Turkey - Commodities Market Development Project

Document of The World Bank Report No: 26836 IMPLEMENTATION COMPLETION REPORT (SCL-43760 TF-25558) ON A LOAN IN THE AMOUNT OF US$4.0 MILLION TO THE REPUBLIC OF TURKEY FOR A TURKEY COMMODITIES MARKET DEVELOPMENT PROJECT November 26, 2003 Environmentally and Socially Sustainable Development Unit Turkey Country Unit Europe and Central Asia Region  CURRENCY EQUIVALENTS (Exchange Rate Effective November 25, 2003) Currency Unit = Turkish Lira TL 1 = US$ 0.0000006705 US$ 1 = TL 1,491, 426 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS ARIP -- Agricultural Reform Implementation Project ASCU -- Agricultural Sales Cooperative Union CAS -- Country Assistance Strategy CMDP -- Commodities Market Development Project DIS -- Direct Income Support ICR -- Implementation Completion Report IT -- Information Technology LIBOR -- London Inter-Bank Overnight Rate LIL -- Learning and Innovation Loan MIT -- Ministry of Industry and Trade MOF -- Ministry of Finance PHRD -- Policy and Human Resources Development PIU -- Project Implementation Unit QAG -- Quality Assurance Group RM -- Resident Mission SEE -- State Economic Enterprise SEMOR -- Seminar Organization, Consultancy, and Travel Co. TA -- Technical Assistance TMO -- Turkish Grain Board TOBB -- Turkish Union of Chambers of Commerce and Commodity Exchanges WRS -- Warehouse Receipt System Vice President: Shigeo Katsu Country Director: Andrew N. Vorkink Sector Manager: Joseph R. Goldberg Team Leader: Mark R. Lundell  TURKEY COMMODITIES MARKET DEVELOPMENT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 3 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 14 6. Sustainability 15 7. Bank and Borrower Performance 15 8. Lessons Learned 17 9. Partner Comments 18 10. Additional Information 22 Annex 1. Key Performance Indicators/Log Frame Matrix 23 Annex 2. Project Costs and Financing 24 Annex 3. Economic Costs and Benefits 26 Annex 4. Bank Inputs 27 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 29 Annex 6. Ratings of Bank and Borrower Performance 30 Annex 7. List of Supporting Documents 31  Project ID: P048851 Project Name: TURKEY COMMODITIES MARKET DEVELOPMENT PROJECT Team Leader: Mark R. Lundell TL Unit: ECSSD ICR Type: Core ICR Report Date: November 26, 2003 1. Project Data Name: TURKEY COMMODITIES MARKET L/C/TF Number: SCL-43760; TF-25558 DEVELOPMENT PROJECT Country/Department: TURKEY Region: Europe and Central Asia Region Sector/subsector: Agricultural marketing and trade (75%); Central government administration (25%) Theme: Rural markets (P); Rural policies and institutions (P); Infrastructure services for private sector development (P); Legal institutions for a market economy (S) KEY DATES Original Revised/Actual PCD: 12/15/1997 Effective: 09/30/1998 02/26/1999 Appraisal: 02/23/1998 MTR: 12/31/1999 01/31/2002 Approval: 07/16/1998 Closing: 03/31/2001 03/30/2003 Borrower/Implementing Agency: GOVERNMENT OF TURKEY/MINISTRY OF TRADE AND INDUSTRY Other Partners: STAFF Current At Appraisal Vice President: Shigeo Katsu Johannes Linn Country Director: Andrew N. Vorkink Ajay Chhibber Sector Manager: Joseph R. Goldberg Joseph R. Goldberg Team Leader at ICR: Mark R. Lundell Severin L. Kodderitzsch ICR Primary Author: Mark R. Lundell 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: M Bank Performance: S Borrower Performance: U QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes  Introduction During the period 1975-99, Turkish agriculture grew at one-third the rate of the overall economy, with a major reason being the unfavorable effects of government intervention in the sector. An important mechanism of state intervention was direct price support through procurement of key crops by State Economic Enterprises (SEEs). In addition to reducing the efficiency of agricultural production, intervention also added to the country's fiscal deficit; price support levels were set by the Council of Ministers, with the government providing intervention agencies with financing, and losses met by the Treasury. One reason for the government's reluctance to disengage from direct price support through public procurement has been the perception that the private sector was not able to accomplish a broad range of crop marketing functions, in particular the role played by commodity exchanges. This perception was increased by the underdeveloped state of the country's commodity exchanges, with most providing only basic services. In the last few years, the government has committed to a broad program of reducing its intervention in the agricultural sector. Under the Bank's Agricultural Reform Implementation Project (ARIP), approved in July, 2001, the government agreed to reduce grain purchases by TMO, the Turkish Grain Board, and in fact has done so. Additionally, Agricultural Sales Cooperative Unions (ASCUs), the principal agencies 1 supporting a number of commodities' prices, have been cut off from budgetary subsidies and are being restructured. The Government has also drastically reduced other credit and input subsidies and moved to a system of targeted income transfers, known as the Direct Income Support (DIS) Program. By strengthening commodity exchanges, the Commodities Market Development Project (CMDP) was intended to increase efficiency in commodity markets and facilitate productivity enhancements targeted by the overall reform program. _____________________________________________________ 1 TMO purchases have been falling since 1998. In 1998 TMO purchased 5.2 million tons of grain (26% of the country's total production); in 1999, 4.2 million tons (23%); in 2000, 3 million tons (17%); in 2001, 1.5 million tons (10%); and in 2002, around 0.8 million tons (5%). - 2 -  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The overall objective of strengthening commodity-based infrastructure was to increase marketing efficiency, and thereby assist government to disengage from its broad intervention policy. Specific project objectives include: (a) increase the marketing efficiency of grains and cotton (Turkey's most important commodities) through selected commodity exchanges by introducing improved systems of price discovery, dematerialized trade, and regulatory oversight; (b) demonstrate the benefits of increased private commodity marketing; and (c) provide a model for development of other private exchanges, and impetus for government to withdraw from its intervention in the marketing of other commodities. 