Turkey - Industry Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7883 PROJECT PERFORMANCE AUDIT REPORT TURKEY FIVE DFC AND INDUSTRIAL SECTOR PROJECTS (LOANS 1748-TU, 2093-TU, 1754-TU, 1755-TU AND 1952-TU) JUNE 29, 1989 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Turkish Lira (TL) (annual eve ages) 1978 US$1 = TL 24.3 1979 US$1 = TL 31.1 1980 US$1 = TL 76.0 1981 US$1 = TL 111.2 1982 US$1 = TL 162.6 1983 US$1 = TL 225.5 1984 US$1 = TL 366.7 1985 US$1 = TL 522.0 1986 US$1 = TL 674.5 1987 US$1 = TL 857.2 1988 US$1 = TL 1,453.1 ACRONYMS CBT - Central Bank of Turkey DFC - Development Finance Corporation DYB - Dev1et Yatirim Bankasi EIB - European Investment Bank ERR - Economic Rate of Return FE - Foreign Exchange FERIS - Foreign Exchange Risk Insurance Scheme FRR - Finance Rate of Return GDP - Gross Domestic Product GOT - Government of Turkey IEDP - Industrial Export Development Project IFC - International Finance Corporation KfW - Kreditanstalt fur Wiederaufbau LDR - Least Developed Region OED - Operations Evaluation Department PCR - Project Completion Report PPAM - Project Performance Audit Memorandum PPAR - Project Performance Audit Report SEEs - State Economic Enterprises SMI - Small and Medium Industry SMLI - Small and Medium Labor-Intensive Industry SPO - State Planning Office SYKB - Sinai Yatirim ve Kredi Bankasi TA - Technical Assistance T1jS - Textile Development Services, Inc. TSKB - Turkiye Sinai Kalkinma Bankasi FISCAL YEAR Government of Turkey/SYKB/TSKB: January 1 - December 31 FOR O CIAL USE ONLY THE WORLD BANK Wash"ton. D.C. 20433 U.S.A. Oike of Owetctnwal Operessue Evaluiatum~ June 29, 1989 HEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUIJECT: Project Performance Audit Report on Turkey Five DFC and Industrial Sector Projects (Loans 1748-TU, 2093-TU, 1754-TU, 1755-TU and 1952-TU) Attached, for information. is a copy of a report entitled 'Project Performance Audit Report cu Turkey - Five DFC and Industrial Sector Projects (Loans 1748-TU, 1093-TU, 1754-TU, 1755-TU and 1952-TU)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their oficial duties. Its contents may not otherwise be disclosed without World Bank authoriation. PROJECT PERFORMANCE AUDIT REPORT TURKEY FIVE DFC AND INDUSTRIAL SECTOR PROJECTS (LOANS 1748-TU, 2093-TU, 175A-TU, 1755-TU AND 1952-TU) TABLE OF CONTENTS Page No. PREFACE ............................................................. i BASIC DATA SHEETS ................................................... iii EVALUATION SUMMARY .................................................. xi OVERVIEW ............................................................ xv PROJECT PERFORMANCE AUDIT NEMORANDUK I. BACKGROUND ................................................... 1 Economic Developments .................................... 1 Rcle of FERIS ............................................ 5 Developments in the Industrial and Financial Sectors ..... 7 II. PROJECT OBJECTIVES ........................................... 11 III. PROGRESS IN MEETING OBJECTIVES ............................... 16 Loans XIII and XIV ....................................... 16 Loans 1754-TU, 1755-TU and 1952-TU ...................... 18 IV. OPERATIONAL AND FINANCIAL PERFORMANCE ........................ 21 A. TSKB .................................................... 21 Loan Approvals ......................................... 22 Portfolio .............................................. 23 Resource Mobilization .................................. 25 Financial Situation .................................... 27 Compliance with Loan Requirements ...................... 28 Factors Affecting Performance .......................... 30 Efforts at Diversification and Expansion ............... 31 B. SYKB ......................................... .......... 31 Operations and Financial Position ...................... 31 Quality of Portfolio ................................... 32 Factors Affecting Performance .......................... 33 Efforts at Diversification and Expansion ............... 34 C. Utilization of Bank Funds ................................ 34 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (cont'd) Page No. V. FINDINGS AND LESSONS ................. # ....... .......... 37 Overall Assessment of Achievement of Objectives .......... 37 The Bank's Role ............ ............... 39 TSKB's Sustainability .................................... 40 SYKB's Sustainability .................................... 40 Issues and Leasons Learnt ................................ 41 List of Tables in the Text 1. Gross Domestic Product, 1978-88 .............................. 2 2. Foreign Exchange Rate and Infla,ion, 1978-88 ................. 3 3. Foreign Trade and Balance, 1978-88 ........................... 3 4. Distribution of Bank Loans Among Textile Subgroupings ........ 14 5. Foreign Currency Loan Approvals .............................. 22 6. Arrears and Rescheduling ..................................... 24 7. TSKB Arrears and Portfolio Position, 1981-83 ................. 30 8. SYKB: Resources Raised, 1979-88 ............................. 32 9. Arrears of More Than Three Months ............................ 33 ANNEXES I. TSKB: Income Statements, 1987-1988 .......................... 43 II. TSKBs Balance Sheets, 1987-1988 ............................. 44 III. SYKBt Approvals, Commitments and Disbursements, 1979-1988 ... 46 IV. SYKB: Summary Income Statements, 1979-1988 .................. 47 V. SYKB: Summary Balance Sheets, 1979-1988 ..................... 48 PROJECT COMPLETION REPORT (TSEB) I. INTRODUCTION ............................................ 53 II. THE ENVIRONMENT ......................................... 53 The Economy ............................................ 53 The Manufacturing Sector ................... 54 The Financial Sector ................................... 55 III. TSKB' ROLE AND BANK GROUP OBJECTIVES ...................... 56 Background ........................................... 56 Bank Group Objectives ......... ............ 57 Loan 1748-TU ...................... 57 Loan 2093-TU ........................................... 57 Fulfillment of Objectives .............................. 58 IV. UTILIZATION OF BANK LOANS .................................. 59 A. Loan 1748-TU .......................................... 59 B. Loan 2093-TU ........................................... 61 TABLE OF CONTENTS (cont'd) Page No. V. INSTITUTIONAL ASPECTS ...................................... 63 VI. OPERATIONAL AND FINANCIAL PERFORMANCE ...................... 64 VII. SUMMARY AND CONCLUSIONS .................................... 66 Lessons ................................................ E7 Borrower Performance ................................... 68 Bank Performance ....................................... 68 PCR ANNEXES 1. List of Subprojects Financed Under Loan 1748-TU ............... 69 2. Characteristics of Subproje3ts Under Loan 1148-TU .............. 70 3. Performance of Subprojects Under Loan 1748-TU .................. 72 4. Subproject Financial Performance Summary Under Loan 1748-TU .... 73 5. Economic Performance of Subprojects Under Loan 1748-TU ......... 74 6. List of Subprojects Financed Under Loan 2093-TU ................ 75 7. Characteristics of Subprojects Under Loan 2093-TU .............. 78 8. Performance of Subprojects Under Loan 2093-TU .................. 80 9. Subproject Financial Performance Summary Under Loan 2093-TU .... 83 10. Economic Performance of Subprojects Under Loan 2093-TU ......... 86 11. Income Statements .............................................. 90 12. Balance Sheets ............................................... 91 13. Summary of Arrears ............................................. 93 14. Summary of Operations .......................................... 94 PROJECT COMPLETION REPORT (INDUSTRIAL SECTOR PROJECTS) I. Introduction .............................................. 97 Bank Lending Strategy to Turkey's Manufacturing Sector ... 97 The Economy .............................................. 98 The Private Sector ...................................... 99 Impact of Adjustment Policies on the Manufac..uring Sector ................................................. 99 Unemployment and Labor Force Movements ................... 100 II. Performance of Loans 1755-TU, 1754-TU and 1952-TU .......... 100 Loan 1755-TU (Private Sector Textiles) ................... 100 The Objectives of the Loan ............................. 101 Implementation of Loan 1755-TU ......................... 101 Sub-Projects Financed ................................. 101 Technical Assistance ......................... 102 Overall Assessment of Project-Related Objectives of Loan 1755-TU ...................................... 103 TABLE OF CONTENTS (cont'd) Page No. II. Periormance of Loans 1755-TU, 1754-TU and 1952-TU (cont'd.) Loan 1754-TU (Private Sector Textiles) to TSKB ........... 103 Sub-Projects Financed .................................. 103 Technical Assistance ................................... 104 Overall Assessment of Loan 1754-TU .................... 104 Loan 1952-TU (Labor Intensive Industries) ................ 104 The Objectives of Loan 1952-TU ......................... 104 Implementation of Loan 1952-TU ......................... 105 Sub-Projects Financed .................... ....... 105 Technical Assistance ............... .............. 106 Overall Assessment of Loan 1952-TU ..................... 107 III. The Financial Intermediary ................................ 107 Background and Organization .............................. 107 Agreements Under the Two Loans ........................... 108 Impact of the Two Loans on SYKB .......................... 108 SYKB's Current Condition and Future Prospects ............ 109 IV. Summary and Conclusions ................................... 110 Lessons Learned .......................................... 112 PCR TABLES 1. Bank Group Operations in Turkey................................. 97 2a. Loan 1755-TU - Project Summary Data............................. 102 2b. Loan 1754-TU - Project Summary Data............................. 103 3. Loan 1952-TU - Project Summary Data ............................. 106 4. Labor-Intensive Industries (1952-TU)s Operational Summary .113 5. Private Sector Textiles (1755-TU): Operational Summary . .114 6. Labor-Intensive IndustrieG (1952-TU): Number of Job Analysis ............... ............. ..................... 115 7. Labor-Intensive Industries (1952-TU): Summary of Number of Job Analysis ................................. 116 8. Private Sector Textiles (1755-TU): Projected and Actual Results ...... .........................................117 9. Labor-Intensive Industries (1952-TU): Projected and Actual Results ............................. 118 10. Private Sector Textiles (1755-TU): Sectoral and Regional Distribution of Subprojects ........ .............. 119 11. Labor-Intensive Industries (1952-TU): Sectoral, Regional and Size Distribution of Subprojects.......................... 120 12. Labor-Intensive Industries (1952-TU): The Export Commitments in Detail of SSI/N-SSI ....................... I......121 13. Private Sector Textiles (1755-TU)t The Export Commitments ... 122 14. Labor-Intensive Industries (1952-TU): Subproject Data Sunary .......................... ..... 123 15. Private Sector Textiles (1755-TU): Sub-Loan Debt Status 124 TABLE OF CONTENTS (cont'd) Page No. PCR TABLES (cont'd.) 16. Labor-Int+ensive Industries (1952-TU): Sub-Loan Debt Status .... 125 17. Private Textile Loan (1755-TU): Uaplementation Delays ......... 126 18. Labor-Intensive Industries (1952-TU): Number of Implementation Delays as of Sectors .......................... 127 19. Turkey - Changes in the Financial Structure of Firms of the Istanbul Chamber of Industry ............................. 128 20. Training and Research Financed from 1952-TU Technical Assistance Fund ............................... 129 21. Training and Research Financed from 1755-TU Technical Assistance Fund ............................................. 130 22. Characteristics of Subprojects of Loan No. 1754-TU ............. 131 23. Project Completion Report Details of Loan No. 1754-TU .......... 134 ATTACMENT Comments Received from SYKB .................................... 135 PROJECT PERFORMANCE AUDIT REPORT TURKEY FIVE DFC AND INDUSTRIAL SECTOR PROJECTS (LOANS 1748-TUt 2093-TU, 1754-TU, 1755-TU AND 1952-TU) PREFACE 1. This is a Project Performance Audit Report (PPAR) on the following Loans: Date of Name of Board Closing Date Date of Final Loan No. Amount Borrower Approval Original Final Disbursement (USSM) 1748-TU 60.0 TSKB L 06/21/79 12/31/82 09/30/88 11/14/83 2098-TU 100.0 TSKB 02/23/82 06/80/87 06/80/87 08/10/88 1754-TU 65.0 TSKB 09/04/79 12/31/82 12/31/85 01/28/86 1755-TU 15.0 SYKB L 09/04/79 12/31/82 12/31/86 07/09/86 1962-TU 40.0 SYKB 08/08/81 06/30/84 06/80/88 01/08/87 L Turklye Sinai Kalkinma Bankas (TSKB) / Sinai Yaetirim ve Kredi Bankest (SYKB). The objective of the first Loan was to bridge TSKB's financing gap and to shift its primary lending focus to export-oriented projects; the second Loan's objective was for lending entirely for export-oriented projects. The last three Loans were sector-based. The objectives of Loans 1754-TU and 1755-TU were for the financing of textile projects, and Loan 1952-TU for labor-intensive industrial projects. 2. The PPAR consists of the Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and the Project Completion Reports (PCRs), prepared by the Europe, Middle East and North Africa Region. The PPAM is based on the attached PCRs, the Staff Appraisal and the President's Reports, the loan documents, the summary of discussions of the Executive Directors' meetings at which the projects were considered, a study of project files, ard discussions with Bank staff. An OED mission visited Turkey in January/February 1989, and discussed the effectiveness of the Bank's assistance with TSKB and SYKB. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. 3. The PCRs provide a complete account and assessment of the proj- ects' experience and discuss the performances of the Bank and the projects' - ii - executing agencies. The PPAM elaborates on particular aspects such as the foreign exchange risk insurance scheme, sustainability of TSKB and SYKB and TSKB's institutional performance. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Government, TSKB and SYKB. The comments received from SYKB are reproduced as an Attachment to the PPAR. PROJECT PERFORMANCE AUDIT REPORT TURKEY TURRIYE SINAI KALKINMA BANKASI (TSKB) (LOANS 1748-TU AND 2093-TU) BASIC DATA SHEET LOAN POSITION (Amounts In USS Million) As of Jan. 81, 1989 Original Disbursed C-ncel led Rmid Outstanding Loan 1748-TU 00.00 50.95 9.05 88.16 17.79 L Loan 2098-TU 100 00 99.16 0.84 14.78 64.48 /b CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (Amounts In USI million) (Loan 1748) FY80 FY81 FY82 FY88 FY84 Appraisal Estimate 6.10 87.60 58.60 60.00 60.00 Actual 0.88 11.89 26.84 47.88 50.95 Actual as N of Appraisal (3) 7.5 80.4 46.0 79.0 64.9 Date of Final Disbursement: November 14, 1988 (Loan 2093) FY82 FY83 FY84 FY85 FY86 FY87 FY88 Appraisal Estimate 1.00 25.00 68.00 8.00 96.00 100.00 100.00 Actual - 0.88 6.82 51.40 86.92 98.79 99.16 Actual as X of Appraisal (X) - 1.8 10.9 61.9 91.4 96.8 99.2 Date of Final Disbursement: March 10, 1988 L Excludes US38.28 million exchange rate adjustment. L Excludes US*41.02 million exchange rats adjustment. - iv PROJECT DATES Loan 1748 Original Revived/Actual Board Approval n.a. 06/21/79 Signing n.e. 07/12/79 Effectiveness 11/09/79 10/25/79 Loan Closing 12/81/82 09/30/88 Loan 2098 Oriainal Revied(Actual Board Approval n.a. 02/28/82 Signing n.e. 03/05/82 Effectiveness 06/04/82 05/28/82 Loan Closing 06/80/87 06/80/8y STAFF INPUTS (staff weeks) (Loan 1748) FY79 FY80 FY81 FY82 FY88 FY84 FY85 FY86 FY87 FY88 TOTAL Preappraisal 7.8 - - - - - - - - 7.8 Appraisal 27.0 - - - - - - * - 27.0 Negotiations 7.1 0.9 - - - - - - - - 8.0 Supervision - 6.5 12.2 6.0 2.2 2.1 0.1 - - 4.8 88.4 Other 0.8 - - - - - - - 0.8 Total 42.7 7.4 12.2 6.0 2.2 2.1 0.1 - - 4.3 77.0 (Loan 2098) FY80 FY81 FY82 FY63 FY84 FY85 FY86 JFY87 FY88 Total Preappraieal 5.0 28.1 - - - - - - - 28.1 Appraisal - 84.3 88.0 - - - - - - 72.8 Negotiations - - 14.1 - - - - - - 14.1 Supervision - - 18.0 10.2 21.8 15.6 8.4 8.6 7.4 79.8 Other - 1.0 1.6 0.1 - 0.8 - - - 2.9 Total 5.0 58.4 66.6 10.8 21.6 15.9 6.4 8.6 7.4 197.2 MISSION DATA (Loan 1748) No. of No. of Staff Date of MonthfYear Weeks Persons Weeks Rpor Pro-Appraisal 10/78 £ 4 a 11/21/78 Appraisal 01/79 1 5 8 08/07/79 Post-Appraisal 12/79 1 1 1 02/05/80 Supervision i 08/80 1 8 8 08/05/80 Supervision II 07/80 1 2 2 08/06/80 Supervision III 08/81 2 8 6 09/80/81 Supervision IV 02/82 2 2 4 03/10/82 SLpervision V 07/82 1 8 8 08/24/82 (Loan 2093) No. of No. of Staff Date of Month(Year Weeks Persons Weeks Report Pre-Appraisal 06/80 8 2 6 08/07/80 Appraisal 02/81 4 8 12 04/08/81 Poet-Appraisal 08/82 % 2 4 04/29/82 Supervision I 07/82 1 8 8 08/10/82 Supervision II L 08/83 3 1 8 04/05/88 Supervision III Le 08/84 8 1 8 04/16/84 Supervision IV /a 08/84 8 8 9 10/02/84 Supervision V La 11/84 2 1 2 12/16/84 Supervision VI La 01/85 2 1 8 02/21/85 Supervision VII La 10/86 2 8 6 11/01/86 OTHER PROJECT DATA Borrower: Turklye Sinai Kalkinma Bankas1 (TSKB) Executing Agency: TSKB Follow-on Project: Industrial Export Development Project (Loan 2901-TU) Board Approval: January 19, 1988 Amount: USS300.0 million Le Also covered Loan 1748. - vii - PROJECT PERFORMANCE AUDIT REPORT TURKEY INDUSTRIAL SECTOR PROJECTS (LOANS 1754-TU, 1755-TU AND 1952-TU) BASIC DATA SHEET LOAN POSITION (Amounts In USS Million) As of Jan. 81, 4989 Orlainal Disbursed Cancelled Repaid Outstanding Loan 1754-TU 65.00 64.87 0.18 26.88 89.49 /a Loan 1766-TU 15.00 18.68 1.82 3.72 9.96 & Loan 1952-TU 40.00 89.64 0.44 14.89 24.66 Ls CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (Amounts in USS million) (Loans 175/1755) FY81 FY82 FY88 FY64 FY65 FY86 FYST Appraisal Estimate 25.0 52.6 87.5 95.8 99.9 100.0 100.0 Actual 0.1 7.4 28.6 84.6 49.7 89.8 97.7 Actual as X of Appraisal (X) 0.4 14.1 82.6 86.k 49.7 89.8 97.7 Date of Final Disbursement: January 28, 1986 (1764-TU) July 9, 1986 (1755-TU) (Loan 1952) FY82 FY88 FY84 FY85 FY86 FY87 Appraisal Estimate 22.0 54.0 85.0 100.0 100.0 100.0 Actual 5.6 24.5 44.0 89.3 98.7 98.8 Actual as X of Appraisal (X) 25.0 45.0 52.0 89.8 98.7 98.8 Date of Final Disbursement: January 8, 1987 a Excludes USS1O.77 million exchange rate adjustment. / Excludes USS2.48 million exchange rate adjustment. & Excludes USS12.27 million exchange rate adjustment. Viii- PROJECT DATES Loans 1754/1755 Orlainal Revised/Actual Board Approval n.e. 09/04/79 Loan Agreement n.a. 09/17/79 Effecti venits 12/17/79 02/29/90 Loan Closing 12/81/82 12/81/85 Loan 1952 Originol RevisedlActual Board Approval n.a. 08/08/81 Loan Agreement n.a. 08/18/81 Effectiveness 06/12/81 06/11/81 Loan Closing 06/80/84 06/30/88 STAFF INPUTS (staff weeks) (Loans 1754/175) FY78 F.19 FY80 FY81 FY82 FY83 FY84 FY85 FY88 FY87 FY88 TOTAL Preappraisal 22.4 6.9 - - - - * - - - - 29.8 Appraisal - 60.9 8.3 - - - - - - - - 64.20 Negotiations - - 4.8 - - - - - - - - 4.3 Supe,vilsion - - 9.9 18.1 11.4 6.8 1.8 4.0 - - 1.4 52.2 Othwr - 0.9 0.9 - - 0.1 - - - - - 1.9 Total 22.4 68.7 18.4 18.1 11.4 5.7 1.8 4.0 - - 1.4 151.9 (Loan 1952) FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY88 FY87 FY88 Total Preapprelsal 18.6 88.0 15.6 - - - - - * - 65.1 Appraisal - - 18.4 - - - - - - - 18.4 Negotiations - - 8.9 - - - - - - * 8.9 Supervision - - 0.7 9.7 8.9 6.6 8.1 0.6 0.4 2.0 27.0 Other - 0.1 0.9 - - - - - - - 1.0 Total 18.6 86.1 44.4 9.7 8.9 6.6 3.1 0.6 0.4 2.0 120.4 - ix - MISSION DATA (Loans 1754/1756) No. of No. of Staff Date of Month/Year Weeks Persons Weeks Rpor Appraisal 08/78 8 8 18 07/24/79 Supervision I 04/80 1 1 1 05/12/80 Supervision II 06/81 2 8 6 08/13/81 Supervision III 02/82 1 2 2 04/29/82 Supervision IV 06/88 0.6 2 1 06/26/83 Supervision V 07/84 0.4 2 0.8 07/27/84 Completion 09/87 0.2 1 0.2 07/10/88 (Loan 1952) No. of No. of Staff Date of Month/Year Weeks Persons Weeks Report Appraisal 06/80 8 5 15.0 02/06/81 Supervision I 02/82 0.4 2 0.8 02/22/82 Supervision II 08/82 0.4 2 0.8 08/27/82 Supervision III 08/83 0.4 1 0.4 04/04/83 Supervision IV 09/83 0.4 1 0.4 09/07/83 Supervision V 06/84 0.6 1 0.6 08/10/83 Completion 09/8 0.2 1 0.2 07/10/88 OTHER PROJECT DATA Borrowers: Turkly* Sinai Kalkinma Bankast (TSKB) (Loan 1764-TU) Sinai Yatirim ve Kredl Bankasi (SYKB) (Loans 1756-TU and 1952-TU) Executing Agencies: TSKB, SYKG Follow-on Prolects: Small and Medium Industries Loan Project (Loan 2647-TU) Board Approval: January 7, 1986 Amount: USS100.0 million Industrial Export Development Project (Loan 2901-TU) Board Approval: January 19, 1988 Amount: US3800.0 million PROJECT PERFORMANCE AUDIT REPORT TURKEY FIVE DFC AND INDUSTRIAL SECTOR PROJECTS (LOANS 1748-TU, 2093-TU, 1754-TU, 1755-TU AND 1952-TU) EVALUATION SUMMARY Introduction 1. The five Bank Loans covered by this report were approved over the period June 1979 to December 1981. These were years of transition in Turkey where the Government, with the support of the Bank, had initiated a process of adjustment to shift the development strategy from state- oriented, import-substituting heavy industry growth towards an export- oriented growth through private initiative. The process of adjustment involving economic liberalization led in the initial years to a reduction of inflation, a sharp depreciation in the external value of the currency, and a resumption of GDP growth. While GDP growth and improvement have continued in the second half of the 1980s, the Government has still not succeeded in controlling inflation and, therefore, stemming the continuous depreciation of the Turkish Lira (PPAM, paras. 1-29). Objectives 2. Of the five Loans, two Loans (Loan 1748-TU and Loan 2093-TU) were traditional DFC loans to Turkiye Sinai Kalkinma Bankasi (TSKB), shifting the emphasis in their operations to export orientation in the choice of subprojects. The remaining three Loans had a sector orientation, Loans 1754-TU and 1755-TU being for the development and modernization of the private textile sector, in narticular for garments and printing/dye- ing/finishing activities to promote textile exports, and Loan 1952-TU being for labor-intensive industries to relieve urban unemployment. Loan 1754-TU was made to TSKB and Loans 1755-TU and 1952-TU were made to Sinai Yatirim ve Kredi Bankasi (SYKB), a new financial intermediary for the Bank (PPAM, paras. 30-46). Implementation Experience 3. The five Loans moved slowly in the early years, both because of an adverse investment climate during the early adjustment period and because of the reluctance of entrepreneurs to bear the foreign exchange risk under the Loans; as a result, the closing dates had to be extended. Disburse- ments moved quickly, however, after the Government introduced the Foreign Exchange Risk Insurance Scheme (FERIS), under which the Government provided cover on medium-term foreign exchange borrowings from approved Turkish institutions (PPAM, paras. 104-114). Results 4. The Loans financed in all 249 subprojects (99 subprojects under the two DFC Loans, 36 under the private sector textile Loans, and 114 under the labor-intensive industries Loan). The Loants generated the number of jobs targetted under them, and the export targets are likoly to be reached as the subprojects build up production and export outlets. However, the distribution set under Loan 1754-TU for various textile sub-groups was not reached, and the range of urban areas reached under Loan 1952-TU was nar- rower than that initially envisaged (PPAH, paras. 47-66). 5. TSKB's portfolio had deteriorated in the late 1970s and early 1980s as a result of the poor performanace of its projects and their inabil- ity to meet their payment obligations under a depreciating currency. The portfolio showed improvement in the late 1980s both because of action taken by TSKB to deal with problem projects, and the gradual increase in viable subprojects financed out of recent Bank loans. SYKB has gradually moved away from its earlier role of a supplier of working capital finance in local currency to a DFC providing almost wholly medium-term loans in foreign currencies. The operations of TSKB and SYKB have increased over the years 1979 to 1988. The earnings of both the institutions have also increased over the period, though in terms of returns on shareholder funds, they remain inadequate. The two institutions have also sought to diversify their operations, for example, TSKB into short-term finance and foreign exchange trading activities and SYKB into tourism (PPAM, paras. 67-104). Sustainability 6. The demand for funds from the two institutions depends upon their ability to provide to industry low-cost, essentially Bank, funds with subsidies under FERIS and discounting facilities from the Central Bank. Without Bank funding and FERIS, their continued existence is jeopardized. The DFCs need to diversify their operations and broaden their revenue earning base. They have to work out their future strategic options within the emerging economic environment in the country (PPAM, paras. 123-127). 7. This environment shows trends which raise issues about the sus- tainability of the DFCs' operations in the future. Continued (and vola- tile) inflation and exchange rate depreciation are strong disincentives to medium-term borrowing in foreign exchange without the cover provided by FERIS. The interest rate structure in the financial market is highly diverse, varying from negative real interest rates on preferred credits (under FERIS and Central Bank rediscounting) to highly positive rates (over 301 in real terms) on commercial bank loans and trade credits. The DFCs are unable to carry on any local currency project operations owing to their inability to raise long-term funds at viable interest rates for their operations. These trends in financial markets need systematic study by the Bank (PPAM, paras. 128-130). 0 - xiii - Findings and Lessons 8. While the two DFC Loans to TSKB changed its orientation to exports, an important achievement, the Loans did not produce the level of exports anticipated nor the benefits of institution-building described in the two appraisal reports. The three sector projects were overall success- ful, with the export and employment targets nearly reached under the tex- tile projects and the employment target under the labor-intensive industry project exceeded (PPAM, paras. 115-122). 9. The Bank's move to diversify its channels for private sector lending (SYKB was brought in ey Loan 1755-TU approved by the Board on April 9, 1979) has helped it to reach a broader clientele and to widen its institution-building role in Turkey. The lending shift was broadly successful, 249 subprojects were financed with over 80Z oriented to exports. The change in the Government's anti-trade bias policies had opened the way to the emergence of an export trend in industry (PPAM, para. 131). 10. The Bank's projections of DFC operations must be sensitive to eme.:ging economic trends in a country. Loan justification should not be sought by bolstering appraisal reports with exaggerated assumptions. This leads to misjudgements of the institution and of its ability to contribute to industrial growth. Changes in DFC focus should be brought about only after careful study; the shift in DFC lending to less developed regions led to problems for TSKB portfolio. Project weaknesses were gradually exposed as economic difficulties mounted after the first oil crisis in 1973 (PPAM, para. 134). 11. TSKB's severe difficulties are similar to the Bank's experience with other problem DFCs. DFC rehabilitation and portfolio improvements are a long, slow and painful process, requiring strong and consistent support from the shareholders, the Government and the Bank. But given this support, a DFC can frequently be rehabilitated and rendered viable, making a substantive contribution to industrial growth. In the case of TSKB (and SYKB), its contribution is strongly supplemented by the export-orientation of most projects financed since 1979 (PPAM, paras. 132-133). PROJECT PERFORMANCE AUDIT REPORT TURKEY FIVE DFC AND INDUSTRIAL SEOR PROJECTS (LOANS 1748-TU, 2093-TU, 1754-TU, 17;5-TU AND 1952-TU) OVERVIEW Economic Background 1. The period June 1979 to December 1981, during which the five loans covered by the PPAR were approved, is marked by a transition in the coun- try's development strategy. Industrial development efforts in the 1960s and early 1970s were based on an import-substitution strategy, relying to a large extent upon State action to develop heavy industries in the country. In mid-1970, the country ran into serious economic difficulties, marked by severe foreign exchange problems, high inflation and depreciation of the Turkish Lira (TL), leading to a fall in GDP in the late 1970s. The Govern- ment initiated in 1979-80 a program of reform, seeking to move the economy away from State orientation. Under this reform program the Government brought in important economic liberalization measures seeking to promote exports and replacing quantitative import restrictions by tariffs, and adopted an exchange rate policy which sharply reduced the value of the TL. It also sought to reduce the role of the State in industry. The Bank sup- ported these moves by providing five structural adjustment loans over the period 1980-85 (PPAM, paraF. 1-2). 2. The economy responded to these measures. Inflation was brought down, the foreign trade deficit reduced, and GDP growth resumed. Economic recovery in the early 1980s was slow, however, and the reduction of the import-substitution protection measures, compounded by rising interest rates and TL depreciation in the case of enterprises set up with foreign exchange borrowings, had an adverse effect on industries established in the 1970s. These developments also led to a fall in demand for foreign cur- rency loans from DFCs as borrowers were required to assume the foreign exchange risk on such loans (PPAM, paras. 3-8). 3. The Government introduced in 1984 a Foreign Exchange Risk Insur- ance Scheme (FERIS) under which it provided foreign exchange cover to borrowers from approved Turkish financial institutions (and also from IFC). The economy picked up momentum after 1984, with the growth rate exceeding 6Z in 1984 and subsequent years (barring 1985). The trade (merchandise) deficit had stabilized during 1984-87 at around US$3 billion and was reduced to $1.8 billion in 1988. The current account reached a surplus in 1988 for the first t' e in tb last 15 years. One area in which the Government has not made progress is in controlling inflation. To strengthen competitiveness, the TL depreciated at rates slightly higher than inflation during 1980-87, and about equal to inflation in 1988 (PPAM, paras. 9-11). - xvi - 4. Government measures stimulated export-oriented industries. Fol- lowing the introduction of FERIS, there was a sharp increase in demand for foreign currency loans from the financial institutions. The rate of inter- est charged under FERIS was, and remains, negative in real terms, i.e. below the inflation rate prevailing in the economy. As a result, FERIS provides a substantial advantage to borrowers covered by it, freezing their principal payments at the exchange rate prevailing at the time of borrowing (under FERIS the foreign currency loan is expressed in TL terms) and pro- viding the funds at a negative real rate of interest. Therefore, from the Borrower's point of view, the more rapid the domestic inflation becomes, the more profitable their FERIS transactions are. A reference to the role of FERIS was included in the Bank's first Financial Sector Adjustment Loan, approved in June 1986, and a review was required to be made in 1986. While FERIS fosters demand for foreign exchange loans from ontreprensurs and has helped stimulate private sector investment, it also provides, as noted above, a substantial subsidy to borrowers. FERIS has been the subject of internal memoranda and notes within the Bank and of discussions between the Government and the Bank, but no systematic work has been done under the Bank's economic and sector work program. With almost five years of experi- ence with FERIS, it would now be appropriate to make an in-depth analysis of the working of the scheme, including an economic cost-benefit analysis (PPAM, paras. 12-18). 5. Private sector investment has revived slowly. Exports have risen from US$2 billion in the late 1970s to around US$10 billion in 1987 and 1988. Trends in the financial sector are more diverse. With a high and volatile inflation rate in the economy, the market for lunds has become essentially short-term with.one year or shorter maturities, except in the case of preferred credits rediscounted at the Central Bank and foreign currency funds covered by FERIS. The range of interest rates is wide, with annual rates of interest varying from 45Z under preferred credits and FERIS, to 60Z on deposits with commercial banks, 502 to 60Z on (tax-free) Treasury bonds (varying with tender offers), 90% to 100Z on commercial bank loans and 72 to 9% (monthly) on trade credits, in a situation where the wholesale price inflation rate was slightly below 702 in 1988. The finan- cial market is thus compartmentalized, and the range of real interest rates is wide, varying from negative to a high (302 or more) positive, depending upon the inflation rate. Tax incentives (particularly income tax exemption for a portion of new investment), low-cost preferred credits and the repay- ment terms of FERIS (3-year grace period and subsidy element), have enabled companies to build up liquidity and thus to minimize their need for bank borrowings at normal rates. As a result, some trends towards financial disintermediation have emerged in the system, with industry providing sub- stantial trade credits to their customers (thus becoming a source of income to industry) and Government providing medium-term preferred TL credits and FERIS cover. Budget deficits have continued at substantial levels, partly because of the high interest cost of the Government's borrowings simul- taneously as it is providing subsidies under FERIS and the preferred credits to industry. At the same time, its tax base is being eroded to some extent by its borrowing through tax-free bonds and its provision of - xvii - fiscal incentives for priority investments. The Government's inability to control inflation has been a major failing in its economic reform measur-: (PPAM, paras. 19-29). Loan Objectives and Performance 6. Of the five loans being reviewed, two (Loans 1748-TU and 2093-TU for US$60 million and US$100 million, respectively) were DFC loans to Turkiye Sinai Kalkinma Bankasi (TSKB -- the Loans being referred to here as Loans XIII and XIV) largely with an orientation towards exports. The other three loans (Loans 1754-TU, 1755-TU and 1952-TU for US$65 million, US$15 million and US$40 million, respectively) were sectQr loans, the first two to TSKB and to Sinai Yatirim ve Kredi Bankasi (SYKB) respectively, covered under one appraisal report, for private sector textiles and the third to SYKB for labor-intensive industry (PPAM, para. 30). 7. The main objectives under the TSKB loans were to help promote exports (in the first laan subsidiary objectives were lending in the less developed regions and to small- and medium-scale labor-intensive industry) and to help improve TSKB's institutional capability. The main objectives under the textile sector loans were to help modernize aud increase capacity in the private sector textile industry with a view to increasing its export potential, particularly of the garments and knitting subgroup in the sec- tor. The objective of Loan 1952-TU was to generate employment oppor- tunities in urban centers through the financing of small- and medium-scale industry. In the case of the three sector loans, the Bank also sought to open another channel for on-lending to private sector industry thLough DFCs and had institution-building objectives, particularly improvement of appraisal capability and supervision procedures, for SYKB (PPAM, paras. 31-35, 37-38, 40-41, 45). 8. The design of the projects involved, under the first DFC loan, setting up targets for lending to various categories (exports, less developed regions, employment generation -- the second DFC loan was essen- tially entirely for exports); allocating funds to various textile sub- groupings under the two private sector textile loans; and, under Loan 1952-TU, arranging with a commercial bank (Is Bankasi, the largest shareholder in SYKB) to ensure distribution among various urban centers, and allocating one-third of the funds to small-scale industry. All the loans also had technical assistance components, intended to further the loan objectives, in particular by providing for training of DFC staff, studies of the textile sector and of export markets for textiles, and, under Loan 2093-TU, consultancy services to small- and medium-scale industry (PPAM, paras. 36, 39, 42-44, 46). 9. TSKB achieved less than half the total projected approvals set out in the appraisal report for Loan XIII. Foreign currency approvals were projected at US$322 million for the two years 1979 and 1980. In the previous two years, 1977-78, TSKB foreign currency approvals had amounted to only US$140 million. An increase of 65? per year was thus projected for the 1979-80 period. Bearing in mind the economic uncertainties, it is no surprise that there was little increase in the level of approvals actually - xviii - achieved. This amounted, in gross terms, to $179.5 million (and $139.4 million net of cancellations). The investment climate was sluggish but, even if demand had been strong, TSKB had neither tie resources nor the ability to raise additional foreign currency funds as the international market, by early 1977, was closed to Turkey. In this scenario, a 65% annual increase in projected approvals was not justified. Therefore, that TSKB would fail to reach the forecast apprivals was inevitable and should have been foreseen. 10. TSKB's efforts in meeting the subsectoral targets were only modestly successful. $115 million was envisaged for export-oriented projects but $86.5 million was actually financed. Four projects achieved the 30-40Z level of exports instead of nine as forecast; 13 had been forecast as exporters but only ten had undertaken some exports and, of these, the exports of three were notional. The subsectoral targets for small- and medium-scale industry was set at $35 million but loans for only $5.6 million were approved. The forecast and achievements for the least developed region were $90 millio-i forecast against $46.0 million actually approved and, for the semi-developed region, $50 million forecast against $48.8 million actually approved. The subsectoral approvals clearly show TSKB's shift cut of high risk lending to small- and medium-scale labor- intensive industry and in least developed areas. Export-oriented projects are largely owned by well established industrial groups with strong financial resources. TSKB was obviously looking to improve its portfolio, then facing considerable arrears (para. 19; PPAM, para. 71). 11. The projected loan approval situation under Loan XIV, compared to what was actually realized, proved to be similar to that of Loan XIII. Although the appraisal report forecast foreign currency approvals of US$316.0 million in 1982 and 1983, US$122.3 million was actually approved in this period (eventually diminished to US$56.3 million as a result of subsequent cancellations). During this period, investors were avoiding the assumption of any exchange risk, and thus foreign borrowings. In 1982 the dollar rose in value against the Turkish Lira by 46?, and in 1983 by 39.3Z. However, during the appraisal of Loan 2093-TU in 1981, the situation was little different with the dollar's value increasing by 462 against the TL, the exchtge rate falling from TL 91.75 to TL 133.63 to the US dollar. Given the investors' reluctance to take any exchange risk, and net foreign currency approvals of only US$79.1 million and US$15.1 million in 1980 and 1981 respectivcly, it is difficult to explain the high projected approval figure of $316.0 million for 1982-83. The Loan's subsectoral objective was aimed solely at exports. Fifty of the 62 subborrowers (with eighty sub- projects) are exporters and, of these, 32 were expected to export 30-40? of output but only 13 were able to meet this export level. Despite TSKB's failure to achieve the export targets under both the Loans, TSKB had clearly shifted its focus to the financing of export-oriented projects (PPAM, para. 72). 12. Nineteen subprojects were financed under Loan XIII but TSKB was unable to disburse the full amount; $9.05 million, 15? of the Loan amount of $60 million, was cancelled. Depressed demand, high inflation and entre- preneurs' reluctance to accept an exchange risk led to slow use of this - xix - Bank Loan. It is only with FERIS being introduced in April 1984 that approvals escalated with disbursements rising rapidly from 1985. Without FERIS, this Loan would have languished. The closing dates under both Loans were extended, nine months for Loan 1748-TU and six months for Loan 2093-TU (PPAM, paras. 73, 74). 13. Thirty-six subprojects were financed under the private sector textile project (Loans 1754-TU and 1755-TU) and 114 under Loan 2093-TU. The Bank gave waivers to TSKB on the distribution of Loan 1754-TU between the subgroupings in the textile sector; SYKB met the allocation targets set for it by the Bank. Under Loan 2093-TU, SYKB met (and exceeded) the Bank's targets for the number of jobs generated and the amount on-lent to small- scale industry. The arrangement with Is Bankasi to use its branches for broadening the geographic spread of subprojects was not successful due to the lack of referrals of projects from the branches;1 57Z of subprojects under Loan 2093-TU are located in Istanbul, Bursa and Izmir. The export targets under the three sector Loans have not been reached so far (PPAM, paras. 64-66, 109-114). 14. Technical Assistance: The effect of the technical assistance under Loan XIII components was unexpectedly deep. A substantial program vas carried out whereby TSKB staff was trained to prepare export market studies. This portion of appraisal reports is now well prepared. Studies on Turkey's export potential and for specific subsector studies were also undertaken. About half the $0.7 million set aside for technical assistance was diEbursed. The TA components under Loan XIV were only partially implemented but such reports as were prepared with the support of foreign consultants were well received by industry. Only $0.5 million of the $2 million TA component for studies was expended. International bidding and payment of TL expenditures by TSKB helped to minimize expenditure but the cost of foreign consultants and TSKB's reluctance to incur foreign currency costs did curtail greater use of the TA component. The $2 million set aside for lending to subborrowers for their own TA program was not utilized at all. TSKB has maintained that subborrowers were unwilling to use foreign currency, with the attendant devaluation risk, for consultancy services in that pre-FERIS period. A more forceful effort, through seminars and workshops, could well have brought about greater use of these funds, and improvements in the recipient projects. TSKB essentially opted not to pursue the matter (PPAM, paras. 50, 51). 15. The private sector textile and labor-intensive industry projects had strong technical assistance elements, comprising sectoral objectives and institution-building efforts through staff-training. The staff training element, as noted earlier, operated smoothly and effectively. Under the textile project, a large amount was provided to TSKB mainly to 1/ Due to the sluggish investment climate, not many encouragement certificates (the Government certificate on the basis of which incentives are granted) were requested, or issued. Each new certificate holder was directly approached by SYKB. The opportunities, therefore, for Is Bankasi branches to secure viable projects for financing under Loan 1952-TU were pre-empted by SYKB. - xx - build up textile activities through research on export markets and the modernization needed to meet such markets. Apart from work in this field, the main contribution of TSKB under this part of the project was to promote and set up Textile Development Services, Inc. (TDS), in collaboration with a Swiss textile consulting firm. TSKB and SYB are major shareholders in this company. TDS is now a successful textile consultancy company. It has undertaken studies for the public and private sector, in Turkey and abroad (PPAM, paras. 