Turkey - Second Public Sector Industrial Credit Loan Project

FILE COPY Report No. 1300-TU Appraisal of a Second Loan to Deviet Yatirim Bankasi - DFC Project Turkey December 10, 1976 Projects Department Europe, Middle East and North Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS May 1974 to September 1974 US $1.00 TL 13.50 TL 1.00 US $0.074 M,arch 1976 to September 1976 US $1.00 TL 16.00 TL 1.00 US $0.063 GLOSSARY OF ABBREVIATIONS DYB Devlet Yatirim Bankasi SEEs State Economic Enterprises SPO State Planning Organization HCB High Control Board OECD Organiation for Economic Cooperation and Development US-AID United States Agency for International Development IFF Internal Financing Fund DFCs Development Finance Companies EEC European Economic Community FRR Financial Rate of Return ERR Economic Rate of Return LIBOR London Interbank Offering Rate FISCAL YEARS Government March 1 to February 28 DYB January 1 to December 31  FOR OFFICIAL USE ONLY APPRAISAL OF A SECOND LOAN TO DEVLET YATIRIM BANKASI - DFC PROJECT TURKEY Table of Contents Page No. SUMMARY .............* * * * * * * * * * * * * * * * * * * * * * * *. i-iii I. INTRODUCTION. . ......... 1 II. THE STATE ECONOMIC ENTERPRISES....... 1 The Economic Environment. 1 The System of State Economic Enterprises 2 Performance of State Economic Enterprises 3 Conclusions. 4 III. INSTITUTIONAL DEVELOPMENTS....... 5 Policies.. . 5 Organization........ 5 Resources ......6 Interest Rates ... .. .......... 7 Lending Procedures ...... 8 IV. OPERATIONS AND FINANCIAL PERFORMANCE ...... ..... 11 Characteristics of Operations. 11 Economic Impact of Bank Financed Sub-Projects 13 Financial Performance .15 Audit and Accounts ..17 V. PROSPECTS .18 Economic Forecast ...... 18 Projected Operations ...... 18 VI. PROPOSED LOAN .........................................21 Performance Under First Bank Loan . .21 Objectives and Criteria of Proposed Loan . .21 Justification ..23 VII. RECOMMENDATIONS ..23 This report was prepared by Messrs. Storch, Takahashi, and Wachs on the basis of their two-week mission in July, 1976. | This document has a restricted distribution and may be wed by recipients only in the performance of their official duties. Its contents may not otherwis be disclosed without World lank authori2ation.  TABLE OF CONTENTS (Continued) BASIC DATA ANNEXES 1. Brief Review of Industrial Sector 2. Income and Profitability of Major Industrial SEEs, 1972-1974 3. Financial Position of Major Industrial SEEs, as of December 1974 4. Key-Figures of Major Industrial SEEs, 1971-1975 5. Summary of DYB's Statutes and Regulations 6. Organization Chart 7. Statements of Resources as of December 31, 1975 8. Approvals, Commitments and Disbursement of Term Loans, 1970-1975 9. Sectoral Distribution of Term Loan Approvals, 1973-1975 10. Breakdown of DYB Loans by SEEs as of December 31, 1975 11. Maturity of Term Loans Approved, 1973-1975 12. Size Distribution of Term Loans Approved, 1973-1975 13. Geographical Distribution of Term Loan Approvals, 1973-1975 14. Sub-Project Financing Applications Approved by the Bank under Loan 1024-TU 15. Income Statement, 1973-1975 16. Balance Sheets, Year-end 1973-1975 17. Source and Application of Funds, 1973-1975 18. Financial Indicators, 1973-1975 19. Analysis of Arrears in Excess of Three Months, 1974-1975 20. Projected Operations and Assumptions, 1976-1979 21. Projected Income Statement, 1976-1979 22. Projected Balance Sheets, 1976-1979 23. Projected Source and Application of Funds, 1976-1979 24. Projected Pipeline 25. Estimated Schedule of Disbursements.  TURKEY APPRAISAL OF A SECOND LOAN TO DEVLET YATIRIM BANKASI - DFC PROJECT Summary i. - The Turkish Government created Devlet Yatirim Bankasi (DYB) in 1964 for the purpose of financing public sector industry. The first Bank loan to DYB ($40 million) was made in 1974, to be passed on as sub-loans to State Economic Enterprises (SEEs). DYB has submitted and the Bank approved 10 sub- projects having the following characteristics: average total investment cost of $14 million, average Bank financed sub-loan of $3.8 million, and weighted average financial and economic rates of return of 25% and 29% respectively. Within 24 months from the date of signature, 95% of the first loan was com- mitted; disbursements are generally on schedule. The Government and DYB have now requested a second loan, to be used for the same purposes. ii. The organization, control, and composition of SEEs in Turkey has not significantly changed since the previous appraisal of DYB. Sales revenues of all SEEs more than doubled between 1973 and 1975 (from TL 45.4 billion to TL 96.3 billion). However, the increase in production costs was even greater, so that total SEEs net profit before taxes in 1973 of TL 400 million turned to an estimated loss of TL 2.9 billion in 1975. For operational SEEs, invest- ment rose from TL 13.7 billion in 1973 to TL 34.3 billion in 1975. To fill the gap in investment capital and shortfall in working capital, the SEEs had to rely heavily on transfers from the general budget, borrowings from social security and pension funds, and extraordinary recourse to the Central Bank. This increased dependency on Government financing was contrary to the Third Five Year Plan (1973-1977) which, although it envisaged relatively capital- intensive investment by SEEs, also projected a 33% increase in the surpluses of SEEs. The contrary has happened: instead of financing their own invest- ments and yielding profits which contribute to national savings, the SEEs have become a drain on the Government's financial resources. iii. The underlying reason for the deficiencies in economic performance