made in the exchange rate systeia, the export and import regimes, the tax system, interest rate and selective credit policies and the public investment program. Implementatiri of the adjustment program was carried out under a military regime during September 1980 - November 1983 and since then ,y an elected government. The Structural Adjustment Program -- 1980-84 7. The Turkish economy has shown an impressive response to the structural adjustment program and actual performance met or exceeded the Government's own targets through 1982. By contrast, results in 1983 and 1984 proved to be mixed, due in part to adverse economic developments on the external front, slippages in the monetary program, a persistent shortfall in Government revenues and the renewal of inflationary pressures. 8. Real GNP expanded by 4.1 percent in 1981 and 4.6 percent in 1982. In 1983, GNP growth slowed down to 3.2 percent, due in large part to the effects of a bad harvest and a decline in the contribution of the foreign balance. The growth rate rebounded in 1984 to an estimated 5.7 percent, supported by favorable performance in the productive sectors with agricultural value added growing at 3.6 percent and industrial value added at 9.6 percent. Capacity utilization rates in private industry in 1984 are estimated to have risen by about 5 percent to an average rate of 72 percent. On the expenditure side, the average annual real rate of growth of public fixed investment has been contained to 3.1 percent over the 1980-84 period while the growth rate of private investment has improved systematically from -17.3 percent in 1980 to 4.8 percent in 1983 and an estimated 5.4 percent in 1984. Private consumption, which had actually fallen by 5 percent in 1980, grew at 4.9 percent in 1983 and an estimated 5.0 percent in 1984. On the other hand, helped by strict budgetary discipline, the rate of growth of public consumption declined from 8.4 percent in 1980 to 1.8 percent in 1983. Estimates for 193!t suggest a modest growth of 2.4 percent.  9. Through 1982, the Government met with considerable success in reducing the rate of inflation through a combination of fiscal, monetary and incomes policies. After peaking at 107 percent in 1980, the annual average rate of increase in the wholesale price index declined to 37 percent in 1981 and 27 percent in 1982. In 1983 che downward trend was reversed and the inflation rate rose to 30 percent. This rise was fueled by an expansion of Central Bank credits to firms and comaercial banks in difficulty during the second half of 1983 as well as an unexpected increase in the budget deficit. The resulting liquidity expansioa, in conjunction with a lowering of nominal deposit interest rates, encouraged consumption at the expense of savings. 10. Inflation accelerated further in the first half of 1984, although it moderated in the second half. The average inflation for 1984 is estimated at a little over 50 percent. The major factors that contributed to the worsening of the inflationary situation were the lagged impact of the expansionary monetary policy pursued during the second half of 1983, and a significant increase in agriculture product prices, especially of fresh fruits and vegetables, as a consequence of export liberalization au- higher export market prices. Other important inflationary factors included substantial "catch up" increases of SEE prices and higher import prices resulting from the nominal depreciation of the Turkish lira. In addition, inflationary pressures steamed from a larger than anticipated budget deficit in 1984 as a result of a slowdown in the growth of revenues. Given the tight monetary and fiscal programs likely to be agreed upon with the IMF as part of a new standby agreement (para. 25), the expectations are that inflation will decline this year. 11. Commercial bank interest rates, which were deregulated in July 1980, have increased substantially and are now positive in real terms. As a result, total bank deposits increased by 72 percent in 1980 over 1979, and in 1981 this trend accelerated, with total deposits growing by 103 percent and time deposits by 274 percent. Growth in total deposits slowed after 1982, and in 1983 and 1984 they grew at 53 percent and 42 percent respectively. The bankruptcy in late June 1982 of a major non-bank financial institution shook depositor confidence and was followed by a shift of funds into the larger banks. The Government averted an immediate crisis in the banking sector and undertook actions to reform and strengthen the financial sector as a whole. A new banking law was enacted in June 1983 which covered many of the recommendations made in the Bank's report on the Financial Sector (No. 4459-TU). These included measures to reduce the undercapitalization of banks, place limits on the real assets and investments of banks, link the establishment of branches to the level of a bank's equity, reduce the interlocking between banks and corporations, introduce a deposit insurance scheme, and increase the role of the Central Bank in the supervision of the banking sector. A new law is currently before Parliament which will further the banking reform process by introducing standardized accounting for banks and improved procedures for handling non-performing loans. The Government also took a major step towards reducing the cost of intermediation by reducing the financial transactions tax from 15 percent to 3 percent. Separately, the Government has reduced the level of withholding tax applicable to interest payments on deposits and bonds from 20 percent to 10 percent. Other important developments in the financial sector include measures undertaken to revitalize the capital markets, for which IFC has provided technical assistance, and the sale of revenue-sharing certificates linked to the income from selected public facilities (e.g. the Bosphorus bridge).  -4- 12. The Government is committed to maintaining an interest rate structure for deposits which is positive in real terms. Time deposits have been yielding more or less positive real returns since end-1983, with interest rates ranging from 45 to 53 percent depending upon the term of the deposit. While positive real interest rates have provided an incentive to save, they have also meant high borrowing costs. Nominal interest rates range from 60 to 80 percent on non-preferential credits, in part because of the high intermediation costs of the commercial banks and their widely prevalent practice of requiring compensating balances. The interest rate differentials between preferential and non-preferential credits and among preferential credits are large and need to be reduced. The Government has reaffirmed its determination to achieve positive real rates on all lending by a combination of bringing down inflation and phasing out interest rate subsidies on preferential credits. In January 1985, it eliminated preferential interest rates on short-term export credits. High market interest rates, together with the limited availability of credit, have led to considerable liquidity problems for the private business sector, particularly for businesses supplying the domestic market. Measures are also needed to lower the operating costs of banks, which are well above prevailing levels in comparable countries. 13. In the fiscal area, progress was evident from 1980 to 1982 but there have been slippages in 1983 and 1984. The budget deficit to GNP ratio was reduced from 5.3 percent in 1980 to 2.1 percent in 1982, and the Public Sector Borrowing Requirement (PSBR) dropped sharply from 12.6 percent of GNP to 6.9 percent over the same period. However, the revenue to GNP ratio has been declining over the past three years. From a high of 20.3 percent in 1981, it has fallen sharply to an estimated 15.6 percent in 1984. Largely because of this significant shortfall in revenues, overall fiscal performance has worsened since 1983 even though government expenditures have been considerably curtailed (from 24.2 percent of GNP in 1980 to an estimated 20.8 percent in 1984) and budgetary transfers to SEEs as a percentage of GNP have fallen steadily (from 4.8 percent in 1980 to an estimated 1.6 percent in 1984). The budget deficit is estimated at 5.2 percent of GNP in 1984 and the PSBR at 8.8 percent. The downward trend in the Government revenue to GNP ratio highlights the urgency of mobilizing additional public resources. As a step in this direction, the Government introduced a Value Added Tax (VAT) in January 1985. 14. Improvements in the balance of payments were systematic through 1982 with the current account deficit decreasing from $3.3 billion (5.7 percent of GNP) in 1980 to $1.2 billion (2.2 percent of GNP) in 1982. However, in 1983 the current account deficit widened to about $2.1 billion (4.2 percent of GNP) as merchandise exports and workers' remittances fell short of targets. Exports rebounded strongly in 1984, growing by 25 percent in dollar terms to $7.1 billion. Remittances, too, registered a higher than expected increase, reaching $1.9 billion (up by 24 percent). concurrently, there was a continued large inflow of deposits through the Dresdner scheme ($550 million in 1984). Under this scheme the Dresdner Bank collects deposits from Turkish workers in Germany and automatically places these funds at the disposition of the Central Bank of Turkey, which guarantees the deposits and pays an interest rate commensurate with the Euro-market rate. However, these increases were offset by a sharp rise in merchandise imports to $10.8 billion (up by 16 percent in dollar terms). As a result, the current account deficit in 1984 was considerably higher than projected, reaching $2.1 billion (4.3 percent of GNP), or about the same level as in 1983.  -5- 1i. On balance, merchandise export performance has been u,r- ssive over che 1980-84 period, growing at an average annual rate of about 26 percent in dollar terms. This growth has been led by the manufacturing sector and has involved a rise in the share of exports to the Middle Eastern countries. Industrial exports, comprised primarily of processed foods and textiles, have risen from 36 percent of total exports in 1980 to 72 percent in 1984. These results were achieved by a combination of indirect (flexible exchange rate policy and import liberalization) and direct (tax rebates, preferential credits) measures to enhance the relative profitability of exports and offset the traditional bias towards producing for the domestic market. The flexible exchange rate policy was one of the most important factors contributing to the growth of exports, together with the penetration of Turkish products in Middle East markets. 