3.2 Revised Objective: The objectives were not revised. 3.3 Original Components: l Modernization Support to Commodity Exchanges to facilitate financing, on a cost-recovery basis, at selected exchanges. Investment could be for: (a) training and technical assistance; (b) laboratory and information technology (IT) equipment, weighbridges; (c) civil works for trading floors and storage facilities. There are around 110 commodity exchanges in Turkey; most are rudimentary "registration points," where commodities are traded and taxes paid. Around seven or eight exchanges serve the function of "price discovery," and it was these exchanges that were considered as potential participants in the project. The exchanges included in the project are private entities, owned by their members, and are self-supporting and generally profitable (see Tables 2 and 3). Their income derives mainly from a fee of 0.1% to 0.3% of the value of the commodities traded. l Development of Trading Institutions and Strengthening of Oversight Capabilities: (a) Introduce nationally accepted and internationally compatible quality grades (standards) for wheat and cotton; (b) revise regulations and initiate implementation of a Warehouse Receipt System (WRS, see below); (c) improve market surveillance and supervision of commodity exchanges; (d) assist in the establishment of a communications network linking commodity exchanges. (A WRS permits producers to store their 2 commodities in warehouses, and in turn receive receipts stating the value of the goods, which can then be used as collateral for commercial loans. Warehouses guarantee that the commodity will be stored in a manner that will maintain the quality at which it was received. This allows producers and processors more flexibility in choosing when to buy and sell, potentially permitting them to obtain better prices) l Project Impact Evaluation: Ongoing assessment to track key performance indicators and report at 3 points, with baseline, mid-term, and final reports. __________________________ 2 While it was initially envisioned that a communications network between exchanges would be required, as participating exchanges increasingly began to use the internet for information dissemination it became evident that a separate network would not be needed. - 3 -  Project preparation and start-up were supported by a PHRD Grant of US$350,000. This grant was used to fund an initial foreign study tour by exchange staff, design a common IT protocol for use by exchanges, 3 initiate development of modernized cotton and grain standards, initiate the process of formulating legislation and regulations for a WRS, and train PIU staff. 3.4 Revised Components: The components were not revised. 3.5 Quality at Entry: Quality at Entry is considered satisfactory: Consistency with Country Strategy: The September 1997 CAS discussed the reform of economic management as a priority, and within that area stressed: (a) privatization or closure of state-owned enterprises; (b) restoring financial viability to the social security system; (c) reducing the fiscal cost and distortionary impact of agricultural subsidies; (d) improving public financial management; (e) strengthening the banking system. The CMDP principally addresses CAS goal (c), but also addresses (a) insofar as strengthening private exchanges facilitates the government's efforts to restructure and eliminate government support of the ASCUs and reduce the activity of TMO. The central theme of the CAS relating to Bank agricultural assistance was poverty reduction and social development: to help raise the productivity, incomes, and living standards of small farmers in poor areas. The CMDP was explicitly described as an element of the Bank's support of the rural sector (although in the CAS it was not considered as a Learning and Innovation Loan, or LIL). Approach and Design Appropriateness: The design of the CMDP is considered highly appropriate. Because of the country's previous setbacks in implementing agricultural reforms, the CAS provided for (1) lending to small operations with a direct impact on rural poverty and in subsectors where the policy environment was sufficiently supportive; and (2) carrying out technical and advisory work to demonstrate the costs of the counterproductive policies and to help the government find acceptable solutions. While the CMDP was originally discussed in the mid-1990s as an investment project (US$100 million was discussed), in light of the slow pace of policy developments up to 1999, the CMDP was implemented as a LIL with an envisioned Bank contribution of US$4 million. This minimized costs and risks to the Borrower, while maintaining Bank involvement in an important institutional area. Government Ownership: Government ownership was substantial. At the time of project identification, given the inefficiencies and high cost of intervention, the Government signaled its intention to reduce support of agricultural prices (and in fact has done this). The Government further suggested that the benefits of CMDP as a LIL could have a positive demonstration effect on the reform process. __________________________ 3 Later study tours of foreign exchanges were funded by the project's TA component. - 4 -  Involvement of Stakeholders and Beneficiaries: Stakeholder involvement was high. As part of work done in support of the larger investment loan that had been considered earlier, there were extensive consultations with a number of exchanges discussing the types of equipment and technical assistance they would need to strengthen their operations. In 1997 and 1998, exchanges interested in becoming involved in the project participated in several workshops in Ankara at which their preliminary investment plans were reviewed. Although of course the scope of the CMDP was much smaller, these discussions established relationships and an agenda for the new project. Institutional Analysis: Institutional analysis was deficient. As explained further in the next paragraph and section 7.6, a lack of familiarity with Bank procedures hindered initial project progress. Readiness for Implementation: Readiness for implementation was deficient, and project start-up encountered significant delays. While the project was approved in July 1998, it became effective in February 1999, and the PIU was established only in February 2000. Neither of the two main participating agencies, MIT and TOBB, had had any prior experience with Bank projects, which led to delays as they learned Bank procurement and financial reporting practices. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Overall, the achievement of CMDP objectives was marginally satisfactory. While there were a number of shortcomings, this ICR argues that most major relevant objectives were achieved, and that the magnitude of the benefits outweighed the shortcomings. In particular, considerable benefit was achieved for a relatively small investment. Further, as a LIL, the CMDP achieved a substantial demonstration effect that will benefit future development of Turkish commodity exchanges and facilitate agricultural reforms. To understand the satisfactory rating, for a project which disbursed only a third of its loan funds, one must first understand that prior to the CMDP there were no scientifically based standards for grading wheat and cotton in Turkey, no automated wheat sampling techniques as those instituted at CMDP participating exchanges, and no trading of wheat on other than the basis of physical handling (and in particular, tasting) by traders. Currently, modern trading of wheat and cotton in this major agricultural country is largely a product of this small project. The CMDP was successful in providing to participating exchanges a sophisticated vision of how a modern commodity exchange functions. The exchanges then used this vision as a guide to the expansion of their physical facilities and activities. Without the CMDP, this alternative vision of commodity exchange functions would unlikely not have been implemented, and in any case, such a development would have happened much later. Overall, the expanded knowledge of the participants was of much greater value than the physical investments made with Bank funds. This is illustrated by the actions of Edirne, which invested a total of US$220,000 of Bank funds (section 4.2), but which then invested a further US$2 million of its own funds in new laboratory space, a trading floor, and other facilities in accordance with the more sophisticated concept of exchange operations they acquired. With regard to the example of an expanded vision of commodity exchange operations, executives of several exchanges noted the model of the Memphis Cotton Exchange (which officials visited), with its structure of a central exchange with decentralized collection points co-located with laboratories, weighbridges, and licensed storage facilities--all linked by an automated data system to a trading floor, and with trading data disseminated in near-real time by a variety of means. While the Turkish exchanges have not yet been able - 5 -  to implement all parts of this model, several have made impressive progress during the CMDP. 4 Importantly, due to the progress made by the exchanges that participated in the CMDP, additional exchanges have become interested in how they can upgrade their operations. Objective (a): Increase marketing efficiency of grains and cotton through selected commodity exchanges by introducing improved systems of price discovery, dematerialized trade, and regulatory oversight. l Market efficiency and price convergence: As part of the project impact evaluation (Component 3), an econometric study was performed using three years of daily price data for the three exchanges involved in wheat trading. 5 Dividing the exchanges into three pairs, it was determined that it can be expected that prices will converge, over time, for two pairs of exchanges at the 99% confidence interval, and for the third pair, at the 95% confidence interval. Convergence connotes greater market efficiency, but does not imply that prices will reach the same level, only that they will fluctuate in parallel, reflecting, e.g., geographic location. However, the study determined that no convergence was likely between Turkish exchanges and major foreign exchanges, apparently reflecting government intervention in the market (at least in the historical data that were analyzed). l Increased customer satisfaction: As described in Table 1 below, surveys of exchange customers show that from 2000 to 2003, the proportion of customers increased that was satisfied with the accuracy of price information determined at the exchanges and with the efficiency of transmitting price information. During the same interval, an increased proportion of customers also reported that product weights were accurate and that off-exchange price information was available when needed. In contrast, the percentage of customers reporting that they could receive better prices away from the exchange decreased substantially. l Perceptions of increased efficiency: Both buyers and sellers at the Polatli exchange report that the process is more efficient than it was earlier. Because the process has been automated, the "throughput" of vehicles and the processing of wheat is faster than it was earlier. Traders report that they spend less time per transaction, and because they have greater knowledge of the characteristics of each grain lot (due to uniform standards) have more confidence in the specific product they are trading. Polatli executives report that, as a result of the "vision" conveyed to them by the CMDP, using their own funds they are now working with a number of highly knowledgeable IT consultants to develop the infrastructure for futures and forward trading in the expectation that an adequate legal framework for these will be in place in the near future. l Uniform national standards for wheat and cotton: As described in detail below (Component 2), quality standards for both grain and cotton were developed and promulgated under the project, and they now comprise accepted national standards for these crops. This was a major step forward in facilitating trading and enhancing market efficiency for these commodities, and is a major benefit produced by the CMDP. ________________________ 4 Some of the progress made resulted from the exchanges investing their own funds to upgrade their facilities in accordance with the vision they developed during the project. 