Turkey - Export Finance Intermediation Loan Project

Document of The World Bank Report No: 19271-TR PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$252.53 MILLION TO THE TURKIYE IHRACAT KREDI BANKASI A.S. WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY FOR AN EXPORT FINANCE INTERMEDIATION LOAN JUNE 9, 1999 Private and Financial Sector Development ECCO6 Europe and Central Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective May 12, 1999) Currency Unit = Turkish Lira Turkish Lira I = US$0.00000254 US$1 = 393,027 Turkish Lira FISCAL YEAR January-December ABBREVIATIONS AND ACRONYMS ALM Asset and Liability Management BIS Bank for International Settlements CAS Country Assistance Strategy CEO Chief Executive Officer CBT Central Bank of Turkey CIRR Commercial Interest Reference Rate CIS Commonwealth of Independent States DC Direct Contracting ECA Export Credit Agency or Europe & Central Asia (Region) EDP Electronic Data Processing EFIL Export Finance Intermediation Loan EU European Union FMS Financial Management System FX Foreign Exchange GOT Government of Turkey IAS International Accounting Standards ICB International Competitive Bidding ICR Implementation Completion Report IDP Institutional Development Program IFI International Financial Institution IMF International Monetary Fund IPO Initial Public Offering IT Information Technology ISP International Shopping Procedures LACI Loan Administration Change Initiative NCB National Competitive Bidding NS National Shopping OECD Organization for Economic Cooperation and Development OM Operations Manual PFI Participating Financial Intermediary PIU Project Implementation Unit PMR Project Management Report QCBS Quality and Cost-Based Selection SCL Single Currency Loan SMP Staff Monitored Program SOF Statement of Expenditure SYB Sinai Yatirim Bankasi TSKB Turkiye Sinai Kalkinma Bankasi Turk Eximbank Turkiye Ihracat Bankasi (the Borrower) TL Turkish Lira Y2K Year 2000 Vice President: Johannes Linn Country Director: Ajay Chhibber Sector Director: Lajos Bokros Sector Leader: 1Iham Zurayk Program Team Leader: Lalit Raina PROJECT APPRAISAL DOCUMENT Republic of Turkey Export Finance Intermediation Loan CONTENTS A. Background ....................................................... 2 B. Project Development Objective................................ ..........4 1. Project Development Objective..................................... 4 C. Strategic Context.. ................................................. 4 1. Sector-related CAS goal supported by the project.........................4 2. Main sector issues and Government strategy. .................... ........ 5 3. Sector issues to be addressed by the project and strategic choices........ ........... 5 D. Project Description Summary........................6..... .............6 1. Project components.......................6....... ...............6 2. Key policy and institutional reforms supported by the project................ 6 3. Benefits and target population ...........7............ .............7 4. Institutional and implementation arrangements...........................7 E. Project Rationale .................................................... 7 1. Project alternatives considered and reasons for rejection ........... .........7 2. Lessons learned and reflected in proposed project design....................7 3. Indications of borrower commitment and ownership ............................. 8 4. Value added of World Bank support in this project..............8.......8 F. Summary Project Analyses.............................................9 1. Economic....................................................9 2. Financial.....................................................9 3. Fiscal.......................................................9 4. Technical....................................................9 5. Institutional...................................................9 6. Social ........... ....................................10 7. Environment.........................10 8. Participatory approach............................................10 G. Sustainability and Risks................................................1 1. Sustainability.................................................. 2. Critical risks................................................. 11 3. Possible controversial aspects.......................................12 H. Main Loan Conditions ............................... 12 1. Effectiveness conditions ............................... .......... 12 2. General Covenants ......................... ................. 12 I. Readiness for Implementation ........................... ........... 13 J. Compliance with World Bank Policies.................................. 13 Annexes Annex 1. Project Design Summary ................................... 14 Annex 2. Project Description ................................ 16 Appendix 2.1 Terms and Conditions for Turk Eximbank (Between the World Bank and Turk Eximbank) ..........................7.19 Appendix 2.2 Terms and Conditions of Subsidiary Loans (Between Turk Eximbank and PFIs)...............................20 Appendix 2.3 Terms and Conditions for Sub-Borrowers, Sub-projects and Sub- Loans (Between PFIs and Sub-borrowers) ........... .....21 Annex 3. Estimated Project Costs ......................................23 Annex 4. Project Implementation Arrangements ...................... ......24 Annex 5. Institutional Development Program for Turk Eximbank: Terms of Reference............ ................. ............... 29 Appendix 5.1 Profile of the borrower: Turk Eximbank............ .....38 Annex 6. Likely Profile of Participating Banks, Pre-qualification and Final Eligibility Criteria.......................................................48 Annex 7 Exports Growth, Export Loans, and General FX Loans Availability Analysis ...53 Annex 8. Procurement, Disbursement, and Financial Management Arrangements........56 Table 8.1. Summary of Procurement Arrangements .................. 59 Table 8.2. Procurement Review................................. 60 Table 8.3. Procurement Plan ..................... .............61 Table 8.4. Allocation of Loan Proceeds..........................62 Annex 9. Project Processing Budget and Schedule...........................65 Annex 10. Documents in the Project File....................... ..............66 Annex 11. Statement of Loans and Credits.................................67 Annex 12. Country at a Glance .............................................. 71 Map REPUBLIC OF TURKEY EXPORT FINANCE INTERMEDIATION LOAN Project Appraisal Document Private and Financial Sector Development ECCO6 Europe and Central Asia Region Date: May 13, 1999 Team Leader: Lalit Raina Country Director: Ajay Chhibber Sector Director: Lajos Bokros Project ID: 65188 Sector: Financial Program Objective Category: Financial Sector Development Lending Instrument: Financial Intermediary Loan Program of Targeted Intervention: 1 Yes [ X] No Project Financing Data [X] Loan [ Credit [] Guarantee [ Other [Specify] For Loans/Credits/Others: Amount (US$ thousand): 252,530 Proposed terms: Multicurrency [X] Single currency, specify $US Grace period (years): 3 Standard Variable Fixed [XI LIBOR-based Years to maturity: 7 Commitment fee: 0.75 percent Front-end fee: 1 percent Financing plan (US$ thousand): Source Local Foreign Total IBRD 100,000 152,530 252,530 Turk Eximbank* 500 0 500 Sub-borrowers* TBD TBD TBD Total 100,000 152,530 253,030 * While it is expected that both participating banks and sub-borrowers themselves will contribute to the financing of individual sub-projects, the precise amount of such financing to be provided cannot be determined ex ante, as the loan design does not envisage the use of predetermined cofinancing requirements. Instead, participating bank maximum exposure to individual sub-borrower limits, debt equity and debt service coverage ratio requirements and maximum sub-loan size for sub-borrowers will drive the amount of cofinancing to be provided. Borrower: Turk Eximbank Guarantor: Republic of Turkey Responsible agency(ies): Turk Eximbank Estimated disbursements (World Bank 2000 2001 2002 FY/US$M): Annual 77,525.3 100,004.7 75,000 Cumulative 75,525.3 177,530 252,530 Project implementation period: September 1, 1999 - August 31, 2002. Expected effectiveness date: September 1, 1999. Expected closing date: February 28, 2003 -2- A. Background Introduction: Longstanding inflation accompanied by chronic macroeconomic distortions has plagued Turkey for many years. In order to achieve a significant and lasting decline in inflation during 1998, the Turkish Government put together a stabilization and reform package described in the authorities' Memorandum of Economic Policies of June 26, 1998. The implementation of this stabilization effort has been monitored by the IMF staff under an 18-month Staff Monitored Program (SMP). The main features of the program included: (i) a significant improvement in the primary budget balance to narrow the large public sector deficit; (ii) adjustment of public sector wages and agricultural support policies in line with targeted inflation; (iii) strengthening of public finances through structural reform; (iv) stepped up privatization; (v) limits on the expansion of the central bank's net domestic assets; and (vi) measures to strengthen the banking sector. Developments during the year: The SMP succeeded in reducing inflation (wholesale price inflation came down to 50 percent from 92 percent at the beginning of the year) in line with the authorities' targets, and some of the quantitative targets for the fiscal and monetary policy were achieved in 1998. While the primary fiscal surplus reached the program target of 4.1 percent of GDP in 1998 and enabled a stabilization of the consolidated budget deficit at about 7.2 percent of GDP, the broader public sector deficit widened because of the higher Treasury receivables owed to the State banks, and other public entities' losses. The central bank, in spite of significant capital outflows during the year, held the growth of its net domestic assets within the program ceiling of TL 700 trillion, thereby stabilizing reserves. At the same time, it tried to maintain competitiveness through its exchange rate policy. The balance of payments position improved in 1998, with reserves rising to US$20 billion, as the external current account position moved from a deficit of 1.4 percent of GNP in 1997 to a surplus of 0.4 percent. In addition, during the first half of 1998, some of the agreed structural reforms were implemented; e.g., international pricing for petroleum products was adopted, agricultural support prices were raised broadly in line with targeted inflation, tax reform legislation was adopted to widen the tax base and reduce tax collection lags, the privatization program gained momentum; and a phased reduction in the banks' net open foreign exchange position from 50 percent to 30 percent of capital by the end of January 1999 was initiated. However, during the latter half of the year, the reform momentum was not sustained due to political uncertainty and external shocks, and other structural reforms planned under the SMP were not implemented. These included approval of a regulatory framework for the telecommunications and energy sectors in order to facilitate privatization, social security reform, significantly increased privatization, and adoption of a banking sector reform bill to establish an independent regulatory and supervisory body, and tackle problem bank resolution. A new government formed after the elections held on April 18, 1999 has now begun to retackle these issues. The draft banking law has been resubmitted to Parliament and is under discussion. The new government has also committed itself to a strong program of privatization and social security reform. Impact of External Shocks: Turkey was adversely affected by the recent turmoil in emerging markets, particularly in Russia. The contagion effect of the Russian crisis was immediate, and since Turkey has a very liquid Government securities market, foreign investors liquidated their Turkish T-Bill positions in order to cover their losses in other markets. As foreign investors pulled out, yields on Treasury bills started to increase and rose from 77 percent on average in July 1998 to 120 percent in January 1999. During the last three months, interest rates have fluctuated in the range of 125 to 150 percent. With expected consumer price inflation at around 66 percent on an annual basis, these nominal rates imply extremely high real interest rates. The equity market was also affected with the Istanbul Stock Exchange Index falling by 47.5 percent during the height of the Russian crisis. The central bank intervened heavily in the foreign exchange market in order to provide stability of currency depreciation. As a result, official reserves declined from US$26 billion in June to around US$20.4 billion in December of 1998. Foreign exchange earnings and economic activity have been further dampened by reduced trade, tourism and construction services. The external shock and associated high real interest rates have slowed GNP growth -3- to around 0.7 percent in the last quarter of 1998, down from 2.45 percent in the third, 4.4 percent in the second and 9.2 percent in the first quarter of the year. For 1998 as a whole, real GNP growth was 3.8 percent compared to 8.3 percent a year earlier. Following a limited increase of 0.9 percent in the third quarter, the quarterly industrial production index declined by 5.2 percent in the last quarter of 1998. Hence, the annual average increase in the industrial production index decelerated to 1.8 percent in 1998 from 11.5 percent a year earlier. On the other hand, capacity utilization stood at 75.1 percent in the fourth quarter of 1998, 5.2 percentage points below its level in the same period of last year. Impact on Exports: Turkish exports have been an important economic success story in the recent years growing at an average annual rate of over 14 percent, from US$2.9 billion in 1980 to US$26.8 billion in 19981. The share of exports in GNP increased in the same period from 4.2 percent to nearly 13.7 percent. However, recently exports have been particularly hard hit by the combined impact of: (i) the slowdown in growth in Turkey's export markets from an average of 8.9 percent in 1997 to 5.3 percent in 1998; (ii) disruption in the previously rapidly growing Russian and CIS markets; (iii) the sharp increase in domestic real interest rates which is undermining the competitiveness of Turkish export products in foreign markets; and (iv) the severe credit and liquidity squeeze in Turkey due to non-availability of reliable short and medium term finance. Concerning the latter, though most of the export credit stock and flow information for the post emerging markets crisis period is still coming in, an analysis of the trend in export loans-to-total asset ratios of the banking system as a whole and of all of the major individual banks clearly indicates a sharp decline in the volume of loans being provided to exporters, as well as in the number of banks that are engaging in export lending. This is partly because of the increased unavailability of foreign exchange funding of longer maturity, and partly because of increased uncertainty over the renewability of existing foreign exchange denominated syndicated loans, as well as shortening maturities of retail foreign currency deposits. Anecdotal evidence (through direct interviews with the leading banks) suggests that banks not only have reduced their lending volumes in line with this increased asset/liability mismatch risk, but actually also have recently started to call inexisting foreign currency loans to exporters before maturity. Reportedly, only two banks today have refrained from such behavior and/or are still providing new export loans. Consequently, export growth dropped from 13.3 percent in 1997 to an estimated 2.3 percent in 1998, and fell even more sharply in the first quarter of 1999, with this small aggregate increase masking actual declines in a number of important export sub-sectors, including the critical textile and leather industry and several segments of the agro-processing industry. In order to cope with this external shock, during the last six months, the Turkish exporting sector has explored opening up of new markets in the Middle East and North Africa as well as the USA to compensate for the loss of the Russian and CIS markets. However, the severe credit squeeze and the consequent non-availability of reliable and competitive funding for working capital or investment purposes has created a real danger of the exporting sector not being able to position itself to deliver even in Turkey's other major export markets like the EU. (For more statistics on export growth, export loan availability, see Annex 7). Future Outlook--Policy and Program Targets for 1999 onwards: The World Bank's response to the crisis has been to intensify its policy dialogue in the past few months through: sponsorship and participation in seminars on disinflation and reform of agricultural subsidies; financial sector policy discussions and technical discussions on public financial management, as well as participation in the IMF's first review mission for the SMP. The World Bank is providing sizeable financial support to the Government's basic education reform program, and a major study on living standards and public policy is under preparation that should guide future initiatives aimed at poverty alleviation and strengthening social safety nets. The World Bank is also actively engaged with technical staff in the Government on a reform program. An IMF mission visited Turkey in late January to complete the SMP review and discuss the ' This number does not include the so-called 'suitcase trade'. Including suitcase trade, total exports would be higher by approximately US$3 to 4 billion. -4- macroeconomic framework for 1999. The IMF mission commented positively on the progress made in reducing inflation and in achieving a significant portion of the SMP objectives, and has announced plans for a full-scale program for Turkey. An IMF team will visit Turkey June 15-28 for Article IV discussions and initial talks on a program. The proposed EFIL is the latest addition to the World Bank's package of financial support intended to assist Turkey in softening the impact of the crisis. B. Project Development Objective 1. Project development objective: The proposed Export Finance Intermediation Loan's (EFIL's) primary objective is to provide short and medium term working capital and investment finance to private exporting enterprises to assist the Turkish exporting sector hurt by the recent global financial crisis. The secondary, but in many ways even more critical, objective for long term sectoral development is that the EFIL structure enables a strategic dialogue and close interaction with the major banks and the Bankers Association in Turkey, through setting up of stricter and upgraded prudential eligibility criteria and banking standards for capital adequacy, foreign exchange exposure, connected and insider lending and risk management systems. The proposed EFIL will therefore, through a bottom up sectoral consensus building approach, complement the top down policy dialogue being undertaken in respect of the Government's financial sector reform program. Finally, the loan will also facilitate further institutional development of Turk Eximbank itself as an efficient and professionally run export finance institution/export credit agency, through a comprehensive review of its institutional development priorities and targeted institutional strengthening efforts to be implemented through a technical assistance component to be included in the loan. C. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: CAS document number: 16992-TU Date of latest CAS discussion: September 4, 1997 The CAS, which was written during the summer of 1997, is predicated on the premise that Turkey will be pursuing a broad based economic reform program comprising both fiscal and financial sector reform measures intended to address the inability--prevalent even before the recent global financial crisis--of the financial sector to meet the medium and long; term financing needs of the private sector. This inability, as indicated in the CAS, stems from a combination of tax and other incentive distortions and the crowding out of private sector borrowing by public sector borrowing needs. During the last 15 months, despite major political upheavals and external shocks, the Turkish authorities have indeed actively pursued a combination of fiscal and financial sector reform measures intended to address these problems, supported by an IMF Staff Monitored Program (SMP) (see Background Section). Several important tax distortions directly affecting the financial sector have been removed (e.g., the taxes on deposit and repurchase transactions have been unified) and a new draft banking law (the World Bank has been working closely with the Turkish authorities on this law) supporting the creation of a more independent bank regulatory and supervisory authority has been submitted to the Parliament. Additionally, during the last six months the maximum open foreign currency position limits for the banking system have been reduced from 50 to 30 percent of bank capital. However, with the Russia crisis and the sharp net outflow of funds, a major credit squeeze is underway. This credit squeeze is affecting both on the demand side (with even the most creditworthy private sector borrowers increasingly unable to tap international capital markets and reverting back to domestic credit markets, and the Government simultaneously experiencing similar difficulties in rolling over its existing -5- foreign currency debt and meeting the increased PSBR2 resulting from the recent interest rate spike, and also reverting to increased local borrowing), and the supply side (with the domestic banking system further reducing both the volume and maturity of its real sector lending in response to the reduced volume and maturity of its own funding and the higher perceived credit risks associated with current interest rate levels). Under these circumstances, and taking into account the resulting sharp deterioration in export performance (see Background Section above), the Turkish authorities have requested the World Bank for an export credit line that could help meet the increased credit demand on the part of private sector exporters. The pre-crisis CAS specifically envisaged that the World Bank Group would be an active player in helping meet the private sector finance demand gap through: (i) World Bank guarantee operations to assist Turkey's privately owned development banks to help raise the necessary medium and long term financing in international capital markets; and (ii) IFC financing, in the order of an estimated US$170 million new own account lending, US$10-15 million new equity and quasi-equity investments, and US$125-175 million of new syndications annually during the period FY97-99. The global financial crisis has effectively closed off the guarantee option, as the sharp widening of credit spreads for emerging markets borrowers has made it impossible for the Turkish development banks to borrow in the international capital markets even with the prospect of a World Bank guarantee. While IFC has continued to remain actively engaged, the worsening external environment has precluded IFC new commitments from fully reaching the target level specified in the CAS (e.g., IFC's new own account financing between end June 1997 and end December 1998 totaled US$137 million; few new equity investments were made; but the level of new syndications remained on track). Against this background, the proposed EFIL responds to the changed circumstances facing Turkey today by providing direct financing in the form of an export oriented credit line operation. The financing provided by the EFIL will help meet the enhanced financing needs that have become apparent as a result of the above mentioned events. 