16. On the import side, the 1982-83 period was marked by a relative stability in the growth of merchandise imports, mostly due to exogenous factors. Imports fell by 1.0 percent in dollar terms in 1982 and rose by only 4.4 percent in 1983. This reflected price decreases .n both oil and non-oil imports. Merchandise imports, however, increased substantially in value in 1984. The increase has been most significant in some of the groups (e.g. raw materials and consumer goods) that have been subjected to major liberalization in terms of both a lowering of tariff rates and a significant removal of quantitative restrictions. Medium-Term Prospects 17. The Government's Fifth Five Year Plan (1985-89) was approved by the Grand National Assembly in July 1984. The Plan reaffirms the Government's determination to pursue an outward-oriented development strategy and to liberalize the economy by relying increasingly on market forces for allocation decisions. The public sector is targeted to play a supportive role by concentrating its investments in infrastructure rather than manufacturing, while the private sector is to be encouraged to play a leading role in the growth of manufacturing and exports. Some of the key targets are: (i) an average annual GNP growth rate of 6.3 percent; (ii) an average annual real rate of growth of merchandise exports of 10.6 percent; (iii) an average annual real rate of growth of merchandise imports of 8.2 percent; (iv) an average annual real rate of growth of 10.9 percent in private investment and 6.8 percent in public investment; and (v) a declining external debt service ratio, from 26 percent in 1984 to around 18 percent in 1989.  -6- 18. While the overall thrust of the Plan is in accord with the goals of the structural adjustment program, certain targets seem optimistic in view of both past performance and the ismediate prospects for the economy. The Bank's projections indicate the need for a continuation of the stabilization program well into 1987, implying a lower growth rate in GDP for the early years of the Plan and a return to a higher growth path only in 1988. Key economic variables in the Bank's latest projections for the period 1985-89 are presented in Table 1: Table 1: TURKEY - SELECTED ECONOMIC INDICATORS, 19833-89 1903 1984 ~ 1 953 1959 Ke1 Otb _I E W IMit Acul t. Preed 2 193 1986 CI) (I) ipDL 1983 .IL b 11468 12122 127TO 15899 5.0 3.7 Li7 3.6 Agriculture 203D 2132 2202 2481 6.4 0.3 3.6 3.0 Industry 209D 3393 331 4732 5.0 7.6 9.6 7.0 Services S331 3929 0179 7771 6.1 4.0 D .3 3.7 Coauptioa 0 ff 10064 1U39 1290D 3.9 4 4 3.1 Fixce inveatNent 2101 2220 2600 3180 3.5 3.0 1.8 7.3 Kaports of gods Current a a 5728 7100 *S41 17534 24.0 13.9 22 1 9.4 ePort of goda 9231 10756 11500 21307 -0.1 12.0 13.8 7.2 Trade balanc -3507 -365b -2959 -3723 Currnt eccoeunt balance Current a a -212t -2135 -1750 -2003 Oat Los t'I' ntmlCD 19.0 10.3 18.9 20.0 Savings=P 2 16.3 17.1 17.4 19.3 Keporte of good-/JW 2 11.3 14.6 13.9 13.9 Current ecoount deficit/GDP b 2 .4.1 -4.3 -2.8 -1.8 Debt *ervice ratio le x 28.0 25.0 23.7 19.8 Public fied irwvtmentl x 60.3 5e.9 57.6 52.6 TOcal fixed imesotmt le itml Grass capital required /d Current S a 3687 4290 3844 53D5 /a At market prices; components are expressed at factor cost and will not add up due to exclusion of indirect taxes and subsidies. /b Based on constant TL. /c Total Debt Service (excluding short-term) /Exports of Goods and NFS plus Workers' Remittances. /d Includes net IMF. Source: State Planning organization for actuals and IBRU projections.  - 7 - 19. Bank projections indicate a GDP growth of 5.6 percent per annum on average for the Plan peried, with a low of 4.9 percent in the initial year of the Plan (stabilization period) and a high of 6.3 percent for the final year (growth period). Achievement of these growth rates will depend on the performance of the productive sectors, namely agriculture and manufacturing. This in turn will depend to a large extent on the Government's determination to constrain the growth of the public sector in line with public resources and to create a more favorable investment climate for the private sector. This translates itself into a projected real growth per annum in public fixed investment of about 5.0 percent on aveiage for the Plan period, starting with a modest increase in the early years. The comparable figure for private fixed investment is 10.6 percent or a little more than twice the growth rate for public fixed investment. These figures are consistent with the need to meet the infrastructure requirements of the economy through the public investment program, while providing for the capacity expansion of the private sector necessary to meet the export and growth targets. 20. Merchandise exports are projected to grow at an average 9.4 percent per annum in real terms. Merchandise imports, on the other hand, are projected to grow more slowly in real terms through 1986 and then pick up to an average 7.5 percent per annum in the terminal years of the Plan. On these assumptions, the current account deficit is projected to decrease through 1986 as stabilization policies act to contain import growth while encouraging exports. As higher growth rates set in during the middle of the Plan period, the trend would reverse and the current account deficit would rise moderately through the end of the Plan. The terminal year 1989 would show a deficit of approximately $2.0 billion as compared to a 1985 figure of $1.7 billion. The projected capital account is seen to remain manageable throughout the period even in the face of some sharp increases in the amortization payments in 1985-87 arising from the debts rescheduled during the 1978-80 period and an imposed constraint on foreign exchange reserves equivalent to at least two months' imports. Consistent with the above is an average debt service ratio for medium and long-term credits for the Plan period of 21.7 percent. Including short-term debt the average debt service ratio for the Plan period is 23.7 percent. Gross capital inflows required in 1989, on these assumptions, would be about $5.9 billion, or about 38 percent higher than the amount in 1984. Such an inflow is consistent with a decreasing debt service ratio from 1986 onwards. 