5 This test used the Hodrick-Prescott filter methodology. - 6 -  The goals of trading "dematerialized" commodities and improving government capacity for regulatory oversight of commodity exchanges were not entirely achieved. Due to a dispute between the Ministry of Industry and Trade (MIT) and the TA contractor for Component 2, the pilot implementation for dematerialized trading and some of the legal studies were not completed. However, other studies and contract deliverables, including the training of government staff, were completed and led to improved government capacity for regulatory oversight of commodity exchanges and licensed warehouses. As described below under Component 2, working groups were established and, with the contractor's assistance, developed draft laws on Commodity Exchanges and on a WRS. At the time of ICR preparation, this legislation is being reviewed by the Prime Ministry prior to being introduced in the Parliament. Although the CMDP exchanges are taking tangible steps to prepare for dematerialized trade and to utilize decentralized collection points, without the cognizant legal framework in place it is not yet possible to "initiate implementation" of a WRS as envisioned in the project documents. Objective (b): Demonstrate the benefits of increased private commodity marketing. Customer Satisfaction: Enhanced customer satisfaction is a key benefit that can be provided by improved private commodity marketing. Component 3 provided for project evaluation using surveys of exchange customers. Three surveys were conducted: in 2000, 2002, and 2003, involving from 122 to 256 respondents who were customers of exchanges that were participating, or expected to participate, in the project (a 5% random sample of all customers). On the basis of these surveys, it is evident that customer satisfaction with participating exchanges increased during the period of the CMDP. As shown in Table 1, below, customers reported that, from 2000 to 2003: l the accuracy of price information determined at the exchanges improved l hygienic conditions at exchanges improved l participant satisfaction with the exchanges improved l trust in exchange operations increased l off-exchange utilization of prices discovered at the exchanges increased l wheat price information became easier to evaluate as the use of a reliable standard for grading became more widespread - 7 -  Table 1: Customer Satisfaction with Exchange Performance, 2000, 2002, and 2003 (percent of respondents agreeing) (percent of respondents agreeing) 2000 2002 2003 1. Price information was available when needed 79 81 87 2. Price information was accurately reported 81 88 88 3. Exchange Prices accurately reflect value of their 57 81 89 product 4. Off-exchange price information was available when 69 87 84 needed 5. Price information is easier to evaluate if products are 80 87 93 graded using a reliable standard 6. Exchange provided regular data on country-wide prices 67 89 94 7. Products were accurately weighed at the exchange 86 94 96 8. Buyers and seller are treated fairly at the exchange 81 82 81 9. Exchange fees were too high 51 47 31 10. Respondents can receive better price away from the 57 37 19 exchange 11. Warehouses were clean and free of insects and 61 64 65 rodents 12. Respondents who reported using prices reported at 60 76 81 exchange for off-exchange transactions Source: SEMOR and Oklahoma State University, Final Wheat Report, May 2003. More Effective Dissemination of Information: The transparency of grain trading in Turkey has increased considerably over the term of the CMDP. As discussed in detail below under Component 1, participating exchanges have greatly improved the dissemination of information on trades completed at their exchanges. Using the internet, telephone "hot lines," and more traditional newspaper, television, and mail, in large measure as a result of CMDP the four exchanges improved their dissemination of price, quantity, and other data on trades at their own exchanges, and, in some cases trades at every other major grain exchange in Turkey. Data on Turkish wheat prices from the Polatli exchange are distributed internationally by Reuters. It should be noted that there has been a relatively short time in which the benefits of the CMDP could be manifested, and then observed by others. Officials of the Konya exchange, among others, observed that the results "are just beginning to show," and that the demonstration effect of the improvements will be amplified over time. Objective (c): Provide a model for development of other private exchanges, and impetus for government to withdraw from its intervention in the marketing of other commodities. l As noted earlier, Government is gradually withdrawing from intervention in commodity markets; from 1998 to 2002 TMO grain purchases fell from 26% of the country's production to 5%. There are many factors motivating these actions, but among them is certainly the enhanced capability and efficiency of the country's private commodity exchanges. l In 2000, the Polatli exchange drew grain lots from 10-12 provinces before restructuring their operations and upgrading their systems. Currently, with the new system operational for a year, management estimates that it is drawing product from a 300-km radius, comprising 60 provinces. This - 8 -  success has provided an impetus for exchanges which are "losing" market share to upgrade their facilities and processes. l The Konya Exchange -- the largest for grain in the country -- made initial plans to invest under the project, but delayed implementing these plans. After seeing the success that the Polatli and Edirne exchanges achieved after upgrading their IT infrastructure and other facilities, in 2002 Konya elected to make the investments it had been contemplating. l The Gaziantep Exchange (multi-commodity) was not at first considered for inclusion in the project. However, when it saw the benefits that the other exchanges were realizing, Gaziantep requested to be included, a request approved by the Bank and the Borrower, and a Loan Agreement and investment plan were submitted in November 2002. According to Gaziantep officials, what most attracted them was the ability to upgrade their IT, laboratory, and other infrastructure so that they could engage in futures and forward trading when the regulatory environment permits. l Executives of participating exchanges have developed business plans, and in some cases have made physical investments (e.g., in storage facilities), in anticipation of the passage of legislation that will permit trading of dematerialized commodities. l The Edirne Exchange reports that executives of 6 other Turkish exchanges (Antalya, Denizli, Canakkale, Nevsehir, Karacabey, Bandirma) have visited its new facility and have been provided with documents and plans (e.g., floorplans, schematics, IT system specifications) on its operations. A number of these exchanges are reported to be seeking funding to upgrade their operations. 