Turkey - Agricultural Sector Adjustment Loan Project

The Wo: FYOR OMICL Report No. 10025 PROJECT COMPLETION REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) OCTOBER 25, 1991 Agriculture Operations Division Country Department I Europe, Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official dutie.s. Its contents may not otherwise be disclosed without World Bank authorization.  WEIGHTS AND MEASURES 1 kilogram (kg) 2.20 pounds 1 metric ton 1,000 kilograms 1 metric ton 0.98 long ton 1 meter (m) c 1.09 yards 1 kilometer (km) = 0.62 mile 1 hectare (ha) c 2.47 acres 1 decare - 0.1 ha = 0.25 acre 1 square kilometer (km2) 2 100 ha 0.386 square mile 1 liter (1) = 0.264 gallon ABBREVIATIONS AND ACRONYMS USED APK - MAFRA's Planning, Research and Coordination Bureau ASAL - Agricultural Sector Adjustment Loan DSI - State Hydraulics Works Agency (within the Ministry of Public Works) FAO/CP - Cooperative Program Between the Food and Agriculture Organization of the United Nations and the World Bank ICB - International Competitive Bidding MAFRA - Ministry of Agriculture, Forestry and Rural Affairs SAL - Structural Adjustment Loan SEE - State Economic Enterprise SPO - State Planning Organization II&V - Training and Visit System TIGEM - Agricultural Enterprises of Turkey, an SEE TOR - Terms of Reference TZDK - Agricultural Supply Organization of Turkey, ar. SEE FISCAL YEAR Government of Turkey - January 1 - December 31 World Bank July 1 - June 30  FOR OFFMCIUL USE ONLY THE WORLD BANK Washington, DOC. 20433 U.S.A. Oifke of Di,fcttorGenetJ OpelAt,ons Evelwtinf October 25, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Turkey Agricultural Sector Adjustment Loan (Loan 2585-TU) Attached, for information, is a copy of a report entitled "Project Completion Report on Turkey - Agricultural Sector Adjustment Loan (Loan 2585- TU)" prepared by the Europe, Middle East and North Africa Regional Office with Part II of the report contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restricted distribution and may be used by recipients only In the performance I of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) Table of Contents Page No. PREFACE. ........................................... i EVALUATION SUMMARY..,,,.........,,,,,,,,,,,,,,,,,,,,. iii PART I - PROJECT REVIEW FROM BANK'S PERSPECTIVE. 1 A. PROJECT IDENTITY. 1 B. BACKGROUND. 1 Macroeconomic Developments. 1 Sectoral Context ................, 2 C. LOAN OBJECTIVES AND DESCRIPTION ....................... 3 D. IMPLEMENTATION PERFORMANCE ............................ 7 - Second Tranche Release. 7 - Post Second Tranche Release Developments. 8 - Causes of Slow Disbursements ........................ 10 E. PROJECT RESULTS ....................................... 12 F. LESSONS LEARNED ........................ , . , . 14 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . 16 A. Performance of the Bank ............................... 16 B. Performance of the Borrower (Implementing Agencies)... 16 C. Comments .............................................. 17 D. Borrower's Comments on Part I ......................... 18 PART III. STATISTICAL INFORMATION............................ 19 TABLES: A. Related Bank Loans .................................... 19 B. Cumulative Loan Disbursements ......................... 20 C. Mission Data ....................... 20 D. Use of Loan Proceeds ....................... 20 E. Status of Studies ....................... 21 F. Weighted Average Net Fertilizer Subsidy ............... 23 G. Status of Legal Covenants ............................. 24 H. Staff Inputs by Stages of Project Cycle ............... 26 ANNEX Statement of Agricultural Sector Policies, 1985 .......... 27 MAP IBRD 16766R. 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.  i PROJECT COMPLETION REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) PREFACE This is the Project Completion Report (PCR) for the Second Agricultural Adjustment Loan to the Republic of Turkey (Loan 2585-TU) in the amount of US$300 million, which was signed on June 27, 1985. The Loan Closing Date, originally June 30, 1987, was extended subsequently to June 30, 1989. The accounts were closed effective May 15, 1990, with the cancellation of about US$49.8 million. The PCR was prepared jointly by the Agriculture Operations Division, Country Department I, Europe, Middle East and North Africa Region (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). The Statement of Agricultural Policies, 1985, submitted as a basis for the loan, is attached as an Annex. The PCR was initiated during the Bank's final supervision mission of the project in June 1990 and is based, inter alia, on the Staff Appraisal Report; the Loan Agreement; supervision reports; correspondence between the Bank and the Borrower; and internal Bank memoranda.  iii PROJECT COMPLETION REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) EVALUATION SUMMARY Objectives 1. The loan was a policy-based adjustment loan to support Government of Turkey's medium-term agricultural sector adjustment program by financing essential imports, staff training and sector studies. The policy adjustments for achieving these goals focussed on: (i) ending the parastatal monopoly on wholesale fertilizer distribution and fertilizer imports, and introduction of private sector retailers; (ii) phasing out the retail price subsidy for fertilizer; (iii) improving the distribution and marketing of seeds; (iv) im;roved allocation of irrigation investments throvgh preparation of an irrigation investment plan and impiementation of an agreed core program for completion of drainage and on-farm development works; (v) achievement of positive real agricultural interest rates; (vi) decentralization and improved coordination of research and extension services; and (vii) strengthening the capacity of the Ministry of Agriculture, Forestry and Rural Affairs (MAFRA) for planning, policy analysis, and public expenditure programming and monitoring. Implementation Experience 2. The Loan was signed on June 27, 1985. The first tranche became available upon loan effectiveness, on August 9, 1985. The second tranche of $100 million was released on February 5, 1987, about six months later than anticipated. The tranche release was based on better than anticipated performance with the fertilizer reform program, achievement of positive real agricultural interest rates, and sufficient progress on the other components to conclude that, in spite of delays, the agricultural reform program remained on track. Subsequent to tranche release, there was backsliding on the fertilizer subsidy and agricultural interest rate issues. The undertakings of a July 1988 letter providing revised schedules for meeting the fertilizer subsidy reduction and interest rate targets were not achieved. The Loan Closing Date, which had been extended from June 30, 1987 to June 30, 1989, was not extended further. Accounts were closed on May 15, 1990 (allowing for some delays in equipment shipment and subsequent time for resolvi.ng accounting issues) and the undisbursed balance of $49.8 million was ca.acelled. Results 3. Liberalization of fertilizer distribution, import and pricing progressed further than anticipated. The share of sales by the two state enterprises, which had formerly handled all fertilizer distribution, was reduced to about 30 percent. Progress in liberalizing seed imports, distribution and pricing has also been good. However, the net fertilizer subsidy to farmers, which was to be reduced from about 45 percent at appraisal to zero by end of 1988, has  iv been reduced only to 25 percent (as of October 1990). Minimum agricultural interest rates were brought to positive levels during 1986, but became negative thereafter with increased inflation. The average agricultural interest rate (including agroindustries and sales cooperatives) was brought to positive levels by March 1990, in accord with a revised agreement under a Third Agricultural Credit Project (Loan 3090-TU), but bringing the minimum rate to positive levels has not yet been achieved. The core program for improving drainage Lnd reducing salinity is about three years behind the original schedule, but appears to be picking up momentum. The irrigation master plan had major deficiencies, but these are being eliminated under a revised consultants contract which is now supervised by an inter-ministerial committee. Some progress was made in strengthening the capacity of MAFRA's Research, Planning and Coordination Department (APK) in monitoring investment and recurrent expenditures, but further strengthening would be required to enable APK to take a lead role in coordinating sector policy and evaluating policy alternatives. Sustainability 4. The liberalization of fertilizer and seed imports, distribution and pricing appears unlikely to be reversed and is having a major positive impact. The importance of adequate drainage to maintain productivity of irrigation has been recognized and a start has been made in dealing with this issue. Equipment financed under the loan is helping to improve irrigation maintenance. The interest taken by the State Planning Organization (SPO) in the revised irrigation master plan provides grounds to expect that it will achieve its intended objective. On the other hand, the fluctuation between progress and back-sliding on the fertilizer and interest rate subsidy issues indicates the difficulty of achieving sustained progress in these areas. Lessons Learned 5. While the support of Treasury and SPO for the subsidy reduction goals of the loan was initially successful, it appears in retrospect that greater Bank effort to convince MAFRA officials of the merits of the proposals might have improved sustainability. Greater emphasis on output pricing issues would have also been beneficial and progress in raising farmer prices to world market levels would have supported efforts to combat wasteful input subsidies. An unintended effect of Bank procurement requirements, combined with private sector reluctance to accept interference in its procurement decisions, is that progress in liberalization may result in reduced disbursements. Measures to avoid this problem should be considered. Institutional reform studies are more likely to be successful if supervised by inter-ministerial steering committees rather than only the institution being reformed. Greater realism is needed in estimating time and technical assistance requirements for ICB procurement. A portion of the loan allocated to general imports would have assisted in providing the quick disbursement features intended for the operation. Finally, preparation of future loans of this type should concentrate on a few issues of greatest importance, without attempting all- encompassing sectoral coverage.  PROJECT COMPLETION REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE A. PROJECT IDENTITY - Project Name: Agricultural Sector Adjustment Loan (ASAL) - Loan Number : 2585 - TU - RVP Unit : EMENA - Country : Turkey - Sector : Agriculture B. BACKGROUND Macroeconomic Develoments 2.01 In the late 1970s, Turkey began to suffer from its failure to adjust its economic policies to changes in the external environment. The result was the build up of a massive debt burden--a decline in GDP, an untenable rise in the government deficit, severe import shortages, and a critical rise in levels of unemployment and inflation. Efforts to rectify the situation began early in 1980. The Government embarked on a structural adjustment program based on increasing reliance on market forces and reorienting the economy towards export production. The program soon began receiving joint support from the IMF (in a series of standby arrangements) and from the Bank in the form of five Structural Adjustment Loans (SALs) which totalled more than US$1 billion dollars. (Five is the maximum, number of SALs permitted in one country). Since then, Turkey has achieved notable progress in regaining external balance by liberalizing trade, deregulating the exchange rate and interest rates, increasing export growth and in shifting government investment from manufacturing (to reduce excess capacity and encourage the private sector) to the priority sectors of agriculture, energy, and transport. Improvements in the banking system have also been initiated. But despite such positive steps, the economy still faces serious problems with inflation and unemployment. Further continuation of export-oriented and efficient import-substitution strategies based on comparative advantage is necessary to sustain growth in the economy. Increasing the value-added to production is also essential. 