Turkey - Second Agricultural Credit Project

Dociuneuit of The World Bank FOR OFFICIAL USE ONLY Repor No. 9342 PROJECT COMPLETION REPORT TURKEY SECOND AGRICULTURAL CREDIT PROJECT (LOAN 2318-TU) FEBRUARY 12,1991 Agriculture Operations Livision Country Department I Europe, Middle East and North Africa Region This documeLt has a restricted distributioa and may be used by recipients only In the performance o-f tbeir official duties. 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) - 1.09 yards 1 kilometer (km) - 0.62 mile 1 hectare (ha) - 2.47 acres 1 decare - 0.1 ha - 0.25 acre 1 square kilometer (km2) - 100 ha - 0.386 square mile 1 liter (1) _ 0.264 gallon ABBREVIATIONS AND ACRONYMS USED ACAP Agricultural Credit and Agro-Industries Project AEAR Agricultural Extension and Applied Research Project AP Action Program FAO Food and Agriculture Organization of the United Nations FAO/CP FAO/World Bank Cooperative Program IAEE Igdir-Aksu-Eregli-Ercis Irrigation Project MAFRA Ministry of Agriculture, Forestry and Rural Affairs MIS Management Information System SACP Second Agricultural Credit Project SAR Staff Appraisal Report SEE State Economic Enterprise TCZB Turkiye Cuinhuriyeti Ziraat Bankasi (Agricultural Bank of Turkey) TKK Agricultural Credit Cooperatives TZDK Agricultural Supply Organization WB World Bank FISCAL YEAR Government of Turkey - January 1 to December 31 TCZB - January 1 to December 31 World Bank - J3uly 1 to June 30  FOR OFFCAL US ONY THE WORLD SANK W.shington. D.C. 20433 U.S.A. Oik. of Ov.cutcv.G.mv Opmalmm Ivulmtntn Feiruary 12, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECTt Project Completion Report on TURKEY Second Agricultural Credit ProJect (Loan 2318-TU) Attached, for information, is a copy of a report entitled Project Completion Report on Turkey - Second Agricultural Credit Project (Loan 2318-TU)" prepared by the Europe, Middle East and North Africa Regional Office. This project has not been audited by the Operations Evaluation Department at this time. Attachment This document has a rstricted distribution and may be used by recipients only in the performance or their official duties. Its contents may not otherwise be disclosed without World Bank aulhofintion.  FOR OMCVL4 USE ONLY PROJECT COMPLETION REPORT TURKEY SECOND AGRICULTURAL CREDIT PROJECT (LOAN 2318-TU) Table of Contents Page No. ' PFEFsACE i EVALUATION SUMKARY jjj pART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Project Identity 1 B. Background 1 C. Project Objectives and Description 2 - Project objectives 2 - Project description 2 D. Project Design and Organization 3 - Design 3 - Organization 3 E. Project Implementation 4 - Loan effectiveness and project start-up 4 - Implementation schedule 4 - Credit program 4 - Institutional aspects 5 - Procurement 6 - Project costs 6 - Disbursement 6 - Loan allocation 6 - Covenants 7 F. Project Results and Impact 7 -Project objectives 7 -Physical results 7 - Institutional impact 8 -Financial impact b G. Project Sustainability 10 H. Bank Performance 10 I. Borrower Performance 11 J. Project Relationships 11 K. Consulting Services 12 L. Project Documentation and Data 12 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 ^uthorization.  Table of contents (Cont'd) Page No. PART IIs PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ............... 13 PART III: STATISTICAL INFORMATION ................................ 15 Tables. 1. Rela:.ed Bank Loans and Credits ........................ 15 2. Basic Data ................ ................ . 16 Loan Disbursements .................................... 17 4. Project Costs ......................................... 18 S. Project Financing .................................... 19 6. Pro"ect Results .................. ... ........... 20 7. Status of Covenants .. ..... ..... . .. ... 21 8. Staff Input and Mission Data .......................... 22 8a. Staff Inputs ................................... ... 2 3 9. TCZB - Loan Collection Performance 1980-88 ............ 24 ANNEX 1 Tables: 1. TCZB: Comparative Balance Sheets 1984-88 25 2. TCZB: Comparative Income Statements 1984-88 26 3. TCZBs Key Financial Indicators 1984-88 27 4. TCZBs Disbursement of Loans to Sub-Borrowers .......... 28 ANNEX 2: EXCERPTS FROM PCR PREPARED BY TCZB I. Introduction .......................................... 29 II. Project Identification, Preparation ................... 29 III. Implementation ................................... 32 IV. Operating Performance ......................... .. 35 V. Institutional Performance Development ........... *. .... 