4.2 Outputs by components: 1. Modernization Support to Commodity Exchanges As shown below in Table 2, based on expressions of interest, seven commodity exchanges were initially planned to be included in the project - five that principally traded grains and two that mainly traded cotton. Of the seven, two did not present any investment plans, and so could not be included in the project. Three others provided investment plans, but after expressing a clear interest in the CMDP, they either elected to implement these plans with their own resources or did not invest at all. Of the remaining three exchanges, two provided investment plans during the first iteration, and the third began participating later (Konya). A fourth participating exchange, Gaziantep, not initially envisioned as a participant, was attracted by the benefits it saw among participants and signed a subsidiary loan agreement and submitted its investment plans in November 2002. - 9 -  Table 2: Exchanges considered for CMDP participation Exchange Principal Status in first Status during Final Commodity stage of Project Implementation Participants Traded 1. Adana Grain Did not provide investment plans 2. Edirne Grain (1) (2) l 3. Eskisehir Grain Did not provide Implemented investment plans investments with own funds 4. Izmir Cotton (1) Was not considered creditworthy** 5. Konya Grain (1) (2) l 6. Polatli Grain (1) (2) l 7. Sanliurfa Cotton (1) Did not invest 8. Gaziantep Cotton Not considered (2) l at inception* (1) Signed Letter of Intent to Borrow (2) Borrowed and invested under project l Participant at Project Close * Signed Loan Agreement November, 2002 **Izmir had made large IT investments (using its own funds, and not in connection with CMDP) in contemplation of introducing futures trading, but suffered a loss on this project. The Polatli and Edirne exchanges have begun to realize the benefits of their investment under CMDP, and have evolved from registries of grain sales to the benchmark markets around which price formation for grains in Turkey now takes place. These initial investments include IT equipment, laboratories, and automated sampling equipment. These upgrades allow these 2 exchanges to conduct automated grain sampling and electronic floor trading, with the results posted to their websites. The Konya exchange, the largest for grain in the country, observed that Polatli and Edirne were attracting traders from a greater distance, and so in 2002 elected to proceed with its initial investments. The main achievements under this component included: l Under the CMDP, the Polatli Exchange developed new laboratories, automated weighing and sampling devices, and an IT system that allows it to display key data on each trade (in near real time). (The automated truck weighing and sampling system for grain, and associated analytical laboratory, all common in developed countries, were the first in Turkey.) These include the type of wheat, physical and chemical characteristics, price and quantity traded; high, low, and average prices for the day, and cumulative volume; summaries for the previous few days and for the week; and wheat prices from all the other major exchanges in Turkey. The wheat lot is also assigned a grade based on the grading system established under the project. This information is disseminated using the internet ( www.Polatliborsa.org.tr), by a telephone "hotline" with 12 dedicated telephone lines, and by mail. Hotline information is updated every 30 minutes. The website receives around 3,000 hits a month (annual average), with about 1,000 inquiries per day (telephone and internet combined) during the peak season. The exchange has also set up an electronic display panel in the central square of the town of Polatli that displays the same information as the display used on the exchange floor (with all the - 10 -  information noted above). Data on Turkish wheat prices from the Polatli exchange are distributed internationally by Reuters. l Under the CMDP, the Edirne Exchange gained a much broader vision of the potential role it could play, and the exchange moved out of its cramped quarters in the center of town into a much larger facility (financed with its own funds). The new facility includes extensive storage facilities that are intended to be used as bonded warehouses when the legal framework for a WRS permits. The exchange installed a new trading floor, conference hall, and ancillary facilities. The CMDP financed new laboratory equipment that permits sophisticated chemical analysis and certification of each batch of wheat, a weighbridge, and IT hardware and software that permit the display of each trade on a screen in the trading room as well as on the exchange's website. The exchange estimates that the amount of time needed to process samples has been reduced by 2/3 as a result of the automated equipment purchased under the CMDP. While Edirne had a website prior to its participation in the CMDP, it substantially upgraded the site (www.etb.org.tr) after participating in the study tours. Currently, each trade is displayed, showing the type of wheat, quality grade, where it was grown, and price. Edirne's website also displays the same information for three other Turkish exchanges, as well (which information is obtained from Polatli). The exchange reported that in 2000 (before the site was upgraded) it received an average of 4,000 hits a month, but by 2002 it averaged around 7,000 to 8,000 hits per month. Edirne also disseminates trade information by telephone and by regularly providing information to the local press and television stations (updated daily). l The Gaziantep Exchange was attracted to participate in the CMDP when it saw the benefits that the other exchanges were receiving. CMDP-supported investments included new laboratory facilities and equipment, a weighbridge, and the software and hardware necessary to link these together to increase efficiency. While greater efficiency was achieved, Gaziantep officials stated that the most important CMDP benefit was the broader vision of the functions of a commodity exchange that they gained, including bonded warehousing. The exchange disseminates price data on the internet, as well as mailing daily, weekly, and monthly data to its customers. Approximately 45% of the trading at Gaziantep consists of wheat, 22% cotton, with the remainder being a broad variety of agricultural products and livestock. l Officials of the Konya exchange stated that the most important knowledge they gained from the CMDP