2.02 The major macroeconomic structural reforms undertaken during the 1980-1985 period included: o commercial bank interest rates deregulated (July 1980) o substantial devaluation followed by flexible exchange rate to maintain competitiveness o reduction in quantitative import restrictions and tariffs o Value Added Tax (VAT) introduced in January 1985 o increased export incentives  -2- 2.03 Following the launching of an economic adjustment program in 1980, the Turkish economy rebounded impressively, registering a real growth rate of 4.1% and 4.6% in 1981 and 1982, respectively. Inflation was reduced from 107.2% in 1980 to 25.2% in 1982 while the external current account deficit declined from 5.6% of GNP in 1980 to 2.0% of GNP in 1982. The economic adjustment program lost its momentum in 1983, in the face of new elections, with a slack-ning of monetary and fiscal discipline. This led to a resurgence in inflation rising to 31.4%, a rise in the external current account deficit to 3.4% of GNP and a fall in the growth rate of the economy to 3.2%. 2.04 The new Government which was installed in November 1983 moved to address these economic problems. Inflation control and cxport growth were at the center of its 1984 Program. Along with a tighter fiscal and monetary policy, the Government introduced further trade liberalization and pursued interest rate policies designed to provide a positive real rate of return on savings while largely freeing the lending rates of commercial banks. Efforts were also made to improve the financial discipline and performance of the State Economic Enterprises (SEEs) and to implement policies for promoting the private sector in manufacturing. The Government's overall development strategy, as spelled out in the Five-Year Development Plan (1985-.9), continued to be based on a greater reliance on market forces (rather than quantitative controls) for improving the efficiency of resource allocation and on policies designed to sustain high export growth over the medium term. Implicit in the goals and targets of the Plan was a continuing structural adjustment program designed to stabilize the economy while concurrently strengthening the foundation for a sustainable medium-term growth path which would gradually reduce unemployment. The Plan was intended to provide the final leg of the transition from an economic strategy based on import substitution to one based on outward orientation. Sectoral Context 2.05 While the relative importance of the agriculture sector in Turkey's economy is declining, the sector still represents about 17% of gross domestic product (GDP), 20 of export earnings and about 50% of civilian employment. The growth rates of agricultural GDP and exports are projected to remain below those of the economy as a whole, but the sector will continue to play a significant role in generating employment, meeting domestic food requirements, supplying industrial raw materials, and sustaining export levels. 2.06 Through the 1970s, Turkey's agricultural policies were inward- looking, stressing food self-sufficiency through subsidized inputs and producer prices. This led to relatively rapid growth of production through the first half of the 1970s, averaging 4.7 percent from 1972-75. However, with a deteriorating overall macroeconomic situation, these growth rates could not be maintained due in part to the strain placed upon the budget by the level of subsidization, and the competing demand for resources from the manufacturing sector. As a result of the overall economic crisis, growth in the sector slowed to less than 1.5 percent per annum during the late 1970's. Ineffective public investment policies, weaknesses in technical services, and problems in marketing and credit also contributed to sluggish growth. During this period, sectoral exports remained a small fraction of total production (less than 1 percent of agricultural GDP in 1979) due to the overvalued exchange rate and other disincentives to export.  - 3 - 2.07 Under the SAL program (1980-1.984) significant reforms were instituted affecting the agriculture sector. The share of agrie!ulture in the Covernment's investment program increased from 7% in 1980 to 11% in the 1984 program, with greater emphasis on quickly gestating projects. Project completion rates increased significantly. In the irrigation subsector, for example, as against only 18,000 ha. of new irrigation put into operation by State Hydraulic Works (DSI) in 1981, 86,000 ha. were put into operation in 1984. Moreover, several large projects, the economic viability of which had not been established, were dropped, deferred for study or substantially reduced in scope. The system of commodity support prices was replaced by one of protective floor prices, and the number of affected commodities reduced from 25 to 13. Plant protection subsidies were eliminated and fertilizer subsidies reduced. Livestock and grain exports were liberalized. Significant organizational reforms were implemented in an effort to improve delivery of research and extension services, and to create an organization with responsibilities for medium-term sector policy plar.ning. Irrigation water charges and agricultural interest rates were increased. The agriculture sector adjustment loan (ASAL) was designed to build on the progress already achieved and to assist in fostering continued progress in structural reform of the agricultural sector. 2.08 The new Government elected in 1983 took several steps prior to Board presentation of ASAL indicating its intention to revitalize the agricultural sector. The Ministry of Agriculture, Forestry and Rural Affairs (MAFRA) was reorganized with the objective of simplifying and decentralizing decision making to render the operation more efficient. The prices of seed and agricultural machinery were decontrolled, the restrictions on seed imports were removed, and the time required for testing and registration of new seeds was reduced. In addition, under other Bank-financed agricultural projects, the Government agreed to implement a comprehensive action program of reforms to the Agricultural Bank of Turkey (TCZB),1 to aropt the T&V extension system on a phased basis and to initiate a review of the organization of the research and oxtension services and of operational policies and priorities for these entities.2 C. LOAN OBJECTIVES AND DESCRIPTION 3.01 The loan was based upon substantial sector dialogue following the June 1983 Report "Agricultural Development - Alternatives for Growth and Exports". This report identified the priority areas for further reforms leading to improved efficiency as (a) deepening and expanding the input distribution, marketing, and credit channels; (b) rationalizing public investment with primary focus on irrigation, since it absorbs about 65% of public investment in agriculture and is key to further intensification; (c) strengthening MAPRA's research, extension, protection and disease control services in the context of the June 1984 reorganization; (d) improving parastatal efficiency; (e) reducing producer subsidization while maintaining adequate incentives; and (f) strengthening management, planning and policy Second Agricultural Credit Project (Loan 2318-TU). 2 Agricultural Extension and Applied Research Project (Loan 2405- TU).  -4- analysis in the sector. Based upon this policy dialogue, while differences remained on matters of pace and detail, broad agreement on these goals for sectoral reform were expressed by key officials involved with economic policy, before the formal process of loan identification began. In the case of the major reforms agreed in the fertilizer subsector, the loan built upon work to develop reform proposals initiated by the State Planning Organization (SPO) prior to the Bank's identification mission. This work was stimulated in part by a consultant's study financed under a fertilizer industry rehabilitation loan (1985-TU). 3.02 The loan was intended to be the first of several of sectoral adjustment loans designed to support the Government's efforts to broaden and deepen the structural adjustment process through reform programs in key sectors. Preliminary discussions on the possible content of the agricultural reform program were held witn the Government in August 1983 and preparation missions took place in May-July 1984 and September 1984. The proposed loan was appraised in December 1984 and February 1985. Negotiations were held in Ankara in May 1985 with a Government delegation headed by the Deputy Undersecretary of the Undersecretariat for Treasury and Foreign trade. Loan Objectives and Description 3.0 The loan supported the Government's medium-term Agricultural Adjustment Program by financing essential imports, staff training, and sector studies. A letter from the Deputy Prime Minister dated May 21, 1985 attaching a Statement of Agricultural Sector Policies (attached as Annex) set out the main elements of the program. The specific objectives of the Loan were to: (a) stimulate agricultural production, exports and intensification through agreed policy reforms; (b) encourage more efficie"it pricing and distribution of seed and fertilizer; (c) strengthen and accelerate irrigation program implementation, rationalize investment priorities and programming; (d) strengthen the priorities and functional organization of extension and research; (e) strengthen key agricultural SEEs and sales cooperatives; (f) strengthen overall sector management in areas of strategic and operational planning, policy analysis and performance monitoring; (g) strengthen the financing, planning and management of public sector programs through improved programming and monitoring of public expenditares; and (h) implement key subsector reforms which would provide the bases for subsequent project loans and other subsectoral lending operations.  5 - 3.04 The policy adjustments for achieving these goals focused on: Agricultural Inputs Prixinand Diatribution (a) Fert_i_e_r. Implementation of an action program to phase out the remaining retail. subsi.dy, establish a competitive wholesale distribution network, expand the retail distribution system through increased use of private retailers, and revise distribution credit regulations; (b) Seeda. Implementatix f actions to revise and implement the relevant seed laws an -- crees with a view to improving seed selection, handling and pricing, and to encourage comnercial seeds production; IXrratio9nDrainaee In estment Program Application of agreed investment criteria to all new and ongoing irrigation subsector projects, improved programming and coordination, and implementation of an agreed Core Program to focus irrigation subsector investment on the completion of drainage works, on-farm development and improved O&M for completed schemes; Technical Support Services Implementation of a'rangements to decentralize and consolidate the budgeting and operation of research and extension, and appointment of national level research and extension coordinators; and Sector Planning and Monitoring Strengthening MAFRA's Research, Planning a-d Coordination Department (APK) to improve sectoral policy formation, performance monitoring, and planning and monitoring of agricultural recurrent and investment expenditure. 3.05 Main Agreements Reached; o Retail fertilizer subsidy to be phased out by end 1988. (Promised first step reductions were announced in August 1985.); o End of parastatal monopoly in wholesale fertilizer distribution with introduction of private sector retailers on a phased basis, starting in 1986, and permission by 1989 for private traders to import fertilizer directly; o Core Program of Drainage and On-Farm development investments to be undertaken; o Government to review portfolio of ongoing irrigation projects, based upon agreed criteria, and discuss findings with Bank; o Preparation of management improvement action programs for parastatals engaged in fertilizer and seed distribution, and an action program for improvement of agricultural research. 3.06 The loan financed imported inputs, capital goods, training and consulting services designed to support the adjustment program described above. A total of $300 million was provided for financing the following:  -6- (i) Fertilizer: $152.4 million of fertilizer imports during 1985- 87; and overseas training and technical assistance for a Fertilizer Monitoring Unit to be established in MAFRA and for the main fertilizer distribution state enterprise TZDK (which handled 90% of fertilizer distribution, with the remaining 10% handled by the Turkish Sugar Factories, another state enteiprise); (ii) Seeds: $20 million of imported seeds (to be distributed by the state enterprises), $5.4 million of seed production equipment, and technical assistance and training for TIGEM, a recently created state enterprise designed to operate Government seed production activities on a commercial basis; (iii) Irrigation/Drainage: $111.0 million of equipment needed by DSI (State Hydraulics Works Agency) for the rehabilitation and maintenance of surface drains, consultant services for preparation of an irrigation master plan and for preparation of a Core Investment Program for completion of on-farm and drainage works (which had fallen significantly behind the completion of main irrigation works), and overseas training; (iv) Technical Support Services: Technical assistance to improve the identification and prioritization of agricultural research programs, and $2.7 million of equipment for an automated management information system for MAFRA, plus technical assistance and staff training for setting up the system; and (v) Sector Planning and Monitoring: Overseas training and technical assistance for APK. In total the loan included $6.2 million to finance the technical assistance services listed above and $2.3 millijn for the training programs. 