40 VI. Evaluation .........0.*............................... 44 VII. Conclusion .. ................... ....... 45 ANNEX 3s Letter of the Government of Turkey dated September 27, 1990 *****........****....*.*.......... 46 MAP - !BRD 17071  PROJECT COMPLETION REPORT TURKEY SECOND AGRICULTURAL CREDIT PROJECT (LOAN 2318-TU) PREFACE This is the Project Completion Report (PCR) for the Second Agricultural Credit Project (SACP) in Turkey, for which Loan 2318-TU, in the amount of US$150.4 million, was approved on June 27, 1983. The loan was closed on June 30, 1988, six months behind schedule. It was fully disbursed. The PCR was prepared by FAO,CP. The Borrower, Turkiye Cumhuriyet Ziraat Bankasi (Agricultural Bank of Turkey, TCZB) prepared its own PCR excerpts of which are given in Annex 2. Preparation of this PCR was initiated during the Bank's final supervision mission of the project in October 1987, and is based, inter alia, on the Staff Appraisal Report; the Loan, Guarantee, and Project Agreements; supervision reports; correspondence between the Bank and the Borrower; internal Bank -emoranda; and information gathered by the FAO/CP mission which visited Turkey in November 1989. The report was updated and appropriately edited by Bank staff. The Government's and TCZB's comments to the PCR were conveyed to us by letter of September 27, 1990 from the Undersecretariat of Treasury and Foreign Trade (see Annex 3). The text has been revised in light of these comments.  - iii - PROJECT COMPLETION REPORT TURKEY SECOND AGRICULTURAL CREDIT PROJECT (LOAN 2318-TU) Introduction 1. The Second Agricultural Credit Project (SACP) was appraised in November 1982 and approved by the Bank's Board in June 1983. Project cost was US$363.5 million toward which the Bank provided a loan of US$150.4 million. The loan closing date was extended once by six months from December 1987 as stipulated in the Loan agreements to June 1988. The loan was fully disbursed. Obiectives 2. The main objectives were to: (a) increase agricultural production and to raise the productivity and income of farmers by supporting TCZB in its lending activities in those areas where the Government has undertaken to intensify support services to farmers; (b) further encourage institution building of TCZB through: (i) an agreed Action Plan for its reorganization and strengthening, and (ii) provision of staff training and equipment; (c) address sectoral issues of on-lending interest rates and strengthening of credit cooperatives through seeking agreement with the Government to: (i) achieve real positive on-lending interest rates in the agriculture sector by end 1984, and (ii) arrange for a study to develop a 5-year plan for development of the credit cooperative system, which may form the basis of a future project for possible Bank financing. ImRlementation Experience 3. The loan became effective after 10 months in April 1984 following two delays involving a total of six months. Despite initial delays, the credit program was successfully implemented. Disbursements by TCZB under the on-farm development component expressed in 1983 TL terms exceeded appraisal estimates by 345% in the short-term credit category and 57% in the medium- term credit category. Conversely, credit demand in Government-assisted special schemes was far less than anticipated at appraisal. Accordingly, funds from the slow-moving special schemes components were reallocated to the short-term credit category in the on-farm development component.  - iv - 4. There were initial delays by TCZB in implementing the institutional reforms stipulated in the project. However, after 1986, TCZB started in earnest to implement the reforms and, by the end of the project, it had carried out most of them. Of the US$4.7 million allocation for vehicles and equipment only US$147,000 was actually used for procurement, the remainder reallocated to the on-farm development component. TCZB's request for reallocation of proceeds was based upon a reduction in the number of armored vehicles required. While this request may have been influenced by earlier Bank refusal to modify Bank procurement requirements, the Bank chose not to question the reasons given for the request and agreed to reallocate funds to meet the larger than expected demand for short-term credit funds. Results 5. The project was successful in attaining its principal objectives of providing credit for increased agricultural production and strengthening TCZB. About 200,000 farmers or 74% of the appraisal target benefited from the