lies with the social objectives imposed on SEEs which often take precedence over profitability. The instrument of price controls is, in most cases, the biggest single impediment to adequate financial returns, causing sales rev- enues to lag behind the inflationary rise in production costs. There are also the usual hinderances which public sector industry has with political pressures, monopolistic practices, and private sector competition for staff. The Third Plan recognized the faults of the existing SEE system and outlined reforms to improve productivity and profitability. The Government subsequently proposed SEE reform legislation to Parliament, but so far it has not been passed. How to administer SEEs is a key issue between Turkey's political parties, and the initial steps for reform must be taken in the political arena. iv. The Bank's first loan to DYB was an experiment to see if results could be achieved by working within the SEE system, since fundamental changes  - ii - would require legislation in a form and at a time which cannot be determined by the Bank. The loan was restricted for use in financing projects in manu- facturing and processing industries, and to a limited extent in non-fuel mining. The rationale for this approach was to attempt to extend institution building activities, through DYB, to those projects and SEEs with which the Bank would otherwise have no relationship. The performance of 11 out of the 14 SEEs which fit the sector eligiblity criteria of the Bank loan was gen- erally profitable between 1973 and 1975. The findings indicate that progress has been made in strengthening DYB. SEEs often consult with it when planning their new projects. When requests for financing are presented to DYB, it can and does reject unsuitable projects, delay them when additional preparation work is needed, or modify their financial plans when necessary. v. From 1973 to 1975 DYB's total assets doubled. Loan portfolio in- creased from TL 15,934 million to TL 32,277 million, while long-term borrow- ings rose at a slightly higher rate. Equity did not keep pace with the in- crease in operations; the term debt/equity ratio rose from 4.6:1 in 1973 to 7.8:1 in 1975. Since DYB is permitted by law to issue bonds without being restricted by the amount of its capital, a debt/equity covenant could not be incorporated in the first Bank loan; instead, agreement was reached on a debt service coverage ratio, to be a minimum of 1.3:1, and DYB has stayed well above this minimum. DYB's overall yield spread on funds employed has in- creased from 1.5% to 2.0% between 1973 and 1975. Over the same period, net income before taxes increased from 23% of equity to 38%. DYB can be con- sidered creditworthy because of the repayment record established by its SEE borrowers and because DYB's profitability, equity base, financial position, and management are satisfactory. vi. To further strengthen DYB institutionally, the Government, DYB and the Bank reached agreement on the following: employment of additional staff needed for appraisal and supervision, participation of DYB in the Government deliberation process before final decisions are made about SEEs investments, expansion of the scope of DYB's appraisal work, inclusion of individual proj- ect entities in the contract signed between DYB and the parent SEE, and super- vision of all projects after they are operational. To improve DYB's financial position and capability to borrow in the international market, agreements were reached on capital increases for DYE and improvement in the presentation of accounts. vii. The proposed second loan (of $70 million) would cover about 6% of DYB's projected commitments in the 1977-1978 period. Sub-projects would be subject to the same general eligibility criteria as applied in the first loan, except that the maximum sub-loan limit would be raised from $6 to $9 million in view of inflation; also, there would be a free limit of $2 million. Given DYB's complete dependence on the Ministry of Finance for resources, the Govern- ment has agreed to fulfill DYB's additional needs for funds when it finances sub-projects approved by the Bank. DYB's interest rate on Bank financed sub-projects would be 12.5%, subject to review, and the foreign exchange risk would continue to be borne by sub-borrowers. The debt service coverage ratio of 1.3 would continue to apply.  - iii - viii. Agreement having been reached on the principal issues, the project is suitable for a Bank loan of $70 million to Devlet Yatirim Bankasi, with the Guaranty of the Republic of Turkey, to be relent to selected SEE sub-borrowers. An appropriate term for the loan is seventeen years, including up to three years of grace, with an adjustable composite amortization scheme.   I. INTRODUCTION 1.01 The Turkish Government created Devlet Yatirim Bankasi (DYB) in 1964 for the purpose of financing public sector industry. The Bank's initial relationship with DYB was formed in 1973 because of the Antalya Forest Utiliza- tion Project, in which DYB was made an intermediary for transferring part of Bank loan proceeds. Subsequently, the Government asked the Bank for a direct loan to DYB to assist in financing projects proposed by State Economic Enter- prises (SEEs), Turkey's public sector companies. The Bank's first loan to DYB, of $40 million, was signed on June 28, 1974 and has now been fully com- mitted. The appraisal mission for the proposed second loan visited Turkey in July of 1976 and negotiations were held in November. The second loan, of $70 million, would cover about 6% of DYB's commitments over the 1977-1978 period (this percentage is small, because