2. Main sector issues and Government strategy: Main Sector Issues: The main issues in the financial sector relate to: (i) the independence of the bank regulatory and supervisory authority; (ii) problem bank resolution; (iii) the regulatory framework for financial institutions, especially as it relates to risk management; and (iv) restructuring and privatization of troubled state owned banks (e.g., Ziraat, Halk, Emlak). These issues have been discussed by the World Bank and the Turkish authorities on a number of occasions during the last two years and most recently in November last year, and the Government has already taken a number of steps to address the identified weaknesses, including the submission of new banking legislation to Parliament that would create a more independent bank regulatory agency and further strengthen the bank regulatory framework. This top down policy reform is to be complemented through a bottom up sectoral consensus building approach through the proposed investment loan EFIL. The EFIL structure, through using Turk Eximbank as the Borrower and Implementing Agency rather than the Government, and through setting up of stricter and upgraded prudential eligibility criteria and banking standards for capital adequacy, foreign exchange exposure, connected and insider lending and risk management systems enables a strategic dialogue and close interaction with the major banks and the Bankers' Association in Turkey at a professional rather than political level. 3. Sector issues to be addressed by the project and strategic choices: For this project, a design has been chosen that will minimize the direct involvement of the Government, by electing Turk Eximbank to be both the Borrower and Implementing Agency. Turk Eximbank is Turkey's official export finance/export credit guarantee agency and in that capacity today already performs the function of supporting export development through the provision of a range of financial 2 Estimated at 8.7 percent of GDP in 1998 compared to 7.6 percent in 1997. -6- products and services tailored to the needs of Turkish exporters. Turk Eximbank has an established wholesale lending operation in place, through which it lends funds to 58 private banks, complete with an internal bank analysis and risk monitoring assessment capacity. This project will draw upon that capacity to onlend the credit line through Turk Eximbank to privately owned banks, which in turn will onlend the funds to private exporters. At the same time, the planned review of Turk Eximbank's own institutional development priorities and the targeted institutional strengthening efforts that will follow from this review, as well as the use of a set of more demanding bank eligibility criteria to be applied under the proposed EFIL will further enhance Turk Eximbank's own capability to manage the credit risks it incurs by taking on exposure to individual banks. Similarly, the banks that will be selected for participation in the EFIL are likely to benefit from the enhanced initial and ongoing scrutiny by Turk Eximbank for such aspects of their operations as their internal risk management system capacity, their true capital adequacy ratios, foreign exchange exposure, connected and insider lending practices, Y2K readiness, etc. Thus, the EFIL, by working with a set of core banks in Turkey, is expected to further enhance the robustness of the Turkish banking system by bringing an increased focus on the gamut of risks (operational, credit, foreign exchange, ALM, etc.) banks face in today's increasingly volatile environment. D. Project Description Summary 1. Project components: Component Category Indicative Costs Percent World Bank- Percent of (US$M) of financing World Total (US$M) Bank- financing Credit Line Working Capital and 246,000,000 Investment Finance plus 97.2 246,000,000 97.4 PFIs'/exporters' contributions* Technical Consulting Assistance for services/equipment Turk Eximbank and training for Turk 4,504,700 1.8 4,004,700 1.6 Eximbank's own institutional strengthening Front End Fee 2,525,300 1.0 2,525,300 1.0 Total 253,030,000* 100.0 252,530,000 100.0 * While it is expected that both participating banks and sub-borrowers themselves will contribute to the financing of individual sub-projects, the precise amount of such financing to be provided cannot be determined ex ante, as there are not going to be any predetermined cofinancing requirements. Instead, participating bank maximum exposure to individual sub-borrower limits and debt equity and debt service coverage ratio requirements for sub-borrowers will drive the amount of financing to be provided by these parties. 2. Key policy and institutional reforms supported by the project: As a fundamental part of the mid term review, which will take place at the time commitments under the credit line component of the project have reached US$100 million, the World Bank will consider progress made by the Government in its financial sector reform program. The technical assistance funding will directly aid Turk Eximbank's institutional strengthening efforts. Furthermore, the conditions attached to the sub-loans and the increased scrutiny to which the participating banks are to be subjected, should indirectly lead to a strengthening of their internal risk management systems. -7- 3. Benefits and target population: The credit line would support Turkish exporters that currently suffer from a chronic shortage of medium term funds to finance production and export activity. By injecting additional funds into the Turkish banking system, exporters would be able to increase their activity and profitability and explore new export markets. Thus the program will support employment in Turkey. 4. Institutional and implementation arrangements: Turk Eximbank will be the Borrower and Implementing Agency for the loan, and has appointed its existing Deputy General Manager, Lending Operations, as Program Manager. The Program Manager will be responsible for all day to day interaction with the World Bank, the Government of Turkey and the participating banks regarding matters associated with the EFIL. In addition, Turk Eximbank will create a small PIU (Project Implementation Unit) within its credit department. The PIU will report to the Program Manager and will be staffed with six officers, one of which will head the unit (for more detail see Annex 4). The PIU will set up and maintain the financial management and reporting system for the project and will additionally be responsible for day to day coordination and project implementation including: (i) selecting the participating banks using the eligibility criteria outlined above, and monitoring the banks' ongoing compliance with these criteria; (ii) managing all the disbursement and procurement aspects of the project; (iii) ensuring compliance by the participating banks and sub-borrowers with World Bank procurement and environment standards; (iv) arranging a review of Turk Eximbank's own institutional development priorities and the subsequent implementation of targeted institutional development efforts in areas identified by the review; and (v) monitoring of progress and impact performance indicators for the EFIL, both in terms of disbursements as well as incremental export growth and enhanced institutional capacity of Turk Eximbank itself. E. Project Rationale (See Annex 7 on Exports Growth, Export Loans, and General FX Loans Availability Analysis) 1. Project alternatives considered and reasons for rejection: Prior World Bank credit lines for Turkey (e.g., the Industrial Export Development Project, the Agro- Industry Project, the Second Small and Medium Enterprise Project, the Third Agriculture Credit and the Private Investment Credit Project) have used the Undersecretariat of the Treasury as the Borrower and Implementing Agency. With the exception of the Industrial Export Development Project, these operations did not have an explicit export focus. Also, at the time these prior operations were designed, Turk Eximbank--established in 1987 and fully operational only in 1988--as an institution was either non- existent or still in its infancy, and therefore was not considered a viable alternative Borrower and Implementing Agency. Lessons learned from World Bank credit line operations elsewhere indicate, however, that it is far from ideal to have a Government entity act in an APEX capacity, as such entities generally do not have the skills, in-house system capacity and-most importantly-financial incentives to proactively pursue successful project implementation. Turk Eximbank, as an established export finance institution with a functioning wholesale lending function is ideally placed to be the Borrower and Implementing Agency for the proposed operation. There are currently no ongoing related operations in Turkey. As indicated above all the prior credit lines in recent years were completed successfully. The proposed EFIL, through its bottom-up institutional focus, will complement and enrich the Government's policy dialogue on financial sector reform. 2. Lessons learned and reflected in the project design: Lessons Learned from Recent Credit Line Operations: The main lessons learned during the last few years from World Bank credit line operations in the ECA Region and elsewhere indicate that the design should be kept as flexible as possible, with a minimum number of, or no restrictions in terms of minimum sub-loan size, maturity, currency denomination, sub-borrower cofinancing requirements, sectoral lending -8- focus, etc., but using sensible financial indicators for the selection of both the participating banks and the sub-borrowers/sub-projects in line with established market practices (e.g., for participating banks, BIS/IAS based capital adequacy and other prudential ratios, for sub-borrowers/sub-projects established financial indicators such as debt equity and debt service coverage ratios). Restrictive procurement requirements unsuitable for private sector borrowers and the World Bank's currency pool loan features also have proven to be a hindrance to expeditious project implementation, and where more flexible arrangements have been used, including the use of established commercial practice and Single Currency Loans (SCLs), these factors have ceased to be a bottleneck. As referenced above, another important lesson learned has been that the most successful formula for high quality and expeditious project implementation is to combine the Borrower and Implementing Agency functions in one and the same entity if possible. Lessons Learned from Previous Credit Line Operations in Turkey: The Implementation Completion Reports (ICRs) for the previous World Bank credit line operations in Turkey indicate that some of these operations had to be restructured in mid-stream because the initial project design turned out to be too inflexible (e.g., too many requirements in terms of minimum sub-loan maturity, sub-borrower cofinancing requirements, local currency onlending requirements, etc.). The ICRs indicate that, after restructuring, project implementation generally proceeded well. Lessons Learned from Export Oriented Credit Lines: Finally, for export credit line projects, earlier World Bank credit line operations in India, Mexico and Colombia have demonstrated the appropriateness of an export-import bank or a foreign trade bank as the focus for the on-lending of World Bank funds (e.g., export-import bank in India, Bancomext in Mexico, Bancoldex in Colombia). These banks are dedicated institutions for developing foreign trade, and do not carry out normal commercial retail operations. Usually they target export financing, and in some cases, they work as wholesale banks and develop lending programs for the first tier banks, in addition to their own direct lending to exporters. The proposed project design incorporates all of these lessons learned by using Turk Eximbank as the Borrower and Implementing Agency for the loan, by the use of a set of market based eligibility criteria for participating banks, sub-borrowers and sub-projects, and by the use of SCL terms and procurement arrangements suitable to private sector borrowers. 3. Indications of borrower commitment and ownership: Turk Eximbank has already indicated its commitment by appointing its Deputy General Manager, Lending Operations, as Project Manager for the proposed EFIL and additionally appointing all of the PIU staff. In addition, Turk Eximbank has already undertaken extensive export research to document the existence of an export finance demand gap, and has pre-screened the eligible participating banks. Turk Eximbank is keen to become involved in this project as it will -- through the credit line component-- strengthen its wholesale lending function and -- through the technical assistance component--its own institutional capacity, and because the proposed EFIL is highly complementary to its existing inventory of export finance support products. The Government has indicated, during discussions and through its policy dialogue, its support for reform of the financial sector. As a fundamental part of the project's mid-term review the World Bank and the Government will discuss progress made on the Government's financial sector reform program. Full disbursement of funds under this project will be subject to satisfactory progress on these sectoral reforms. 4. Value added of World Bank support in this project: The proposed project will help fill the export finance demand gap that has opened up in Turkey as a result of the recent global financial crisis, and help stem the resulting alarming decline in export growth Turkey is currently experiencing. Additionally and even more critically, by allowing the World Bank to become -9- engaged in the financial sector at the individual bank level, the policy dialogue on the financial sector reform agenda will be enriched with knowledge of actual banking practices and bottlenecks on the ground. By introducing a focus on risk management system capacity in the project's design and by providing targeted institutional strengthening assistance to Turk Eximbank, the World Bank's involvement will also contribute to a further strengthening of the banking system's ability to manage the increased risks the system is exposed to today as a result of increased financial market volatility, both at the level of Turk Eximbank as a wholesale lender and at the level of the individual participating banks. F. Summary Project Analysis 1. Economic: N/A 2. Financial: FRR=15 percent for investment sub-projects The project will provide, predominantly, incremental working capital to a large volume of companies in the export sector. It is not feasible to determine, on an ex-ante basis, the financial or economic rate of return on these working capital sub-loans. Instead, the participating banks will be expected to submit borrowers to rigorous credit analysis and all borrowers will be required to be in compliance with predetermined debt/equity and debt service ratios. 3. Fiscal impact: The project will have a positive fiscal impact. By targeting exporting companies the loan will, in addition to increasing the taxable profits of the participating banks and companies, assist in the generation of foreign currency earnings. The participating banks carry the full credit risk on the loans to their customers. Turk Eximbank, a wholly State owned entity, carries the credit risk on the loans to the participating banks, however, given the long standing relationship between Turk Eximbank and these banks and the improvements in risk monitoring expected to result from the technical assistance component, default risk is not considered significant. 4. Technical: Issues related to the final selection and ongoing monitoring of participating banks, e.g. through analyses of International Accounting Standards (IAS) audit reports, foreign exchange exposure, connected and insider lending levels, assessment of individual bank risk management capacity and determination of Y2K compliance, will require special attention on the part of Turk Eximbank as well as the project Team, to minimize Turk Eximbank's credit risk on the participating banks and to ensure that only the strongest banks are selected and retained as participants in the project. The proposed technical assistance for Turk Eximbank is intended to help strengthen Turk Eximbank's capacity to undertake this task. 5. Institutional: Turk Eximbank has not worked with the World Bank before, and although Turk Eximbank is by now an established financial institution with adequate institutional capacity, Turk Eximbank, in managing the implementation of this project, will have to come up a not insignificant learning curve, especially as concerns its oversight function in establishing initial and ongoing participating bank eligibility, using criteria that are more stringent than the criteria Turk Eximbank itself hitherto has applied to its own wholesale lending. The proposed institutional strengthening efforts for Turk Eximbank intend to mitigate the risk that Turk Eximbank will not be able to properly perform these tasks. Most of the participating banks are likely to already have some experience with participating in World Bank credit line operations, and therefore the learning curve at the participating bank level will not be as steep as it will be for Turk Eximbank. - 10 - 6. Social: [ ] To be defined (indicate how issues will be identified) [X] None Private sector exporters are one of the key stakeholders in this project. During project pre-appraisal, contacts were established with the Turkish Exporters Association and its feedback on the project was taken into account in the design of the project. The project, through its support of the export and manufacturing sectors is, indirectly, supporting employment in Turkey. 7. Environment: Category [FI) Turk Eximbank will be responsible for ensuring that sub-projects financed under the EFIL will undergo environmental screening to ensure their conformance with Turkish environmental legislation and regulations and the World Bank's policies and procedures, as set forth in OP/BP 4.01. The credit officers already appointed by Turk Eximbank to staff the PIU will perform this function. A PIU Operations Manual detailing, inter alia, the World Bank's requirements in respect of environmental assessment, will be prepared prior to loan effectiveness. The PFIs, according to the procedures outlined in the Operations Manual, will undertake the environmental screening of the sub-loan applications to determine the appropriate environmental risk category for the sub-borrowers/sub-projects. The sub-borrowers will be responsible for carrying out any environmental analysis and for confirming that the proposed sub-projects comply with national environmental guidelines, and for obtaining the necessary clearance from the appropriate licensing authorities. Requirements in respect of environmental analysis will also be written into the sub-loan agreements. 8. Participatory approach: Primary beneficiaries and other affected groups: During project pre-appraisal and subsequent appraisal, Turkish Treasury officials, Turk Eximbank and several of the prospective participating banks have been consulted on the proposed project design. The feedback provided by all of these parties, as also reflected in the ICRs for the previous World Bank credit line operations in Turkey, has been incorporated in the proposed project's design. As the prospective participating banks will be chosen from the universe of 58 banks currently involved in Turk Eximbank's own wholesale lending operations, an established and functioning relationship between Turk Eximbank and the participating banks already exists. Turk Eximbank today routinely undertakes risk assessments for all of the banks it wholesales funds to, and therefore the banks concerned are already used to working with Turk Eximbank and to providing them with access to (sometimes confidential) information. Other key stakeholders: Private sector exporters are the other key stakeholders in this project. During project pre-appraisal, contacts were established with the Turkish Exporters Association and its feedback on project design was sought. The Turkish Bankers Association will also play a role in support of the project's focus on risk management system capacity of the banking system by proactively marketing the tools required to develop, implement and maintain such systems in individual banks. Preliminary discussions with the Bankers Association on this issue have already taken place and the Association has indicated in writing that it is very interested in pursuing this agenda together with the World Bank. Activities in this area such as seminars and risk management system assessments in individual banks, to be funded from the Special Financial Operations (SFO) budget for Turkey and Italian CTF grant funding are currently under preparation and likely to come to fruition at or around the time of EFIL effectiveness. G. Sustainability and Risks 1. Sustainability: The sustainability of this operation is ensured by using Turk Eximbank, an established export finance institution, as the Borrower and Implementing Agency. Turk Eximbank's wholesale lending function, already well established today, is likely to become more sophisticated as a result of this project and therefore Turk Eximbank is well placed to successfully channel the project reflows to additional private sector exporters during as well as beyond the period of project implementation in line with the maturity of the World Bank's loan (7 years). Turkey's past export growth record, as well as the World Bank's own past experience with credit line operations in Turkey, indicate that the private enterprise sector has the technical and managerial ability to successfully tap export opportunities provided they have access to appropriate financing (e.g., in terms of pricing and maturity). Thus, expansion of existing and new export operations that will be financed by the funding to be provided by the proposed EFIL have a very high likelihood of self-sustainability. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Rating Risk Minimization Measure Generic Risks (e.g., macro- S Following the recent economic risks, political elections, the government in instability) Turkey is expected to be more stable. There is increased likelihood of a full-fledged IMF program shortly after the April elections, as publicly announced by the last IMF SMP monitoring mission; Turkey's private sector exporters' track record of resilience to macro-economic instability is also a mitigating factor. Project Specific Risks (e.g., M Maximum incentive for Turk Turk Eximbank not having Eximbank to implement the worked with the World project successfully by Bank before, risk of combining Borrower and participating banks Implementing Agency experiencing financial function into one entity; difficulties, participating inclusion of targeted banks' on-lending of funds institutional development to non-viable export assistance for Turk operations). Eximbank; focus on risk management capacity of banks in the selection and ongoing qualification of participating banks. Overall Risk Rating M _ Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) - 12 - 3. Possible Controversial Aspects: Risk Type of Risk Risk Minimization Risk Rating Measure Directed lending 0 N Turk Eximbank has by Turk confirmed that after Eximbank to Turkey became a some specific member of the EU sectors Customs Union, any lending policies directed towards specific sectors have been completely shelved as a necessary precondition to membership in the Union. Type of Risk - S (Social), E (Ecological), P (Pollution), G (Governance), M (Management capacity), 0 (Other) Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) H. Main Loan Conditions 1. Effectiveness conditions: * The PIU in Turk Eximbank has been created and staffed with trained professionals capable to satisfactorily implement the project. * The Operations Manual, including the environment guidelines for the sub-loans, has been adopted. * At least 2 PFIs have undergone the qualification procedure and have signed subsidiary loan agreements * Satisfactory legal opinions on both the Loan and Guarantee Agreements have been received. 2. General covenants: * Commitments under the credit line, beyond the first US$100 million, will be subject to the World Bank having confirmed to Turk Eximbank its satisfaction with progress achieved by the Government in carrying out its financial sector reform policies. * Turk Eximbank to maintain satisfactory financial management systems, including records and accounts, and prepare financial statements satisfactory to the World Bank. Annual project accounts and an IAS audit of Turk Eximbank's financial statements to be provided within six months of each year-end during the implementation period (audits to be carried out by independent external auditors in accordance with International Auditing Standards and International Accounting Standards, under terms of reference satisfactory to the World Bank). * Turk Eximbank to maintain a PIU with satisfactory staffing and other resources as required for effective project implementation. * Turk Eximbank to monitor project performance in accordance with the agreed performance monitoring indicators. I. Readiness for Implementation [ J The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X] Not applicable. - 13 - The procurement documents for the first year's activities are complete and ready for the start of project implementation. [X] Not applicable. [X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. J. Compliance with World Bank Policies [X] This project complies with all applicable World Bank policies. [X ] The project complies with all other applicable World Bank policies. Program Team Leader: Lalit Raina Sec r Director: s Bokros Country Director: Ajay Chhibber - 14 - Annex 1 Export Finance Intermediation Loan Project Design Summary Narrative Summary Key Performance Indicators Monitoring and Critical Assumptions Evaluation Sector-related CAS Goal: (Goal to World Bank Mission) Help meet private sector Increased aggregate exports Trade Statistics financing needs, to enhance Macro-economic and private sector political instability does not competitiveness worsen significantly Project Development (Objective to Goal) Objective: To provide short and Credit line Utilization Progress reports Absence of a major medium term working Indicator: prepared by Turk financial sector crisis capital and investment Eximbank's PIU finance to private exporting Amount of credit line enterprises, to assist the actually Supervision missions Turkish exporting sector disbursed/projected credit hurt by the recent global line disbursement on a financial crisis straight line basis To provide successful Sub-loan Performance financial intermediation Indicators: based on sub-borrower creditworthiness criteria Amount of non- performing sub-loans; Interest and/or principal defaults/total amount of sub-loans disbursed To undertake targeted Technical Assistance institutional strengthening Effectiveness: better risk of Turk Eximbank management capacity in Turk Eximbank, as evidenced inter alia through more selected lending to bankscrisis - 15 - Outputs: (Outputs to Objective) Sustained/increased export Export Multiplier: Progress reports Continuation of the growth prepared by Turk current floating exchange Incremental average Eximbank's PIU rate regime aggregate annual exports generated (measured over 3 Supervision missions years for all sub- borrowers)/total credit line disbursed Project Components/Sub- Inputs: (budget for each (Components to Outputs) components: component) Timely disbursement Credit Line US$246,000,000 Progress reports prepared by Turk Turk Eximbank to set up and Eximbank's PIU run the PIU, using part of the onlending margin to finance Supervision missions the PIU's operating costs Technical Assistance US$4,004,700 - 16- Annex 2 Export Finance Intermediation Loan Project Description Project Concept 1. The Export Finance Intermediation Loan (EFIL) consists of two components: (i) Financing of Sub-loans under Part A of the project in an aggregate amount of US$246,000,000; and (ii) Provision of Institutional Development Technical Assistance to Turk Eximbank under Part B of the project in an aggregate amount of US$4,004,700. Details are given below. 2. Part A of the Project: Credit Line Component---Sub Loans: Under Part A of the project, the EFIL will provide short and medium term financing for the procurement of input goods, equipment, works and services by private exporters. The inputs could be procured locally or externally on commercially competitive terms and will, therefore, benefit both direct and indirect exporters. Commitments under the credit line, beyond the first US$100 million, will be subject to the World Bank having confirmed to Turk Eximbank its satisfaction with progress achieved by the Government in carrying out its financial sector reform policies. Progress in carrying out its financial sector reform policies will be assessed as part of the mid-term review by the World Bank. 3. Part B of the Project: Technical Assistance Component---Institutional Development of Turk Eximbank: Under Part B of the project, the EFIL will provide financing for the procurement of consulting services, IT equipment (hard- and software) and related services, and training for the further institutional strengthening of Turk Eximbank, in areas identified during Appraisal, and agreed between the World Bank and Turk Eximbank (Borrower). 4. Borrower and Implementing Agency: The Borrower and Implementing Agency for the EFIL will be the state owned Turk Eximbank, with the Government issuing a guarantee to the World Bank. For the credit line component, Turk Eximbank will act in the capacity of a wholesale institution and will onlend the loan funds through a pre-selected group of a maximum of five private banks (including one privately owned development bank) which will be selected pursuant to criteria agreed between the borrower and the World Bank (see Annex 6). Turk Eximbank will take the credit risk on the banks selected for participation. The participating banks in turn will make sub-loans to private exporting enterprises for procurement of raw materials, equipment, works and services in order to expand their current export volumes, or in exceptional circumstances to enable them to retain and maintain their current level of exports. The on-lending banks will take the credit risks on the borrowing enterprises. Turk Eximbank will also manage and implement the technical assistance component, and provide cofinancing for this component in the form of making available office space, telecommunication facilities, staff support, etc. 5. Due Diligence of Turk Eximbank: During pre-appraisal and appraisal, due diligence was undertaken of Turk Eximbank itself to determine its own financial health and creditworthiness as the Borrower of the proposed World Bank loan (see Appendix 5.1, Annex 5). A review of Turk Eximbank's IAS audit reports for the years 1997-1998 indicates that Turk Eximbank exceeds the minimum BIS risk weighted capital adequacy ratio of 8 percent. Generally, Turk Eximbank does not apply IAS 29 (accounting for hyperinflation) when producing its annual financial statements. However, as part of the due diligence process, Turk Eximbank produced IAS 29 compliant financial statements for year-end 1997 and year-end 1998. A review was also undertaken of Turk Eximbank' s own bank lending policies, and it was determined that while these policies are generally adequate using a fairly elaborate analytical system developed with the assistance of Citibank, there is room for further improvement (e.g., determining individual bank lending ceilings not only on the basis of the financial strength and intermediation -17- effectiveness of the banks concerned but also in terms of prudent maximum exposure limits to individual bank borrowers as a percent of its own capital base. While currently such exposures to individual banks are within acceptable limits, this outcome is more the result of intuitive risk diversification attempts rather than of structured risk management system features). Turk Eximbank has agreed to an in-depth review of all of its policies and procedures, including its direct lending (to corporate borrowers) policies, its insurance & guarantee policies, its ALM practices and overall risk management system capacity, to further document the need for change in this and other areas of institutional strengthening. Targeted efforts to implement institutional change will be financed under the US$4,004,700 technical assistance component of the EFIL (see Annex 5). Finally, it has been determined that Turk Eximbank is sufficiently advanced with undertaking all preparatory activities necessary to ensure timely Y2K compliance, and written documentation to this effect has been submitted to the World Bank. 6. Loan Terms: Turk Eximbank, based on its own funding mix and anticipated demand of exporters, has indicated a preference for a US$ Single Currency Loan (SCL), which it will then on lend to participating banks for a period of five years, which will include a 3 year grace and 2 year amortization period during which the participating banks will have to repay loans to Turk Eximbank. In order to offset its administrative and implementation costs as well as the credit risks involved, Turk Eximbank will charge an on-lending margin to the participating banks of between 400-500 basis points over its cost of funds under the World Bank loan. During pre-appraisal, a comprehensive assessment was undertaken of bank foreign currency loan funding and loan pricing practices, and it was determined that the proposed on-lending margin is in line with current market practices. However, the proposed margin is significantly above pre-crisis costs of foreign borrowing of the banking system, and also above current borrowing costs for shorter term funds. Thus, in case the political and macroeconomic situation stabilizes in the coming months, the cost of the World Bank funds along with the above on-lending margin might be too high. Therefore, the on-lending margin will need to be periodically reviewed (e.g., every six months) to reflect changes in market conditions, and a clause will be included in the subsidiary loan agreements between Turk Eximbank and the participating banks allowing for adjustment of this margin in line with prevailing market conditions. The loans made to the participating banks as well as the eligible beneficiary sub- borrowers will be denominated and repayable in US$. The participating banks are expected to price their sub-loans on a commercial basis, currently at around six month LIBOR plus 800-1000 basis points. The foreign currency risk will be borne by the ultimate borrowers (see terms and conditions under Annex 2, Appendices 2.1-2.3). 7. Selection of Participating Banks: A short list of nine banks has been compiled from the universe of 58 banks with which Turk Eximbank currently maintains wholesale lending relationships, using the following selection criteria: (i) total assets during each of the last two years to exceed a minimum of US$500 million equivalent on average; and (ii) export loans-to-total asset ratios during each of the last two years to exceed a minimum of 10 percent on average. These criteria ensure that only banks with a minimum two year operational history, a viable asset base and an export sector lending focus are selected for further screening. From this group of nine banks, a smaller group of five banks will be selected as final participating banks for the EFIL by Turk Eximbank based on the following eligibility criteria: (i) general compliance with all legal and regulatory requirements; (ii) audited IAS financial statements, including hyperinflation adjustments; (iii) minimum BIS risk-weighted capital adequacy ratio of 10 percent; (iv) maximum foreign currency exposure limits; (v) maximum large exposure to single and connected clients and maximum insider lending limits; (vi) Y2K compliance; and (vii) willingness to undertake a full scope review of the adequacy of their risk management systems. These criteria are considerably more rigorous than existing Turkish banking law requirements in order to set a higher standard for the leading banks participating in the EFIL (see Annex 6--Likely Profile of PFIs, Pre- Qualification and Final Eligibility Criteria). 8. Eligible sub-borrowers: All private (private ownership more than 50 percent) exporters with foreign exchange earnings, irrespective of their sector, will be eligible for participation as sub-borrowers on a commercial basis. The prospective sub-borrowers will have to prepare and present a business plan - 18 - and an export development plan as part of their loan applications, as well as satisfy the procurement and environmental rules stated as part of the World Bank loan conditions. The creditworthiness of the sub- borrowers will be assessed by the PFIs, subject to the minimum requirement that the sub-borrowers maintain a maximum debt equity ratio of 70:30 and minimum debt service coverage ratio of 1.5:1 (after receipt of the sub-loan). The World Bank, in coordination with Turk Eximbank, will carry out a prior review of the first two sub-loan applications of each of the participating banks to satisfy itself about the credit analysis process carried out by these banks (see Annex 2, Appendix 2.3). 9. Projected Disbursement Profile: Because of the pent-up demand for export finance, the EFIL is expected to disburse fairly quickly (within three years of loan signing) as compared to other credit lines in the past in Turkey and in the Region. The proposed project implementation period for the EFIL, therefore, is three years instead of the customary five years for investment operations. The EFIL is expected to achieve this significantly higher credit line utilization rate as a result of incorporating the following features in loan design: (i) loan utilization parameters are flexible:--both short and medium term working capital loans by themselves or in combination with investment loans will be available; (ii) the use of Turk Eximbank, rather than the Government, as the Borrower and Implementing Agency, creating positive incentives (onlending margin) for efficient loan utilization; (iii) pre-allocating an amount of subsidiary loans (and the commitment fee burden) to participating banks upon loan signing, and therefore creating downstream positive incentives for the participating banks in terms of higher returns by quicker utilization, and the negative incentive of commitment fee payments in the absence of such utilization; (iv) the inflexibility of previous credit lines in Turkey has been avoided (e.g., too many requirements in terms of minimum sub-loan maturity, sub-borrower co-financing requirements, local currency onlending using artificial interest rate structures, etc.) which performed much better when restructured to rectify such inflexibility. - 19 - Appendix 2.1 Export Finance Intermediation Loan Terms and Conditions for Turk Eximbank (Between the World Bank and Turk Eximbank) For Turk Eximbank the following terms and conditions shall apply: * Initial and ongoing compliance with a minimum BIS risk weighted capital adequacy ratio of 10 percent; * For the duration of the project implementation period, beginning with year-end 1999, submission of an audit report, that is: (i) prepared in accordance with International Auditing Standards and International Accounting Standards, including IAS 29 (Hyperinflation Adjustment); and (ii) has an unqualified audit opinion, except as the World Bank shall otherwise agree; * Timely and satisfactory implementation of the institutional development program agreed with the World Bank, including in particular the development of appropriate risk exposure limits on individual Turkish banks expressed as a percentage of Turk Eximbank's capital base as defined under BIS; * Turk Eximbank will onlend the funds under the EFIL to PFIs (selected according to the eligibility criteria agreed with the World Bank) using subsidiary loan agreements. All subsidiary loan agreements are subject to prior review by the World Bank; * For the duration of the project implementation period, creation and maintenance of a Project Implementation Unit, staffed with qualified personnel, capable to satisfactorily implement all aspects of the EFIL; * Turk Eximbank will monitor the performance of the project on a quarterly basis using performance indicators agreed with the World Bank, and will provide the World Bank with quarterly progress reports, giving the details of the progress made in project implementation; * Timely preparation and submission of EFIL project audit reports in accordance with International Accounting Standards and agreed Financial Management Arrangements (see Annex 4 and Annex 8); * All commitments under the subsidiary loan agreements beyond an aggregate amount of US$100 million will be subject to the Bank having confirmed to EXIM satisfactory progress achieved by the Government in carrying out its financial sector reform policies; and * Turk Eximbank will receive the funds from the World Bank on a seven year maturity, approximately six months LIBOR; Turk Eximbank will pay a front-end fee of 1 percent and a commitment fee of 0.75 percent on undisbursed balances; the commitment fee will be payable with effect from 60 days after loan signing. - 20 - Appendix 2.2 Export Finance Intermediation Loan Terms and Conditions of Subsidiary Loans (Between Turk Eximbank and PFIs) The following terms and conditions will apply to the subsidiary loan agreements to be entered into between Turk Eximbank and PFIs: * Initial and continued compliance with the eligibility criteria for PFIs (see Annex 6); * US$ denomination; * Maturity of the subsidiary loan of five years with three years grace; * Interest rate of the cost of World Bank funds to Turk Eximbank plus an onlending margin reflecting (a) Turk Eximbank's administrative costs; and (b) a credit risk margin; * Commitment fee equivalent to the commitment fee payable by Turk Eximbank on the World Bank Loan; * The funds available to PFIs will depend upon the availability of funds to Turk Eximbank from the World Bank, and commitment of loan funds beyond the first US$20 million will be subject to prior approval by Turk Eximbank; * PFIs will be responsible for ensuring that the sub-borrowers comply with the World Bank's procurement rules for the procurement of goods, works and services under EFIL sub-loans, and all applicable Turkish environmental legislation/regulation; and * PFIs will provide a full set of documentation for all sub-loans to Turk Eximbank on a periodic basis, in order to enable Turk Eximbank to maintain all project records and make them available for ex-post review by the World Bank or by external auditors as necessary. -21 - Appendix 2.3 Export Finance Intermediation Loan Terms and Conditions for Sub-Borrowers, Sub-projects and Sub-loans (Between PFIs and Sub-borrowers) The following terms and conditions will apply: For sub-borrowers: * Private ownership (defined as more than 50 percent private ownership or private control); * Exporter, with an approved export development plan; * Maximum debt/equity ratio of 70:30 (after receipt of the sub-loan). * Sub-borrower after receipt of the sub-loan should generate enough cash during the pay-back period to maintain a minimum debt service coverage ratio of at least 1.5:1; * Certification from the relevant local or national authorities that the proposed sub-project meets all environmental laws and standards in force in Turkey, as well as the World Bank policy on environmental assessment (available in the operational manual for the EFIL to be prepared by Turk Eximbank's PIU); For sub-projects: * Sub-projects must be targeted towards the generation of exports consistent with the sub- borrower's Export Development Plan; * Sub-projects involving investments should generate a financial rate of return of at least 15 percent (the calculation of economic rates of return will be required only in cases where major price distortions in inputs or outputs are evident); * Goods, works and services on the World Bank's negative list will not be eligible for financing; * Compliance with the World Bank's procurement procedures for the procurement of goods, works and services to be financed under EFIL sub-loans; For sub-loans: * Sub-loans will be made for the financing of raw materials, spare parts, plant and equipment, works, services and consulting services both for working capital as well as investment purposes; * Sub-loan applications must include a business plan incorporating an Export Development Plan; * Sub-loans will be evaluated in accordance with the PFI's normal project and credit evaluation guidelines and in addition will be evaluated using World Bank provided evaluation guidelines (available in the project file); * Sub-loans must be denominated in US$; the foreign exchange risk will be borne by the sub- borrower; * Sub-loan pricing and maturity will be determined by the PFI based on the needs of the particular sub-borrower and sub-project being financed, with the proviso that the interest rate must at a minimum be equal to the costs of World Bank loan funds to the PF plus an appropriate credit risk margin; * Sub-loan size to any individual sub-borrower or group of connected sub-borrowers will not exceed US$10 million; - 22 - * For sub-loans larger than US$5 million (free limit loan size of US$5 million) and for the first two sub-loans for each PFI irrespective of size, prior review by the World Bank will be required; * All sub-loans not subject to prior review, can be subject to post review by Turk Eximbank or the World Bank in order to verify compliance with the subsidiary and sub-loan agreement terms. - 23 - Annex 3 Export Finance Intermediation Loan Estimated Project Costs Project Component Local Foreign Total ----------------------------us$ ----------------- Credit line 98,500,000 147,500,000 246,000,000* Technical assistance 1,500,000 3,004,700 4,504,700 Consultants 500,000 1,900,000 2,400,000 IT Equipment (hard & software, services) 1,000,000 500,000 1,500,000 Training 0 604,700 604,700 Front End Fee 2,525,300 2,525,300 Total 100,000,000 153,030,000 253,030,000* Total