credits under the project, and there was substantial increase in production of agricultural crops financed, particularly cereals. TCZB's lending policies and procedures were modified to facilitate adequate credit flow to f.armers, its organization made more functional and steps taken to introduce improved management information and accounting systems. The project, however, did not succeed in its sectoral objective of raising preferential on-lending in1:erest rates to positive levels in real terms by end-1984. Interest rates were raised to positive real levels in 1986 (the revised target) but accelerated inflation made rates negative again thereafter. A study of .ne agricultural credit cooperative (TKK) system with a development plan was completed. However, the institutional development component proposed for inclusion in the Third Agricultural Credit Project was dropped because TCZ;3 refused to bear the credit risk for onlending to TKK for such purposes. Sustainability 6. The sustainability of the credit program supported under the project will depend on TCZB ensuring that farmers continue to get timely and adequate loans. More cooperation will a4lso be required between TCZB and MAFRA if farmers are to get the full benefits of credit and extension. The sustainability of institutional reforms will depend on TCZB's ability to continuously review its policies and procedures and introduce changes whenever deemed necessary, even if it involves departure from traditional practices. Findings and lessons 7. The main lessons learnt from this project concern institutional aspects. The project has shown how institutional reform is particularly slow and difficuit in a government-owned organization with a long history and established practices and traditions. Timely implementation of key decisions requires the full involvement and commitment of senior officials which sometimes proves elusive. The project has also shown that, in order to effect basic changes down the line, the mere issuing of instructions from head office is not adequate. The branch staff need to be educated and convinced about the benefits and advantages that will be derived from the changes.  PROJECT COMPLETION REPORT TURKEY SECOND AGRICULTURAL CREDIT PROJECT (LOAN 2318-TU) PART I: PROJECT REVIEW FROM BQAK'S PERSPECTIVE A. Project Identity Name: Second Agricultural Credit Project (SACP) Loan No.: 2318-TU RVP Unit: EMENA Region Country: Turkey Sector: Agriculture B. Background 1. The Second Agricultural Credit Project (SACP) was one of several projects identified for possible Bank financing by an agricultural sector mission which visited Turkey !n early 1981. The project, which was to continue the efforts started under the first Agricultural Credit and Agro- industries Project (ACAP), was prepared by TCZB with FAO/CP assistance in September 1982, appraised by the Bank in November 1982, approved by the Bank's Board in June 1983, and became effective in April 1984 after a delay of six months. It closed at the end of June 1988 after a six-month extension. A follow-up project, the Third Agricultural Credit Project, became effective in November 1989. 2. The agriculture sector in Turkey plays a significant role in generating employment, meeting domestic food requirements, supplying industrial raw materials and generating foreign exchange. Throughout the 1970s, the country's agricultural policies stressed self-sufficiency in food production and, between 1972 and 1975, sought to achieve this through subsidized inputs and producer prices. These policies stimulated rapid growth in production. However, the sectoral growth rates slowed down to l.5X per year in the late 1970s, largely due to a sharp reduction in the incentives, ineffective investment policies, weak technical services and inadequate marketing and credit systems. Beginning 1980, the Government, with Bank assistance, started taking steps to carry out policy reforms and improve the agricultural support services, including the credit delivery system. 