DYB is an institution with over $2 billion in assets and has a large volume of annual lending activities). DYB is the primary source of term loans for the development projects of SEEs. Strengthen- ing DYE's role in appraising and supervising projects, in order to increase the efficiency and profitability of SEEs, merits continuing Bank support in view of DYB's performance under the first loan (para 6.01). II. STATE ECONOMIC ENTERPRISES The Economic Environment 2.01 The most recent report on the economy of Turkey, "Country Economic Memorandum", was distributed to the Board November 2, 1976. From 1973 to 1975 Turkey's annual rate of GNP growth averaged 7%, putting it in the top rank of the larger non-oil producing countries in the world. The biggest single cause of the economy's dynamic performance was agriculture, which experienced bumper crops in 1974 and 1975 due to excellent weather conditions. In industry and manufacturing specifically, the respective rates of growth for 1973-1975 averaged 10.1% and 9.9% per annum. Growth rates of different industrial sectors varied considerably: the energy sector accelerated, reaching an estimated growth in value-added of 17% in 1975; mining peaked at 22% in 1974, then declined; and manufacturing dropped from about 14% in 1973 to 8% in 1975. A brief review of the industrial sector is set forth in Annex 1. 2.02 Like many other countries, Turkey experienced a rather high rate of inflation during this period, but it is getting more control over the problem with the GDP deflator declining from 27% in 1974 to 16% in 1975. Primarily due to the sharp decrease in foreign demand for emigrating workers, total unemployment and underemployment were estimated to have reached 13% in 1975. The major weakness in Turkey's recent economic performance has been the balance of payments wich started to deteriorate in 1974 after substantial improvement in the previous three years. By 1975 the current account deficit had reached $1.8 billion as a result of the slow-down in the growth of exports and remittances, a sharp increase in import volume and an unprecedented rise in import prices generally.  - 2- The System of State Economic Enterprises 2.03 The organization and control of SEEs has not changed since the previous DYB appraisal. To summarize how the system works, SEEs are the enterprises which have more than one half of their capital owned by the Gov- ernment. There are over 100 such companies, but the preponderant majority of their assets are held by the 35 biggest ones. Those SEEs which are 100% Government owned are entitled to create separate legal entities called Estab- lishments which are, in effect, independent branch operations having one or several factories, as determined by the nature of the industry and geographi- cal location. Every SEE, along with its Establishments and subsidiaries, is under the control of its related Ministry. The Board of Directors of each SEE is usually composed of three members of the SEEs top management plus two members appointed by the Council of Ministers, one drawn from the related Ministry and one from the Ministry of Finance. Supervision of SEEs opera- tions is the general responsibility of the related Ministry and the specific responsibility of the High Control Board, an auditing organization which reports directly to Parliament (see para 4.17). 2.04 The Government provides SEEs with the credit and capital needed to sustain operations and to make new investments. This is done in accordance with the Five Year Plan and the annual programs for public sector industry. The complicated administrative procedures can be described briefly as fol- lows: the SEEs present their financial requirements for new and on-going projects to the State Planning Organization (SPO) in July of each year; the SPO consults the Planning Council, composed of various Government agencies; and by the end of the year the Council of Ministers approves the annual in- vestment program (capital for new projects) and the annual financial program (working capital and capital to complete projects under construction). The SEEs are bound by the financial ceilings granted to them and must resort to special procedures when changes are required. 2.05 In following the principles of a mixed economy, the Government has established various social and economic policy objectives for SEEs which have varied in priority according to the planning period; some examples are import substitution, income redistribution, employment creation, and growth of underdeveloped regions. Many studies have been done on the impact of these policies, but they have not been all encompassing or conclusive in their findings (several are currently being completed by the SPO in view of in- creased consciousness about income and regional disparities). Turkey's extensive system of industrial subsidies, incentives and controls greatly complicate the task of evaluating the performance of SEEs, and of relating this performance to the large volume of public investment in SEEs.  -3- Performance of State Economic Enterprises 2.06 Sales revenues of all SEEs more than doubled between 1973 and 1975 (from TL 45.4 billion to TL 96.3 billion). However, the increase in produc- tion costs was even greater, so that total SEEs net profit before taxes in 1973 of TL 400 million turned to an estimated loss of TL 2.9 billion in 1975. SEEs employment over the same period only rose from 426,000 to 474,000, a slow-down in the previous rate of increase. Given the twofold expansion in production of goods and services, obviously the output per employee has great- ly increased, reflecting the heavy investment in capital goods of recent years. For operational SEEs, investment rose from TL 13.7 billion in 1973 to TL 34.3 billion in 1975 (according to a sample of over 100 public sector proj- ects currently under implementation, investment costs rose by over 80% between 1971 and 1975). The investment-savings gap consequently increased sharply to TL 28.5 billion in 1975. To fill the gap in investment capital and the short- fall in working capital, the SEEs had to rely heavily on transfers from the general budget, borrowings from social security and pension funds, and extra- ordinary recourse to the Central Bank. 1/ In the years prior to 1974, the SEEs had not needed to resort to the Central Bank for investment or working capital. This increased dependency on Government financing was contrary to the Third Five Year Plan (1973-1977) which, although it envisaged relatively capital-intensive investment by SEEs, also projected a 33% annual increase in the surpluses of SEEs. The contrary has happened: instead of financing their own investments and yielding profits which contribute to national savings, the SEEs have become a drain on the Government's financial resources. 2.07 The underlying reason for the deficiencies in economic performance lies with the social objectives imposed on SEEs which often take precedence over profitability. The instrument of price controls is, in most cases, the biggest single impediment to adequate financial returns, causing sales revenues to lag behind the inflationary rise in production costs. There are also the usual hinderances which public sector industry has with political pressures, monopolistic practices, and private sector competition for staff. The Third Plan recognized the faults of the existing SEE system and outlined reforms to improve productivity and profitability. The Government subsequently proposed SEE reform legislation to Parliament, but so far it has not been passed. How to administer SEEs is a key issue between Turkey's political parties, and the vital steps for reform must first be taken in the political arena. 2.08 SEEs Financed by DYB. Of the 28 major operational SEEs, the biggest aggregate losses for the 1973-1975 period were incurred by four enterprises (State Railways, Turkish Coal Corp., Soil Products Office, 1/ In 1973, the usual financing sources sufficed to cover SEE needs. In 1974, special funds of TL 6.4 billion were obtained for the Central Bank; in 1975, these special funds rose to TL 7.6 billion, plus TL 2.1 billion from the Treasury, and covered not only investments but working capital deficits of SEEs.  - 4 - and the Maritime Bank); Other SEEs which, in the aggregate have been unprofit- able over the same period were the Meat and Fish Organization, the Milk In- dustry, Mining (Etibank), Turkish Cement, Pulp and Paper Factories (SEKA), and Turkish Airlines. Though generally profitable, the majority of the re- maining SEEs had yields--net profit/equity--which were very low when compared with the cost of capital in Turkey. Annexes 2 to 4 give key financial figures on the 20 major industrial SEEs (financial, transport, and communication SEEs excluded). For 1974, the last year for which detailed information is avail- able, only six out of these 20 SEEs produced a net yield on equity which was above the 10% average rate for term loans to the public sector that year. It can be concluded that the most profitable SEEs (Turkish Petroleum Company, Petrochemical Company, Turkish Iron Steel Mills Corp., Turkish Sugar Company) enjoyed the best leverage on equity, were the most capital intensive, and had price structures more sensitive to market pressures. By contrast, the money losing SEEs were those most subject to social objectives, particularly employ- ment creation and income redistribution. 2.09 SEEs Financed by Bank Loan to DYB. The Bank's first loan to DYB was restricted for use in financing projects in manufacturing and processing industries and non-fuel mining. The reason for this limitation was that (a) it is in these sectors that the small and medium-sized projects exist (as so defined in the context of Turkey's public sector), over which DYB could have some influence, with Bank support; and (b) the Bank has direct operations in the other sectors DYB serves so they were excluded from eligibility under the first loan. 1/ The rationale for this approach was to attempt to extend institution building activities, through DYB, to those projects and SEEs with which the Bank would otherwise have no relationship. The performance of 11 out of the 14 SEEs which fit the sector eligibility criteria of the Bank loan was generally profitable between 1973 and 1975. The economic impact of the particular projects financed under the Bank loan is analyzed in paras. 4.09 and 4.10. Conclusion 2.10 The variation in SEE peformance is not the result of any designa- tion by the Government about which SEEs are to follow economic objectives and which are to follow social objectives. Instead, this variation is a conse- quence of the mix in social and economic objectives set for the economy as a whole and independently followed by SEEs in their respective operations. The various Governments of Turkey in recent years have recognized the problems of the SEE system and the need to solve them. The question is therefore not whether to reform the SEEs, but when and how, and this is a matter to be 1/ There is only one SEE which has received both a direct Bank loan and financing under the loan to DYB, namely, SEKA (the pulp and paper SEE). SEEs which have received direct Bank financing but which are not eligible for financing through the Bank loans to DYB are the Electricity SEE (TEK), Turkish Iron and Steel Mills Corp, State Railways, Turkish Coal Corp, and the Istanbul Fertilizer Co.  -5- decided by Parliament. The Bank's first loan to DYB was an experiment to see if results could be achieved by working within the SEE system, since fun- damental changes would require legislation in a form and at a time which can- not be determined by the Bank. The findings indicate that progress has been made in strengthening DYB which, in turn, can influence the new investments and performance of SEEs (para 6.01). A continuation of this approach is recom- mended, namely, to restrict the Bank loan to those SEEs and sectors where there are good chances of success in applying economic criteria to operations, and then to build on this in order to enlarge DYB's influence over the less efficient SEEs. The Bank's goal is to achieve heightened sensitivity in the entire SEE system to financial and economic rates of return, increased in- fluence for DYB over SEEs performance, and consequently more productive and profitable SEEs. III. INSTITUTIONAL DEVELOPMENTS Policies 3.01 DYB is subject to Law 440 and Law 441 which together comprise DYB's Statutes. There has been one new development since the previous Bank loan appraisal, namely, the Council of Ministers has approved DYB's "Regulations" which were published on July 29, 1974. These Regulations supplement Laws 440 and 441 by spelling out in detail DYB's functions, responsibilities, and procedures. Given these three documents (summarized in Annex 5), and DYB's unique role in the SEE financing system, DYB's Board has seen no need to adopt a formal Statement of Policy. DYB continues to be a 100% Government owned institution under the control of the Ministry of Finance, with the purpose of providing project financing to SEEs. DYB has no debt/ equity limit, no single exposure limit, and no limits on loan size. Organization 3.02 Board and Management. The Chairman of the Board and General Director of DYB since it was created, Mr. Nedim Rustu Aksal, retired at the end of 1974. It was not until the end of 1975 that the new Chairman and General Director, Mr. Sukru Akgungor, was appointed. An economist by education, Mr. Akgungor has held posts in the SPO and most recently in the Ministry of Finance. Counting the two assistant General Directors, Messrs. Dosluoglu and Kivanc, DYB's management has a voting majority in the five man Board of Directors, as is typical for SEEs. The functions and procedures of the Board have remained unchanged over the past three years. Given Mr. Akgungor's previous positions in the Government and the record of Messrs. Dosluoglu and Kivanc over the past years, DYB's management can be considered sound, experi- enced, and competent. 3.03 Staff. DYB now has 284 staff positions authorized by the Ministry of Finance, up from 189 positions authorized as of July, 1976. However, only 148 out of the 284 positions are presently filled (in 1973 there were 181  -6- authorized and 113 filled). One of the unfilled posts is that of Legal Advisor, which will be filled as soon as possible. Progress in hiring addi- tional staff is hampered by, first, the short supply of qualified candidates and, second, the competition of higher salaries paid in the private sector. DYB does have one advantage over other SEEs in that it can employ personnel on an annual contractual basis at a pay level higher than the standard salary structure for SEEs. This employment on a contractural basis is a procedure limited by the Government to DYB, SPO, and the Ministry of Finance. Neverthe- less, DYB has still not been able to attract enough employees to fill the positions available The turn-over rate has been reasonable, averaging 12% p.a. from 1973 to 1975. Very recently DYB received Ministry of Finance permission (a) to raise somewhat its salary structure for regular employees and (b) to increase the authorized positions from 189 to 284, including 39 more slots for experts, most of them slated for the Appraisal Department. During negotiations DYB confirmed its plans to fill a majority of the open positions by end 1977 (see paras. 3.12 and 3.16). 3.04 Structure. DYB's organization chart is shown in Annex 6. There have been no significant changes in the past three years. It is likely that DYB management will decide to undertake some organizational changes in the near future; for example, the possibility of establishing a foreign exchange division has been studied and will probably be implemented in the near future. 3.05 Training. DYB has a good reputation for training its staff through both formal programs and on-the-job instruction. Furthermore, DYB makes a unique contribution to the public sector by conducting a two month seminar every year on project appraisal techniques. Mainly due to work commitments, DYB has had to decline several requests to hold this seminar twice a year. The seminar accepts up to 60 trainees from various SEEs (DYB's staff included); the lecturers include experts from Government ministries, SPO, HCB, Turkish and foreign universities, as well as specialists from the OECD. Since 1967 about 350 employees of SEEs have attended the seminars. Although recently some SEEs have started to conduct courses for their own staff, DYB is still the only source of fairly sophisticated training on project appraisal. Usually the 15 best participants in each course are awarded OECD scholarships to at- tend Bradford University, England. Resources 3.06 DYB does not take an active part in mobilizing its own resources. Instead the necessary funds are obtained and allocated to DYB by the Ministry of