21. The medium-term scenario presented above is, of course, only one of many possibilities and is used specifically to illustrate Turkey's potential in the light of che Government's own development strategy. Given Turkey's progress in the structural adjustment program, the favorable response which chis has evoked from the international financial community and the present view of future resources and export market possibilities, the Government's somewhat more L 'itious Plan ta-gets would be feasible provided they are supported by slightly higher export growth rates and greater success in the mobilization of public resources. This may be more difficult to achieve in the early (stabilization) phase of the Plan. 22. In view of the sensitivity of the projections to the assumptions of export and import growth rates, a downside risk case has also been developed. With Turkey's export performaance heavily dependent on exogenous factors such  - 8 - as the world economic outlook and movements in international prices, a sloaer growth of merchandise exports (an average of 6.9 percent over the Plan period) would lead to a more difficult but still manageable balance of payments situations more external borrowing, a lower CDP growth (averaging about 4.8 percent per annum) and a higher debt service ratio (22-24 percent per anmum). In such a situation the Government would have little chance of absorbing the unemployed and improving tangibly the average standard of living. Eowever, given the Government's emphasis on export promotion and the determined efforts to counter the bias towards producing for the domestic market, there is good reason to support the perspective set out in the mediur-term scenario presented in paragraphs 18 to 21. External Debt and Creditworthiness 23. At the end of 1978, Turkey had $7.2 billion in short-term debt and S7.0 billion in medium and long-term debt. Between 1978 and 1980, Turkey rescheduled same $9.2 billion of outstanding obligations through a series of rescheduling arrangements coacluded with official and commercial creditors. Approximately $6.0 billion of short-term debt, including $2.6 billion in convertible Turkish lira deposits and bankers' credits and $1.2 billion of non-guaranteed suppliers' credits, were consolidated into mediumrterm loans or partially converted into Turkish lira obligations. Following the resolution of the debt crisis, inflows were mostly from official sources - major creditors being the OECD countries, the World Bank and the IMF. Of the estimated tocal debt outstanding of $22.7 billion at end-1984, 81 percent constituted medium and long-term debt (including IMF). Short-term debt 83 a percentage of total debt outstanding fell from 51 percent in 1978 to about 11 percent in 1982, then increased to 14 percent in 1983 and to an estimated 18 percent in 1984. Much of this growth in the stock of short-term debt is due to the inflows associated with the Dresdner Bank scheme (para. 14). At end-1984 the outstanding liabilities associated with the Dresdner scheme are estimated to amount to $1.8 billion, which would represent about 45 percent of Turkey's short-term external obligations and 8 percent of its total outstanding debt. Based on the growth scenario outlined earlier, debt outstanding and disbursed as a percentage of GDP is projected to fall from an estimated 41 percent in 1984 to 32 percent in 1989. This translates into a total debt outstanding forecast for 1989 of $30.6 billion, with short-term debt constituting about 23 percent of that total. Dresdner scheme inflows are projected to be around $600 million per annum throughout this period and to account for a large part of che rise in the ratio of short-term debt to total debt outstanding. 24. The debt service ratio for medium and long-term credits (in relation to exports of goods and non-factor services and workers' remittances) increased from about 14.6 percent in 1981 to a peak of 28 percent in 1983 as a result of a large repayment of previously rescheduled debt under the earlier OECD agreements. Debt service obligations are likely to be high over the coming years and would average about $3.B billion per year in 1985-89. However, the debt service ratio is seen to decrease from an estimated 25 percent in 1984 to 19.8 percent in 1989. The debt burden should remain manageable provided current policies are successfully implemented, the export drive is sustained, and Turkey continues to receive further support from international comnercial and official sources. There have been encouraging  -9- signs of Turkey's ability to enter the market for commercial borrowings. From December 1983 to November 1984, Turkey had secured a little over $500 million from commercial credits, constituting about 23 percent of the total external credits received during this period. The Central Bank of Turkey recently completed the syndication of a $500 million multi-component mediuw-term (seven years) facility involving a large number of U.S., European, Japanese and Middle Eastern commercial banks as lead managers. 25. Turkey's economic program has been supported by the IMF through a series of standby arrangements. A three-year standby arrangement in an amount equivalent to SDR 1250 million was approved by the IMF's Board and became effective on June 18, 1980. The Government purchased the full amount authorized under the arrangement. The Government also purchased three-quarters of a SDR 225 million one-year standby arrangement which was approved by the IMF in April 1984 and replaced an earlier one-year arrangement terminated at the request of the Government. Discussions are presently under way on a further one-year standby arrangement. PART II - BAME GROUP OPERTIONS IN TORKEY 26. Through March 31, 1985 the Bank and IDA have lent $5383.5 million 1| to Turkey, through 81 projects. Agriculture accounts for 19 percent of funds lent, industry and DFCs for 24 percent, power for 13 percent, structural adjustment and program loans for 32 percent, and urban development, transportation, education, tourism and technical assistance for the remaining 12 percent. Disbursements for all sectors combined (excluding structural adjustment loans) average 49 percent of appraisal estimates as compared to 50 percent for Tunisia and 49 percent for Morocco. As of March 31, 1985, IFC commitments to Turkey totalled about $239 million, of which about $64 million were still held by IFC. Annex II provides a sumnary statement of Bank loans, -DA credits and IEC investments as of March 31, 1985. 