3.07 Total foreigrn exchange costs were to be financed for goods and training, and foreign consultants. The loan also covered the ex-factory costs of equipment contracts won by local firms through ICB and 90% of costs of local consultants' contracts. The loan was composed of two tranches. The first of $200 M was to be released upon loan effectiveness, based upon both the agreements in the Loan Agreement and the letter setting forth the content of the adjustment program. The conditions for the release of the Second Tranche were satisfactory progress in carrying out the ASAL program outlined in the Government's policy letter and in particular in: (a) reducing the subsidy element in retail fertilizer pricing; (b) opening up fertilizer distribution to private sector wholesalers and retailers; (c) preparing and implementing a management improvement action program for TZDK; (d) carrying out the Irrigation Core Program for completion of on- farm and drainage works; and (e) achieving positive real interest rates in the agriculture sector.  - 7 - 3.08 In addition to the Turkey-rplated objectives listed above, mention must also be made of an internal Bank objective. In view of the outstanding success of the Turkey SAL program, this loan was looked upon by some as a model. to establish the "New Product of the Bank". This led to major theological debates on issues such as whether there would be a separate Staff Appraisal Report or merely an expande& President's Report (as in SALs), the relative emphasis on the policy letter vis-a-vis covenants, and the advantages of positive vs. negative lists. It also led to efforts to make the loan all encompassing to incl.ude agricultural equipment, rural roads, water supply and electricity and overall reformn of agricultural SEEs. These additional subsectors, which had not been included in the original proposals for the loan, eventually dropped out during preparation but diverted staff attention in the meantime. The precedent setting role of the loan added considerably to the delays and stress in its preparation and negotiations. In addition, significant Borrower resentment occurred whenever decisions were made to alter the SAL precedents the Borrower expected (e.g. a negative list with SAL-type procurement requirements, and conditionality in a policy letter). D. IMPLEMENTATION PERFORMANCE 4.01 The loan was signed on June 27, 1985. It became effective on August 9, 1985, leading to release of the first tranche. Second Tranche Release 4.02 The second tranche of $100 million was released on February 5, 1987, about seven months later than anticipated. 4.03 Of the tranche release criteria listed in paragraph 3.07 above, progress at tranche release under conditions (a), (b), and (e) exceeded intended targets: (i) Fertilizer prices (both retail and wholesale) had been completely decontrolled (which went beyond ASAL expectations). The retail fertilizer subsidy (net of taxes) was reduced to 27 percent of estimated retail prices without taxes or subsidies, below the tranche release target of 30 percent. (ii) Fertilizer imports and domestic marketing were opened in July 1986 to all fertilizer manufacturers, and to farmer cooperatives and their agents, ending the virtual monopoly of TZDK. The private sector had already opened about 560 retail outlets in the first three months after the liberalization decree. (iii) Positive real agricultural interest rates were achieved before the December 31, 1986 deadline. The minimum agricultural interest rate to farmers was 30 percent, as compared to the December 1986 over December 1985 inflation rate (measured by the wholesale price index) of 25 percent. 4.04 iProgress in the formulation of a management improvement program for TZDK was about 15 months behind schedule. However, a contract had just been agreed with consultants for the preparation of the management improvement  -8- program. The Bank had agreed to the Government's request for revision of the relevant dated covenant based upon the revised schedule of the consultants' work. 4.05 Progress in implementation of the Core Program for Irrigation and Drainage was also 15 to 18 months behind schedule, due to delays in hiring consultants and procurement of equipment. However, based on progress on these matters, the Bank agreed to a Government request for revision of deadlines in the Loan Agreement and side-letters for implementation of the Core Program, based upon a revised schedule for procurement of equipment and hiring of consultants. 4.06 Progress was also under way in meeting most of the other actions referred to in the Loan Agreement and in the Agricultural Sector Policy Letter. While serious delays had occurred in the consultant selection process, most of the technical assistance components had now at least reached the stage of invitation of consultants to submit proposals, and one was about half-completed. The two largest training programs, covering the irrigation agencies, had been approved and were being actively followed up, while the other training programs were being prepared. Staffing of MAFRA's APK had been improved and additional senior staff positions had been authorized. On balance, progress on the overall sectoral adjustment program was considered to be adequate to justify release of the $100 million second tranche. Post Second Tranche Release Developments 4.07 As noted above, delays in procurement of irrigation equipment and in hiring of consultants had delayed disbursements under the loan. In addition, fertilizer disbursements were also below expectations due to initial delays in developing fertilizer tender documents acceptable to the Bank. For these reasons, by the original Closing Date, December 31, 1987, only $139 million had been disbursed (excluding the revolving fund) out of the $300 million loan. However, there had been good progress since tranche release in hiring most of the consultants and procurement of irrigation equipment. Contracts had been signed for all of the irrigation equipment other than dump trucks, for which it had been agreed that a new tender with revised specifications could be issued. It was estimated in December 1987 that full disbursement could take place by December 31, 1988 if we were willing to accept curtailment of the training cormponent, finance some consultants services under other loans, and transfer this funding to fertilizer and seed procurement. 4.08 However, 1987 was an election year. There was backsliding on the understandings concerning agricultural policies, including in particular introduction of new interest subsidies and an increase in the level of retail fertilizer subsidy from about 27% to about 33% (excluding the interest subsidy). New subsidies on pesticides, animal feed and milk sales were also introduced in 1987. Government officials indicated that these changes should not be interpreted as abandonment of the policy goals agreed under ASAL letter of sectoral policies. Instead, they were asserted to be temporary deviations to alleviate a decline in farmer net incomes due, in particular, to adverse development affecting the prices of some agricultural commodities (including the effects of European Community dumping of livestock and livestock products, subsidies being given by competing wheat exporters, and the reduced purchasing power of Turkey's Middle East customers). During the Bank's Annual Meetings, the Government representatives stated that the Bank would be pleased by policy  - 9 - announcements to be issued in December 1987, following the elections. When a court decision required a one month postponement of the elections, it became clear that no decisions on new subsidy reduction targets could be expected until after the Closing Date. In the circumstances, the Bank agreed to extend the Closing Date by six months (to June 30, 1988) to allow time, following the elections and expected new cabinet appointments, to reach revised agreements on those portions of the ASAL policy reform program which could no longer be achieved by the originally scheduled dates. 4.09 Post-election performance during the first half of 1988 with respect to the major areas of concern, fertilizer subsidies and agricultural interest rates, was positive. The level of fertilizer price subsidy (net of taxes and duties, and excluding interest subsidy), which had been 45% at the time of loan approval, declined from a 1987 average of 34% to 24% (as of June 1988). Interest rates on loans to farmers were increased by 7 to 11 percentage points and ranged from 29-45% (cf. 22-35% in 1987). While these actions were not sufficient to meet the originally agreed schedules, they appeared to demonstrate the direction of the Government's policy intentions. The major reform of the ASAL, liberalization of fertilizer imports, pricing, and distribution, continued to show good results. In 1987, the former monopoly SEEs' shares of imports and sales were 23% and 33%, respectively. Progress was also made on institutional issues. Consultants were at work preparing an irrigation master plan and on the design of the drainage and on-farm development Core Program. Consultant studies on institutional improvements for the seed production and fertilizer distribution SEEs were completed and were under review by the Government and the Bank. Consultants were also close to completing work on a computerized user-friendly agricultural sector model, for use by the Ministry of Agriculture. 4.10 In the above circumstances, the Bank informed the Government that a further postponement of the Closing Date to June 30, 1989 could be considered provided thct an acceptable new agreement was reached on revised schedules for meeting the interest and fertilizer subsidy reduction targets, which could no longer be achieved as originally scheduled. In response, on July 14, 1988 the Bank received a letter, signed by the Minister of State responsible for economic affairs, postponing and updating the earlier statements of intent on agricultural interest rates and fertilizer subsidies, as follows: (i) Agricultural Interest Rates. The letter stated the Government's intention to adjust interest rates in the light of inflationary trends with the aim of bringing those preferential rates which had become negative to positive real levels during 1989 as inflation declined. This was consistent with the understanding under the Second Financial Sector Adjustment Loan, under which achieving positive interest rates on all preferential credits for the productive sectors was a condition for the release of the second tranche (expected about June 1989). (ii) Fertilizer Subsidy. The net fertilizer subsidy (excluding transport subsidies to remote, low-income areas) was originally to be brought to zero by December 31, 1988. The letter reaffirmed the aim of achieving zero net fertilizer subsidy, and specified Government's intention to achieve this objective by not increasing the current level of TL subsidy. For the purposes of this loan, a zero net subsidy implies that the average gross  - 10 - subsidy, is less than the effect on fertilizer prices of the value added taxes (at that time 12%) plus import levies (averaging about 8%). Given expected inflation and devaluation, holding the subsidy constant in TL terms was expected to reduce the gross subsidy to about 20% by December 1989, bringing the net subsidy to zero. 4.11 In the above circumstances, after consultation with the Senior Vice President, Operations, the Bank decided that the revised commitments in this letter provided an adequate basis for postponement of the Closing Date by one year to June 30, 1989. In particular, the statement of intent to keep the fertilizer subsidy constant in TL terms, allowing it to bo eroded by inflation and world price che ges, was considered a significant step forward. 4,12 Unfortunately, on August 10, 1988 the Government announced an increase in fertilizer subsidy levels by a weighted average of 57%, in clear violation of the letter of intent. Taking account of inflationary increases in fertilizer prices, the average net subsidy was increased from 24% to 28%. Average net fertilizer subsidies declined again to 24% during the first four months of 1989. However, a sharp increase in subsidy levels was introduced in April 22, 1989 in response to a major drought, raising average net subsidy levels to about 43.5% (almost back to pre-ASAL levels). Since then the subsidy has been held constant in TL terms, in spite of inflation, reducing the average net subsidy (as of January 1991) to about 20%. 