61, 62). 16. The performance of the Technical Assistance Fund, set up under Loan 1952-TU to provide consultancy assistance to small- and medium-scale industry, did not come up to expectations, mainly because of the reluctance of small enterprises to bear a part of the cost of such services. As a result, SYKB used a part of the funds, with the Bank's approval, for its subscription to the share capital of TDS.2 However, such use did not meet substantively the particular objectives for which Loan 1952-TU was provided, namely the encouragement of employment through general small- and medium-scale industry development, in that it was specialized in one industry and not limited in the size range of enterprises it covered. The Bank's assessment of demand for consultancy from small-scale industry and its willingness to bear even a part of the cost of such service proved over-optimistic (PPAM, para. 63). Institutional Performance and Prospects 17. TSK3 is the first development bank which the Bank helped to estab- lish and the first one to which it made a Loan. Since its establishment in 1950, it has received 16 Bank loans. It has built up an excellent appraisal capacity, and its industrial development capabilities and perfor- mance are widely recognized in Turkey. Its main shareholders have been a number of local banks, with Is Bankasi, Turkey's largest financial con- glomerate and closely associated with the Government, as its largest share- holder. TSKB's shareholding base, however, has narrowed over the years. In 1979 its five largest shareholders held 62.7Z of its shares; now the five largest hold 85.6%. Despite the narrower base, and Is Bankasi's individual shareholding of 43.6%, TSKB retains its autonomy and its project decisions are based on technical appraisals (PPAM, paras. 67, 83). 18. TSKB's foreign currency loan approvals declined during the 1980-83 period when the investment climata was dismal. In 1984, there was a marked change with the introduction of FERIS; TSKB foreign currency loan approvals rose sharply, and have continued at the higher level. 1988 shows further improvement. Throughout the 1980s, TSKB's loan operations have shifted to export-oriented projects, conforming fully to the Government's declared policies, from the earlier focus on lending in less developed regions and 2/ SYKB notes that the promoters of small enterprises are often relictant to reveal their problems to outsiders, and thus to seek technical assistance. SYKB also notes that in recent years it has used some funds from the Technical Assistance Fund to make a donation to Small Industries Development Organization in connection with the follow-on Small and Medium Industrier Loan Project (see attached comments from SYKB). - xxi - to small- and medium-scale labor-intensive industry. Bearing in mind the low market demand situation, high inflation and entrepreneurs' reluctance to assume an exchange risk, and high interest rates (private sector manu- facturing investment was negative in 1979-81 and marginal in the subsequent two years, 1982 and 1983), the appraisal forecasts for Loans XIII and XIV prepared during these times were clearly exaggerated, and impossible for TSKB to achieve. Only half of the forecast foreign currency approvals (about one-third, if cancellations are taken into account) was finally achieved and this only because FERIS was Introduced in April 1984. More- over, with Turkey's creditworthiness problems, already known at the time of Loan appraisal, it was a fiction to assume a large foreign currency resource mobilization program to support the Bank's overly optimistic fore- casts of project approvals. Although, in the early 1970s before the first oil shock of 1973, TSKB could have raised money on the U.S. and European markets, it was under no pressure to do so either from the Bank or its Government, and it continued with the soft option of looking to the Bank for its long-term foreign currency resources, and on the Government and its shareholders for its term TL resources. This remains the overall situation today. During the decade 1979-88, foreign currency disbursements were 73Z of the total, with IBRD loan disbursements amounting to about wo-thirds thereof, highlighting TSKB's heavy dependence on borrowings from the Bank (PPAM, paras. 70-75, 81-85). 19. The economic adjustment and liberalization measures, commencinG in 1979, placed enormous pressures on enterprises, established earlier under Turkey's protection-driven import-substitution strategy. These enterprises were neither competitive nor efficient. High inflation and interest rates, a depreciating TL and depressed demand added severely to their problems. The portion of TSKB's portfolio that proved the weakest was located in the less developed regions where, at the Bank's insistence, TSKB had been active in project financing. Soon its portfolio was weighed down by arrears. TSKB has struggled to improve its portfolio since 1980 and only in 1987 were the first benefits visible. This severe arrears problem during 1980-86 also made TSKB illiquid and impacted very adversely on profitability. To support this weight of arrears, TSKB borrowed short-term money at high cost as lower cost long-term debt had to be repaid. Its profitability was tenuous until 1987 when, with the Bank's restructuring effort described in the Industrial Export Development Project appraisal report (No. 6885-TU dated December 14, 1987), profitability and viability were regained. In 1988 and early 1989, TSKB-s financial situation further strengthened both structurally and profit-wise (PPAM, paras. 78-80, 86-88). 20. Since improvement of its arrears situation and financial position, TSKB has undertaken some modest diversification measures: lease financing through a joint venture, raising short-term TL funds in the market to lend for clients' working capital, and dealings in foreign currency. More substantive measureq are, however, required (PPAM, para. 94). 21. SYKB was set up in 1963 by five banks, with Is Bankasi holding 60% of its share capital, to provide permanent working capital to industry. Loan 1755-TU marked the beginning of its association with the Bank, and the Bank has played a significant role both in the expansion of its operations - xxii - and in improving its institutional capability. SYKB made rapid progress, particularly after 1984 when FERIS was introduced, with its portfolio increasing at 20Z p.a. during the period 1984 to 1986. Its operations, however, are now wholly in foreign currency loans, provided predominantly by the Bank and dependent upon FERIS for demand (PPAM, paras. 54-60). 22. SYKB's operations and staff increased in the 1980s, and its port- folio has remained healthy, though showing some sign of deterioration in recent years. SYKB has improved its supervision procedures and organiza- tion, and generally takes prompt action in cases of default, thus evidencing awareness in dealing with its portfolio problems. As suggested by the Bank, it has put its portfolio supervision activities on a regular basis, and has now set up a separate unit within its organization to carry them out. It has also branched out into tourism. The profitability of both the DFCs is low, with the return on equity being well below the infla- tion rate in the economy (PPAM, paras. 96-102). 23. Overall, the too institutions depend upon the Government (directly in the case of TSKB and through the Central Bank's rediscount facilities in the case of both) for their local currency resources, and upon interna- tional and regional agencies, mainly the World Bank, for their foreign currency resources. To secure resources during the past decade from the U.S. and European markets was not an option for these institutions, in view of Turkey's creditworthiness difficulties; TSKB has to a limited extent tapped the Japanese market. Both TSKB's and SYKB's operations in foreign currency depend upon a continuation of FERIS, and to the extent that their TL lending is linked to their foreign currency project lending, in the absence of FERIS, the base for their TL lending would also disappear. It is difficult to foresee future developments in the Turkish economy but, in the areas which concern DFCs, TSKB and SYKB are strongly positioned to identify activities which fit in with their comparative advantages. The two DFCs need to decide their strate - options in the light of develop- ments in the economy, and improve their institutional capabilities in the fields chosen (PPAM, paras. 92-95, 100-104). Findings and Lessons 24. The two Loans to TSKB played an important role in sustaining its operations; however, the projects were misdesigned, and both Loans failed to reach their principal objectives in terms of operations and institution building and only partially met subsectoral targets. The three sector Loans broadly achieved the goals sought to be reached under them, with the caveat that TSKB did not reach the targetted distribution among textile subgroups and SYKB subprojects under Loan 1952-TU showed some conc atration in Istanbul, Bursa and Izmir (PPAM, paras. 115, 118, 120-122). 25. The two institutions are efficient on-lenders of funds raised by them. Their appraisal studies are of good technical quality, and under- taken without delay. The projects selected have satisfactory financial and economic rates of return. However, their operations are predominantly in foreign currency, depending upon resources raised mainly from the World - xxiii - Bank and the demand for them upon the continuation of FERIS. This depen- dence on the Bank and, consequently, on FERIS constitutes a high risk for the two institutions. They need to diversify their activities (PPAM, paras. 123, 127). 26. The experience under the projects provides important findings and lessons for the Bank. As has been noted with a number of other projects reviewed by OED, the economic environment plays a critical role in influ- encing DFC operations and portfolio. The Bank's SAL and sector operations in the 1980s have helped in improving the overall growth rate. As a result, the investment climate for private sector industry, and thereby the climate for DFC operations, improved in the second half of the 1980s. On the other hand, the continuation of inflation has brought about the adverse developments now tiking place in the financial market. The observed developments are a highly differentiated interest rate structure, exclusion of term funds from the market, reliance upon Government for medium-term TL funds and FERIS operations, and financial disintermediation in the industrial sector. A gradual rationalization of the financial market would assist the financial intermediaries in their respective rol:ts (PPAM, paras. 128-130). 27. The Bank needs to be sensitive to emerging economic trends in its fo ecast of DFC operations. Its failure to do so in the case of the two DFC Loans led to its setting exaggerated targets for TSKB operations and their consequent under-fulfillment. It also led to misjudgment of TSKB as an institution and of its ability to contribute to industrial growth. Moreover, before any change in the direction of DFC operations is initi- ated, it is necessary to carry out an effective study to determine its likely impact on the DFC -- TSKB's portfolio problems arose partly out of a misguided entry into lending to enterprises in less developed regions, at the Bank's insistence, without a study of the comparative advantages of different locations. 28. As these and other projects reviewed by OED have demonstrated, it takes time and resources to improve the portfolio and operations of a DFC when these have deteriorated. The Bank's support to TSKB through loans and advice in the 1980s, together with the funds provided by its shareholders and the Government, have played an important role in resuscitating TSKB. Lorag-term commitment to a DFC by the Bank is essential to enable it to cope with the vicissitudes in its economic environment (PPAM, paras. 133-135). 29. The shift in the Bank's DFC lending practices in the late 1970s and early 1980s, using more than one institution for on-lending in a coun- try and choosing specific sectoral objectives (e.g., export promotion, textiles, employment generation), has been successful, as the experience under the sector loans covered by this report shows. This strategy has helped broaden the Bank's institution-building role, provided a choice of institutions to local entrepreneurs, and increased the geographic spread of its funds. However, a proper economic environment -- or a safeguarding mechanism -- is required to ensure a viable investment climate for the private sector, and the introduction of FERIS was needed to stimulate demand for medium-term foreign currency funds (PPAM, paras. 119, 132). PROJECT PERFORMANCE AUDIT MEKEORANVu TURKEY FIVE DFC AND INDUSTRIAL SECTOR PROJECTS (LOANS 1748-TU, 2093-TU, 1754-TU, 1755-TU AND 1952-TU) I. BACKGROUND 1. The period since 1979, when the first three of the five Bank Loans (Loans 1748-TU, 1754-TU and 1755-TU) covered by this report were approved, has been marked by unusual economic developments in Turkey. The economic difficulties, reflected in an upsurge in prices and increasingly adverse external balance, which began in 1976-77, were accentuated by the oil-price rise of 1979-80. The Government sought to meet these difficulties by undertaking a series of adjustments in economic policies in 1980, com- prising mainly a movement away from the earlier import-substitution strategy, a reining in of Government expenditure and of investment in State Economic Enterprises (SEEs), and a general liberalization of the economic regime, reducing, in particular, quantitative restrictions on imports and encouraging exports. 2. The Bank's response to these moves of the Government in the eco- nomic area was positive, reflected both in an increase in the pace of lending to the country since 1980 and in the areas supported by such lending. Total Bank lending to Turkey during the eight years FY1981 (when the structural adjustment process started) to FY1988 amounted to US$6,722.3 million (against US$2,059.0 million in the eight years FY1973 to FY1980); lending for structural and sectoral adjustment during the period amounted to US$2,881.3 million, 43X of the total (as against nil during the FY1973 to FY1980 period).1 Economic Developments 3. Four developments in the economy of Turkey during the period 1979-88 are of particular relevance to the performance of the Loans covered by this audit. Firstly, following the economic crisis of the mid- and late 1970s, the Government moved away from a policy of import substitution and direct Government investment in industry towards one of economic liberali- zation, in particular, support of an export promotion strategy, greater 1/ OED findings on the five structural adjustment loans of US$1,556.3 million, approved during the five years FY1981 to FY1985, are covered in OED Reports (Nos. 4015, 5763 and 7205) issued in June 1982, June 1985, and April 1988. The financial sector adjustment loans (Loan 2714-TU and Loan 2965-TU) are still to be audited. The Bank also approved adjustment loans in the agricultural and energy sectors for a total amount of US$625 million. - 2 - reliance on private sector for industrial investment, and greater freedom in financial markets. Secondly, the Government set the exchange rate for the Turkish Lira (TL) free, leading to a fall in its external value in keeping with the inflation rate. Thirdly, while the Government brought down inflation from the above-100Z rate in 1980 to about 502 by 1984, inflation, fed in part by budget deficits, has continued to remain high (in the 30-40% range) in ensuing years, rising to almost 70% in 1988.2 Finally, the Government introduced in April 1984 the Foreign Exchange Risk Insurance Scheme (FERIS), covering exchange risk on borrowings from speci- fied financial institutions for eligible investments. Turkiye Sinai Kalkinma Bankasi (TSKB) was covered under the scheme in July 1984 and Sinai Yatirim ve Kredi Bankasi (SYKB) a little later. 4. Price and Exchange Rate Movements: Economic difficulties in the second half of the 1970s had led to a reduction in the growth rate of the economy, and GDP showed small declines in 1979 and 1980. Government meas- ures in 1980 towards economic liberalization, changes in development strategy, and steps to control inflation reversed the recessionary trends in the economy. The GDP growth, after being negative in 1979 and 1980, became positive in 1981 (Table 1). Table 1: GROSS DOMESTIC PRODUCT, 1978-88 1978 4.8 1979 -0.6 1980 -0.6 1981 8.6 1982 4.5 1988 8.9 1984 6.0 1985 4.2 1988 7.3 1987 6.6 1988 a 6.2 La State Institute of Statistics (SIS) *stiate of December 1988. 5. The rate of inflation was brought down from 107% in 1980 to 37% in 1981, and the TL, under the floating exchange policy, declined sharply from TL 77 (average) to one US dollar in 1980 to TL 113 in 1981 (see Table 2). 2/ Early in 1989, the Government announced across-the-board cuts in public expenditure to reduce the fiscal deficit, thereby to contain the inflationary pressures in the economy. - 3 - Table 2: FOREIGN EXCHANGE RATE AND INFLATION, 1978-88 Increase In the Rate of Year Exchange Rate La Foreign Exchange Rate Inflation Lb (TL per US81) () () 1978 24.8 - - 1979 81.1 68.06 68.87 1980 78.0 99.32 107.25 1981 111.2 45.61 86.77 1962 182.6 48.00 27.00 1988 225.5 89.84 80.50 1984 88.7 60.76 50.80 19865 622.0 41.66 48.20 1966 674.5 81.46 29.60 1987 657.2 26.06 82.00 198 1,468.1 65.70 68.08 La Annual average. /b SIS wholesale Index. 6. The shift in the Government's development strategy had other con- sequences on the economy, in particular, on exports and on investment in the export sector. The depreciation of the TL helped particularly to pro- mote exports, thereby reversing the trend in the balance of trade deficits noticed in the late 1970s (see Table 3). The trade deficit which was al- most $4 billion in 1980, declined to $2.6 billion in 1982. Table 8: FOREIGN TRADE AND BALANCE, 1978-88 (USS MilIon) Imports Exports Trade Deficit 1978 4,224 2,298 1,78W 1979 4,435 2,281 2,174 1980 6,920 2,910 4,010 1981 8,567 4,708 8,864 1982 8,518 5,890 2,628 1988 8,895 5,905 2,990 1984 10,881 7,889 2,942 1986 11,280 8,265 2,975 1986 10,664 7,598 8,081 1987 18,56 10,822 8,284 1988 (Nov.) 12,837 10,162 2,675 Sources: International Financial Statistics and, for 1988, SIS. -4- 7. Impact on Industry: These developments had a significant impact on industry. The shift in Government policy from promotion of import-sub- stitution industry towards general economic liberalization and export pro- motion led to a shift in demand, leading to recessionary trends in many industries set up in the 1970s. Moreover, entrepreneurs who had set up industries with foreign exchange loans found their TL liabilities rise sharply as a result of the depreciation of the TL. 8. The changes, therefore, also had serious consequences for develop- ment finance companies (DFCs) like TSKB, many of whose clients found it expensive and difficult to implement or operate projects initiated or com- pleted by 1979. While their project costs had risen (in TL terms) as a result of the depreciation of the TL, their market expectations were not reached owing to the recessionary trends in the economy. Even more perni- cious for TSKB was the inability of its many clients to meet their increased TL payments on their foreign currency loan installments. TSKB's portfolio was weighed down by arrears. SYB escaped this fate only because its operations were predominantly in local currency till the late 1970s, mainly for the permanent element of the working capital needs of its clients. Given the economic environment, approvals and disbursements of the two institutions under the Bank's Loans were low, in relation to Bank projections, in the years till 1984 when FERIS was introduced. 9. Beginnings of Economic Recovery: In some respects, the year 1984 marked a turning point in the process of readjustment, with the GDP growth reaching 61. In this year the Government also introduced FERIS, discussed in greater detail below, which led to a revival of foreign exchange bor- rowing and investment activity based on such borrowing. The GDP growth rate has remained over 62 in all subsequent years, barring 1985. The external trade deficit stabilized at around $3 billion range in subsequent years; in 1988 (first 11 months) it was $2.68 billion (against $3.23 bil- lion for the whole of 1987 -- see Table 3), and it is reported that the current account balance (including invisibles like receipts from tourism and worker remittances) was for the first time positive in 1988 (a surplus of $742 million for the first 11 months of 1988 against a deficit of $529 million in the corresponding period of 1987). 10. The Government policy In respect of inflation has not been as consistent -- and, therefore, not as successful -- as in relation to its external account. The inflation rate, after being brought down to 27? in 1982 (and projected by the Bank in its economic and SAL reports to decline still further in the mid-1980s), has remained high, rising to 68% in 1988 (see Table 2). 11. The impact of these changes was reflected in industrial investment and the operations of the DFCs. There was a revival in investment, par- ticularly in export-oriented industries, in the second half of the 1980s, as reflected in the number of industrial certificates issued. With the cover available under FERIS, the demand for foreign currency loans also increased, as shown by rising approvals and disbursements of DFCs, including those of TSKB and SYKB, as will be detailed later. -5- Role of FERIS 12. The economic adjustment process had an adverse impact on invest- ment and on foreign currency borrowings in the early years. There was a sharp slowdown in foreign currency lending by DFCs, including TSKB and SYKB which had obtained Bank loans. To deal with this situation, the Government introduced FERIS in 1984. Under the scheme, the foreign currency loan is denominated as a TL loan at the exchange rate prevailing at the time of borrowing, and a rate of interest, fixed over the life of the loan, is charged on the loan. The scheme applies to all approved foreign currency borrowings from specified Turkish institutions and to the International Finance Corporation (IFC). The interest r2te initially set under FERIS was 26% -- below the inflation rate at the time (and also the rate of depreciation of the TL, see Table 2). Originally, it was expected that the inflation rate would decline in later years, falling even below the interest rate, so that the loss under FERIS in the initial years would be neutralized by the surplus earnings in the latter part of the FERIS loan period;3 this did not happen. 13. The below-cost element in FERIS can be divided into two specific components: firstly, as constituted, no separate insurance premium is charged on the exchange cover, so that the user of foreign exchange obtains the cover at zero premium against higher TL payments (an average compound rate of 40% p.a. during the four years since 1984) on the principal amount under the loan; for example, a principal amount of US$1 million (equivalent to TL 368 million), borrowed in 1984, had the local currency equivalent of TL 1,800 million at the end of 1988, though under FERIS the borrower's liability has remained at TL 368 million; no specific premium rate is fixed for this service. Secondly, FERIS provides cover over a medium-term (5- to 8-year) period. The interest rate fixed under FERIS has been lower than the inflation rate, so that the loan under FERIS carries a negative real interest rate; for example, the interest cost under a FERIS loan taken in 1984 at a nominal interest rate of 26Z has been an average -14% in real terms, given the average inflation rate of 40Z during the 1984-88 period.4 14. Demand for Foreign Currency Loans: The main role of FERIS was to revive demand for medium- and long-term foreign currency funds which had almost dried up by 1983 as a result of loss of confidence in the external value of the TL. The Bank has been a direct beneficiary of this revival, not only through faster approvals and disbursements of its loans under implementation in 1984, but also through the demand for new credits generated by investment demand fostered by access to FERIS facilities. Many industrialists whom the OED mission met in early 1989 expressed a 3/ As a normal rule, no prepayment is allowed under loans covered by FERIS. 4/ FERIS borrowing offers some other advantages, for example, enabling capitalization of half the interest cost on such borrowings during the implementation period; this reduces the financial needs of a project during such period. It further offers an additional exchange rate cover and interest rate subsidy on the amount capitalized, assuming that TL continues to depreciate over the repayment period and the inflation rate remains higher than the interest rate under FERIS. -6- strong reluctance to borrow funds on medium-term unless they had an ade- quate exchange cover, a view also confirmed by TSKB and SYKB officials who consider that the demand for foreign exchange loans would dry up if FERIS were discontinued. The experience of bearing exchange risk in the seven- ties (incidentally, still reflected in TSKB's portfolio) has been too traumatic for industrialists to resume borrowing on such terms. Despite the liberalization policies followed by the Government, business has still not regained confidence in foreign currency borrowing owing to continued inflationary pressures and depreciation of the TL since 1984 at rates varying between 302 and 70% during 1985-88. 15. At the project level the most important consequence of FERIS has been the demand it has generated from users of foreign currency funds. The facets of this demand are manifold. Firstly, the demand is for foreign exchange.5 Secondly, the demand is for medium-term, mainly 8 years. Because of the grace period of 3 years, successful enterprises can build up financial liquidity in the initial years at low cost which they can, and in fact do, use for local currency operations, lending mainly to their cus- tomers. Thus, thirdly, the foreign currency borrowings under FERIS simul- taneously create TL liquidity in the market; and help suppress the rise in free market interest rates in the system (and thereby fuel inflationary pressures in the economy) through trade credits advanced by manufacturers; FERIS loans have thus become a source of extra profits to the borrowers (or users) of such funds. 16. It has to be recognized that FERIS involves a substantial subsidy to borrowers under it, and has an impact on demand for foreign exchange and generation of TL liquidity with borrowers. Given the inflation and exchange rate depreciation since 1984, the subsidy involved in the interest rate arrangement under the scheme for the early (1984-85) loans has increased due to the initial low FERIS terms. Subsequent adjustments in the scheme, including changes in interest rates, have reduced, but not eliminated, the interest (and the exchange rate) subsidy.6 17. The FERIS account is currently in surplus, as repayments under loans covered by it are small in relation to interest earnings from accumu- lated past loans. However, even if the inflation rate stabilizes (say, at the average of the past five years), the scheme is likely to show large losses both under individual accounts and as a whole. Such losses can be reduced if the Central Bank were to invest the present notional surplus 5/ Local currency funds on almost similar terms are also available under rediscount terms for preferred credits, though, incidentally, such rediscount funds have to have a counterpart, about 20%, from the local lender, thereby making such funds more expensive than under FERIS. 6/ Government introduced in March 1989 a variable rate FERIS under which a borrower is given an option to take loans under the scheme at a variable rate, the initial rate set being 601 (as against 45Z under the fixed rate arrangement); the borrowers' response to this choice will be worth following over the coming months. - 7 - under the scheme at going rates of interest, for example, by auctioning the funds, initially among commercial banks and large industrial and commercial houses. Apart from benefitting the FERIS fund, such a policy would have two other advantages: it will relieve to some extent the present strin- gency of TL funds in the market, and help reduce, however marginally, their cost, thereby to some extent reducing the high real rates of interest on TL funds (see para. 23 below) and the wide disparity between the local and international interest rates. Secondly, it will be an interesting financial liberalization measure, creating a free market for a small part of local lending/borrowing operations. 18. Need for an In-depth Study: FERIS has been covered under the Bank's financial sector adjustment loans, and has been a subject of discussions between the Government and the Bank, as also of internal Bank notes and memoranda. It is suspected, however, that its implications for the monetary equilibria (including those of the foreign exchange) are not yet fully assessed or even understood. Its role and impact need to be systematically analyzed under the Bank's economic and sector work, now that FERIS is completing five years. Such an evaluation should cover both a financial and an economic cost-benefit analysis of the scheme, including investment, foreign exchange earnings and employment generated by investments covered under the scheme; in particular, it should be possible to collate the charges under the scheme in order to determine the relationship of the price paid to the benefits obtained under the scheme. The data needed for such an evaluation is available with the institutions covered by the scheme. Perhaps the Bank should initiate such a study, as part of its economic and sector work, at least in terms of the implications on the use of its funds. The basis for such a study could be the data from the institutions it has financed. Developments in the Industrial and Financial Sectors 19. Industrial Sector: In the period before 1977,7 Turkey followed a deliberate strategy of import substitution for industrial development. Introduction of modern, advanced technology was another strategic objec- tive, and also a shift from consumer goods to intermediate goods industry. The incentive system was geared to this strategy. Industrialization pro- ceeded rapidly and steadily under the aegis of the first three five-year plans. During the plan periods 1962-77, industry's share of GDP increased from 13Z to 18Z, with an annual average growth rate of about 10. These glowing indices belied a number of serious deficiencies in the nature of this growth; industry's weak competitive capability, sub-optimum scale, slow project implementation augmenting project costs, low capacity utilization due to lack of shift work, poor quality domestic inputs, anti- trade bias (the domestic market was rendered more profitable than the overseas market), relatively high capital intensity (import nf modern 7/ For further particulars, see "Private Manufacturing: Assessment of the Impact of Past Policies and Future Adjustment Needs" (Report No. 6684-TU dated July 21, 1987) and "Industrial Export Development Policies" (Report No. 6685-TU dated December 14, 1987). -8- technology involved high costs), high degree of import dependence (particularly in the non-traditional subsectors, e.g., pulp and paper, machinery, dyes and chemicals), and low efficiency (relatively high cost for poor quality). Concerning the division of industry between the public and private sectors, the public sector has virtually irremediable structural problems, such as poor choice of investment, locational difficulties, technical problems, personnel overmanning, management turnover, low capacity utilization and substantial deficits. The private sector, on the other hand, has historically invested in profitable enterprises. 20. The export orientation of industry that commenced in 1980 through incentives, import liberalization, redirection of resources, and FERIS has increased exports dramatically (see Table 3 above). This change has been led by the private sector whose capacity utilization increased from 53? in 1979 to 74Z in 1986. Textiles were Turkey's largest export commodity with 42Z of manufactured exports in 1980, and although textile exports grew by 27Z p.a. until 1986, its share of total manufactured exports declined to 35? as other manufactures' exports increased more rapidly. Turkey's export prospects are bright; it needs, however, to continue its shift out of textiles i view of quota problems in developed countries. To do so, it has to improve quality and diversify products in other subsectors which, in view of its already high capital utilization rate, calls for additional investment (paras. 1.09, 1.13 in the Sector PCR8 deal with these trends). 21. Financial Sector: The developments in the economy in the 1980s have had their implications for, and impact on, the financial sector and its clients in the industrial sector, not all expected or anticipated.9 Simultaneously, the Government was also making changes in its industrial and financial sector policies. 22. Government policies and actions have covered two main areas in the financial sector. Firstly, as described in the earlier section on economic developments, the Government instituted FERIS in 1984 and also continued to supply, through the Central Bank's rediscounting facilities, local currency funds at low (below inflation and market-determined) interest rates to preferred sectors as defined. Secondly, the Government redefined its incentive system for industrial promotion, varying both the industries covered and the scale and form of incentives provided; the main focus of industrial development policies was towards export promotion and encourage- ment of private initiative. 8/ The "Sector PCR" refers to the PCR covering Loans 1754-TU, 1755-TU and 1952-TU. The OTSKB PCR" refers to the PCR covering Loans 1748-TU and 2093-TU. Both PCRs are attached to this Memorandum. 9/ For a review of these developments, see the reports (Report No. P- 4258-TU, and P-4784-TU) on the financial sector adjustment program supported by the Bank. - 9 - 23. Interest Rate Structure: Strong inflationary trends throughout the 1980s have led to a shortening of the maturity period for both domestic lending and borrowing, to mostly one year or less. Medium- and long-term operations in the financial market are based only on preferred rediscount facilities for TL credits offered by the Central Bank and on FERIS in respect of foreign currency loans. Secondly, there has emerged a wide disparity between domestic and foreign interest rates: in the domestic market, preferred credits (including loans covered by FERIS) carry interest rates below the domestic inflation rate (currently, for example, the total cost of preferred credits to the final borrower is below 502 p.a. against a domestic inflation rate of nearly 702 in 1988 -- and a forecast 60Z for 1989). Most other transactions in the credit markets -- normal commercial bank loans, trade credits -- take place at rates of interest ranging up to 1002 or more p.a., far above the inflation rate, leading to real interest rates of 30Z or more.10 Thirdly, implicit in the above is a manifold frag- mentation in the domestic financial market with varying interest rates in different subsectors. Fourthly, while the annual volume of preferred credits provided by the Central Bank has declined, it still forms a sub- stantial part of total bank credit (about TL 2,500 billion out of a total credit of about TL 17,500 billion at the end of 1988), with annual outflow of about TL 300 billion; the share of credit to industry in the total preferred credit is around TL 550 billion, about one-fifth. 24. Liquidity in Industry; The financial liquidity of many enter- prises in Turkey is high for various reasons: the lag between earnings flowing from projects and repayments under FERIS loans;11 the quick turn- around of funds in export markets where sales are made against delivery or on short letters of credit; and deferment of corporate tax liability under investment incentives, particulariy exemption of tax equivalent to a part of the investment made. As a result, many enterprises have small or no commercial bank borrowings (other than those at preferred rates as under FERIS and export incentive arrangements), and extend credits to their domestic wholesalers.12 This financial disintermediation process, observed in many instances at the enterprise level, appears to be confirmed at the 10, The high interest rate charged by commercial banks reflects the high reserve requirements in Turkey, inadequately remunerated, which raises the cost of loanable funds from commercial banks. 11/ The favorable liquidity position would, of course, be reduced when repayments start under FERIS and the tax liability commences after the tax holiday period -- except that it is possible for an entrepreneur, if the present arrangements continue, to keep investing and borrowing on preferred terms, thus, at least, postponing net repayments under FERIS and tax payments on corporate earnings. 12/ For a group of 65 companies financed by TSKB, it was found that their trade receivables had increased from TL N9.53 billion in 1982 to TL 562.69 billion in 1987 while their short-term bank borrowings had risen from TL 38.63 billion to TL 385.52 billion over the same period. - 10 - macro-financial level: some official data indicate that bank lending to industry as a proportion of total bank loans has declined over recent years. 25. One consequence in the banking sector is that the banks have less business with good (high-earning, viable, creditworthy) clients for their normal commercial bank lending. As a result, apart from the deterioration in their portfolio following the recessionary trends in the late 1970s, the quality of the overall commercial banking portfolio can be expected to have further worsened. The commercial banks' reluctance to undertake external audits and to make provisions against losses on the basis of findings of such audits, as required (and agreed to by the Government) under the Bank's Financial Sector Adjustment Loan, also leads to an adverse inference on the quality of the portfolio. 26. Implications for Financial Institutions: These developments in the financial sector have consequences for bank and DFC operations, for the industrial sector, for central banking and for the Government's fiscal position. As regards the commercial banking sector and DFCs, their busi- ness operations have become partly dependent upon access to funds and credits trom official sources through rediscount facilities provided by the Central Bank. Access to such facilities requires the banks to use their own resources for a portion of such loans, but, overall, an important source of funds for such operations by the lending institutions is not their deposit-gathering activities but access to central banking funds. 27. As a result of its high liquidity, industry's need for access to outside funds, both loans and equity, has declined simultaneously as the Government has tried to develop a capital market in the country; this has happened despite inflationary pressures in the economy which generate a need for equity to match the increasing inventory and other items of costs working capital. Overall, therefore, industry is being increasingly insulated from banks and the capital market, the main source of contact between the two being industry's use of the financial sector as access to low-cost pref?rred credits. 28. In effect, therefore, the Central Bank has become a large player in the industrial (or, rather, "preferred") credit market, not merely pro- viding guarantees for external borrowings, but acting as a direct source of funds to the sector, using financial intermediaries only as conduits for such credits. Thus, *ow deposit mobilization at the resource end is matched by disintermediation of banks at the industrial user end, following increasing industrial liquidity. Preferred credits represent an injection of funds into the economy, the Government using the Central Bank as a channel for distributing such funds. Investmnt financed by such funds does not represent corresponding savings on the part of the Government, and, to the extent it is financed out of flows from reserve requirements, represents a transfer of banking funds to priority sectors at low interest cost, subsidized by the Government. - 11 - 29. These trends have their impact also on Government revenues. The Government's budgetary deficits hav? remained high,13 making partly for the continued high inflation rate in the country. The Government borrows on the market at high interest rates to cover a part of this deficit; such borrowing not only increases the interest burden of Government debt, but, being tax-free, also reduces the tax base for future Government revenue. At the same time, the Government extends various fiscal and monetary incen- tives to preferred economic sectors, as a result of which the Government makes a loss on its credit operations and loses tax revenue. This cycle of low Government revenues leading to fiscal deficits and thereby to inflation has continued through the structural adjustment era in the 1980s. II. PROJECT OBJECTIVES 30. Of the five Loans covered by this report, Loans 1748-TU and 2093-TU to TSKB, approved in June 1979 and February 1982, were essentially DFC loans, with both the Loans having an export orientation in the choice of subprojects. The other three Loans, Loans 1754-TU, 1755-TU and 1952-TU, were industrial subsector loans (the first two for private sector textiles, approved in September 1979, and the third for labor-intensive industry, approved in March 1981), using DFCs mainly as conduits for the distribution of the funds. Loan 1754-TU, though provided to TSKB, was for private tex- tile sector development, and all aspects relating to it are covered with the other textile Loan (1755-TU), provided to SYKB. The objectives, design and rationale of the Loans were derived from the differing characteristics of each project. 31. Following the increasingly difficult economic environment in Turkey since 1973, the Bank started a process of reviewing its lending objectives and strategy in the country. As a result, Bank lending to Turkey was to be aimed at supporting the country's efforts to improve itat (a) capacity to earn or save foreign exchange, through promotion of indus- trial and agro-industrial exports; (b) income distribution, employment opportunities and living standards, through rural and urban development; (c) lagging public sector savings, through the encouragement of improved management and financing of the investments of key SEEs; and (d) infra- structure posing bottlenecks for development. It was recognized that agri- culture and industry would remain the key sectors for lending. The designing of projects with an export orientation, and the Bank's initiative in doing so, were vital to the private sector and to the DFCs. Loans 1748-TU, 1754-TU and 1755-TU, approved in 1979, were in consonance with these objectives, in particular regarding export generation. 32. Soon after these Loans were approved, the Government of Turkey made further changes in its economic policy. Subsequent Bank lending to Turkey was aimed at supporting the economic policies initiated by the 13/ See Table 4.6, Evaluation of Structural Adjustment Lending in Turkey (OED Report No. 7205, dated April 13, 1988). - 12 - Government, especially: domestic economic policies aimed at establishing macroeconomic balance, increasing domestic savings, restraining public investment and reorienting it to reflect the priorities Implicit in the situation prevailing then -- especially completion of ongoing projects, empha.is on quick-yielding new investments, and balance of payments impact. Apart from structural adjustment lending, which the Bank had already insti- tuted in 1980, the Bank identified agriculture, industry and energy as key sectors for project lending; and in industry (including DFCs). 33. The five Loans were designed and appraised in a continuing period of economic recession which had commenced in 1977: high inflation, poor growth rates -- per capita GDP had declined in 1980 for the third year in a row -- increasing unemployment and large BOP deficits. All the Loans had in common this economic scenario which clearly affected the project design. 