Finance which, as the parent institution, will guarantee DYB's obligations and is required to act as a provider of last resort (Article 10, Law 441). The amount of money allocated to DYB each year is dependent on the annual in- vestment and financial programs of the Government for SEEs. Annex 7 shows DYB's own term resources employed as of end 1975. There has been no basic change in the method of raising funds or the sources since the previous Bank loan appraisal, except for Credits under Special Laws and Managed Funds (see para. 4.02). All of DYB's borrowings are in local currency, except for the  -7- first Bank loan and a recently concluded Euro-dollar borrowing of $150 mil- lion, guaranteed by the Government. In addition, DYB has assumed the repay- ment obligations on certain foreign aid loans Turkey received from the Federal Republic of Germany, OECD, and USAID; these particular obligations were taken over by DYB from the Internal Financing Fund (IFF) and had been handled by DYB's predecessor organization. The foreign exchange risk on the Bank loan is passed on to DYB's customers. Risk on the Euro-dollar borrowing is borne by the Central Bank. The risk on the foreign aid funds (via IFF) is borne by DYB which has incurred foreign exchange losses every year on this liability in view of the gradual devaluation of the Turkish lira. As of end 1975, the Bank's loan disbursements of $5.3 million amounted to only 0.3% of DYB's re- sources employed; this figure is projected to rise to 1.4% by end 1978 when the first loan is fully disbursed. Interest Rates 3.07 In late 1974 DYB increased its standard lending rate from 10.5% to 12.5%. 1/ When SEEs borrow Bank funds through DYB, there is an additional cost of assuming the foreign exchange risk (the lira/dollar depreciation has been 18.5% since 1974). Measured by the GDP deflator, inflation in Turkey rose from 14.7% in 1972 to 27.6% in 1974, before subsiding to an estimated 16.3% in 1975. The Government is determined to lower the rate of inflation further as rapidly as possible, and there is a good chance that it will decline to about 10% within the next several years. Taking into account all of the above, it is likely that the 12.5% currently charged by DYB will result in a positive real rate of interest over the average life of sub-loans fi- nanced out of Bank funds. 3.08 As is clear from para. 3.06, interest rates do not play a role in the mobilization of DYB's resources. As for the allocation of DYB's resources to SEEs, it should be recognized that interest rates are a very minor element in the Governmental financing system which is guided by five-year plans, an- nual programs, and social as well as economic objectives. In 1976, with the Bank's help in outlining the work, the Government agreed to undertake six studies on the financial system dealing with flow-of-funds, financial effi- ciency, informal markets, factors affecting financialization, special law Banks, and term credit; the studies are to be completed in 1977. Through the course of these studies as well as through the usual supervision activities, 1/ In its letter of October 30, 1974, the Ministry of Finance instructed DYB to reduce its normal lending rate by up to 1.5% for railroad and maritime transport projects and up to 1.0% for communication, energy, and power, steel, machine-tools, railroad rolling stock manufacture and repair, and ship building projects; these reductions are only in order when the cash flow requirements dictate that the project needs a lower rate to be financially viable.  - 8 - the Bank will keep a close watch on the interest rate structure. During negotiations an agreement was reached that the Bank and DYB will exchange views on DYB's sub-loan interest rate and that, for the present, DYB's sub- loans would continue to bear a rate of 12 1/2% unless otherwise agreed to by the Bank. Lending Procedures 3.09 Project Preparation. During the annual exercise of the SPO, Plan- ning Council, and Council of Ministers (para 2.03) when they decide on finan- cing new and on-going projects for the coming year, DYB often has an opportu- nity to make its views known on an informal basis, either directly or through the Ministry of Finance which officially participates in the decision-making process. Also, when the SEEs are preparing their new projects, it is not unusual for them to consult with and to seek the advice of DYB before present- ing their loan applications to it. In neither of these activities does DYB have any established authority or responsibility; its success is completely dependent on personal contacts and relations with Government entities and SEEs concerned. Since DYB is a repository of appraisal expertise and financial experience, and since project preparation is the best time to influence the design of new investments, DYB should be given a larger role in project prep- aration. During negotiations an understanding was reached with the Ministry of Finance and DYB clarifying DYB's role. In May of each year, the SEEs which plan to borrow from DYB in the coming year are required to submit summaries of their new investment proposals. The Ministry of Finance will henceforth ensure that DYB receives all such summaries and will provide DYB with the full text of the investment proposals when DYB so requests. DYB will then be able to consult with all SEEs on all new project proposals destined for application to DYB in the coming year; also, when appropriate, DYB can then make its views known to the Ministry of Finance before the decision making process has reached the final stages, in which the Ministry formally participates. 