4.13 In view of the Government's failure to live up to its subsidy reduction undertakings, the closing date (originally June 30, 1987 and extended subsequently to June 30, 1989), was not extended further. The Bank agreed to hold accounts open to December 31, 1989, and thereafter extended the date to March 31, 1990 with respect to a few pieces of equipment for which shipment had been delayed. Accounts were finally closed on May 15, 1990 after resolving some accounting issues and the undisbursed balance of $49.8 million was cancelled. Causes of Slow Disbursements 4.14 While policy based, this was a hybrid operation with all disbursements against a positive list of imported agricultural inputs and agricultural equipment (plus small amounts for consultants and training). There was only minor modification of standard ICB procurement requirements. The use of a positive list combined with Bank ICB procedures caused slower disbursements than would have occurred with a negative list. Government had originally expected, following earlier SALs, that a negative list without ICB procedures (except for large purchases) would be the procurement mechanism. This issue was addressed early in the identification stage of the operation and the Government was advised that for the bulk of the sector-specific items likely to be financed (fertilizer and construction equipment), ICB procedures would be required. Nevertheless, the Government made clear its continued preference for SAL disbursement arrangements. While attaching Bank funds to specific import items using ICB procurement procedures is inherently more time-consuming than the SAL arrangements, there is a trade-off in sector adjustment lending between the need for quick-disbursing funds and the possible advantages of linking the items to be financed to specific sector needs. In the case of the ASAL, this issue was complicated by the difficulty some agencies had in meeting Bank procurement requirements.  - 11 - 4.15 Even Turkey's largest Governmental agencies (DSI, TZDK) had difficulty in handling the exacting tendering procedures required by ICB following Bank guidelines. The tightened enforcement of the guidelines in recent years meant that even experienced agencies had to develop revised standard bidding documents. After working through the first tender documents for fertilizer and for seeds, models were established which for a time allowed procurement to proceed without major difficulties. Further adjustments of fertilizer procurement procedures were agreed thereafter, both to accelerate the process and to assist TZDK to adjust to the new competitive environment introduced in 1986. Despite frequent and specialized help from the Bank, it took DSI about one year to complete tender specifications and contract documentation satisfactory to the Bank. The time required for developing and debating the bidding documents delayed the arrival of needed equipment, slowed disbursements, and generated frustration. It took a great deal of Bank and Treasury staff time to explain the reasons for specific Bank procurement requirements to the agencies concerned and to assist the agencies in developing procurement documents to the Bank's standards. 4.16 Similar difficulties delayed preparation of invitations, contracts, and short lists for consultant services. The situation was made more difficult by a court ruling that a provision in Turkey's procurement law allowing for special procedures for internationally financed contracts applied only to grant financing. While some agencies found other legal provisions permitting use of short lists for recruiting consultants, others interpreted the court ruling as requiring a prior step of advertising to obtain statements of interest from consultants. This has added to delays in consultant selection. 4.17 In retrospect, the Bank underestimated the technical assistance required for the preparation of tender documents, consultants terms of reference and contracts, and the frequency of reminders needed to ensure that the steps to implement agreed actions received sufficient priority. More interventions at the technical level, in connection with visits for the preparation/supervision of other projects, would have probably been useful, without waiting for appropriate timing for a formal supervision mission. The recent appointment of staff in the Resident Mission with procurement expertise makes possible the type of assistance needed to expedite solution of procurement issues. Such staffing, unfortunately, was not available when most ASAL procurement took place. In retrospect, it is clear that Bank disbursement estimates were unrealistic as to the time needed for handling ICB procurement requirements. 4.18 Of the final undisbursed balance of $49.8 million, about $30 million are funds originally allocated for imports of fertilizers and seeds. The inability to use these funds, in spite of 1 1/2 years of Closing Date extensions, reflects in part the better than expected progress in increasing the private sector share of fertilizer and seed imports, combined with private sector unwillingness to use Bank procurement procedures. The loan was designed on the assumption that most fertilizer and seed imports would continue to be carried out by SEEs. By 1987, the share of fertilizer distribution of the two SEE's (who formerly had a monopoly of imports and distribution) was only 33%. In addition, the private sector had taken over most seed imports. Various efforts were made to adjust to these developments. The eligible imports were expanded to include fertilizer raw materials as well  - 12 - as finished fertilizer. The agreement was amended to permit private sector firms and other fertilizer manufacturers to finance fertilizer and raw material import contracts below $5 million, awarded based on price quotations from three eligible suppliers. However, since liberalized access to foreign exchange enabled the private sector to import fertilizer and fertilizer raw materials without utilization of the loan, there was no incentive for private firms to do paper work to demonstrate even the collection of three price quotations. For seeds, since most private firms are affiliated with overseas joint-venture partners from whom they import directly, requesting price quotations is not a viable option. Therefore, funds for fertilizer and seed imports were only used by SEEs. 4.19 The other major cause of cancellation of loan proceeds was the financial problems of a Turkish truck manufacturing firm which had won a bid (through international competitive bidding) for 400 dump trucks for DSI. Due to these financial problems, the firm was only able to deliver 35 trucks prior to the Closing Date, leading to a cancellation of about US $17 million. E. PROJECT RESULTS 5.01 While there have been some significant positive achievements under this loan, including, in particular, the liberalization of fertilizer distribution and pricing, the overall accomplishments must be considered disappointing. 5.02 The average net fertilizer subsidy to farmers, which was about 45% at appraisal, was to be reduced to zero by end 1988. Good progress was achieved through 1986 when the average subsidy was reduced below the 30% tranche release target. Thereafter, as described in Section IV (and summarized in Part III, table F), subsidy levels fluctuated in the 25%-35% range until April 1989 when, in the face of a major drought, average net subsidy levels were raised to abou- 43.5%. Since then, fertilizer subsidy levels have been held constant in TL in spite of inflation, reducing the average net subsidy to about 20% (as of January 1991). Meanwhile, progress in liberalizing fertilizer distribution import and pricing ptxgressed faster than anticipated. The share of sales by the two SEE's which formerly handled all fertilizer imports and distribution was 21% for 1990. Competition has 'iproved farmers access to fertilizer through private retailers, encouraged the introduction of new products, and reduced overstocking. Progress in liberalizing seed imports, distribution and pricing (in accordance with measures announced prior to ASAL signature) has also been good, leading to the establishment of many new joint venture seed companies, the virtual elimination of seed imports by SEEs, and substantial progress in the introduction of new seed varieties. 5.03 Minimum agricultural interest rates were brought to positive real levels during 1986. However, reduced interest rates for fertilizer and livestock combined with increased inflation made minimum interest rates negative in 1987. Thereafter, interest rates were increased but inflation accelerated faster. A revised schedule was agreed in May 1989 under Agricultural Credit III (Loan 3090-TU) whereby average rates (including agroindustry and sales cooperatives) would be brought to positive levels by March 1990), while minimum interest rates were to be positive by March 1991. The March 1990 target for positive average interest rates was met (through a combination of interest rate increases in mid-1989, and inflation reduction  - 13 - thereafter.) However, minimum interest rates were not brought to positive levels by March 1991. The lowest rate 36% (34% interest plus 2% taxes and fees), remains below the average of inflation for the 12 months ending March 1991 (49%) and expected inflation for the next 12 months. 5.04 With regard to the irrigation investment program, a start has been made in implementation of the Core Program of investments to improve drainage and reduce salinity in areas where major irrigation works have been completed or are close to completion. While this program is about three years behind the original schedule, it appears to be picking up momentum. Most of the equipment financed under the Loan for improving irrigation maintenance was received (following significant procurement delays) and is now in operation. The irrigation master plan, originally scheduled to be completed in 1986, was received in early 1989. However, it had major deficiencies, due in part to instructions given to the consultants by DSI (outside the officially approved terms of reference) to assume that all irrigation projects under implementa- tion would be continued and should not be analyzed. The consultants contract has been extended (with finance from another loan) to remove these deficiencies. Treasury and SPO have expressed interest in this work. An inter-ministerial advisory committee has been established for this study with Treasury providing coordination. 5.05 MAFRA's Research, Planning and Coordination Department (APK) has made progress in monitoring investment and recurrent expenditures. However, APK staffing has not been strengthened sufficiently to enable it to take a lead role in coordinating sector planning and evaluation of policy alternatives. An agricultural planning model suitable for desk-top computers was produced. However, strengthening is required if APK is to make full use of the results of this work. The intended component for establishment of a pilot management information system for MAFRA was not utilized, due to objections to proposals for hiring consultants (to be financed under the loan) to design the component. An agricultural research study was finally completed after long debates as to the consultants manpower required. It was at least an initial step toward the design of a research project, facilitating follow-up assistance work by FAO/CP. The study intended to asssist APK to improve the methodology for floor price determination was of disappointing quality, but it did provide useful inputs to a subsequent Bank study of price and trade policy issues. 5.06 The value of the management improvement study for TZDK (the main fertilizer distribution SEE) was severely diminished by assumptions that warehouse and warehouse handling costs and branch distribution structure are fixed, and that TZDK would have a fixed share of the market for products and areas served, independent of any TZDK efforts to improve marketing in competition with other distributors. The consultants report states that they were specifically instructed (outside the official TOR) not to consider restructuring TZDK's distribution structure, changing the number, size, and location of branches, or alternative distribution methods such as direct deliveries to farmers. The Bank did not receive TZDK or Government comments on the report or their action program for improving TZDK management and operations. The reports for the seed consultancy study and for the agricultural sales cooperative study were not so hobbled by restrictive  -14 - assumptions, but had limited effect in improving operations in these fields. The sales cooperative study was useful in highlighting problems which may have influenced later reform actions. 