were an understanding of WRS, the role that exchanges can play in warehousing generally, and futures and forward trading. As the other exchanges, they envision undertaking these functions when the regulatory environment permits. Konya used project investment funds to install sampling and instrumentation, new laboratories, and IT equipment. Konya officials commented that their observation of foreign exchange practices led them to believe that Turkey had too many agricultural laboratories, often sponsored by different agencies, which sometimes hindered the uniformity of assessment. Loan Terms: Funds were loaned by the Bank to the Turkish Treasury at LIBOR plus 1.5 percent, with a term of 17 years and five years grace. Treasury then on-lent funds to the Turkish Union of Chambers of Commerce and Commodity Exchanges (TOBB) with a 0.25 percent service fee, and TOBB then provided loans to exchanges at LIBOR plus 1.75 percent with an eight year term and two-year grace period. Each exchange could borrow a maximum of US$1 million (in US dollars), and loans could be provided to finance up to 70% of total project costs, with the remaining 30% financed by the exchange. The borrowers assumed the foreign exchange risk. All repayments to date have been made in a timely manner. - 11 -  Additional Benefits: The following benefits were also achieved under this component: l The automated analysis of incoming grain lots has enabled the Polatli Exchange to establish a "grain damage map," showing the incidence of pests by specific locations. The exchange shares this information with the Ministry of Agriculture to help target their disease prevention services. l In part as a result of the expanded vision of the role that an exchange can play, Edirne began an outreach and extension program (using its own funds). The exchange developed a handbook on soil and leaf analysis, which it distributes to farmers, and representatives visit growing areas to explain the function that the exchange can play in price discovery and quality certification. 2. Development of Trading Institutions and Strengthening of Oversight Capabilities Initial Delays: Implementation of this component was substantially delayed. An initial delay in the start of the one-year technical assistance contract was caused by personnel turnover in MIT generally, and on the evaluation committee for this contract in particular. After MIT selected a contractor, initiation of the contract was then opposed by the Ministry of Finance on the grounds that there was insufficient time for its completion (within the original term of the project), as well as a shortage of counterpart funds to cover MIT's 30 percent of the funding, the latter principally a result of the large depreciation of the Turkish Lira in April 2001. (In the event, all required counterpart funds were provided) Later, the Ministry of Finance opposed the training services that were to be provided under the project. The contract eventually became effective in January 2002. The delays necessitated extending the closing date of the project by 24 months. Achievements Training: Training was provided for project stakeholders (staff of the government, exchanges, producers, banks, and traders) on exchange operations, warehouse certification and inspection. Two study tours were conducted to analogous facilities in Bulgaria and the U.S. (Memphis Cotton Exchange and Minneapolis Wheat Exchange). As noted earlier, this training was highly successful in developing a sophisticated vision of how a modern commodity exchange functions, and provided guidance for actions taken by participating exchanges. The staff learned from the ability to observe the functioning of an operational WRS, futures and forward trading, and the role that storage facilities can play. Preparation of new legislation: A Working Group on warehouse receipts was formed with membership including representatives from relevant government ministries, commodity exchanges, industry associations, the Turkish Standards Institute, Turkish Union of Chambers of Agriculture, TMO, ASCUs, and major private traders. The Working Group (initially with the assistance of the Japanese Grant and then with the assistance of the contractor) developed a draft law on a WRS. MIT was also assisted to develop a draft Commodity Exchange Law (to update Law 5590). The new Law 5590 would expand the permissible functions of commodity exchanges to include such activities as forward and futures trading, and would permit the exchanges to incorporate. At the time of ICR preparation, this legislation has been drafted and is being reviewed by the Prime Ministry prior to introduction in the Parliament. Because the legal framework is not yet in place, it was not possible to "initiate implementation" of a WRS as envisioned in the project documents. The delay in the start of the technical assistance contract had implications for other project goals, as exchanges were understandably reluctant to invest in storage facilities (which investments could have been funded by the project) as long as the country had not yet enacted legislation governing bonded warehouses. Additional delays in investment by the exchanges was caused by the TOBB request, starting in April 2002, - 12 -  that exchanges purchase bank guarantees for their loans (section 7.6). Although such guarantees would have cost only around 2 percent of the loan amount, they caused several exchanges to delay or cancel investment plans. (As explained below, TOBB dropped the guarantee request after about 6 months) Quality Standards/Grades for grains and cotton: Working Groups were formed with representation from relevant government ministries, industry associations, the Turkish Standards Institute, Turkish Union of Chambers of Agriculture, TMO, and the ASCUs. These groups met and developed quality standards for both grain and cotton, which were promulgated and now comprise accepted national standards for these crops. The development of national standards was a major step forward in facilitating trading and enhancing market efficiency for these commodities, and a major benefit achieved by the CMDP. 3. Project Impact Evaluation This component was satisfactorily completed. Three surveys were conducted in 2000, 2002, and 2003, reflecting the exchanges that were participating -- or expected to participate -- in the project: l 2000 -- 256 respondents using Eskisehir, Polatli, Konya, Edirne, and Sanliurfa exchanges l 2002 -- 143 respondents using Polatli, Konya, and