Baseline Cost Physical Contingencies - - 0.0 Price Contingencies - - 0.0 Total Project Cost 100,000,000 153,030,000 253,030,000* *While it is expected that both participating banks and sub-borrowers themselves will contribute to the financing of individual sub-projects, the precise amount of such financing to be provided cannot be determined ex ante, as the loan design does not envisage the use of predetermined cofinancing requirements. Instead, participating bank maximum exposure to individual sub-borrower limits, debt equity and debt service coverage ratio requirements for sub-borrowers and maximum sub-loan limits will drive the amount of cofinancing to be provided. - 24 - Annex 4 Export Finance Intermediation Loan Project Implementation Arrangements Institutional and Implementation Arrangements 1. Turk Eximbank will be the borrower for the EFIL, and the Undersecretariat of Treasury will provide the guarantee to the World Bank on behalf of the Government of Turkey. Turk Eximbank will also be the implementing agency for the project, and will set up a Project Implementation Unit (PIU) within Turk Eximbank headed by a Deputy General Manager of Turk Eximbank. The Turk Eximbank PIU's responsibilities, functions and staffing details are given below. Onlending Arrangements 2. Turk Eximbank, the Borrower, will wholesale the EFIL to a maximum of five private banks (four commercial banks and one development bank) selected according to a set of pre-qualification and final eligibility criteria (see Annex 6). The on-lending will be carried out by means of subsidiary loan agreements entered into with the selected banks (Private Financial Intermediaries--PFIs). The PFIs in turn will make sub-loans to private exporters satisfying a set of eligibility criteria, according to agreed sub-loan terms and conditions and procurement and environmental guidelines (see Annex 2). Turk Eximbank will take the credit risk on the PFIs and the PFIs will take the credit risks on the sub-borrowers. Project Implementation Unit (PIU)--Responsibilities, Functions and Staffing 3. Responsibilities. Project coordination and implementation will be done through a PIU to be established within Turk Eximbank. The PIU will be responsible for: (i) coordination, communication and public information of all aspects of the EFIL with the World Bank, the Undersecretariat of Treasury, PFIs and exporters' organizations; (ii) carrying out the initial selection of the PFIs according to the agreed final eligibility criteria for participating banks; (iii) monitoring of the performance and the risks associated with the PFIs and periodic reporting to the World Bank based on the PFIs' audited financial statements; (iv) negotiating the terms and conditions of subsidiary loan agreements with PFIs and entering into such agreements with PFIs on behalf of Turk Eximbank; (v) communicating, the sub-loan terms and conditions including minimum eligibility criteria and procurement and environment guidelines for EFIL, to the PFIs; (vi) reviewing the sub-loan applications through prior or post review to ensure that all the sub-loan terms and conditions have been complied with by the PFIs; (vii) submission to the World Bank of those sub-loan proposals that require prior World Bank approval; (viii) management of the technical assistance component and the institutional development objectives of the Turk Eximbank under Part B of the project; and (ix) setting up of a financial management, accounting and reporting system to handle the information flow between the sub-borrowers, PFIs, Turk Eximbank and the World Bank. 4. Functions. Based on the above project responsibilities the functions and tasks of the PIU have been grouped under four specific areas: (i) Performance and Risk Monitoring of PFIs; (ii) Credit Operations Management; (iii) Accounting and Reporting; and (iv) Institutional Development Technical Assistance Management. The task details under each functional group is detailed below: Performance and Risk Monitoring of PFIs: As part of the Performance and Risk Monitoring function, PIU will carry out the review of the financial information provided by the PFIs in order to determine their eligibility for final selection and participation in the EFIL credit line based on the Eligibility Criteria agreed and coordinated with the World Bank. After the initial selection of the PFIs, and signing of the subsidiary loan agreements with the - 25 - PFIs, their continued compliance with the criteria and overall financial performance will be monitored by means of quarterly financial information provided by the PFIs to the PIU, and complemented by full year-end financial statements, audited by independent auditors, in accordance with IAS including IAS 29. The objective of this monitoring will be to evaluate the financial and operational performance of the PFIs as part of their credit risk assessment of the PFIs and their continuing eligibility for participation in the EFIL. * Credit Operations: The PIU credit operation sections will provide assistance to the PFIs and sub-borrowers on all aspects of the terms and conditions and eligibility criteria of the sub-loans under EFIL, and will review all the sub-loan applications on a prior or post review basis in order to ensure their compliance with respect to the objectives, criteria and covenants as stated in the subsidiary loan agreements. In doing this, PIU in consultation with the World Bank, will prepare an EFIL Operations Manual (OM) to explain all the operating procedures and guidelines governing the implementation of the EFIL. The OM will include (i) terms and conditions and eligibility criteria for sub-loans and sub-borrowers; (ii) the Guidelines, checklists and the formats for the preparation of business plan and export development plans by the sub-borrowers, and for the evaluation of working capital and investment sub-loans; (iii) the applicable procurement guidelines and the prior review thresholds for sub-loans; (iv) the environment guidelines and checklist for sub-loans; and (v) the operational process for the information, documentation, and payments flows; and (vi) the accounting, reporting and auditing requirements as applicable at different levels in the onlending process. The credit operations will also monitor the disbursement progress in the utilization of the EFIL, monitor the debt servicing performance of the sub-loans jointly with the PFIs, collect information on the incremental exports generated by the EFIL in line with the agreed impact performance indicators, and prepare quarterly progress reports on these areas, for eventual submission to the World Bank. * Accounting and Reporting: The Accounting and Reporting section will prepare the Financial Management System (FMS) required for the accounting and reporting of all project related activities under the EFIL in joint consultation with the World Bank. The Accounting Officer, under the supervision of the Financial Officer, will be responsible for: (i) the documentation and recording of the transactions involving disbursements from the special account; (ii) recording the funds flow to the PFIs; and (iii) all recording and reporting related to preparation of Project Management Reports (PMRs) according to the formats agreed with the World Bank. In order to record, monitor and report on the transactions related to the project activities, specific balance sheet and income statement accounts for these transactions will be opened within Turk Eximbank's chart of accounts. These accounts and their totals at any given time will provide the PIU with a clear picture of the status of the funds flow in the project. Entries in these accounts will be recorded under PIU authorization. The character and the number of accounts to be opened will be determined according to the types of the loans, number of the PFIs participating in the project and the status of the special account. The PIU will monitor these transactions and will prepare monthly account summaries in parallel with the monthly accounting cycle within Turk Eximbank, and, if requested, send these monthly reports to the World Bank. Through these accounts PIU will compare the funds flow information with the PFIs and if needed with the sub-borrowers. Periodic reconciliation of these accounts between Turk Eximbank, the World Bank, the PFIs will also be carried out by the PIU's accounting section. The PIU will also ensure that audits of the financial statements or reports are submitted within the periods specified in the loan agreement and that these reports include a certification that the PFI is in compliance with the provisions of the loan. * Institutional Development Program of Turk Eximbank: Turk Eximbank's institutional development is an important objective of the loan and an integral part of the project. The -26- technical assistance component of the loan is intended to upgrade the institutional capacity of Turk Eximbank and transform it into a more effective and efficient institution. This would be achieved by strengthening its strategic planning, operational, administrative and technical capabilities through procurement of consulting services, acquisition of IT equipment hard- and software) and related services required to upgrade Turk Eximbank's IT capability, and training. This section of the PIU under guidance from senior Turk Eximbank management and in consultation with the World Bank will: (i) coordinate programs and budgets for relevant activities; (ii) prepare terms of reference and tender documentation for the procurement of consulting services, IT equipment and related services, and training; (iii) in close cooperation with Turk Eximbank's IT department prepare the technical specifications for the procurement of IT equipment and related services; (iv) coordinate the procurement and disbursements related to these programs with other sections of the PIU; and (v) prepare and submit reports on these activities both to the PIU director and to the World Bank. 2. Staffing The PIU staff will be composed of Turk Eximbank staff assigned to this unit. Turk Eximbank has appointed its Deputy General Manager, lending operations, as the Program Manager. The Program Manager will be responsible for the overall project management and coordination with the World Bank, PFIs, the Government, and the exporting sector. In addition, he will be responsible for the creation, appropriate staffing and functioning of the PIU. The PIU will be managed by a Director, PIU, (currently the head of the export credits division of Turk Eximbank), who has already been appointed and has worked closely with the World Bank during EFIL preparation. In this task, the Director, PIU will be assisted by five specialists, recruited from the risk assessment, export credits, project credits, accounting and the Treasury funding divisions of Turk Eximbank and will report directly to the Director, PIU. 3. Turk Eximbank has also appointed its Deputy General Manager, Treasury, Funding Operations, as the Project Manager (IDP) for coordination and implementation of the Institutional Development Program of Turk Eximbank in joint consultation with the World Bank. The Financial Officer working within the PIU and responsible for the Institutional Development Implementation within the PIU will report to the Project Manager (IDP) for Institutional and Technical guidance and decisions in this area. The organization structure of the PIU is shown below. The specific functional responsibilities and related staffing are described in the following paragraphs. Turk Eximbank PIU Organizational Chart Deputy General Manager, Turk Deputy General Manager, Turk Eximbank Eximbank (Credit Operations) (Treasury-Funding Operations) Program Manager (EFIL) Project Manager (IDP) Mr. Osman Asian Mr. Ertan Tanriyakul Director, (PIU) I Ms. Gillcin C6kli L- - - - - - - -------------------- -I- Performance & Risk Credit Operations Credit Operations Accounting Financial Officer Monitoring Specialist Specialist Officer (Institutional Specialist (Short Term (Medium/Long (Accounting and Development Technical Loans) Term Loans) Reporting) Assistance) - 28 - B. Project Implementation Plan (schedule) 1999 1999-2002 Seq. Tasks/Activities Feb. Mar. Apr. May June July Aug. Sep. Oct. 1. Project Identification & Preparation 2. Project Appraisal 3. Loan Negotiation 4. Board Presentation and Approval 5. Selection of Participating Intermediary Banks (PFIs) 6. Signing of Subsidiary Loan Agreements 7. Effectiveness 8. Implementation 9. Supervision -29 - Annex 5 Export Finance Intermediation Loan Institutional Development Program for Turk Eximbank Terms of Reference A. Introduction 1. Background. Turkiye Ihracat Bankasi A.S. (hereafter referred to as Turk Eximbank) is Turkey's official export import bank/export credit agency (ECA). Turk Eximbank was created in August 1987 and its main objectives are to increase the competitiveness of Turkish exporters and contractors working abroad, as well as to create opportunities for them in newly emerging markets. Turk Eximbank is supporting foreign trade through various credit, guarantee and insurance programs, both acting as direct lender and as a wholesaler of funds through Turkey's banking system. In 1998, 15 percent of Turkey's total exports benefited from Turk Eximbank's financial support. Turk Eximbank's main sources of funding are its capital base (provided by the Turkish Treasury which is the sole owner of the bank), and borrowing from Turkish commercial banks, developed economy ECAs and international financial markets. Turk Eximbank does not take deposits, is not a profit-oriented institution and is exempt from corporate income tax. 2. During its establishment phase, Turk Eximbank received technical assistance from several sources. This assistance included support from the NCM (the ECA of the Netherlands) for the establishment of its export credit insurance and guarantee operations, and support from Citibank (USA) for the creation of its banking risk monitoring function. During the first twelve years of its existence, Turk Eximbank has developed into a fairly successful export financing institution which has earned respect both in the Turkish exporting and banking communities, as well as abroad among other ECAs and international lenders. In order to build upon this initial success, and to further mature into a full fledged modern ECA however, Turk Eximbank's current organizational structure, operational policies and procedures and staffing have to be upgraded to keep pace with the growth and enhanced scope and complexity of its operations, and to keep them fully in line with international best practice standards. Structured application of the most recent tools and techniques developed in mature market economies for the management of its operations and the multitude of risks inherent in these operations is therefore critical for Turk Eximbank's future development. The present terms of reference spell out the areas in which further institutional development of Turk Eximbank is required to achieve these benefits. Specific proposals for the provision of the services would be prepared on the basis of these terms of reference. 3. The further institutional strengthening of Turk Eximbank is an integral part of a proposed US$252.53 million Export Finance Intermediation Loan (EFIL) to be provided to Turk Eximbank by the World Bank. Turk Eximbank will be the Borrower and Implementing Agency for this Loan, the first of its kind in Turkey that incorporates the concept of wholesaling of World Bank loan funds through a local financial institution with an existing wholesale lending function. The EFIL contains funding for the financing of the technical assistance envisaged in this terms of reference. 4. Role of the Consultant. In order to ensure rapid and efficient upgrading of its institutional capacity, Turk Eximbank's management envisages that the technical assistance services would be provided by a reputable foreign consulting firm (hereafter referred to as the Consultant) specialized in financial institutions development, preferably having prior experience with the provision of technical assistance to similar institutions providing export credit and export credit insurance & guarantees operating in mature market economies or comparable emerging market settings. - 30 - 5. The Consultant will act in an advisory capacity. Training of counterpart staff will form an important part of the Consultant's duties. A single Consultant should arrange for all services required by Turk Eximbank under this program, although sub-contracting arrangements may be entered into for the provision of certain specialized services, in which case these would need to specified in the proposal and contract documentation. All proposals will be evaluated on the basis of the criteria defined in the Letter of Invitation, and a contract will be awarded according to the World Bank's guidelines for the procurement of consulting services. B. The Focus Areas for Institutional Development 6. These terms of reference are based on a review of Turk Eximbank's audited financial statements for the last five years and extensive discussions with the bank's management. The findings of the review are reflected in the attached Appendix 5.1, which also contains a more detailed write-up of Turk Eximbank's current operations. The review has identified a need for further institutional development in the following areas. 7. Strategic Planning. Turk Eximbank has clearly articulated high level strategic goals (e.g., to support exporters, to refrain from competing with Turkey's banking community by gradually shifting its activities from short term lending to medium and longer term lending and the provision of insurance & guarantees in line with the banking system's capacity to expand the maturity of its own lending). Turk Eximbank's management also receives short term strategic guidance for its operations from its supervisory board (the "Supreme Advisory and Credit Guidance Committee"), which each year identifies priority lending areas for the bank in line with Turkey's overall export-driven economic development strategy, and sets overall country exposure limits. During its early years of operations, this high level short term strategic guidance has been sufficient to allow the bank to function in a satisfactory manner. However, the lack of a formalized strategic planning capability is increasingly becoming a bottleneck to Turk Eximbank's ongoing and planned future expansion. Recent events (e.g., the global financial crisis and the resulting liquidity squeeze in Turkey's domestic credit markets) have also underlined the importance to Turk Eximbank of a strategic planning capacity that will allow management to respond to growth opportunities in a structured manner and within clearly defined parameters (e.g., capital adequacy targets) so as to safeguard the bank's financial health. Therefore, Turk Eximbank needs to develop an in- house strategic planning capacity, as well as a detailed medium term strategic and financial plan setting out specific growth objectives and the manner in which these objectives are to be achieved with due regard to prudential requirements such as capital adequacy, large exposure limits, etc. The formal strategic and financial plan, once completed, will provide the necessary foundation for other institutional strengthening activities identified in this terms of reference. 8. Organization. Turk Eximbank's current organization structure needs to be strengthened and fine tuned in order to better address several weaknesses, especially in the organization of the credit and insurance/guarantee functions which are somewhat fragmented to allow for adequate monitoring of overall credit risk. The enhanced complexity of its operations arising from the shift away from short term lending and towards medium and longer term lending and insurance & guarantee activity is also likely to require further fine-tuning of the credit function (e.g., structured on a geographical basis). The responsibility for the management of the overall gamut of risks the bank is exposed to (operational risk, legal and documentation risk, interest rate risk, market risk, foreign exchange risk, maturity mismatch risk as well as credit risk) has to be clearly assigned within the organization. Furthermore, the human resource management function needs to be upgraded. Thus, a revised organization structure should be developed that can accommodate Turk Eximbank's future growth objectives as well as its need for stronger risk management. The revised structure should incorporate the requirements of the strategic plan. 9. Budgeting. Turk Eximbank engages in budgeting based on the guidance it receives from its supervisory board. However, the budgeting system needs to be further developed to ensure that it can -31- motivate and control performance throughout the bank. The revised budgeting system should be formally linked to the strategic planning process to ensure that the annual financial plan for the bank represents Turk Eximbank's strategic objectives. 10. Credit, Insurance & Guarantee Operations. Turk Eximbank's credit function is currently divided into (i) pre- and post-shipment short term, direct and wholesale lending; and (ii) medium term buyers credit, and insurance & guarantee operations. This hinders an integrated identification and monitoring of credit risk. In addition, there is a need for clearly defined loan classification and provisioning policies across product lines rather than the present somewhat ad hoc loan loss provisioning practices. Turk Eximbank also does not currently have a problem loan management unit. While the bank to date has incurred very few problem loans due to it being a wholesale bank and an ECA (with a large part of its lending flowing through the banking system and with the Turkish Treasury absorbing political risk), the increasingly volatile local and international banking environment mandates a significant strengthening of the bank's credit risk management. The formalized management and operational structure delineating credit policies, procedures and systems must be upgraded to achieve this objective. Additionally, there is a need to broaden Turk Eximbank's product range at the medium/long term end of the maturity spectrum, both for loan and insurance & guarantee products. 11. Treasury and Asset/Liability Management (ALM. Turk Eximbank has a well functioning treasury and funding department, but to date the level of complexity of its operations has been fairly low, as the bank has essentially been running a matched book both as far as the currency denomination and maturity structure of its assets and liabilities are concerned. The bank has also engaged in a limited number of off balance sheet derivative operations (e.g., currency swaps and forward agreements). In the absence of strong risk management capacity, these ALM policies have served the bank well. However, in view of its strategic objective of lengthening the maturity of its lending, especially in an increasingly credit constrained and at the same time more volatile interest and exchange rate environment, Turk Eximbank stands to gain significantly from an enhanced capacity to manage a broader range of risks, including interest rate risk and maturity mismatch risk. The bank also needs to diversify its funding base to reduce its dependence on local bank financing. Furthermore, in response to the enhanced volatility of the domestic and international environment, Turk Eximbank's pool of liquid assets has reached a size that justifies the development of market risk management capacity. 