3.10 Project Appraisal. DYB's overall appraisal work has shown steady improvement since the previous Bank loan. The financial aspects of the SEEs, which are the loan applicants and sponsors of the projects, are now regularly reviewed whereas in the past DYB focused only on the project entity. The technical aspects are generally well covered, due to qualified staff with engineering credentials in DYB's Appraisal Department. As for economic analyses, prior to the Bank's first loan, DYB did not systematically calcu- late the economic benefits and, when it did so, used the value added approach. At the request of and in cooperation with the Bank, DYB started in 1975 to employ the Bank's recommended guidelines on calculating the internal economic rate of return (ERR) for those sub-projects submitted to the Bank. This work is now very well done, and DYB has reached the stage where it should also attempt to analyze external project benefits and costs even though they are not generally quantifiable. Current deficiencies in DYB's appraisal reports worth mentioning are the lack of information on the management of project entities and the avoidance of substantive discussion on sector or SEE policies;  - 9 - also, it is often necessary for the Bank to remind DYB about including its opinion on SEE procurement practices. DYB is very sensitive about its rela- tions with SEEs and hence is reluctant to be critical, particularly about management; the same sensitivity exists with regard to analysis or criticism of sector policies, which are established by the Government. During negotia- tions the Bank and DYB confirmed their mutual understanding about the sub- stance of appraisal work. DYB gave assurances that it would gradually apply the Bank's guidelines on the ERR to all new projects which it appraises, regardless of the source of financing; an understanding was reached that this practice would be implemented over a two year period. 3.11 After reviewing an investment proposal, DYB has severval alterna- tives. It can return the loan application to the SEE because it is not com- plete, not correct, or not in keeping with the Plan and the annual programs. Also, DYB can try to convince the SEE to withdraw the application because it is not eligible for technical, economic or financial reasons. If a project's cash flow is not sufficient to cover debt service but it is in an under-developed region where external economic and social factors come into play, then DYB can obtain a Treasury guarantee for such a loan (at end 1975 there were three such loans outstanding, amounting to TL 949.9 million). Besides those projects headed off before the loan application stage (para 3.09), DYB, for the reasons described above, did not approve 16 out of 54 applications received in 1973, 6 out of 26 in 1974, and 10 out of 18 in 1975. This illustrates the useful screening function DYB performs in trying to improve the quality of SEEs investments. If there is a dis- pute or if DYB rejects a project outright, the SEE concerned can appeal DYB's decision and seek arbitration according to a prescribed procedure; to date no SEE has resorted to arbitration. It can be concluded that DYB, through its established procedures and moral suasion, does in fact influence SEE investments, provided construction on the projects has not already started; for this reason, DYB's input to project preparation and investment decision-making is to be strengthened (para. 3.09.) 3.12 The 29 staff members in DYB's Appraisal Department have been ably led by the Assistant General Director and three group heads; unfortunately, two of these group heads recently left DYB for other institutions. In addition, the Department is under-staffed. A concerted effort needs to be made to increase the Appraisal Department staff in order to (a) take a broader role in the SEE project preparation cycle proposed for DYB, (b) handle the increased appraisal work load anticipated in 1978 when the next Plan period begins, and (c) conduct project supervision activities properly since they too are a responsibility of the Appraisal Department (see para 3.16). 3.13 Loan Contracts. DYB does not take specific security on its loans, because it has by law the general right to liquidate assets of delinquent SEEs in cases of unpaid loans. SEEs are Government-owned so there is no reason for the Government to take security against itself, given that DYB is also an SEE. In the first Bank loan to DYB, agreement was reached about  - 10 - a number of amendments needed in DYB's standard loan contract with SEEs so that the contract would conform with legal requirements for sub-loans to be financed by the Bank. After receiving a draft of the revised contract, a bank lawyer visited DYB to discuss further amendments needed. DYB's contract used for Bank financed sub-loans now covers satisfactorily the total amount of project financing to be provided, right of supervision during the construction and operation of the project, assumption of foreign exchange risk by the sub- borrowers, and various other terms and conditions deemed necessary. 3.14 By law, DYB's contracts must be signed by the SEEs. However, there is nothing to prohibit the additional signature of an Establishment or an SEE subsidiary when they are involved, i.e. when they are the actual entity under- taking the project rather than the head-office of the SEE itself. In fact, the project entity is usually an Establishment. When this is so and when it is in existence at the time DYB makes the loan, then the Establishment should also sign the contract along with its parent SEE. The purpose of dual signa- ture is to make management of the project entity fully aware of its obliga- tions to DYB and also to facilitate DYB's supervision functions. During negotiations DYB gave assurances that it would require dual signature, when- ever possible. 