Edirne exchanges l 2003 -- 122 respondents using Polatli, Konya, and Edirne exchanges The respondents comprised a random sample of approximately 5% of the users of the exchanges. As shown in Table 1 and discussed earlier, above, customer satisfaction with the participating exchanges increased during the CMDP. Volume Traded at the Exchanges: As shown in Table 3, between 1998 and 2001, the volume of wheat traded at the Polatli and Konya exchanges fell, while volume traded at the Edirne exchange increased. (It should be noted that while the 2001 drought caused overall national production to fall by 7.7% compared to 2000, production in the provinces surrounding Polatli fell by 22%, in those surrounding Konya by 48%, and in those surrounding Edirne by 25%.) Table 3: Wheat Production and Sales, Nationwide and at Participating Exchanges (000s of tons) 1997 1998 1999 2000 2001 Nationwide 18,650 21,000 18,000 21,000 19,380 production Polatli 1,530 1,280 1,072 1,071 905 Konya 851 1,417 1,645 1,781 1,046 Edirne 88 73 165 225 203 Source: SEMOR and Oklahoma State University, Final Wheat Report, May 2003 Interim Rating: It should be noted that starting in January, 2002, the project was rated "U" on Implementation Performance, and was designated a "problem project." However, during calendar year 2002, strong management intervention facilitated a significant improvement in project performance (as noted below, a QAG Quality of Supervision Assessment found supervision "satisfactory" overall, as well as in all four assessment dimensions). Three participating exchanges (Polatli, Edirne, and Konya) disbursed around half the loans allocated to them, and two additional exchanges prepared tenders for the use of US$600,000 in loan funds. The Polatli and Edirne exchanges began to realize benefits from their initial investments ($600,000 total, using $420,000 in loan funds) which enabled them to conduct automated grain sampling and electronic floor trading, with results posted to their websites. By introducing - 13 -  the grain quality grading standards adopted under the project and using automated sampling of grain characteristics, these exchanges gained the confidence of the market in the accuracy and reliability of their quality assessment of individual lots traded by them. As a result of this confidence and the ability to post their results to web sites, these exchanges evolved from registries of grain sales to the benchmark markets around which price formation in Turkish grain markets takes place. In late 2002, the contractor finalized the draft Warehouse Receipt and Licensed Warehousing act along lines that will modify the current Law 5590; this is currently being considered by Parliament. The firm also conducted study tours for participating exchanges. Finally, TOBB dropped its request for a counter-guarantee in November 2002, and the project rating was raised to "S" the following month. 4.3 Net Present Value/Economic rate of return: N/A 4.4 Financial rate of return: N/A 4.5 Institutional development impact: Institutional development impact was modest. The institutional strengthening of the exchanges was significant, as they observed how sophisticated foreign exchanges worked, made investments based on this vision (using their own funds as well as those from the project), and changed their organizations to operate in a more sophisticated way. They also began to invest in systems that they will be able to use, after the passage of legislation, to conduct futures and forward trading, and implement a WRS. The development of quality standards and grades for wheat and cotton was also a major step forward in facilitating trading and enhancing market efficiency for these commodities. As noted above, the envisioned initial implementation of a WRS did not take place, owing to delays in approving and signing the technical assistance contract for component 2, as well as in approving a new law and regulations that would have permitted exchanges to invest in related facilities and systems. Nevertheless, MIT officials gained knowledge of the role of private commodity exchanges, and by the end of the project they had developed proper draft legislation concerning the WRS and the amendment of Law 5590. Currently, MIT is elaborating regulations which need to be issued regarding electronic warehouse receipts and laboratories involved in the process. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: There were no significant factors outside the control of MIT or TOBB which affected project implementation or outcome. 5.2 Factors generally subject to government control: l Turkey's turbulent macroeconomic situation during much of the project caused some exchange investment plans to be halted or delayed. In particular, the large currency devaluation in April 2001, interrupted the implementation of several investments. l The Ministry of Finance (MOF) delayed the signing of the technical assistance contract, arguing that there was not sufficient time in the original contract to complete the scope of work (the project was - 14 -  then extended). MOF also caused delays by opposing the use of project funds for training. 5.3 Factors generally subject to implementing agency control: l Delays in the establishment of the PIU (detailed below in sec 7.6), delay in signing a contract for technical assistance, and TOBB's demand for a "counter-guarantee" during much of 2002 all hindered project progress. 5.4 Costs and financing: The project closed on March 30, 2003, two years later than originally planned. Total Bank disbursements were US$1.42 million, around 40% of the amount envisioned. Most of the shortfall was explained by the lack of physical investment for modernization (Component 1); 31% of the funds for this component were disbursed, compared with 69% for development of trading institutions. Much of the shortfall can be attributed to delay in passage of the law that would have permitted a WRS, which would have enabled large additional investments. Thirty-six percent of the Bank funding (envisioned at appraisal) was disbursed, 75% of the Borrower funding, and 30% of the expected investment from the exchanges. Additional investment by participating exchanges was hindered by the TOBB request for a "counter-guarantee," and by the country's turbulent macroeconomic conditions. 