Turkey - Igsas Ammonia - Urea Manufacturing Project

RESTR'ICT'ED CIRCULATING COPY Report No. P-1062 TO BE RETURNED TO REPORTS DESK - ~~~FILE C'OU"PY This report is for official use only by the Bank Group and spccifically authorized organizations or persons. It may not be -published, quoted or- cited-without Bartk Group-au:thcrization. The - - Bank Group-does not accept responsibility fgr the accuracy or complctcness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO ISTANBUL GUBRE SANAYII ANONIM SIRKETI GUARANTEED BY THE REPUBLIC OF TURKEY FOR AN AMMONIA UREA MANUFACTURING PROJECT April 28, 1972  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOYHENDATION OF THE PRESID ENT TO TIE EXECUTIVE DI.ECTORS ON A PROPOSED LOAN TO ISTANBUL GUB1E SANAYII ANONflI SIRKETI GUARANTEED BY THE REPUJBLIC OF TURKEY FOR AN AMMONIA UREA MANUFACTURING PROJECT 1. *I submit the following report and recommendation on a proposed loan to Istanbul Gubre Sanayii Anonim Sirketi (IGSAS) with the guarantee of the Republic of Turkey for the equivalent of $24 million to help finance a fertilizer project designed to produce for sale 274,OOO tons per year of urea and 90,000 tons of ammonia (other than ammornia produced and converted into urea). The loan would have a term of 15 years, including 4 years of grace, with interest at 7-1/4 percent per annum. A guarantee fee of 1-3/b percent would be payable by IGSAS to the Republic of Turkey. PART I - INTRODUCTION 2. The level of Bank Group operations in Turkey in past years has been largely influenced by the almost chronic balance of payments diffi- culties and the heavy external debt service burden, the limited IDA re- sources which could be made available to Turkey and, to some extent, diffi- culties in project preparation. In 1968 the Bank and the Turkish authori- ties began discussions to establish a basis for a major increase and greater continuity in the level of lending. In the Bankts view, the main pre-requi- site for this was the institution of economic policies that would increase Turkeyts capacity to borrow on Bank terms. This meant, in particular, im- proved extarnal debt management, introduction of reforms in the system of trade and p3yments, and the provision of more resources and incentives for export-oriented projects. Another important factor was a significant im- provement in the Government's capacity to identify and prepare projects. 3. By the end of 1970, the Government had made substantial progress in these fields. The goal of achieving external viability within a reason- able time period and the promotion of exports as the principal means of doing so had been accepted. In August 1970, a stabilization program was initiated and the Turkish Lira was devalued. Parallel with these developments, the Bank Group stepped up its assistance in project preparation, notably with advice on project selection criteria and institution building. As a result, the volume of Bank/IDA lending reached $114 million in FY 1971, thus ex- ceeding the amount lent in the five preceding years.  - 2 - 4. Bank Group lending to Turkey aims at assisting the country in three major tasks: (a) improving the foreign exchange position parti- cularly through export promotion; (b) institution building and reform in key sectors including improved financial viability of the major State Economic Enterprises; and (c) the achievement of a better balance in rural and urban development. Several projects financed by the Bank Group in recent years or presently under discussion focus on the first task. For instance, emphasis was placed on export-oriented sub-projects in the last loan (713-TU) made to the Industrial Development Bank of Turkey (TSKB) and in the Loan and Credit (762/257-TU) for the Fruit and Vegetable Export Pro- ject. Other projects for which lending is contemplated in coming years, especially for livestock, forestry and irrigation, are expected to enhance Turkey's ability to earn foreign exchange, but attempts to assist the ex- pansion of tourism have not borne fruit so far for lack of a firm Govern- ment policy and of suitable projects. The objective of institution build- ing has been pursued chiefly in agriculture (including agricultural credit), power and transportation. The Bank has been instrumental in bringing about a comprehensive reorganization of the power sector culminating in the es- tablishment of the Turkish power authority (TEK) to which a loan (763-TU) was made in 1971. It has also acted as executing agency for UNDP technical assistance studies on transport coordination and on a railway investment program, and a first railway project will be appraised in 1972. Finally, the two-pronged approach to agricultural development of the poorest parts of Central and Eastern Turkey and to urban development has been started with the Second Livestock Project and the proposed Urban Development and Water Supply Project for Greater Istanbul, the most rapidly growing urban center. 