5.07 Sustainabilitv - The liberalization of fertilizer and seed imports and distribution has had a major positive impact and is considered unlikely to be reversed. The importance of adequate drainage to maintain productivity of irrigation has been recognized and a start has been made to deal with this issue. The irrigation equipment financed is expected to make a significant contribution to improving maintenance. Some improvement in the efficiency of the fertilizer distribution SEE is being induced by the need to compete with the private sector. While the initial irrigation master plan had major deficiencies, the interest taken by SPO and the formulation of an interministerial steering committee provide reason for hope that the master plan will achieve its intended effect. On the other hand, it appears that input and interest subsidy levels may continue to be adjusted up and down with the political circumstances, and that sustained progress on these issues will be difficult to achieve in the near future. F. LESSONS LEARNED 6.01 The mixed record of accomplishment and back-sliding reflects internal Government policy divisions, as well as the effects of external events (election schedules, droughts, international price movements). The Borrower, particularly the Treasury and SPO, were deeply involved in defining the strategy and criteria for the operation. In MAFRA, however, commitment to the objectives and design of the operation was uneven. Some senior officials of MAFRA were involved and agreed with the reform objectives and performance criteria (although not always with the pace of reform), but others kept themselves out of the process. This may reflect the greater interest in a quick disbursing loan on behalf of Treasury and SPO due to their concerns with the balance of payments, their sharing Bank objectives for reducing the burden of subsidies on the budget, and their greater familiarity with policy based lending under the SALs. However, during a period of frequent elections in 1987 and 1988, the relative influence of economic technicians within the Government weakened. Nevertheless recognition must be made of the adjustment fatigue which Turkey is now facing after making outstanding overall progress during the 1980-86 period. It may be that some period of relaxation and consolidation is necessary after five or six years of dramatic change, and that little the Bank could do would have made much difference in these circumstances. 6.02 A significant weakness in ASAL preparation was that little effort was made on issues of agricultural output prices beyond statements of principle in the Government's letter of intent and consultants studies of the support price policies and the sales cooperative system. This omiss'on reflected both belief in the intent of the Turkish economic team based upon their record of achievement during the 1980-85 period, and the substantial statistical work which would have been required to analyze domestic prices. Subsequent analysis under the June 1989 (Green Cover) Review of Agricultural Pricing and Trade Policies indicates that on average reductions in farm income from agricultural pricing policies have significantly exceeded increases in income from agricultural subsidies. These distortions include not only .7ormal export  - 15 - taxes but also informal understandings witl: exporters unions limiting exports. An additional distortion arises from requirements that crops be distributed through organized markets, which add to distribution costs and reduce the share of the consumer price received by the farmer. Future efforts to combat wasteful input subsidies should also seek progress on output pricing issues. Dialogue on these issues, initiated during the discussions of the draft report on pricing and trade policies, is continuing. 6.03 A major issue identified under this loan is that an unintended effect of Bank procurement requirements combined with private sector reluctance to accept interference in its procurement decisions is that progress toward meeting the liberalization goals, shared by the Government and the Bank, may result in reduced disbursements. In the case of this Loan, the faster than expected progress in expansion of the private sector role in fertilizer and seed imports as well as in the liberalization of private sector access to foreign exchange reduced the utilization of funds intended for financing such imports. In such cases, possibilities should be considered for limiting procurement requirements for private sector firms, at least in cases where there is adequate competition so that commercial self-interest can be trusted to ensure economic procurement. 6.04 In retrospect, it was not prudent to entrust supervision of consultants engaged in institutional reform studies entirely to the organizations being studied. Even when the management of the institution being studied is fully behind the reform efforts, too much opportunity is provided for vested interests within the organization to provide additional instructions to the consultants, outside the terms of reference, and to influence unduly the consultant's recommendations. Clearly it is important to have the full cooperation of the organization being studied, but a balance of influences is desirable to help maintain the consultant's objectivity. The inter-ministerial steering committee introduced for the revision of the irrigation master plan provides a useful model for future efforts of this type. 6.05 Greater realism is needed in future sector adjustment loans in estimating the time required for ICB procurement. Particularly for the initial tenders, greater Bank assistance to those preparing the tenders would have been beneficial. (The current addition to our Resident Mission in Turkey of staff with procurement expertise puts the Bank in a better position to provide the appropriate assistance.) While there are advantages in a sector loan of providing some imports directly benefiting the agencies undergoing reform, a portion of the loan allocated to general imports would have assisted in providing the quick disbursement features intended for the operation. 6.06 It is important in the preparation of future loans of this type to concentrate on a few issues of the greatest importance and to resist demands that sectoral coverage be all-encompassing. The efforts to try to prepare suitable components covering rural roads, water supply, and electrification, agricultural machinery, and overall reform of agricultural SEE's resulted in unnecessary staff costs and diversion of attention from the preparation of those issues originally identified as having highest priority.  - 16 - PART II. PRJECT REVIEW FROM BOERRWERSPRSETV ~~R R_ PERSPECTIVE A. Performance-of the Bank Performance of the Bank during the implementation and progress of the project did not create serious problems in terms of relationship with the implementing agencies and procedure of the Bank. However, some organizations comment on the procedures for disbursement of the credit and procurement, and that reconsideration of them might facilitate implementation of similar projects in the future. The comments are: - As it is known, TZDK purchased fertilizer from abroad under the project. In the purchasing process, TZDK faced difficulties in applications of the terms and conditions of the Bank's standard bidding documents for fertilizer procurement, since the standard procurement does not allow the evaluation of spot bargain offers and payments in terms. Although the loan agreement amended to permit spot bargain and purchase later, many fertilizer distributors avoided using the loan for fertilizer import because of the difficulties in disbursement and procurement procedure. - On the other hand, TZDK also found it difficult to supply the documents required for the payments, specifically against letter of credit. It took a long time to provide the documents evidencing the payment of the corresponding bank to the relevant firms. This caused delay in procurement of fertilizer on time which is very important. - As part of the project conditions, fertilizer distribution was liberalized. However, TZDK was not supported for its financial loss accrued for its fertilizer distribution on the unprofitable areas. - TIGEM indicates that, it also encountered difficulties in procurement and disbursement process because of the Bank's conservative disbursement and procurement procedures. Delay of tender documents' approval by the Bank is the common complaint of the implementing agencies. In evaluation of the bids, the first priority for the Merit Point Systems is given to the price. Implementing agencies suggest that technical factors must also have priority in evaluation and in determining the technical factors implementing agencies' opinions should be taken into account. - All the implementing agencies find the special account useful for speeding up disbursement. B. Performance of the Borrower (Implementing Agencies) Most of the implementing agencies find their performance satisfactory under the project. However, there are some issues that could be raised: - Implementation of the training component of the Droject which belongs to the GDRS was very slow because of the internal  . 17 - bureaucracy and the Bank's long procedure to evaluate it. For this reason GDRS could not use its training component fully. - For TIGEM, it was the first experience to use a World Bank credit. The credit was used in the most appropriate areas which cover the major needs of the General Directorate. Procurement of cultivation, planting, harvesting and seed processing machinery and equipment comprising the main machinery park of TIGEM were the main items of credit spending. In terms of seed production the loan is used in a most productive way. TIGEM suggests that in the event of a complaint by a bidder company to the Bank, the implementing agency should only give the response to the Bank not to the company, and the Bank should correspond with the company. If the bidder informs TIGEM directly about its complaint then, TIGEM should make the necessary attempts. - TIGEM indicates that it paid an unfair interest for two years because the loan was allocated to them in 1985 but they were able to use it in 1987-88 due to completion of performance analysis, which was a condition for using the credit. Therefore, they suggest the performance analysis should have been made prior to the credit allocation to avoid delay in using it. - TDZK has faced difficulties in application of the terms and conditions of bidding documents for fertilizer procurement approved by the Bank, since the Bank's procurement procedures are applicable for fixed capital good purchases. - Other than the above issue all implementing agencies find that disbursements under the credit were made regularly in conformity with the loan categories and both the agencies and the Bank fulfilled commitments in a favorable manner. C. Comments For contribution of solving future procurement problems, Turkish Law and procedures should be taken into account while applying the Bank's standard bidding formalities. Any step to shorten the procurement process will contribute to the speed of the use of the credit. The special account established in the Central Bank of Turkey contributed to the speed of disbursement and facilitated the procedure for the implementing agencies. Bank procedure should be flexible to be modified, when it is possible, according to the type of project or to the specific character of the project activity. Other than delay in the evaluation process of bids and procurement, the relation of the borrower and implementing agencies with the Bank had no difficulty. Both parties fulfilled their commitments in conformity with the project's terms and conditions.  - 18- D, Borrowger'sC Cmments on PartI With regard to paragraph 3, page (iii), of the Evaluation Summary, raising agricultural interest rates to a positive level was among the objectives of ASAL. This objective has been reached on the average interest rate. Raising all agricultural interest rates to a positive level has become a condition of Agricultural Credit III Project and the necessary process is continuing to comply with that condition. We share the comment made in paragraph 5 of page (iii) of the Summary, that SAL programs should not try to cover all the issues in the sector. It should address a few basic issues of greatest importance and try to be effective on them. In line with this, having a staff appraisal report may not be necessary, and an expanded President's Report may be enough as commented on page 7. With regard to the relations between the Bank, borrower and organizations, there is no difficulty encountered in these relations, with the exception of the delay in evaluation process of the bids and procurement due to the Bank's complicated and time consuming procedures on the subject.  - 19 - PART III - STATISTICAL INFORMATION Original Loan Amount $300.0 million Disbursed : $250.2 million Cancelled $ 49.8 million Ori-inal Loan Date Actual Date Initiating Memorandum October 2, 1984 Negotiations Completed May 11, 1985 Letter of Development Policy May 21, 1985 Board Approval June 18, 1985 Loan/Credit Agreement June 27, 1985 Effectiveness September 25, 1985 August 9, 1985 Second Tranche Release June 30, 1986 February 5, 1987 Loan Closing June 30, 1987 June 30, 1989 Accounts Closed May 15, 1990 A. Related-Bank Loans Loan/Credit Year of and Title Purpose A1proval Status 1. Structural To support policies to shift Turkey's 1980- Completed Adjustment Loans inward looking development strategy, 1984 I-V emphasizing import substitution, to outward looking, emphasizing export- led growth 2. Agr.Credit To strengthen the Agricultural Bank of 1983 Completed Proj. II (Ln.2318- Turkey (TCZB) and to broaden TU) agricultural credit and resource mobilization in rural areas as well as to foster the rationalization of interest rate policy. 3. Agr. Credit To support the lending and 1989 Ongoing Proj. III (Ln. institutional development programs of 3090-TU TCZB and the credit operations of the TKK (Agricultural Credit Cooperatives). 4. Agr. Extension To introduce extension and research 1984, Ongoing & Applied Research system reforms into 37 of Turkey's 71 1990 Proj.I & II (Ln. provinces as the first steps towards 2405-TU, 3177-TU) nationwide reform. 5. Drainage & On- To assist the Government to finance 1986 Ongoing Farm Development the Core Program of priority drainage (Ln. 2663-TU) and on-farm development works  - 20 B. Cumulative Loan Disbursements ,US$ Millions) FY86 fyf8 FY88 FY89 FY90 (a) Planned 200.0 300.0 300.0 300.0 300.0 (b) Actual 94.3 133.5 239.5 250.0 250.2 (c) Percent of (a) 47 45 80 83 83 C. Mission Data'/ No. of No. of Staff Month/Year Weeks Persons Weeks Date of Report Identification August 1983 2 4 8 September 1983 Preparation May-July 1984 8 12 40 Augusc 6, 1964 Post-Preparation September 1984 4 20 60 October 1984 Appraisal Nov/Dec 1984 3 11 18 May 22, 1985 Post-Appraisal February 1985 4 11 35 February 28, 19852/ Supervision 1 November 1985 3 2 6 November 22, 19852/ Supervision 2 June/July 1986 2 9 18 July 30, 1986 Supervision 3 Sept/Oct 1986 4 7 28 November 12, 1986 Supervision 4 April 1987 2.5 4 10 June 26, 1987 Supervision 5 Jan/Feb 1988 1 2 2 March 16, 1988 Supervision 6 April/May 1988 1 2 2 June 24, 1988 Supervision 7 June 1989 1 2 2 August 18, 1989 Supervision 8 June 1990 1 2 2 July 30, 1990 1/ List excludes some supervision missions where mission members assisted on specific issues (e.g., procurement, irrigation master plan), while supervising other projects. 2/ Date of Aide Memoire (BTO report not found). D. Use of Loan Proceeds (in US $M) Original Plan Actual 1. Imported Seeds 20.0 13.9 2. Seed Multiplication and Processing Equipment 5.4 6.5 3. (a) Imported Fertilizer 152.4 123.3 (b) Imported Fertilizer Raw Materials - 5.0 4. Irrigation Operation and Maintenance Equipment 111.0 94.3 5. (a) Computer Hardware, Software and Communication Equipment 2.7 0.6 (b) Artificial Insemination Equipment and Materials 0.4 6. Training 2.3 1.5 7. Consultants Services 6.2 5,1_ Subtotal 300.0 250.6 Less Cross Currency Gains on Special Account -t-)-0,4 Total 300.0 250.2  - 21 - E. Status of Studies Purpose as Defined at ADppraisal Status Impact 1. Preparation and Basic Core Pro- Initial Subprojects Assistance in gram Developed. under implementation; Implementation of Assistance in additional subprojects of a Core Program implementation being prepared. of Drainage and On- under way with Farm Development financing from Works Loan 2663 (Drain- age and On-Farm Development). 2. Preparation of an Initial Plan had To be determined. Irrigation Master major deficiencies. Involvement of SPO and Plan Revision being pre- creation of Interminis-pared pared with financing terial Steering Committee from Loan 2663. are hopeful signs. 3. MAFRA Agricultural Abbreviated study Provided initial infor- Research Review completed. mation for FAO/CP preparation of proposed Agricultural Research Project. 4. Design and assist Not started. None. implementarion of MAFRA Management Information System 5. Modificaion of Revised Model Limited due to shortage Agricultural Sector prepared suitable of Government staff with Model and Staff for use on a PC. necessary background. training to enable Staff training in- However, knowledge by it to be used by complete, but Turkish Turkish consultants MAFRA APK, SPO, and consultants avail- provides potential for Treasury staff able to provide future impact. training to appropriate staff. 6. Assisting MAFRA APK Completed, but of Provided inputs to in improving metho- disappointing subsequent Ag. Sector dology for floor quality Report (Price & Trade price determination Policy Review) and refining struc- ture of agricultural tariffs and export levies  - 22 7. Management Improve- Completed. Limited usefulness, ment Study of TZDK's since consultants were Fertilizer Distribu- instructed not to consider tion Activities, changing the number, size, including assista.ace or location of branches on redefinition of or alternative distribution role and objectives methods. in new competitive market. 8. Management Improve- Completed. Identified TICEM investment ment study of TIGEM requirements financed under and TZDK Seed Pro- ASAL. Some management duction and improvement recommendations Distribution activities have been implemented. 9. Recommendation of Completed. No action directly measure to improve attributable to study was cooperative system, taken. Study useful in particularly with highlighting problems regard to systems of which may have influenced crop procurement and later reform actions. marketing  - 23 - F. Weighted Average Net Fertilizer Subsidy a/ Percent 1983 54 1984 First half 54 1984 Second half 46 1985 First half 45 1986 Second half 27 1987 35 1988 First half 24 1988 Second half 28 1989 January-March 24 1989 April 43.5 1990 March 35 1990 October 25 1991 January 20 a/ For the period through 1985, the equivalent price, without taxes, subsidies, or duties, has been estimated based on CIF price plus port unloading/truck loading charges of $7-8 per ton plus an assumed 15% distribution margin. Under the new distribution system established in July 1986 where distributors are free to set their own price, in practice in most periods the private sector has set its prices slightly above or below the TZDK price, indicating that the TZDK price to farmers net of the subsidy deducted at the time of sale, was reasonably in line with CIF prices plus import duties plus distribution margin (including profits) plus value added tax minus subsidy. Tests in early 1988 based on actual TZDK CIF prices during the end of 1987 showed a reasonably close fit based on a distribution margin of about 18%. (A reasonable distribution margin will vary from time to time given interest fluctuations and similar factors.) On this basis, net subsidy as a percent of the price farmers would have paid in the absence of all subsidies, taxes and import duties has been calculated as: Subsidy - Value Added Tax - Import Duties TZDK net price to farmers + subsidy - Value Added Tax - Import Duties  24 - G. usoe va Agree- Original Revised ment g= Status Date _pate Description of Covenants Comments 3.01 About 3 Various Various Schedule Core Program for Proceeding generally about 1 year behind Loan years dates dates Irrigatlon and Drainage. revised schedule. While Initial delays behind 9/85 8/87 occurred in hiring consuRtants and initial through through procurement of equipment needed for Core schedule 1989 1991 Program, progress is now proceeding at a reasonable pace. 3.02 In 6/86 5/88 Irrigation Master Plan Received in eady 1989 but has major Progress deflciencles. Agreement reached to extend consultants contract to remove these deficiencies. Work now underway to prepare revisions. 3.04 OK Tranche Progress Report Release 3.05 and NO Pilot Management Consultants never hired to design Sch.3.11 Information System for component MAFRA 3.06 and Partial 6/86 12/87 Management Improvement Consultants' reports received and some Sch.5 Action Programs for TIGEM actions taken but no formal action and TZDK. programs prepared by the Government. 3.07 and Partial Overseas Training Program About half of what was originally planned Supple- was completed. mental Letter 2 3.09 OK but 5/86 8/87 Agricultural Research Consultants report received 12/89. late Review. 3.10 OK Every year Audits by 9/30 Sch.3 11 A OK Consultants' studies on Quality of study of price policy dis- (e) and (f) price policy, fertilizer, appointing. There has been no follow. Policy transport, improving sales through on study of sales coops (but this Letter 2.03 cooperatives, and was not a covenant). and 3.02 agriculture sector model. Sch. 5 NO Tranche Tranche Phasing out retail fertlizer Net subsidy reduced from 45% to below and Policy release release subsidy. tranche release target 7/86 and reached as Letter and 12/88 and low as 24%, but was increased back to 43% (5.04- albout in 4/89. Reduced (through inflation) to 25% 5.06) and 12/89 as of October 1990. Bank 6/85 letter of interpret- athon Sch. 5 & Very good Tranche Uberalization of Fertlizer Progress further and faster than expected. Policy release Distribution and Imports Letter and 12/88 (5.06 & 5.07)  - 25 - Sch. 5 See corn- Tranche see Posltive real agricultural Achieved by 8/86 but by 1987 increased mints release comment Interest rates. Inflation made rates negative again. New schedule agreed under Ag. Credit Ill. Policy 1.01, Partial Agriculture Investment to be Agricultural Investment dropped to 7% of Letter 3.01 10% of total Government total In 1985 and 1986, but restored to 9- Investment, of which 66% to 10% range thereafter. Core Program not irrigatlon, 35% of Irrigation held back by budget, but rather by design Investment to Core delays. Program. Policy 2.01, NO Improved Producer Prices. New subsidies added in 1986/87 for Letter 3.01 Reduction in Subsidies livestock feed, pesticdes, and milk. Producer prices on average below world market prioe equivalent. Uvestock subsidy eliminated in 8/89. Policy 3.02, Some Strengthening MAFRA Letter 4.03 Progress planning programming and evaluation unit. Policy 3.01, Reason- Seed distribution reform. Seed liberalization in 1984 has been Letter 5.02 ably OK maintained, but Incorporating various decrees into a new seed law has not been accomplished.  - 26 - H. Staff Inputs by Stage of Project Cycle in Staff Weeks Stage of Proj ect Total Cycle FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 (STWs) Preparation 1.6 68.3 193.0 262.9 Appraisal 121.8 121.8 Negotiations through Board Approval 25.3 25.3 Supervision .- 0.3 35.2 110.3 72.1 45.9 8.1 271.9 Total 1.6 68,3 340.4 35.2 110,3 72.1 45.9 8.1 681.9  -27 - ANNEX 1. C. BA6BAKANLIK HAZINE ve DI$ IICARET MOtSTE$ARLI1I Hazinc: DEI-IV- 1j 94 7 Say : 56909-85 Konu Mav 21, 1985 Mr. A. W. Clausen President International Bank for Reconstruction and Develooment 1818 H Street, N.W. WashinRtan, D.C. 20433 U.S.A. Dear Mr. Clausen: The Turkish Government has now comDleted the fifth vear of the Government's oroeram for restructurinz the economv. The adiustment urogram has heloed Turkev to exoand exoorts and realize external balance. Under the Fifth Five-Year DeveloDment Plan (1985-1989), the Government will continue to encouraRe imoroved oroductivitv in areas of comparative advantaae and further proaress in increasing exDort earninRs. We have also beaun to broaden the adiustment Drocess bv emohasizing oolicv and institutional reforms at the sectoral level, which will be developed further over the next.five vears. Dur .na this period, the Government has assigned highest Drioritv to reforms in the agricultural sector. The annexed Statement of Agricultural Sector Policies sets forth the-main elements of the Government's medium-term program for adjustment in 3rimarv oroduction Dolicies and for further rationalization of public investment, and our economic and financial policies for the agricultural sector. It encompasses poliev and institutional reforms underwav or to be undertaken in 1985 and 1986. I am therefore writing vou at this time to reouest an Aericultural Sector.Adjustment Loan in the amount of S. 300 million durine 1985 to support the Government's proeram for structural change. Sincerelv Yours /-Kava ERDEM utv Prime Minister and Minister of State  - 28 - STATEMENT OF AGRICULTURAL SECTOR POLICIES 1 9 8 5 I. Macroeconomic Perspective 1.01 The medium-term framework for economic restructuring has been set out in the Fifth Five-Year Development Plan (1985-89) which was approved by the Parliament in mid-1984. The basic theme is a continuation of outward oriented development with increased reliance on market forces. The development strategy will continue to be based on sustained export growth. Agricultural exports will continue to play a significant role with agricultural growth increasingly coming from higher productivity and through a crop mix which better reflects Turkey's comparative advantage. The Government's medium-term policy is that import restrictions should not be used to protect domestic producers. Hence the further liberalization of fertilizer feed stocks, aeeds and.certain processed agricultural commodities have been included in the import liberalization program during 1985. The strategy requires that the private sector be allowed to play a leading role, since export growth is critically dependent on private entrepreneurs developing their comparative advantage. In this context, the direct activities of the state would be confined mainlv to the development of infrastructure (including irrigation) geared to supporting the development of the private sector. In order to raise output growth, public investment in agriculture will be maintained at leastat a level of about 10 % of total public fixed investment, and we intend to allocate an average of 35 % per annum of the funding for irrigation and drainaee to the Core Program, for Irrigation and DrainaRe. II. ARricultural Sector Perspective 2.01 In the agricultural sector, attainment of the Government's macropolicy objectives has been and will continue.to be facilitated bv trade liberalization, improved producer Price Policies, reduction of subsidization, and redirection of government resources toward productive investment in areas supporting private sector initiative and fostering technological change. 