34. Loan 1748-TU. This Loan, known as Loan XIII (the thirteenth Loan made to TSKB) was for US$60.0 million. The objectives were to: (i) help TSKB bridge its financing gap until end-1980; (ii) enable TSKB to assist Turkish industry by giving priority to export-oriented projects; and (iii) help TSKB to finance projects in the backward regions, to promote newly established, broadly-owned enterprises and to foster small- and medium-scale labor-intensive (SMIs) projects.14 Under this Loan, the export-orientation goal was delineated for the first time. It was the precursor to subsequent Bank loans geared solely to export projects. A technical assistance (TA) component formed an important constituent, primarily to train TSKB's staff to appraise export-oriented projects, and also to undertake studies on Turkish industries' export potential, and specific sectors. An amount of US$0.7 million was allocated for TA purposes. 35. The project set out specific targets for TSKB's overall foreign exchange lending in 1979-80, included also in the Loan Agreement. Approvals of foreign exchange loans for the two-year period were set at: (i) US$115 million for export-oriented projects; (ii) US$90 million for projects in the least developed regions; (iii) US$90 million to the less se i-developed regions; and (iv) US$35 million to SMI. 36. Under Loan XIII, the concept was to prepare TSKB to change its focus to export-oriented projects without entirely relinquishing assistance to less developed regions (LDRs) and to SMI. This was the major theme under the earlier Loan XT when it was agreed that in 1975-76 TSKB would allocate at least 50% of its resources to LDRs. In fact, it allocated 562, compared to 102 in 1973. Assistance to LDRs was reinforced under Loan XII and TSKB was expected to place in 1977-78 (i) no more than 252 of its resources in the eight most developed regions, (ii) at least 40Z in the LDRs, specifically identified, and (iii) the balance in the semi-developed regions, also specifically identified. These targets were substantially met by TSKB. Between 1973 and 1976 it loaned an average of US$12 million per year for SMI. Under Loan XII, the target for SKI lending was further increased to US$30 million plus TL 500 million for the two years 1977 and 14/ The regional and SMI focus was begun with Loans XI and XII to TSKB. - 13 - 1978. TSKB met these targets with approvals amounting to US$36 million and TL 403 million. Although Loan XIII, as designed, still contained large allocations for LDRs and SMI (para. 89), the principal underlying concept was changed, and TSKB's prime focus was directed to export-oriented projects. 37. Loan 2093-TU. This Loan, known as Loan XIV, for US$100.0 million to TSKB and described as an Export-Oriented Industries Project, stipulated these objectives: (a) financing investments to improve capacity utiliza- tion with emphasis on exports; (b) improving existing export capability; and (c) continuing the development of TSKB's capability to promote and finance export-oriented projects, and to identify technical assistance needs and to meet them. A substantial component (amounting to US$4.0 million) provided for the technical assistance requirements of TSKB- financed projects and for TSKB staff training. 38. The Appraisal Report (para. 5.17) noted that "TSKB expects to commit foreign investment loans of US$215.0 million equivalent in the two years 1982-83.0 Under this umbrella, it then set out a more specific agenda strictly for uttlization of the Bank Loan, though not in the form of Loan Agreement covenants. This was: (a) US$86 million to finance fixed assets (US$72 million in direct foreign exchange financing and US$14 mil- lion in imputed foreign exchange costs); (b) US$10 million to co-finance a working capital fund of at least US$30 million; (c) US$2 million for TA purposes (problem diagnosis of export firms, export market evaluation, advisory and consultancy services, TSKB staff training); and (d) US$2 mil- lion as loans for TA programs of subborrovers. The Appraisal Report (para. 6.01) stipulated that 502 of TSKB's lending operations in 1982, 55% in 1983 and 602 in 1984 would be for export-oriented projects. This last represented the most significant objective for this Loan. 39. Loan XIV thus took TSKB further into the financing of export- oriented projects. A key element was the TA component to strengthen TSKB's capability to provide technical help to exporters and also the TA needs of individual projects in the field of exports. The project design also covered TSKB's institutional development and growth, improvements in the quality of its portfolio, the mobilization of domestic resources and strengthening of its internal organization. The ossential basic strategy, however, supporting the Loan lay in the Government program of January 1980 to switch to an export orientation, and the Loan anticipated that the larger part of TSKB's efforts and financing would be concentrated on the promotion of exports. The project was designed accordingly. 40. Loans 1754-TU and 1755-TU. The two Loans for the private sector textile industry were covered under a single report, the total amount being divided between TSKB (US$65.0 million) and SYKB (US$15.0 million) for on- lending to private sector clientele. Therefore, while the industrial objectives and strategy under the Loans were the same, the institutional objectives and the entrepreneurial beneficiaries were different, varying with the two institutions and the client-base of each (see also paras. 2.03 and 2.04 of the Sector PCR). - 14 - 41. The project's industrial objectives were to: (i) rationalize and improve the structural balance of the industry, promote viable expansion and value added; (ii) improve productivity and quality, reduce costs and improve overall competitiveness; (iii) induce modernization of equipment; (iv) promote exports and ensure a domestic supply of inputs for exports of adequate quality; and (v) improve the institutional and policy framework. TSKB had received its thirteenth Bank Loan only three months earlier, and no additional institutional objectives were set for it. For SYKB, the Bank's main goal was to improve its appraisal and supervision capabilities. 42. Considerable effort was put by the Bank into the development of the private sector textile project Loans, in particular, in identifying specific groupings (garments, knits and home furnishings) for future growth, in examining the export market potential and in determining the technical assistance needs of the industry. Moreover, at the DFC level, through its Loan to SYKB, the Bank opened a new channel for the distribution of its funds to private sector industry, a conscious effort to reduce the concentration on TSKB. The project provided for training of SYKB's staff. Further, to enable a rapid movement of funds under the two Loans, the Bank ensured that the two DFCs had done preparatory work on canvassing likely textile clients and had built up an initial list of applicants for the Loans. To reach the objectives under the project, targets were set for the allocation of Bank funds to various subgroups of the textile industry, as shown in the Table below. Table 4: DISTRIBUTION OF BANK LOANS AMONG TEXTILE SUBOROUPINGS TSKB SYKB Total Share ---US mI I IIon ---- --- (M Carmenta/Making up and Knitting 14.0 8.0 17.0 27 Weaving 16.0 4.0 20.0 82 Dyeing/PrInting/Finishing 18.5 2.5 16.0 26 Spinning 4.5 1.6 6.0 10 Accessories and Other 2.0 1.0 8.0 5 Total Allocated 60.0 12.0 62.0 100 Unallocated 10.1 2.9 18.0 - TOTAL 60.1 14.9 75.0 - The agreed minimum targets for financing in each segment of the textile industry emphasized (i) garments and knitting, which were undeveloped and had important urban employment and export potential; and (ii) weaving and dyeing/printing/finishing, which required modernization and expansion to overcome bottlenecks and imbalances. An amount of US$13 million was left unallocated, intended to provide flexibility in implementation. - 15 - 43. It was expected that the project would finance 35 to 45 firms, creating about 5,000 jobs directly. The diversification of channels was to help reach both the smaller size range in the textile sector and thus to reach the project targets in terms of number of units covered and jobs created. To ensure coordination in the use of funds, the Bank provided for a protocol to be signed between the two institutions. 44. The balance of US$5 million under the Loans was intended for tech- nical assistance: (i) US$1.2 million for an extension service in indus- trial engineering and assistance in export marketing; (ii) US$3.3 million for complementary training, technical assistance and technology transfer from abroad; and (iii) US$0.5 million for TSKB and SYKB staff training. These allocations were in consonance with the primary objective of the project to develop the technology and export capability of the textile sector. 45. Loan 1952-TU: The major objective of Loan 1952-TU (US$40.0 mil- lion) was to foster employment in urban centers through the development of labor-intensive industrial enterprises. Five thousand jobs were expected to be generated through the Loan at an investment cost of no more than US$15,000 equivalent each. SYKB was chosen as an intermediary as its operations were mainly with small- and medium-scale industry. To make a tangible impact on urban centers with high unemployment levels, private labor-intensive industrial investment was to be supported primarily in the three metropolitan cities of Istanbul, Ankara and Izmir and 20 other regional urban centers, which accounted for 75% of total urban unemployment at that time. The main thrust at the institutional level was to assist SYKB to strengthen its supervision procedures by developing a formal sys- tematic project supervision program (see also paras. 2.15, 2.17 of the Sector PCR). 46. The cost per job created, under Loan 1952-TU, was not to exceed US$15,000. To increase the employment impact of the project, one-third of the Bank Loan was earmarked for small-scale enterprises, with fixed assets after completion of less than US$350,000 for new and US$500,000 for expan- sion projects. The Bank had considered another bank (Halk Bank) as a pos- sible second intermediary for its funds under the project. Given Halk Bank's size (more than 10 times larger than SYKB) and number of branches (more than 400), it would have been an appropriate channel both for providing funds to small-scale industry and for ensuring their broad geo- graphic distribution. However, the Bank found Halk Bank institutionally inadequate to handle its funds, and Halk Bank's new management, installed in at about the time appraisal discussions were started, did not agree to the arrangements made by the Bank with the earlier Halk Bank management. In view of the progress made in preparing the project, the Bank, with the concurrence of the Government of Turkey, agreed to the whole Loan amount being channelled through SYKB alone. It was also proposed that SYKB would obtain assistance from Is Bankasi and its branches for reaching clients in centers outside Istanbul, and an agreement between SYKB and Is Bankasi was reached to this end. Finally, the project also envisaged the provision of technical assistance, through the ser?ices of Turkish industrial consul- tants, to SYKB subborrowers, with SYKB bearing 802 of the costs out of a Technical Assistance Fund, to be created out of a transfer of part of the spread on the Bank Loan. - 16 - III. PROGRESS IN MEETING OBJECTIVES Loans XIII and XIV 47. Institutional Objectivest TSKB was already in 1977 a mature, efficiently organized institution with relatively low administrative costs. Its severe and worsening portfolio problems in 1978-80, with loans in arrears over three months increasing from 31.6Z to 50.4Z of portfolio, com- pletely changed the course of the Bank's and TSKB's institution- building efforts. Whereas TSKB had created an organization geared to project promo- tion, appraisal, financing and follow-up, the first three activities were considered the prime thrust of TSKB till 1978, with follow-up being some- what passively undertaken. A radical change in attitude was brought about by its deep portfolio problems, and from 1980 through 1987 the organiza- tional focus rested upon follow-up work. Large-scale reorganizations were undertaken twice and several mini reorganizations were also carried out based on experience and results. The objective, however, remained the same: to create an organization to concentrate on problem projects, including their rehabilitation needs. While project financing continued, the new trend since 1980 was to finance larger-sized projects of larger- sized borrowers who were in a position to invest even in Turkey's depressed economic situation, and project promotion was eschewed. This remains the situation to this day. In 1988, TSKB undertook a further reorganization. Now that it had brought its portfolio under better control, it has begun to alter its focus to a market/client orientation. These reorganizations are interesting in that they have responded to the needs of the time, but they do not address TSKB's long-term strategic needs; thib is discussed in paras. 95-96 below. 48. 1979 and 1980 were also years of staff crisis for TSKB. Forty-two of its staff left, essentially for more lucrative employment with foreign institutions which were then establishing themselves in Istanbul. Although TSKB lost some of its best professionals, its staff depth was sufficient to enable it to manage its affairs, with some disruption but without any major hiatus. TSKB's management is dedicated but its preoccupation with the portfolio issue had prevented it from taking steps to create a broader operational base for TSKB. Now that its portfolio is under better control, it is time for TSKB's management to prove its skills in competing in Turkey's emerging financial market. It has yet to demonstrate this quality fully. 49. The Is Bankasi, a predominantly Government-owned commercial bank, has gradually become the dominant shareholder in TSKB. At end-1974, it held 20.82, in 1979, 36.3Z, and it now holds 43.6Z of TSKB's share capital. Its position is reinforced as TSKB's Board regulations distributes voting power proportionate to shareholding (instead of the more common practice of having one vote for each director). Is Bankasi has not, however, undertaken any decision-making control over TSKB's management. Project approval, in the Board's hands, has been exercised judiciously and based on TSKB's technical appraisal. There has been no intervention in TSKB's aulonomy. At the same time, it must be recognized that the shadow of Is Bankasi does fall on TSKB, and ideally TSKB should have a shareholding far - 17 - broader than the present 69, with the five largest shareholders controlling 62.7Z. While the Bank did endeavor to push TSKB to broaden its share capital under Loan 2093-TU, nothing permanent was achieved. In view of TSKB's poor condition and general inactivity in the stock exchange, the matter was not pursued again by the Bank. 50. Technical Assistance: The effect of the technical assistance components was unexpectedly deep. Under Loan XIII, a substantial program was carried out whereby TSKB staff was trained to prepare export market studies; the TSKB PCR (para. 4.11) describes the training that was given. The effect was evident partly in the appraisal reports of subprojects under Loan 2093-TU, but, more so, under the later Export Development Loan (2901-TU): the export market portion of appraisal reports are now well prepared. 51. The TA components under Loan XIV were only partially implemented (PCR, para. 4.11) but such reports as were prepared with the support of foreign consultants were well received by industry. International bidding and payment of TL expenditures by TSKB helped to curtail expenditure but the cost of foreign consultants and TSKB's reluctance to incur foreign currency costs did curtail greater use of the TA component. Only $0.5 million of the $2 million TA component for studies was expended. On the other hand, the $2 million set aside for lending to subborrowers for their own TA program was not utilized at all. TSKB has maintained that subbor- rowers were unwilling to use foreign currency, with the attendant devalua- tion risk, for consultancy services in that pre-FERIS period. A more forceful effort, through seminars and workshops, could well have brought about greater use of these funds and improvements in the recipient proj- ects. TSKB essentially opted not to pursue the matter. 52. Sector Policy Objectives: Loan XIII had diverse policy objec- tives: export-oriented projects; geographic distribution of projects particularly to LDRs; and SMI. The latter two policy objectives were not achieved. It had already become clear that a large number of projects in the LDRs and SMI projects were weak. They had neither the resilience nor sufficiently strong management to contend with depressed market conditions and an escalating foreign debt in TL terms. This situation could have been observed in 1977 as arrears in projects belonging to these categories had started to mount since 1975. A smaller allocation for LDRs and SMI proj- ects would have produced a more valid project design and a better sector policy approach. As it happened, this was precisely the actual result with TSKB's strong shift to lower risk, export-oriented projects and exclusion of lending in the least developed region and to SMI. 53. Loan XIV had accepted the shift to export-oriented projects. The appraisal report made the point that the project had the character of a sector loan in view of its export objectives. This move towards export- orientation remains the basic contribution that TSKB has made to the coun- try's economic and industrial development in recent years. It was made at a time when amelioration of the balance of payments was of the first importance. - 18 - Loans 1754-TU, 1755-TU and 1952-TU 54. Institutional Objectives: Loan 1755-TU to SYKB was the first Bank Loan to a DFC in Turkey other than TSKB for retail distribution to private sector industry, in this case textiles.15 SYRB was set up in 1963 by five commercial banks, with Is Bankasi holding 602 of the shares, to provide permanent working capital funds to industry. SYKB's clientele comprises mainly small- and medium-scale industry. Though its shareholding structure is similar to TSKB's (a select group o' banks holding the whole or majority of shares in the DFC), SYKB did provide a differential element to the Bank's DFC lending operations by enabling access to a broader range of smaller industrial enterprises -- an opening which the Bank was to utilize further in its subsequent Loan, Loan 1952-TU, to reach the small- and medium-scale industry sector. 55. In 1978-79, the Bank had appraised in-depth SYKB's organizational structure, its operational practices and its operations, and had found SYKB a suitable intermediary for channelling Bank funds. It had noticed an inadequacy in supervision practices -- mainly a tendency to supervise projects only after they got into difficulty -- and suggested supervision be taken up on a regular basis. For Loan 1952-TU, the Bank found suffi- cient institutional progress to accept SYKB as the only intermediary for Bank funds under the Loan. 56. Two major changes have occurred in the institutional development of SYKB since 1981. Firstly, mainly as a result of economic changes in the country, and in particular due to SYKB's inability to raise local currency resources, it withdrew in 1983-84 from its traditional business of pro- viding permanent working capital needs of industry and, instead, concen- trated on its new activities, on-lending Bank funds.16 This shift, while good, needs to be supplemented by diversification in financial sector activities, particularly in domestic currency operations. Secondly, it has improved its institutional capabilities, strengthening its project appraisal and supervision activities, particularly since its association with the Bank. More recently, it has tried to broaden its operational role by undertaking never activities like tourism. It has expanded its staff and improved its staff capability, partly with Bank support, to undertake these activities. 57. SYKB's staff has increased over the period, and its staff capa- bilities improved, partly as a result of technical assistance provided under Bank loans fot staff training. The OED mission had discussions with staff members in various departments, and was satisfied with their quality and understanding of issues involved in technical, financial and economic aspects of appraisal and supervision work. 15/ As noted earlier, there were no institutional objectives under Loan 1754-TU to TSKB. 16! SYKB points out that it was active in project finance in the late 1960s (see attached comments from SYKB). - 19 - 58. SYKB's operating procedures and practices are satisfactory, and its staff capable. The Follow-Up and Supervision Unit of SYKB in particu- lar has been operating well, having computerized the data base and super- vision data, and was able to produce updated information as needed. The Bank should continue to support this institutional development of SYKB, in particular, encouraging it to introduce revised calculations of FRRs and ERRs for completed projects with large SYKB commitments, and in the case of expansion projects, to calculate ERRs and FRRs for both the expansion pro- grams and the company as a whole, to enable comparative analysis of com- pleted projects where data cannot be segregated for the expansion project after completion (as is normal for textile and engineering expansion proj- ects). Data received in the Supervision Unit should also be used as a management tool to anticipate project difficulties and deal with them before the difficulties become unmanageable (see also paras. 3.01, 3.11 of the Sector PCR). 59. Operations and Management Developments: SYKB has made rapid progress, particularly since 1984 when FERIS was introduced, in expanding its operations; the rate of growth of the portfolio is estimated at 20Z p.a. in real terms during 1984-88. This growth was based on special factors in terms of operations (mainly foreign currency loans covered by FERIS), resources (preferred credits from the Central Bank and foreign currency borrowings from international and regional agencies covered by Government guarantees), and investments based on incentives. 60. SYKB's management has remained the same since the Bank established relations with it. It smoothly made the transition from a supplier mainly of working capital finance to one providing medium-term funds for invest- ment, predominantly in foreign currencies. Moreover, it made organiza- tional and functional changes needed for its new functions, in particular, improving appraisal capabilities and building up supervision activities. The management enjoys autonomy in the carrying out of its operations. 61. Technical Assistance Programs: The private sector textile and labor-intensive industry projects had strong technical assistance elements, comprising sectoral objectives and institution-building efforts through staff-training. The staff training element, as noted earlier, operated smoothly and effectively. 62. Under the textile project, a large amount was provided to TSKB mainly to build up textile activities through research on export markets and the modernization needed to meet such markets. Apart from work in this field, the main contribution of TSKB under this part of the project was to promote and set up Textile Development Services, Inc. (TDS), in collabora- tion with a Swiss textile consulting firm. TSKB and SYKB are major share- holders in this company. Operations of TDS are detailed later under the section on Utilization on Bank Funds. 63. The performance of the Technical Assistance Fund, set up under Loan 1952-TU to provide consultancy assistance to small- and medium-scale industry, did not come up to expectations, mainly because of the reluctance of small enterprises to bear a part of the cost of such services. As a result, SYKB used a part of the funds, with the Bank's approval, for its - 20 - subscription to the share capital of TDS.17 However, such use did not meet substantively the particular objectives for which Loan 1952-TU was provided, namely the encouragement of employment through general small- and medium-scale industry development, in that it was specialized in one indus- try and not limited in the size range of enterprises it covered. The Bank's assessment of demand for consultancy from small-scale industry and its willingness to bear even a part of the cost of such service proved over-optimistic. 64. Sector Policy Objectives: The main objectives under the textile sector project were to foster its modernization and diversification with a view to promoting its exports. One of the instrumentalities to achieve the objective was the distribution of the funds among subgroups, emphasizing in particular garment and make-up and finishing activities. TSKB did not achieve this distribution as its operations were geared towards large-scale industry, to which garment-making is not amenable. 65. As regards exports under the two textile sector Loans, actual exports were below the targets set (272 overall, against targets of 40Z for expansion and 30% of total production for new projects). However, under the prosent environment exports of textiles and other items (leather goods, finished marble products) have been rising, and most plants visited by the OED mission were making exports. 66. The main objective of Loan 1952-TU was to generate employment in urban areas through development of small- and medium-scale industry. The loan objective was met, with almost two-thirds of the funds going to small- scale industry (against targetted one-third) and more jobs created. How- ever, the geographic coverage of the subloans was concentrated (572) in the three cities of Istanbul, Izmir and Bursa, and the arrangement with Is Bankasi for broad coverage did not work out owing to inadequate referrals by the Is Bankasi branches;18 to that extent the project objective was not reached in full. 17/ SYKB notes that the promoters of small enterprises are often reluctant to reveal their problems to outsiders, and thus to seek technical assistance. SYKB also notes that in recent years it has used some funds from the Technical Assistance Fund to make a donation to Small Industries Development Organization in connection with the follow-on Small and Medium Industries Loan Project (see attached comments from SYKB). 18/ Due to the sluggish investment climate, not many encotragement certificates (the Government certificate on the basis c which incentives are granted) were requested, or issued. Each new certificate holder was directly approached by SYKB. The opportunities, therefore, for Is Bankasi branches to secure viable projects for financing under Loan 1952-TU were pre-empted by SYKB. - 21 - IV. OPERATIONAL AND FINANCIAL PERFORMANCE A. TSKB 67. TSKB is the first development bank which the Bank helped to estab- lish and the first one to which it made a loan. Since its establishment in 1950, it has received 16 Bank loans. It has built excellent appraisal capacity, and its industrial development capabilities and performance are widely recognized in Turkey. TSKB built itself as a model DFC, as con- ceived by the Bank, and until the late 1970s, despite certain interim port- folio problems, it remained a sound, well-managed development bank, contributing substantially to the growth of Turkish private industry. 68. Economic reform measures introduced in March/April 1979 shifted the strategy of industrial development from an import-substitution approach to an export orientation. The liberalization of interest rates in July 1980 led to their rapid increase, TSKB's lending rate going up to 52Z effective July 1, 1980, while a year earlier it was 26%. The Government also devalued the Turkish Lira substantially in 1979 from TL 31.08 to the dollar to TL 70.00, thereby doubling the foreign currency liabilities of TSKB borrowers. Not surprisingly, TSKB's portfolio affected by arrears, already at a high 29Z in 1979, escalated to 502 in 1980. Many TSKB proj- ects, already weak due to low capacity utilization, were caught in the turmoil of trying to change to an export orientation approach and, at the same time, coping with the effects of devaluation. They fell into diffi- culties, and this led to a sharp increase in TSKB's nor.-performing assets. 69. It is during this period of recession and adjustment in Turkey, 1977-1982, that the Bank made Loans 1748-TU, 1754-TU and 2093-TU to TSKB. These Loans sustained TSKB through this and the subsequent period during which it had to contend with a number of serious problems: during 1983-85, TSKB was scarcely able to retain its viability; it was beset by heavy arrears, extreme shortage of TL resources which compelled it to borrow from commercial banks at high interest rates to meet its liquidity crisis, causing a negative spread for its local currency operations; and finally, TSKB faced shortage of Bank resources during 1985-86, when TSKB had to secure suppliers' credit lines to continue project financing. Its profit- ability was inadequate to finance the increasing need for provisions to cover potential loan losses. By 1987 TSKB was virtually insolvent. It was only after the Bank's Industrial Export Development Project (Loan 2901-TU approved in January 1988) that TSKB's circumstances began to show clear improvement. During appraisal of this Loan in 1987, the Bank coordinated efforts to restructure TSKB and put together a package which, with the active help of the Government and shareholders, placed TSKB on the path to recovery. In 1987 its results improved, and in 19S8, were satisfactory. Although TSKB has now been financially restructured to a large extent, and there is every sign that during 1989 it will have achieved a sound posi- tion, TSKB's basic viability continues to depend very much on its ability to diversify its operations and compete in the Turkish financial market. - 22 - Loan Approvals 70. The Table19 below shows TSKB loan approvals during the 1979-84 period: Table 6: FOREIGN CURRENCY LOAN APPROVALS (in USS alillons) 1979 1980 1981 1982 1983 1984 Realized: Cross 82.6 97.0 51.6 76.1 47.2 118.8 Net 60.3 79.1 16.1 38.5 17.3 91.2 Projected: Loan 1748-TU 822.0* 200.0 226.0 - - (gross) Loan 2093-TU - 64.0 138.0 178.0 218.0 *For 1979 and 1980 combined. 71. TSKB achieved less than half the total projected approvals set out in the appraisal report for Loan XIII. Turkey was passing through uncer- tain economic times when the Loan was appraised. The stabilization measures of early 1978 had led to stagnant investment and a fresh stabili- zation program was put in place in March/April 1979. With this background, it is difficult to understand the rationale for the high level of projected approvals. Foreign currency approvals were projected at US$322 million for the two years 1979 and 1980. In the previous two years, 1977-78, TSKB foreign currency approvals had amounted to only US$140 million. An increase of 65% p.a. was thus projected for the 1979-80 period. Bearing in mind the economic uncertainties, it is no surprise that there was little increase in the level of approvals actually achieved. This amounted, in gross terms, to $179.5 million (and $139.4 million net of cancellations). The investment climate was sluggish but, even if demand had been strong, TSKB had neither the resources nor the ability to raise additional foreign currency funds as the international market, by early 1977, was closed to Turkey. In this scenario, a 65% annual increase in projected approvals was not justified. That TSKB would fail to reach the forecast approvals was inevitable. 72. The projected loan approval situation under Loan XIV, compared to what was actually realized, proved to be similar to that of Loan XIII. Although the appraisal report forecast foreign currency approvals of US$316.0 million in 1982 and 1983, US$122.3 million was actually approved in this period (eventually diminished to US$56.3 million as a result of subsequent cancellations). During this period, investors were avoiding the assumption of any exchange risk, and thus foreign borrowings. In 1982 the dollar rose in value against the Turkish Lira by 462, and in 1983 by 39.3?. However, during the appraisal of Loan 2093-TU in 1981, the situation was 19/ A summary of operations for 1980-87 appears in Annex 14 of the TSKB PCR. - 23 - little different with the dollar's value increasing by 46Z against the TL, the exchange rate falling from TL 91.75 to TL 133.63 to the US dollar. Given the investors' reluctance to take any exchange risk, and net foreign currency approvals of only US$79.1 million and US$15.1 million in 1980 and 1981 respectively, it is difficult to explain the high projected approval figure of $316.0 million for 1982-83. 73. Perhaps the Bank expected the economic reform package of January 1980 to provide the underpinnings for growth more rapidly than what actually took place. More likely, this was an attempt to justify the Bank loans by bolstering the appraisal reports for these Loans with exaggerated operational assumptions, thus projecting TSKB's contribution to private sector industrial growth (and the growth of the sector itself) at an unrealistically high level and, consequently, TSKB's institutional develop- ment at a pace beyond reach. While TSKB managed with difficulty to commit the Bank Loans (15% of Loan XIII had to be cancelled and Loan XIV 2093-TU was committed largely because of FERIS), TSKB's project operations with non-Bank foreign currency funds were negligible. 74. In 1984, the demand for foreign currency investment funds changed dramatically. As a result of FERIS, foreign currency net approvals went up to US$91.2 million compared to US$17.8 million in 1983 and US$38.5 million in 1982. Without FERIS, loan approvals would have continued to languish. 75. Apart from the two years 1982 and 1983, when investors avoided borrowings in foreign currency, the far larger part of TSKB lending since its inception has been in foreign currency. In 1986, foreign currency disbursements were 72.72 of total disbursements, in 1987 this ratio was 88.8% and in the first nine months of 1988, 83.6Z. During the decade 1979-88, foreign currency disbursements were 72.62 of the total, with IBRD loan disbursements amounting to 45.7?, highlighting TSKB's heavy dependence on borrowings from the Bank. There is every reason for TSKB to look to other sources for funds. Portfolio 76. Over the past five years, TSKB's portfolio has radically changed its configuration. In 1982, there were no FERIS loans; in 1987, this com- ponent amounted to half of TSKB's total portfolio. FERIS loans have been given to "establishment" corporations undertaking significant exports; they generally belong to the leading Turkish industrial groups with strong financial underpinning. In addition, the theme of LDRs and SMI was replaced by export-oriented, expansion (as opposed to new) projects in firmly entrenched industries primarily in the more developed areas. Through the application of this policy and the presence of FERIS, the risk element in TSKB's portfolio declined sharply, as can be clearly seen in the discussion that follows on TSKB arrears. As a consequence, TSKB's port- folio should be able to withstand Turkey's volatile inflationary trends. 77. The growth of TSKB's portfolio is understated by the FERIS loans, where the exchange rate at loan commencement is used and maintained during the life of the loan, and so reflected 5n TSKB's balance sheet. For a proper assessment, FERIS loans would need to be adjusted and brought on to - 24 - a current year exchange rate basis. Using this formulation, TSKB's port- folio showed an increase of 30Z between 1982 and 1987, a modest annual growth of 52. 78. Arrears. Loans affected by arrears over 3 months amounted to 4.7% of portfolio in 1974, 13.62 in 1978 and 50.42 in 1980, at this point the most serious arrears situation experienced by TSKB, giving rise to acute financial distress. (This is discussed in greater length in para. 6.05 of the TSKB PCR.) The situation was brought under some semblance of control thereafter, with the affected portfolio being brought down to 28.42 in 1981,20 declining to 14.42 in 1984. The 1986 ratio of 5.32 gives the wrong picture as, at this stage, TSKB covered much of its portfolio difficulties through large-scale rescheduling. The following Table sets out the arrears situation in the 1986-88 period: Table 6: ARREARS AND RESCHEDULING (in TL bilions) 1986 1987 1988 (a) Arrears of principal over 8 months 81.8 40.1 46.8 (b) Loans affected by arrears of over 8 months 17.8 41.9 48.5 (c) Total loan portfolio 385.0 444.8 669.1 (d) Rescheduling 50.9 26.6 19.5 (*) Portfolio affected by arrears over 8 months 6.83 9.4 7.01 Le (f) Loans affected by arrears plus rescheduling as X of portfolio 20.5 16.2X 9.91 L The figure Is arrived at after excluding two of TSKB's largest arrears cases, Dokusan and Turkman, two associated textile mills, involving loans amounting to TL 27.2 billion, which early In 1989 were acquired by new owners. The loans have been partly repaid and partly restructured. Their exclusion gives a more accurate picture of TSKB's arrears at end-198b. 20/ The Government introduced a foreign exchange guarantee scheme in 1977 and terminated it a year later in 1978 with retrospective effect. This action gave rise to problems among the projects covered by the scheme which most unexpectedly found themselves saddled with large and, in TL terms, increasing foreign debt. The 1980 increase in problem loans with TSKB's portfolio is partly due to this ill-conceived Government action. The Government had to mount a rescue operation through the medium of a special rediscounting facility amounting to TL 35 billion. - 25 - 79. The declining trend in the adversely affected portion of the port- folio is satisfactory. While TSKB has since 1979 made determined efforts to reduce the number of loans in arrears both by stricter collection efforts and by structuring illiquid enterprises, the most relevant factor in the improving ratio has been the lower risk lending policy that TSKB has followed since 1980. A second, different view of the portfolio is also revealing. In August 1985, 167 firms out of 440 in TSKB's portfolio accounted for 92? of arrears. At September 1988, this had narr-wed to 40 firms out of 530, accounting for 94? of arrears. This represents a sub- stantial cleaning up of TSKB's portfolio. Again, the eleven worst, most problematic, cases produced 24Z of arrears in August 1985, while in Sep- tember 1988 the ten worst cases constituted 60Z of arrears. Arrears are now cor.entrated in a smaller number of projects than in the past. The portfolio has thus become more manageable. Both analyses lead to the same conclusion: TSKB arrears have improved substantially, and are under reasonable control. 80. Another aspect, which reflects on earlier Bank actions, comes from the geographic dispersion of arrears. As of September 1988, 12.61 of TSKB's portfolio in arrears was in the most developed region, 22.8? in the semi-developed region and 42.2Z in the least developed region. This profile is well recognized in the appraisal reports of Loans XIII and XIV. Under its then development norms in the 1970s, the Bank had pushed TSKB hard to pursue project lending in the semi- and least developed regions. This was done on a generic basis and with no proper scrutiny of the economics of location, an omission that represented a major failure on the part of the Bank, and even today, more than half of TSKB arrears are attributable to loans made to projects in these areas, most of the loans having been made more than a decade ago. The Bank needs to acce-c a large measure of responsibility for the heavy onus that TSKB has had t,i bear with its severe arrears problem. Resource Mobilization 81. Now that its portfolio has become more manageable. failure in resource mobilization which has always been a severe deficiency, has now become TSKB's most severe deficiency. It has made some noticeable progress since 1986 in issuing foreign currency bonds, e.g., Yen-denominated bonds by private placement in Japan, suppliers' credits and, more recently, term loans from foreign banks providing suppliers' credits. Over the past decade, though, TSKB felt itself unpble to raise funds in the European or US markets in view of the creditworthiness problem faced by Turkey. As a result, TSKB has been, and remains, largely dependent on the Bank for foreign currency resources. 82. The more serious aspect of resource mobilization pertains to local currency. Virtually at no time since its inception has TSKB had sufficient TL term funds. It has been afflicted by a system of ad hoc replenishment in which shareholders, the Government and the Central Bank have shared. Occasionally, TSKB has tapped the market, but the market is thin and amounts available small, e.g., in 1985, only TL 4.75 billion was raised in three-year bonds. Short-term money is available and TSKB by end-1988 had raised over TL 100 billion in short-term notes sold to the public. - 26 - 83. Dependence on shareholders has had its penalty. TSKB had 212 registered shareholders in 1979 but only 69 now. Three of the five largest shareholders (Osmanli Bankasi, IFC and Yapi Kredi Bankasi), with 20Z of total share capital in 1979, reduced their shareholding proportions by not contributing to share capital increases, and have been replaced as the largest shareholders by three other banks, all Turkish. This considerable reduction in the number of shareholders and the significant change in major shareholders point to difficulties from the shareholders' viewpoint. Every year since 1978 TSKB has had to increase its paid-in share capital, and faced with this steady demand for funds, resistance is not unnatural. Smaller shareholders, in large numbers, relinquished their holdings, and some of the larger shareholders also refused to participate in the repeated calls: in 1979, the five largest shareholders held 62.7Z of TSKB shares; their shareholding had increased to 85.62 in 1988. This narrowing of TSKB shareholder base is a by-product of the repeated share capital increases. Another result is that the Is Bankasi group, Turkey's largest financial conglomerate which is under quasi-Government control and held 36.3Z of TSKB shares in 1979, now holds 43.6%. Today TSKB is widely perceived as being a subsidiary of the Is Bankasi group. 84. Why has TSKB had to resort to repeated capital increases? There is, of course, TSKB's need for TL resources through share capital increase. But, equally important, is TSKB's mandatory formula to maintain its debt- equity ratio at 10:1. TSKB's debt is largely, 66% at 1988, foreign cur- rency-based and the rapid and continuing devaluation of the TL kept increasing TSKB's debt, making TSKB hit the debt-equity ceiling and making share capital increases inevitable. For the same reason, although here the motive of resource mobilization plays a more important role, the Govern- ment-provided qaasi-equity has also had to be increased frequently. Between 1966 and 1981, this remained static at TL 368.1 million but since then it has been increased on four occasions and now stands at TL 43 bil- lion, a 116-fold increase. 