5. The industrial development that the Bank is seeking to encourage in Turkey aims primarily at improving the competitiveness of both the pri- vate and public enterprises which had for a long time been accustomed to a rapid but inward-oriented growth behind a barrier of high tariffs and quan- titative restrictions. Given Turkey's natural resources and the emergence during the 1960's of a new class of industrial entrepreneurs, increasingly capable and outward-looking, there appears now to be considerable scope for further growth both in export-oriented industries using domestic raw mate- rials(mining, food processing, forest products and textiles) and in judi- cious import replacement (particularly fertilizers and enginerring). Past Bank industrial lending has been channeled through TSKB which has received since 1950 eight loans totaling $128 million to assist private enterprises, covering the whole spectrum of industrial activities, but mostly for rela- tively small projects. The private sector has so far been unable to mobilize capital resources on the scale required for large scale industrial operations which, as a result, have been left mostly to the Government. The proposed loan, like the one recently approved for the Erdemir Iron and Steel Company which was the first direct Bank lending operation to industry in Turkey, will help increase the flow of capital for industry, although a long run sclution has to be sought mainly through the development of the capital market.  - 3 - 6. Recent Bank Group lending has concentrated predominantly on the agriculture and power sectors. In addition, attention has been given to industry in the form of a series of loans to TSKB and lately to Erdemir, and to education. The execution of projects in Turkey has been generally satisfactory apart from prolonged delays in achieving effectiveness for several recent loans (see my report on the Irrigation Rehabilitation and Completion Project, dated January 6, 1972). 7. Five Bank/IDA operations are planned for FY 1972. A $18 million credit for the Irrigation Rehabilitation and Completion Project was signed on January 25, 1972; a $76 million loan for the Erdemir Steel Plant Expan- sion Project was approved on March 14, 1972; and a $16 million Credit for the Second Livestock Development Project was approved on April 4., 1972. The Istanbul Urban Development and Water Supply Project has been appraised and is planned for negotiations in the second quarter of 1972. A summary of Bank loans, IDA Credits and IFC Investments as of March 31, 1972 is attached as Annex I. If the Erdemir Expansion and Second Livestock pro- jects approved but not signed are included, total Bank Group lending in Turkey to date amounts to $314.7 million in loans and $145.8 million in credits. A number of projects have been identified and preparation is underway for Bank Group lending in FY 1973 including a multipurpose power and irrigation project, a further loan to TSKB and the first Bank financed operation proposed in the transportation sector, for railway improvement. 8. IFC has been active in Turkey, having participated in industrial investments for nylon yarn, pulp and paper, glass and aluminium. Total commitments so far amount to $29 million. IC is currently investigating a number of new investment opportunities in various sectors including mining, special steel and cement. 9. The Ammonia-Urea Manufacturing Project was first appraised by a Bank mission in December 1970 and was reappraised in November/December 1971 following several project changes introduced by the Sponsors. During nego- tiations in Washington from February 22 to Iiarch 10, the Government of Turkey was represented by Mr. Ahmet Tufan GMl, Chief Commercial and Economic Counselor, l1r. Teoman Koproluler, Counselor and Mr. Alaeddin Yoruk, Financial Attach6, all of the Turkish Embassy, Washington, D.C., and Mr. Yusuf Ergun, Ministry of Agriculture; the Borrower was represented by Kr. Selahattin Ozkan, President of Turkiye Petrolleri Anonim Ortakligi (TPAO), Mir. Hassan Cil, Vice President of TPAO, Fir. Erdal Kutlug and Mr. Mehmet Adanali of TPAO, Mr. Turgut Ogmen, Refinery Manager of Istanbul Petrol Rafinerisi Anonim Sirketi (IPRAS) and YMr. Kaya Uysal, Legal Adviser of IPRAS. The Agricultural Bank of Turkey was represented by its Secretary General, Mr. Nesit Parman.  - 4 - PART II - THE EnONOMY 10. A report entitled "The Development Prospects of Turkey" (EMA-30a) dated February 1, 1971, was distributed to the Executive Directors on February 4, 1971. This was updated by a memorandum entitled "Current Economic Position and Prospects of Turkey" (EMA-40a) dated July 19, 1971, which was distributed on July 26, 1971. A Bank economic mission visited Turkey in April 1972 and a new report will be distributed in the fall of 1972. A country data sheet is attached as Annex II. 11. Following the 1969 elections, which confirmed the Justice Party in power, the Government under Prime Minister Demirel faced a constant erosion of its majority in the National Assembly. At the same time, violence by groups of extremist students and unrest among workers were on the rise and persisted through 1970 into the early months of 1971. In March 1971, the Armed Forces intervened, the Government resigned and a new "above-party and reformist" government was formed under Prime Minister Erim. 12. The new government's program called for the restoration of law and internal security, more rational.management of the economy, and long overdue wide-ranging structural reforms. These reforms included: land and educational reform; far-reaching reorganization of the government, including State Economic Enterprises (SEEs) and external trade agencies; nationali- zation of private enterprise in mining, petroleum arid forestry industries; and stricter enforcement of the conditions for foreign capital investment, including Turkish majority participation. 