6. Sustainability 6.1 Rationale for sustainability rating: Sustainability is considered as likely. The vision imparted by the project has energized the exchanges, and they have developed business plans and invested (in most cases using their own funds) in facilities to support this expanded concept. Another factor that makes the benefits more sustainable is the increased satisfaction of customers (farmers, commodity users, traders) with the exchanges (Table 1). In the areas of accuracy of price information, efficiency of transmission of prices, hygienic conditions, and overall approval, customers of participating exchanges showed increased satisfaction with the participating exchanges over the period of the project. These customers are likely to continue using these exchanges. Sustainability is also enhanced by the reduction in TMO purchases, which bolsters the role of private exchanges, and also by changes in government agricultural support policies generally. 6.2 Transition arrangement to regular operations: Regular operations are essentially underway. The participating exchanges are regularly utilizing the equipment and knowledge acquired during the project, and most of the envisioned benefits are being realized as foreseen. 7. Bank and Borrower Performance Bank 7.1 Lending: Bank performance was satisfactory. As described earlier, on balance Quality at Entry was satisfactory. Noteworthy was the Bank's unwillingness in the mid-1990s to go forward with a large investment loan for commodity exchanges until there was a substantial improvement in policy. Readiness for Implementation and Institutional Analysis were deficient, but other aspects of Quality at Entry were positive. - 15 -  In retrospect, the project design would have been improved if the legal changes and institutional strengthening had preceded the physical investments (see Lessons Learned). This would have permitted the exchanges to make better use (e.g., in terms of facilities funded by the project) of what they learned during the project. 7.2 Supervision: Supervision was satisfactory. As noted earlier, delays were encountered in implementation of some aspects of the project, and during calendar year 2002, the project was rated "U" on Implementation Performance and was designated a "problem project." However, management took strong corrective measures, implementation improved significantly, and the project rating was raised to "S" in December 2002. This improved performance was noted by the QAG Quality of Supervision Assessment, conducted in October 2002, which found supervision "satisfactory" overall, as well as in all four assessment dimensions. A number of exchange officials noted that devolution of project management to the Resident Mission permitted a quick response to their requests for statements of "no objection" or other questions or approvals. When it became clear that MIT and TOBB knowledge of procurement and financial management was inadequate, RM staff provided training to maintain satisfactory project performance. And Gaziantep officials were quite positive about how quickly their exchange was able to become a participant, and have their investment plans approved, even though their application was submitted late in the project (Gaziantep signed a loan agreement in November 2002). 7.3 Overall Bank performance: Overall Bank performance was satisfactory. Borrower 7.4 Preparation: Overall Borrower performance was unsatisfactory: Preparation was satisfactory. In part because the Bank had worked extensively with the government on an envisioned large investment loan, there were extensive consultations with exchanges and cognizant agencies. However, even though PHRD funding was available, insufficient attention was placed on preparing MIT and TOBB for their roles in the project, e.g., regarding procurement and project financial management. 7.5 Government implementation performance: The government did not provide a macroeconomic environment conducive to the achievement of project goals. The financial crises of November 2000 and February 2001--as well as the overall macroeconomic turbulence--hindered some planned investment by the exchanges. In addition, the Ministry of Finance did not fully support implementation of the technical assistance contract (which delayed that component), and also opposed provision of training services under the contract. - 16 -  7.6 Implementing Agency: The Ministry of Industry and Trade (MIT) was the main executing agency, and the Project Implementation Unit (PIU) was located there. The PIU handled procurement for the overall project, e.g., the technical assistance contract for Component 2, and the evaluation contract for Component 3. There were significant delays in the establishment of the PIU, which became operational in February 2000, around one year after the project became effective. These delays were caused by MIT's failure to assign dedicated staff to the PIU in a timely manner, as well as by the agency's unfamiliarity with Bank procurement and financial reporting procedures. Delays in the start of the one-year technical assistance contract were caused by personnel turnover in MIT generally, and on the evaluation committee for this contract in particular. In addition, a Project Administration Team at the Turkish Union of Chambers of Commerce and Commodity Exchanges (TOBB), functioned as an intermediary between the PIU and the exchanges. TOBB received funds directly from Treasury and was the on-lending agency for funds lent to exchanges. TOBB concluded sub-project agreements with participating exchanges, guaranteed the loans, and monitored disbursements and repayments. Starting in April 2002, when it received a request for a sub-loan, TOBB began to request a "counter-guarantee" from a commercial bank that guaranteed repayment to TOBB. This was not consistent with the Loan Agreement, and the Bank (as well as several government agencies) requested TOBB to withdraw this provision. However, TOBB maintained this position for around 6 months, and, although it was ultimately rescinded, this caused the delay or cancellation of several investments by exchanges. 7.7 Overall Borrower performance: As described in section 7.6, overall Borrower performance was assessed as unsatisfactory. The key factors in this assessment were: l The poor macroeconomic environment, which impeded investment l Delay by MIT in establishing the PIU and in awarding the project's main TA contract l Delays in implementation of the technical assistance contract 8. Lessons Learned l LILs may need a longer term to deal with uncertainties attendant to their innovative designs: The original term of the CMDP was 2