85. Both the Government and Is Bankasi have been reasonably steadfast supporters of TSKB, although there have been times when all concerned with TSKB voiced doubts and held back finance in view of TSKB's portfolio prob- lems. The Government's policy of providing ad hoc quasi-equity assistance, as and when required, is unsatisfactory. TSKB is, however, fortunate in that its long-term TL needs are greatly curtailed by the Central Bank's rediscount facilities which enables TSKB to finance 801 of TL project lending from this source. The swap arrangements through the Central Bank for its Japanese bond issues have helped TSKB to generate Turkish Lira; in 1987, US$62 million equivalent was swapped into TL. Nevertheless, TSKB continued to need TL funds (to finance its loan arrears) which were pro- vided through additional Government contribution to quasi-equity. This ad hoc process is not one that is helpful to TSKB and has proved difficult for the Government at times of monetary restraint. TSKB and other development banks need to be relieved of their persistent TL scarcity, and it is for the Bank to work with the Government to find ways to do so. The present system where TSKB's TL resources are replenished at Bank insistence on the occasion of each Bank loan, gives the wrong signal: that TL funds are being provided to TS" to attract Bank loans and not because TSKB requires these resources for development reasons. The Bank would do well to insist - 27 - on an appropriate Governient response, e.g., the Government Pension Fund would do much better by lending to development banks than to the Government (at 10%) but cannot do so as its present regulations do not permit this course, but the regulations can be amended. Financial Situation 86. The TSKB PCR (para. 6.04 and in Annexes 11 and 12) describe TSKB's financial situation; attached Annexes I and II give 1988 data. It has been fragile. High cost, short-term borrowings to finance arrears cut away TSKB profits. As the portfolio grew in size during the 1979-88 period and the relative share of arrears diminished, TSKB's debt portfolio was gradually restructured with short-term borrowings being replaced by long-term. The Government's role has been critical: it provided substantial amounts of quasi-equity and it has swapped TSKB's Yen bonds, the latest swap in February 1989 producing TL 75 billion. This last arrangement finally completes the restructuring of TSKB's b.:lance sheet, with TSKB's term portfolio being supported entirely by long-term loans. 87. TSKB's profitability has been low and insufficient to meet its needs. While it has had to provide for substantial annual dividends, on average 20Z between 1980 and 1987, tc induce shareholders to respon4 favorably to its repeated calls for additional capital, it should also, with its weakening portfolio have set aside large loan loss provisions, but its profits were inadequate for this purpose. TSKB's financial picture only started to improve in 1987, the first time since 1980, with an increase of 54% over 1986, as high-cost short-term bank borrowings were gradually eliminated. The 1988 picture is still more encouraging with profits before provision amounting to 4.42 of average total assets, a further increase of 68% over 1987. The improved profit performance has enabled TSKB to set aside higher provisions, TL 25 billion over the 1987-88 period. Provisions at end-1988 amounted to 42 of portfolio, a level that is moderate but improving, considering that TSKB's portfolio is largely represented by FERIS-based loans (50Z) to export-oriented, established industries, where default risks are low. 88. With its balance sheet restructured, and its debt-equity ratio standing at 6.6 at end-1988, TSKB has, in a financial sense, achieved stability. It has taken TSKB ten years to achieve this satisfactory state. There are lessons to be learnt here: that to rehabilitate development financial institutions is a long, slow and painful process; that the entire management must be fully focussed on the task; that the Government must be highly supportive in terms not only of additional funding but also a com- mitment to the long-term success of the institution, and that the manage- ment must have available to it sound financial advice, which last was provided in the case by the Bank. Finally, Bank support was vital in terms of both additional funding as well as backing to TSKB management, without which the flow of Government assistance would have become difficult, and TSKB's management rendered shaky at a time when firm, consistent direction was essential. - 28 - Compliance with Loan Requirements 89. TSKB clearly experienced difficulties in adhering to the require- ments of Loan XIIIt (a) TSKB's failure to meet the overall target of approvals is dealt with in paragraphs 70 to 74. As a consequence, it follows that TSKB also could not meet its other lending targets, for export- oriented projects, for projects in the least developed and semi- developed regions, and for small- and medium-scale industries. The targets and achieved data are given belowt (i) Export-oriented projects: target of $115 million and achieved $86.5 million; (ii) Projects in the least developed regions: target of $90 million and achieved $46.8 million; (iii) Semi-developed regions: target of $50 million and achieved $48.8 million; and (iv) SMI: target of $35 million and achieved $5.6 million. It is interesting to note that while TSKB went a long way to attaining the target for export-oriented industries, it fell far short of the SMI target. This points to a clear shift to lower risk projects; TSKB's export-oriented projects are largely expan- sions undertaken by established business groups. (b) TSKB was to follow-up on the mobilization of long-term foreign exchange financing from Arab sources. The Bank's supervision missions have questioned whether TSKB's efforts were serious and concentrated. (c) At least 70Z of TSKB's export-oriented projects in 1979-80 were to export more than 40Z of output. Under Loan 1748-TU, 13 projects were export-oriented but, instead of nine, only four projects reached the 30-40% target.21 As TSKB could not mobilize other resources, this requirement became in effect specific to the Bank Loan. (d) TSKB's portfolio affected by arrears was expected to fall below 10Z in the course of 1980. This was not to be achieved until 1986 and then only with the assistance of massive rescheduling. A reading of the appraisal report on arrears (paras. 5.09 and 5.10) implies a failure by the Bank to assess the seriousness of the arrears situation, and consequent misjudgment on the institution's evolution. I I 21/ New projects were expected to export 402, and expansion projects 302. - 29 - 90. The picture under Loan XIV is similar in a number of respects: (e) $14 million was allocated to finance the imported foreign exchange costs of local equipment. Of this, only $9 million was finally utilized; (f) $10 million was allocated to co-finance a working capital fund of at least $30 million. The scheme did not function and nothing was used. (g) $2 million was allocated for technical assistance for a TSKB- administered export promotion project. Less than $0.5 million was eventually used. (h) $2 million was allocated to finance technical assistance programs of subborrowers. This entire amount was cancelled as nothing was utilized. 91. For these changes, different explanations are given. The most common, and that which runs throughout, pertains to the resistance of sub- borrowers to assume the foreign exchange risk. The failure of the working capital scheme is also blamed on the low interest credits that became available for export-oriented projects. (i) TSKB proposed diversification of its share capital. Although agreement was reached on this issue under this Loan, nothing per- manent occurred. On the contrary, the shareholding base has narrowed (see para. 83 above). (j) TSKB was to follow a policy to maintain an appropriate spread on local currency lending. In 1984, the spread turned negative and it is only now, five years later, that TSKB's TL lending, as a whole, shows a positive spread. (k) TSKB was to prepare a local resource financing plan. Scarcity of TL funds became one of TSKB's most severe problems. No innovative proposals were made to resolve this situation either by TSKB or by the Bank. (1) TSKB was to keep arrears and reschedulings below certain levels. * These are shown in Table 7 below as well as the actual results. Apart from 1981, where only the rescheduling target was not met, all target figures were overshot, in 1983 considerably so. - 30 - Table 7: TSKB ARREARS AND PORTFOLIO POSITION, 1981-88 1981 1982 198 1. Projected arrears of more than 8 monthe (TL billion) 7.6 4.0 2.0 Actual result 8.0 4.7 9.1 2. Projected percentage of portfolio affected by arrears over 8 months 405 20X 141 Actual result 285 251 25X 8. Above maximums to be met subject to a maximum rescheduling X (TL billion) 2.5 8.0 1.0 Actual result 4.7 9.1 18.5 92. Some of these deviations are more substantive than others. But. taking an overall view, both projects, as designed, were only partially implemented, whatever the reasons and however good the reasons may be for the shortcomings. There is undoubtedly an element of aggressive drive on the part of the Bank, perhaps an attempt to move TSKB more vigorously, that has led to excessively high approval targets (paras. 70-73). But they were out of step with the times and beyond TSKB's capacity. Finally, there appears to have been a somewhat simplistic approach by the Bank, marked by optimism, to the subject of arrears. To achieve any degree of success in the process of project restructuring requires no less than 3-4 years, and arrears targets should properly reflect this reality. The responsibility for the misdesigning and mistargeting of these projects rests with the senior departmental management, who did not apply their judgement to the overall situation of the Turkish economy. Factors Affecting Performance 93. Turkey's private sector manufacturing investment was negative during 1979-82, marginal in 1982-84 and became positive, on average 62, during 1984-86. TSKB's overall pattern fits this scenario. Until 1983-84, TSKB continued to deteriorate with a portfolio virtually out of control, extreme liquidity difficulty and a management team that was overwhelmed. From 1984 until 1986, the situation continued to remain grave but the hard deterioration appeared to have ceased. Only in 1987 was it possible to say that TSKB had begun to register improvements in its portfolio and liquid- ity. The process was triggered by the rehabilitation process under the Bank's Industrial Export Development Project (Staff Appraisal Report No. 6885-TU dated December 14, 1987). 94. The single most insidious factor that has hurt TSKB was the coun- try's volatile inflation. It pushed interest rates and TL depreciation to levels where enterprises were severely weakened, affecting TSKB's portfolio and placing it in a financial squeeze through a negative spread on its TL operations. The factor that has enabled TKSB to survive since 1984 has been the Bank Loan (No. XIV) supported by FERIS. It has helped TSKB to supplement its weakened portfolio with sound export-oriented loans and, in - 31 - fact, to continue it lending activity. The support of the Government, TSKB shareholders and the Bank, although there has been vacillation on their part from time to time, finally led TSKB into financial viability. The process has taken a decade. Efforts at Diversification and Expansion 95. One of TSKB's most important objectives has been to diversify its operations, both in terms of lending and resource mobilization. This theme has been pressed by the Bank since the early 1980s. TSKB, totally pre- occupied with its portfolio problems, was unable to prepare meaningful programs until 1986. It then undertook two initiatives. First, it began to sell short-term notes to the public, by end-1988 this component stood at over TL 100 billion, at interest rates, which on an adjusted basis, are slightly lower than the rates on Government's tax-free Treasury bills. Second, it has entered into machinery and equipment lease financing through participation in a joint venture with Societe Generale and IFC. It is difficult to describe this step as a diversification measure, it is more akin to an investment. In mid-1988, TSKB commenced a new activity, dealing in foreign currency, which TSKB expects will produce significant income. TSKB needs to go further and faster. Its revenue has been, and continues to be, overdependent on Bank subloans and associated TL lending. An action plan for diversification of services was ou.tlined jointly by the Bank and TSKB under the Industrial Export Development Project (Loan 2091-TU), and certainly the several activities described there (lending for non-invest- ment and non-manufacturing purposes, money and capital market intermedia- tion, Treasury operations, consultancy and advisory services) would broaden TSKB's base of financial services. Concrete action has yet to be discussed with the Bank. 96. What has been observed is TSKB's reluctance to employ experts to train its staff and to ensure that risks are kept within acceptable limits. TSKB, in view of its recently improved liquidity as of February 28, 1989, is entering into short-term lending for working capital purposes, but it needs the services of an experienced commercial banker who would be able to introduce techniques which TSKB does not possess. In any diversification move in the financial sector, in-depth risk assessment and staff training are of paramount importance. These can best be carried out by experts who should be retained by TSKB for 6-12 months or even longer if so required. B. SYKB Operations and Financial Position 97. Annex III to this PPM provides data on approvals, commitments and disbursements of SYKB over the years 1979 to 1988. Two characteristics of these operations, apart from their annual growth rate, deserve comment. Firstly, the distribution of SYKB operations has moved away from the local currency operations wh'-ch formed 75Z of its total operations in 1979 towards foreign currency operations (almost 10O% of total operations in 1988). Secondly, all of the foreign currency operations of SYKB are based on coverage under FERIS. - 32 - 98. These operations are based on access to various forms of preferen- tial positions -- either preferred credits from the Central Bank or coverage under FERIS of loans obtained from international and foreign agencies. As the data in Table 8 show, SYKB's main sources of funds are governmental for local currency resources, and regional and international agencies (EIB end IBRD) and foreign banks for foreign currency resources. The Central Bank resources are for preferred credits, and they form an uncertain base for local currency operations. Table 8: SYKS: RESOURCES RAISED, 1979-88 Foreign Resources Loan Date of Loan Lender Number Agreement Amount (ml I.) EIB (u.e.) 79 10/28/80 15 IBRO (8) 1756 09/17/79 15 IBRD (8) 1952 08/18/81 40 IBRD (8) 2647 01/17/86 80 IBRD (8) 2901-1 04/15/88 50 Societe Generale (FF) - 04/2988 50 Swiss Bank Corp. (SFr) - 12/15/88 80 Resources Obtained from Central Bank Years Amount In TL (al I lIons) 1979 416.641 1980 422.820 1981 686.155 1982 1,891.956 1988 1,877.822 1984 468.021 1986 4,514.654 1986 4,900.168 1987 1,152.800 1988 4,935.528 99. As a result of the increasing operations, the portfolio and the income of SYKB have increased substantially, as shown in the summary of income statements and balance sheets of SYKB for the years 1979 to 1988 (9 months) in Annexes IV and V to this PPAM. Quality of Portfolio 100. Overall, SYKB is a conservative organization. Its appraisal and supervision practices are of a high quality, and generally its projects - 33 - have been sound and viable. About four-fifths of its loans are based on bank guarantees which it exercises as soon as a default occurs; on loans not so covered, it takes prompt action, legal or against the guarantor, in case of default. As a result, the overall default rate on its portfolio is low, as shown in the Table below. Table 9: ARREARS OF MORE THAN THEE MONTHS (as percent of Portfolio) December 31, Principal Interest Total 1979 0.4 0.1 0.6 1980 0.8 0.6 0.8 1981 0.2 1.0 1.2 1982 0.4 1.8 2.2 1988 0.8 1.3 2.1 1984 1.0 1.6 2.5 1985 2.9 1.2 4.1 1986 8.6 2.5 6.8 1987 6.7 1.8 8.5 1988 L 8.2 2.0 10.1 L As of September 80. The percentage at the end of 1988 is likely to be higher as a large number of installments fall due at year-end. The arrears position is satisfac- tory, reflecting mainly the choice of sound and viable projects, but also the security against which SYKB lends, and its policy of enforcing such guarantees within three months of a default occurring. Though low, the default rate has been rising over the years. This rising trends, despite prompt action for recovery, should be a cause of concern, even when a part of these defaults arises from cost overruns or delays in project implemen- tation and a part reflects temporary liquidity problems of the clients. The trend calls for further emphasis on supervision, geared to forecasting problems in projects financed and taking preventive action based on such analysis. Factors Affecting Performance 101. Three main external forces have influenced SYKB's operations: firbtly, the operation of FERIS; secondly, increase in export-oriented investment; and thirdly, high domestic interest rates which have restricted SYKB's ability to raise local currency resources on the market and the demand for such funds, except for those available under preferred sector rediscount facilities offered by the Central Bank. 102. Among the internal factors influencing SYKB operations, the most important is the quality of management and staff, leading to investments in viable enterprises. The security arrangements for SYKB loans reflect essentially a fall-back position, which has generally not needed to be - 34 - used. The increasing resources devoted to supervision and the prompt action taken to deal with problem projects should help to prevent any large increase in arrears. 103. The return on SYKB equity, at about 40% on paid-up share capital and half that on the equity, has remained low, in fact negative in real terms at the inflation rates prevailing. The increases in SYKB's share capital reflect not the attractiveness of such investment but the willing- ness of the small club of its shareholders to support the institution, even at a financial cost to themselves.22 Efforts At Diversification and Expansion 104. As regards its operations, SYKB has now diversified into tourism and raising and investing money on short-term. Given the relatively under- developed nature of tourism in Turkey in relation to its potential (near- ness to Europe, a hospitable and large sea coast, strong historical interest) and Government support for it as an export earner which entre- preneurs are already beginning to exploit, tourism is likely to become an important source of investment in Turkey. SYKB has already made a beginning in building up its operations in this sector. 105. SYKB's strategy in the money market is to borrow short-term (up to one year) funds from contractual savings institutions like pension funds and to invest them in Treasury bonds (tax-free, with equal maturity). Such transparent trading in tax status and interest rate distortion depends upon the availability of lenders without tax benefit and a government policy accepting such a leak in its revenue base. Such a strategy can only be a transient source of income, not be a permanent source for business opera- tions (see also paras. 3.12, 3.15 of the Sector PCR). C. Utilization of Bank Funds 106. Loan XIII. Paragraphs 4.01 to 4.06 and Annexes 1 to 5 of the TSKB PCR deal adequately with the utilization of Loan XIII. Nineteen subproj- ects were financed under this Loan. Considering that the number of loans was few, the industry-wise distribution, covering twelve subsectors, is wide, partly because only one textile project was financed under this Loan, others being covered under Loan 1754-TU. TSKB's focus was no longer on small subprojects, only four were financed below $400,000 level. The geo- graphic distribution is also interesting -- eleven of 19 subprojects were located in the aeveloped region -- and shows TSKB's shift out of LDRs. Four subprojects achieved the 30-402 level of exports instead of nine as forecast; 13 had been forec&st as exporters but only ten had undertaken some exports and, of these, the exports of three were notional. Given that export orientation was new to the country at that period, TSKB's record is creditable. Employment data are incomplete but indications are the cost 22/ SYKB notes tha in 1985 an institutional buyer bought SYKB shares being sold by an SYRS founder at a 702 premium over the par value (see attached comments from SYKB). - 35 - per job is high, perhaps around US$90,000 equivalent per job. The ex-post FRR and ERR of subprojects are broadly satisfactory. The overall performance of the subprojects is generally at acceptable levels, although two are in arrears, representing 5.5Z of the amount disbursed. 107. Loan XIV. Paragraphs 4.07 and 4.14 and Annexes 5 to 10 of the TSKB PCR cover the use of Loan XIV. It assisted 80 subprojects and 62 subborrowers. Although fairly well distributed by industrial subsector, textiles with 38Z of the disbursed Loan and electrical machinery/elec- tronics with 21Z took large shares. The shift to the developed region is again pronounced, with 72Z of the Loan amount being allocated to subproj- ects in this region. It demonstrates TSKB's growing focus on lower risk operations. A high level of export orientation was targetted, 50 of the 62 subborrowers are exporters. Of these 50, 32 were expected to export more than 40Z of output but only 13 subborrowers were able to meet this export level. Turkish industry was attempting to move into exports aggressively but firms needed time to build their export markets. The overall result is satisfactory and TSKB's strong effort is shown by the fact that 942 of the Loan was disbursed to export-oriented subprojects. The FRR and ERR also show good results; only three of the 62 subborrowers are in arrears, involving 9.52 of Loan disbursements. 108. Looking at a sampling of 65 subprojects financed by TSKB and in comercial production, an increasing trend towards exports is clearly dis- cernible; the ratio of exports to net sales was 5.8Z in 1979, increasing to 15.1Z in 1987. In the same period, wages as a percentage of sales fell from 15% to 9.8% both because wages have not kept pace with inflation and because productivity improvements have taken place, with capacity utiliza- tion improving from about 502 in 1979 to around 702 in 1987. Raw material prices have shown the effect of the second oil price shock, rising from 34.52 of net sales in 1979 to 48.32 in 1981 and has since fluctuated around 42-452. The oil price increase had a severe impact on profitability and liquidity. Profits fell sharply from 8.32 of sales in 1979 to 2.22 in 1980, and a marginal 0.52 in 1981. It has since improved but only managed to reach the 1979 level of 8.3X in 1987. The extreme pressure under which industrial units operated is clear: high interest expenses and raw material costs reduced liquidity (and increased debts) and profits in the early and mid-1980s, and only in 1987 have the companies shown firm signs of recovery in productivity. In fact, the situation is now somewhat better than in the pre-oil shock period of 1978-79 as export sales, giving enter- prises a more diverse market base, have improved profits and liquidity. 109. Under Loan XIII, 14 out of 19 subprojects, and under Loan XIV, 40 out of 50 subprojects experienced cost overruns and implementation delays. Cost overruns occurred as a result of the underestimation of the local currency component of the project costs. A proper estimation of the TL portion, with inflation taken into account, would have involved a signifi- cant increase in project cests, and with the debt-equity ratio being held at no more than 1:1, this would have required more equity. In order to push projects, TSKB went forward knowingly with underestimated local cur- rency costs with somewhat amorphous assurances on the availability of additional TL resources. Usually, the risk paid off in that the projects were implemented but not without considerable pressure on their liquidity. - 36 - These are the projects that easily fall into temporary arrears. A further point was th- weak cost accounting in projects. During appraisal, as a standard req irement for multi-product industrial units, provision should be made for computerized production accounting and affiliated cost accounting. Currently, doubts remain whether all products are properly costed and contribute to the project's profits. 110. Loan 1754-TU: The US$65 million Loan was committed by TSKB over the years 1979-84, and closed out in December 1984. TSKB approved 23 sub- loans, including US$20.4 million for eight new projects. Overall, the appraisals, including projections of costs and completion, were not far out from the actual project costs and implementation schedules. Actual project cost data are available on 18 of the 23 subprojects; of these, there was an overrun on nine subprojects (+22.62) and underrun on the remaining nine (-18.4%), making for a net overrun of 6.6Z. TSKB's share of financing in these subprojects was 32.7% against 34.8% projected at the appraisal stage (subproject details are given in paras. 2.10, 2.13 and Tables 22-23 of the Sector PCR). Ill. Two aspects of the use of funds by TSKB need to be noted. Firstly, the average size of the subloan was large, nearly US$2.8 million; moreover, with eight new subprojects the overall gestation period was long. Secondly, the subsectoral distribution of the TSKB Loan deviated substan- tially from the distribution originally envisaged to be reached under the appraisal, and required waiver from the Bank, as provided in the Loan Agreement. 112. Loan 1754-TU also had a component for increasing TSKB technical assistance to textile industry in Turkey. As mentioned above, TSKB helped set up a separate company (TDS) to provide textile consultancy services. This independent institutionalization of the textile consultancy function marks a step forward in the development of the consultancy business in Turkey. The consultancy company has done general work for the State Planning Orgaaization and industry organizations, and carried out specific technical consultancy assignments for various textile companies and foreign investors proposing to invest in the textile industry in the country, besides doing referral work initiated by its shareholding partners. The operations of the consultancy company have increased since it was set up, and the Bank's objective in promoting increased technical support to the textile industry was effectively met by this arrangement. 113. Loan 1755-TU. SYKB approved 13 subloans to textile units out of the Bank funds, the average approval being a little above US$1 million equivalent, thereby meeting the Bank's objective of broadening the benefi- ciary group under its DFC loans to Turkey. SYKB subloans also met the other criterion of the Bank Loan, namely, the subsectoral distribution within the textile industry, in particular, providing funds to the garment- making and finished goods subgroup, given its small and medium industry client base. Details of subloans under Loan 1755-TU are given in the attached Sector PCR (paras. 2.01, 2.09 and Tables 5, 8, 10, 13, 15, 17, 21). - 37 - 114. Loan 1952-TU. SYKB provided 114 subloans out of this Loan for a total amount of US$39.5 million (the average size of subloan was below US$350,000), of which almost two-thirds was for small scale industry. The industrial distribution of the subloans was broad, covering clothing and textiles (37%), food products (25%), and leather (6Z). The subprojects generated 5,572 jobs, 11Z more than the target set under the Loan. Fifty- seven percent in number of the subloans were in three cities (Istanbul, Bursa and Izmir), and the arrangement with Is Bankasi, intended to broaden the geographic spread of the operations under the Bank Loan, did not work out for lack of referrals by its branches. Details of the subloans are given in the Sector PCR (paras. 2.14 and 2.22 and Tables 4, 6, 7, 9, 11, 12, 14, 18 and 20). 115. Of the two Loans to SYKB covered by tais report, there were arrears in respect of 31 subloans (four out of 13 under Loan 1755-TU and 27 out of 114 under Loan 1952-TU). Of these 31 subloans, 20 were covered under bank guarantees, and legal action had been initiated in respect of subloans due from the remaining eleven companies. SYKB has thus kept a strong vigilance on the performance of the subprojects, taking prompt safe- guarding actions as needed to protect its interests. V. FINDINGS AND ISSUES Overall Assessment of Achievement of Objectives 116. Loans XIII and XIV were vital to TSKB. Until the approval of Loan XIII in June 1979, TSKB had, with the Bank's encouragement, directed its lending activities to the less developed regions and for small- and medium-scale labor-intensive industries. With Loan XIII and more so with Loan XIV, the focus shifted to an export orientation. This important change, fully in line with the country's economic needs, could only be brought about by TSKB because of these two Loans. Other sources of foreign currency term money were not available to TSKB. While the subprojects could not meet the export targets to the extent stipulated under the Loans, the number of subprojects which were expected to, and did, export, although the exports of some were small, was impressive. It demonstrates TSKB's strong policy shift. That this policy would be implemented by TSRB is largely due to the technical assistance program under Loan XIII whereby TSKB's staff were trained to undertake an assessment of export markets. By involvement with foreign consultants under Loan XIV, who helped to carry out subsector and foreign market studies, TSKB staff strengthened their skills which directly enabled TSKB to redirect its project lending to an export orientation. 117. The underlying thrust in institution building, under both Loans, was essentially twofold: first, the growth of TSKB into a significantly larger institution, hence making a more substantial contribution to Turkey's industrial development with sound project choices, and second, improvement in TSKB's portfolio through reduction in arrears. Under the first, little was achieved. Turkey, as a country, had creditworthiness problems from 1979 through 1986. TSKB had no possibility to mobilize long- - 38 - term foreign currency funds but had it been able to do so, though conjec- tural, it is highly doubtful if TSKB, in the stagnant investment climate of those times, would have been able to find viable industrial projects beyond those financed under the Bank Loans. On the matter of TSKB growth, there were serious misjudgements by the Bank. TSKB remained in the 1980-87 period an institution without growth, in real terms, and with assets of half a billion US dollars. But its altered focus on export-orientation, through the Bank Loans, made a most substantive qualitative contribution to the national economy. On the second matter of portfolio improvement, here too, again under both Loans, the Bank made proposals based more on optimism than realism. TSKB gave great attention to arrears both organizationally and functionally but in a major transformation of the industrial economy from import substitution to an export orientation overlaid by high inflation and depreciating TL, known to the Bank at a time when the Loans were being processed, rapid portfolio improvements were impossible to achieve. These optimistic arrears forecast gave a misconception in the projected financial statements of the depth of TSKB's problem, and led to basic misjudgements on its financial performance in the medium term. These two Bank Loans, however, played a key part in TSKB's survival and led eventually to its rehabilitation under the Industrial Export Development Project (Loan 2091-TU) which was approved by TSKB's Board on January 19, 1988. 118. While the Loans were essential to TSKB and, indeed, to Turkey's program for shifting to an export orientation, it is clear that the proj- ects around these Loans were misdesigned. What was expected was impossible to achieve. 119. The textile and labor-intensive industry Loans generally met the Bank objectives set under them, except for two specific points: (i) The subsectoral distribution envisaged under Loan 1754-TU was not reached. This was part of the agreement (Section 3.07) between the Bank; TSKB was given waiver, as provided under the Section. SYKB's operations under Loan 1755-TU, however, showed that there was demand from the knit and garment subgroup for such funds. Given the focus of TSKB operations with which the Bank was familiar as a result of its earlier relationship with the institu- tion, this reflected a deficiency in the Bank's assessment of TSKB's capacity to achieve the subsectoral distribution; and the main reason for TSKB not reaching the subgrouping distribution targets was the Bank's failure to make a realistic assessment of TSKB's delivery capacity in relation to the Loan objective. (ii) Secondly, there was some concentration of subprojects with 57Z of them located in Istanbul, Izmir and Bursa. The Bank's effort to set up a mechanism to broaden the geographic spread did not work out for lack of referral by Is Bankasi branches. Such dispersal was not the subject of an agreement between the Bank and SYKB, and the Bank could not reasonably have foreseen the failure in prac- tice of the agency arrangement with Is Bankasi to ensure referral of projects from other urban areas in Turkey. - 39 - 120. Overall, the Bank's strategy in providing loans for developing industrial sectors and the objectives (expanding and modernizing textiles, reduction in unemployment through small- and medium-scale industry, ex- panding exports) and its use of diversified financial channels (in this case DFCs, but later also commercial banks) was highly successful in the case of the Loans covered by this audit memorandum. The Loans helped the development (mostly modernization and expansion) of the targetted sectors (textiles, labor-intensive industry) and helped achieve the general objec- tives (150 enterprises financed, nearly 10,000 jobs generated, a substan- tial increase in exports, all these viably contributing, in however small a way, to the overall improvement in the economy of the country) for a rela- tively small outlay (US$139 million under the three industrial sector Loans) by the Bank. The sectoral financing strategy is capable of being repeated in Turkey, in particular in respect of leather products, tourism and small engineering units (components, ancillaries), which have a com- parative cost advantage, have built up initial exports, and offer future growth potential. The Bank's Role 121. The Bank's efforts, at both the institutional and the general economic level, have been laudable as shown by its operations with the two DFCs and its general country operations since 1980. 122. At the DFC level, the Bank operations have had a number of bene- fits. The Bank loans have provided resources to the two institutions to enable them to carry on operations at a time when there were few other resources, local or foreign, available to them. The provision of these resources has enabled TSKB to improve gradually the quality of its port- folio and thus regain viability, and SYKB to move successfully from a sup- plier of working capital funds to becoming a term-lender. The Bank has been able to diversify its channels for lending to private sector industry and to reach the small- and medium-scale industry through its loans to SYKB. It has helped SYKB in its institutional development, particularly in improving its appraisal capability and building up its supervision activi- ties. It enabled TSKB to restructure its operations and organization, and to move towards diversification of its activities. The Bank has been able to channelize funds for economically relevant activities like exports and small- and medium-scale industry development, which had not received atten- tion in the 1970s, using the DFCs as effective intermediaries for the job. 123. The Bank's coordinating and guidance role needs full recognition. Through its supervision missions, the Bank coordinated Government's and shareholders' support, it induced TSKB to improve its loan follow-up pro- cedures, it had TSKB establish a special unit for serious problem cases under the direct supervision of an Assistant General Manager. Finally, the Bank openly and frankly expressed to TSKB management its concerns and pushed for action while, at the same time, continuing its support of the management. The institutions have benefitted from the Bank's suggestions for diversification into related activities. The Bank needs to follow up on these initiatives, particularly in respect of the strategic options available to the DFCs, in the light of the issues on sustainability and new initiatives, discussed below. - 40 - TSKB's Sustainability 124. TSKB depends on Bank loans aud FERIS for its operations; the removal of either means the loss of two-thirds of its incremental revenue. For a medium-size institution like TSKB, the situation is fraught with risk. It needs a high level of profits to build provisions (at end-1988 this was a modest 5% of portfolio), and to finance substantial dividend pay-out in order to be able to continue new capital subscriptions from the shareholders. Dependency on Bank loans and FERIS needs to be reduced and although the Bank has repeatedly enjoined this cause, and TSKB has also put diversification first in its strategic objectives as described in its Medium-term Plan (1983-85), it has only since mid-1988 given concrete expression to these good intentions by its new currency dealing activity; it needs to go much further. If it is to sustain itself, then it should write a scenario with less emphasis on Bank loans and FERIS. 125. TSKB's comparative advantage lies in its high caliber staff. TSKB has had a strong record in the area of project promotion but, as it faltered in 1980 and became preoccupied with its portfolio and financial difficulties, this activity ceased. The Bank needs to review with TSKB the direction of its future promotional activities. The risks of project pro- motion would need to be covered adequately but the benefits lead to indus- trial development and cannot be foregone. Herein lies much of the raison d'Otre for TSKB. SYKB's Sustainability 126. SYKB's long-term strategy, as at present envisaged, is to carry on its present medium-term lending and investment activities through resources funded by its existing lenders, primarily the Bank and, to a small extent, the European Investment Bank. Currently, the demand for such funds is based on FERIS coverage; without it entrepreneurs have argued that they would be unlikely to borrow tcreign exchange. It is not possible to gauge to what extent this reluctance would be translated into action if FERIS were withdrawn or modified. However, if the pre-1984 experience is any- thing to go by, the demand for foreign currency funds in the absence of FERIS is likely to decline severely. Apparently, SYKB's strategy is to rely on its preferred access to resources from international agencies, on the assumption that the present Government policies would continue to make borrowing from it (SYKB) attractive to local investors. 127. SYKB has depended strongly upon its present activities for its future growth, particularly in acting as a channel for funds from its existing suppliers of funds and in distributing such funds in the areas and to the client-sector it is familiar with. It needs to seek a new focus for its role in the future, given the fact that the country's economic environ- ment and its financial sector are likely to undergo major changes in the coming years. 128. The main concern about SYKB operations remains at the domestic end of the financial intermediation operations. As mentioned earlier, there is increasing independence of successful enterprises from market borrowing in the economy, as a result of their high liquidity. Moreover, SYKB does raot - 41 - have access to local market resources at a cost at which it can profitably carry on domestic operations iihich are based on access to low-interest rediscount credits from the Central Bank at a nominal margin, supplemented by its own local currency resources. It is within this context that the future role of SYKB needs to be worked out. Issues and Lessons Learnt 129. The main issues that arise from a review of these five operations are not those of project viability or institutional capability at project appraisal and supervision level. The basic issues that face the institu- tions relate to their role in the econcmy, the sustainability of their operations and the environment in which they operate. 130. One issue facing the DFCs is the prevalence of inflation and its impact on the external value of the currency. Various consequences of these on DFC operations are notable. Entrepreneurs have not regained con- fidence in the external value of the TL, and they (and the DFCs) have become dependent upon FERIS in foreign exchange borrowings of medium-term maturity. For the same reason, both the DFCs and the entrepreneurs have become reliant on preferred rediscounting facilities of the Central Bank for their local currency resource needs. 131. In particular, the market for medium- and longer-term funds, other than under FERIS and Central Bank preferred credits, has disappeared. The financial market, including that for Government borrowings, is concen- trated on short maturities, mostly of one year or less. Even within this narrow maturity range, there is fragmentation in the market with a wide variation in interest rates (see para. 23). Under recent inflationary conditions, such rates represent real spreads of -5Z on the cheapest funds to a positive 30Z or more on the most expensive. One further consequence of this imperfection in the financial market is that many successful companies invest only within the limits of preferred credits available to them through commercial banks and DFCs, and maximize internal liquidity. This liquid cash is then lent to their customers through trade credit. A process of disintermediation has set in which affects adversely the quality of commercial banks' portfolio. These trends need study on a systematic basis to determine the extent of their prevalence and their impact on financial sector growth in the country. 132. On the positive side, the Bank's strategy in diversifying its channels in its DFC lending operations enabled it to broaden the distribu- tion of its funds and to strengthen its institution-building role. Sectoral lending helps to improve the technological and economic bases of the sector, and thereby helps achieve other objectives like competitiveness of the sector in international markets. However, a proper economic environment -- or a safeguarding mechanism -- is required to ensure a viable investment climate for the private sector, and the introduction of FERIS was needed to stimulate demand for medium-term foreign currency funds. 133. These projects emphasize a lesson learned from earlier ones, that rehabilitation of a development bank is a long, slow and painful process. - 42 - The financial restructuring element has to be introduced after the port- folio starts to improve to avoid *throwing good money after bad.* The restructuring needs to address not only spread and profits but also liquidity. This was the Bank's approach in its subsequent loans to TSKB, and the hih quality of the restructuring program enabled TSKb to start its recovery. 134. Similarly, as has been demonstrated elsewhere, there is no quick fix for portfolio problems. To turn problem projects into viable ones usually requires new partners, new management and additional funds. This transformation takes three to four years and frequently longer. The parties concerned with the development banks need to have a long view and a long-term commitment to it. 135. There is at least one other lesson of interest: no broad proposal such as embarking on lending activity in less developed regions should be implemented without careful, in-depth study. No study was proposed by the Bank nor contemplated by TSKB on the comparative advantages of different locations. This radical change, at the Bank's instigation with projects that preceded those under review here, in TSKB's normal tenor of business produced a series of problem projects and heavy arrears. The large lending program scheduled under the Bank Loans under review ignored the experience of the immediate past and the impact of existing economic elements, including inflation, in drawing up these programs. Even as targets, the programs were excessively high. It was inevitable that TSKB would fall far short. 