12. MIS and Management Accounting. While Turk Eximbank currently has the capability to produce basic management information, there is no formalized MIS and the management accounting system is characterized by several important omissions (e.g., large exposure monitoring, risk-adjusted return on capital). The system also does not support real time cash management. 13. Operations andIT. While most of Turk Eximbank's operations are currently fully automated, the implementation of institutional strengthening activities envisaged in the credit, Treasury/ALM, and management accounting/MIS areas are likely to require a further upgrading of its existing IT capacity. Such upgrading should take place in the context of a structured IT plan that also incorporates the growth objectives identified in the strategic plan. 14. Human Resource Management. While Turk Eximbank's staff is dynamic, relatively young and committed to Turk Eximbank's mission, and while the bank has functioning personnel and training departments, these departments operate independently from each other and need to integrate their activities in a structured effort to strengthen its human resource capacity. As Turk Eximbank's operations have become increasingly complex, and as it is anticipated that Turk Eximbank's rapid growth will continue for the foreseeable future, there is a need to upgrade the human resource management function of the bank to avoid skilled personnel shortages becoming an obstacle to the bank's future growth and expansion. - 32 - 15. Internal Audit. Turk Eximbank's existing internal audit department reports directly to the General Manager of Turk Eximbank, is currently staffed with qualified audit professionals, and is capable to perform all basic audit tasks. In line with the strategic plan and the implications of that plan, however, the existing internal audit function needs to be upgraded and, where applicable, appropriate new manuals or manual sections completed. Turk Eximbank also currently has no EDP audit capacity and such capacity needs to be developed and implemented along with the upgrading of the IT infrastructure of the bank. The role and responsibility of internal audit vis-A-vis management and the shareholders also needs to be further defined. C. Scope of Work 16. Strategic Planning. The Consultant needs to design and help Turk Eximbank implement a formalized strategic planning process which establishes how the task of planning is organized, conducted and monitored on an on-going basis. The role of various departments (including, if necessary a specialist strategic planning unit within the bank) in the planning exercise must be established and the steps in the process with appropriate deadlines for completion of tasks must be outlined and agreed with the bank's management. The Consultant should assist Turk Eximbank with the preparation of a medium term strategic plan that clearly defines Turk Eximbank's mission and objectives, target markets, products and services, financial goals (including target capital adequacy ratio), resource requirements and action plans for executing its strategy and achieving its goals and objectives. 17. This corporate strategy will then be extended into a series of plans, each covering a major business unit of the bank, defining specific goals, target markets, products and services, resource requirements, and actions programs as needed to provide practical guidance to each business unit and tools for monitoring and evaluating performance. 18. The Consultant is expected to train Turk Eximbank staff in strategic and business planning in the course of the work, so that the bank has the ability to continue the planning process in the future. 19. Organization. The Consultant is expected to work with management to formulate changes to Turk Eximbank's existing organization structure that would allow the bank to more effectively achieve the objectives outlined in the strategic plan and to strengthen its risk management capacity. The Consultant should prepare a definition of each organizational unit (including the permanent committees and branches), its mission, main responsibilities, key functions to carry out each responsibility, and required staffing levels. The Consultant should also prepare a plan for implementing the proposed organizational changes indicating implementation actions and responsibilities, schedule and support requirements. 20. Budgeting. The Consultant should assist Turk Eximbank in organizing and implementing a comprehensive and formalized system of budgeting. The system should ensure that individual units within the bank as well as the two branches budget for all income and expenditure items over which they have responsibility. The process should also ensure the following: * that the annual budgets for the bank and its departments and branches are linked to the strategic planning process and objectives; * that budget targets are agreed to between top management and individual department/branch managers to ensure challenging but realistic targets and secure good motivation and performance from managers; * that detailed and relevant variance analysis takes place on a regular (preferably monthly) basis and all significant variances from the bank's targets and objectives are highlighted, explained and responded to as necessary; and * that the management accounts for the bank and its constituent parts are designed to report actual performance against budgets and strategic targets. - 33 - 21. In addition to variance analysis, the Consultant will ensure that Turk Eximbank has a comprehensive system of measuring performance against targets through the use of a well defined set of management accounts and reports as well as through a system of individual performance management, each noted elsewhere in the terms of reference. 22. The Consultant will train a core staff in the utilization of the new systems and processes developed. 23. Credit, Insurance & Guarantee Operations. The Consultant will undertake the following tasks, and in so doing, will take into account the unique nature of Turk Eximbank's operations as an export credit agency wholesaling funds through the Turkish banking system and having full recourse to the Government for political risk: * review and document the organization of the credit function (e.g., the existing credit, insurance & guarantee departments, the Credit Committee) and propose organizational changes as required to strengthen credit risk management, including specifically a review of the need for a separate project finance department; * review and document Turk Eximbank's existing credit policies and procedures, and formulate recommendations as required to further strengthen these policies and procedures, with special emphasis on credit analysis techniques, risk acceptance criteria and credit risk monitoring; * develop a structured loan classification and loan loss provisioning policy, covering all of Turk Eximbank's exposures arising from its direct lending, wholesale lending (through the banking system), insurance and guarantee operations; * assist Turk Eximbank with the creation of a problem loan management unit, define this unit's objectives, policies and procedures and staffing requirements; * define specific steps required to upgrade the status within the organization and the capacity of the bank monitoring unit, to bring its bank analysis methodology in line with international standards (BIS/IAS); and * assist Turk Eximbank with the development of new credit, insurance & guarantee products at the medium and long term end of the maturity spectrum, in accordance with the objectives of the strategic plan; develop and document appropriate risk analysis procedures and risk acceptance criteria for these new products. 24. The Consultant will train Turk Eximbank staff in the use of new credit policies and procedures and credit analysis techniques. 25. Treasury and Asset/Liability Management. The Consultant will undertake the following tasks: * review and document existing ALM processes and organizational responsibilities (e.g., of the Treasury and Funding Departments, the Asset/Liability Management Committee) and identify any gaps in the current organization of the Treasury function that preclude an integrated approach to risk management; * review the appropriateness of the existing asset/liability management strategies of Turk Eximbank in light of the requirements of the bank's existing and planned future operations as outlined in the new strategic plan and propose remedial measures for any deficiencies identified in these existing processes; * develop and document new ALM processes for interest rate risk and market risk management; * train key staff (treasury staff, treasury management and other senior managers who will participate in, or contribute to, ALM decisions), in utilizing the new/upgraded ALM processes and risk management systems to meet practical day-to-day needs; -34- * prepare a medium term funding diversification strategy for Turk Eximbank; and * review the existing Treasury information infrastructure and identify, cost and propose solutions to meet additional internal and external information requirements (e.g., Reuters system). 26. MIS and Management Accounting. On completion of the bank's strategic plan, the Consultant should prepare a detailed plan of the management information required to execute the strategy including management reports at each management level that allow Turk Eximbank to strengthen liquidity, performance and risk management. The new management information system must provide management with financial information for each of the operational units of the bank as well as for the bank as a whole. 27. The MIS plan should include all the key areas of Turk Eximbank's operations and management, including: * credit and portfolio status; * treasury including liquidity, interest rate, maturity mismatch, foreign exchange and market status and risks, funding and asset & liability management; * operations, front and back-office, head-office and branches; and * strategy, budgeting and performance measurement including the design and implementation of an upgraded management accounting system; the accounting system should include information on a profit/contribution center and cost-center basis with appropriate transfer pricing for inter-unit transactions. The management accounts should also be designed to give revenue, cost and profitability information by product, customer, and business division. 28. The Consultant will assist Turk Eximbank to integrate the new management information requirements, including the upgraded management accounts, into the IT strategy of the bank. 29. The Consultant will train a core staff in the utilization of new systems and processes developed. 30. Operations and IT. Once a strategy for the future operations of the bank has been developed and the management information needs of the bank have been defined, the Consultant will review and evaluate the efficiency and effectiveness of the existing hardware and software architecture and system engineering in the bank. In so doing, the Consultant will take into account the following: * The need for congruence between the bank's strategy, business goals and existing technology; * An analysis of the information and processing effectiveness of the existing systems; * Based on the business strategy for each unit, an assessment of the information and processing requirements, and a definition of a set of additional application needs for the bank; * The cost of additional hardware, software, training and incidental expenses; preparation of tender documents for the procurement of IT goods and services allowing Turk Eximbank to effectively and quickly procure the required equipment, software and related services under the World Bank Loan; * The need to integrate any new initiatives both internally, with regard to a compatible system of hardware, software and communications from head office to branches, and externally, with any payments system and inter-bank arrangements; * The management, organization, staffing and training requirements needed to implement the program. * An implementation schedule together with major milestones. 31. Human Resource Development. The Consultant is expected to develop a new organizational structure for the human resource development function that will integrate the existing personnel and - 35 - training departments. The Consultant should define a mission statement for the new structure and prepare a staffing plan, including detailed job descriptions. 32. Additionally, the Consultant is expected to work with management to upgrade/develop human resource management systems in the following areas: * Training-Needs Analysis. Ajob-by-job identification of training needs. * Training and Development Master Plan. Prioritization and planning of how all training needs will be met. The training needs analysis and plan should take into account the requirements under each of the functional areas. * Performance/Potential Appraisal. Assessment of the performance and potential of all employees; identification of major development needs. * Staffing. Effectively matching people to jobs in the revised organization structure. * Human Resource Planning. Supply/demand analysis, projection of gaps and excesses (3-5 years) by major skill/rank levels and plans to fill the gaps and deal with the excesses. * Recruiting. Pro-active methods for finding and selecting key talent. * Rewards Management. A compensation system that will attract, retain and motivate managers, technical personnel and staff. * Management Development. Methods for developing general and technical managers. * Performance Management. System for managing individual performance (e.g., goals, standards, monitoring, evaluation). 33. These steps will include documentation of each system in the form of an operating manual, as well as pilot implementation and training of implementation staff. 34. Internal Audit. The Consultant will undertake the following tasks: * review Turk Eximbank's audit organization and methodologies, and identify any existing gaps in the proper scope and depth of audit coverage mandated by Turk Eximbank's current operations as well as its planned future operations outlined in the strategic plan; * for the additional audit needs identified, develop audit methodologies, define reporting standards, propose solutions for additional hard and software requirements, and identify and define additional audit skill requirements; * assist Turk Eximbank with the development of an EDP audit capacity; and * train Turk Eximbank staff in the utilization of any new proposed audit methodologies. D. Time Frame 35. Turk Eximbank believes the full scope of the work can be completed in two to three years. This estimate is based on balancing the work load and absorptive capacity of management and staff to deal with the changes/new systems called for and the need to upgrade its existing institutional capacity to position the bank for rapid future growth. The Consultant and Turk Eximbank will together work out a realistic timeframe. 36. At a minimum it is expected that the Consultant will work with management to produce the following in the first year of the assignment: * A strategic plan, * Individual business plans for individual business units, * A revised organization structure, * Implementation of the first four human resource management systems, - 36 - * Upgrading of the credit function covering credit policies and procedures, with particular emphasis on bank credit risk management; * Upgrading of ALM systems for managing interest rate risk, and * Identification of requested MIS for generation of the data. 37. Turk Eximbank will need documentation of the progress of the work. At a minimum, the Consultant would produce the following: * within one month of commencing work, a detailed, updated work plan based on initial findings, for review; and * quarterly progress reports documenting findings and progress to date, and proposed next steps. Detailed reporting requirements will be agreed with the Consultant during contract negotiations. - 37 - Table 1: Estimated Cost of Institutional Development Program for Turk Eximbank Consulting Services (US$) Strategic Planning 100,000 Organization 100,000 Budgeting 100,000 Credit, Insurance & Guarantee Operations 450,000 Treasury & ALM 350,000 MIS & Management Accounting 100.000 Operations & IT 300,000 Human Resource Development 300,000 Internal Audit 100,000 Sub-total Consulting Services 1,900,000 IT Procurement Hardware 500,000 Software 700,000 Non-consulting Services 300,000 Sub-total IT Procurement 1,500,000 On-the-job training/courses abroad Course fees 300,000 Travel expenses & Accommodation 304,700 Subtotal on-the-job training 604,700 Total 4,004,700 - 38 - Appendix 5.1 Export Finance Intermediation Loan Profile of the borrower-Turk Eximbank A. Introduction 1. Turkiye Ibracat Kredi Bankasi A.S. (hereafter Turk Eximbank) Turkey's official export-import bank/export credit agency, was established in 1987 as the successor institution to the Turkish State Investment Bank. Turk Eximbank's objectives are to increase the competitiveness of Turkish exporters and contractors working abroad as well as to create opportunities for them in newly emerging markets. Through its export credit, insurance and guarantee programs Turk Eximbank has provided support for 15 percent of Turkey's total exports in 1998. Turk Eximbank is not a profit-oriented institution and is exempt from corporate income tax. The Turkish Treasury is the sole owner of the bank and has agreed to a zero dividend policy with all profits allocated to retained earnings. B. Legal Foundation 2. Turk Eximbank was established by Law No. 3332 "On the Transformation of the State Investment Bank into the Export Credit Bank of Turkey Inc." of March 25th, 1987 and Cabinet Decree No. 87/11914 "Principles Relating to the Reorganization of the State Investment Bank Under the Name of the Export Credit Bank of Turkey, Inc". The Cabinet Decree specified how the State Investment Bank was to be transformed into a joint stock company, and also mandated the use of two classes of shares- A and B - which differ from each other only insofar as the Class A shares (representing 51 percent of the total number of shares) must remain in the ownership of the Treasury, while the Class B shares (representing 49 percent) may be transferred by the Treasury to public and private banks, financial institutions, insurance companies and other entities. The matters which remain out of scope of the Cabinet Decree are governed by the Turkish Commercial Code. The Articles of Association of the bank, prepared on the basis of the Cabinet Decree, are registered in the Trade Registry. C. Corporate Governance and Organization Structure 3. Supervisory Board. The Treasury's ownership rights in Turk Eximbank are exercised by a Supervisory Board (the "Supreme Advisory and Credit Guidance Committee") which consists of several undersecretaries of economy-related ministries headed by Prime Minister or a State Minister appointed by Prime Minister, the Governor of the Central Bank of Turkey, the Chairman, Vice Chairman and Chief Executive Officer of Turk Eximbank. The Supervisory Board approves the annual lending, insurance & guarantee programs and sets limits for the credits to be extended and insurance & guarantee cover to be issued either on an aggregated basis or by countries, sectors and product groups. The Board of Directors of the Bank is obliged to observe these limits. 4. Board of Directors. The Board of Directors is charged with responsibility for all other decisions concerning Turk Eximbank's operations. The Board consists of seven Directors, one of whom, the Chief Executive Officer (CEO), is appointed by a joint decree of the State Minister responsible for Turk Eximbank, the Prime Minister and the President of the Republic, while the remaining six are directly appointed by the State Minister responsible for Turk Eximbank. This is an interim arrangement, pending the holding of the first general shareholders meeting which would occur upon transfer of some or all of the Class B shares by the Treasury, after which four Directors would be elected by the holders of the Class A shares and the remaining two by the holders of the Class B shares. The Board of Directors elects a Chairman and Deputy Chairman among its elected members. Turk Eximbank is managed and -39- represented on a day-to-day basis by the CEO, to whom several of the powers of the Board of Directors are delegated. 5. Senior Management and Staff The CEO is assisted by four Deputy General Managers. As of year-end 1998, Turk Eximbank employed 365 staff (including Directors), 41 of whom have a post- graduate degree and 163 have a graduate degree. The average length of employee service is around six years and the average age (excluding Directors) 34 years. -40 - Turk Eximbank Organization Chart Pre-Shipment export credit Deputy General Department Manager Board of Directors MPerformance-Related Exp. B ar ictos Credit Department Secretariat Specific Loans & Risk Assessment Department Board of&Directors Deputy eInsurance & Guarantees Internal Audit 1 ~ Deputy General______________ Department CEO Byr rdt-IDprmn Buyers Credit -II Department CEO's Secretariat Treasury Department Deputy General Manager Legal Department Research & Information Department Internal Audit Deputy General Department Manager System Development & Data - Processing Department Public Relations & Training - Department ESecretary General - 41 - D. Products and Services 6. Turk Eximbank's products and services include short term pre-shipment and post-shipment export credits, medium term buyers' credits, and export insurance and guarantees. Short-term pre-and post-shipment export credits are extended to Turkish exporters in Turkish Lira or foreign currency, either directly by Turk Eximbank or indirectly via Turkish commercial banks. Medium and long-term export credit programs finance the export of capital goods and turnkey projects to be undertaken by Turkish contractors abroad. Most of these programs involve direct lending, although certain insurance and guarantee activities fall into this category. Insurance programs provide cover against commercial and political risks for Turkish exporters selling on credit, investors and overseas contractors. Guarantee programs provide political and commercial risk coverage to Turkish banks financing export transactions through the provision of export credit to foreign buyers. 7. During its first years of existence Turk Eximbank has concentrated on the provision of short-term export credits. However, in the long-run, the bank intends to place more emphasis on insurance and guarantee programs, and medium and long-term trade and project finance, while leaving short-term trade finance to Turkish commercial banks. 