27. Bank lending is aimed at supporting Turkey's mrziumrterm objectives of restructuring the Turkish economy by placing more r_liance on market forces and adopting a more outward-oriented strategy. The main vehicle for the Bank's operational discussions with the Government has been the structural adjustment lending (SAL) program. SAL V, which was approved in June 1984, completed the series of five loans which the Bank had indicated would be the maximum to a country. Significant progress has been achieved in the past five years, but the task of restructuring is by no means over. The next phase will involve the broadening and deepening of the adjustment process at the sectoral level. Recent econaomic developments have underlined the need for a continuation of the stabilization program without giving up the goals of 1/ Net of cancellations.  - 10 - sectoral adjustment. Hence the emphasis of Bank lending in the post-SAL period would be on striking an appropriate balance between sectoral adjustment lending designed to be quick disbursing and supportive of policy reforms in the major sectors, and carefully formulated project lending focussing on high priority projects principally in the agriculture, energy and transport sectors. 28. Efforts have already been initiated to develop a series of sectoral adjustment loans for the major sectors over the next few years, starting with agriculture. The loans for the agriculture sector would help to support a mediumrterm action program aimed at increasing the growth of primary production and exports, rationalizing public investment and strengthening sectoral institutions. Sectoral adjustment lending would also support measures to address the structural problems of the financial sector and enhance the utilization of industrial capacity in the public and private sectors, keeping in view the scope for the "privatization" of publicly-held assets in the manufacturing subsectors. Other sectors where sectoral adjustment loans could be developed include energy and transport. 29. Project lending, which will continue to make up the majority of the lending operations, will be designed to support and strengthen the adjustment process. A portion of project lending would be earmarked for the construction or rehabilitation of key projects in the energy sector. Other projects would be guided by the major policy objectives of the Government, which include generation of foreign exchange (incLuding improving productivity in export industries and providing essential infrastructure for exports), improvement of institutional efficiency, non-inflationary output growth and amelioration of the social costs of adjustment (including provision of social infrastructure and employment generation, with some emphasis on the least developed provinces in Eastern Turkey). 30. The close macroecononic and sector dialogue established with the Government in recent years is expected to be pursued. The economic and sector work currently being undertaken includes a review of the five-year development plan and studies of housing finance, telecommunications and electronics. Topics to be covered in the future include a review of the public investment program, a study focussing on the impact of structural adjustmrent, a review of transport investments and studies of engineering and agro-industries. 31. In addition to this loan to Turkey, other projects being presented to the Executive Directors this fiscal year include a loan for pulp and paper rehabilitation, an agricultural sector adjustment loan, and loans for a fourth power transmission project; a power system operations assistance project, an industrial schools project and a ports project. 32. Turk: ,'s debt burden is projected to remain manageable throughout 1985-89 (pars . 23 and 24). The Bank Group's share of Turkey's total external debt was 12.4 percent in 1983, is estimated at 13 percent in 1984, and is expected to grow to about 17 percent by 1989. Official debt outstanding is projected to increase from $11.4 billion in 1984 to $14.4 billion in 1989 and private medium and long-term debt outstanding is projected to increase from $5.7 billion in 1984 to $8.8 billion in 1989. The Bank group's share of total debt service payments is pLojected to increase from about 12 percent in 1983 to an estimated 13 perce.-t in 1984, and to about 17 percent ii 1989.  - 11 - 33. IFC has invested in synthetic yarns, textiles, pulp and paper, glass, aluminum, cement, iron and steel products, heavy diesel engines, motor bicycle engines, piston rings, food processing and tourism. It has also inwested in the Industrial Development Bank of Turkey (TSKB) and provided guarantees for overseas contracting firms. In addition, IFC is currently providing technical assistance to the Governmeut with respect to the development of the capital market and a regulatory framework for leasing. PART III - THE URBAN SECTOR 34. Urbanization has proceeded rapidly in Turkey with the urban population reaching 23 million in 1983, or 47 percent of the total population of 48 million. This 4.4 percent per annum rise in the urban population from 1945 to 1983 has been fueled by migration from the countryside which has accounted for 60 percent of urban growth. Turkey's total population growth over the same period has averaged 2.5 percent per annum. About one in three urban dwellers live in metropolitan Istanbul C4.5 million), Ankara (2.1 million) and Izmir (1.4 million); there are about 30 other urban centres in Turkey with populations greater than 100,000 inhabitants. Urban inhabitants are projected to reach 43 million in number, or 65 percent of the country's total population, by the year 2000. Approximately 75 percent of GDP is currently being generated in urban areas as compared to 50 percent in 1950. 