231 For details of the restructuring program, refer to the Appraisal Report No. 6885-TU dated December 14, 1987. of the Industrial Export Development Project. - 43 - ANNEX I PROJECT PEORMANCM AUDIT REPRT 7MMI TURKEY SINAI KALKDA BAKASI (TAn): NCOME STATEMENTS, 1987-198 (LOAM 1740-TU AND S08-TU) (TL IIlio) 191 19!! Income Intereet on loan portfolio 78,561.7 101,5682.2 Interest In liquid funds 10,005.4 11,921.6 Commissions and other income g,248.5 17,816.6 Dividend income 2,001.9 8,05. Crosa capital gains 4,597.6 La 1,664.2 Lb Other Incomes 6710.7 4,169.0 Total Income 102,928.0 189,738.4 Expenses Personnel expenses 4,478.9 7,151.8 Directors' and staff bonus 504.2 778.5 Administrativ expo se* 00.1 2,155.6 Depreciation 856.9 1,900.5 Provision for retirement 62.0 88.0 Ta*xe, duties and fees 870.2 542.6 Interest charges 75,997.8 92,037.9 Provision for losses 936S.0 16,278.3 Project promotion expenses 88.9 65.0 Other expenses 1.516.1 2,966.0 Total expenses 94,116.6 124,864.2 Profit before taxation 6,767.4 14,874.2 Taxes on profit 102.9 1,575.5 Net profit 8,684.5 1,298.7 Appropriation Dividend 7,067.9 9,168.9 Reserve - Legal reserve 1,551.2 2,505.8 - Contingency reserve 25.4 129.0 Ratios Total Income/average total assets 16.8 16.3 Administrative expenses/average total assets 1.0 1.1 Interest charges/average long-torn debt 15.2 12.8 Interest income/aerage loan portfolio 16.8 16.0 Dividend income/average equity portfolio 12.1 12.3 Earnings before tax/everage net worth 24.1 28.1 Net profit/average not worth 28.8 25.1 Net profIt/share capital (paid-in) 21.7 26.6 Dividend/net Income 61.6 08.9 Dividend/par value 25.0 27.6 Le La Of this amount 4,000.0 TL has been added to the capital as of 12/31/87. b Of this amount 1,500.0 TL has been added to the capital as of 12/31/66. Lc Breakdown of this ratio: 21.23 cash payment; 8.65 revenue from sales of equity portfolio; and 2.53 script issue. - 44 - ANNEX II Page 1 of 2 PROJECT PERFORMANCE AUDIT REPORT TURKEY TURKEY SINAI KALKINMA BANKASI (TSKB): BALANCE SHEETS, 1987-1988 (LOANS 1748-TU AND 2093-TU) (TL Million) December 81, 1987 Cecember 81, 1988 ASSETS Cash and Banks 82,419.8 68,410.2 Short-term investment 14,88.2 26,857.7 Accrued income 11,287.8 17,778.7 Arrears (principal and Interest) 64,281.1 88,198.0 Others 8.442.8 4,136.0 Total current assets 126,269.2 194,878.6 Loans to Central Bank 86,650.2 140,790.0 Local currency loans 141,040.9 154,291.1 Foreign currency loans 188,862.1 149,450.1 FERIS loans 154,406.4 854,404.7 Undisbursed I/c'* 14,968.4 10,955.8 Total 444,277.8 669,101.7 Provision for losses (26,447.0) (40,564.9) Equity participations 18,001.9 38,419.7 Provision for losses (60.8) (616.2) Total long-term portfolio 486,192.4 681,340.8 Government bonds (net) 9,722.4 12,727.5 Fixed assets (net) 9,485.9 12,438.4 Financial leasing (net) 5,876.7 Prepaid taxation 2,857.7 2,696.1 Other assets 8,692.0 5.881.4 Total assets 678,869.8 10380.124.0 - 45 - ANNEX II Page 2 of 2 December 31, 1967 December 81, 1988 LIABILITIES Short-term Bank loans 4,448.5 Accrued interest and others 14,972.9 40,072.4 Taxes on profit due 102.9 1,675.5 Dividends 8.692.1 9,942.4 Total current liabilities 28,116.4 51,690.3 Long-t*rm debt Government subordinated dabt 36,085.9 48,527.2 Central Bank rediscount credits 41,571.7 42,089.1 Central Bank loans 58,142.2 54,037.6 TSKB notes (net) 28,225.8 69,965.9 Other Turkish Lira debt 7,029.5 8,478.8 Total TL debt 178,004.6 216,098.4 Foreign currency debt 164,114.5 187,860.2 FERIS debts 169,999.4 864,418.4 Japanese Yen bones 92t.8.6 141s696.4 Total long-term debt 5689,464.1 912,068.4 Staff retirement fund 176.5 264.5 Other liabilities La 15,459.8 12,008.1 Shareholders' equity Paid-in capital 40,000.0 50,000.0 Legal reserves 4,062.6 6,68.5 Contingency reserves 890.2 624.7 Revaluation reserve 1,190.5 8.084.5 Total 45s668.6 60,197.7 Total liabilitles and equity 678,869.8 1,036.124.0 Contingencies Loan commitments 8,298.8 9,839.2 Equity commitment. 429.6 5.4 Guarantees 8,144.5 8,311.4 La This account includes both the unearned income from government bonds, default interest and corresponding accounts of Japanese Yen bonds lending for which no payment has yet been made. 3-E 113M YÅTmm VE ~1 assut (VM): A04Ls. chIhM Ns S oIMIIIM@, 1479-81Me <LOAIS 17se..7U. 17Es-7Ui 501ßen (TL Miltien) A1~ ~ 4ss... strs simm as 0 eM.$ 10 1.200.7 25 2.211.1 M 1.10.9 29 4,~r. 17 2,170.0 *~ 8,s8e.4 7 ,^.* 9 12,^s?.1 1 177.0 Estorffl Surs« ssd 9A .m li& f LeLA M LML !a L-0ZL M 14*.1. 4..4 § .l j~A j~ E,~J L 7.1.1 Loss. se 1..8 2 2,718.o 48 4,240.7 el 8^,o.1 Ms 7,491.1 fs 16.712.9 12,119.7 fl 40.81.0 74 4.7MA 78 4.9 Emuity Ist o 29.8 a 11.4 0 62.8 4 88.8 a 1s.7 a 70.9 0 0.0 a 18e.6 0 0.0 1 ~80.0 ofs.lie kure. bes 48 mo0.m in 8ms.e a 1.142.1 go ,~.i 14 2.010.7 a sm.e a8 8,2~o.4 11 ,~.9 a 1.11.0 8 0.117.1 External &urea 9s~ -2 2"ZA j A~.A U - LJ 2- LalL2 El L24, Z 11.12.20 j -111-9 19 It~ a m.A ab A.A Totl LOs~. 4s 788.4 20 8M2.2 24 2,812.0 6 9.8167.8 8 4,s~s.1 el 18^s8 2 8 s,s8.. 0 =,.8 74 a0.U 87 s,866 .7 Equiy Inve~stIes a 28.8 4 28.8 4 40.8 8 81.0 a 18.7 2 84.9 1 W. a 188.c 0 0.0 1 100.8 t~en os~t;eie saure Cased 42 M84.0 1 78.7 20 1,008.1 42 1.4s.8 la 1,488.9 8 1,010. s2 4,52.2 11 4.814.8 7 2,^87.7 4 s,off.o E.tar~§s re keed .~ 1 _L j . 1-M.s JU 1..1 2 .Z fl L A & 14A141.0R la _zgL4 A 1.74 gH 20.15.9 fl E.ULA Total tsn. 48 sOs.* 28 1,23a.0 as 2,^s4.2 87 8,79.1 48 #,40s.7 8s 18,6f.6 44 8,4~.6 as 24.44s.2 70 80^,. U8 7^82.. Equity Inv~stot 4 19.7 8 21.9 9 49.1 7 18.9 6 3s.1 2 34.9 1 a8.0 a 128.0 2 8I.O 1 8sO.O -47 - ANNEX IV PRoj pPacfANC ALDrT EPmr SINAI YArfRIN VE REI SAIOCASI (&~M8): SEARY I~UE STATEMNM. 1979-198m (LOANS 1754-TU. 175-TU ANÐ 1952-TU1 (TL Nil Heon) imz im im im im im& im i im im L F Inanr6 4 Fs on Loe 38.0 6W4.4 970.7 1.781.4 2.797.8 4,152.0 9,630.4 14.82.0 23.902.0 25.80.2 Incomo fraf Oter Invtestent 19.8 16.9 16.8 42.4 122.9 129.3 210.8 1.435.0 3,684.0 4,021.4 other Incoma _. .»å 22.9 46.6 .4M =1.0 189.9 12.0 1.777.0 .1.427.4 TOTAL INC E 417.0 § 1.0104 1.04 2.932 5.111.3 . 16. .0 29.3 0 32.101.0 EXPENSE Intoreat & Fe. on Borrosinga 142.8 319.2 494.4 1,007.6 1,672.2 2,714.6 872. 10,042.0 2.,198.0 23,026.7 Personnel Cos. 43.4 84.9 125.4 155.0 243.4 355.7 68.7 955.0 1.896.0 1,896.9 Tae Fes 13.3 23.3 31.1 11.4 13.4 9.6 26.8 356.0 442.0 531.5 Other Cost 1.1 7.7 12.2 17.2 36.1 69.4 15.1 1.715.0 1,248.0 218.5 Provioiono _.AL 30.4 19.4 .4 17. 4.219 1.^0.2 2.241.0 2.^2.0 00. TOTAL EXPE65 JL1 465.5 662.5 l 2.140.7 8.778.2 8.054.4 15.309.0 27.602.0 25.3736 INCSE 9~FE TAMc 144.6 219.7 327.9 647.8 822.5 1.321.1 1,976.2 1,620.0 1.741.0 6,727.4 TAX (8 ItE DN2 D~Z, 2 i 21.4 §j0I 212. 9.M78 1M. 924.8 NEr D1E 1052 1L 71,.Z 2964 511.7 Mg,1 LELZ .44. 1.7. 5.02.6 ia January through September. - 48 - ANNEX V Page 1 of 2 PROJECT EmFMOAQ AWDIT REPO]RT SINAI YATIRIM VE otEDI BAMASI (SvYB): SJtARY MAJNCE SHTS. 1979-1968 (LOANS 174-TU, 1755-TU MD 1962-TU (TL Mi Ion) 192 19M i1 A 1M ME ASH I I9. I. Current Assets Cash & Due from Banks 89.8 43.8 78.8 188.8 809.4 816.8 591.8 4,059.0 4.171.0 14,792.2 Sundry Receivables 161.4 276.1 436.1 680.6 1,205.1 2,868.5 8,833.7 8,149.0 11,101.0 12,202.8 Treasury Bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5,826.0 10,268.0 3.204.0 Other Aseet* - .&Ll 37,74.13M 1393 17 .J. 1..ZL.0 1 28& 9. Subtotal 200.7 359.1 558.5 952.8 1,858.8 2,851.6 4,788.7 19,759.0 25,668.0 80,691.2 Loano A Investments Loans 2,458.3 8,731.8 6,015.8 8,702.5 12,890.5 18,717.2 86,182.6 55,996.0 88,028.0 115,942.2 Equity Investments 67.4 89.8 188.4 207.4 248.5 450.1 518.9 788.0 926.0 1,887.9 Covernment Bonds .. & .5 . 30. . 240 __*A 210,2 .114 . 0. Subtotal 2,526.1 8,821.1 6.14.0 9,209.Y 18,376.0 19,401.8 88,911.7 868.98.0 89,949.0 117,830.1 Less Provision for Loses .L .7. a..L 107,6 . 2 9.a 2,2.4 .LW5 §,826i 4,.30. Not Total Loans & Investment 2,494.3 8,764.4 6,077.8 9,102.8 18,092.8 18,492.5 34,648.8 82,893.0 82,121.0 112.999.9 Net Fixed Assets -AL. 4 L .. .2 26 ..JEl ....06 1.160 ...M.2DS TOTAL ASSETS 2ZILA .4.1 A9, 2 1A 24AL2 MI29 U 21J61 9.Z1 7. AZ A I9LM 1At5M. in January through September (unaudited). - 49 - ANNEX V Page 2 of 2 U/2 In aen .Am aga IM 1tM Im AtZ Uff M i LEASTLITIES Current Liabilitles Taxes Due 53.2 112.8 169.4 254.9 354. 615.7 933.0 401.0 119.0 1,016.5 Other P.yables 187.1 101.9 155.9 261.2 369.4 555.1 892.1 4,672.0 8,074.0 8,409.1 Short-term 0. Borrowings 0.0 0.0 0.0 200.0 51.7 8.6 0.0 0.0 0.0 0.0 Bonds lamued by SYKB 0 * 0Q __m .0 . .0 6..AgW .m.0 ,29, Subtotal 190.3 214.7 325.3 716.1 7786 1,074.4 1,825.1 11,721.0 17,038.0 9,714.6 Medium & Long Ters Debt Local Currency Shareholders Bank 412.1 412.1 412.1 412.1 725.4 0.0 0.0 0.0 0.0 0.0 Covt. Subordinated Loan 103.6 99.5 95.4 91.8 67.2 82.1 75.7 69.0 63.0 60.0 Central Banks 601.7 861.0 1,476.4 2,570.2 8,091.5 3,571.0 6,083.5 9,038.0 9,251.0 11,85.7 rD 0.0 0.0 0.0 175.2 1,111.9 4,270.5 14,408.4 25,821.0 49,793.0 67,529.8 Foreign Currency AID 323.0 449.5 445.1 87.7 295.4 57.4 0.0 0.0 0.0 0.0 EI 627.6 1,467.7 2,987.9 3,754.1 4,784.2 4,938.4 6,421.4 8.050.0 9,961.1 11,833.6 Eximbank 8.9 43.7 49.5 48.6 42.4 17.5 0.0 0.0 0.0 0.0 rea 0.0 0.0 183.5 994.1 2.548.8 4,060.0 8,364.9 11,893.0 15,232.0 27,757.5 L/C Pending . . 0. .0 .0 .0 .0 . 0-0 .L Subtotal 2,076.9 3,358.5 5,649.9 8,418.8 12,686.8 16,994.9 38,333.9 54,871.0 84.300.0 118,516.6 Staff Retirement Fund 3.8 28.7 8.1 89.8 69.0 76.8 183.2 251.0 403.0 80.8 Shareholders' Equity Share Capital 400.0 400.0 400.0 400.0 800.0 2,000.0 2,785.2 8,55.0 4,000.0 8,867.1 Legal Reserves 50.0 64.1 85.6 184.0 211.1 322.7 488.2 688.0 995.0 1,290.5 Special Reserves 0.0 5.6 9.2 20.3 40.6 69.8 111.5 164.0 411.0 448.7 Revaluation Surplus 0.0 0.0 0.0 141.8 141.6 880.5 126.0 406.0 726.0 797.0 Retained Earnings 16.0 103.6 168.1 3860.1 451.1 689.5 912.0 1,272.0 1,072.0 5,810.3 Subtotal .0 573, . 9 I.M.0 1.A U4A .425 4 422.9 .2Ig0 72.0 L1(J1. TOTAL LIABILITIES A EQUITY gjjyA .4. j L2 IL2a 1jJA IMQ 21ZJ10. 39,7325, 90.& "L2j. 2 103. La January through September. - 51- PROJECT COMPLETION REPORT TURKEY TURKIYE SINAI KALKINMA BANKASI (LOANS 1748-TU AND 2093-TU) March 31, 1989 Industry, Trade and Finance Division Country Departmert I EMENA Regional Office - 53 - PROJECT COMPLETION REPORT TURKEY TURKIYE SINAI KALKINKA BANKASI (LOANS 1748-TU AND 2093-TUI I. INTRODUCTION 1.01 TSKB was established in 1950 by a group of Turkish banks and financial institutions and insurance companiLa as a development bank with the objective of providing long-term financing for the private manufacturing sector. The Bank Group played an active role in the formation of TSKB and has supported TSKB's development by providing 15 loans totally $532 million as of June 1986. TSKB is also an active participant under the Industrial Export Development Project (Loan 2091-TU), which was approved by the Board of Directors on January 19, 1988. IFC has also been associated with TSKB since its inception as an investor and co-financer and, at present, holds 2% of TSKB's equity. 1.02 In addition to financing industrial projects through TSKB and SYKB and other financial institutions, the Bank has taken the initiative in recent years for supporting the restructuring of the Turkish economy with emphasis on market forces and adoption of a more outward-oriented economic strategy. Towards this end, since 1980, the Bank has extended five structural adjustment loans, one financial sector adjustment loan, one agricultural sector adjustment loan and one energy sector adjustment loan. At present, a second financial sector adjustment loan is under consideration of the Bank. Besides, the Bank has made direct loans to large manufacturing industries and infrastructure in Turkey. II. THE ENVIRONMENT The Economy 2.01 Prior to 1980, Turkey had adopted an inward-oriented economic strategy focussing on high protection both to public and private sectors, large investments in State Economi.- Enterprises (SEEs) and capital intensive import substitution in the basic industries. Together with an over-valued exchange rate and the oil price hikes in 1973 and then 1979, such inward- orientation resulted in severe economic imbalances and distortions in Turkey. Thus, at the beginning of the eighties, Turkey was struggling with triple-digit inflation, a small export base, an over-valued exchange rate, a large and inefficient industrial sector, high unemployment, a large debt burden and a negative GDP growth rate. 2.02 Faced with a serious economic crisis, Turkey launched an economic reform program in 1980 with emphasis on an outward-oriented economic strategy. The main elements of the new trategy were: (i) competitive exchange rate; (ii) import liberalizatioL; (iii) export promotion; (iv) deregulation of prices; (v) public sector reforms; and (vi) deregulation of the financial system. Adoption of the new strategy helped Turkey in stabilizing its economy to a large extent while achieving a GDP growth of about 5% per annum during 1980-87. Export performance during this period has been impressive, growing at about 24% per annum in real terms, with total - 54 - exports reaching 17% of GDP. The rate of inflation was reduced from a level of over 100% in 1980 to 30% in 1986, even though 1987 saw inflation going up to 49%. Besiees, the rate of capacity utilization improved significantly and private manufacturing investment rebounded from a depressed level to about 6% since 1983. 2.03 Although the two Bank loans became available to TSKB in the beginning of the critical phase of the Turkish economy, TSKB's initial response to the new situation and performance were somewhat uneven at least until 1985. As Turkey implemented economic reform, TSKB's weaknesses became manifest especially in responding quickly to the changing scenario in the country. Viewed against the backdrop of liberalized economic policies, TSKB seems to have fallen behind in adopting an outward-oriented corporate strategy and facing tasks and challenges posed by the aew economic regime. The Manufacturing Sector 2.04 Prior to 1980, Turkey's industrial development strategy was based on capital intensive import substitution in basic industries. The main policy instruments employed were large investments in State Economic Enterprises (SEEs) and generous tax and financial incentives combined with high levels of protection, which benefitted both the public and private sectors. These policies led to strong industrial growth which increased industry's share in GDP from 13% to 18% between 1963 and 1977. However, these policies gave rise to serious weaknesses, such as anti-trade bias, high import dependence and low efficiency, especially in SEEs. These weaknesses became manifest with the oil price rises in 1973 and 1979. Industrial growth declined sharply, capacity utilization rates fell to low levels and inflation surged. 2.05 Early in 1980, the Government adopted a new industrial strategy focussing on private sector growth and relying on market forces for generating the desired results in the manufacturing sector. To implement this strategy, the Government undertook wide ranging reforms: Exchange rate (a large nominal devaluation followed by frequent adjustments in order to maintain a competitive exchange rate), import liberalization (reduction of quantitative restrictions and lowering of tariffs, simplification of regulations and centralization of import administration), export promotion (indirect tax rebates, subsidized export finance, priority access to foreign exchange, relaxation of export price controls and procedural simplifications), price liberalization (freeing price controls over non-basic commodities and reducing subsidies on basic commodities), public sector reforms (freeing most SEEs from price controls and rationalizing public investments), monetary policies (control of monetary aggregates to curb inflation), tax reforms (increasing resource mobilization and restructuring investment incentives for exports), and financial sector policies (deregulation of interest rates, reduction of selective credits and capital market legislation). 2.06 In addition to policy initiatives mentioned above, the Government took a number of steps to reduce bureaucratic regulations and institutional rigidities and thus to improve the overall business climate for corporate industrial activity. For instance, the authority for granting investment and export incentives was centralized in the Investment Incentives Department of the State Planning Organization and streamlined procedures were adopted. This greatly facilitated establishment of new projects and entry of new firms. Corporate tax assessment procedures were simplified and streamlined. Labor - 55 - laws were amended to enable firms to rationalize excess employment and keep real wages at realistic levels, helping particularly the SEEs. 2.07 The manufacturing sector's response to the Government's stabilization and liberalization measures has been impressive. Between 1980-86, manufactured exports grew by over 30% per annum, which doubled industry's share in the merchandise exports from 36% to 75%. The export growth as above was achieved mainly through improvement in the capacity utilization, modest investment in improving the quality of Turkish exports and depressed local demand. Turkey succeeded in exploiting new markets in the OECD countries, besides the traditional Middle East and North African markets. The export growth was also facilitated by the adoption of realistic exchange rate and complementary export promotion measures. Thus, the manufacturing sector has emerged as a lead sector growing at an annual rate of 8%, as against GDP growth of about 5%. Most of this growth has taken place in the private sector reflecting its more positive response to the adjustment policies. 2.08 But these impressive results were not without some negative effects. High real interest rates, shortage of equity resources and continued depressed demand inhibited fixed investment. Private fixed investment stagnated until 1983 and since then it has shown growth of the order of 6%. Moreover, net employment generation has been very modest, reflecting both low level of investment and high capital intensity of investment in industry. Similarly, the policy reforms have adversely affected many enterprises which had large foreign currency debt, were financially over-,everaged and relied on continued high protection to operate profitably. 2.09 The Bank supported such structural adjustments programs with various SALs, sector adjustment loans and normal project financing. A loan of $100 million was made available by the Bank to TSKB specifically for helping export promotion efforts under way then. Broadly, the Bank's export-oriented assistance under the thirteenth loan and direct export-related fourteenth loan helped TSKB in supporting industry's efforts at expanding the export base. Initially, however, TSKB's response got adversely affected by a number of macro and micro factors. TSKB had until then concentrated on foreign currency operations and a major devaluation of the lira in 1979 crippled the core of TSKB's business. At the same time, TSKB could not increase the share of its domestic operations due to restrictions on domestic resource mobilization through bond issues or other borrowing routes in the domestic market. In view of the low level of industrial investments and with the emergence of other financial institutions on the Turkish financial scene, TSKB's importance declined somewhat since 1980. Incidentally, this period also saw worsening collections and TSKB's portfolio got steadily affected by arrears. Pursuing certain socio-economic goals and priorities in financing, especially financing units in less developed regions and supporting small- and medium labor-intensive units, also added to the worsening recoveries of TSKB. TSKB's overall performance as a a result of all these developments remained subdued and TSKB thus could not avail itself of the Bank's loan to the full extent up to 1985, when a new FERIS was introduced by the Central Bank of Turkey. The Financial Sector 2.10 Although Turkey has a diversified banking system, medium- and long-term finance in Turkey is provided mainly by development banks. While the volume of credit to the private sector has increased in real terms, medium - 56 - and long-term credit has remained scarce. The term finance institutions until recently relied heavily on multilateral and bilateral institutions and Central Bank's rediscounting facility for their resources. Domestic resource mobilization by these institutions has been limited. While deposit money banks provide medium and long-term loans to the extent these are partly rediscounted by the Central Bank, the term finance extended out of their own resources is very limited. Data for 1980-85 suggest that the growth of term finance has been stagnant in real terms. 2.11 In the context of Bank-assisted operations, specifically the Financial Sector Adjustment Loan, as also other sector-specific loans and with several initiatives on the part of the Government of Turkey, the overall financial sector's performance has improved benefitting TSKB and enabling it to regain its initiative in responding to new challenges since the mid-eighties. In 1985, various restrictions on issues of bonds by the financial institutions were removed enabling TSKB to augment its resources by issues of bonds and commercial paper. Also, FERIS was reintroduced in April 1984 and with that the utilization of foreign currency funds by TSKB improved considerably. TSKB's ability to raise additional funds has been enhanced due to the recent increase in its paid-up capital in connection wiTh the Bank assisted financial restructuring program (para 5.03). Thus, the financial system has become conducive to TSKB and should help TSKB in improving its domestic as well as foreign currency operations. III. TSKB's ROLE AND BANK GROUP OBJECTIVES Background 3.01 The Bank's association with TSKB has been the longest and its impact noticeable. The Bank provided a series of loans to TSKB to support its operations. TSKB's operations increased rapidly in the sixties, mainly supported by the Bank and the Government of Turkey for its resources. As of 1980, TSKB had emerged as a large and mature organization. Its operations were substantial and it played a significant role in promoting industrial development in the private sector of Turkey. Bank support for TSKB, its policies and finances, has been crucial to its growth, the Bank's contribution being prominent in the areas of project analysis and financial resource transfers. The latter, especially in terms of foreign exchange, has been valuable in times of foreign exchange scarcity as far as Turkey was concerned. Thus, by the end of the seventies, despite certain problems that developed due to the adverse economic and trade situation, TSKB had succeeded in establishing a reputation for a professional approach and technical competence, and was well regarded by the industrial and financial community. 3.02 TSKB has been responsive to the need for building up a suitable organization structure to undertake various operations in an efficient manner. TSKB's Board has been adopting policy statements from time to time to direct TSKB's operations and functions to conform to the national economic objectives. Thus, it adopted a Policy Statement in April 1978, which remained valid when the XIII Bank loan was being administered. Later, it revised its strategy statement emphasizing TSKB's role in the context of the export drive in the country. During the mid-eighties, it became necessary to further revise its business strategy to transform itself from a development bank to a merchant bank. For implementation of various objectives and for following - 57 - speciric guidelines, TSKB has been endeavoring to adopt suitable appraisal and supervision techniques and adapting the same in the light of new research, and is guided in this regard by the Bank group from time to time. TSKB's appraisals continued to be strengthened through a wide range of sector studies and employment of various techniques. TSKB's Policy Statement specifies that the Economic Rate of Return (ERR) must be calculated for projects costing more than $2 million and that ERR must be higher than 15%, unless substantial reasons warrant an exception. TSKB ensures that appropriate competitive bidding procedures are adopted by the sub-borrowers. Bank Group Objectives 3.03 In line with the macro-economic reform undertaken by Turkey at the beginning of the eighties with particular emphasis on export growth, the Bank's objectives while extending the thirteenth loan (1748-TU) and the fourteenth loan (2093-TU) have been defined so as to assist TSKB to take on tasks to suit the national effort. The objectives of the Bank in the earlier loans (eleventh and twelfth) were to direct the investments in the least developed regions and small and medium labor-intensive projects, in addition to TSKB's resource diversification. The thirteenth Bank loan marks a significant departure in that it stressed TSKB's contribution to the development of the industrial sector's export efforts and capabilities. The fourteenth Bank loan went a step further and its focus was entirely on TSKB's assisting Government's strategy of economic recovery and encouragement to the private sector through expanding exports. Having regard to the changing economic scene and focussing on export promotion, agreement was reached with TSKB during negotiations of the loans on specific objectives as follows. Loan 1748-TU (i) To help TSKB bridge its financing gap until end-1980, in a period when the critical international situation of Turkey constrains TSKB's capacity to mobilize alternative sources of long-term foreign exchange financing and risks jeopardizing its ability to continue carrying out its programs of industrial development financing in Turkey's private sector; (ii) To make it possible for TSKB to contribute to the development of Turkish industry's export capacity, by giving priority to the financing of export-oriented projects with demonstrated export potential, and (iii) To help TSKB continue to work toward the achievement of those priority objectives which it set for itself, in agreement with the Government and the Bank, since 1974, namely the development of the most backward regions of Turkey, the promotion of newly established broadly owned industrial enterprises, and the fostering of small and medium scale labor intensive projects. Loan 2093-TU The focus of the Government's new strategy of economic recovery was on encouraging the private sector to expand exports. This project supported the above strategy by: (i) Financing investments to improve capacity utilization of existing firms and develop new, competitive capacity in lines where Turkey has comparative advantage, with emphasis on exports of non-traditional manufacturing; (ii) Improving existing export capability of the private sector by upgrading technological proficiency, improving product quality, reducing production costs, developing marketing ability, improving availability of imported inputs; and (iii) Continuing the development of TSKB's capability to identify, promote, and finance export-oriented manufacturing in the private sector, particularly its capacity to identify technical assistance needs and help in meeting them. Fulfillment of Objectives 3.04 Fulfillment of Targets. By and large the objectives set uader the thirteenth and fourteenth loans have been partially achieved. TSKB was caught up by unfavorabl.e investment climate on one hand, and lack of adequate internal response to changing conditions on the other hand. During 1979-80, for instance, investment climate deteriorated as a result of rapid inflation increases, polit-.-1 uncertainties and labor unrest in the country. TSKB's operations droppe to low levels both in the foreign exchange area and domestic operations (due also to v rtually inoperative domestic capital market). As the sub-borrowers were adversely affected by these factors, TSKB's financial isition also began to deteriorate. TSKB's management was slow in developing a well-defined corporate strategy for guiding TSKB under the adverse economic conditions. 3.05 Export Targets. The export targets agreed under the two loans have been only partially met, even though a substantial progress was made in re-orienting TSKB's approach and financing of export-oriented units, supported by the Bank's loans to TSKB during the period. Under the thirteenth loan in particular, the extent of export-oriented project financing during 1979-80 was of the order of 24%, as against an agreed target of 70%, due mainly to preponderance of new companies (13 out of 19) in the group of companies financed under the Bank loan, which normally take long in commencing operations and starting exports. However, the anti-export bias in trade policy probably was an even more important factor. Even under the fourteenth loan, the targets were only partially met during 1982 (15% against 50%) and 1983 (34% against 55%). During this period TSKB was directing much of its effort to strengt*en export promotion by its assisted units through technical assistance, training of staff, and marketing and product studies. That the export-oriented project financing target was exceeded during 1984 (69% against 60%) is indicative of the efforts under way during the intervening period as well as the important trade and macro-adjustments started in 1980. 3.06 Regional Diversification/Employment Generation. Going by the over-fulfillment of targets in respect of project financing in the least developed regions (LDRs) and small and medium labor-intensive projects (SMLI) under the two previous loans, fairly large targets were fixed and agreed under the thirteenth loan. The extent of fulfillment was considerably less as regards projects in LDRs (about 50%) and practically negligible in respect of SMLI projects (15%). The fact that LDRs got a much smaller share of TSKB - 59 - financing reflects on TSKB'S increased emphasis on export-oriented projects which are located mostly in developed regions. As for SMLI projects, the share of TSKB's financing was considerably less because preference was accorded to well established large sized firms in terms of financial and other support. Under the then prevailing economic conditions, the priority of SMLI projects has been superseded by the priority attached to expanding exports. Thus, under the fourteenth Bank loan, there was no specific reference to LDRs or SMLI projects. 3.07 Domestic Resource Mobilization. TSKB's operations and overall performance was significantly affected by the limited domestic resource availability during the period when the Bank-financed projects were being implemented. While it was expected that TSKB would mobilize funds from commercial banks and by way of bond issues, little progress was made due to the inoperative domestic capital market during 1979-80. TSKB's limited access to domestic resources was throughout the seventies the major issue affecting TSKB's role and financial stability, which also hampered its efforts to rehabi.itate the clients towards the end of the seventies. TSKB's problems in this regard persisted until about 1985, when the constraint under the Banking Law which disallowed development banks from accepting deposits from the public r issuing negotiable instruments was removed. This change enabled TSKB to raise domestic resources in the financial market by issuing commercial paper. TSKB has taken full advantage of this change and has become an active participant in the commercial paper markets. TSKB's domestic resources were augmented further through capital increases in connection with its financial restructuring (para. 5.03). 3.08 Foreign Currency Resource Mobilization. Under the thirteenth loan, TSKB was required to follow up on its efforts to raise funds from the Middle-Eastern sources. However, Turkey's economic problems prevented TSKB from diversifying its resource base either from the Gulf or other potential sources. A planned IFC-syndicated loan of $40 million and a loan of $18 million from the Gulf failed to materialize. While TSKB secured export credits from Banque Paribas (F.F. 200 million), Norway ($20 million equivalent), and Finland ($10 million equivalent), the rate of utilization was so slow that 50% of the export finance thus arranged had to be cancelled. Only the funds from EIB, KfW and the World Bank were obtained as planned. While the immediate results of TSKB's resource mobilization in the international markets were disappointing, the exercise did result in establishing contacts between TSKB's senior staff and the banking community. These contacts have helped TSKB in securing additional funding from diverse sources in the later years. TSKB was the first Turkish institution to float three private placements of Yen bonds, the proceeds of the latest bond issue ($62 million equivalent) being swapped with the Government for lira funding at 32% per annum helping TSKB in acquiring domestic funds. IV. UTILIZATION OF BANK LOANS A. Loan 1748-TU 4.01 Annexes 1 to 5 present data on subprojects, their characteristics and economic/financial performance. TSKB extended finance for 19 projects under the thirteenth loan amounting $50.6 million, out of the $59.3 million -60- available to TSKB. Of the $700,000 earmarked for the export-study, sectoral studies and training programs only $335,500 was utilized by TSKB. US$ $9.05 million was cancelled due to cancellations of a number of sub-loans approved by TSKB, caused by the uncertain economic climate, high lira devaluation. TSKB's share in the total financing was very small at 25% or more in respect of 3 projects only and less than 25% in the remaining 16 projects. TSKB's financial assistance went largely to new companies (68%) as against expansion projects (32%). 4.02 Due largely to adverse economic circumstances and various uncertainties prevailing in Turkey during the implementation period, the Bank-financed sub-projects experienced large cost overruns and implementation delays. Out of 19 projects financed, cost overruns occurred in respect of 14 projects, the extent of overruns being as high as 500% for 4 projects, 100-500% for 8 projects and less than 100% for the remaining projects. Likewise, only 2 projects were implemented on schedule, with 7 projects behind schedule by 6 months or more and 8 others by 12 months or more. Cost overruns and implementation delays created financing and operating strains for the projects concerned as also to TSKB. 4.03 TSKB's assistance under the Bank loan has been distributed over diverse industrial sectors, electrical machinery and electronics accounting for 15%, followed by metal products (10%), non-ferrous metals (10%), chemicals (10%), and pulp and paper (10%), whereas certain traditional sectors, namely, textiles, food and beverages accounted for 5% each. TSKB was expected to distribute a larger share of its assistance for financing projects in the least development regions (LDRs) as also to small and medium labor-intensive projects, in conformity with certain socio-economic priorities. The actual financing pattern, however, indicates that there was a marked shift in the emphasis from LDRs to semi-developed and developed regions, as 11 out of 19 projects financed were located in the most developed regions. This was due to the fact that the overall economic and business climate was not conducive for promoting projects in LDRs as they could not have coped with economic and financial strains and hence could not have greatly contributed to export effort either. Similarly, the target in respect of SMLI projects got grossly underfulfilled as these projects experienced difficulties on all scores. 4.04 TSKB adopted usual appraisal procedures with emphasis on economic analysis of the projects. The results on this count were satisfactory as 11 projects showed ERR of diore than 20%, 8 other projects between 15% and 20%. In terms of employment generation, the expectations have been reasonably achieved as 12 projects (for which information was available) generated 3,250 jobs as against a target of 3,760 jobs. The rate of capacity utilization was satisfactory at 75% or more in respect of 5 projects, 50 to 75% for 6 projects and below 50% for the remaining projects. The financial performance of the projects financed, measured in terms of sales or returns on equity, was satisfactory, even though the sales figures appeared high due to inflation. 4.05 One of the major problems confronting TSKB was the worsening collections and mounting arrears. Arrears at the end of 1980 were 20% of the loau portfolio, loans affected by arrears (of more than 3 months) being 50% of TSKB's portfolio. The Bank supervision missions which visited TSKB during this period followed up this matter with TSKB's management, as a result of which TSKB's supervision procedures underwent an important change. As against a passive role played by TSKB so far with emphasis on collections only, the - 61 - entire approach was changed and, apart from the collections, supervision teams (composition of which was also changed to make it broad-based) started looking into the fundamental problems faced by its clients and assisting them in tackling the same. A special 'follow-up committee' was appointed to look at 278 cases, 150 involving short term relief and remaining 128 requiring in-depth study, and an 'Action Plan' was drafted to tackle these cases. While TSKB adhered to the reporting requirements, the most important benefit was in terms of headway made by TSKB in its supervision attitudes and procedures. 4.06 On the whole, the performance of the subprojects financed by TSKB under the thirteenth loan could be considered as mixed. The fact that there were cost overruns and implementation delays was directly responsible for the unsatisfactory performance either as regards capacity utilization, debt servicing capabilities, and adequate contribution to the export promotion efforts. Some of these shortfalls could be attributed to the difficult economic phase in Turkey then. Constant supervision by the Bank's staff helped TSBK in creating due awareness of the critical problems that cropped up from time to time, the most important impact being on TSKB's supervision and follow-up approach. B. Loan 2093-TU 4.07 Annexes 6 to 10 present data on the subprojects financed under the XIV loan. TSKB financed 80 subprojects in respect of 62 sub-borrowers under the fourteenth loan. While actual utilization of this Bank loan for financing costs of imported machinery and equipment was higher (rendered possible due to reallocation of funds out of other components), TSKB could not utilize working capital foreign exchange finance as the sub-borrowers were not willing to take further foreign exchange risk. TSKB's share of finance as percentage of total project costs was relatively small at 25% or more for 20 projects, 10-25% for 20 other projects and below 10% for the remaining projects. In a sharp contrast to the pattern under the XIII loan, TSKB's finance went to expansion projects (numbering 50 accounting for 80% of the finance), the balance amount going to new projects numbering 11 only. This was consistent with TSKB's policy of improving the quality of its portfolio. 4.08 In view of persistent adverse economic situation (caused by lira devaluation, inflation, high interest rates and depressed domestic demand), sub-projects financed under the XIV loan experienced cost overruns and implementation delays on a large scale, as under the Bank's XIII loan. Out of 50 projects, only 10 projects were completed within cost estimates, the remaining 40 projects exceeding cost estimates to the tune of over 200% (4 projects), between 100-200% (3 projects) and less than 100% (33 projects). 4.09 TSKB continued to assist diverse industrial sectors under the XIV loan. While the textiles group (at 38%) received a relatively large share of its assistance in view of its importance for exports, other important groups financed under the loan were electrical machinery and electronics (11%), food (10%), pulp and paper (9%), glass (5.5%), rubber products (5.5%), and transportation vehicles (5.4%). Continuing with its shift in emphasis from least developed to most developed regions, 43 projects were located in the most developed regions and other 12 projects in the semi-developed regions. 4.10 The economic benefits of projects were generally satisfactory with 45 projects showing ERR over 20%, and 7 others between 15-20% and none below - 62 - 15%. Data on employment are available in respect of 27 project only which created 4096 jobs against an estimate of 4270 jobs. Of the projects financed, 43 were identified as export-oriented projects. The rate of capacity utilization was on the whole satisfactory as 15 units showed capacity utilization over 75% and 13 others between 50% - 75%. In terms of sales performance, except for a couple of cases which had sales below the estimates, all others showed sales much higher than the estimates. While there were 3 loss making companies, 12 other companies showed net earnings on equity between 10% - 20% and the remaining 20 companies 20% or more. 4.11 An important thrust of the XIV loan was towards improving staff capabilities for exploring the export markets by conducting export market studies, by promoting/identifying industrial sectors capable of contributing to export effort and arranging various financial and technical consultancy services to the sub-borrowers. Under this program, TSKB conducted six sectoral diagnostic studies covering food processing, electrical machinery, furniture, marble quarrying, casting and agricultural implements industries. Following these diagnostic studies, TSKB was in a position to carry out fourteen export market studies surveying export prospects in the same sectors in Europe, Middle East, and North Africa. TSKB also made available consultancy services through resident consultants and other ad-hoc consultants from among the European consultancy firms. With the thrust in extending support services as above, TSKB's own staff received an important exposure to and training in identifying export potential, offering consultancy services to the export-oriented units and helping them undertake actual exports. Besides, TSKB organized direct training for twelve internal staff in problem identification in different industrial sectors, whereas sixteen others had direct experience of marketing in foreign markets. Thus, TSKB's staff and management received a very significant orientation in promoting exports especially under difficult economic circumstances. 4.12 TSKB continued to strengthen its supervision and follow-up approach and procedures and, in view of groundwork prepared under the earlier loan, it could obtain the desired results to some extent. In January 1982, under the reorganized structure, TSKB appointed a Task Force and Portfolio Management Department to handle the collections and monitor the arrears. As the general economic conditions were greatly depressed then, no immediate results were forthcoming but TSKB succeeded in avoiding a large number of new firms from being added to the 'problem' category during this period. While peak level of arrears, witnessed at the end of 1980, had declined considerably by 1982, problems confronting the assisted units (devaluation, high real interest rates and depressed demand) persisted and the arrears situation continued until about 1984. The supervision function was once again reorganized and integrated into the loan and investment department and, by the end of 1984, the affected portfolio had come down to 21.7%, 40% of the problem cases beiag taken to the courts for legal action and the number of problem cases being reduced to below 100. 4.13 A very important experiment initiated under the XIV loan was introduction of a fundamentally new instrument, that is, foreign currency loan for working capital. While many borrowers experienced difficulties in 1980-81 in accessing foreign exchange for imports of vital inputs, the introduction of foreign exchange working capital idea did not take off the ground at all. Many exporters were in a position to obtain domestic funds on a priority basis for financing working capital requirements. Also, as exports picked up, some - 63 - exporting units had improved their access to foreign exchange as a result of retaining a part of their export earnings in foreign exchange as allowed by the Government. The period also saw competition from the commercial banks as they could offer a better financial package to the exporting units. The result of all these factors was in the non-utilization of funds earmarked for working capital finance in the form of foreign exchange and reallocation of the same for TSKB's normal export-oriented project lending. 