8. In line with the annual programs endorsed by the Supervisory Board, Turk Eximbank's facilities are structured to reflect strategic priorities for Turkey's export sector. Thus, the country limits for a selected group of priority countries are generally set at higher levels than for non-priority countries, and Turk Eximbank has separate facilities for small and medium-sized exporters and for exporters located in priority development areas. The latter facility, available only in TL, is the only facility carrying a preferential interest rate (10 percent below comparable TL interest rates on other facilities). E. Sources of Funding and Asset/Liability Management 9. Turk Eximbank's main sources of funding are its capital base, provided directly by the Turkish Treasury which is the 100 percent owner of the bank, local and foreign commercial banks loans, loans from other export credit agencies (ECAs) and international financial institutions (IFIs), and, since 1997, borrowing in international capital markets 3. Funding composition on a percentage basis was as follows: 3 Turk Eximbank received an initial credit rating from Standard & Poor's and Moody's in 1997 in order to be able to borrow in international money and capital markets without Government guarantee. The bank's rating has since been maintained and is the same as Turkey's sovereign rating. - 42 - TURK EXIM Bank Balance Sheet - Liability Composition 100% - EMCapital 90% - 80% - * Debt securities issued 70% - 60% - M Due to government 50% - institutions 40% - MOther liabilities 30%- 20% MDue to international 10% lending agencies 0% M Due to banks & credit 1994 1995 1996 1997 1998 institutions 10. Turk Eximbank is essentially running a matched book both as concerns the maturity and the currency composition of its assets and liabilities. Short term TL export credits are funded by the TL capital base; short term FX export credits are funded by short term FX loans from local and foreign banks; and medium & long term FX buyers' credits are funded by medium & long term loans from other ECAs, IFIs and FX denominated bond issues in international capital markets. Cross currency FX risk is hedged through the use of currency swaps and forwards. As a result, Turk Eximbank has very limited FX exposure (during the past two years a net long position that has fluctuated between 65 and 85 million US$ on a total balance sheet size of around US$3 billion) and very small mismatches across the entire maturity spectrum of its liability base. F. Asset Composition and Credit Policies 11. On the asset side, Turk Eximbank's loan-to-asset ratio during the last five years has been quite high (over 90 percent on average), as can be seen from the following chart. Short term export loans are still the most important asset category. 4 IAS 29 hyperinflation adjusted financial statements are only available for year-end 1998 and year-end 1997, and therefore a 5 year trend analysis based on hyperinflation adjusted statements cannot be done. As fixed assets under the non-adjusted statements were already revalued in line with inflation, however, the difference between total assets under the two sets of financial statements is marginal (1 percent). - 43 - TURK EXIM Bank Balance Sheet -Asset Composition 100% 90% - Other assets 80% --- 70% t - Fixed assets net of 60% if depreciation 50% Cash & balances with 50% the Central Bank 40% -- Medium and long term 30% -- buyers' credits 20% 1- Short term export 10% _ -~ credits 10% 1994 1995 1996 1997 1998 12. For short term TL export credits, Turk Eximbank's stated pricing policy is to provide funding to exporters at 15-20 percent below local money market rates. As its TL denominated capital base is the main source of funding, Turk Eximbank still earns a significant positive lending spread on this type of lending. For short term FX export credits, Turk Eximbank's stated pricing policy is to earn a positive spread of approximately 50 basis points over its average weighted costs of funds, allowing it to fully cover its overhead costs. 13. For medium and long term FX buyers' credits, Turk Eximbank abides by the OECD Consensus Arrangements'. In practice, Turk Eximbank's lending rates are generally well above commercial interest reference rates (CIRR) minimum rates, incorporating a risk premium for country risk, buyer risk, loan maturity, quality of collateral, etc. Turk Eximbank's stated pricing policy for medium and long term buyers' credits is to earn a positive spread of approximately 40 basis points over its average weighted cost of funds, still enough to cover its overhead costs. 14. At times of crisis (e.g., the 1994 Turkish banking crisis, the 1998 Russia crisis) lending spreads can temporarily decline, and for the short and medium term FX lending can temporarily become negative, as lending rates are adjusted to increases in funding costs with a time lag in order to allow Turk Eximbank to cushion the impact of sudden interest rate shocks for exporters. However, on an aggregate basis, Turk Eximbank's lending spreads always have been and are likely to remain sufficiently positive to cover its operating costs due to its zero TL cost capital base (see also section VIII below). 5 In the context of the EU Customs Union between Turkey and the EU which was established in early 1996, Turkey adopted OECD Consensus Arrangement principles and provisions set by Council Decision of the EU on officially supported export credits. Turk Eximbank's medium term buyers' credit, insurance and guarantee operations are subject to these provisions. Turk Eximbank is also a full member of the Beme Union and Turkey, represented by Turk Eximbank, became a member of the OECD Group on Export Credits and Credit Guarantees in April 1998, with the expectation that Turkey will sign the OECD Consensus Arrangements within two years of entry (i.e., by April 2000 at the latest). - 44 - 15. Turk Eximbank's export credit insurance operations are predominantly short term in nature, with medium and long term cover still negligible in US$ terms (on average only around US$15 million during the last three years). Short term export credit insurance has gained in importance during the last five years, in line with Turk Eximbank's strategic objective to use instruments such as these. to support exporters rather than direct lending whenever possible. Although total export insurance coverage turnover reached nearly 3 billion US$ in 1998, premium income still constitutes only a small portion of Turk Eximbank's net income (7.5 percent in 1998). 16. For both its short and medium/long term export insurance cover, Turk Eximbank's premium rates are comparable to those of other ECAs, as evidenced by the disclosures in this respect made by all ECAs to the Berne Union. G. Capital Adequacy and Asset Quality 17. The Law No. 3332 establishing Turk Eximbank provides in Article 4 (C) that losses incurred by the bank in its credit, insurance and guarantee operations as a result of political risk are to be met by the Treasury. In addition, the Treasury and Turk Eximbank executed a Guideline for Procedures on November 6, 1997 setting out the procedures by which claims for reimbursement are to be made. Turk Eximbank must advise the Treasury of the amount of the claim by September of each year. The Treasury will then apply to include these funds in the Republic of Turkey's consolidated central Government annual budget for the following year. If approved for inclusion in the budget, payment will be made to Turk Eximbank, following approval of the budget, at the time budgetary payments are made. To date, this mechanism has worked in a satisfactory manner in practice6. 18. While the responsibility for political risk is thus clearly assigned to the Treasury, Turk Eximbank retains the commercial risk on all of its operations. For its short term direct lending export credit operations, the commercial risk exposure is nearly fully transferred to the local banking system as Turk Eximbank routinely obtains local bank guarantees for its exposure to Turkish exporters. Thus, in all of its short term lending (direct and wholesaling through the banking system), its credit exposure is nearly exclusively to the Turkish banking system. Turk Eximbank has a bank risk monitoring unit to monitor this exposure, which was created with the assistance of Citibank US. While this unit is able to monitor bank risk, there is some room for improving the analytical techniques being used which have not fully kept up with recent best practice standards (e.g., BIS capital adequacy ratios) and the scale of Turk Eximbank's lending operations to the Turkish banking system. 19. For its medium term buyers' credit operations, Turk Eximbank always obtains a sovereign guarantee from the buyers' country. These guarantees generally do not distinguish between commercial and political risk, and therefore the default risk in practice is born by the Treasury. For its short term export credit insurance operations which cover mainly commercial risk, approximately 70 percent of the risk is reinsured with prominent reinsurance companies such as Munich Re and Swiss Re. Medium term insurance cover is mainly for political risk and thus default risk is again born by the Treasury. 20. Loan Loss Provisioning Rules: Due to the unique nature of its operations (with the bank's credit exposure risk being virtually exclusively to the banking system and with the Turkish Treasury taking full responsibility for political risk), Turk Eximbank is exempted from compliance with the Treasury's loan 6 One exception concerns a claim on the former Soviet Union carried on the bank's balance sheet since 1995. This claim was rescheduled in the Paris Club and was a performing loan as of the year-end 1998 balance sheet date. However, as some portion (40 percent) of the loan was funded with Central Bank money and the maturity of this funding was not rescheduled to match the new repayment schedule of the restructured former Soviet Union debt, the auditors have qualified the year-end 1998 IAS audit report (i.e., the qualification relates to the undefined nature of the maturity of Turk Eximbank's liability to the Central Bank rather than the quality of the loan asset; any default risk on the loan will be absorbed by the Turkish Treasury). -45- loss classification and provisioning policies. This is also true for other development and investment banks which do not accept deposits. (Banking Law, Article 94). However, despite this exemption and the fact that to date the bank has incurred very few asset quality problems, Turk Eximbank actually does classify and provision for all of its short term loan assets according to the Treasury's ruled. While the Turkish loan classification and provisioning rules are more lax than international standards, the limited potential for problem loan assets to arise on Turk Eximbank's books mitigate the impact of this discrepancy. Turk Eximbank's provisioning for medium term buyers' credits takes the form of general rather than specific provisions. Banking sector risk was not provisioned as of year-end 1998, but Turk Eximbank has started to build up a 1 percent general provision for its aggregate banking sector exposure starting in 1999. Specific provisions are only made for short term export credits that do not carry bank guarantees and under Turkish classification rules fall in either the category 'special follow-up' or 'legal follow-up' (roughly comparable to substandard and loss classification under international rules). The percentage of short term export credits provisioned in this way is very low (less than one tenth of one percent of the total balance outstanding as of year-end 1998). 21. As a result of the above mentioned unique features of Turk Eximbank's asset base and repeated injections of new capital by the Turkish Treasury, Turk Eximbank's capital adequacy ratio has consistently increased during the last from years, from a low of around 2.5 percent in 1994 to 18 percent as of year-end 1998 on a BIS risk-weighted basis (as confirmed by Turk Eximbank's auditors). H. Earnings and Liquidity 22. As indicated earlier, Turk Eximbank's pricing policies have allowed it to maintain and even improve its net interest income margin on an aggregate basis, as can be seen from the following chart': Loans plus accrued interest are transferred to administrative follow-up when principal or interest is past due. Such loans in administrative follow-up and uncollected within 30 days are transferred to legal follow-up. Loans classified are placed on non-accrual status and a 100 percent reserve is provided. ' Under the IAS 29 hyperinflation adjusted financial statements, net income in 1998 and 1997 is significantly lower than under the non-adjusted statements. Despite these differences, due to other IAS 29-related adjustments, shareholders' equity under the two sets of statements is either the same (in 1998) or higher (in 1997). As total assets are virtually the same under both sets of statements (in 1998) or higher under IAS 29 by a comparable amount in 1997, the hyperinflation adjustment has only a marginal impact on capital adequacy. - 46 - TURK EXIM Bank - Income and Expense Analysis 50,000,000 N -- t Interest Income 45,000,000 N r 40,000,000 35,000,000 - - Net Income 30,000,000 - -- 25,000,000 - ---- -,Loan Loss Provision Expense 20,000,000 ------ 15,000,000 Other Operating 15,000,000 .Expense 10,000,000 . - -- 5,000,000 .Other Operating Income 0 -- 1994 1995 1996 1997 1998 23. This chart also indicated that Turk Eximbank's non-interest operating expense and loan loss provision expense have been kept in check as the bank's business has grown. As a result, the bank's return on assets and return on equity consequently has improved over the years: Table 1: Turk Eximbank - Return on Assets/Return on Equity 1994 1995 1996 1997 1998 ROA 0.64 percent 0.78 percent 3.03 percent 2.28 percent 5.14 percent ROE 9.53 percent 9.59 percent 26.32 percent 14.52 percent 27.85 percent 24. As a result of Turk Eximbank's matched asset/liability profile, the liquidity profile of Turk Eximbank has remained relatively stable during the last four years: TURK EXIM Bank - Liquidity Ratios 1.40 - - - - . - .. ST Interbank Claims 1.20 as percent of ST 1.00. Interbank Loans 0.80 -...Readily Marketable .6'Assets as percent of 0.60 . Total Assets 0.40 Volatile Liabilities as percent of Total 0.00 -- -- - - Liabilities 1995 1996 1997 1998 _j - 47 - 25, While the short term interbank claims/short term interbank loans ratio has deteriorated somewhat, it is still comfortably at around 1.00. As Turk Eximbank's short-term pre-shipment credits are mostly self-liquidating, Turk Eximbank should be in a position to generate enough liquidity from its short term loan portfolio in case it would face sudden liquidity needs beyond its readily marketable asset portfolio. - 48 - Annex 6 Export Finance Intermediation Loan Likely Profile of Participating Banks, Pre-qualification and Final Eligibility Criteria Typical Participating Bank Profile 1. There are 72 banks in the Turkish banking system. These include private commercial banks, state owned banks, foreign banks, development banks and investment banks. Out of these banks, Turk Eximbank has active working wholesaling relationships with 58 Turkish banks (these exclude the investment banks who are not typical corporate lenders, and foreign banks who usually have their own sources of funds). In order to determine the extent of credit exposure Turk Eximbank should take on any one of these banks, Turk Eximbank carries out on a quarterly basis a risk assessment of these banks by monitoring their financial information including capital adequacy, profitability, and liquidity ratios. However, in the interest of efficient implementation of EFIL, it was agreed that the number of participating banks should be limited to about five banks out of the total universe of 58 banks. This would also enable an amount of approximately US$50 million to be intermediated by each bank and enable the World Bank and Turk Eximbank to create the right incentives in the selected banks to focus their management time and effort in timely and efficient implementation of the EFIL according to the project guidelines, and providing much needed medium term finance to exporters. 2. A secondary objective of EFIL is to complement the financial sector legislative and policy reforms being proposed and discussed between the World Bank and the Government of Turkey, by entering into a dialogue with the leading private sector commercial banks and build a consensus with them in favor of improved banking standards in line with BIS and EU standards and an increased focus on risk management. 3. In order to achieve these objectives, the selected banks would have had to have (i) a proven track record of lending to exporters, and (ii) the participating banks needed a certain 'critical mass' in terms of their balance sheets and, though not as critical, their branch network. Finally the technical and prudential standards applicable to the participating banks had to be set at a level very close to the international banking prudential standards, thereby setting an example for the rest of the banking sector, and assisting in the financial sector reform efforts. 4. The selection of the participating banks has therefore been planned in two stages: (i) pre- qualification, and (ii) final eligibility and selection. The pre-qualification criteria used are listed below: * The banks should be privately owned; * Minimum total asset size should be at least $500 million equivalent, and the banks should have maintained this minimum asset size for each of the last two years (1997 and 1998) on a quarterly basis on average. This would establish that the pre-qualified bank should have at least a minimum size of operations on a consistent basis for two years running; * The pre-qualified banks (as determined by information compiled by Turk Eximbank over the last two years) should have a minimum export loans/total assets ratio of 10 percent for each of the last two years (1997 and 1998) on a quarterly basis on average. This would establish that the pre-qualified banks had proven export orientation in their lending operations and had maintained this orientation consistently for the last two years. 5. The pre-qualification process has led to a preliminary list of 18 banks which include 17 private commercial banks and one private development bank, as shown in the table below. These banks range from (i) an asset base of US$7,243 million to US$556 million, and (ii) an export orientation of 41 percent to 10.1 percent at the lower end. Out of this preliminary list of 18 banks, the top eight banks in asset size -49- were selected to form a short list, and the only development bank (Turkiye Sinai Kalkinma Bankasi or TSKB) in the list of 18 was added to constitute a short list of nine banks (i.e., half of the universe of 18 banks will be pre-qualified). These nine banks will be formally invited to express their interest in participation in EFIL and will be sent a copy of the final eligibility criteria (paragraphs 7-10) required for the second stage of selection. The 18 banks (from the population of 58 banks) satisfying the pre-qualification criteria ranked by (i) total assets; and (ii) export sector loans/total assets Annual average Annual average export loans/total loans total assets Number 1998 1997 1998 1997 of %US$ million US$ million Branches Yapi Kredi 17.7 23.4 7,243 5,480 420 Isbank 19.6 16.6 7,204 6,461 834 Garanti 12.9 14.6 7,097 5,013 182 Akbank 12.3 12.8 6,789 5,028 520 Pamukbank 12.9 16.0 4,605 3,540 169 Toprakbank 16.0 21.5 1,986 1,527 145 Kocbank 17.5 16.7 1,908 1,581 60 Osmanli 13.5 16.7 1,709 1,190 77 Esbank 15.2 18.3 1,614 1,385 94 Finansbank 10.1 14.2 1,544 1,094 46 Iktisat 20.8 28.1 1,253 988 53 Disbank 11.9 27.2 1,211 760 60 TEB 19.1 25.6 991 930 36 Sumerbank 18.8 17.8 985 990 88 Sekerbank 10.7 15.7 875 599 208 Egebank 25.6 29.6 845 677 76 Kentbank 23.7 28.2 836 514 64 TSKB 41.0 37.1 556 570 2 6. Pre-qualified Short List!. The nine banks included in the pre-qualified short list are briefly profiled below: * Yapi (Yapi ve Kredi Bankasi). Yapi Kredi, was established in 1944 and is a member of the Cukorova conglomerate; the bank is highly exposed (25 percent of total loans) to other group companies. Yapi Kredi is one of the largest retail banks in Turkey, having over 420 branches; this network provides the bank a very strong deposit base. At the end of 1998, Yapi accounted for approximately 8.5 percent of the assets of the whole banking sector; The Undersecretariat of the Treasury (the Guarantor of the EFIL) and Turk Eximbank (the Borrower) have specifically recommended to the World Bank to consider the inclusion of a second privately owned development bank, Sinai Yatirim Bankasi (SYB). Although SYB, like TSKB, has special skills in medium and long term lending and does not fund itself with deposits, it did not pre-qualify according to the asset size and export orientation criteria. However, since SYB is likely to meet the rigorous final eligibility criteria, the bank should be kept in reserve and can be approved for participation in the EFIL in case five banks out of the 18 pre-approved were not found eligible or were not keen to participate. - 50 - * Isbank (Turkiye Is Bankasi A.S.). With 834 branches, Isbank has the largest retail banking network in Turkey. 28 percent of the bank's shares are held by the CHP political party which is represented on the Board of Directors. At the end of 1998, Isbank accounted for approximately 8.3 percent of the assets of the banking sector. * Garanti (Garanti Bankasi A.S.). Garanti is an innovative bank, having centralized a number of its core processing functions, established a central telephone call center and launched a branded credit card. The bank has 182 branches throughout Turkey and accounted for approximately 8.3 percent of the assets of the banking sector at the end of 1998. * Ak (Akbank T.A.S.). Akbank is a subsidiary of the Sabanci industrial/financial group, which also owns 10 percent of TKSB. The bank has been heavily exposed to group companies; however as regulatory limits have constrained its group lending activities it has increased its efforts in the retail banking sector. The bank has 520 branches and accounted for approximately 8.5 percent of the assets of the banking sector at the end of 1998. * Pamuk (Pamukbank T.A.S.). Pamukbank is also a member of the Cukorova conglomerate and, like Yapi Kredi, is heavily exposed to group companies. The bank has had weak earnings over many years suggesting that the balance sheet contains a large portion of assets that are underperforming but not classified. The bank has 169 branches in most major urban centers and accounted for approximately 5.7 percent of the assets of the banking sector at the end of 1998. * Toprak (Toprakbank A.S.). The bank, which was founded in 1992, is primarily focused on serving smaller companies. It has rapidly built a network of 145 branches and accounted for approximately 2.2 percent of the assets of the banking sector at the end of 1998. * Koc (Kocbank A.S.). A member of the Koc Group, the bank is dependent on the group for a large volume of its business. Kocbank was, in 1997, the most active player in the Turkish repo market. The bank is continuing to build its branch network to capture a larger share of loan business. At the end of 1998, the bank had 60 branches and accounted for approximately 2.1 percent of the assets of the banking sector. * Osmanli (Osmanli Bankasi A.S.). The bank has 77 branches and accounted for approximately 2.2 percent of the assets of the banking sector at the end of 1998. * TSKB (Turkiye Sinai Kalkinma Bankasi). This development bank has, since its foundation in 1950, played an active role in the development of Turkey's manufacturing and financial sectors. Originally focused on earnings from medium and long term lending activities, the bank has gradually changed its orientation towards fee based activities; from 1996 to 1998 the bank was the leading underwriter of initial public offerings (IPOs) in Turkey. At the end of 1997, the bank was 57 percent owned by Isbank, with three other commercial banks owning a further 32 percent of equity. Over two thirds of TSKB's long term debt is guaranteed by the GOT or the central bank and the remainder is owed principally to its shareholders. The bank has only 2 branches and accounted for approximately 0.6 percent of the assets of the banking sector at the end of 1998. Final Eligibility Criteria for Participating Financial Intermediaries (PFIs) 7. The nine banks in the preliminary short list will have to meet the final eligibility criteria mentioned below. All the capital based criteria would have to be certified by the auditors as of year end 1998 audit reports. In exceptional cases, some banks may have increased their capital base since January -51 - 1999, and depending upon satisfactory evidence of such an increase in paid up capital, the new capital base can be considered on a case by case basis. It is possible that out of the preliminary short-list, less than five banks will be able to or willing to meet the final criteria. In such an event, banks from the remaining group of eight banks from the initial pre-qualified list of 18 will be invited. In the event that more than five might qualify out of the short list of nine, the banks with the best capital adequacy ratio will be selected. 