35. Rapid urban growth has brought problems in its wake, including the lack of infrastructure and services, housing shortages. and ineffective municipal administration. The Government recognizes that improvemnts in urban efficiency can significantly reduce economic development costs. Its main objectives are to improve che management and resource mobilization of municipal governments, provide adequate infrastructure and services, relieve housing shortages and improve coordination amongst agencies in the urban sector. Urban Infrastructure and Services 36. About a quarter of the urban housing stock, or one million units, is located in unplanned and unlicensed settlements called "gecekondus." The majority of these unplanned settlements are characterized by inadequate water and sewerage facilities and poor social services. A major effort is essential to tackle the massive backlog in the provision of services for ge9ekondu communities, with parallel efforts to ensure that fucure urban growth takes place on serviced land. Important elements of this effort include the adoption of appropriate infrastructure and planning standards, improvement in the level of cost recovery, and simplification of land acquisition and development procedures. At present, less than of 30 percent of the investment costs for sewers and roads is recoverable from beneficiaries, and tariffs do not cover the operation and maintenance costs of sewerage nor, in most cases, of water supply.  - 12 - Urban Administration, Management and Finance 37. Urban management in Turkey reflects a strong tra::tion of financial and administrative centralization. There are 67 provinces and 1,702 municipalities, 990 of which have a population of over 3,000. The muanicipalities employ almost 200,000 people. Management skills have been eroded by the dominance of central agencies which have historically undertaken most of the planning, design and implementation of investment programs. Since 1980, however, legislation has been passed to create metropolitan authorities, reorganize the provision of some utility services, increase municipal revenues and mobilize additional resources for housing development. In 1984, the Government stated its intention to decentralize authority aad responsibility to municipal governments. Recent steps taken include the delegation of authority to local governments in metropolitan areas to approve mater plans, previously a responsibility of the Ministry of Public Works and Settlement (MPWS). However, devolution of authority to municipal administrations will also require significant changes in their roles and responsibilities as well as those of the various central organizations so that they mutually reinforce one another in providing services more efficiently. Much remains to be done in defining municipal responsibilities and establishing the organizational and financial framework for more effective local management of urban development. For example, decentralization will require the adoption of accounting systems which show the costs of services, and definition of tariffs and charges to recover these costs. 38. The Government is undertaking a major effort to mobilize additional resources for municipalities to overcome past deficiencies and to meet the needs of rapidly growing urban areas. In 1981 legislation was enacted assigning local governments five percent of total government tax revenues. The 1984 finance law provided for the share of central government budgetary resources for the municipalities to rise gradually, from five percent in 1984 to 8.3 percent in 1986. These funds would continue to be channeled through Iller Bank (the Municipal Bank), which would receive an additional two percent of government tax revenues to carry out its own investment program. In addition, municipalities are authorized to raise local revenues such as local taxes and water and sewerage tariffs, but a systematic approach to cost recovery has not been adopted. There may also be opportunities to realize economies by establishing more independent water supply and severage authorities and to involve the private sector in providing some public services such as solid waste disposal or in performing certain tasks on a contract basis. Such possibilities would be explored under the proposed engineering project. The Institutional Framework 39. In addition to the MPWS and the Ministry of Interior, there are several central goverrment agencies which assist municipalities in the planning, designing, implementing and financing of physical facilities. Iller Bank, an autonomous agency under the MPWS, is a key institution in the urban development process filling the roles of (i) planning and executing agency for urban physical infrastructure; (ii) financial intermediary providing funds to municipalities for infrastructure investment; and (iii) cashier for channeling government tax revenues to the municipalities. Over half of its investments  - 13 - are in water and sewerage facilities. The State Hydraulic Works (DSI), under the Ministry of Energy and National Resources, is responsible for allocation, conservation and