4.14 TSKB generally adhered to various conditions and understandings reached with the Bank under the XIV Loan. In particular, the auditing requirements as for the assisted units with investment project costs of more than $10 million was being followed up by addition of a condition to that effect in each sub-loan agreement. Various other conditions, namely, reporting requirements, conditions of sub-loans, procurement procedures, have been satisfactorily complied with. V. INSTITUTIONAL ASPECTS 5.01 The past decade, 1978-87, was a very crucial decade as far as TSKB was concerned. By 1978, TSKB had emerged as an important financial intermediary and was well regarded by the financial and industrial community in Turkey and had played a very significant role in the industrial and financial development of Turkey. Subsequently, however, TSKB experienced problems, both external and internal, and faced challenges in the face of changing economic/industrial scenario in the country. Externally, the Turkish economy developed some serious and unfamiliar problems during the transition from an old inward-oriented economy to new outward-oriented strategies. Among these were inflation, depressed demand or a difficult international economic situation. Internally, TSKB's old organization structure proved ineffective, and, because of changes in its organization in 1978, 1979 and 1982, and the retirement of old and experienced staff on a large scale in 1982, it encountered problems on various fronts. Even the Bank's approach to financing Turkey's projects or development banks underwent a change, with emphasis on structural adjustments and sector-specific financing, compared to general purpose lending prior to 1978. Export bias in the two loins and a new instrument in the form of working capital in foreign exchange and a large thrust in the organization of studies and training implied a difficult project for implementation so far as TSKB was concerned. While the Government of Turkey was responsive to the new economic phase and changing industrial and financial systems, in view of the ambivalence of some of these policies, TSKB was constrained in undertaking corrective actions. TSKB's achievements and shortfalls have to be viewed against the backdrop of the decade which was full of problems, challenges and new directions in Turkey. 5.02 TSKB's ownership pattern, as represented by its shareholding distrl'ution, remained unchanged, despite attempts to broaden the same especially with a view to acquiring a certain degree of international representation. A change in the ownership pattern per se would not have drastically altered TSKB's organizational character and competence, but TSKB could have got a broa.er exposure especi ly through larger international representation. TSKB's organizational structure has undergone frequent changes, which were necessary in the face of TSKB's own experiences and the external challenges faced from time to time. With retirement of key staff in 1982, TSKB could induct young staff and a few professionals since then and - 64 - broaden its professional capabilities for performing diverse functions. Various changes brought about in the supervision and follow-up departments indicate TSKB's response to the worsening arrears situation. In November 1986, TSKB engaged a consultant from Morgan Guaranty for studying its organization structure, and the implementation of some of the agreed recommendations started early in 1987. 5.03 Financial and Operational Restructuring of TSKB. A Bank mission which visited TSKB in October 1986 devised a comprehensive operational and financial restructuring program to address TSKB's fundamental problems and to restructure TSKB financially so that it could again play an active role in the financial system. The main elements of the financial restructuring plan consisted of: (i) doubling of its share capital from TL 20 billion to TL 40 billion over the 1987-88 period; (ii) raising long-term TL resources by TL 20 billion to enable TSKB to lend in local currency; (iii) increasing the spread by an introduction of 2% p.a. commission/service charge on all new loans starting April 1, 1987; and (iv) restructuring terms of the existing quasi-equity loans. The main elements of the operational restructuring plan entail offering a broader range of banking servicis. Specifically, TSKB plans to offer the following services: (i) working capital finance initially to its existing clients; (ii) money ma.ket operations; (iii) capital market operations, especially commercial paper and government securities; (iv) lending to non-industrial sectors, and (v) leasing. The implementation of the these programs are proceeding on schedule and will be closely monitored under the Industrial Export Development Project (IEDP) Project. 5.04 TSKB's Board has been reviewing the matters and adopting strategies for directing TSKB's operations form time to time. Thus, a new strategy statement was adopted in 1978 which mainly focussed on socio-economic objectives, besides the resource mobilization/diversification tasks. On the eve of the Bank's fourteenth loan, TSKB came out with a revised strategy emphasizing export-orientation in TSKB's operations. With a major economic transition in the first half of eighties, TSKB needed a vastly different direction, which has been provided in the restructuring program outlined above. TSKB has undertaken steps to perform new tasks and, given the degree of success on various fronts in 1986-87, it should be in a position to enter a new phase with restored confidence. Thus, as the troubled decade comes to an end, TSKB is getting back its initiative and confidence in organizing diverse functions, facing th! challenges effectively and playing its traditionally predominant role in Turkey. Given the Bank's initiatives and those provided by the Government, TSKB should have resources, human as well as financial, to play a new and innovative role in the context of Turkey's industrial development in the years to come. VI. OPERATIONAL AND FINANCIAL PERFORMANCE 6.01 Annex 14 provides a summary of operations of TSKB for 1980-87. In view of the difficult economic conditions prevailing up to 1985, TSKB's operations do not present a satisfactory growth and in fact foreign currency approvals declined from a level of $97 million in 1980 to a low of $47.2 million in 1983 and picked up somewhat since then. While 1984 saw quantum jurp in TSKB's foreign exchange approvals, the following two years (1985 and 1986) have been lean years in t.aat respect and tne growth rate picked up in 1987 again. As for domestic loan operations, TSKB has been greatly constrained - 65 - because of lack of domestic resources but with the availability of additional resources from the market, TSKB expects to gradually increase its local currency operations. 6.02 In terms of operational prospects, apart from the increase in the level of development banking operations, TSKB would be going in for diversified operational areas as per the plans finalized by TSKB recently (para. 5.03). Such a diversification program, making a major thrust in the merchant banking activities, should help TSKB in acquiring off-balance sheet sources of income and relieve pressure to some extent on the financial resources which are required for on-balance sheet assets. In a natural growth pattern, Turkey's industrial companies should be in a position to mobilize resources without the support of financial intermediaries such as development banks. Such effort necessitates merchant banking assistance and TSKB's staff should begin to arrange such assistance for their industrial clients. Yet another direction in which TSKB could diversify is leasing operations initially within Turkey and later in cross-border leasing. Operational prospects therefore have to be judged in terms of success in diversifying TSKB's operations in the years to come. 6.03 TSKB's financial results (income statements, balance sheets, and arrears) for the period 1980-87 are presented in Annexes 11 to 13. TSKB's lending has suffered a decline in real terms during this period. TSKB's assets have grown titeadily from TL 47.7 billion in 1980 to over TL 100 billion in 1982 and then experiencing a big quantum jump reaching an amount of TL 677.3 billion at December-end 1987. Because of rapid TL devaluation, TSKB's liabilities (which were mainly in foreign exchange) increased alongside assets. TSKB's net worth increased from TL 2.8 billion in 1980 to TL 6.9 billion in 1983 and TL 45.7 billion by December 1987, but despite increases in net worth as above, year-end debt/equity ratios (as defined by the Bank) crossed the limit (10:1) in 1980 and 1984. Without the capital increase in late 1986, the ratio would have crossed the limit again, but it has been contained considerably at 7.2 and 5.9 at December-end 1986 and 1987 respectively. This should provide a cushion to TSKB for further resource mobilization as also against lira devaluation in the ensuing two to three years. 6.04 The level of TSKB's profitability has been very low during the period under review. Its spread was inadequate to generate surplus to build up its capital base and in fact declined from 6% in 1980-81 to 2% in 1985. Because of the high proportion of non-performing assets in its portfolio on which TSKB accrued interest, its real spread was negative. As its liquidity problems mounted, TSKB resorted to high cost short and medium-term borrowings (at 50-90% p.a.) and these borrowings reached TL 39 billion by December 1986. However, TSKB continued to report profits, pay taxes and dividends during 1983-85. Because of recent changes in Turkish accounting rules on interest accruals, TSKB can no longer accrue default interest on arrears until they are collected. Despite these adverse situations experienced up to 1986, steps taken to implement financial restructuring, improvements witnessed in TSKB's collections, new low-cost resources and refinancing of old high-cost funding undertaken by TSKB, the level of profitability has shown a marked improvement in 1987 and is expected to restore TSKB's financial health in the near future. 6.05 The most serious financial problem that was faced by TSKB during the last decade was poor collections and mounting arrears. At the end of 1980, - 66 - more than half of TSKB's portfolio was affected by arrears of more than three months, actual arrears being 17.1%. While the proportion of affected portfolio came down to a 25% level during the following three years, TSKB continued to be affected by arrears. The problem started with the companies in LDRs, or those which were broadly owned or workers' companies or the SMLI projects many of which faced serious financial and managerial problems towards the end of the seventies. Early in the eighties, assisted units got affected by high inflation and high interest rates, inability to raise finance especially for working capital requirements, labor unrest and the low level of capacity utilization. The matter was constantly monitored by TSKB and the Bank, and the reorganization implemented in 1982 emphasized the task of dealing with the arrears. As a result of these efforts and the Government introducing rediscounting facility for those units which were affected by an increasing foreign exchange burden, the problem was brought under control in the later years. The collection performance of the accounts under FERIS has been much better, with colleztions over 95%. Thus, by the end o,f 1987, arrears of more than three months worked out at 15.2% of the total portfolio, the affected portfolio being 9.4% as of that date. VII. SUMMARY AND CONCLUSIONS 7.01 Compared to the earlier Bank loans, there was an important directional change in the objectives of the two loans (1748-TU and 2093-TU), in that they sought to assist TSKB contribute to export promotion efforts in Turkey. While under the XIII loan, there was continued additional emphasis on certain socio-economic priorities in TSKh's financing, the XIV loan laid total stress on export efforts through development of industrial capacity, improvement of exporting capabilities and development of TSKB's managerial capacities for undertaking the export tasks. The loan objectives as above were set as the Bank saw a major economic reform undertaken by the Government of Turkey and sought to address various tasks by extending structural adjustment loans, sectoral reform loans and normal project lending in addition to export-oriented lending through the intermediation of TSKB. 7.02 The major objective under the two loans of promoting export efforts has been partially met. However, working through a disturbed economic phase and shaking the industrial enterprises out of the protected environment was a laudable task. Any export effort for exploring various foreign markets, whether in the OECD group or in the developing economies in the Middle East and Africa, is a long process as other developing countries too are seeking to make a dent in such markets. Yet another important hurdle in export effort was a trend towards growing protectionism in the industrial countries in order to correct trade imbalances during the first half of the eighties. Bearing in mind the difficult international trade situation and adverse internal situation, the export-financing targets would seem to be too ambitious. It is pertinent to note that the IEDP Project approved by the Board in January 1988 sets a more realistic qualifying cr'.-:erion of exports of 20% of incremental production, as against 40% under the two loans. The only positive feature under the circumstances was to re-orient TSKB and its sub-borrowers to the export efforts and organization of supporting services for exports. 7.03 The other targets under the KIII loan, set in line with certain priorities in financing, of achieving regional dispersal of industries and - 67 - employment creation through small and medium scale labor-intensive industries have also not been satisfactorily fulfilled. In view of various problems encountered in the external economy and because of export drive launched by the Government, these objectives could be considered as incompatible. With the benefits of hindsight, a development bank such as TSKB was not the most appropriate vehicle for achieving such objectives. 7.04 Looking back to the XIV loan and its various components, it seems that the idea of working capital finance in foreign exchange, even when supported by the earlier unhappy experience of the exporters in obtaining such finance, was not evaluated from different angles adequately and therefore it did not work. That the scheme would face resistance due to higher foreign exchange retention for the exporters (because of high exports), effective competition from commercial banks, and also due to currency pooling associated with the Bank loans, was not adequately judged both by the Bank and TSKB. 7.05 Another major shortcoming in the project implementation, even when specific targets were not set under the XIV loan, was in terms of domestic resource mobilization. Looking back to the period prior to 1980, TSKB relied heavily on the Bank for its resources and concentrated unduly on foreign operations. Had TSKB made a serious attempt in developing a balanced mix of foreign and domestic operations through the seventies, it would h;Ve been in a much better financial position to cope with the economic changes. 7.06 A major failure of TSKB was in not responding quickly to the changing economic scene in the country and in coming up with an outward-oriented policy statement, commensurate with outward-oriented economic strategy of the Government of Turkey. While it came up with policy statements in 1978 and ten in 1982, these statements did not bring out as to how TSKB would like to reshape itself and address tasks different than in the past. The thrust in operational diversification, in the financial management (especially the liability management) and thus in acquiring a character, different than strictly the development banking character as in the past, was necessary and TSKB could have come up with a statement on these aspects early in the eighties. An early start in acquirIng off-balance sheet sources of income could have perhaps saved TSKB from a number of problems, which it faced otherwise during the first half of the eighties. It was with the initiative of the Bank, that an operational and financial restructuring program was designed in October 1986, guiding TSKB in its policy stance. Lessons 7.07 Several lessons can be learned from the two projects reviewed. These are discussed below. (i) The programs designed by the Bank under the XIII loan to promote regional development and small-scale industries were consistent with the prevailing government policies at that time. Although these objectives were basically sound, the vehicle selected i.e. TSKB was an inappropriate one. A single private development bank is not in position to have substantial influence in promotiig regional development. For such an objective to succeed other key factors such as infrastructure, labor, and transportation have to be in place. Fiscal incentives and financing are not the most important factors. With the benefit of the hindsights, it is also clear that TSKB was a wrong vehicle to reach the small-scale industries. SSIs are generally better handled by commercial banks through their extensive branch network. - 68 - (ii) The objective of promoting and financing export industries through TSKB under the XIV loan was basically sound. Although TSKB did not fully meet all the performance targets, the Bank clearly made a major contribution in re-orienting TSKB's approach to financing industry. Also, the environment was conductive for exports. Concerted efforts were made by the Government in all areas (exchange rate, incentives, finance, and institutional support). The experience gained was very valuable and became the building block for designing the Industrial Export Development Project (Loan 2901-TU). (iii) A development banking institution needs to be aware of the changing economy, financial system, and the emerging demand for financial services from its clients. To continue to play an effective role in the economy, it needs to adapt its policies, organization and staffing to cater to the changing needs of clients. It also needs to !maintain a good balance between development and financial soundness. Borrower Performance 7.08 TSKB's overall performance was mixed. Given the ambitious targets establiched under the two loans and the dramatic transformation of the economy during the implementation period, TSKB performed well in attempting to make good faith efforts to meet the objectives. However, TSKB was slow in adjusting itself to the changing environm.ent and suffered greatly during the early 1980s because it was unable to maintain a good balance between the two conflicting objectives of carrying out its developmental role and preserving financial soundness. The trend was reversed in 1986 and TSKB is now a more vibrant financial institution and barring a major economic turmoil, it should be able to continue to play a key role in the financial system. Bank Performance 7.09 The Bank aimed to assist TSKB and the Government in meeting socio-economic objectives. However, the clinging economic priorities, and structural adjustments which took place during the implementation period made it difficult for TSKB to achieve these objectives. The Bank was flexible in its approach and worked closely with the Government and TSKB in addressing the constraints. The Bank also played a key role in assisting TSKB in its financial and operational restructuring programs. June 1988 Revised: March 1989 - 69 - Annex 1 PROJECT COMPLETION REPCRT TURKEY: TURKIYE SINAI KALKINMA BANKASI (LOANS 1748-TU AND 2093-TU) LIST OF SUBPROJECTS FINANCED UNDER LOAN 1748-TU Subproiect Sub-borrover's Bank Sub-Loan N=ber HAm Sectora Amount (t) B.1 Adel Kalemcilik, Giresun Other 1,482,411 B.2 Tam Gida, Eskisehir Food 881,638 B.3 Orta Anadolu Ser., Nigde Ceramics 567,705 8.5 Nasas, Kocaeli Non-Ferrous 2,242,201 B.7 Dogusan, Erzincan Earthenware 106,719 B.8 AEG Eti, Kocaeli Electrical 1,144,936 machinery and electronics B.9 Nabas, Izmir Chemicals 528,277 B.11 Eltim, Bursa Electrical 204,953 machinery and electronics B.12 Cimtas, Bursa Metal products 271,547 A.1 Koruma Tarim, Izmit Chemicals 1,467,461 A.2 Topkapi Sise, Istanbul Glass 6,578,231 A.3 Camsan Agac, Ordu Wood products 5,255,585 A.5 Artema, Sakarya Metal products 6,589,- 2 A.6 Metekaan, Ankara Pulp and paper 7,621_ 01 A.7 Anadolu Biracilik, Konya Beverages 5,898,551 A.8 Demirer Kablo, Bilecik Electrical 4,992,609 machinery and electronics A.9 Meteksan, Ankara Pulp and paper 1,978,578 A.10 Bakirsan, Sakarya Non-Ferrous 818,378 metals All M.A.N., Ankara Automotive 1,983,173 - 70 - Annex 2 Page 1 of 2 PROJECT COMPLETION REPORT TURKEY: TURKIYE SINAI KALKINMA BANKASI (LOANS 1748-TU AND 2093-TU) CHARACTERISTICS OF SUBPROJECTS UNDER LOAN 1748-TU Amount of Number Bank Sub- Percentage Loans 1. Sectoral Distribution Food 1 881,638 1.8 Beverages 1 5,898,551 11.7 Textiles 1 5,255,585 10.4 Pulp and paper 2 9,599,880 19.0 Chemicals 2 1,995,738 4.0 Ceramics 1 567,705 1.0 Glass 1 6,578,231 13.0 Earthenware 1 106,719 0.2 Non-Ferrous Metals 2 3,060,580 6.0 Metal products 2 6,860,809 13.6 Electrical machinery and 3 6,342,500 12.5 electronics Others 2 3,465,585 6.8 2. Type of Subprolect - New 13 38,704,193 76.5 - Expansion 6 11,909,331 23.5 3. Project Location - Developed 11 24,839,041 49 - Semi-developed 3 12,463,509 25 - Less developed 5 13,310,973 26 4. Size of Loan Distribution (Thousand TL) Less than 200,000 6 200,000 to 399,999 0 400,000 to 599,999 5 600,000 to 799,999 3 over than 800,000 4 - 71 - Annex 2 Page 2 of 2 Amount of Number Bank Sub- Percentage Loans 5. Estimated Implementation Period of Projects Less than a year 12 1 to 2 years 40 2 to 3 years 8 3 or more years 1 6. Distribution of Maturities (included grace) Less than 2 years - 2 to 4 years - 4 to 7 years - 7 to 10 years 19 10 to 15 years - over 15 years - 7. Distribution of Cost per Job Less than US$100,000 2 $100,000 - $199,999 2 $200,000 - $299,999 5 $300,000 - $399,999 2 over than $400,000 1 PROCT Cup ~TI REP~ linmEY: TIKIIVI SINA KALIMA 8IIAS! (Lans 1748-TU and 20M-1U0 Performn e grefe.fmtt Uldae LtL 174-t.U s, TIaseta1 se. _g lo.et.se ess. t il, tt' ii _tati_________ a~ mea Pro.et Scb-borro~r'w Rate of Return Rate of Return ..Overre .m t (M i -t _makea*_4mr - .etal U r CI) etlt. Aktsl gg ik) P-ts. Mtu. 8.1 Adel taleriltt,cireseu 25 i 637 682 -5 -1 13 17 4 31 a26 6. r.A. 9.2 Tam Ctde, t.ktgehtr 41 54 431 1.791 1.360 316 25 73 48 192 5$8 340 82 19 ".l ortA Afldola seer.,Uiade 28 30 2.3$5 1.470 -1.065 -42 24 24 0 9 774 336 -438 -91 *.5 Wag. Roesll 34 15 4.649 6.263 1.614 35 18 30 12 67 335 8.A. I.A. wA. 8.7 DoRuufn. Erziricen D.A MC0 ati, Soc4el 44 27 2.703 22.087 19.384 2/ 717 25 20 5 20 35 IN.A. 209 -10 9.9 "shs. tamir 35,5 I.A. 1.56? 1.897 330 21 19 37 18 98 38 m.A. w.. - 0.11 ItIm. Bare.a -- 311 W.A. W.A. - 19 ».. .A. - 199 W.A. w.. - *.17 çimta. Sura* 37 49 1088 N.A ".A - 16 20 0.45 20 287 28 3/ 3 .A. 9 0.1 «oruma Taran. Irmit 42 40 514 3.409 2.895 2/ 564 25 30 5 20 - N.A. i.. - A.2 Topkapt $§$P. totanbul 70 28 840 1.703 863 103 24 28 4 17 20 205 .A. - 4.1 Oar n Af.at. Ord 2Q 26 1.196 3.635 3.438 204 28 54 26 93 104 168 +64 62 x.' Arteme. SakArya 131.12.186) 20 17 1.636 8.745 7.109 435 32 56 . 2 75 603 515 - t0 - A f Metetsan.A,t*arg 37.5 40.5 2.095 15.962 11.867 2/ 662 23 36 12 33 124 280 4126 119 x.? Anadola *irar:1st.on25 1'n 1.789 13.095 11.306 632 30 53 23 77 66 76 410 15 A.9 tImrer KahIt.PlIeik 17 2.405 5 500 2.895 111 24 19 -5 -20 110 163 -? -4 8.9 letetsan, Ankaro 7, 28. 3.73 15.962 12.224 327 11 16 1 50 124 260 4136 1G A.10 Baktrran,gatorvo 7<> 7.751 5.081 2.830 126 15 21 0.6 40 231 306 .75 32 A.11 ".A." , ;n3ar i3.1; 119,-) 1 27 7.59 19.484 11.895 15: 20 32 12 60 511 300 -741 - 1/ rinaneial *nd eronrmir PP Vre not toletilated in the projert report. 2/ Pro.ert k* erpanded further. I ri,pt * cenitrae.in>. ,v~pafly. 8.a. S<ot *valI.ble 1UUŒY: 1UIKKYE SINAI KMUCDGA SAl@¢ASI ""ens 1748-TU end ^ m0-110 Sue =hes6 Faal Porforv.nc. Sunr« Under Loan 1746-TU sleg. Ill eenI / 'm~t Carmms~ 6bflhI Åg 1 ef I guie+ Pr~jevt + f ak~ 8.1 Adel aLelItI,Iesua SS15 1.209 641 116 25 tes - 4 -1 9.2 am andå, SkIgbir 1.260 5.098 3.838 »5 20 38 189 48 316 8.3 Otte amaln ger.,Migde . . . . . . . . -2 0.5 woedg Es.1l 4.702 7.002 2.300 49 21 23 <26) 12 9.7 049s. æznes "laer Iavetienut 5.8 Au att, Reeselt 9.212 12.231 3.025 33 23 lei t 717 8.9 møbef. Ismir 2.119 14.547 12.388 14 23 23 i s1 9.11 Olt*, Rure 7601/ 89 l/ .29 4 31 1/ 1 z/ -3O .A 8.A C.12 fImtAr, lera 4.150 6.159 2.009 48 60 7 -53 4 .A A.1 lor teris. tmit 992 14.445 13.451 1.316 26 1 -25 5 S64 A.2 T pa 6i9e. tatemtel 1.718 8,68 6.830 399 25 6 -19 4 103 a.3 Ce~s A¢, Orde 1.113 6.912 #5.799 521 30 41 2* +204 A.3 Artamn. Sakarl@ (1985) 1.632 3.116 4128 38 - - 24 443w w A.6 Ueteksas,Ankare 2.120 15.165 13.645 644 53 1 <98> 12 862 A. u Aedele Pt iiee k,oenå 1.556 4.041 2.491 160 33 loS 23 612 A.8 Demirer cab4,gi01eIt 4.168 10.382 6.114 249 999 1os -1 113 A.9 Meteta. Aakors 3.558 15.765 12.207 343 43 1 t98) 5 32; &.10 Bet;.e6.aare 9.875 1.367 4.492 45 27 4 -23 8 126 A.11 n.A.M., a re (1986) 1.819 11.495 462 35 - - 12 4151 1/ tEtimested figure* repreet the jeer else the projert $g etti=ted to have. reched fell tepacity here zpplicable. Actet fiSer9 are token from the øme yerle follosr-up reporte. 2/ The *etingted sad Betaet flagre* belo*g to the Var 1984 日整畫鹽上靈生纏墮里1團日里1 劉豐豐釭一蠱靈望工」疊因日墾區鹽 盛竺壁」墜靈j暨劃豳」里盛」遮 點劉州訌Lhd匯口口自U已j由臘劉匯曲L跑由巳細鹽」挫 曰曰莖萋瓤轟轟瑟囊私瑯 口調鳥4C么“•••奮口』調0•…〞•。‘騷，－二l為•二，二•。鳥調他… t一C二•個•調0唱•．,,t。•胞二神，，•必白0•．〞，才才．〞唱響細，．。‘ 口彎他．狗弓個禪，t．雲•『口邑k磚妒唱月狗t才．觀tt夕磚〞，.j歸藝．〞嗎•．，〞t 向，．••飾“當．開中n‘綢自t，必t,,，個．自t,．•，t口．自言的••．邑 魚唱••。•他•••t•，．•細•．他 自口目既自．t婦歸t。t騙tt,t藝t】，奮•。自。才．必，••。絕才．&t•．自 ．•細，．開觔－－·•開二‘.t•．&，奮t才。•t. 二．。·。。－－·一：…。t·。•二，•·。j. 一－--－一一一｀』 一‘－→－一‘-－·一．一參 &.&’攔”，瀾‘備””州a.’·用•．’州”.’不 點”••．t•f…，0•幼t&，。才，．才．•••…，二 奮馴戶神．審也•．•魚O•為的他t．藝儿鈴討加藝開唱••發騙，．他 。•口“j開••，np，。綱編訕．,t細他開t.．•．0．開唱… 自〞吃•••個• 個．t緘，。•調口“－••一t鉑才•O•．&t。，,，… 由．州細他．•皂，．亂O調0言才騙牌才才，論才“爭必tft,t神唱•．么 •••總••『焜．bt.”物必t的，，一由嗚．亂〞，tt抽t必忽認。，n寧擊。必唱魚’:．•，言 。t•t•“•奮中•歸－一’－一電調才婦：.,．勾韋，… …f.o .t-&,.，二州t.,t才，t舅，，·”t，·劇•＇二，t一l斗 －一一•，&&t＿話．-.t，一，It開口t．編蠶二唱口由一I。 個口口開牌電自e一，•，.‘。纏•，&‘一‘-..．一一〞一•一’一居i t＇觔t毛•口tdf侮自•．中．們吋間••。tt細神館•勵口個t細．巒•j闢t It韶t開口t開歸個口響on勰勵『，n．亂，叩“.,fl&. •自•“神“，•：t細，. .tn唱””•劍斤‘&.tt細••■•界””州晚．t■開．•••，•t．〞一魚『啊•”.. 歹l·”,L,.,t飛，,l。，,‘。‘&,，•邊一伙〞〞1仲“,o:,,,l叩“ - 7i Page I Gf 3 PROJECT C212LISIMRMRT TURM! TURKIX1 SIMI RAWMA BANKASI (LOANS 1748-TU AND 2093-M) 16T OF SUBPROJECTS rINANGED UNDER LOAN 2093-TU SARTaiect SubAorroveX'a Dank Sub--Loan Number N= Sectors Awmt it) C.1 Cistas, Bursa Metal 350,561 B.2 products 176,129 C.2 Artema, Bilecik Metal products 242,820 C.3 Eltim, Bursa Electrical 211,223 machinery and electronics C.4 Celik Montaj, let. Automotive 638,484 C.5 Olcusan, Kirklarell Automotive 389,984 644,173 43,478 C.6 Doklas, Bursa Iron and steel 978,417 B.9 157,591 C.7 AEG-Eti, Kocaeli Electrical 240,001 B.21 machinery and 1,150,647 Electronics C.8 Kav, Bursa Chemicals 668,523 C.9 Turkey, 19tanbul Chemicals 659,329 C.10 Akkardan, Kocaeli Transportation 1,185,017 vehicles C.11 lot. rreuhauf, Sakarya Transportation 1,500,000 vehicles 82,082 B.13 680,435 C.12 lusa, Istanbul Textiles 902,264 C.13 Zge Seramik, Izmir Ceramics 1,088,835 C.14 Mako, Bursa Electrical 582,240 machinery and electronics C.15 Sass, Adena Textiles 3,082,748 C.16 Bastas, Ankara Cement 801,711 C.17 Maktas, Izmir Food 2,659,955 C.18 Ort. Anadolu Tek. Textiles 3,599,543 1B.16 Kayseri 169,325 C.19 Lases, Kocaeli Rubber products 3,253,536 B.17 203,036 C.22 Isbir Sentetik Textiles 2,548,202 B.20 Balikesir 272,544 - 76 - Amex 6 Page 2 of 3 PROJECT COMPLETION REPORT TURKEY: .TURKIYE SINAI KALKIMMA BAKASI (LOANS 1748-TU AND 2093-TU) LIST OF SUBPROJECTS FINANCED UNDER LOAN 2093-TU Subriaet Sub-borrower*e Bank Sub-Loan Number Rg Sectors hAmon (*) C.23 Platean, Istanbul Textiles 782,871 C.24 Ceatas, Bursa Iron and Steel 677,494 C.25 Entas, Sakarya Food 2,780,000 C.25/a Entas, Sakarya 303,341 B.22 644,684 C.26 Edip Iplik, Istanbul Textiles 3,400,000 16,791 B.23 179,437 C.27 Akeimento, Istanbul Cement 1,644,878 B.24 550,725 C.28 Samsum Yapay Jut. Samsun Textiles 794,870 C.29 Yunsa, Tekirdag Textiles 3,000,000 C.29/a 153,848 B.25 223,974 C.30 Adel, Istanbul Others 657,687 C.31 Guris, Ankara Machinery 1,955,000 B.26 121,600 145,664 C.32 Canakkale Seramik Ceramics 627,984 B.29 C. Kale 339,549 C.33 Komili, Balikesir Food 1,854,836 B.31 170,000 C.34 Goldtat, Mersin Food 400,400 B.32 195,815 C.35 Kalebodur, Canakkale Ceramics 640,000 B.34 105,168 C.36 Kaleporselen, Istanbul Ceramics 286,573 B.35 144,922 C.37 Narinler Kadife, lt. Textiles 3,230,000 C.37/a 383,012 B.28 150,000 C.38 Modul, Istanbul Textiles 214,617 C.40 Ikpas, Istanbul Rubber products 2,000,000 C.41 Polipak, Tekirdag Textiles 149,665 C.42 Hateks, Hatay Textiles 635,283 - 77 - Annex 6 Page 3 of 3 PROJEGI COMMEION REVORT TURKEY: TURKITE SINAI KALIUMMA BANKASI (LOANS 1748-1 AND 2093-TUI LIST OF SUBPROJECTS FINANCED UNDER LOAN 2093-TU Suboroect Sub-borrower's Bank Sub-Loan Number hAM Sectors Amomt (i) A.1 M.A.N., Ankara Automotive 4,484,185 B.8 48,609 A.2 Kartonsan, Kocaeli Pulp and paper 8,999,921 A.3 Polinas, Manisa Plastics 1,195,966 A.4 Trocd, Icel Glass 5,399,712 A.5 Anadolu Biracilik, Konya Beverages 402,500 A.6 Esas, Istanbul Electrical 3,900,000 machinery and electronics A.7 Warin Mensucat Textiles 4,900,000 A.7/a Tekirdag 224,325 B.33 230,000 A.8 Soktas, Aydin Textiles 3,000,000 A.9 Akin Tekatil, Istanbul 4,035,000 A.9/a 215,000 A.9/b " 418,817 B.1 Pemko, Tekirdag Electrical 34,815 machinery and electronics B.3 Kondas, Kocaeli Electrical 27,804 machinery and electronics B.5 Kimkat, Kirklareli Chemials 40,352 B.6 Kordsa, Kocaeli Textiles 120,516 B.7 Dilsizler, Istanbul Industrial services 31,476 B.10 Cetin Giyim, Istanbul Textiles 10,113 B.12 Hisar Celik, Kocaeli Iron and steel 49,817 B.14 Bayraktarlar, Bursa Transportation 128,859 vehicles B.15 Pinar Et, Izmir Food 958,289 B.18 Birlik Mensucat, Kayseri Textiles 144,196 B.27 Sesan, Istanbul " 67,855 B.30 Ormae, lat. 35,000 B.36 Mensucat Santral, ist. 202,180 - 78 - Annex 7 Page 1 of 2 PROJECT COMPLETION REPORT TURKEY: TURKIYE SINAI KALKINMA BANKASI (LOANS 1748-TU AND 2093-TU) CHARACTERISTICS OF SUBPROJECTS UNDER LOAN 2093-TU Amount of Number Bank Sub- Percentaie Loans 1. Sectoral Distribution Food 8 9,967,323.80 10.0 Beverages 1 402,500.64 0.4 Textiles 27 37,492,006.14 38.0 Pulp and paper 1 8,999,921.65 9.0 Rubber products 3 5,456,573.26 5.5 Plastic 1 1,195,966.18 1.2 Chemicals 3 1,363,205.48 1.4 Ceramics 7 4,106,129.25 4.1 Glass 1 5,399,712.53 5.5 Cement 3 2,997,314.99 3.0 Iron and steel 4 1,863,321.32 1.9 Metal products 3 769,511.90 0.8 Machinery 2 2,222,265.39 2.3 Electrical machinery and 9 10,679,527.11 10.8 electronics Transportation vehicles 6 5,292,415.94 5.4 Industrial services 1 31,476.03 - Others 1 657,687.88 0.7 Optional Items 2. Type of Subproject - New 11 19,939,135.81 20.0 - Expansion 50 78,957,723.68 80.0 3. Project Location - Developed 43 71,080,025.18 72 - Semi-developed 13 21,904,685.38 22 - Less developed 5 5,912,148.93 6 - 79 - Annex 7 Page 2 of 2 Amount of Number Bank Sub- Percentage Loans 4. Size of Loan Distribution (Thousai.d TL) Less than 50C,000 30 500,000 - 999,999 12 1,000,000 - 1,499,999 11 over than 1,500,000 8 5. Estimated Implementation Period of Prolects Less than a year 1 1 to 2 years 8 3 or more years 10 6. Distribution of Maturities (included grace) Less than 2 years - 2 to 4 years - 4 to 7 years 5 7 to 10 years 56 10 to 15 years - over 15 years - 7. Distribution of Cost per job Less than US$100,000 7 $100,000 - $199,999 32 $200,000 - $299,999 12 $300,000 - $399,999 3 over than $400,000 7 7 ~mcEY _~ SINAI KAUJDia BAIASI (L0a 174‡-TU ond WWM-TUI Perforenc* et Suprlcto Und, am ~oe-TU ?_mse lai tesem4leestmt Cet0 6 il U .7 Ssat m1a ie Deb mestaI Sub-brreuers Rate of Return amte of Reture 3 ~ (IIthD -m - We_ms i> <> ltte. Ockval MUMderee kal ActI (U etI M ~ f ~eet clasg. Sase 97 4 1.089 .A. w.. - 16 2S 4 - n8 2 -fl - Artem. 9$ieelk 431.12.190a 29 17 1.636 8.745 7.109 - 32 34 24 - 0 s 15 - 11 - åtita. 19re - - 311 KI. w.A. 19 - N.. •.. 1M w.A. .A. - I;qlik ~tej. tst. ".A. ".A. 451 1.123 1.272 82 a 24 16 201 1 .A - - iloUse@. atrkerotel 32 18.7 1.080 2.355 1.275 118 35 41 b 17 96 91 1 5 Dttag. %srea 37 21 2.701 3.815 1.114 41 13 31 18 138 30n 263 m m 31 ALC-Eti. Kogeell 38 0.A. 4.610 2.087 17.47? 379 12 36 34 301 33 - 33 -10 Rev. Srs 33 28 538 579 -9 -2 18 18 0 8 36 24 -13 -33 iitke.tetabqel 2? 21 567 l.A. - - 18 w.&. - - 44 o.A. - - Atkrdsa.Keesel1 30 26 2.351 2.763 412 - 1 24 14 - 38 N.A. D.A. - 1st.Prenhaef.Sekeryet33.12.P6> 34 30 3.404 7.889 4.485 - 19 31 12 - 132 205 *19 - ese.1stenbu1 4' 35 1.140 1.910 720 61 19 19 0 0 21 - - at* seresIk.trafr 42 42 1.?10 1.360 158 13 12 21 9 75 - - Noko.Pares 33 - .1.069 1.632 364 53 0 1 67 - -- sea. Adse 55 57 9.975 15.387 S.412 S4 21 231 . - - 21 175 .6 13 bete.Ankera 42.7 O.A. 670 922 252 3 12 12 - - 34 61 9 mkts.miht 31 18 1.940 7.137 192 9 18 S . - 6 ".. - Ort.Ansdola tek..teysyri 40 47 2.399 2.818 479 20 - - * * Laas.toeselk (31.1?.1006) 29 39 5.500 6.000 9 - 17 2 9 - 90 - Ué-esistm al <0 Bennte M <C Uesten Cet~ _ _ rISet C fms 1 ebe M ~ber og' (S) 4s Corroetø .toer neth) .sra sn Mese Estiime kaiLed Bett etel kUnDra 15 Estim. hgjgui Uhare <1m kIMa Mini mere iS t94it seleItk lskeslr 43.11 33.61 1.149 1.s$4 I 0.2 10 38 le 100 0s - - - Platesea.1steImm 3S 29 718 615 -104 -14 11 1 3 22 18 30 -2 -4P gentes. Du 46 13 1.003 1.191 18 19 20 20 - - - - - aetg, S~aes 35 33 7.029 17.1"4 10.155 144 22 27 S 23 263 - - - Stp lplit, tøeabul 41 24 3.901 1.008 1.107 2 11 15 - - - - - - Akæmto, toteol os 70 2.362 3.v00 638 27 27 20 -, -26 8 8 8 8 Sensum tapep 396Sasum 35 27 771 Ø.A. - - 12 O.A. - - 18 U.A. - - fOime, Tetee 31 46 4.269 4.263 0 0.1 14 32 is 129 48 92 44 3 Ae.1 titemtu1 -26 692 1.461 169 04 1 10 - - - - - -I urg. ø Arlrø 32 30 2.132 ".A. - - 14 M.A. - - 2i7 - - - Ørnekiale 8.rsk,.ele 4 31 2.171 1.602 -369 -17 14 14 .s- 00 -5 -4 £5mili. Iel,k.sr 50 60 2.625 ".A. - - 1s5.. - - 4- - - Goldkat. "esta 23 26.1 926 916 -10 -1 11 36 i1 27 s# - - - cole~der. ea kkl 26 2? 3.335 3.114 -M i 1 18 3 20 30 34 -5 -12 RE8pereeleaSteUb0l 01 24 124 05 181 2S 10 16 6 60 35 ".a. a.". ".A. nerialer Kødtef.lot. 28 40 2.658 5.621 2.993 113 20 23 3 11 23 a.a. O.a. ".A. Ua111,tstenbul 28 13 420 351 -63 11 13 12 - - 220 m.A. - - ikbeg. isteabul 21 23 4.292 - - - 16 16 0 0 30 - - - to. 00 felipek. Tektrdai 31 32 171 202 27 -5 3 1 * 133 9 9 - - o "*takt. metal 34 47 1.3.3 - - - 11 - - - 9 - - - rim=gj pl.0 ma n~1c4l.0% langtetoet.- 2 2EA tit--- C»&a et~d h re s oeI <1) MCorreatø er it< i §r MØge> Mameb,aljgsWd EsiA Esl.. gM*el er <> IW,. Amal i m g gues i ....., 3 :....91.48. 111 - 5 3W - ål -1 - Ueinesec, masenl - 26 23 4.9 26.111 11.003 200 39 43 12 0 3 113 -14 -31 Potes. mestee 27.1 11.2 4.344 *.3ge 2..4 .0 33 33 1 * 193 214 3t 4M aese, itgel 33 43 4.t0 3.331 3.191 %l 1 33 13 11 134 e - Amegete Uleeau,k. ise 39 25 11.181 13.091 1.90 1 11 s1 l 4 66 14 10 1 .s,te~l 09 37 3.M99 .564 1.14 41 i1 33 1 $ t1 101 1M3 $t 96 gari 0ameuset, Tet. ea 33 31 4.931 2.244 11.331 312 39 23 3 1 *t g.j. g.&. N.A. etgtef.,Ags 39 .I 11.703 1.243 -40 -4 27 13 -14 -11 OG 09 -4 -1 Ak~m Tekst 1steabe1 39 42 13.38 iMC - - 1 C - - 20 PC - - - Pek, tkr 33 15.4 i012n - - - 11 - - - lit - - gangeeett 44 33 2il 384 113 42 12 12 - - 1 G - -109 £laket terell 49 - 1.311 1.464 147 il t4 34 12 50 91 If 24 21 9edse, sneeli 31 24 4.010 4.810 800 20 13 13 0 4 29 1 221 -tv -25 Diloist.er,stembut 23 3.A. 141 141 - - 14 14 - - 1 1 -4 -5 g.U. Ili, 1st..akø 1.1 s3 300 313 1 le le e - - 6P ns 4' 3 misse c11k.lReesølt 41.0 33.5 1.063 2.34 1.301 12 21 3Y 12 144 94 09 - - aeektørlar.feroe 40 29 91 1.029 48 - 12 34 17 - 2» 3.A. 3.8. • Pate om. tamir 41 39.9 1.663 9.963 4.300 16 8 1 3 38 0 s3 243 6 Girlik Masweat, geuert 22 ti. 4.8?9 4.?? -757 1 34 14 - - 338 140 -8 -1 Nip tplik.ls. tee, sto~41 35 39 si9 941 172 14 32 18 4 50 10 00 1 2 bus , ost. 30 42 391 346 -51 3 14 14 0 - 163 3.A. 3.A. - Useubet setrel.tet. 31 2s 9.157 3.A M. - 18 O.A. N.A. - 42 0.&. W.8. - W.A. Ot &elleble ese . Projøet at Camploted. w PRO5CT COPLETIUN EPIRT MEY: fRKIM E SINI KAUDM DM~I &«n« 1749-U and Uft-1M0 Uu..ele.6 FImsIele Pefora:e Sur Under Las. 1058-1 1 0*2e ( till=..> 0EK mer nam 8* of 64E+ILT + Pejet SlCos sub-borrower nme .Ra. At. - at. at. Dala , atom Sintag, Besse 4.150 6.159 *2.009 48 60 1 -53 1 4 8.6. artee, Uiteeik 1.63 3.i18 412 38 .. - to e435 E1I8. heres 160 189 29 4 31 1 - U.a. 8.6. gotik ~aJ. tal. 3.300 10.618 1.310 221 a 1 -» 16 383 GäckE. larkleelI 1.155 1.013 82 1 22 1 95 6 11a 8mtag. Betet 1.100 14.92 $.692 108 28 21 2l aS 41 &a-81. Kotcii 10.930 12.237 1.401 13 23 to 44D 2* 319 Kev. Brma 1.857 4.387 .2.530 413D 3* ( tal. - -2 w~ tka.tt6ans.1 2.005 - D.A. - 33 9.a. - - - ka~rdec.etall 4.047 5.121 +1.015 21 24 36 1 -2 14 *la 1st.Priuheft.gakrg 3.63 2.268 -60 • - 12 *132 2@4.31~61 6.320 13.08 6.i86 106 1 33 10 6 96 sermalk.swlir 2.328 5.659 43.431 154 12 2a . lh 9 13 ålko.Morsa 1.392 23.920 16.5328 2' 2 29 -6 .53 es. Maga 42.035 119.510 11.535 164 33 28 - - - Bettg.Anksra 850 3.002 2.1532 253 >2 93 191 - 36 MåkLg.ehir 9.518 19.48 10.880 12. XJ, a 9 Ort.madolf rek..9E4eer 1.438 19.239 11.791 Ish 1 .1 1 3M. il 1t 29 I L49s98.9e«e1i 50.066 73.134 i /1 . de Iå r 1 00 w•l $Sa c i. KULL-30 mot Et.cuaj Numth4 v. As I or EqJity project I Cggt 1.b.rMi.et Act. - e Est. -e. Ca.arI. 0~~es Owrren. C.22 Ifbir toateLik. lkltkstr 5.036 6.111 1.081 21.4 40 .- 18 .2 C.23 Patea.tetaatul sp6 1.101 331 43 2.1 4 - -14 C.24 Gmtfg. aere 9.221 8.404 -811 -9 20 1' -11 - 19 C.2% atag. Sakarya 6.316 - - - 21 4.1. - 5 144 C.26 Mi tplik. tetobol 9.261 14.652 1.391 58 25 1 -12 1 - 8 C.2r Agaete. Iftöhel 11.928 M5 (1 (t) 50 tal -1 21 C.28 8as Tapa jmt.£amfi 1.2131 W.. - - .6 .ä. - - C.29 ~@a... Tkardel 4.600 12.5328 .920 112 12,5 20 1.5-6 1 18 6 C.3S u~. latchol 4.819 8.354 3.475 *11 11 !..s - - 66 C.31 Cörlg. Aakara 10.000 - - - 45 - C.32 ~ekkale 8eenkk.c.tl 14.511 46.411 31.966 220 d2 52 1 - -1 C.33 ail. Gaslkestå 26.228 - - - 30 - - - - C.34 6514tåt. §knia 4.481 4.978 +491 f11 21 2 -5 .25 -I C. ~8ee .n. Gametael 9.89 26.209 16.620 113 90 12 -3 1 3 - C.36 fat.perel«e..tgtenbal 3.336 6.245 2.915 88 27 26 -1 .4 f25 C.3I I maImlr uadIfe.tet. 9. - - - 35 - - . ens C.3 mdi1.Zthumel 1.383 M.6. - - 184 *.A. -15 C.4 tkag. toemI 1.888 1.04 -2 0 23 21 - - - C.41 felipk. Tek14 < - - - - - 1 C.42 a~ste. Uata 10.11 - • - - 1s - - -- C/ Asedig to the projeut the Iseetdat ms projeted ta filbed 1M 1986 s s eta tifs beh be mu de f t 1986 sales (I2. MIlOG) t trniag uLbg et d ASf e~ s preject Cent fuber.eta it. aet. - g at. Ae. awie. Dole &.1 U.A... asakre 10.819 1y.495 . 62 31 - -12 t 8.8 A.2 etOGens. wcael 12.211 - - - 44 - - 12 .28S A.3 Piass. ma@ 1.307 1.411 .4.110. +472 10 *2 - - .11 1.4 safne. %e*& 1.113 (9s - - i tal - 12 85 A.5 4Adel. Irasgilk. aere 1.501 4.047 -1.460 -27 9 -108 109 1 1 A.6 gse. teteabel 3.939 8.333 .2.414 .41 1 8 - 3' *41 å.k Maria Masest. Tektrac 14.68 - - - 38 -3 312 8.33 Å.8 8Öktag. Ayta 21.190 - - - 33 - - - - A.9 akta Tekattl. stanbul 20.950 VC - - 1 P 1 PR - VW DU 9.1 eke. T7k41d~ 5.801 17.397 411.596 20 22.5 3.8 - - - 9.3 aendeG.eeelf 83 1.298 #425 49 1 48 38 -10 - 431 9.3 IteG.Cektaerolå 2.239 -. - - 39 - - *12 ta I 8.4 crdee. 6mss1t 26.325 1.M13 +41.250 .117 35 41 46 - *20 8.7 Dlaster.tste«bel 120 215 95 19 20 6 -14 - 8.30 99t19 cirka. letanbul 112 5.533 4.761 a1l 41 11 24 - 8 8.12 Niger alitk.aeeelt 2.114 4.327 2.413 1.14 I 24 1 -111 12 120 8.14 mgrrektariar.ftrom 3.395 4.120 .225 *6 68 82 .14 2 .3 t &.15 P Sar t, 3ir 5.831 28.454 +22.623 398 10 - 3 6 8.18 Sirlik esseet. torsert 31.331 19.982 8.641 16 17 28 fil - -3 8.73 dip IptIkist. 8.27 Bess. Istenbul 1.001 1.668 667 66 27 toss - L #* 8.30 rnäf. Ist. 899 - - - 143 - - - t131 8.36 fhsesct sentral.ist. 73.140 6e 972 26.774 115 1 23 18 .5 5.4. w.a. M The ivestset Ss Nersi has started preoductio la Ortober 1986 with a delar of 12 sfths. PMC * Projett not C~qpleted m... Not Avalleble 0 Oi PMOJECT COpLTICo PW W~KEY: TJKIME SIMI LDM B M I X ~ene 1748-4 and 208-1U E1onoMIe Porformn~. of SubeoroJc Ulder Le W 2008TU ces.city IU- 1 22prte 1 &apart es I Ierf~ C*st0I c *alm ade s.6-msereu..r n=se iet t'l .ll i låii..f I r of meloc 1 alem1 , . . 6 L teatl- gettt-t t baLe t sa. gut_ 1 I' atlam 1 aie s Le i 1 at ial 1 mmi e tu i 10 t n inue n aa1*10 * 1 ' a te 1o 1 2.00 4.330 53 93 181 Ds 3.153 1.& *1 rts @D 1s 80 201 1.1V» 3o ff i0s sis 3 la 1.33 Utta 0 o 4o - - - - 1e0 1.& .4 M.L 3e Golit lmetaj 0 1o 4 - - - - o M. as ".a ».a utgsse sm 4o *s - - - - ha er u.n n.as tu @uitgs e s 45 see 1.44 a ni De 1as 3.1 14.sW R.OMs ams att b eS 60 1.35 11 40 1 29% - 15.134 N.Ä 9.4 00 a bo fo 192 eld 40 15 3 24 1s n me5 ~aeter W o 10 1.& 40 w.a 44 11. 13 1.9 rat a~karde 6 0 sk 3u 13 9 1 W 7.a 18.351 e2.14» ?22 tr. Freeast D 40 21 943 - 30 - 13 ffs 20 a 1.9n las. 80 l4 a 38 2.241 11.5 17.2 3- 56.6 - o gse Sormt.ltmir 9 100 100 tra . - - - - - - 1in k 100 100 133 - 1 100 11 11 - seg 0 id 80 14.851 5.456 40 46 20 10 at Ss 1o.662 s.fta. to . 14 - - - - 53 a 12..U 15.11. NG 0-O 蜓莖日粹襲轟藪遼轟藝蠢 個瞌魷•，．儲•。么1 .5.1．。徊唱編二鈴．••屆鰓奮’．•么•由鳥－ 織吃。細劇細細黝細。‘磚購•！.&,．。唱儲．6偶•．一•t。，關•。倘讓 鳥．•••O--－•婦鈴神•．’•．,．遼編• t.．他f魚”tdl也幼認•”t二，.,．飾才，,1，神一鴉．••t’•0論－ ，魚瞬．一。ts物嗚協唱n計才才h騙話t才論黝口f．必 中d闢。口•e二。t計．婦，才奮。•、必勺，奉．必痲：t!.-－一自口自－ ht‘••100•．禹t .7婦購．鳥加•．曲才必勻口．二才才•．二，。煙個唱•。自 l 。．,t,l。二”.,,．冷，二”.,.，。一＿。…，，。． 1I 幼弓自•••幼〞。韋的俗．鸛0矗9 00••言．0口自 口•••。！．神，J唱t論1購騙．色幼t開．自由t口。總騷細．自t，個．么忽，,- 奮h••幼 闕．t,t.t••物•1 ot卹才O他．言，5 j.1俗才．0】J··－一才．讓唱口•一邑 權馳l二魚購一才．鈴才一白0一才寧才．才．，一曾．口他，- 中•．k細t．魚階••個t幼幼開t．驕5 1．才騙婦跑討才5才，訕闢矚－ .,：二。，。＿:．…＿，二，．。．,．、二，.，二”．聲―翁 .1. &．話戲•‘．。二“,&.,.，觔，觔“.,，一，＿闖1．」 一－－一，•同•，一。－一•．,f•。，＇呈”&；•，一騙•f•日卜‘ 010 卜為l &，•．劇“•。”．才‘，。，才，的0.,&,.,,,,&.,，·參l 一一一一一一一一一一一－---－一－---- capettkr utå- wegört* r~rt at vakna 4~ **b-eorrowrie bl attattig-tt> 11,19 ha ffittingi I-A-PUPIM J-timi* Katt- Ettå- ana- I Loell la* mig Attmat eate LIKtmåt mig l acta4 ma* mu l akt 108 10 kli 40 31 dA 21 m.a m.a Udito lo - 3.334 50 23 tia - Wa 109 WA t. 100 MMA 369 151 219 *0 tio 30 143 ftlipalk.takirdet 3D I~ ~ complekoj ta Msa 9 9 19 "steka 0 160 40 60 9 - all "Dta r 0 ra 20 sil as al G.M 100 ad 236 171 n 99 de st 2$9 an 30 år 133 224 ra 24 Mm tcel 50 -tt? 746 - 10 134 - 31 ~ 18 attaestak LD as 31 :333 273 40 t at la 114 als 3.879 Måna$ D 63 ft i.132 IDO 19 2 M 139 la 33 9.4n ~98 g at ap 109 NM? 73 30 12 66 U3 aktat log 19.013 48 80 la l~ akta ~ 91 pm CYBY p= 40 M 29 G44. m 4.151 nr .112 1. 3m 44 a lit t 5 6~ 9 44 13 9 N.UG 143.363 La 97 UM2 0 0 M emffej te not ta öporation meden, 0 94 MD 6.126 24.0n 31 35 2a 221 14 3.1% oftarted fförektoco ta 1997. ceteel ffemåte gr# cot ~ lable. l l l 1 5 Invexstemt l i i Carett oti- e xsport* 5 uport a . 5 teceecntal 6 C t/~Jm 5 le l Team sch-Serromre bl t aktatt i stt l ktiom IL 9q 4stee i os.lemi-Ok it's tt *@ ttless i' lm attimen IamitIå l gata- l gott- l |totti- l l mktt- ga | Ctt- l | a t- i | careseri . aesies ese i ctet et cm.- i måete ACIta semt i k@ lae Atteit I seiatt~t 5 3 5 4 5 5 5 65i Sa e i, io1 i 11 12 113 5 (4 5 15 i *ttester 0 100 0 - - - - 1 1 28 141 31 U.a Catta C1Ile s 100 it 5.256 30 95 229 29 1.316 1.196 G6 6.1 Nae ..ecaeII 0 86 11<2) 264 6 1/ 12 2 a/ 91 96 11 24 1.126 - Sapeaktarlar 0 30 Wi 1.66 540 30 13 20 - a9.M?l S1.443 393 1.a Ptaci 94 0 66 52 2.010 2.131 34 1. 290 531 19.5 - 3.W - Strilk nhceot LO 100 100 2.S10 9.424 51 41 m6e 16 29 29 1.14- dIp tp1lk 0 - - - - - - - - - - - Dessa 0 el 0.a 4% 268 40 16 50 68 16 16 »3 w.a Dm's 8 100 - 132 - 80 - 10 - 3.33 -. Sa - meat teatral 0 60 11.222 29.616 0 60 42 21 $ CP V 2e tevostmat Mestt ficitemi ta 1986 / alt~e.gh the Iavnstao has bad (Woe hm 196. tho metel »«lte tera stem for this pmue heese 95 I et the tavesta.et hes bee efft~d bl the nd e 198 Han started production (n 197; actual results not avatlable. LD: Leant Developed ReRions. SD: Semit-developed, Di Developed PO.CT COMPLETIm a T 1lU(Es ITEII SIA KAl(pæ A~10A1 Laff 1740-1U nd SO-1~i 1nes~ st*ta«ent (1l to Ye L) m<s ml m I m mI.. . -.. ..... ..... . .o ..... I se. less portelle 1.300,1 S.IN.! N4.8, aS.mu, 33.31,5 u.m.0 *R,0 73.g.1,3 Ilter Is Ilo 1 usd . 0.1 1,3 m8. $, M, 1.141.1 I.M.4 *. , tesstes sd etter 1acms 331,1 33,8 1ft,1 311,3 1.0,1 1.01,5 3.01.5 sa.24, m u eltat Ml#, -11.11 .1 .., 1.111.1 5.1, 4.L9ø,l Bilpem 5mt ,11,5 !!8,1 1.13,1 1.11,1 3.11f,1 .j,8 . _ 5,15., total ucess 8.1N,4 .., 15. 3.,8 530,1 18.318,3 l.2.926, Fe a espesse 1.1 1I,5 15,8 1.83, 1.,J . ..Mt 11. .1,g Streeter aff beses Irn 31,6 61.1 II,T 113,3 1,11,. ". M ,2 tlmistrattile esteut e 1113. 111.1 i.? 13,3 Mj,3 15,1 ,1 gg1, Bepreelttie 11,3 11,1 I4,? 43,5 , ,9. sg ,9 Prmelotes fetireutt - . . . - . - 62. lana,.htes sed fme INJ. ial.t to,l IN, .6f, in, Tll IT6.2 latarest e trs 4.1,1 LITI't1 14.1.1 Oi.M,3 4 1. , .,1 17 .3 Proeisie fot loe.,e m,# 1.113,4 1.51., 3. ,0 3.m, l.1S, 1.0,1 9.93. Pr*Jeet ur~ets espemse 6. ,,# aj8,3 81., 8,. 1lt, 31,1 3..9 ether elm- . - . -M.4 11.3 SILJ Total et~ ., 1.4,. 13.151, 1.1,1 33.1. I.i8 1.10,4 99hS. flit Meorm tautie .3, 3 31 1.111.8 .3, 4.Lu,t. 1.64. .N,9 6.767.4 leet ae P fit ,119. .11.1 1, , SU,3 1.. .,1 3., 31.1 --.ajitu Dtt prufit 111,3 1.314,8 1.111.1 1.141 3.11,1 1.1l,t 1.111,. 