3. In mid-1982, a World Bank (WB) agricultural sector mission concluded that there was a need to more than double in real terms the existing flow of credit to the farming community by 1990 if production and export growth targets for the agriculture sector were to be realized. The credit requirements would consist mostly of short-term production credits at least until the mid-1980s, but a strong investment credit demand could develop later in the decade. The magnitudes clearly exceeded the existing capabilities of  -2- the formal agricultural credit system to service, and probably exceeded the financial sector's resource mob.'lization cap: ility as construed. Remedial actions were therefore called for both to generate additional funds for on- lending to farmers, and to improve the loan generation, processing and supervision capabilities of on-lending institutions. Because of its size and importance TCZB - the largest bank in the country and the only one with branches ir all rural areas - was to remain a key element of this strategy, and strong mepsures were needed to improve its internal efficiency and expand its resource base so that it could extend loans to more farmers on a timely and adequate basis. The SACP was conceptualized with the above strategy in mind. C. Proiect Objectives and DescriRtion 4. Proiect objectives. In furtherance of the initiatives taken under ACAP to build up th( a&icultural credit system in Turkey, the SACP objectives were to: (a) increase agricultural production and to raise the productivity and income of farmers by supporting TCZB in its lending activities in those areas where the Government has undertaken to intensify support services to farmers; (b) further encourage institution building of TCZB through: (i) an agreed Action Plan for its reorganization and strengthening, and (ii) provision of staff training and equipment; (c) address sectoral issues of on- lending interest rates and strengthening of credit cooperatives through seeking agreement with the Government to: (i) achieve real positive on- lending interest rates in the agriculture sector by end 1984, and (ii) arrange for a study to develop a 5-year plan for development of the credit cooperative system, which may forr the basis of a futv'f project for possible Bank financing. 5. Project descriRtion. The SACP provided for: (a) On-fam development. Medium-term loans for farm machinery, livestock, etc. to 6,500 farmers and short-term loans for working capital needs to 70,000 farmers, in 10 selected provinces of Turkey, where Government planned to intensify general extension services; (b) Second croRs scheme. Short-term loans to 60,000 farmers to grow a second crop on about 220,000 ha of irrigated areas in 15 provinces; (c) Fallow reduction scheme. Short-term loans to 50,000 farmers to grow crops on about 265,000 ha of land in 12 provinces, which were left fallow; (d) Igdir-Aksur-Ereghi-Ercis (IAEE) Irrigation comnonent. Short- and medium-term loans to 2',000 farmers, to meet their on-farm investment and production credit needs in the areas covered by the Government's irrigation development scheme (Loan 2433-TU);  - 3 - (e) Corum-Cankili =.RgU=. Sbort-term loans to 6C,,000 farmers in areas covered by the Bank-assisted Corum-Gank4.ri Rur4l Development Project (Loan 1130-TU); (f) Inatitutional strengthnLng of TCZB through: (i) implementation of the Action Plan for its reorganization arid improvement in its operatic-i; (i) provision of consultant services in carrying out a system and procedures study, an accounting system study and any other studies to be agreed between the Bank and TCZB; (iii) provision of training abroad of selected TCZB staff; and (iv) provision of -vehicles and equipment for TCZB. 6. Total project costs were estimated at US$?63.5 million, of which the Bank was to contribute US$150.4 million or 41X; TCZB US$138 million or 38X; and farmers the remainder amounting to US$75.1 million or 21X, as equity contributions. D. Project Design and Organization 7. Desig. The project concept and design were appropriate for the purpose of facilLtatil.g increased and timely flow of credit to the farmers as well as improving the efficiency in the operations of TCZB. However, at the time of project design it was expected that inflation would continue its downward trend. Therefore, the possible impact of inflation on the farmers' decisions to borrow was not analyzed nor was it identified as a project risk. With the advent of rapid inflation during project implementation, the loan sizes stipulated at appraisal became inadequate for short-term loans. This was remedied by linking loan amounts to the cost of inputs through farm budgets. This was one of the reasons why disbursements of short-term credit by far exceeded expectations. In the case of medium-term borrowing, this linkage proved difficult and, in the early years of the project, many farmers postponed their decisions to borrow because of the rapidly chaAlging prices whicn meant that by the time the loan was approved, the amount would be inadequate and TCZB's branch manager did