8. General Criteria: The Participating Financial Intermediary (PFI) shall: * remain in general compliance with all legal and regulatory requirements applicable to its operations, as (re)confirmed by the bank's management to Turk Eximbank in writing on a quarterly basis; * provide evidence, through hardware/software vendor certification or otherwise, that all of its systems are Y2K compliant or, in case such evidence cannot be provided before the end of the third quarter of calendar year 1999, that it has adequate contingency plans in place to deal with any Y2K related system failures, as confirmed by the Central Bank of Turkey and the bank regulatory authority; and * within [three] months of the date of signing of its subsidiary loan agreement with Turk Eximbank and using its own funds, engage independent external experts to undertake a full scope review of the adequacy of its risk management systems, covering all relevant banking risks (e.g., credit risk, legal/documentation risk, settlement risk, liquidity risk, interest rate risk, market risk, foreign exchange risk, country/transfer risk, operational risk), under terms of reference acceptable to the World Bank. 9. Audit Criteria: The PFI shall, at the time of selection and for the duration of its subsidiary loan agreement with Turk Eximbank, for each year-end beginning with year-end 1998, present an audit report which: * covers two full years of operations; * is prepared by an internationally recognized audit firm in accordance with International Auditing Standards and International Accounting Standards (IAS), including IAS 29; and * contains an unqualified audit opinion. 10. Capital Adequacy: The PFI shall at the time of selection have, and for the duration of its subsidiary loan agreement with Turk Eximbank maintain, a minimum BIS risk-weighted capital adequacy ratio (using definitions of capital, risk weights and weighting methodology as prescribed by the Basle Capital Accord) of 10 percent, as certified once a year by independent external auditors; and shall report its risk weighted capital adequacy ratio (as defined under Turkish rules) on a quarterly basis to Turk Eximbank using unaudited interim financial statements. 11. Credit Policies: The PFI shall, at the time of selection and for the duration of its subsidiary loan agreement with Turk Eximbank, have limited its exposure (both on and off balance sheet, the latter converted to on balance sheet equivalents using BIS conversion factors) expressed as a percentage of its BIS capital, as certified once a year by independent external auditors: - 52 - * to a single client to no more than 25 percent; * to a single group of connected clients (using EU Directive 92/121 definitions of connected clients') to no more than 60 percent by year-end 1998, 50 percent by year-end 1999, 40 percent by year end 2000, and 25 percent by year-end 2001; * to all single clients to which exposure exceeds 10 percent of the BIS capital of the PFI and groups of connected clients combined to no more than 800 percent; * to insiders, defined as members of the PFI's Supervisory Council, Management Board and employees in a management position or their direct family members, and shareholders holding more than 10 percent of the share capital of the PFI, to no more than 50 percent by year-end 1998, 45 percent by year-end 1999, 35 percent by year-end 2000, and 25 percent by year-end 2001. 12. FX Exposure: The PFI shall at the time of selection and for the duration of its subsidiary loan agreement with Turk Eximbank respectively maintain maximum foreign currency exposure expressed as percentage of its capital base (as defined under the Basle Capital Accord) of not more than 30 percent at the time of selection, 20 percent by end December 1999 and 15 percent by year-end 2000 and thereafter. '0 Group of connected clients shall mean: (i) two or more natural or legal persons who, unless it is shown otherwise, constitute a single risk because one of them, directly or indirectly, has control over the other or others, or (ii) two or more natural or legal persons between whom there is no relationship of control as defined in (i) above but who are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties. - 53 - Annex 7 Export Finance Intermediation Loan Exports Growth, Export Loans, and General FX Loans Availability Analysis 1. GDP Growth. GDP (in constant prices) has shown continuous growth since 1994. However the rate of growth, around 8 percent from 1995 to 1997, fell to 120,000 '.0% a little over 3 percent in 1998. With 100,000 its traditional export markets in * 80,000 2.0% turmoil and increased pressure from 0.0% Far Eastern competitors, there are /-2,0% real concerns that Turkey's economy 40,000 will further suffer in 1999. 20,000 -6.0% - , -... . ....-.---- -- -8.0% 1993 1994 1995 1996 1997 1998 GDP (constant prces) - GDP growth 2. Exports as percent of GDP. - GDP has grown from US$170 billion to US$199 billion in the years 250.0 16.0% 1995 to 1997 (the collapse in 1994 14.0% was due to the US$ almost tripling in 200.0- value against the Lira), and 150. 10.0% subsequently leveled off. 8.0% S100.06.0% Exports, as a percentage of total 5o.o GDP had been increasing from 1995 2.0% to 1997 but fell back slightly in - 1998. 1- 8 3.GOP (USD)- --*Expo-rts as -perc-entage -OfGODP - 54 - 3. Export Growth. Total - exports increased from a little over Turkeys export performance US$15 billion in 1993 to US$26.8 30 . -- - 250% billion in 1998. However, Turkey is exhibiting a worrying slowdown in 25 20.0% the rate of growth of exports, from 2 an average of over 17 percent for the .8 15.0% years 1993 to 1997 to only 2.3 2 15 percent in 1998. 10. 10.0% 5 5.0% There is a distinct possibility that 50 arovd sy.Stalms. . export growth could turn negative 0 0.-- - - - ..oo for 1999 which would have a knock- 1993 1994 1995 1996 1997 1998 on effect on the whole economy. It _. Exp-rts _,__E_xp_Ort growth-rate i is for this reason that the Government of Turkey has given such strong backing to this loan. 4. Trend of loan commitments New commitments to the private sector directly to the corporate sector. A further indication of the availability 4,000 of funds to the private sector is the 3,&0 .. number of new commitments opened 3,000 by the banking and the non-bank 2,500 - - financial sector. The chart indicates 2,000 that there has been, during 1998, a 1,500 very sharp reduction in new 1,000 commitments. 500 0 - 1998-QRT1 1998-QRT2 1998-QRT3 1998-QRT4 ---- New commitments 5. Trend of foreign export loan Exportfinance availability through the banking sector. The slowdown in growth of funding to the real sector would in - - - - - itself be a cause for some concern. However, more troubling for a - country which looks to foreign sales. to drive the economy forward would I be a deterioration in the level of funding available to export sector. The chart shows that, within the 1997 1997 1997 1997 1998 1998 1998 1998 asset side of the banking sector's stri qr2 qtr3 qtr4 qirl qtr2 qtr3 qtr4 balance sheet, the relative volume of Export loans/total loans Total loansitotal sts Export loansitotal assets funds available for loan financing is declining significantly. Moreover, within that reduced envelope, the funds available to finance export activities are being further squeezed. It is inconceivable that the export sector can continue to grow whilst being choked of financing. - 55 - 6. Export finance costs. In- 6. Eportfinnce osts InCost of 6 month USD export credit addition to the problems caused by i the general lack of availability of funds to the export sector, the cost of -- borrowing those funds that are 200 available is seriously denting the 'low% profitability, and hence the sustainability, of the export sector. It can be seen from the table that, since July of 1998 the cost of US$ . denominated funds has risen by over 298% -- 9 percent. Exporters looking to O - J F0- Mar- May- Jt - Aug Se OMDec borrow in Turkish Lira have seen even more dramatic increases in the cost of borrowing. Whilst it is acknowledged that the funds available under the proposed loan are not sufficient to breach the funding deficit facing the export sector, it will send an important signal to the market and mobilize further private sector flows. An increase in the supply of foreign currency should ultimately lead to an easing of the borrowing spread. 7. Capital account flows during 1998. It was noted above that, in September a large volume of funds were brought onshore only to return offshore in October and November. Capital account data compiled by the Central Bank of Turkey (CBT) confirms this assertion. While for the whole of 1998 there was a net inflow to the banking sector from overseas of almost US$ 900 million, this represents a reduction of US$1.5 billion compared to 1997. From informal discussions with the CBT, we understand that preliminary data for the first two months of 1999 show a net outflow of capital. - 56 - Annex 8 Export Finance Intermediation Loan Procurement, Disbursement and Financial Management Arrangements Procurement Arrangements 1. The procurement of goods, works and services would be carried out in accordance with the World Bank's procurement guidelines applicable to the two components of this loan. The procurement arrangements under (i) Part A of the project, sub-loans to private borrowers through private intermediary banks, in the form of goods and works; and (ii) Part B of the project, institutional development technical assistance to Turk Eximbank, the Borrower and Implementing Agency, in the form of consulting contracts, Information Technology (IT) equipment, and overseas training of its staff, are described below. The project components, their estimated cost and procurement methods are summarized in Table 8.1 of this Annex. The World Bank's review process is presented in Table 8.2, and the procurement plan for the institutional development technical assistance to Turk Eximbank is presented in Table 8.3. 2. In case of procurement under sub-loans, the Participating Financial Intermediaries (PFIs) will be responsible for ensuring that the procurement rules for sub-loans specified below are complied with by the sub-borrowers. Turk Eximbank will be responsible for reviewing and monitoring the compliance with the procurement rules by the intermediary banks and their sub-borrowers. The Credit Operations Specialist within the Turk Eximbank PIU will be responsible for all procurement oversight for the management of the project (see Annex 4). The assigned procurement staff will be trained through World Bank seminars to be conducted in Turkey in order to be familiar with the World Bank's procurement rules and practice. Such staff have already been identified at Turk Eximbank and have been nominated to attend the World Bank's procurement seminar being held in Ankara during the week of April 19, 1999. The PIU will keep the records and copies of the documents of the procurements handled through the intermediary banks, and the World Bank's ex ante and ex post review supervision shall be implemented through the PIU. In case of procurement of consulting services, IT equipment and training overseas for Turk Eximbank staff under the institutional development technical assistance, the procurement will be directly carried out by the Turk Eximbank PIU staff assigned this task responsibility and duly trained as mentioned above. Procurement Rules for Sub-loans under Part A of the Project 3. Private Sector Procurement Practice in Turkey. In order to establish the appropriate procurement rules for sub-loans under this project, an informal review of the private sector procurement practices was undertaken by the World Bank's resident procurement specialist in Ankara. It was determined that there are well-established commercial practices for the procurement of goods and works by private sector enterprises, autonomous commercial enterprises and individuals. In case of goods, the local practice is to prepare the technical specifications and solicit quotations from the local and/or international market. In case of medium and large works, the technical specifications are usually prepared by consultant companies and bids are collected from qualified contractors. Minor works are generally tendered on a lump sum basis by, collecting bids from a number of local contractors. When equipment and machinery is needed for expansion of existing facilities, the purchasers usually prefer proprietary goods from a single source for the sake of standardization and minimization of the operation and maintenance cost. Therefore, the local private sector or commercial practices can be considered to be consistent with the World Bank's criteria with respect to economy and efficiency. The general rule in the sector is to procure the least cost goods and services consistent with minimum quality requirements. - 57 - 4. Procurement of Goods and Works: Based on the assessment above, procurement of goods and related services (installation and maintenance) financed under the proposed project will be according to the World Bank procurement guidelines for financial intermediation projects. For contracts below US$5.0 million equivalent, established local private sector commercial practices will be followed. Project sponsors would seek bids from a list of potential suppliers broad enough to ensure competitive prices. Care has to be taken of other relevant factors such as time of delivery, efficiency and reliability of the goods and availability of maintenance facilities and spare parts therefor, and in case of non-consultant services, of the quality and competence of the parties rendering them. Advertising in the local and international press will not be required. For contracts above US$3.0 million equivalent but less than US$5.0 million equivalent, more than one quotation must be obtained. However, International Competitive Bidding (ICB) would be required for individual contracts of US$5.0 million equivalent and above for goods and related services. All procurement of goods and related services under contracts equal to or above US$5.0 million equivalent will be subject to prior review. Civil works up to a threshold of US$300,000 equivalent would be procured under the World Bank's standard procurement procedures for minor works. For civil works estimated to cost US$300,000 equivalent or more but less than US$3.0 million equivalent per contract, National Competitive Bidding (NCB) procedures satisfactory to the World Bank would be used, and such contracts shall be subject to prior review by the World Bank. Procurement Rules for Institutional Development Technical Assistance to Turk Eximbank under Part B of the Project 5. Procurement of Consulting Services: All consulting services will be procured using the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" issued in January 1997, and revised in September 1997 and January 1999. Terms of Reference, letters of invitation, short lists and final award of contract for all consulting services valued at more than US$50,000 equivalent for firms and more than US$20,000 for individuals, and any single source consulting contracts will be subject to the World Bank's prior review and approval. Quality and Cost Based Selection (QCBS) methods will be used for all consulting services. 6 Procurement of IT Equipment and Related Services: All IT equipment and related services (telecommunication, cabling, etc.) procured under the Institutional Development technical assistance component of the project shall be procured in accordance with the provisions of the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the World Bank in January 1995 and revised in January and August 1996 and September 1997 (the Guidelines). Goods and services estimated to cost less than the equivalent of US$100,000 per contract may be procured under national shopping procedures, while contracts above US$100,000 equivalent but less than US$400,000 equivalent may be awarded on the basis of International Shopping procedures in accordance with the provisions of paragraphs 3.5 and 3.6 of the Guidelines. Goods and services which must be purchased from the original supplier to be compatible with existing equipment or are of a proprietary nature, may, with the World Bank's prior agreement, be procured under Direct Contracting procedures in accordance with the provisions of paragraph 3.7 of the Guidelines. All contracts of US$400,000 equivalent or more will be procured under contracts awarded in accordance with the provisions of Section II of the Guidelines and paragraph 5 of Appendix I thereto--International Competitive Bidding (ICB). 7. Procurement of Overseas Training: Turk Eximbank will arrange participation for its professional staff (currently numbering around 60) in overseas courses as well as on-the job training abroad, with course fees, accommodation and travel expenses to be financed by the World Bank loan. The procurement will take place in accordance with established commercial practices. 8 Procurement Planning: The proposed procurement plan for Part B of the Project--institutional development technical assistance to Turk Eximbank--is presented in Table 8.3 to this Annex. Procurement of all goods and services for Part B of the project shall be undertaken in accordance with this - 58 - plan. As the procurement by Turk Eximbank of IT goods and related services, and of overseas training for its staff should be aligned with Turk Eximbank's overall medium term strategic plan to be prepared with the assistance of consultants to be hired by Turk Eximbank for this purpose, the actual procurement activities in these categories may be subject to minor changes during project implementation. Table 8.1 Project Costs by Procurement Arrangements" (in US$) Expenditure Category Procurement Method Total Cost (Bank Financed) DC NS ISP ICB Minor Works NCB Commercial QCBS N.B.F Practice 1. Sub-loans - Goods and Services 20,000,000 220,000,000 240,000,000 Works 3,000,000 3,000,000 6,000,000 Sub-loans Total 20,000,000 3,000,000 3,000,000 220,000,000 246,000,000 (246,000,000) 2. Institutional Development Consulting Services 1,900,000 500,000 2,400,000 IT Goods 300,000 100,000 300,000 500,000 1,200,000 IT Related Services 50,000 250,000 300,000 Overseas Training 604,700 604,700 Institutional Development 300,000 150,000 550,000 500,000 604,700 1,900,000 500,000 4,504,700 Total (4,004,700) Total 300,000 150,000 550,000 20,500,000 3,000,000 3,000,000 220,604,700 1,900,000 500,000 250,504,700 (250,004,700) Figures in parenthesis are the amounts to be financed by the World Bank loan. While it is expected that both PFIs and sub-borrowers will contribute to the financing of individual sub-projects, the precise amount of such financing to be provided cannot be determined ex ante, as there are no predetermined PFI/sub-borrower cofinancing requirements. Instead, PFI maximum exposure to individual sub-borrower limits, debt equity and debt service coverage ratio requirements for sub-borrowers, and maximum sub-loan size will drive the amount of financing to be provided by these parties. Table 8.2: Thresholds for Procurement Methods and Prior Review (in US$ million) Expenditure Category Thresholds ICB ISP NS DC NCB Minor Commercial QCBS N.B.F Works Practice 1. Sub-loans Goods and Services >5.0 <5.012 Works <3.0 <0.3 Prior Review All All First two packages for each PFI 2. Institutional Development Consulting Services All N/A IT Goods 0.4 <0.4 <0.1 N/A Overseas Training All Prior Review All All All First two packages All 12 For contracts costing the equivalent of US$3.0 million or more, such commercial practices should include obtaining quotations from more than one supplier. - 61 - Table 8.3: Procurement Plan Procurement Plan: Institutional Development - Technical Assistance to Turk Eximbank 1 2 3 4 5 6. Estimated Dates Description Type Number of Estimated Procurement Pre- (BD/RFP) Bid Contract Contract items/sub- Cost method qualification/SL 1. Preparation 1. Invitation Signing Completion packages (US$) 1. Invitation GPN/SPN/Local GPN/SPN/Local 2. Opening 2. Opening 3. Evaluation & 3. Evaluation & Recommendation Recommendation Award INSTITUTIONAL CS 1 *1,900,000 QCBS 1999 1999 1999 1999-2001 DEVELOPMENT Sub Total 1,900,000 IT GOODS & SERVICES IT Equipment G 2 500,000 ICB 1999-2000 2000 2000 2000-2001 Software G 7 700,000 ISP/DC 1999-2001 1999-2001 1999-2001 2000-2002 Related services S 2 300,000 ISP 1999-2000 1999-2000 1999-2000 2001 Sub Total 1,500,000i OVERSEAS TRAINING Implementation Course fees S 60 300,000 CP Training Master Plan for 1999-2002 1999-2002 1999-2002 Travel/ S 60 304,700 CP Training Master Plan for 1999- 1999-2002 1999-2002 Accommodation 2002 Sub Total 604,700 TOTAL 4,004,700 * Turk Eximbank will provide staff and facilities to support the institutional development program. It is estimated that such support has a value of US$0.5 million. Disbursement Arrangements 9. The Disbursement Categories and Percentage of Expenditures to be financed, and projected disbursements are shown in Table 8.4 below. The total loan is expected to be disbursed over three years from the date of effectiveness, expected to be September 1, 1999. Commitments under the credit line, beyond the first US$100 million, will be subject to the World Bank having confirmed to Turk Eximbank its satisfaction with progress achieved by the Government in carrying out its financial sector reform program. - 62 - Table 8.4:: Allocation of Loan Proceeds (US$) Expenditure Category Amount of Financing Percentage Loan Allocated 1. Part A of the Project (Credit Line) (a) Sub-Loans--Goods and works 246,000,000 100 percent of foreign expenditures, 100 percent of local expenditures (ex-factory costs); and 85 percent of local costs for other items procured locally 2. Part B of the Project (Institutional Development Program for Turk Eximbank)) Consultants Services 1,900,000 100 percent Information Technology Equipment 1,500,000 100 percent of foreign expenditures, 100 percent of (Hardware and Software and local expenditures (ex-factory costs); and 85 installation) percent of local costs for other items procured locally Training 604,700 100 percent Total Part B 4,004,700 Front End Fee 2,525,300 100 percent TOTAL 252,530,000 Use of Statements of Expenditure (SOEs) 10. Under Part A of the project--the credit line--disbursements would be made against Statements of Expenditures for: (a) goods contracts costing less than US$1,000,000 equivalent each; and (b) works contracts costing less then US$300,000 each. Detailed documents evidencing these expenditures would be reviewed and retained by the PFIs and at Turk Eximbank and made available for the required audit as well as to World Bank supervision missions. Disbursements for the financing of goods and works contracts exceeding the above limits would be made on the basis of full documentation. Disbursement and procurement documents using SOE procedures would be retained by the PIU for a period of at least two years after disbursement and made available to World Bank staff and external auditors. 