protection of water resources, and also designs and constructs water production and transmission facilities for towns with populations over 100,000. Two other agencies under the aegis of the MPWS, the Real Estate Credit Bank and tne Land Office, respectively provide public housing finance and acquire land for shelter schemes. The Title and Cadastral Office, located in the Prime Ministry, is responsible for the titling and registration of land. In 1984, the Government also created a national housing fund under the Prime Ministry to finance housing from earmarked taxes and levies. The lack of effective coordination amongst these agencies, coupled with overlapping responsibilities, has hindered the efficient operation of the urban economy. The Cukur-ova Region 40. The Cukurova Metropolitan Urban Planning Region (CMUPR) includes the agriculturally rich Cilician Plain within the provinces of Icel, Adana and Hatay. The population of these provinces was 3.2 million in 1980 and has grown by 3.5 percent annually since 1945. The populations of the four major centres of Adana, Mersin, Iskenderun, and Tarsus reached a total of one million in 1980, and have grown at an annual average of 5.1 percent since 1945; this compares with a 4.4 percent annual growth rate for all Turkish cities with 10,000 or more inhabitants. 41. The CMUPR has experienced and is expected to enjoy continued rapid agricultural and industrial growth through agriculture-linked industries (processing and textiles), a variety of heavy industries (including the largest steel plant in Turkey), as well as a wide range of light industries which serve the region, the hinterland, and increasingly, export markets. The region is anchored at either end by the major ports of Mersin and Iskenderun, both of which are under expansion. There are additional ports at Yumurtalik (fertilizers), Dortyol (oil pipeline terminus), and Isdemir (iron and steel mill). New industrial free trade zones are planned for Mersin and Yumurtalik, with the latter centre also being the site of the proposed Iraq-Turkey gas pipeline terminal. There are also proposals under consideration for trade centres at Mersin and iskenderun. 42. The increase in urban population in the four main cities of the CMUPR is attributed in large part to immigrants, originally attracted by prospects of seasonal employment in agriculture, who tend to remain in the region and are integrated into the industrial labor force. Official planning standards, which assume construction of multi-family apartment blocks on large plots, do not reflect the living patterns of low-income rural migrants. As a result, close to half of the urban population is accommodated in unplanned settlements on the urban fringes which are inadequately served with water, electricity, roads and sewerage facilities. 43. Master plans which exist or are under preparation address a number of bottlenecks in the supply of urban services. However, despite water supply programs under implementation, several cities have grown to the point where local ground water sources have started to become insufficient. This is  - 14 - exacerbated by the high proportion of unaccounted for water (estimated, for example, at about 35 percent in Adana), mainly attributable to pipeline losses and inadequate metering . There are backlogs in the supply of sewerage services and major schemes are under consideration to install networks and treatment plants in the main cities of the region. Furthermore, the lack of adequate services and housing shortages in existing urban areas have generated proposals for the development of new towns. These proposals. however, do not appear to take into account more cost-effective options such as rehabilitating and extending existing areas. There is also scope to improve the plamning and operational efficiency of water supply, sewerage anu solid waste disposal services in the four major cities. In addition, investments which are proposed or under way (para. 41) will have major implications for urban patterns in the Cukurova Region. These issues would be studied under the proposed engineering project. Bank Role in the Urban Sector 44. The Bank has so far provided one credit of $2.3 million for an Istanbul Urban Development Project (Credit 324-TU) signed in 1972 and closed in 1981. The aim of this project was to prepare an integrated urban development program f:or the Istanbul metropolitan area. The Project Completion Report (PCR) of May 25, 1982 and the Project Performance Audit Report (PPAR) No. 4372 dated December 30, 1983 concluded that although the project stimulated an awareness of the problems of urban management, particularly the need for changes in institutional arrangements, it was only partially successful mainly because it was too complex and ambitious. The reports highlighted a number of problems including lack of an effective project implementation unit and poor coordination of government agencies. The proposed engineering loan has been designed taking these findings into account by inclusion of a Project Coordinating Unit and establishment of national and local steering committees. 