3.614,8 Spprratlos 119 #~, 1.0,1 1.30,1 1.485.1 I.IN,l 1.0,3 f1,6 1.67.9 ecaeree-LetaI rese 11,9 113.1 Mj8,6 331,3 313, 11,3 11.1 1.561. -Cntigeel reger'. N,5 113.1 II,! 311,3 311,3 1,1 . ulu,l 25.4 hatige letallumee/mer total se t# 1,1 18,1 11.1 1I,J 18,1 l,I 11,1 15,3 btettetiT e ge tetl amst . 1 13 I,1 1, 1,1 e. 1,o l late ebrgesteeagu ltes-e &K 14.4 [t 11,4 13,6 14,4 16, 1.1 19.1 l lten m / aucu.Ilerage lim prtfolte 11.1 19, 33,4 1,3 16,4 11, 16,6 u1 Slude m e /age40 miett #ortelle 15,9 al,l 1.9 18.1 18,1 1.6 1,1 52, lageles bore tes/ølre el gerth 1,1 0, 1 44,3 , ,3 ø,l L, Bel pmfit/ea §et r, 1.4 01.0 9,6 ., 11,s2 Itelduudlutt la te.n 1184 13. 1m,4 a,§ #.l ,e Je S,,0 u, øe ,2 Source: TSKB 7I2 'IMY SINA! KALI3NA SMlAS! (L.mns 1748-TU and 2008-7lfl Bal~c medetM (l9a t iljoni 1) as$m 'eebc 1t.14 bete 3161 hepser 11.1f.92 e 31.1113 &ustk 31.M sOst 1,18 ~is,er 31.A led al. §ar Cu6 n4 Iute .118.1 i m8,j 8.311,. 4.811.? C.0M,I I., 38.824.1 0.tgu,j "~4 Iscms 34. 1 $.211 2.^, 4.319,.. 1$. 105.1 8.112.8 11.217.3 Arr*,vneiptuapelaWteret 111.§ 81.J fS.M8.I 24.315.2 41.1.1 .m#,8 173.2 64.281.1 Mer 1i,l 3 $41.3 4.011.1 4."#8 8.471.2 $.5,1 Mj1, 3.443.8 14tul cisret iasett 18.441, IS.48. 1.85.1 1.8.S 8.394.8 .J95,1 1.13.2. I2 .253 ,3 le te cestrul ha.t Lcl erreet otna 1.334.9 4.11,1 Wt.M.5 tt.2? ,1 30.~11, 1 1.22, I . . I.41.9 fte-i cirtee~ Se 30 62.3 4.01.8 st.188,4 G.74.2 1M1.I #.118, I11.1,1 13 itt bu 12.19,8 la 2M, 112.85.8 353.4%.4 lsinter-ed ti e 4231,1 3.81, 1.18. 1.01,8 50.4 I.Ij $.81, * total j 544.1 2.944.4 Il.lAf.2 Iff.8.23 I13.5,1 3.108.2 334.8, 444.2377.8 Protiebo for 1Ise (8.33 (2.15,(1l .. (1. io M2,> 111.915.) In.M .3I limit? frtrptiaietes .3X.1 2.114,1 2.11, 4.1,1 8.413.1 19.1101 38.21,1 18.8e. .9 -.MIN ter .san inj1 (119.1.) (111.2 121,21 114,) 14.2) f14,3) (641.4 etal Iesf/terWMtieo #.84,1 Il92,8 11.15., 0..88.m 10.5n.,1 iWt.31n, MJO.11,8 433.192.4 Cogenmeut heda 10.3 J .3,2 13. f .04,8 l8,8 0.2, 9776,4 F1Se4 usate last) 8. 61 ft.t 0M.4 11.4 1.810, I2.4 geg4. er-vill tnie 4,2 .14,2 f..8 6 .J 9.341.5 2.054.1 1.911.1 2.85,7 Oth ese n .7.134.3 ........ . ...... ..... ......... ......... ......... . ....... totsl usete 47112.1 10.14.2 106.111,5 139.188.2 28. 01,l 314.833 ellff4il 67i3i2. L1IIIII;IIs Seri/ter leReu In1.s 44,1 He,-J.1 i12..S 332. 4.8,M.4 li,te4 siteetm see ettr , 23.4 3.1he,$ 4.9#.2 .141,8 31183 801.8 34: .0.. 1*es s profIt du 3812.3 3.181,1 1.15. 11. 1.01 l 48 81,8 9,. SiTe-de 524.8 10.2 1.513,5 1.111.5 f.m4,8 1.31.2 11. Total stret liiIItien 4.1.8 .MJ1. 6..lf,W MJ.02.8 < , 31.301 19.9.124.3. 16,4 Icei- tara 40t Csesest estrdI:sted 4ebt 3., 3143,4 1.89,8 1848.3 8.(,4 ene81f,2 28 5.I5 Cectral Isnb twseal rMitecst tredits -4l tS-6.4,1 .0,5 23.99.4 I.I0,3 MJ .I.N39 1e TI..094% 1811.8 L021.3 2 ,.8..f $^ c3- 9 ,j 198, 4. 5.89 W r essee..eWl Ru lem ii.4 1 67.6 501.2 f5 M, 18.211,1 14 ml 8.0329 Other ertis k2 3 L.ir4 48. 4 3J. 0.84,8 1 131, 18.217. .otal it, let 5.14.2 12.1.J 31.914, e4.44.3 l4.82,j 85.n1,3 in 3,3 176.486,9 3- O M yorps ierrec den t *5238,j 41 26ti 40.13.3 1.5131 * M.. 1N-MA MUSJ 11.4614.934,5 b08, 40,10t1 49.01, 0 50. IlM 83.1 169.9MA 4 ,np le e 19-214. 21.4.4 92.335, itet tos te lt 48 .31, $91.41.,4 i.i t, (38.932.8 3IN.01 2 ,8 3li.t$.1 M9.2.8.6.4 3e.ew 't. 3eelbber 31.1I.t Det,Ober 31.191 h:eober 31,113 leumbr 31,111s kt ewr 31.111s >.c#.or i1.!lm6 Dec~e r 31. 197 StMff retireest fed 94,5 94.5 114,5 114,5 114,5 114.5 114,5 176.5 Other liabilities 141,4 15.459.3 sarelolders' eltyt Secpiu 3.111,1 3.610,0 1.111,1 1.111,1 1.111,1 1100,1 24.101,1 10. 000,0 reid-in capital 1.115,6 3.10,1 3.x14,4 4.613,1 1.ml#, 11."1,# 225M, 40.000.0 resenes 01,3 859,4 1.261,1 1.105,1 3.314,1 2.419.1 2.896.4 Beialiatin nserte 635,3 2.154,1 3.1536 1.8I.4 4.02 leserie fron the profit ot the peid 390,2 Total 2.116.e 3.859,4 1.141,5 1.954,5 11.2, 18.145,1 ti.1i,s 45.63. total liabilities a9d equlit 41.142.1 13.143,2 1A6.111,5 139.189.12 2.lle, 314.131,1 4.1741fZ,5 7.3.ULi patios Cartrent ratio 21.23,6 319,1 313,3 375.5 414.2 461,3 5'46, Correst ratio leieledim t arrears) 85.1 12, 139.3 112,3 111,1 1, 111,6 267,9 'roisioftslioao portfollo 2,7 3,8 6,1 1.8 3,6 1.4 6.1 6,0 Døbt/eqoiti (li.it '-0) 13,2 1,6 1,1 6,8 11,5 6,2 1,2 5.9 Source: TSK OQ% PIOJCT CMPLATIN REPrT rUEYs TIMIE SAI UI(DaA aWWeI OAes 1748-U and 20f8-1M Sumary f Arrsre (ts atIIt" IL) 3L121W= 31.1L2.19"1 5.1.198 31.12.1983 S31 t*4 Stt.12al8f S1t1290M2-12.1507 Principal Up to 3 moths 3388 82.0 544,s 426,s 1.762'0 9j42 .395,7 Ge,. Hore then 3 moths 2.457.6 2.557,4 2.322.2 4.38,. 0.053,s 14.29,5 4.015,2 11.6306 it court ... EgA 1U6. IL2L. I2ISLI 1143L1 M2 6J TOTAL Z?"A 2,Li Lf22. 92*2. 19.94.1 Milal 35,12UIJ Interest Up to 3 moths 442, 175.9 1.306,7 1.29.S 2.220,5 372.5 S.09S'g Nore than 3 months 3.752,5 4.738,1 6.099,1 7.737,1 11.279,1 14.774,2 2.210,0 8.916.2 At court -- .01. 5,1.2 132 10,522.* 2*.t Ey1ZJ TOTAL W.1953 4&.9f.0 Ia 1 14,751.8 23Ig. 2A.. g2503 9 2.1 Total Up to 3 months 181,6 257,9 1.ISIS 1.724.8 3.982,S 1.26.7 5.991.3 More then 3 months 6.210,0 7.295,5 9.421,3 12.575,3 19.331.9 29.067.7 6.225,8 . . At court - 20-Iff-S~ ~ ~ jjj ILlai ~ 1UL* TOTAL 6.91. 1 .46.0 ISA01.1 24,31.2 43,749.1 S4.022. Wl"11 nm, Loans affected by arrears of more tham 3 months 19.317.9 14.993,.0 19.S581 25.309,3 23.SS4.9 2S.551,9 17.6"3,3 41307.2 Total loom portfolio 36.246,9 S2.444* 70.199,2 102.828,3 183.3520) 230.102 346.99G.6 44.277.8 Arrears (including at court) of mr than 3 months as S of portfolio -Principal 3,s O,s 6,0 G'9 1161. 12,3 q'5 9.8 -Interest 10.4 got 11.1 13.1 1262 1100 G'q 6 .2 -Total 17, 1 15.3 1l'? Z2,0 26,3 23,8 16,4 16,a Total arrears as S of portfolio -Principal 7,? 4.9 G'7 9,3 12,2 13,2 10.1 9.2 -Interest 11,6 9,3 13.4 1*,3 14,3 1101. I's 6.6 -Total 19.3 13,0 20.1 223 23.3 24o3 tell 1.2 Portfolio affected by arrears of more '. than 3 months (S) S4.1 26,4 25,0 24,3 14,4 11,5 S,3 9.4 ....... *-.w - 94 - Annex 14 PROJECT COMPLETION REPORT TIKEY LOANS 1748-TU AND 2093-TU SUMMARY OF OPERATIONS (USS MILLION) ADDrovals Foreign Currency 97.0 51.6 75.0 47.2 118.8 74.7 83.1 100.6 TL Lending 1,226.8 8,929.4 1,5360.2 18,188.4 16,497.7 43,747.9 70,537.4 69,828.9 (TL billion) US$ Equivalent 15.8 79.2 93.4 79.3 44.8 83.8 101.8 79.8 TOTAL 112.8 130.8 168.4 126.5 163.6 158.5 184.9 180.4 Commitments Foreign Currency 66.9 55.7 64.9 13.7 117.4 42.7 62.0 68.5 TL Lending 733.2 5.445.6 14,491.5 10,678.5 10.656.3 34,095.8 68,238.0 38,816.8 (TL million) US$ Equivalent 9.4 48.3 88.1 46.6 28.9 65.3 98.5 44.4 TOTAL 76.3 104.0 153.0 60.3 146.3 108.0 160.5 112.9 Foreign Currency 59.4 69.9 52.3 15.6 33.3 117.4 62.7 85.2 TL Lending 570.6 4,727.3 13.525.8 9,352.8 5,378.4 23,776.7 69,874.4 37,116.7 (TL million) US$ Equivalent 7.3 41.9 82.2 40.8 14.6 43.5 100.8 42.4 TOTAL 66.7 111.8 134.5 56.4 47.9 162.9 163.5 127.6 - 95 - PROJECT COMPLETION REPORT TURKEY INDUSTRIAL SECTOR PROJECTS (LOANS 1754-TU, 1755-TU AND 1952-TU) March 31, 1989 Industry, Trade and Finance Division Country Department I EMENA Regional Office - 97 - PROJECT COMPLETION REPORT TURKEY INDUSTRIAL SECTOR PROJECTS (LOANS 1754-TU. 1755-TU AND 1952-TU) L Introduction Bank Lending Strategy to Turkey's Manufacturing Sector 1.01 The three projects under review represent a synthesis of two elements of the Bank lending strategy to assist the manufacturing sector in Turkey. In the fifties and the sixties, Bank operations in support of industry in Turkey were mostly confined to the private sector through DFC loans to TSKB. The objective was to support Turkey's industrial development through private sector initiatives and to upgrade the appraisal capacity and investment process of the intermediary banks. Financial and economic viab.lity of firms and sub-projects were considered the primary criteria for efficient resource allocation. As Table 1 demonstrates, between 1950 and 1972, Bank L"FC lending to Turkey amounted to US$130 million and was above the Bank-wide average of 20% of total commitments. Table 1: Bank Group Operations in Turkey A (US$ million) 1951-63 1964-72 1973-79 TSKB 23 105 220 DYB -- - 110 Direct Industrial Lending -- -- 323 Total DFC & Industry (1) 23 105 653 Total Bank Lending to Turkey (2) 63 473 1,147 (1)/(2) 37% 22% 56% a/ Net of Cancellations Source: Sector Operations Review: The Industries and DFC Program in Turkey, (0ED Report No. 3077), pp. 44. 1.02 In the seventies, Bank lending strategy to the manufacturing sector began to focus on broader economic issues and it was viewed that raising the efficiency of the public sector enterprises--which controlled more than half of Turkey's industrial capacity--should also be actively supported. As a result, the Bank identified7six direct state-controlled industrial projects 1' in the amount of US$323 million, and provided the State Investment Bank (DYB) with two loans in the amount of US$110 million for on-lending to public sector entities. 1.03 Following the economic crisis of the late 1970s, the Bank resumed its DFC lending to the private sector which would now also focus on specific economic objectives such as promoting labor-intensive enterprises. In 1/ ERDEMIR steel, IGSAS fertilizer, AKDENIZ and BALIKESIR pulp and paper - 98 - addition, the Bank became more interested in developing other private and public intermediaries. Thus, two of the loans under review mark the beginning in a new strategy in Bank lending to the manufacturing sector which was to combine economic objectives and DFC lending. 1.04 SYKB, which was selected for these two loans, was established in 1963 as a private development bank by five major banks in Turkey. Originally, SYKB was to provide working capital financing. But since the late 1970s, SYKB has made a shift in its lending strategy and has had a growing role in channelling investment funds to the private industrial sector. It has developed an ability in financing small and medium scale private enterprises. In this context, it has served as an intermediary DFI in a number of Bank assisted operations. 1.05 While there have been several PCRs covering the performance of TSKB in particular, and loans channeled through DFCs in Turkey in general, this is the first PCR that reviews the performance of SYKB under the two loans. The Economy 1.06 During the period of 1980 and 1985 when the three loans under review were being utilized, Turkey was emerging from its most severe economic and political crisis and was introducing wide-ranging adjustment measures to restructure its economy. Until the 1980s, Turkey's industrial development strategy was based on capital-intensive import substitution in basic industries. The main industrial instruments were large investments in State Economic Enterprises (SEEs) supported by generous tax and financial incentives combined with high levels of protection which benefited both the public and private sectors. Real interest rates were generally negative and the exchange rate was overvalued particularly during the last part of the 1970s. These policies led to strong industrial growth which increased industry's share in GDP from 13% to 18% between 1963-77. However, these policies also gave rise to some serious structural weaknesses in the industrial sector, namely a pronounced anti-trade bias and lack of competitiveness, high capital intensity, high import dependence particularly for intermediate and capital goods and low efficiency, particularly in SEEs. These weaknesses became manifest following the first oil crisis in 1973 and were accentuated by the second oil crisis in 1979, which led to an unsustainable external imbalance and a severe foreign exchange crisis. Industrial growth declined sharply, capacity utilization rates fell to record low levels and inflation surged. 1.07 In response to the crisis, in early 1980, the Government announced a new economic strategy aimed at stabilizing the econom.-, placing greater reliance on market forces than on quantitative controls, and encouraging the efficient growth of the private sector. To implement this strategy, the Government adopted wide-ranging reforms involving a number of key policy areas, such as exchange rate adjustments, import liberalization, export promotion, public sector reforms, financial/monetary policy and tax reforms, and price liberalizations. In addition to reforms in the major policy areas, the Government undertook a number of steps to reduce bureaucratic regulations and institutional rigidities and to improve the overall business climate. 1.08 Since 1980, the Government's reform program has been supported by five SALs, two Financial Sector Adjustment Loan, one Agricultural Adjustment - 99 - Loan, and one standby loan from the IMF. The adjustment measures, on the whole have been successful. External adjustment has been a success. The area where policy adjustments have been less successful is in internal adjustments, as evident from the very high prevailing real interest rates and continued high inflation. The Private Sector 1.09 Until 1980, export promotion and employment generation were viewed as a natural outcome of industrialization. With the Government's adjustment strategy of outward orientation and reliance on market forces, the private sector was viewed as the main stimulant of growth, employment and exports. However, the past incentives and high levels of protection had led to shortcomings and bottlenecks in the private sector which slowly had eroded the comparative advantage of Turkey vis-a-vis potential trade partners, and reduced its capacity as an efficient producer. 1.10 Traditionally, the public sector in Turkey has been engaged in large capital-intensive ventures, such as steel, petrochemicals, fertilizers, pulp and paper, and cement, while the private sector has been dominant in light and non-process industries, such as fabricated metals, electrical and mechanical machinery, glassware, rubber and plastic, wood products, and textiles and garments. In the past years, the capital intensity in the private sector has increased faster than the public sector. But on the average, the private sector remains more labor-intensive particularly because of its concentration in light as well as small and medium scale industries. In the 1980s, the private sector has accounted for roughly 50-60% of manufacturing investment, 60-65% of value added, 65-70% employment in the organized sector and over 70% of exports. Since the late 1970s, the Bank has supported three loans in support of private sector small and medium scale industries with high labor intensity in order to sustain the growth of the sector as well as to address the unemployw2nt issue in Turkey. Impac, of Adjustment Policies on the Manufacturing Sector 1.11 The manufacturing sector appears to have successfully adjusted to the Government's stabilization and liberalization program. The adoption of a realistic exchange rate and complementary export promotion and import liberalization policies stimulated manufactured export growth to a remarkable extent. Between 1980-85, manufactured exports grew by almost 41% per year, which doubled industry's share in total metchandise exports. However, between 1980-83, private investment was depressed due to low domestic demand and excess capacity inherited from the pre-liberalization period. After 1983, private investment in manufacturing has been constrained by high interest rates prevailing in the Turkish financial system and limited availability of medium- and long-term credit. High public sector borrowing requirements are the main cause of the high real interest rates. Since non-preferential interest rates have remained high and the cheaper preferential. credits have declined as a share of total credit, the average interest rate charged to the corporate sector has increased. The Turkish corporate sector has reacted to the persistence of high interest rates by adjusting their investment plans, and resorting relatively less on borrowed funds and more on equity financing. The increase in equity financing has come mostly through rights issues and internally generated funds. In addition, the rapid depreciation of - 100 - the Turkish Lira increased the foreign exchange risk of foreign borrowings which discouraged investors to take foreign currency loans. In 1984, the Foreign Exchange Risk Insurance Scheme (FERIS) was introduced which alleviated state supported investment from any foreign exchange risk. Unemployment and Labor Force Movements 1.12 Turkey's population in 1984 was estimated at 47 million with an average growth rate of 2.5% since the mid-1950s. Labor force participation grew at a lower rate of 1.9% but, the Turkish economy had not been able to generate sufficient employment opportunities in the past two decades. For exa -le, only 2 million additional jobs were created between 1962 and 1977, translating int-D an annual growth rate of 1%. In the late 70's unemployment, particularly in urban areas, increased, mostly due to a decrease in external migration which had been a partial solution. With the increase in oil prices in 1973 and 1979 and the resulting recessions in Western Europe, the flow of external migration slowed down considerably. In addition, with a decline in agricultural employment, the urban share of the population increased from 18% in the 1950s to 45% in 1978 and was mostly concentrated in the seven largest urban centers, causing urban unemployment to be a major social problem. 1.13 The unemployment problem was partially caused by macroeconomic policies which had tilted the balance of production toward capital-intensive operations with low employment generation. Two factors played a role in the low level of employment generation in the industrial sector. First, measures such as an implicit subsidy on imported capital goods provided by an overvalued exchange rate, low interest rates and customs duty deferral and exemption encouraged large scale capital intensive investments. Second, unionization and a high degree of labor unrest in the 1970s pushed entrepreneurs further into capital-intensive investment. In addition, a large proportion of the unemployed were barely literate with no s' 1s or other training and thus unsuitable for the growing manufacturing sector. The non-organized artisan sector which had originally absorbed the unskilled labor force suffered itself from severe underemployment and continuous low productivity perpetuated by overcrowding and lack of skills training. H. Performance of Loans 1755-TU, 1754-TU and 1952-TU Loan 1755-TU (Private Sector Textiles) 2.01 The Private Sector Textile Loan was the first DFC lending operation in Turkey that attempted to do the following: (i) focus on one sector unlike previous operations which merely specified eligibility criteria for sub-projects regardless of sector of origin, and (ii) involve as an intermediary SYKB which would become one of the major channels of industrial financing in future Bank operations. 2.02 In the late 1970s, the textile sector had emerged as one of Turkey's leading manufacturing industries, a major foreign exchange earner, as well as the most important industrial employer. Three-quarters of the industry was in private hands. But, it was operating well below potential because of structural imbalances, bottlenecks and obsolete machinery. It could not effectively meet the expanding domestic demand for high quality or mass-produced textile products. Its exports were excessively concentrated on - 101 - yarn and it was unable to take advantage of potential export markets, mostly in Europe and the Middle East. The Objectives of the Loan 2.03 The objective of the project was to provide an integrated industry-wide approach to help remedy some of the above-mentioned problems. This was to be achieved through a balanced lending to various sequential operations--such as weaving, dyeing, printing and finishing--a broad technical assistance and technology program, and a continuing dialogue with the Government to improve 'he investment and export climate of the sub-sector, as well as upgrading technological proficiency, reducing costs, improving quality and productivity. Two loans for the amour of US$80 million were approved under Loans 1754-TU and 1755-TU. The first loan for the amount of US$65 million was earmarked for TSKB which included US$4.9 million for technical assistance to the textile sector. The second loan in the amount of US$15 million was for SYKB and contained US$100,000 for staff training, studies and institutional strengthening. A separate project to assist the rehabilitation and modernization of the public sector textile enterprises in the amount of US$83 million to Sumerbank (Loan 1847-TU) was approved in May of 1980 (OED Report No. 7113). 2.04 The eligibility criteria which were developed for sub-project financing were to reflect closely the priorities identified in the sub-sector. The free limit f3r SYKB was set at US$750,000 and the ERR of the sub-projects was to exceed 15%. Implementation of Loan 1755-TU 2.05 Loan 1755-TU became effective on September 17, 1979 and its implementation completed on December 31, 1984, after a two-year extension was granted. As in the case of Loans 1754-TU and 1952-TU, slow commitments were the major problem in the beginning years of loan effectiveness. Commitments fell far short of what had been projected. A substantial devaluation and an adjustable foreign exchange policy as a component of the new economic reforms of 1980 and the ensuing risk on foreign exchange borrowings, led to a fall in demand for foreign loans. Investors, on the one hand, could not fully estimate the extent of the risk and thus decided to abstain fully from foreign borrowings, and, on the other, expected the foreign exchange rate policy to be short-lived. During the period of 1981-84, project financing was mostly in the form of equity and domestic currency financing. As Table 19 demonstrates, during this period the ratio of total debt to total assets in private industry, as represented by members of the Istanbul Chamber of Industry, declined by an average of 50%. But, when it became apparent that the policy was to stay and that the foreign exchange risk had to be reckoned with, demand for foreign loans increased slowly. However, the introduction of FERIS in 1984 increased the pace of commitments. Sub-Projects Financed 2.06 Under loan 1755-TU, 13 sub-projects (net of cancellation) were financed for a total Bank commitment of US$13.6 million. Three projects were in the garment making, one in spinning and nine in weaving. Twelve of these projects were in the developed and one in the semi-developed region. Three projects were completed according to schedule, three were completed with minor - 102 - delays of 3-6 months, and the remainder with delays of 12 months or more. The projects created 2187 jobs at an average per job investment of US$9,978 (US$6,832 for SSI and US$11,873 for non-SSI), eight sub-projects were new projects. Projected ERRs and FRRs were above the 20% threshold for all sub-projects approved. However, due to lack of project related incremental data, ex-post ERRs and FRRs could not be calculated for all projects. Only one sub-project provided the necessary data. Actual ERR and FRR were 14% and 19% respectively compared to projected 25% and 29%. If ex-post rates could have been calculated, it is safe to assume that they would have been lower than projected at appraisal mostly due to generally lower capacity utilization in the textile sector during the initial years of project start-up. Table 2a: Loan 1755-TU -- Project Summary Data Number of Projects Financed 13 Number of Industrial Groups 3 Number of Jobs Created 2187 Export Commitment US$90 million Financing (bil TL) IBRD 4453 Other 1030 Equity 4039 Distribution of project within economic development regions (%): Developed Region 88 Semi Developed 12 Less Developed Source: SYKB 2.07 Another objective of the project was to increase textile exports. The export target criter*.a for eligible sub-projects were set at 40% of incremental production for expansion and 30% of total production for new projects. Data on incremental exports revenues due to the project per se are not available. However, the average total export sales as a share of total sales was 27%, which is satisfactory. Technical Assistance 2.08 The technical assistance component for SYKB amounted to US$100,000 and was primarily intended for staff training and financing of studies. Table 21 illustrates the use of these funds. The training and technical assistance component of the loan contributed to the upgrading of the skills of SYKB staff. Out of total withdrawals of US$99,979 (out of the allocated US$100,000), US$31,271 financed three studies focusing on the export prospects of various Turkish textile products, US$63,480 financed participation in various training courses and attendance at international fairs and seminars. The remainder was used to finance SYK8's first micro-computer and related training. More wide-reaching technical assistance to the private textile sector in Turkey was included into loan 1754-TU to TSKB. - 103 - Overall Assessment of Project-Related Objectives of Loan 1755-TU 2.09 Other than the commitment and loan utilization problems stated above, the project is considered to have achieved its investment related objectives and is in compliance with loan conditions. Due to the small size of the loan, its contribution to the overall sector was modest. It helped, however, mobilize an amount approximately equivalent to the Bank loan in additional foreign as well as domestic funds, and started to build SYKB's capability for long-term investment financing through training of staff and exposure to Bank standards and requirements for appraisal, supervision and loan processing. Loan 1754-TU (Private Sector Textiles) to TSKlKB ' Sub-Projects Financed 2.10 Loan 1754-TU to TSKB had the same objectives and implementation probler..s as its sister loan to SYKB and was in the amount of US$65 million which in%luded a US$4.9 million technical assistance component. As TSKB was a significantly larger and more experienced financial institution than SYKB, it was felt that in order to have a major impact on the sector, SYKB would not yet be in the position to implement the entire loan. Under 1754-TU, TSKE financed 23 sub-projects (net of cancellation) for a total commitment of US$62.9 million and will have created an estimated 13% more jobs above projected. Eight sub-projects were new and the remaining involved expansion and balancing. While SYKB supported smaller producers, TSKB's loan proceeds were used by larger producers who were able to make a more considerable contribution to the sector. Table 2b: Loan 1754-TU -- Project Summary Data Number of Projects Financed 23 Number of Industrial Groups 3 Number of Jobs Created 1365 a Financing Pattern (%) TSKB and IBRD 32 Other 68 Size of Loan (US$mil) less than 1 6 1 to 2 4 2 to 4 5 4 to 6 8 Distribution of Projects within Economic Development Regions (M) Developed Region 60 Semi Developed Region 29 Less Developed Region 11 Source: TSKB a/ This number only refers to additional employment generation in 7 of the 23 projects financed by the loan. 1/ A review of TSKB's operational aspects was conducted in the preparation of a PCR on Loan 1748-TU and 2093-TU issued on June 29, 1988. - 104 - Technical Assistance 2.11 Technical assistance under this loan to TSKB had two components. The first component attempted to create a textile consulting department and the second focused on traininE of TSKB staff. As the firms financed under 1754-TU were of a larger scale and consequently more sophisticated, the consulting services provided by TSKB to its clients (i.e. extension services and technology fund) met a far higher demand than experienced with SYKB. The textile consulting department has since been spun off to a separate consulting firm where TSKB is a shareholder. 2.12 Under the internal training, TSKB was able to expose its staff to a sector which has emerged as a leading sector in the economy. The loan led staff to gather information and develop contacts both in the domestic and external markets. Overall Assessment of Loan 1754-TU 2.13 In general, the loan did achieve its objectives. Originally, certain sub-sectors were allocated a larger proportion than was needed which was adjusted during implementation. Also, any of forward and backward linkages to related sectors not covered under the loan were established over a longer period of time than anticipated. For example, the accessories sub-sector (e.g. buttons, zippers, etc.) developed over time as a result of increased demand for higher quality products. Above all, the finishing and dyeing sub-sectors benefited directly and indirectly form the loan. Loan 1952-TU (Labor Intensive Industries) 2.14 In the 1970s, urban unemployment in major population centers in Turkey had increased at an alarming rate. The industrial development strategy during the 1970s together with an overvalued exchange rate promoted capital-intensive industries with inadequate employment impact. With a population growth of 2.5% over the last three decades and an annual labor force participation rate of 1.9%, employment opportunities in the industrial sector had only grown by 1% per year. External migration to Europe and the Middle East had served as a partial solution to the unemployment problem. However, the recession in Europe reduced demand for Turkish workers. By early 1980, unemployment became one of Turkey's most urgent social issue. The Objectives of Loan 1952-TU 2.15 The objective of Loan 1952-TU was to generate at least 5000 industrial jobs at a maximum investment cost of $15,000 per job (excluding land and buildings). The per job investment limit was based on a review of capital intensity of investment projects which had received Certificates of Encouragement from the Government and projects financed in past operations of SYKB, TSKB and Halk Bank. The proceeds of the Bank loan were to finance the cost of imported machinery and equipment and associated permanent working capital in foreign exchange as well as 40% of net cost of domestically produced machinery and equipment. 2.16 Since no limit on the investment size was proposed as long as sub-projects would meet the employment and per job cost criteria, one third of the funds were earmarked for sub-projects in the small and medium scale - 105 - industries. For the purposes of this loan, SSI were defined as those enterprises whose fixed assets (excluding land and buildings) would not exceed US$350,000 in the case of expansion and US$500,000 in new sub-projects. Since the majority of enterprises in the SSI category had little or no experience with foreign borrowing, the Government assumed the foreign exchange risk in these sub-projects. 2.17 The loan contained also two innovative approaches in project promotion and technical assistance. First, it was concluded that loan utilization would be unduly delayed if it had to await an increase the number of intermediary banks. And since SYKB had no branch network, it was agreed thac SYKB would use the network of its founding banks, mainly Is Bank, to reach SSI in the various development regions in order to promote projects. The second innovative aspect--in the technical assistance area--was that sub-borrowers could utilize the services of Turkish consultants financed through a grant by SYKB that would cover 80% of total cost which would come out of the general interest rate spread of SYKB. Implementation of Loan 1952-TU 2.18 Loan 1952-TU (for the amount of US$40.0 million) became effective on June 11, 1981 and its implementation was completed in December 1986. Overall loan implementation and utilization was considerably slower than expected. Poor investment climate and the unwillingness of the entrepreneurs (other than SSI sub-borrowers for whom the Government assured the foreign exchange risk) to accept the foreign exchange risk of borrowings were the main causes of low loan utilization. In addition, within the overall framework of industrial investment incentives, SMI projects were discriminated against because of the bias in favor of enterprises offering economies of scale. Consequently, loan drawdown from the SSI was slower than expected. Simultaneously, potential non-SSI borrowers had to face--after a long period of relative nominal exchange rate stability--exchange rate adjustments. The introduction of FERIS in July 1984--in which the Government would take over the foreign exchange risk--paved the way for faster commitment under the loan. As a result of slow commitments prior to the introduction of the FERIS scheme, the closing date of the loan was extended from June 30, 1984 to December 31, 1986. Sub-Projects Financed 2.19 A total of 149 projects, 96 SSI and 53 non-SSI, were appraised of which 114 sub-projects (net of cancellations) were financed with US$39.54 million of the approved amount. Projects financed were mainly in textiles, electric products, food, metal and engineering, and marble industries. They are located mostly in Izmir, Istanbul, Terkidag, Bursa, and other major urban centers. Thirty-six percent of the loan amount went to finance sub-projects in SSI, slightly above the required target. With the current 80.9% of capacity utilization, sub-projects have created 5,572 jobs at an average per job investment cost of US$7,095. 2.20 Meaningful ex-post ERRs and FRRs could be calculated for only 37 out of the 114 sub-projects due to difficulty to determine exact incremental cost and revenue due to this loan vs. other investment activities of the enterprise. Actual ERRs were higher in 8 sub-projects and lower in 29 - 106 - compared to estimates at appraisal. ERRs in four sub-projects were below the eligibility threshold while 33 were above. Actual FRRs were higher in 5 sub-projects and lower in 32 sub-projects. Based on this sample, the lower rates are mostly due to lower than expected capacity utilization which was as a result of the changing economic environment as well as the fact that assumptions to calculate ex-post ERR were based on a short observation period, mostly during start-up. However, the overall performance of the sample is satisfactory. Technical Assistance 2.21 While the sub-project objectives were by and large achieved, the scheme under which SYKB would utilize the branch network of commercial banks to promote projects was not effective and had to be abandoned. As a result SYKB had to strengthen its promotion activities particularly in the areas of SSI and lesser developed regions. Also, the technical assistance component did not meet the demand that it expected. The funds channelled into the technical assistance fund of the Labor Intensive Industry Loan amounted to TL 277.3 million by May 15, 1988. Expenditures financed from the fund accumulated to TL 106.6 million during the same period. Technical assistance provided to sub-borrowers amounted to TL 50.9 million. The remaining portion was used by SYKB for financing courses, seminars, books and training oriented travel expenses for SYKB staff. The participation of SYKB in the Textile Consulting venture which was financed from this fund amounted to TL 2.3 million. An additional TL 2.7 million was used for the partial finance of a micro-computer. Table 3: Loan 1952-TU -- Project Summary Data Number of projects financed 114 Number of Industrial Groups 25 Number of Jobs Created at 80% Capacity Utilization 5562 " " at 100% " 8641 Average Per Job Investment Cost US$9,978 SSI US$6,832 Non-SSI US$11,873 Export Commitment US$220 million (63% SSI, 37% SMI) Financing (mil TL) IBRD 13,659 Other 31,579 Equity 28,592 Distribution of project within economic development regions (%): Developed Region 57 (49% SMI) (51% SSI) Semi Developed 40 (82% SMI) (18% SSI) Less Developed 3 (100% SMI) Source: SYKB - 107 - Overall Assessment of Loan 1952-TU 2.22 The loan was aimed at alleviating a specific economic problem namely a high level of urban unemployment. In this respect, the project has been very successful. The technical assistance component of the loan, however, proved to be less successful which can be attribtted to the fact that small scale industries in Turkey have not yet realized the need for upgrading know-how and technology. Traditionally, small scale firms show a reluctance to allocate resources to expenditures not directly related to production. Perhaps, a greater degree of marketing of SYKB's objective and services could have helped to estimate potential demand for its services. The loan was, however, crucial to the continuation of institution building of SYKB. III. The Financial Intermediary 3.01 Loans 1755-TU and 1952-TU were essential in helping SYKB become a more development-oriented institution in supporting the Government's economic objectives by providing foreign and local financing to SMIs and thus complementing TSKB--which generally finances larger projects--and other development and commercial banks as well as becoming a major channel for future Bank loans. Although SYKB was already a sound and well-managed financial institution, the projects contributed to the institution-building of SYKB, particularly by assisting it to define its policies, improve project appraisal and supervision procedures, provide staff training and develop medium-term financial planning. Background and Organization 3.02 SYKB was established in 1963 as a private development bank by five major commercial banks in Turkey which were mostly the owners of TSKB. Initially, SYKB was set up as a sister organization to TSKB for providing working capital. But since the late seventies, SYKB has had a shift in its lending policies and has developed a growing role in meeting the investment financing needs of the private sector - SYKB is governed by a six member board, which is composed of the representatives of the shareholder banks and the General Manager. Approvals of loans and the general policy matters are the responsibility of the Board.A 3.03 SYKB has a simple organizational structure. It is horizontally organized into seven departments. Three of the departments (technical, financial and economic) are responsible for project appraisals. Despite an increase in staff from 38 in 1979 to 118 in 1987, SYKB is still relatively small. Staff turnover is very low and morale very high due to competitive salaries and availability of professional training for its staff in the form of short courses, seminars and workshops in Turkey and abroad. 1/ SYKB points out that it was active in project finance in the late 1960s (see attached comments from SYKB). 2/ For more detail concerning SYKB's operations, see appraisal report of Third SMI project. - 108 - Agreements Under the Two Loans 3.04 Under loan 1755-TU, SYKB agreed with the bank to implement the following: (i) formalize its operational policy, (ii) strengthen its appraisal and supervision capacity, (iii) increase its share capital to reduce its long-term debt/equity ratio, and (iv) make provisions for bad loans although arrears of 1.2% of loans were satisfactory at the time. Agreements under 1952-TU regarding the institutional aspects of SYKB were few: (i) an increase in the debt-equity ratio from the previously agreed 7:1 to 9:1, (ii) a strengthening of project supervision, and (iii) a number of institutional studies. Impact of the two Loans on SYKB 3.05 Shortly after its agreement with the Bank under loan 1755-TU, SYKB consolidated its policies into a formal Policy Statement. The principal operational criteria identified were: (i) SYKB would finance projects with a majority (51%) private ownership, (ii) it would give priority to projects consistent with the country's development plan, (iii) it would set upper limits on its loan and equity participation; and (iv) it would require at least a 50% financing by the sponsor. 3.06 Although SYKB's overall financial position was sound, its debt-equity ratio had reached a limit of 12:1. SYKB agreed to reduce this ratio to 7:1 basically through an increase in its share capital by TL 300 million which was achieved by converting its shareholder's debt into equity. Later, during appraisal of the Labor Intensive Loan, it was projected that due to an expected increase in operations, the debt/equity ratio would exceed this limit. It was also recognized that it would be difficult for SYKB to raise additional capital to remain within the limit, since return on shareholders' existing investments were low due to high cost of funds. Thus, it was agreed that SYKB could first raise the debt/equity ratio to 9:1 and second conduct a thorough study of its financial position, the cost of resource mobilization, the adequacy of the spread allowed by the Government and in light of the high prevailing inflation rates in order to estimate the impact of these factors on SYKB's profitability and financial position. The objective of the study was to allow adequate return to shareholders without jeopardizing the financial structure. 3.07 By the end of 1978, arrears of more than 3 months amounted to 1.2% of loans affecting 3.8% of loans outstanding, which was within acceptable limits. Because there had been no loan losses, provisions for bad debt had not been made. However, in view of the projected growth of its operations, SYKB agreed to start allocating 5% of annual income to provisions for bad debts equivalent to 2% of loans and equity portfolio. 3.08 Some of the major institutional changes that were introduced as a result of the Bank's loans were above all in the areas of project appraisal and supervision. SYKB, as required under the loan agreements, followed the guidelines of IBRD in the calculation of ERR and FRR on its subloans. This was SYKB's first experience in calculating such rates on the basis of cash flows. According to project agreements, SYKB was required to calculate ERR for sub-projects exceeding US$750,000. However, such rates have been calculated consistently for all projects, irrespective of subloan amounts. - 109 - 3.09 The significance of supervision was stressed in loan 1755-TU. While SYKB had made regular supervision visits to its sub-borrowers, there was no standard supervision report. SYKB agreed to design a formal supervision program. This was emphasized also under the Labor Intensive Industries Loan. This was partly in response to increasing arrears in the banking sector which had become more and more a nationwide problem. The regular supervision of firms provided actual data on the projects and also contributed to collection of additional information which could give a clear view on the performance of industrial sub-sectors. Thus, arrears could also be followed in a systematic way. 3.10 Also, SYKB became familiar with the disbursement procedures of IBRD and procurement requirements as well as the systems adopted by IBRD for follow-up of outstanding debt. However, the currency pooling system was difficult to explain to the sub-borrowers and gradual but sharp increases in the amortization adjustment factor related to 1952-TU has been an issue of concern of SYKB's clients. 3.11 Above all, the Labor Intensive Industries loan opened up a new area of activity for SYKB. For the first time, small scale enterprises became an area of focus in SYKB's portfolio. SYKB has developed confidence and expertise in financing small scale industries and owes much of its soundness as a financial institution to the solid performance of this sector. SYKB's Current Condition and Future Prospects 3.12 Given the changes in the Turkish economy and banking sector, SYKB has performed strongly in the past but, nevertheless, would need to reevaluate it present condition and future objectives. Between 1979 and 1987, SYKB's net income increased from TL 140 million to TL 1,483 million. Its assets and capital have grown from TL 3,093 million and TL 587 million to TL 108,945 million and TL 7,204 million respectively over the same period. While SYKB is still a small and conservative institution, its management is keen on widening SYKB's scope and operations. The Bank continues to play an important role in supporting SYKB's operations. Recently, SYKB's board approved an increase in its subscribed capital from the current TL 4 billion to TL 20 billion which is expected to be paid in by 1990. While this clearly marks an expansion of SYKB's capability as a lending institution, it is also time to assess more closely its underlying weaknesses. 