2.02. Under the Government's outward oriented strategy, the agricultural sector is expected to continue to plav an important role in the economv over the medium term. The basic objective of the strategy is to complete  - 29 - the transition of farming during the Fifth Plan period from the low technology, low growth and highly subsidized system of the late 1970s to a more commercialized, export oriented and self-reliant system. The transition would be realized mainly through the rein- forcement of programs which aim to; (i) enhance the value-added in production through crop intensification on irrigated and rainfed lands; (ii) increase animal productivity; (iii) improve export marketing, and (iv) stimulate raw material supplies to the agroprocessing industries. The policy and institutional reforms needed to achieve these objectives have been identified and considerable progress.has.been made since 1980 to implement these. The adoption of an appropriate exchange rate and improved export incentives has helped agricultural exports to.increase by over 50 % between 1979 and 1984, while export values of processed agricultural goods by 1984 had .ncreased five-fold since 1979. Although a period of adjustment was required to permit farmers to adapt to the new policies, the average rate of growth of agricultural GDP (net of inflation) in 1982 and 1983 reached 3.1 % (as compared to an average annual growth rate of 1.4 % during 1976-79). Agricultural GDP growth in 1984 is estimated at about 3.7 %. 2.03 Government's interventions in the sector have been significantly redirected from subsidies and regulation to investments and technological improvements. In addition to the general liberalization of agricultural trade, livestock and wheat exports (and all grain imports) were libera- lized in 1984. Opportunities to export since 1980 have resulted in a broad rise in Producer prices. This obviated the need for extensive state involvement to provide attractive prices for farmers. The svstem of commodity support Prices was therefore replaced by one of protective floor prices in 1984, and the number of affected commodities was reduced from 25 to 13. In addition to the general liberalization of aRricultural trade, livestock and wheat exports (and wheat imports) were further liberalized in.1984. We shall continue to review the efficiency of floor pricing policies and import restrictions for sugar and of export dutv levels for traditional export crops. 2.04 On the production inputs side, plant protection subsidies have been eliminated and private sector distribution of chemicals has been introduced. Regulations impeding the introduction of imported seeds and inhibitinz Private investment in seed production have been substantiallv reformed. Fertilizer shortages have been eliminated while the fertilizer retail price subsidies have been sharply reduced and the local fertilizer manufacturing industry made more efficient. Farm machinery prices were set free in 1984, which both resulted in a lowering of domestic farm  - no - machinerv prices and facilitated farm macbinerv exoorts. We have recentlv reduced tariffs for machinerv imports and eliminated quantitative restrictions fbr equipment imports. In the area of public investment, the share of aericulture in Government investment has increased from 7 % in 1980 to an average of 9.5 % during 1982- 1984. This investment has been made more effective throuRh greater emphasis on auicklv gestating proiects, concentrating resources in the irrigation sector on a smaller number of Droiects to accelerate their completion, and delaving the start of new, large Proiects. Organizational reforms have been imDlemented -to create the Ministrv of Agriculture, Forestry and Rural Affairs (MAFRA) bv merging the previous MAF and the rural services directorates of various ministries. These reforms aim to hasten the comDletion of on-farm irrieation works and the Government's basic rural infrastructure DackaRe. An attendant decentralization of MAFRA's main service agencies will accelerate the transfer of improved technologv to farmers. To this end, a general reoreanization, DroRram reformulation, redeDlovment of staff and a devolution of exDenditure authoritv is beine carried out t introduce more flexible and responsive farmer technical suDport while consolidating MAFRA's diverse field services for aericultural research, extension, crop Drotection and animal disease control. 2.05 To finance future aericultural.develooment, the Government's volicv is to augment the recovery of oublic investment expenditures from identifiable beneficiaries, reduce the erowth of recurrent costs, and eraduallv shift responsibilitv for the financine of primarv Dro- duction and agricultural marketine from eeneral revenues to the banking svstem. Thus, irrigation water charges have been increased to have the beneficiaries of government investment bear a lareer share of the costs. while agricultural interest rates have aeain.been increased to close the gap between these and current inflation. In narallel oreanization reforms are being imDlemented for the Agricultural Bank of Turkev, to imDrove both its financial planning and management caDa- bilities and the effectiveness of its agricultural credit service to farmers. III. Directions for Agricultural Sector Reform 3.01 As outlined below, the reforms to be carried out in 1985 and 1986 will aim. to revitalize primary production, and to render more effective te public investment program for agriculture and sectoral economic and financing policies. The Government intends to extend and deepen the reforms in the agricultural sector with emphasis on; (i) reducing producer subsidization while maintaining adequate incentives; (ii) further improvement in the input distribution, marketing,  - 31 - and credit channels (concentrating on fertilizer, but also including improved seeds) ; (iii) improved allocation of public investment in agriculture, particularly in irrigation (66 Z of government agricultural investment); (iv) strengthening MAFRA's research, extension, protection and disease control services; (v) increased infrastructure investment, with a higher priority in the 28 less developed provinces; and (vi) strengthening management, planning, policy analysis and public expenditure Programming in the sector. 3.02 In parallel, the 1985-1986 program will include the development within MAFRA of a capability to carry out sector policy analysis. During 1985 and 1986, reviews will be carried out to improve the overall flow of resources for agriculture. MAFRA, through its Planning, Research and Coordination Bureau (APK) will undertake systematic post-evaluation of completed sectoral projects. Reforms will be identified to improve overall planning and monitoring for the agricultural credit system, in order to augment direct farmer lending. Actions will also be identified to reform the agricultural state enterprises and the Sales and Credit Cooperatives, to enable them to operate more efficiently within the new commercial environment, and to augment the flow of indirect financial resources through these entities to farmers. IV. Sector Economic Policies 4.01 Planning and Analysis. The Government's ability to provide appropriate policies to guide the agricultural sector in accordance with the above objectives was strengthened in June 1984 with the es- tablishment of a Poliev Analvsis Unit within MAFRA's APK with respon- sibilitv to (i) review the performance of Government's entities which intervene in Turkev's aaricultural operations; (ii) advise on agricultural trade Policies; (iii) advise on Droducer floor price and inDuts policies; and (iv) review performance under five-year plans and annual investment Programs. The Government also recently established a fertilizer monitoring unit within APK to assist in programming and monitoring of the fertilizer distribution system.  - 32 - 4.02 Public Expenditure Policies . We intend to give top priority in resource allocation to the completion of essential irrigation works and to meet the increased need for effective agricultural research and extension. To increase their effectiveness, we intend to Prioritize projects and concentrate investment on those having high economic and social benefits, and quick gestation. 4.03 The Government also intends to imorove the overall vlannine and Droerammine of Dublic exDenditure for aericulture, and to strenethen the Droiect selection. monitorine and evaluation caDabilities of MAFRA's APK. In this connection. APK has alreadv been eiven eeneral authoritv to review aericultural Droerams and Dlans. 4.04 Trade Regime. The agricultural trade regime has been progressively liberalized since 1980. Reforms which were introduced in January 1984 effectively freed grain exports and liberalized agricultural commodity and factor;imports, particularly improved seed varieties. The Government has also further liberalized seed imports. V. Inputs Pricing and Distribution Systems A. Seeds Pricing and Distribution 5.01 The Government has given high priority to reforms in the Turkish seeds industry, to stimulate the importation and diffusion of superior varieties. and therebv rapidlv raise croD vields. The Government's medium-term obiectives in the area of seeds are to imDrove the seeds multiplication and distribution svstem and encourage competition by strenetheninR the caDabilities of the private sector. Major Dolicy reformswere incorporated in a series of decrees issued in 1983 and 1984 to encourage the develoDment of a Drivate sector seeds industrv through foreian seed comDanies' particiDation in joint ventures; relaxed imDortation, testing and certification nrocedures; and bv deregulating seed pricine. These measures have alreadv Droduced significant results in attracting the establishment of Drivate sector seed companies. Production of wheat and barley seed will remain, however, primarilv within the public sector since their hiRh retention rate bv farmers vrevents profitable private marketinR of these seeds. 5.02 Durine 1985, the Government intends to submit a revised seeds law for legislature aDproval, consolidating and incorporating the reforms of the existing law contained in the subsequent decrees and reaulations. Concurrently, Government intends to devise a national seed industry development plan to provide detailed policies for promoting a national seeds industry under the new law, and intends to help establish a Turkish Seed Industrv Association as a recognized coordinating entity for private seed producers. The previous system of contract seed growers will be improved, and multiplication of self- wollinated varieties will be turned over to fully commercialized certified seed growers.  - 33 - B. Fertilizers Pricing and Distribution 5.03 Much progress has already been made in improving the fertilizer distribution system. The production of Turkey's fertilizer industry has reached about 60-70 2 of capacity, due to improved availnhility of imported raw materials and more favorable ex-factory prices. A fertilizer factory rehabilitation program has been undertaken which when completed and fully operational in 1988 should enable most factories to sell fertilizer at prices competitive with world market prices. 