45. The Bank made a $37 million loan to the Government in 1972 for an Istanbul Water Supply Project (Loan 844-TU) which was closed in 1981. The project included expanding the water treatment, transmission, pumping and distribution systems for the Istanbul metropolitan area. The PCR dated June 1982 and the PPAR (No. 4835) of December 1983 concluded that the main project objectives were achieved: water production was increased to the levels anticipated at the time of appraisal and a reorganization of the sector was achieved through the creation of the Istanbul Water Supply and Sewerage General Directorate, an autonomous authority responsible for the planning, design, construction and operation of water supply and sewerage facilities in Istanbul. Lessons drawn from the project included the need to address the problem of unaccounted for water and to pay more attention to institutional strengthening and training. In 1982, a loan of $88.1 million was made by the Bank for an Istanbul Sewerage Project (Loan 2159-TU), to increase from 52 percent to 61 percent the portion of the population to be served by sewerage connections and to provide for adequate sewage disposal facilities. Although delays have occurred in the award of some major contracts, project implementation is now proceeding satisfactorily. In addition, a Loan of $6 million for an Ankara Air Pollution Project (Loan S-015-TU) was made in 1979 and closed in 1983. The objectives of the loan were to identify promising methods of manufacturing smokeless fuel from lignite, and investigate other possible te_-hnologies which could provide a cleaner fuel to reduce air  - 15 - pollution in Ankara. Although the pollution xonitoring control equipment is working successfully, no suitable method for developing an appropriate fuel was found. Appropriate technologies to process the low quality of Turkish lignite remain to be developed. 4b. Given the importance of increasing urban efficiency for Turkey's economic development, the Bank has pursued an intensive dialogue based on sector work in the key areas of urban management and investment in municipal services and housing. The Government has sought assistance from the Bank in planning and investment in both metropolitan and secondary centers. The proposed project is designed to deal with the planning and operation of a range of urban services, taking the Cukurova Region as a pilot area. Successful measures there could be replicated more widely in subsequent projects. PART IV - THE PROJECT 47. A proposed Cukurova Region Urban Development Project (CRUDP) was identified during a mission which visited Turkey in March 1984 to review and discuss with the Government a strategy for the urban sector. The Government subsequently requested an engineering loan to facilitate preparation of the proposed project. Preparation is also being partially financed by a $600,000 advance from the Project Preparation Facility. The engineering loan was appraised in November/December 1984. Loan negotiations took place in Washington, D.C. from March 25 to March 28, 1985 with a Turkish delegation headed by Mr. Tunc Bilget, Chief Financial and Economic Counselor, Embassy of the Republic of Turkey, and including a representative from the State Planning Organization (SPO). There is no separate Staff Appraisal Report. A loan and project suumary is provided at the beginning of this Report and Annex III contains supplementary project data. Project Rationale 48. The Government's objectives in the urban sector are to decentralize responsibility for some urban services, improve the management of local administrations, provide adequate infrastructure and services, and reduce housing shortages. The proposed CRUDP, which may be suitable for Bank participation, involves developing an integrated approach to regional and urban development in the Cukurova Region. Although the Cukurova Region is not one of the poorer areas in Turkey, it has been selected by the Government to promote new urban development policies because it is one of the most rapidly growing regions, because inadequate urban investments may impede future growth in the region, and because it is necessary to test new policies and procedures in a pilot area before attempting nationwide change. The project would include designing appropriate investments and associated policies related to institutional and operational issues, including coordination among agencies in the sector, cost recovery, adoption of appropriate infrastructure standards and simplification of land acquisition and development procedures. It would also strengthen the capacity of municipal governments to pl.n and deliver urban services. The Government has sought Bank assistance in preparing this project through the proposed engineering loan which would finance preparation  - 16 - of institutional, feasibility and design studies. Bank involvement is justified because of the scale of the investments involved, the complexity of institutional issues to be tackled, the innovative nature of several of the likely components and the economic importance of the region in Turkey's development strategy. Project Description 49. The engineering project would consist of the following main components: (i3 establishment and maintenance of a Project Coordination Unit to monitor and supervise project activities; (ii) institutional, feasibility and design studies for the CRUDP, including regional urban growth management planning, municipal growth management, municipal financial management and local government staff training; (iii) a program to complete the cadastral survey of the Cukurova Region and a study to define a program to accelerate completion of the nationwide cadastre; and (iv) special studies. These components are described further below. Project Coordination Unit (PCU) 50. About 405 man-months of expert services would be provided to establish and maintain the Project Coordination Unit in Adana. The PCU, under the aegis of the SPO, would be responsible for administration and implementation of project activities. One of its major tasks would be that of coordinating local administrations and the various central government agencies concerned with project design and execution. Institutional, Feasibility, and Design Studies for the CRUDP 51. Regional Urban Growth Mana