3.13 There are two areas of major concern which affect SYKB's future operations. First, due to its type of activities, SYKB's profitability is particularly sensitive to a high collection ratio. As a "back-to-back" lender, SYKB must achieve at least a 87-90% collection in order to br'ak even. Currently, roughly 10% of the portfolio is affected by non-performing loans. However, 60% of this amount is related to low pre-FERIS loans. Several actions, i.e., sale, legal action, debt/equity conversion and write offs have been considered to clean the accounts. A strong portfolio is crucial to SYKB's survival. The supervision division has thus an important role in ensuring that SYKB's clients are profitable and develop early warning systems that would notify and trigger any remedial action on the part of the enterprise and SYKB. 3.14 Second, as in the case of TSKB in the 1970s, SYKB has become dependent on Bank funds. Resource mobilization needs to be strengthened and - 110 - SYKB's participation in the domestic and international markets expanded. SYKB needs to diversify its resources as well as develop products which would convert it over time into a mature and multi-faceted intermediary. The two newly created Securities and Capital Markets departments would need to be strengthened substantially. 3.15 In summary, the Bank has played an important role in developing SYKB which has become a viable intermediary for Bank operations and a competitor to TSKB for Bank DFC lending. However, SYKB has specialized in small scale industries, while TSKB has fulfilled the needs of larger sub-borrowers. Future Bank lending operations aim at broadening SYKB's business scope and creating greater competition between these institutions as well as other sound financial intermediaries within Turkey's private and public banking sector. IV. Summary and Conclusions 4.01 In addition to the general macroeconomic conditions of the late 1970s, two other developments contributed to the preparation and specific design of the Labor Intensive Industries and the Private Sector Textiles loans. These were briefly a resumption of earlier Bank strategy of financing private sector operations which had been reduced substantially in the 1970s, as well as the need to develop alternative channels to TSKB and DYB in DFC financing. 4.02 The overall economic conditions in the late 1970s, which was the most turbulent economic and political period, led to the realization that the prevailing inward oriented economic policies had failed to bring about sustained growth, stable balance of payments position and generate sufficient employment opportunities for a fast growing population. Servicing domestic debt had become a critical issue at a time when exports were slackening due to growing domestic demand and reduced competitiveness abroad and workers' remittances were shrinking due to a declining demand for Turkish workers. The Government, thus embarked on a package of wide :anging reforms which aimed at opening the economy to outside competition and relying on market forces. Within the overall framework, it was recognized that employment generation, particularly in urban areas, was one of the most pressing social issues and that the private sector should be given a greater role as an agent of growth, employment and exporLs. 4.03 The second development which led to the Private Sector Textiles and the Labor Intensive loans was a reversal in Bank's strategy in financing the manufacturing sector in Turkey. Prior to the 1970s, Bank lending to industry was confined to the private sector through lines of credit to TSKB for on-lending to a cross section of private sub-borrowers. In 1968, when the Bank expanded its overall policy of DFC lending to Government-owned DFCs as well, it became possible to lend to the public sector DFIs. Concurrently, on the basis of its economic work in the Bank on Turkey, while still advocating support to the private sector, the Bank began to focus on public sector operations which controlled more than half of the country's manufacturing capacity. Thus the focus of lending in the 1970s shifted towatd improving the workings of the public sector enterprises through direct and indirect financing. Between 1972 and 1978, the Bank financed US$323 million for six - 111 - public sector projects and US$110 million through DYB to public sector enterprises which accounted for 70% of total Bank lending during this period. However, the performance of the loans were less than satisfactory. In addition, the choice of projects financed and their time sequence did not relat, to structural issues, and sub-projects financed through financial intermediaries were not particularly geared to promotion of exports or the creation of employment. The fostering of small-scale labor intensive industry and additional job creation received attention in the Bank's analytical work and its operations in the DFC sector only toward the end of the period under review. 4.04 In parallel, the Bank had begun to look for alternative channels of financing. After ten operations with TSKB, the Bank felt that TSKB had become too dependent on the Bank and other preferential funds. But the model of TSKB, which the Bank had used in other countries as an example of a successful DFC, could not be duplicated in Turkey without Bank's support. 4.05 All of the above led to the resumption of the Bank's previous strategy of supporting the private sector through DFC lending with an added focus toward employment and export generation. The three loans under review had three basic objectives: (i) to support Government's policy of creating employment opportunities in urban areas; (ii) to balance and modernize one of the most important industrial sectors in Turkey; and (iii) to develop additional financial channels by involving SYKB. The Private Sector Textiles Loans for the amount of US$80 million resulted in 36 investments distributed over three sub-sectors which were identified to have had inadequate capacity to satisfy demand. The Labor Intensive Industries Loan, which was for US$40 million, has been able to create, to date, 5562 urban jobs, 562 above target, at an average per job investment cost of US$9,978, well below the US$11,007 at appraisal and the authorized US$15,000. The projects have been successful in attaining their goals, namely creating employment and supporting private sector activities. While the contribution of the Labor Intensive loan to the overall economy was modest due to its relatively small size, the impact of the textile loans on their respective sectors was significant. 4.06 Also, the projects can be credited with having had an important impact on the institution building and transformation of SYKB into one of the major channels of DFC lending to Turkey as well as developing of the textile consulting capability of TSKB which has since become a s.parate consulting firm. SYKB, which had been founded as a small sister agency to TSKB for financing of working capital for TSKB's clients, as a resxtlt of Bank lending has made a shift in its lending policy and expanded its operations into long and medium lending as well as equity investment in private enterprises. Its capital has increased from TL 400 million in 1979 to TL 4 billion in 1987. It has a strong project appraisal capacity. 4.07 With the recent capital increase in 1987 as well as consideration for inclusion in two additional Bank operations (Third SMI and Agro-Industries loans), SYKB is at the crossroads. It was facing problems of rising arrears and heavy dependence on concessionary funding sources. Currently, roughly 10% of the portfolio is affected by non-performing loans. While this figure might not appear alarming, SYKB's bottom line is highly sensetive to a high collection ratio of at least 85-90%. SYKB has attempted to improve its arrears situation, 60% of which is caused by four pre-FERIS loans, through - 112 - sale, legal action and debt/equity conversion. Nevertheless the pressure on SYKB to keep its collections high will continue. The newly created supervision unit will be reinforced and several early warning systems will be implemented. Concurrently, SYKB is strengthening its capital market activities in order to reduce its dependence on bilateral, multilattertal and Government sources. Resource as well as product diversification will be high on SYKB's agenda for the coming years and substantial resources will have to be devoted to make these units functional. Lessons Learned 4.08 Although the objectives of the loans were primarily to help eliminate bottlenecks in the textile sector and generate urban jobs were accomplished successfully, an important lesson was derived from their implementation for the design of future loans to the SMI sector. Access to a branch network is crucial in reaching out to SMIs in less-developed regions. Under the Labor-Intensive Loan, SYKB's lack of branch network was to be overcome through the use of the branch network of Is Bank, one of its founding members, but the scheme proved ineffective. Therefore, while SYKB is an appropriate DFI to channel funds to private small and medium scale industries (SMIs) in the more industrial regions, any future loans designed to support SMIs in the lesser developed regions of Turkey should carefully review the availability of financial intermediaries with adequate presence inlthose areas and, when needed, take steps to promote such intermediaries- 4.09 The Bank's policy of developing additional financial channels in Turkey appears to be a correct one. SYKB, while concentrating somewhat on smaller private sub-borrowers, has nevertheless become a viaole competitor to TSKB for Bank funds. Unfortunately, the examples of SYKB and TSKB have not been duplicated and there is further need for alternative financial channels within the private and the public banking sectors. The availability of alternative institutions would improve financial services through greater competition, and eventually encourage funding sources other than the Bank to channel resources through these institutions. 4.10 While the strategy of the Bank in approving a specialized sector 'oan was a correct one, at the moment and in the near future, there is no specific sector in the Turkish economy that could be a viable candidate. Instead, Turkey as well as the private sector could benefit more from "general-purpose" loans, such as the SMI and Export Development loans. 1/ For a different view, see SYKB's comments attached to the PPAR. December 1988 Revised: March 1989 日日日日日曆秀合日懿斤日斤，&:.:,:,::,:：。：,:,,:,::,:;:,：。·。：:,,:::&,&:::,,,,&,&&;,&：。。，&,&：。‘,,”·‘&&&&&,&”·”&&‘二“‘·‘··，·一’藝 !!！難礬萋〔聲攣聳縈縈雖！〔才 11!!!:!{!!i!:!!:I〕11{!111〕！::!!!!!!i!111!i:I!!!!!I!!!!i!I!11!i:i!:!!:!11!:!!!:i!!!!I！〕〕！!I!！〕〕i!:!!i〕i!11!!:!!!i〕i：〕！ ，唱華蓬蓬．，蘊造蘊，，屆必，蘊三登必革蓬垂總華召蓬蘊蓬，蓬藝，蓬。，華蓬登遲蓬藝，蘊至蓬蓬蘊日蓬蓬蘊這絕日逐蘊變蘊．召造•至藝基基絕造，蘊藝絕建造蘊憂曆曆。召翅石煙石日蘊基藝蘊，日韶蘊他藝基基曆曆華造蓬蘊日華曆日蘊，蘊蘊基曆！召屆 三此名狀煙瞬g，騵認呂以召”。出‘也，‘以此‘；」也牌乞也，緣鰓弋‘瞬絀召容認“，切，“個：右緣‘：以丫“留‘；劊；蒲緣＄：犢妝g補。。：黝古右g‘罕方；；勰召他〕常以：合；仕，他，。觔＇g計合；：日：三 丰‘．以：,，名u：。。，。響；。跚。：。‘：。〕：：。名：:，響：:&:：。，：記緣。“:：馴：。。。增切冶：．。：。‘斤。乞，：出：$：華，，鴉：:::：色：::：給：::,：。：:：弋，兮：：觔；面：歹 迄莖巢：莖蠶蠶莖喜莖討配讜蠶：::：聳配莖翼冀莖翼莖二莖莖翼！晝 〕他語馴 ．二，。茲‘屹“二‘&．氈“&&;：。弱，&，。“蝕’勵“&“離．。計“動““。““。“：茲嚇“館“。：。。，&:!；鄴 ,&&!!!!!!!!!!!！贊！!！豐豐！！豐！！訪豐！!!!!!!!!！豐贊贊贊贊！雙！!!!!！〕‘貧 ::;：黑：:::::::：〕：二：·二：：二二：二：一！：二一：二：:：〕【：：二二：:：】二i：二：!i；二二：::::.1二亡：.::::::!：一：：二二：二二：二·；二二華二【：:!；江！}!：〕” ·－－··－－。··－－·～－·～－··～---~～·～-~--~--～、－··～-~-,～··，、··－~-~－·－·－-－·。，---,~--－·－--－·－~-,~～···－·～，·～~~--~－···，-,，一’寥言｀ Table 51 Private Sector Textiles (1755-TU) Operational Suffmry FIXED ASSETS (MTL.) FIRMING (NTL.) .......... .......................... .................................... Estinted Actual Estinted Actual #Labor of Jobs Gross Pro ------------------ ------------------ ----------------- ------------------ Cost ....................... Caps. total Fittgot Pro- Estim. Actual Debt Debt over, Ututs.Exportloptons. Sates(Z) 011- vince Ind. NEW ------- ------- .......... ............ runs Before After Ratio Cone. Dolan --------- Grow r No Name of Firm Code Code Loc.N-NEW ERR IRR ERR IRR loport Dafte.Totat lopart Domes.Total Equity I= Other Equity IM Other (%) project Project Project (%) Cat)(Nonths) IM 1966 Code .... .... ............. .... .......... ... ..... ... ... ... ... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ...... .... ....... ....... ....... ..... ..... ........ .... .... ... I All Akpet A.S. 16 3 w D M-NEW 26 38 aM 227 1050 721 417 1138 475 5?5 0 437 701 0 lag 0 94 Ise 34 5.00 0 -29 1 2 BT Potiteks A.S. 16 3 W D M-MEW 25 29 14 19 256 250 506 245 204 "9 272 234 0 204 245 0 89 0 48 56 so 2.50 0 -28 1 3 56 Emboy A.S. 34 3 S D NEW 58 58 268 52 320 392 72 4" 160 160 0 302 162 0 145 906 20 1050 91 6.00 12 3 5 2 4 e4 Modem A.S. 34 3 W 0 NEW is * 78 13 91 119 26 1.5 24 50 17 26 119 0 159 163 25 182 100 12.50 4 2 4 2 S AID Maxim A.S. 34 3 W 0 NEV " S3 750 264 1014 713 286 999 507 161 346 206 713 0 99 555 142 635 40 9.00 4 3 -20 2 6 B8 UYm A.S. 34 4 G 0 NEW 35 SS 102 IGO 202 89 70 159 104 93 0 78 111 0 79 23 96 179 Ift 5.00 5 7 16 2 7 A13 Tani Toks. (Y) 34 3 G 0 NEW " S9 1150 350 1500 1193 456 1649 781 719 0 8511 761 0 110 535 750 497 100 6.00 12 3 4 2 8 A12 Yltdiz A.S. 16 3 W 0 NEW 37 20 ZW "4 27?9 2319 758 3077 1469 626 684 1354 790 933 111 200 261 549 so 20.00 12 -3 3 2 9 AS IstCorap.A.S. 34 3 w 0 NEW 26 90 272 105 37? 1044 170 1214 120 257 0 410 804 0 322 178 5452 11112 55 16.50 24 21 10 3 10 111 T It a A.S 34 4 G I NEW 32 39 93 VO 263 163 165 328 130 36 97 54 177 97 i2s 193 197 360 58 7.50 0 6 7 3 ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ..... ....... ....... ....... ..... 6127 1975 9102 6M 2624 9622 4042 2916 IT" 4039 4553 1030 2753 2187 4848 90 IN) These firm are in legal action (Y) These firm are not launched yet. (Z) The vast enjor I ty of the fixed assets and enplane was . It was not estinted In the appraisal report. (A) Not Yet Started Up (B) Order based · 115 - Table Os Labor-Inten*iv. IndustrIGG (1952-TU) Nu.bar of Job Analysi Firans~ -- O VSIS? ..WMmW USTlAT.__ACTUALJAX 1 ateks 4 r 27 q an, 21~ ma 6 8sft'termer 25 D8 e eritigr i 1 i 19 m rsan .. Hof D î8 I5 4Ys jijdodu ss ID 9t hen Git 1 118! D1§'202( San-be 47 l9 (;Uj r A.S 1ill DN 11 45 SMarfis5 A ýR U 48 Wå A.S 3$ 1 10i N 11 11 G ra 2 N S 2 ftr 1 :S D m 21 27 T?E yrm A -SSJS 2s l- Ste i %D :M 18 1 sanUJ: tajl _I ,11a L-ne 35 Tsa l-SSI ONW 13 106 36 Al1.86t u a 2t -Ss DEW 37 -1 A.S. 2 ss D 8 Deksan lin~~ lk 21ha 26 2 rsXm1aN-SSI qD BP s1lt.ba 7 SSI bNUW 2 44~ar .S.N a SlW 4 S. 1 ~ - 112 1 (l) A full capaity 589ras ipilft 20531 lim 7 59l ESW 1963 11 t6ti our 2 A~ s SSh- 68du7 OrTRa 2 3* 91 Mm 9 3 , ¶A. u 331* 3 :i 59 acElC 6 %ns As21 11 I 9-9 9 74 511I m SS 0 D8 gga PiT 28 SD - 89 tfe jlAJTg 11 SD M:f 14 79 1 r SD1 66 t l; m aA .S . 21 N-3S 1 §EW 3 67 eals -NEW 9aff a iAfil N-31 9-9 11R 1 4 9 e A 1 % 7t Miaiu 22 -SI B 3R 8 er a 18 :SS 51B :M4N 6 r0 eS A. A 3RISt ly:tjS .S.24 1931 RD NW u sopa 1S38NE 1 8 no-W ID i~ ptif one 1 SSI BR 3 799 8ffi61S an) A ful NapDct9 - 116 - Table 7: Labor-Intensive Industries (1952-TU) Sumary of Number of Job Analysis NEW N-NEW TOTAL Estimted x Actuat I Estimted % Actuet - Estimtød % ActsuL % SSt 1.146 36 1,257 38 1,822 38 1,990 38 2,968 37 3,247 38 N-SSK 2,020 64 2,083 62 3,010 62 3,311 62 5,030 63 5,394 62 TOTAL 3,166 100 3,340 100 4,832 100 5,301 100 7,998 100 8,641 100 % 40% 39% 60% 61% .100 1002 Table 8: Private Sector Textiles (1755-TU) Projected and Actual Results FIXED ASSETS (1L.) FINANCING (MTL.) Estimted Actual Estimted Actual umer of Jobs --*---*-- ---* *-*-*------------ -----------**---- ----------------- Cost **------------------ Cap. Totat Pro- Estim. Actual Debt Debt over- Utute.ExportIeptim. -Bs vince Ind. ------- ------- **.*.****** ....**.--*rus Nefore After Ratio Cam. Delays Group m.ar So Mam of Firm Code Code Loc.ERR IRR ERR IRR laport Domes.Total Import Doma.Total Equity 18D Other Equity IMD Other (%) Protect Project Project (%) (66)(Months) Code I 81 Titiz A.S. 34 4 G 0 32 39 193 70 263 163 165 328 129 36 98177 54 97 125 193 187 360 58 7.50 0 3 2 87 Politeks A.S. 16 3 0 o 25 29 15 19 256 250 506 245 204 449 272 234 0 204 245 0 89 0 48 56 50 2.50 0 1 S All Akpt A.S. 16 3 0 D 26 38 23 32 823 227 1050 721 417 1138 475 575 0 437 701 0 108 0 94 158 34 5.00 0 1 4 U Modern A.S. 34 3 W D 15 * 78 13 91 119 26 145 24 50 17 26 119 0 159 163 25 182 100 12.50 4 2 5 AI0 Maz m A.S. 34 3 W 46 53 750 264 1014 713 26 999 507 161 346 286 713 0 99 555 142 635 40 9.00 4 2 6 88 Uym A.S. 34 46 0 35 55 102 100 202 89 70 159 104 98 0 78 81 0 79 23 98 179 104 5.00 5 2 7 A2 Y Ld z A.S. 16 3 U 0 37 20 2335 444 2779 2319 758 3077 1469 626 684 1354 790 933 111 200 261 549 50 20.00 12 2 8 6 Eaboy A.S. 34 3 S D 58 58 268 52 320 392 72 464 160 160 0 302 162 0 145 906 20 1050 91 6.00 12 2 9 A13 Veni Teks. (Y) 34 3 G D 44 59 1150 350 1500 1193 456 1649 781 719 0 888 761 0 110 535 750 497 100 6.00 12 2 10 AS Ist.Corap A.S. 34 3 V D 26 90 272 105 377 1044 170 1214 120 257 0 410 804 0 322 178 562 1182 55 16.50 24 3 X) These firm are in legal action (Y) These firm are not launched yet. (Z) The vast mjority of the fixed assets and eloyee was * It was not estimted in the appraisal report. (A) Not Yet Started Up (B) 馳：,．…，，一，一，－·．.－一，．一。一～。．．一，。～一。，～…，.,，·，。。·。．,,，一，。，...．一，一。．．一。，一，．一，一 二二：00000000。。0000000000000000000.&&&&&”州”&&“曦二嗡，.&.,,,，曦•．‘娥，二‘．群群群群．群群群丰；群。：丰群謬零豐萬禺丰：馮黑丰諱祠丰痲馮馮病豐曾零悶響 廈祈勵肥鷺然悲墾龔思嬰鰓肥墾悲鰓思三墾然槃器墾肥墾然然墾鷺然器蠶肥邵鰓器鰓繁肥鰓繁肥器鸚繁肥擊那肥北懇”鷺雙墾 &j。，:，萬日，&（。，必斗。：•，騙勾‘,g痲認‘，讓名，寫呂呂綢墾，豐，病認〔名名狀，辟，&，狀，啊織呂緣寫盡寫，鸛據墾旦勵病，痲瞬織掌據文，肩響寫，寫，,,p病森名以e, ；一審：，斗寥忽，‘•：斗”零認斗讓月，：呂孼＄畫，星，聖雙拯墾肥，旦•旦霎。三日“寥名病為各細遝撾擊震藝•拯•痲呂買寫多啊呂號翁，遼拿一”，分發響•養拯擊，秀發丰擊民華，讀擊＄壇藝牌，•謀潤觀。紹吃撾禺鴉 91一嗡：,:::：日：:,‘。”,,,;；擊。；必織華，,：呂·，,,，藝，&”擊颼，薇丰‘藝，”擊望，;,&&&,,&&“拯擊，語，:,:;&;&::：擊：。，弓。擊：：細呂，。：&,::，藝權召：呆，: ；轎！甚〕〕製〔〕黑 ―。！喜！&‘。“,,&&,&,&&&&&&，。。‘&&,&,&&,&&,&,&&&,&,&,,,&,,,&,&,,&&,,,,，實‘&,,,&&&,,,&,&&,,&&,,,&&,”。“&,&&”。 亂；！莖蠶莖訌莖訌莖莖：二蠶：韋二乏莖莖蠶邸翼萬莖：兀婪莖冀 滷：徑：＊名象：投：；忽，;，記，病讓娥言讓牌訌森零為，編8,，點響斗，，寥藝寧啊織觀．石讓響話編以伏零響，名狀騙肩觀誡石織馮綱‘寫痲戲馮寫擊禺：化娥：斗，零＄丈，兌馮為，，丑憤；；鸛”，斗勻；為．妝，,，。 黑！召i之糁觀，痲喜，：讓，胄力‘；記讀．，病‘處瞬斗曉“乏，喜肩，劊，，丰文名凡，,，調粩，細，謀，讓，目牌．馮，呂，憫‘馮病：，婉鼠“‘丰”肆“J“禽“‘響病k，月，，認日零病。胄，寫寫，&,,,‘勾，專 、豐！”。。。。。。。。。。，”。。。豐登：：丑豐：豐豐：：丑豐’。。。。。。：豐登巒：。。。。。。。。”。“。。。。。。：::::，。’。。。，。”。·：:：豐豐豐豐。。。。。。。。。·豐：豐：::：竺邑 蘇豐11認日面日日認日認日日酒涌酒日日豐豐豐黑豐豐黑竺豐豐竺豐豐云日藝云日茲日豐黑黑弋雙必茲日蔆i茲日日日茲蘇藝藝蘊日云日弋黑竺竺黑日屆屆茲汪云酒日日涌認竺巒黑黑竺黑巒蔆日涌日。日涌騙日蘊實豐巒黑雙豐豐黑實 哺召：戶•r&”嗡二“二：憐月刃勾r妒r&&&9︰糁寫禺輪抑”&&＇驕萬鰓rg︰，刈”．嗡…、••黝馮芻擔狗刃勵勾•喝丰潤為一，r”哺‘計另寫狗記”丰念甲斤斗n中”，•．兌馮啊馮啊戶一，寫編編刈刃勾 誰排i豪矓〕鑲｛排｛蠢i排，i聯i攤！彭i！曇i對；購亂靂111罐遛；豐；澎i戴朧！矣；謹戴拱i｛〕：讓i訪 I：鈴藝胞計蒲不萬三各煙么細甚蒲騙變三屆自邊寫他弄g藝騷呂蓄弗蔥屆惡廈屆旦藝糅奮旦不丰居樂蔆飾言勻個屆各旦呂熙各蘊遛望邊飾纏旦邊藝三奮廈自肥主薔。三遞呃I煙星靦仕遛細吋韭弓優屆澀任浩亂鑿蒼召甚 辭盆〕三纔‘．乞認他讓發丑座，，他，調＃名，。，．安日，擊呂肥石紛啊藝詼名賽擊豐，日。鶴丰禺丰‘以丰次三娥丰：n忽；以華禺莽申擊洛＃呂文離一譽寧。，婦詼化發，馮，。召牌籐•響。胎名馮，k賽病，斗，騙念．婪， 『‘：騙論奮濺j俗忠含需屆么名騙讓讓當；畫言名騙雜斗；名斗寫么當屆留斗當，甚斗斗．斗名：甚忽斗名寫；當屆也石奮以蠶勾奮富也騙騙奮痲斗騙低石，鳥露認霍屆驕俗g名留石讓饕編騙話話熔讓言留認細電常鳥物名萬名騙石名 每：-，···。一：;，。：。，:,,:;：。：。：::::;；。：:：。：::；。。：:：。：::;::::::::：、。：：。：、：:,：。。：。。。，。：；。。。。：：。：,；。。：,，。，:, - 119 - Table 10: Private Sector_Textiles (1755-TU) Sectoral and Regional Distribution of Subprojects SECTORS M DEVELOM % M SEMI-DEV. % N TOTAL % ........ 0000 .. -.aa .... ... .. ......... 0 -aa .. o.oftftaft".. .-. GARMENTS 3 2,248,950 19 0 0 0 3 2,248,950 17 SPINNING 1 376,085 3 0 0 0 1 376 085 3 WEAVING 91 qj2070555 78 1 1,747,242 100 9 10,954:827 81 ......... ... ....... 0 ----- -- SUBTOTAL 12 11o832,621 100 1 1,747,242 100 13 13,579,a&3 100 TRAIN.PROGRAN 0 0 0 0 0 0 0 "8979 0 ....... ... .. .......... ... .. "..a ...... ... TOTAL 12 11,832,621 100 1 -1,747,242 100 13 13,679,842 100 = as % 13% 100 E äl à 8 g gå :O-WWNCOomo-ooNoo.ooo.:wi 8i OQ~OOO CO .O . N.......ONb AN ...... fl : ioO ..O.eb .....@... : P: CH 9- OjOa Q a mbhf 1. ... . . . . .. . ......N.NO ON OO O.. O fl40OtOhOOOlMNN OOOO , Q OOOOOOOeOOOO O l .... .OO O o -.. ....... .O.OOON .OOOO . NNOUOOM . 0ff000 0 0000 00 0 t :. 0OOOOOOOOOOOOOOOOOOtfOOO f flOOOOO ,eOOOOO 0O 580 fl. .-.,O-..O.w.2 h-wO NO8 CCCCCCCCCCO8.COCCl.CQQQC Table 121 Labor-Intensive Industries (1952-TU) The Export Coitminents in Detal of SSI/N-SSI SECTORS N. 551 % m. d-M51 m. TOTAL 2 ................. ........... ... ... .......... ... 1-F0C PRUCT 8 16.50 12 9 29.65 .36 17 46.15 21 3-TUTILEstinc 7 14.15 10 3 9.70 12 10 23.85 11 4-CLOTNINO 11 57.50 41 0 0.00 0 11 57.50 26' 5-LUIMER A U 0 0.00 0 0 0.00 0 0 0.00 0 6-U0®, PULP A 0 0.00 0 1 1.25 2 1 1.25 1 7-PRINTING Am 4 4.33 3 0 0.00 0 4 4.33 2 8-LEATHEXAM 3 12.34 9 0 0.00 0 3 12.34 6 9.KaER PROU 1 2.50 2 0 0.00 0 1 2.50 1 10-CHEMICALS 0 0.00 0 3 6.20 8 3 6.20 3 11-PLASTIC PRO 1 0.75 1 2 3.00 4 3 3.75 2 13-STRUCTURAL 1 0.00 0 2 0.00 0 3 0.00 0 14-POTTERY, TI 0 0.00 0 0 0.00 0 0 0.00 0 15-GLASS AM G 2 0.00 0 1 3.00 4 3 3.00 1 16-CEMENT 0 0.00 0 0 0.00 0 0 0.00 0 17-CEMEKT PR®D 2 6.50 5 1 0.00 0 3 6.50 3 18-MTAL SMLT 0 0.00 0 1 0.00 0 1 0.00 0 19-1ROM, STEEL 0 0.00 0 0 0.00 0 0 0.00 0 20-METAL PRODU 6 6.50 5 2 2.00 2 8 8.50 4 21-MACHINERY A 5 0.50 0 4 15.00 18 9 15.50 7 22-ELECTRICAL 2 0.00 0 4 9.50 12 6 9.50 4 24-VENICLES 0 0.00 0 1 0.00 0 1 0.00 0 25-MISCALLANE0 8 18.83 13 5 2.65 3 13 21.48 10 61 140.39 100 39 81.95 100 100 222.34 100 632 37% 1002 - 122 - Table 13: Private Sector Textiles (1755-TU) The Export Commitments SECTORS N. (la$) GARMENTS 3 18.50 21 SPINNING 1 6.00 7 WEAVING 6 65.50 73 10 90.00 100 ■■■■•••■■••••■•■•■■■•■•••••→•→．-- I}11華量【i!&&,&&，法，,&&&&&”才”華，’華”,,&,’寧’&&,?,,&,&,&‘待”,&&&,,&&&&,&,&&’尋“&,,&,,&,,&,&,&?,,& 權響界蠶！ ，。瞧訌！〔！ ’〞”,,，卜，,,;,::,,,,，兄訕“：織潤馮鳥禺為誠；以：讓啊誠騙網戲，;,,,,，騙，＄黑；&；讓；次詼，，寫；忽響“名騙，．尸〔。之屹（安女肥化•；“。“•為．&a；斗；丰零痲馭，露各各望寫藝擊藝鳥雙藝呂甚望豐丰 Table 15* Private Sector Text11es (1755-TU) Sub-Lom Debt Status . ......... mtwlty of pro- uum of VIT~ $ LomL Curr~ Lmm ........................................ .... ........ f.lon ..... ..... m~ 06 X= of Fl m ~ code Loe. A~ s Totot 1~ t~t tri Curifficy Gr~ Tem G~ SPINING MEAVING TOTAL ;;ý ..... .. .... .. .. ... ........... .. . ..... . .... ............. ..... . ...... ............. .. . ........... .............. .. ..... .............. ........ ..... .............. .............. i V~ti t 34 3 8 D 1,M2.2P 1,M,266.93 I.M.296.93 0.00 1.M,256.93 0.00 0.00 3 10 907,4U.75 907,426.75 2 01 Titiz alyfa 34 4 a 0 M.2112 359,2e2.01 339,2M.01 9.010 0.00 359,ZU 01 2 a m7,924.33 827,924.33 08 ~ ~ Ir 34 4 0 D 187,381 187,381.49 187.381.49 381.49 o i 9W,1e5.79 1,901[1,1115.79 34 3 9 376^ 376,M.12 376,M.12 o w 376 M.12 0.00 0.001 3 10 1:747,242.32 1.747,242.32 5 All 16 SV b 1.617.893 1,617,M.23 1 617,1193.23 0.00 1,617,M.23 0.010 0.010 3 10 1 617.893.23 1,617.593.23 6 . AT Do~ x 3w D 1,900,1116 1.900.185.79 :9W,185.79 0.00 0.010 w i gw,lss.?9 2 10 1:829.745.32 829.745.32 1,129.637 0-00 1 129 636.56 2 a 1,702,286.93 1: As 15~ Cora 34 311 ø 1, 636.56 1.129.6M.56 0.010 0.00 0 1 702.286.93 a 94 Nedem ølem- 14 3w D '648.05 429,648.05 0.00 0.010 0.010 4n:648.05 2 10 1.129,636.56 1,129,636.56 9 * A6 Ortet Orm 34 3w D 8279924 :,924.33 827,924.33 0.00 0.00 0 00 827924.33 2 10 359,282.01 359,m.01 - l 3 ~ Ome 34 SY 9 427 426.75 907.4M.75 0.00 0.00 0 w 907,426.75 2 10 429.648.05 429,648.05 11 97 polit~ 16 3v D Saý 125 MS,125.05 sa.125.05 0.00 %5,125.05 0.0111 0 w 3 10 376,085.12 376^ 12 12 A12 Titdia Tdmti 16 3 W 0 745 1,829,745.32 1.829,745.32 0.00 1 829.745.32 OM 0:00 3 1. 565,125.05 SM,I25.03 13 ATO Nuim Ti~ 39 3U SD 1:747 1,747,242.32 1.747.242.32 U, 1: 747,24232 000 M 1 10 187,381.49 187.381.49 14 Trs rø ProOrm 979 99,979.03 99,979.05 o w 0:00 0:00 99,979 05 ........... ............. ............. ............ ...... . ...... ...... . ...... . .............. ............ . .............. .......... . ... .............. 13.679.842 13,67?.~.W 13,679.W.00 0.00 8.025,759.46 0.00 5,654,0M.54 2.M.950.43 376.M.12 10,9U,W7.40 13,579.862.95 :::&：。，。，&,：。，。：::,:，。：,::,：。。：。：,::::::::::::：。。：，。。：::::::,:::：。。。，:，。。：::::,:,::,:::：。：,：。：:;::;:::;:;，·，·。一！藝 鵝單妒輩荔鰓馴鵝計狀龍絲鵝朋號語妒斗輪妒造辭朋唱鵝養領裴雜，弟婪，器毒醒訐錢審闕攤鰓鰓鵝競鵝鵠謬詣賽鯀絲華“朋話露辭審颼計授讓賽鰓話！，嗡 ！鑾築〕！獎！!!!！彆對！塋！彎！！彆！〕｝。 111111111111111111111111::::::::::::::：辦無無無鰍竺竺黜鸞竺竺默竺鸞然！i翁 -i！鑣癱輟！飄鑣朧鑣讜無韶粤無群雛礬豪無鑣朧攀雜辦裝皺無！！華 ！灣可澤〕，&!! 黨黨黑業業業業黑糞二業業黑業黑黑黑黨黑黑黨黨鄴濺 一一一一一一一一一一一－－一－-------- 126 - Table l7s Private Sector Textiles (1755-TU) Implementation DelaXs Z=ected Wits 0 3 3 - 6 6 - 12 12 TOTAL SECTORS N:--; --- --- --- --- --- --- -- --- --- --- n a 38 3 30 Galmeyts 8 0 6 3 ny.1.3g 0 9 8 8 1 10 Ral v 2 67 0 0 2 67 0 0 1 10 6 60 TOTAL 3 100 0 0 3 100 0 0 4 100 10 100 30 30 40 100 Table 18: Labor-Intensive Industries (1952-TU) Number of Implementation Delays as of Sectors EIPECIED DATE UP TO 3 MotS 3 10 6 MMIm 6 10 12 MulIs OER 12 MinITs TOTAL ....... .......... ...... .................... .................... .................... ............. ..... . ....................... s u-s TOTAL at 8-ss TOTAL at #-s TOTAL ssa m-sse TOTAL a "-sa TOTAL ut "-st TOTAL sEcTI 1. 2 fl. 2 1. 2 1. 2 1. 2 f. 2 1. 2 1. 2 1. 2 1. 2 1. 2 1. 1 . 2 1. . f. . 1. . 1. 2 f. . 1-Ta0DpIeuc319 431 7 24 1 14 1 20 2 170 0 1 20 1 5 3 27 0 0 317 1 1 3 33 4 21 8 13 9 23 17 17 2-BEES 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 d 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3-TENTILESINC 2 13 2 15 4 14 2 29 0 0 2 17 1 6 0 0 1 5 1 9 1 14 2 11 1 10 0 0 1 5 7 11 3 8 1O 10 4-CLOTNING 3 19 0 0 3 10 1 14 0 0 1 8 5 29 0 0 5 23 1 9 0 0 1 6 1 10 0 0 1 5 11 18 0 0 11 11 5-L~IER A u 0 0 0 0 0 0 0 a 0 a 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6-~ *,PUPA 0 0 0 0 0 0 080 0 0 0 0 0 0 1 20 1 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 3 1 l T-PRINTINGAm 2 13 0 0 2 7 0 0 a 0 0 0 1 6 0 0 1 5 1 9 0 0 1 6 0 0 0 0 0 0 4 7 0 0 4 4 B-LEATiER AM 0 00 0 0 0 0 0 0 0 0 0 2 12 0 0 2 9 0 0 0 0 0 0 1 10 0 0 1 5 3 5 0 0 3 3 9-wuRumnU0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 10 0 0 1 5 1 2 0 0 1 1 1O-CIERICAL 0 0 1 8 1 3 0 0 1 20 1 8 0 0 0 0 0 0 0 0 1 14 1 -6 0 0 0 0 0 0 0 0 3 8 3 3 11-PLAsICPRO 1 6 1 8 2 7 0 0 1 20 1 8 0 0 0 0 0 0 0 0 0 0 0 0 0, 0 0 0 0 0 1 2 2 5 3 3 13-STIuTIMAL 1 6 1 8 2 7 0 0 1 20 1 8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 2 2 5 3 3 14-POTTERT, it 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1S-GLAsA 1 6 0 0 1 3 1 14 0 0 1 8 0 0 1 20 1 5 0 0 0 0 0 0 0 0 0 0 D+ 0 2 3 1 3 3 3 16-CEMENT 0 0 0 0 0 0 0b0 0 0 0 0 0 0 080 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 17-CEMENT PRO 0 0 0 0 0 0 0 0 0 0 0 0 1 6 0 0 1 5 1 9 1 14 2 11 0 0 0 0 0 0 2 3 1 3 3 3 18-"ETAL $KL 0 0 0 0 0 0 0 0 0 g 0 0 90 0 0 0 0 0 0 1 14 1 6 0 0 0 0 0 0 0 0 1 3 1 1 19-IacM, S1EEL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 090 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 20-NETAL PRODU 1 6 1 8 2 7 0 0 0 0 0 0 0 0 0 0 0 4 36 '0 '0 4 22 1 10 1 11 2 11 6 10 2 5 8 8 21-MACNINERT A 0 0 1 8 1 3 1 14 0 0 0 0 1 6- 0 0 1 5 0 0 1 14 1 6 3 30 2 22 5 26 5 1 4 10 9 9 22-ELECIICAL 0 0 0 0 0 0 1 14 1 20 2 17 1 6 1 20 2 9 0 0 1 14 1 6 0 0 1 11 1 5 2 3 4 10 6 6 P24-WICLES 0 0 0 0 0,0 0 0 0 0 0 8 0 0 1 20 1 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 3 1 1 25-MISCALLAEO 2 13 2 15 4 14 0 0 0 0 0 0 5 29 0 0 5 23 0 0 1 14 1 6 1 10 2 22 3 16 8 13 5 13 13 13 YTOAL 16 100 13 100 29 100 7 100 5 100 12 100 17100 5 100 22100 11 100 7 100o 18100 10 100 9100 19100 61 100 39 100 100 100 ana agg ~m ~m ~m ~m ~m ~m m m m~m urn mm «Mm ~m ~m W~ ~ ena som men ana ~~m mm 8 9mm w~m ~m mm m anm Dum Uwe ung man ---sa 9 55 45 100 5 42 100 77 23 100 61 39 100 53 47 100 61 39 100 2 29 12 22 18 19 100 Table 19: Turkey - Changes in the Financial Structure of Firms of the Istanbul Chamber of Industry Bank Credits/ Total Debts Total Debts/ Equity Capital Current Assetsi Total Asets Total 2ttsI Thtal Assets --------- ---------------- - - -- ----- -- ------------ - - - lnaustry 1981* 19821 1984t8 1981* 192 19848 1981$ 1921 19801 1'781t 19824 1984 t ------------------------------- ----------- ----------- ---- Fo 48.2 43.0 30.6 623.1 324.6 66.5 . 63.1 63.8 66.0 7-.1 69.9 24.5 Textile. 43.3 37.4 34.7 400.0 217.5 91.7 92.9 71.0 St.5 72.8 62.2 32 easy-sie &rer.ts 39.3 37.9 22.2 383.1 185.5 17.2 85.8 77.2 7?.2 5q.8 5 YU1 Fur and'leatner 23.7 21.8 i.6 552.6 375.9 39.8 91.8 82.1 69.9 61.0 57: 19. Footwear 19.8 21.9 1.9' 551.1 812.0 . 76.4 87.2 93. 24.0 7X.X 5. 4 ,!.V forestry and cork prodctS 12.9 19.1 44.2 237.0 135.1 '97.7 73.0 66.0 5.6 72.: 46.& j5. WIooden furnitures 36.1 14.4 54.7 380.8 352.01 110.1 82.4 77.4 6.0 17.6. 6'. -1. Paper and paper proaucts 35.6 50.4 56.4 211.4 76.9; 58.8 71.9 48.3 46.B 37. - 39.6 27 0 Printing industry 22.9 3119 1 24.4 431,6 291.0 2".8 69.5 60.4 66.1 68.6 64.1 e 4 Basic chemicals 46.7 42.2 21.3 625.6 291.9 106.9 61.7 52.1 55.9 76.6 68.0 7 Other chemicals 27.3 36.9 14.0 344.3 279.6 116.0 53.6 78.4 73.6 62.9 64.9. Petroleum Products 1.1 13.7 17.9 735.3 362.5 17.9 62.6 70.0 17.9 82.4 74.4 11.9 Rubber Products 14.2 36.3 28.4 206.4 114.7 57.5 84.4 72.1 59.6 49.1 44.5 2D Other plastic prc:essing 29.2 33.9 21.4 633.8 344.1 80.4 78.0 71.4 6".9 78.4 72 3. 84ked clay,ceramics and porcelain 47.4 22.8 37.0 575.4 107.5 93.4 72.0 f0.5 -j4.4 7L.5 r/.4 2I Blass and glass Frrducts 24.7 68.3 61.6 333.8 659.2 133.2 77.6 77.6 4J.2 63.5 . Other stone and earthware 65.3 56.6 43.3 - . 94.5 84.2 38.5 30.6 49.1 92.5 47.4 Iron and steel 37.1 36.3 15.2 304.4 162.6 84.2 73.7 63.0 111.6 60.4 30.4 Ncn-ferrous metal 18.1 22.2 96.0 359.9 144.3 246.5 b1.2 54.9 49.9 67.5 50.9 t.i Fabricated Metals 7.5 27.4 26.4 498.3 202.9 84.1 64.2 63.0 4i.4 72.3 59.2 32.5 NSchinEry 29.8 29.2 20.0 946.5 428.2 101.6 79.2 75.1 47.7 84.0 74.5 Electrical .achiriery 8.9 31.0 14.7 309.1 218.8 110.6 78.4 14.3 17.1 67.4 61.4 4.7 Transportation Vehicles 39.6 23.4 20.5 311.5 262.5 115.6 73.1 69.7 49.0 70.1 67.2 :7.7 Professionsl,scierntific utensils 24.0 16.4 57.7 206.3 109.9 69.8 89.7 80.6 76.4 32.7 2.2 30.4 Other Naufacturez 55.1 26.3 53.1 477.3 234.6 76.1 86.7 78.5 fi.6 71.0 61.1 26.1 Manufacturing indtstry 7.3 36.4 24.4 464.5 241.8 95.3 73.9 65.7 '.1 72.5 64.4 . *1215 member firms of ISO (The Istanbul Chamber of Industry) are covered. **2397 member firms of ISO are covered. - 129 - Table 20: Training and Research Financed from 1952-TU Technical Assistance Fund Members of SYKB Staff: 1) Yasar Findikcioglu Technical and economic study of marble Director extractions and processing Dept. of Economic Studies (Greece and Italy): 1984 - 21 days Hiseyin Birol Mechanical Engineer 2) Mstak Korulu Language course Financial Adviser London: 1987 - 3 months 3) Suphi Dinctrk .Visit to fairs for study of automation Chemical Engineer in particular (Singapore, Kuala, Lumpur, Jakarta): 1986 - 18 days 4) Servet Odabasi Research in electro-mechanical sector Project Economist (Switzerland, West Germany, Sweden, Finland): 1987 - 25 days 5) Halim Maro Study of legal aspects of leasing Legal Adviser (London, Boston, New York): 1987 - 25 days 6) Recai Gilray Seminar on application of computers to Manager, Accounting Department accounting University of Syracuse: 1982 - 25 days 7) Ini OtUgen European standards for certain branches Project Economist of food industry. New techniques in leather industry (Belgium, France. Italy): 1982 - 25 days 8) Ismet Arsoy Language course Financial Adviser London: 1985 - 3 months 9) Vedat Bilecen Visit to Hanover fair Textile Engineer 1985 - 12 days 10) Necdet Barkan Training in banking Assistant Manager F.'ankfurt A/M: 1987 - 3 months Loan Department - 130 - Table 21: Training and Research Financed from 1755-TU Technical Assistance Fund 1) Yasar Findikcioglu Contacting consulting and research tirms Director are the subjects of waste water treat- Dept. of Economic Studies ment in textile industry, and organiza- tion of marketing corduray garments and men's shirts. (West Germany, United Kingdom, Netherlands, France, and Switzerland): 1980 - 21 days 2) Ergin Acir Training in waste water treatment in Chemical Engineer textile industry (Armusfoord, Netherlands): April 1981 - 30 days 3) Omer Kizilkaya Language course in London: Assistant General Manager 1981 - 3 months 4) Ahmet Onen (Economic adviser) Market research for corduroy garments BUlent Ege (Economic adviser) and men's shirt and supervision of ITC (West German, Netherlands, and United Kingdom) Desk research of ITC center in Geneva: 1981 - 32 days 5) Nejat Buruk Research on home textile market (West Germany) Collecting information in Hungary for setting up a design center in.Turkey: 1982 - 32 days 6) Saim Akkaya Language course in London 3 months Financial Adviser Course on project appraisal techniques at Brodford: 1981-1982 - 3 months 7) Candas Tecimer Visit to Milano Textile Machinery Fair. Mechanical Engineer Observation of operation in two textile plants: 1981 - 23 days 8) BlIent-Ege - Study of textile imports of North African countries (Egypt, Libya, Tunisia, and Morocco): 1982 - 38 days 9) Muammer Akyuz Visit to Hanover Fair and technical Mechanical Engineer study at two firms. - 131 - Page 1 of 3 Table 22: Characteristics of Subprojects of Loan No. 1754-TU 1. Sectoral Distribution as stipulated in the Loan Agreement (000 S) Sub Sectors Limit Final Disbursements S Spinning 4.500 28.620 W Weaving 16.000 12.112 F Finishing 13.500 16.143 G Garments/Making up and Knitting 14.000 5.143 A Accessories .2.000 889 T Technology Fund x/ 3.300 963 R Training, Research x/ 1.600 996 Free limit 10.100 65.000 64.866 x/ Limits are reduced to the amounts disbursed (1.959.000) The balance outstanding (2.941.000) is added to investment loans. 2. Investment Cost Distribution Number of Investment - Less than $ 2.000.000 5 - $ 2.000.000-S 5.000.000 3 - $ 5.000.000-$ 10.000.000 6 - $ 10.000.000-$ 15.000.000 7 Over than $ 15.000.000 2 23 - 132 - Table 22 (cont.) Page 2 of 3 3. Size of Loan Distribution Less than S 1.000.000 6 S 1.000.000- $ 2.000.000 4 0 2.000.000- S 4.000.000 5 S 4.000.000- 5 6.000.OOQ 8 23 4. Estimated Implementation Period of Projects Less than a year 7 1 to 2 years 12 2 to 3 years 2 3 or more years - 5. Distribution of Cost per Job (est.) Less than $ 100.000 11 $ 100.000 - $ 200.000 2 Over than $ 400.000 1 6. 7 projects out of 23 have actually created about 1365jobs against the estimated figure of 1207. Table 22 (cont.) Page 3 of 3 7. All of the sub projects showed satisfactory Economic Rates of Return at appraisal and its breakdown is as follows ERR No.of Projects 15-19 z 2 19-29 % 7 Over 30 % 10 8. 8 Projects out of 23 have been implemented as new. The loan awarded to 8 new projects amounts S 20,443,000 representing 32 % of the total. 9. The breakdown of location of the projects and loan distribution are given below Location No. -of Projects Loan Amount % Developed 14 60 Semideveloped 5 -29 Less developed 4 11 23 100 Table 23: Project Completion Details of Loan No. 1754-TU INVESIMENT COST MS) t OF ISKI FMNCII1 1# SU PJECT IVPE OF OMMRIP su Date et Rate at TOTAL 19e ---------------------------------- -----------------St- l0 IL%E M S.P. LGCMIG1 SECIOR Cauttaat Etch.41il1 FINNCIN (t) ESTIMTEB ACTUAL 1#,-I 1 ESt.PR.COST AC.PR.COST 1 Kordsa It) å 2 I I P S.F. 13.02.1111 9 5,746,121 29,816,370 NÅt)• 19 2 Tirkm Kadife A 3 9 se P U.F.. 03.03.191 9 5,215,737 10,391,»0 12,890,000 2,499,000 24 50 40 3 Bokuse Å 4 I P SU... 31.05.192 152 2,603,591 7,994,160 9,67,100 672,140 8 33 30 4 Altinyildig å 5 E 9 P S.I.F. 20.07.194 370 ,940,925 10,910,270 12,010,370 1,070,100 10 44 40 5 bitert 6 i P .U. 24.07.1114 379 4,423,793 10,040,00 12,174,390 2,133,490 21 44 36 4 lieri knisucat A 7 E e P S.T. 16.01.194 39 4,949,616 10,957,910 12,031,760 1,073,850 10 45 41 7 Salibli Tekstil A I E SI P S..F. 25.10.1914 415 4,677,254 9,392,s30 10,7e3,010 1,400,1to 15 50 43 8 .N4sucat Sutral å 9 E I P 9. 27. 12.194 442 4,931,565 22,164,590 32,016,360 9,851,780 44 22 15 9 Skt &§ () AÅ 10 1 90 p .. 31.12.1914 408 4,62,785 13,924,910 M I) - -- 10 Iup brsernei 8 I n a0 p F. 04.04.190 75 2,263,127 4,656,190 4,391,000 (265,190) t6) 49 52 11 leksa B 2 E 9 p . 05.05.190 75 2,115,946 7,570,650 4,641,400 12,930,250) (39) 38 12 isaarsu 8 3 E se p 9.X.F.6. 04.11.1910 07 1,370,543 2,251,510 2,968,360 616,050 27 61 48 13 Tan. I 4 N L n Ø. 22.01.1911 1 539,167 1,690,400 1,786,930 a1,530 5 12 30 14 Søyea I 5 N 9 p 8.F. 25.02.191 9 - 65,490 1,520,420 m - 43 IS &11 1 å I LI p I. 14.01.191 122 776,052 5,449,260 4,038,470 (680,790) (11) 14 14 16 Velic Iplik I 7 i n I P p .T. 09.03.192 146 3,^ ,118 14,95,610 14,29,50 4657,j0) (41 26 27 17 Cetta etyls I 10 n I p I. ¢9.12.113 276 411,739 1,005,700 957,550 (120,150) (121 38 43 tØ Akte Tekstil 8 I 12 E * p F. 27.09.1904 408 1,233,864 5,6%,410 M(ti - - 22 19 Dua 0 13 E I p F. 21.09.19 4 412 1,545,701 4,603,910 3,555,710 11,041,210) <23) 34 43 20 Natket I 14 E I t 9. 1o.09.1104 309 3,243,652 0,191,400 7,692,000 (506,400) <6) 40 42 21 idrå mmmgat e15 E Le p 5.U.F. 22.10.1904 41e 1,644,295 12,122,160 Ø,626,270 13,46,501 <29) 14 19 22 mbaar 16 E 1 r I.F. 31.10.19 4 410 526,983 1,365,40 NÅ - 38 - 23 ras i 17 1 0 r 0. 20.12.1904 435 406,944 918,040 761,770 (149,270) (16) 44 53 TVLK å3,677,390 197,715,210 32 24 ine s 2 i 8 p T. 14.02.192 144 114,395 114,395 114,395 6 0 106 100 25 mallser 1 4 1 a8 p 1. 03.03.93 203 78,72$ 70,125 70,725 I 0 100 100 () tparatt- tsaest~t cost 9 I.sti as ut avaslablb da te ovrlsp&" of cattaeq Iaestomts. ATTACHMENT Page 1 of 4 SINAI YATIRIM ve KREDI BANKASI A. 0. (THE INDUSTRIAL INVESTMENT and CREDIT BANK) Barbaros Bulvan, Akdo0an Sokak No. 41-43 80690 Beqiktao - Istanbul. TURKEY Telephone 90-1-1597414 (5 lines) Telex :2263 sykb tr. Cables YATIRIMBANK Fax : 01-1580805 3682/6492 Comments Received from SYKB May 23, 1989 Mr. Alexander Nowicki Division Chief Policy-Based Lending, Industry, Public Utilities and Urban Sectors Operations Evaluation Department Dear Mr. Novicki: Reference: Your letter of April 26, 1989 and its attachments. I am grateful for the opportunity given for our reviewing the draft Project Performance Audit (PPAR) Project Performance Audit Memorandum (PPAM) and Project Completion Reports (PCR). These reports provide an objective assessment of the ref. loans in achieving their intended objectives. In these reports a thorough analysis of actual performance,as compared with expectations within the context of an era marked for rapid and drastic changes, is also provided. We are glad that SYKB was able to show satisfactory performance during this critical period in connection with loans 1755 TU and 1952 TU. I think these loans will also stand out as turning points in the career of SYKBleading to the establishment of close cooperation with IBRD that gave momentum to the international development of SYKB through successive IBRD loans. Enclosed are our comments on various points raised in the ref. reports. I hope you will find them of interest. Sincerely yours, Orhan Altan General Manager Enc1s. ATTACHMENT Page 2 of 4 COMMENTS ON PPAR, PPAM and PCR REPORTS In paragraph 56 of PPAM and 3.02 of PCR SYKB is mentioned as an institution set up to provide permanent working capital funds to industry and furthermore, it is suggested that since 1981 it had withdrawn from the traditional business of providing working capital and whereby had concentrated on its new activities of on lending IBRD funds. Although it is true that starting in 1980 SYKB become active in lending IBRD loans, and at this point of time the gradual shrinking in the volume of working capital loans continued, it must be admitted that back in late 60's SYKB was already active in project finance first using the rediscount facility of the Central Bank and then starting early in 70's, in addition to it was also lending the proceeds of a series of loans obtained from AID and EIB. Reflecting these developments, the outstanding balance of the permanent working capital loans which constituted 44 percent of the total at the end 1970 went down to 16 percent and virtually to zero by the end of 1980 and 1986, respectively. The reason for the dramatic decline in the permanent working capital was related to SYKB's inability to raise suitable funds for that purpose. The sources derived from the Rediscount Facility for financing permanent working capital as a consequence of policy change that took place in early 1983 was not available anymore on favorable terms. We would like to respond to your remarks related to technical assistance appearing in paragraph 16 of the PPAR, and paragraph 63 of the PPAM. SYKBE's technical assistance has an upper limit which is confined to 2 percent of the sub-loan amount. Twenty percent of such expenditures are required to be financed by sub-borrower and the remaining 80 percent by SYKB. The 20 percent contribution requirement we feel was rightly put in to foster conscientious involvement of the subborrower in making expenditures eligible for technical assistance. The difficulty for not seeking technical assistance as far as SSI's are concerned is likely associated with the commonly observed proprietaryship control of these companies where the promoters either assume to know their business very well or refrain from revealing their problems to outsides unless an extraordinary problem emerges. We feel that mentioning of SYKB's million 90 TL donation to Small Industries Development Organization (SIDO) out of the proceeds of the Technical Assistance Fund which was made during 1986-1988,would be appropriate. This donation which has the top ranking funding came as a consequence of commitment made by SYKB together with Halk Bankasi at the negotiations stage of Loan 2647 to prevent a deadlock, in which both were intermediary banks. In the project appraisal report of IBRD, a technical assistance component to be carried by SIDO was forseen and for realization of this scheme a loan component was earmarked. But at the negotiations, the Government representatives expressed their objection to the finance of local expenditures which constituted a portion of the program from IBRD lending. In order to offset the partial resource requirements and thus contribute to the implementation of project SYKB and Halk Bankasi offered and then provided their financial support. ATTACHMENT Page 3 of 4 In paragraph 103 of the PPAM it is stated that "the increase in SYKB's share capital reflects not the attractiveness of such investment but willingness of the small club of its shareholders to support the institution, even at a financial cost to themselves." It is definitely true that SYKB has enjoyed the support of its shareholders. But on the other hand, we would like to make a note of an event that has occured which will indicate the standing of SYKB from the shareholder's perspective. In 1985, Osmanli Bankasi one of our founders, as a reflection of their interral policy change, wanted to liquidate its shares in various institutions includ'.ag SYKB. In the case of SYKB within a very short span of time these shares were taken by TUrkiye Dig Bankasi A.S. by paying a premium that exceeded the nominal price by 0.7 times . We feel that this transaction revealed the fact that SYKB shareholders look at the future with confidence and consider SYKB as a valuable investment. In Paragraph 4.08 of PCR it is stated that, "Access to a branch netwoik is crucial in reaching out to SMI's in less developed regions". We think this statement was not valid in case of loan 1952 TU. As the SMI's covered under Loan 1952-TU were designed to serve the needs of small scale enterprises in formal sector which had the chance of obtaining investment certificates, such investment certificates are made public by periodic listings in the Official Gazette, SYKB had the oportunity of contracting most of the entrepreneurs who had appropriate projects. We believe that time element in identifying and contacting entrepreneurs in less developed regions is not an issue for concern. With the satisfactory transportation and communication systems the distance barrier, we feel has been overcome. Even if SYKB had brands in every province of less developed regions we fear this would not have made any material difference in performance. Investment decisions including SSI's are naturally affected by such variables, among others, as proximity of the site to markets and suppliers, availability of skilled labor, infrastructure, entrepreneurial talent, where most of them are either unfavorable or limited at less developed regions. However, recent regional distribution of investment certificates issued suggest that investments in less developed rigions are likely to increase. If this is to occur, as a reflection of the general situation, SYKB will naturally have new sub-borrowers from these regions. There are a number of corrections to which we would like to draw your attention to. - Please correct the amount of Swiss Bank Corporation Loan amount as 30. (Page 61, of PPAM) - "Sixty-four percent"of the loan amount went to finance sub-projects in SSI, twice the required target (Section 2.19 of PCR) we regret that this is not true. Actually thirty-six percent of the loan amount went to sub-projects in SSI category. - 1. - ATTACHMENT Page 4 of 4 - In the same paragraph, Ugak province is cited as one of the leading sites of loan concentration. We have rechecked our files and do not have any sub-borrowers there. We suggest citing of Tekirdal as a province of high concentration (In Loan 1952-TU, with 5 sub-loans about 19 percent of with- drawals were channelled to sites in Tekirda§). - Contrary to the remark made in paragraph 20 of PPAM. The share of textiles in manufactures goods exports have been increasing during recent ybars. Million US $ 1986 z 1987 % 1988 _ Total Exports 7,457 100 10,190.0 100 11,662.1 100 Export of Manufacured goods 5,324 71 100 8,065.2 79 100 8,943.5 77 100 Textiles Exports 1,851 25 35 2,707.1 27 34 3,201.4 27 36