5.04 Pricing. The heavy burden of the current subsidies on the budget and the financial system (with fertilizer subsidies amounting to more than 1.% of GDP) preempts resources which could be more effectively employed in increasing agricultural production through other means. Nevertheless, the Government has recognized that too abrupt changes in fertilizer pricing policies could disrupt agricultural production in the short run. Therefore, we have followed a policy since 1983 of gradually reducing the retail fertilizer subsidy. In line with these policies, the Government increased fertilizer retail prices by 60 % i'n o6inal terms'in-Januafg 1984 and again by 40 Z in August 1984 and by 20 % in February 1985. We intend to continue to phase out the remaining subsidy by the end of 1988 except that needed for (i) transportation to remote, low income areas; (ii) the higher cost of domestic fertilizer manufacturing over CIF trend prices, until the factory rehabilitation program is fully effective; and (iii) the higher than normal costs of fertilizer distribution until the improvements in the distribution system are fully operational. 5.05 Our goal is to provide the domestic manufacturers with clear signals on policy reference prices by bringing ex-factory prices to levels of import prices of-comparable products. At the same time, we intend to provide manufacturers with the opportunity and incentives to improve their product to meet the demand of farmers. As part of- this process, in Aueust 1984 we announced a substantial improvement in the basic ex-factorv pricing formula. Ex-factory prices are now linked to a dollar price adjusted semiannually for each product, with monthly adjustments for exchange rate fluctuations. 5.06 Distribution System. Our goals are to reastablish a competitive distribution system to promote efficiency and improve services to farmers. This will be done through ; (i) encouraeine participation in fertilizer distribution bv fertilizer manufacturers and private traders at the wholesale level and exDansion of the retail network to areas not currentlv well served throuRh  - 34 - the introduction of private sector retailers. To this end, we will progressivelv remove the obstacles to such participation, starting with the January 1986 fertilizer Pricing decree; (ii) improving DONATIM's management structure and financial and operating capabilities in order to reduce the burden of its current stocking and distribution manaRement oractices on the Government budget and extra-budgetarv resources; (iii) liberalizine imports and bringina domestic fertilizer availabilitv in line with cost-savine opportunities offered bv use of higher analvsis fertilizers; and (iv) nrovidine adequate access to fertilizer Purchase credit to farmers under revised pricing and liberalized distribution arrangements. These reforms will be introduced in two phases. The first will last until December 31, 1988, while the retail subsidy is being phased out. During the second Phase, a further withdrawal of Government reitulation is intended, manaeed carefullv to Drevent inadvertent disruption of fertilizer sunplies. 5.07 To suDvort imDlementation of this Dolicv framework. the Government has established a fertilizer monitorine unit within its MAFRA which will coordinate the introduction of manufacturers and private traders into fertilizer distribution, and the delineation of the marketine areas to be taken uD bv each distributor to ensure adeauate availabilitv of all tvpes of fertilizer throuehout the countrv. To liberalize Droeressivelv ferti- lizer imDortation, Government intends to establish Drocedures to allow direct fertilizer imDorts bv Drivate traders and fertilizer manufacturers followine the Dhase-out of the retail subsidv. It is expected that this system will begin to operate in 1989. To improve DONATIM's capabilities, and enable it to effecitvely adjust to the new system, Government intends to. carry out a comprehensive Management Improvement Study for TZDK during 1985 and 1986. 5.08 Financing/Credit Arraneements. Measures will be taken to make adequate amounts of credit available through TCZB/Credit Coops to meet farmers' increasing credit requirements as the fertilizer subsidy is nhased out. and to orovide farmers.with access to such credit under uniform terms and conditions whether thev nurchase throueh TZDK. the Credit Coo oeratives or alternative (new) channels. The fertilizer manufacturers, private distributors and at some later date TZDK and cooDeratives will be exDected to finance distribution throueh commercial channels. VI. Irrigation and Drainaee Investment Proeram 6.01 The Government continues to assign the highest priority to public irrigation investment. As part of an effort to accelerate completion  - 35 - of on-farm development works, we have begun to use private contractors for such works which had previously been carried out almost entirely by force account. The Agrarian Reform Law was revised in December 1984 so as to require land consolidation only in such large, contigulous irrigation service areas where the benefits of extinsive use of agri- cultural machinery can be realized. We have also made progress in increasing the share of the operation and maintenance costs financed' throuR.h irrigation water charaes, increased the penalties for delicuent payment of such charges, and recovering the capital costs for on-farm works. 6.02 Tne Government recognizes, however, that the current backloe between areas with comDleted maior irrigation works and the comDletion of on-farm develooment is large (exceeding 300.000 ha) and is increasing with the progress achieved in acceleratinR completion of major works. To help alleviate this problem we will, beginning with the 1986 Public Investment ProRram. increase the share of resources being Provided for on-farm work on Nbout-65 &ompletedtand-'bngoing projects of the State Hydraulic Works Agency (DSI), with particular concentration on drainage and soil conservation having high incremental benefits. To these ends, an Investment program for the lirigation and drainage subsector would be carried out between 1986-1989 to (i) overcome the backlog of on-farm works on ongoing or completed DSt Projects, (ii) provide equipment and other assistance to rehabilitate and improve the level of maintenance on all completed surface drainage networks, (iii) provide assistance for the reclamation of saline lands within irrigated areas, and (iv) provide access roads along irrigation and drainage channels to permit regular maintenance and repairs. It is intended that such work will be our Core Investment Program for the irrigation subsector, and it will be assigned the highest investment priority until the on- farm irrigation development backlog has been overcome. During the past three years we have been assigning top priority for new DSI Projects to those having high economic returns and we propose to continue this policy. Beginning in 1986, we intend also to make our decisions for the continued funding of ongoing projects on the basis of the same criteria,.to be screened conjointly with DSI's new proposals. To effec- tively implement these policies, steps will be taken to strengthen the planning , coordination and implementation capabilities of the respon- gible agencies.  - 36 - VII. MAFRA's Agricultural Technology and Information Services 7.01 A major initiative was announced by Government on June 8, 1984, to reoreanize and consolidate the main service deDartments of MAFRA, broaden the Ministrv's resoonsibilities for the Dlannine and mana- eement of aericultural sector Dolicies. and decentralize oroeram for- mulation and execution. including Dooline of facilities, staff, eauioment and budeetine for MAFRA's diverse field services. The imDlementation. of this reform. Darticularlv as it affects the field oDerations of MAFRA's extension. research. croo Drotection and veterinarv services, thus constitutes a third orimarv technical recuisite- alone with the seeds and irrieation develoDment Droerams -- for stimulatine imDroved nroduction technoloeies at the farm level. Under the new MAFRA orea- nization. Government fullv intends to imolement the reforms to Research and extension agreed under the Agricultural Extension and Applied Research Proiect. 7.02 Our immediate objectives are to complete the consolidation of extension and research at regional and Provincial levels and to firm up arrangements for affective technical leadership of the field services, and, to this end, Government intends to appoint durine 1985 a National Agricultural Research and a National Agricultural Extension Coordinator. The oneoine consolidation of.MAFRA's diverse extension activities at the Drovincial level will be.comnleted in 1985 while conioint Droerammine, budeetine and orogram imDlementation will be instituted beginnine 1986. 7.03 An imDortant area needine review is the Drioritization and imolementation of croD and animal husbandrv research. Our medium term obiective is to strenathen the process of identifving and prioritizinR national and local research projects, then to strenethen the caDabilitv of the research network to satisfv these Priorities. As a first steD, the Government established a ministerial research workine grouD in March 1984 to guide a mid-term review which Government intends to carrv out in connection with the Bank-assisted Aericultural Extension and Aunlied Research Proiect. On the research side, MAFRA intends to enlaree this review to encomuass the totalitv of its aericultural research oroerams and research station functions, then revise its oriorities, Droerams, Drocedures, staffine and trainine Droerams, and construction and nrocurement Dlans as necessarv to imDrove the aualitv and usefulness of research. At the same time, an oneoine evaluation svstem.will be developed and established to monitor the efficiencv of the avoroved research oroiects and proerams. 7.04 In the areas of extension, we will carefullv review the Derformance of the new svstem being intr,oduced in the 16 provinces covered bv the Agricultural Extension and ApplieAesearch Proiect bv end 1986, make modifications as necessarv, then formulate additional investment and staffing programs to phase-in application of the project's extension principles nationwide.  - 37 - VIII. Aericultural Financine Policies 8.01 The Government intends to prepare financial reforms affecting the agricultural sector, augment the resources available for agricultural credit and channel the-e in an efficient manner by strengthening the institutions in this field, and improve the financial management of the agricultural SEEs. These measures will complement actions being addressed in the context the SALs and the Second Agricultural Credit Project. 8.02 Agricultural Credit. In the area of agricultural credit, the Government's objectives are to strengthen its capability to carry out prospective credit planning, initiate continuous monitoring of credit utilization, augment the volume of resources available for agricultural credit (consistent with overall financial stabilization objectives), and strengthen the capabilities of the principal intermediaries involved. The Government's principal actions to date have been the introduction of annual credit plans and the progressive raising of interest rates with the objective of eliminating their subsidization and thereby improving resource allocation, increasing the availability of credit resources for the sector, and maintaining the financial viability of sector finan- cial institutions. The Agricultural Bank of Turkey (TCZB) has initiated the implementation of its action plan for institutional development, which is being supported under the Second Agricultural Credit Project. These reforms, though still in the initial stages of implementation, are expected to result in major improvements in TCZB's efficiency. 8.03 The need for more systematic and comprehensive credit planning, both annually and for the medium-term, will be addressed by Government during the Fifth Five-Year Development Plan period. In view of the priority given to the agricultural sector, the Government intends to augment the availability of resources for agricultural lending over the medium-term. 8.04 In addition to the ongoing work under the TCZB action program, the Government will cause TCZB to review4 the adequacy of TCZB's branch network and staffing in those regions where agricultural development is likely to be focused during the Fifth Five-Year Plan period.  MAP SECTION  IBRD 16766R1 :'0 ''t ma 0j)K0jg LAIAO I~~~~~~~~~~~~~~~~~sO -ir5- e ts, . iNlzr4~~~~~~~~~~~~~~~~~~~~MM TAGRCLTRL EIOSr t~~~~~~~~~~~~~~7.ua rwho tA T6, Wr . ld {iL' {s Shil oslus wb tHTjAR, I-~~~~~~~~~~~~~~ZI rod3>llQ>@lrttortrds ;6 =1 MLREGION t=| soUrtHEAsliEGloN i\ NATONALt'AEl'A00 EG OS OG C SOLOOm OWO tNOAu~flE U. "isYtewrTldEtn0 0000 r SEPTEBE- 1'191