13. In its eight months in office, the Government largely restored law and order and, on the economic side, introduced some administrative changes, sub:stantially raised prices of several SEE products and presented several reform bills to Parliament but was not yet able to translate its long-range economic policies into detailed measures and decrees. It was also unable to bring under control the serious fiscal iibalance and the rapid increase in prices, both of which were aggravated by the salary rises introduced as part of the Personnel Reform Law by the previous Govern- ment. Growing opposition from Parliament and the private sector to some administrative changes and reform proposals brought about the resignation of a large group of technocratic.ministers in December 1971. A new coali- tion Government, headed again by Prime M1inister Erim, was then formed with a large nurmber of representatives of the political parties. lb. The second Erim Governmentts program reiterated the urgency of executing-major structural reforms, emphasized the importance of the survival. of democratic procedures in Tur key, and appeared to be conciliatory both in tone and in the choice of key ministers towards Parliament and the private sector. In the program and in subsequent public statements, the role of the private sector was stressed. Since then several administrative features of  - 5 - the original program of April 1971 affecting the private sector have been modified and policies affecting domestic and foreign private investors have been under review. i/ 15. Economic growth in 1970 was influenced by factors associated with civil unrest, the growing balance of payments problems, devaluation, and un- favorable weather affecting the 1969-70 harvest. GNP grew by 5.6 percent at constant prices, compared with an average of 6.6 percent in the preceding eight years. Industrial growth slowed down to 3 percent from 10 percent in 1969, and agricultural output rose by only 1 percent. However, the rest of the economy grew at a rate of 7 percent. 16. In 1971, economic growith, buoyed by a sharp improvement in the overall balance of payments position following devaluation, rebounded to a record rate provisionally estimated at about 9 percent. This performance reflected a record increase in agricultural output for the 1970-71 crop year estimated at over B percent and a recovery in industrial output, which is estimated to have i.ncreased by about 9 percent. 17. Other aspects of economic performance in 1971 were less encoura- ging. Growth of investment slowed down considerably, with public invest- ment actually decreasing in real terms, and private investment increasing .only moderately. The decrease in public investment wTas due to the drop in public savings, which was largeLy the result of the high cost of the Personnel Reform Law and the poor performance of the SEEs. The overall savings ratio increased from 15.1 percent of G-MP at constant prices in 1967 to 16.6 percent in 1970, but according to preliminary estimates, did not improve further in 1971. Viholesale prices increased by more than 20 percent as a result of the combined pressure of increased wage settlements under the Personnel Reform Law, the efect of the 66 percent devaluation on import prices, and the substantial increases in SE3s prices. 18. Following the devaluation in August 1970, Turkey's current account deficit declined sharply to roughly $100 million in 1971, compared with $172 million in 1970 and $221 million in 1969. This improvement occurred despite a widening of the trade deficit in both 1970 and 1971 when steadily rising exports were outstripped by more rapid increases in imports. The main off- setting factor was a jump in workers' remittances from $1L1 million in 1969 to $273 million in 1970 and an estimated $b75 million in 1971. 29. Although private and public capital inflows appear to have declined somewhat in 1971 after a substantial increase in 1970, the growth in remit- tances was strong enough to push up the level of official foreign reserves to a record M772 rillion at the end of 1971, a trend which has continued in early 1972. Turkey's net foreign assets, which were negative in 1968, rose to $411 million by the end of 1971. This relatively high level of reserves should help Turkey protect its new rate of exchange, cushion any sudden drop in remittances, wshich are vulnerable to conditions in Europe, and possibly support a larger degree of import liberalisation. Following the changes introduced in the relationships among the major world currencies in December 1971, Turkey established a central rate of 1L Turkish lira to the the US dollar (replacing the previous parity of TL 15 to the dollar). Y/ The secorld Erim Cabinet resigned on April 17, 1972.  - 6 - 20. Provisional estimates for 1971 indicate a significant increase in the budget deficit over 1970. Although total domestic revenues increased substantially to an estimated