11. Under Part B of the project--Institutional Development Program for Turk Eximbank-- disbursements would be made against Statements of Expenditures for: (a) goods contracts costing less than US$200,000 equivalent each; (b) consulting services contracts for (i) individuals costing less than US$20,000 equivalent each; (ii) firms costing less than US$50,000 equivalent each; and (c) for all training expenditures of Turk Eximbank staff. Detailed documents evidencing these expenditures would be retained at Turk Eximbank and made available for the required audit as well as to World Bank supervision missions. Disbursements for the financing of goods and consulting services exceeding the above limits would be made against normal full documentation. Disbursement and procurement documents using SOE procedures would be retained by the PIU for a period of at least two years after disbursement and made available to World Bank staff and external auditors. - 63 - Special Accounts 12. To facilitate timely project implementation, Turk Eximbank would establish, maintain and operate, under terms and conditions satisfactory to the World Bank, a Special Account in US$ at a bank acceptable to the World Bank. Turk Eximbank has indicated it will open the Special Account with Citibank in New York. The Special Account would have an Authorized Allocation of up to US$10 million representing the expected advance payments on contracts during the peak quarter of expenditures if made exclusively through the Special Account. At the start of the project, the Special Account deposits would be limited to half of the Authorized Allocation (US$5.0 million), and the remaining portion of the Authorized Allocation would be disbursed upon Turk Eximbank's request when the aggregate amount of withdrawals from the Loan Account plus the total amount of all outstanding Special Commitments entered into by the World Bank shall be equal to or exceed the equivalent of US$30 million. Replenishment applications would be submitted at least every three months, and would include reconciled bank statements as well as other appropriate supporting documents. The minimum application size for payments directly from the Loan Account for issuance of Special Commitments is 20 percent of the Special Account authorized allocation. Project Financial Management and Audit 13. During appraisal, the procurement, disbursement and financial management arrangements for the EFIL, including the World Bank's financial management requirements, monitoring and reporting criteria, including financial reporting formats in conformity with LACI were explained to the Turk Eximbank PIU staff. The appraisal mission assessed the capabilities with respect to Turk Eximbank's financial management and reporting systems, including accounting, financial reporting, auditing, internal and other control procedures for the PIU managing and the World Bank's monitoring of project implementation. 14. Turk Eximbank's financial statements are prepared in accordance with local financial and accounting rules and regulations and guidelines of the bank regulatory agency, the Undersecretariat of the Treasury. Annual operational and investment budgets are prepared by Turk Eximbank management and approved by Turk Eximbank's Supervisory Council. Turk Eximbank's existing internal audit department reports directly to the General Manager of Turk Eximbank, is currently staffed with qualified audit professionals, and is capable to perform all basic audit tasks. In line with the proposed strategic plan development proposed under the institutional development component of EFIL, and the implications of that plan the existing internal audit function will be further upgraded and, where applicable, appropriate new manuals or manual sections completed (see Annex 5). Annual audits of the financial statements of Turk Eximbank are undertaken on an IAS basis using International Auditing Standards by a reputed international standard auditing firm. Turk Eximbank's current auditors are Deloitte & Touche's local office. 15. Although the technical capabilities exist within Turk Eximbank to maintain and prepare financial and accounting reports as required by the World Bank, the current accounting and reporting systems are geared towards producing statements and information as required by Turkish laws and regulations. In this context, separate project accounting and reporting modules have been designed and implemented to ensure adherence to accounting and auditing standards and reporting formats acceptable to the World Bank. During appraisal, the mission discussed and agreed with Turk Eximbank that financial management systems including project accounts in conformity with the World Bank's standards for project accounts and financial records for all project-related expenditures will be established. The mission also discussed the various applicable Project Management Report Formats with Turk Eximbank PIU staff. The Project Management Reports to be used include: (i) Summary of Sources and Uses of Funds; (ii) Uses of Funds by sub-loan maturity, sub-borrower and sub-project activity; (iii) Project Balance Sheet; (iv) Special Account statement; and (v) Cash Forecast. Turk Eximbank has agreed to - 64 - establish a Financial Management System (FMS) during project implementation, and will submit to the World Bank their initial output reports for the World Bank's review Once the FMS is established in accordance with the World Bank's standards for project accounts and financial records at Turk Eximbank and certified as acceptable to the World Bank, the project team will recommend that the LACI disbursement procedures be adopted under this project. 16. Audit: In order to ensure that the Special Account, project accounts and institutional accounts would be audited in accordance with the World Bank Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank, the appraisal mission discussed and agreed with Turk Eximbank that the auditors of Turk Eximbank's annual financial statements will also carry out the EFIL project audits. There are several international audit firms represented in Turkey, who are independent and competent to carry out the audits of project agencies in accordance with World Bank guidelines, and one of them would be selected to carry out the audits in accordance with Turkish law. Turk Eximbank would provide the World Bank within six months of the end of each fiscal year with a project audit report of such scope and detail as the World Bank may reasonably request, including a separate opinion by the independent auditor on disbursement against certified SOEs and Special Account and a full audit report on project accounts. The separate opinion should mention whether the SOEs submitted during the fiscal year, together with the procedures and internal control involved in their preparation, can be relied upon to support the related withdrawal applications. As Turk Eximbank has been engaging the services of international auditors for several years and undertakes annual contract negotiations, engagement of the auditor will not be a specific effectiveness condition. Timetable for establishment of FMS Action Date Accounting and reporting component of operations manual drafted July 25, 1999 Chart of accounts/reporting structure defined August 9, 1999 Draft terms of reference for engagement of auditor presented to World Bank October 23, 1999 - 65 - Annex 9 Export Finance Intermediation Loan Project Processing Budget and Schedule A. Project Budget (US$000) Planned Actual (At final PCD stage) B. Project Schedule Planned Actual (At final PCD stage) Time taken to prepare the project (months) First World Bank mission 12/19/1998 (identification/preparation) Pre-appraisal 02/08/1999 02/08/1999 Appraisal mission departure 04/12/1999 04/12/1999 Technical Discussions 05/10/1999 05/10/1999 Negotiations / /19 Board Date 07/06/1999 Planned Date of Effectiveness 09/01/1999 / /19 Prepared by: Turk Eximbank/World Bank Preparation assistance: The UnderSecretariat of the Treasury of Turkey, Central Bank of Turkey, Bankers Association World Bank staff who worked on the project included: Name Specialty Lalit Raina Team Leader, Senior Financial Sector Specialist Marie-Ren6e Bakker Senior Financial Sector Specialist Michael Gascoyne Financial Sector Specialist (FMS) Gurhan Ozdora Projects Officer Barbara Santos Senior Counsel Dilek Barlas Counsel Rohit R. Mehta Senior Disbursement Officer Ibrahim Sirer Procurement Accredited Staff Adriana Jordanova Damianova Environment Specialist Furuzan Bilir Operations Officer (environment) - 66 - Annex 10 Export Finance Intermediation Loan Documents in the Project File* A. Documents in the Project files include the following: * Law on transformation of the State Investment Bank into Turk Eximbank. * Articles of Association of Turk Eximbank. * 1998 and 1997 annual reports and audited (Deloitte & Touche) financial statements of Turk Eximbank. * Turk Eximbank publication: Profile of products and services. * Audited financial statements of potential participating commercial banks: * Sinai Yatirim Bankasi A.S.: 1997, 1996, 1995 (Price Waterhouse). * Turkiye Sinai Kalkinma Bankasi A.S.: 1998, 1997, 1996 (KPMG). * Yapi ve Kredi Bankasi A.S.: 1997, 1996 (Ernst & Young). * Other financial statements: * Sinai Yatirim Bankasi A.S: 1998 (unaudited). * Istanbul Stock Exchange Settlement and Custody Bank Inc. (Takas Bank); 1997, 1996 (Grant Thornton). * Garanti Bankasi A.S.: 1998, 1997 (unaudited) a Law on the Central Bank of the Republic of Turkey 1996. * Banks Act 1997. Paper published by the University of Ankara: Corporate Sector Behaviour under Uncertainty-The Case of Turkey in the 1990's. * Thompson Bank Watch: * Turkiye Sinai Kalkinma Bankasi A.S (8/1998). * Yapi ve Kredi Bankasi A.S (10/98) * Duff & Phelps: Yapi ve Kredi Bankasi A.S (1/98) * IBCA: Yapi ve Kredi Bankasi A.S (10/97) * Turkish Treasury Department: Foreign trade statistics (11/98) * Turkish Exporters' Association: Foreign trade statistics (1/99) *Including electronic files. Annex 11 Export Finance Intermediation Loan Status of Active Operations in Turkey IBRD Loans and IDA Credits in the Operations Portfolio Loan/ Financier Project Project Name Sector Currency Principal Undisbirsed Disbursed Approval Signed Date Effective Date Closing Date Credit ID Date 21143 EECT 38220 ISTANBUL ENVIRON. VX EUR 0.27 0 0.27 15-Jul-93 15-Jul-93 31-Dec-96 21146 EECT 38152 PATARA MANAGEMENT VX EUR 0.27 0 0.27 14-Jul-93 14-Jul-93 30-Sep-97 590 EXIM FINANCIAL SECTOR JPY 40,000.00 0 38,272.14 5-Sep-88 5-Sep-88 31-Dec-92 1540 EXIM ENERGY SECTOR JPY 54,375.00 0 37,725.75 22-Sep-87 22-Sep-87 3 1-Jan-94 ADJUSTMENT 3057A IBRD 9030 HEALTH I HX USD 26.77 3.22 23.55 11-May-89 16-Aug-90 17-Oct-90 31-Dec-98 3057S IBRD 9030 HEALTHI HX USD 29.48 0.1 29.39 11-May-89 16-Aug-90 17-Oct-90 31-Dec-98 3151A IBRD 9061 ANKARA SEWERAGE WX USD 25.13 3.18 21.96 21-Dec-89 16-Aug-90 23-Jan-91 28-Feb-99 3192A IBRD 9029 NATIONAL EDUCATION D EX USD 57.28 27.85 29.43 26-Apr-90 18-May-90 31-Jul-90 30-Jun-99 3192S IBRD 9029 NATIONAL EDUCATION D EX USD 17.88 0.22 17.66 26-Apr-90 18-May-90 31-Jul-90 30-Jun-99 3296A IBRD 9058 TECHNOLOGY DEVELOPME BX USD 42.3 3.78 38.52 28-Feb-91 5-Apr-91 6-Sep-91 31-Dec-98 3296S IBRD 9058 TECHNOLOGY DEVELOPME BX USD 49.37 0.01 49.36 28-Feb-91 5-Apr-91 6-Sep-91 31-Dec-98 33451 IBRD 9071 TEK RESTRUCT. PX USD 40 24.19 3.81 13-Jun-91 13-Sep-91 27-Apr-92 31-Dec-99 3345A IBRD 9071 TEK RESTRUCT. PX USD 69.88 25.68 44.2 13-Jun-91 13-Sep-91 27-Apr-92 31-Dec-99 3472A IBRD 9044 AGRIC. RESEARCH AX USD 34.7 14.94 19.76 21-May-92 12-Jun-92 16-Sep-92 31-Dec-99 3472S IBRD 9044 AGRIC. RESEARCH AX USD 14.3 0.16 14.14 21-May-92 12-Jun-92 16-Sep-92 31-Dec-99 3477A IBRD 9097 TA FOR TREASURY DATA BX USD 2.12 1.13 0.98 28-May-92 12-Jun-92 10-Sep-92 30-Jun-99 3511A IBRD 9099 EARTHQUAKE RECONSTRU UX USD 58.9 27.05 12.35 23-Jul-92 27-Jul-92 18-Sep-92 30-Jun-00 3541A IBRD 9064 EMPLOYMENT & TRAININ SX USD 48.82 37.2 11.62 10-Dec-92 1-Feb-93 26-May-93 31-Dec-00 3541S IBRD 9064 EMPLOYMENT & TRAININ SX USD 18.18 0.03 18.16 10-Dec-92 1-Feb-93 26-May-93 31-Dec-00 3565A IBRD 9065 BURSA WATER & SANITA WX USD 85.61 25.51 40.11 11-Mar-93 25-Mar-93 26-Aug-93 30-Jun-01 3565S IBRD 9065 BURSA WATER & SANITA WX USD 31.39 0.07 31.31 11-Mar-93 25-Mar-93 26-Aug-93 30-Jun-01 3566A IBRD 9065 BURSA WATER & SANITA WX USD 7.84 4.9 2.95 11-Mar-93 25-Mar-93 26-Aug-93 30-Jun-01 3567A IBRD 9023 E. ANATOLIA WATERSHE AX DEM 106.43 83.23 23.2 11-Mar-93 25-Mar-93 26-Jul-93 30-Sep-00 3728A IBRD 9102 PRIVATIZATION IMPLEM BX USD 82.81 11.86 10.12 3-May-94 5-May-94 28-Feb-95 30-Jun-99 3728S IBRD 9102 PRIVATIZATION IMPLEM BX USD 17.19 0.39 16.8 3-May-94 5-May-94 28-Feb-95 30-Jun-99 3802A IBRD 9076 HEALTH II HX DEM 231.97 188.43 43.54 22-Sep-94 28-Sep-94 31-Jan-95 31-Dec-01 38936 IBRD 9093 ANTALYA WATER SUPPLY WX USD 100 78.05 21.95 25-May-95 5-Jul-95 22-Dec-95 30-Jun-03 39420 IBRD 35759 PUBLIC FINAN MGT. BX USD 62 58.7 3.3 21-Sep-95 11-Oct-95 1-May-96 31-Dec-01 4048A IBRD 38091 ROAD IMPR. & SAFETY TX DEM 255.53 255.53 0 20-Jun-96 24-Jun-96 10-Oct-96 31-Mar-03 40490 IBRD 38091 ROAD IMPR. & SAFETY TX USD 100 20.77 79.23 20-Jun-96 24-Jun-96 10-Oct-96 31-Mar-03 40890 IBRD 45073 OIL PIPELINE ENG. GX USD 5 2.41 2.59 12-Sep-96 29-Sep-96 20-Mar-97 31-Mar-99 42010 IBRD 9095 PRIM HEALTH CARE SER H4X USD 14.5 0 0 24-Jun-97 22-Sep-97 18-Dec-97 30-Nov-00 42350 IBRD 9072 PRIV. OF IRRIGATION AX USD 20 18.49 1.51 14-Oct-97 28-Oct-97 24-Apr-98 31-Dec-02 43150 IBRD 8985 CESME W.S. & SEWER. WX USD 13.1 13 0.1 14-Apr-98 8-May-98 7-Sep-98 31-Dec-03 43440 IBRD 48852 NAT'L. TRNSM. GRID PX USD 270 269.75 0.25 11-Jun-98 25-Jun-98 17-Sep-98 31-Dec-03 43550 IBRD 9089 BASIC ED I EX USD 300 296 4 23-Jun-98 25-Jun-98 12-Aug-98 30-Jun-01 43760 IBRD 48851 COMMODITIES.MKT.DEV. AX USD 4 3.9 0.1 16-Jul-98 31-Jul-98 26-Feb-99 30-Sep-01 43880 IBRD 58877 EMGY FLOOD RECOVERY WX USD 369 322.78 46.22 10-Sep-98 11-Sep-98 13-Oct-98 30-Jun-02 P0630 IBRD *DUMMY FOR * TURKEY USD 1 0 1 27-Apr-83 27-Apr-83 27-Apr-83 31-Dec-85 P3500 IBRD 9073 INDUSTRIAL TECH IX USD 2.5 2 0.5 30-Jul-98 28-Aug-98 8-Sep-98 31-Oct-99 930 IFAD ERZURUM RURAL DEVELOPMENT XDR 17.2 0 13.08 3-Aug-82 1-Nov-82 30-Jun-89 1410 IFAD 8951 AGR.EXTN.& APPLD.RESRCH. AX XDR 9.7 0 6.32 16-May-84 14-Aug-84 30-Jun-94 20465 JPN 9065 BURSA WATER & SANITA WX JPY 202.5 0 202.19 3-Sep-91 3-Sep-91 31-Dec-92 20475 JPN 9019 BERKE HYDRO PLANT PX JPY 117.4 0 39.79 11-Dec-91 1 1-Dec-91 30-Jun-95 20485 JPN 9077 COAL POLLUTION ABATE PX JPY 108 13.8 94.2 28-May-92 28-May-92 31-Dec-99 21388 JPN 9093 ANTALYA WATER SUPPLY WX JPY 310.5 0 310.28 16-Mar-92 16-Mar-92 31-Dec-96 21986 JPN 9098 ISTANBUL WAT.SUPPLY WX JPY 250 0 250 25-Mar-93 25-Mar-93 30-Jun-94 22597 JPN 9102 PRIVATIZATION IMPLEM BX JPY 106 0 98.84 3-May-94 3-May-94 31-Dec-95 22598 JPN 9073 INDUSTRIAL TECH IX JPY 32.4 3.32 29.08 11-Jul-95 11-Jul-95 31-Dec-98 1 00 22599 JPN 35769 ZONGULDAK REGIONAL D UX JPY 106 0 106 3-Apr-94 3-Apr-94 30-Sep-97 23064 JPN 9101 MICROENTERPRISES IX JPY 40.9 0 21.91 16-Nov-93 16-Nov-93 31-Dec-96 23065 JPN 9095 PRIM HEALTH CARE SER HX JPY 122.3 0 98.91 16-Aug-93 16-Aug-93 31-Dec-95 25558 JPN 48851 COMMODITIES.MKT.DEV. AX USD 0.4 0.17 0.23 2-Feb-98 2-Feb-98 2-Feb-98 30-Apr-99 25800 JPN AGRICULTURAL RESOURCE SURVEY JPY 45 0 45 17-Jul-91 17-Jul-91 31-Dec-92 26610 JPN 8985 CESME W.S. & SEWER. WX JPY 607.5 44.59 562.91 7-Nov-89 7-Nov-89 31-Dec-98 27110 JPN 9056 AGROINDUSTRY AX JPY 582.5 0 571.92 26-Jul-90 26-Jul-90 31-Oct-97 27133 JPN 8961 DR.& ON-FARM DEV. AX USD 0.3 0.17 0.13 3-Oct-97 3-Oct-97 3-Oct-97 30-Jun-99 27134 JPN 43388 S.EREGION URBAN SAN UX USD 0.39 0.08 0.31 26-Sep-97 26-Sep-97 26-Sep-97 30-Jun-99 27320 JPN 37959 PUB. SECTOR ADJ. LN. BX JPY 60.5 0 49.06 26-Jul-90 26-Jul-90 30-Jun-93 27690 JPN 9058 TECHNOLOGY DEVELOPME BX JPY 87.7 0 87.7 26-Jul-90 26-Jul-90 30-Jun-97 27700 JPN 9071 TEK RESTRUCT. PX JPY 290 0 52.55 28-Aug-92 28-Aug-92 30-Jun-96 29113 JPN 9070 LOW INCOME HOUSING UX JPY 79.5 7.24 72.26 3-Apr-95 6-Apr-95 30-Jun-99 29114 JPN 9074 TRANSPORT TX JPY 106 0 106 22-Mar-95 22-Mar-95 31-Dec-96 29482 JPN 53253 CAPA.BUILD.POV. MON. SX USD 0.5 0.39 0.11 9-Jul-96 9-Jul-96 9-Jul-96 31-Dec-98 29483 JPN 43365 BURSA URBAN TRANSP. TX USD 0.86 0 0.86 30-May-96 30-May-96 30-May-96 30-Jun-98 29666 JPN 45362 ANKARA URBAN TRANSPO TX USD 0.69 0 0.69 10-Jan-97 10-Jan-97 10-Jan-97 31-Aug-98 29667 JPN 48852 NAT'L. TRNSM. GRID PX USD 0.76 0.11 0.65 13-May-97 13-May-97 13-May-97 31-Jul-99 29051 MULT 44175 BIODIVERSITY VX USD 0.35 0.07 0.28 24-Oct-97 24-Oct-97 24-Oct-97 31-Dec-98 2980 SWTZ 8951 AGR.EXTN.& APPLD.RESRCH. AX USD 6 0 4.58 4-Dec-92 18-Jan-93 30-Jun-95 3000 SWTZ 9051 STATE AND PROVINCIAL TX USD 15 0.01 14.99 26-Jun-92 26-Jun-92 30-Jun-97 21934 WBTF 8871 PHASING OUT OZONE DE VX USD 6.17 0.07 6.1 24-Jan-94 4-Apr-94 31-Dec-99 21942 WBTF 38404 ODS PHASEOUT II VX USD 14 8.63 5.37 6-Nov-95 6-Nov-95 11-Dec-95 30-Jun-99 28550 WBTF IDF-TURKEY PARTICIPATORY ENV. USD 0.39 0.03 0.36 20-Jul-95 20-Jul-95 12-May-98 28632 WBTF 8869 IN SITU GENE CONSERV VX XDR 3.71 0.11 3.6 19-Feb-93 25-Mar-93 25-Mar-93 30-Sep-98  71 Annex 12 Export Finance Intermediation Loan Country at a Glance Europe & Upper- POVERTY and SOCIAl. Cental middle- Turkey Asia Income Development diamond 1997 Population, mid-year (millions) 63.7 474 574 Life expectancy GNP per capita (Atlas methodt USS) 3,130 2.310 4,540 GNP (Atlas method, USS billions) 199.5 1.096 2,608 Average annual growth. 1991-97 Population (%) 1.8 0.2 1.5 Labor force(%) 2.9 0.5 2.1 GNP Gross per - primary Most recent estimate (latest year available, 1991.97) capita enrollment Poverty (% of population below national poverty line) .. .. Urban population (% of total population) 72 67 74 Life expectancy at birth (years) 69 69 70 Infant mortality (per 1,000 live births) 40 23 30 Child malnutrition (% of children under 5) 10 .. .. Access to safe water Access to safe water (% of population) 92 .. 78 Illiteracy (% of population age 15+) 17 4 12 Gross primary enrollment (% of school-age population) 105 100 111 - Turkey Male 107 101 . Upper-middle-income group Female 102 99 . KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1976 1986 1996 1997 Economic ratios* GDP (USS billions) 53.4 75.7 181.7 190.7 Gross domestic investment/GDP 19.5 18.8 24.6 25.1 Exports of goods and services/GDP 4.7 13.3 21.5 24.6 Trade Gross domestic savings/GDP 13.9 16.1 18.8 19.3 Gross national savings/GDP 17.3 18.8 22.4 23.8 Current account balance/GDP -3.8 -1.9 -2.6 -2.4 Interest payments/GDP 0.3 2.0 1.9 1.5 Investment Total debt/GDP 11.2 43.5 45.0 47.8 Savings Total debt servicelexports 16.8 34.8 23.3 19.1 Present value of debtfGOP .. .. .. 43.1 Present value of debtlexports .. .. .. 146.6 Indebtedness 1976-86 1987-97 1996 1997 1998-02 (average annual growth) GDP 3.2 4.0 6.8 7.7 4.3 - Turkey GNP per capita 0.6 2.4 5.3 6.9 2.2 -- Upper-middle-income group Exports of goods and services .. 9.4 21.7 19.1 5.5 STRUCTURE of the ECONOMY (% of GOP) 1976 1986 1996 1997 f Growth rates of output and investment (%) Agriculture 32.9 20.3 17.4 15.1 Industry 21.7 31.0 27.9 28.2 2 Manufacturing 14.0 20.6 18.0 18.3 oL- - Services 45.3 48.8 54.7 56.7 -r 22 9s s Private consumption 75.1 78.4 69.8 68.4 .4o General govemment consumption 11.0 7.6 11.6 12.3 -GD -+-GDP Imports of goods and services 10.2 16.1 27.5 30.4 1976-86 1987-97 1996 1997 Growth rates of exports and Imports (%) (average annual growth) Agriculture 0.7 1.2 4.8 -2.2 40 Industry 4.0 5.0 6.4 9.2 20 Manufacturing 4.4 6.8 6.4 - 11.2 Services 3.7 4.0 7.2 6.9 o Private consumption .. 4.5 9.3 10.9 -s 2 93 9 5 97 General govemment consumption .. 3.2 5.4 4.1 . Gross domestic investment .. 4.8 0.2 5.8 -401 Imports of goods and services .. 10.9 19.0 22.4 - Exports --*,-Imports Gross national product 3.0 4.2 6.9 . 8.6 Note: 1997 data are preliminary estimates. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 72 PRICES and GOVERNMENT FINANCE Domestic prkes 1976 1986 1996 1997 (% change) Consumer prices .. .. 78.8 85.6 co Implicit GDP deflator 14.6 35.4 78.3 81.2 Government finance (% of GDP, inchdes current grants) 0 Current revenue .. .. 22.0 23.4 92 93 94 96 96 97 Current budget balance .. .. -2.5 -0.8 - GDP deflator -a--CP Overall surplus/deficit .. .. -9.0 -8.7 TRADE (US$ -Mons) 1976 1986 1996 1997 Export and Import levels (US$ millions) Total exports (fob) 1,960 7.583 23,546 26,782 o.000 Textiles 323 2,094 8,570 9,969 sooo Processed agricultural products 1.072 1,626 3,687 4,365 40000 Manufactures 109 241 224 404 Total imports (cif) 5,129 11,105 42,934 48,585 30 Food 115 452 2,531 2,425 20 Fuel and energy 1,192 2,338 6,089 6,267 10 Capital goods 1,955 3,964 14.969 18,451 0 Export price index (1995=100) 43 75 95 90 9 2 9 4 9 8 9 Import price index (1995=100) .. .. 100 91 0 Exports cimports Terms of trade (1995=100) .. .. 94 98 BALANCE of PAYMENTS (LS$ millions) 1976 1986 1996 1997 Current account balance to GOP ratio (%) Exports of goods and services 2,541 10,580 40,529 47,576 4 Imports of goods and services 5,473 12,176 48,782 56,511 Resource balance -2,932 -1,596 -8,253 -8,935 2 Net income -216 -1,793 -960 -558 Net current transfers 1,120 1,924 4,447 4,866 0 91 93 4 9 6 Current account balance -2,028 -1,465 -4,766 -4,627 Financing items (net) 1,831 2,255 9,311 7,971 Changes in net reserves 197 -790 -4,545 -3,344 . Memo: Reserves including gold (US$ millions) .. 4,424 25,008 27,168 Conversion rate (DEC, locaVUS$) 16.1 674.5 81,307.4 151,239 EXTERNAL DEBT and RESOURCE FLOWS 1976 1986 1996 1997 (US$ millions) Composition of total debt, 1997 (USS millions) Total debt outstanding and disbursed 6,001 32,934 81,822 91,205 IBRD 391 4,662 4,260 3,587 A: 3,7 B: 118 IDA 163 174 124 118 C.594 D 2,940 Total debt service 590 4,473 11,095 10,716 G: 22,634 E: 7,138 IBRD 43 589 1,154 965 IDA 2 5 7 7 Composition of net resource flows Official grants 7 151 555 314 Official creditors 263 628 -841 -64 Private creditors 262 1,198 6,454 10,840 Foreign direct investment 10 125 612 554 Portfolio equity -23 151 -983 -391 F: 54,194 World Bank program Commitments 237 1.277 255 35 A - IBRO E - Bilateral Disbursements 138 636 489 266 B - IDA D - Other multilateral F - Private Principal repayments 15 239 821 698 C - IMF G - Short-term Net flows 123 397 -332 -432 Interest payments 31 355 340 274 Net transfers 93 42 -672 -706 MAP SECTION s IBRD 24903R , - - . ,-F TURKEY - . -- - --'i, r Ti -i -6 ,1|~ ·^ -F i _ - T i 1- . - IC . i _ D 11i-- Cii 1 ~ I C-vi - ---. -- Il lil--I i-TIi_. 1 - t 1¯' '.11 lI-¯ - 1¯. -- --. - ~_lPFur. - MARCH 1994