not have the authority to change the investment models which were accepted as basis for medium/long-term lending. Also, in retrospect it appears that the arrangements in the protocol between the Ministry of Agriculture, Forestry and Rural Affairs (MAFRA) and TCZG guiding the cooperation of the two institutions in implementing the special schemes financed under the project should have envisaged coordination at different levels. The protocol envisaged only semi-annual meetings at the field level. A coordination committee for periodical review of overall progress in financing of schame beneficiaries and redressal of difficulties identified at the lower level may have helped in better utilization of funds provided for these schemes. 8. Organization. TCZB was responsible for implementation of the project. At the time of appraisal of SACP, TCZB was managing the credit components of five Bank-assisted proj cts in the agriculture sector. Despite this experience, TCZB took considerable time to organize itself adequately for meeting the increased responsibilities under SACP. Guidelines for implementation of the credit component of the project were issued to the  -4 branches in the project provinces in February 1985 (effective from ."Iril 1985), nearly one year from the date of effectiveness and about two years from loan signature. This delay affected disbursement of loans by TCZB under the on-farm development component in the initial years. 9. For the special Government schemes (second crops and fallow reauction), TCZB had limited responsibility. The actual administration of t'he schemes lay with MAFRA. Under a protocol with MAFRA, TCZB was only required to provide finance under SACP to the extent iLdicated by the MAFRA officials for the schetmes. This arrargement did not work satisfactorily. The MAFRA officials complained of lack of cooperation from TCZB branches in financing scheme beneficiaries and the difficulties faced by the latter in obtaining adequate credit. As noted in para 7 above, a coordination committee at the national level could have contributed to alleviating the difficulties. E. Pro:.-sct Implementgtion 10. Loan effectivelness and project start-uD. Loan effectiveness was delayed twice for a total period of six months from September 22, 1983 to April 1, 1984, ten months after the loan agreement was signed. The delay was largely due to: (a) slowness by both TCZB and MAFRA in finalizing the execution of the protocol on their respective responsibilities under the project and (b) the conflicting legal opinions within the Government as to whether it had a legal right to guarantee foreign exchange losses on loans to entities when Government is not the direct borrower. r.. latter issue took a particularly long time to resolve and the Government could .tot ratify the loan agreements until this issue was settled. 11. Imnlementation schedule. The slippage of six months in project start-up put the project time-table behind and was not subsequently made up. Therefore, although the project was originally scheduled to be completed by December 31, 1987, it had to be extended by a further six months to June 30, 1988 so as to allow for the futll disbursement of the loan and the completion of the remaining project programs. 12. The credit program, accounting for 83X of the project cost, was successfully implemented despite about a year's delay in the issue of project guidelines and in preparation of investment models. However, within the credit program the implementation of different components varied. The on- farm development component performed very well and TCZB loan disbursements for on-farm development during the project period, expressed in 1983 TL terms, exceeded the appraisal estimates by 57X for medium-term loans and by 345X for short-term loans (Annex 1, Table 4). The much larger relative increase in :sbursements for short-term production loans within the on-farm developmont component resulted from: (a) the switch-over from the system of rationed, norm-based credit to adequate, farm plan-based credit; (b) relaxation in security requirements for loans; and (c) the changes in the agricultural sector. Although medium-term lending was restrained by a depressed investment climate resulting from inflatioa and price uncertainty. under tae on-farm development component it still posted a 57X increase (in real TL terms) compared with appraisal estimates. For reasons explained in para 13 below,  -5- the performance in all other credit categories was poor. This resulted in the reallocation of fin