3.15 Supervision. DYB is required by law to supervise projects it finances during the construction phase, but not after operations have started. This is because the High Control Board (HDB), an autonomous agency attached to Parliament, is directly charged with supervising all SEEs and their operations, as are the Ministries to which the SEE's are related. From the point of view of protecting its credit risk, there is no pressing need for DYB to supervise projects after they are in operation, because DYB's loan is to the parent SEE which is much bigger than any individual project DYB finances and because the Government takes care of SEEs operational deficits and liquidity needs. Still, not supervising or at least visiting a project after it is in operation deprives DYB of the opportunity to obtain empirical evidence about what really happened to the investment which it appraised, approved, and financed; such evidence would provide useful input for DYB's future appraisal work on similar projects (for example, DYB will be financing a number of sugar factories, and it should learn from experience on the past projects in order to prevent mistakes in the future ones). DYB's contract with sub-borrowers of Bank funds does include the right to supervise sub-projects after they are in operation. During negotiations DYB gave assurances that it would gradually undertake post-construction supervision of all projects; an understanding was reached that this would be the practice within two years. 3.16 None of the investments financed under the Bank's first loan to DYB have yet reached the operational stage, so performance of DYB's supervision obligations in this regard cannot be judged. DYB's responsibility to supervise all projects during the construction phase has not been fully dis- charged due to lack of staff in the Appraisal Department, which also has the duty of supervision. In 1973 DYB visited 64% of projects under construction; in 1974, 52%; and in 1975, 49%. This performance is not satisfactory and can  - 11 - only be remedied through employment of additional qualified staff (para 3.03). Supervision reports on visits are written and distributed to management and the Board of Directors; if warranted, they are also sent to the Ministry of Finance, SPO, and the SEE and Ministry concerned. Desk supervision is under- taken through the quarterly and semi-annual reports which borrowers are required to submit to DYB during the period a project is under construction. 3.17. Procurement, Disbursement and Collection. SEEs employ international competitive bidding, according to regulations approved by their related Min- istries, and use procedures which are satisfactory. Documentation on cost estimates is submitted to DYB, and all records on expenditures are available for DYB's examination. Requests for disbursement must be fully supported by invoices and other evidence. During the initial stages of the Bank loan DYB had some difficulties with the Bank's disbursement procedures, but they are now much less frequent. DYB's loan collection procedures are adequate. IV. OPERATIONS AND FINANCIAL PERFORMANCE Characteristics of Operations 4.01 Approvals of new projects are a function of annual investment and financing programs established by the Government for SEEs. The largest number of approvals occurs in the first year of each five year Development Plan with the number tapering off toward the end of each Plan period. As shown in Annex 8, during the first three years (1973-75) of the Third Plan, total approvals amounted to TL 16,136 million, about four times higher than the corresponding period (1968-1970) of the second Development Plan. Annual commitments and disbursements are rather level compared with the wide fluctuation of approvals. During the 1973-1975 period, commitments grew at an annual average rate of 36% while disbursements grew at an average rate of 53% (for 1970-72, these figures were 10% and 14% respectively). DYB's dis- bursements during 1973-1975 accounted for 37.2% of all SEE's estimated fixed investments, compared with 20% during the 1970-72 period. The number of SEE's borrowing from DYB has increased somewhat, with 27 clients on the books in 1975 compared to 23 in 1973. 4.02 Varieties of Lending. DYB is currently providing credit in three forms: term loans, working capital loans, and credits under special laws. Term loans are the bulk of DYB's business, amounting to TL 22,809 mil- lion outstanding as of December 31, 1975 and equivalent to 71% of DYB's total portfolio. Total working capital loans outstanding accounted for only 6% of DYB's total portfolio. 1/ Credits under special laws amounted to 23% of DYB's 1/ During the first half of 1976, total working capital loans more than tripled, from TL 1,870 million to TL 6,097 million. Between end 1975 and June 30, 1976 the Managed Funds doubled, from TL 6,255 million to TL 12,568 million.  - 12 - portfolio at end 1975; most of these credits were made for eight years out of resources passed on to DYB by the Central Bank to finance the SEE's working capital and other requirements. In 1974 the Constitutional Court ordered DYB to stop extending credit under special laws for several reasons, of which the one most worth noting is that DYB is supposed to finance spe- cific projects according to established procedures, not supply credit for general needs without project appraisal, e.g., working capital loans for general purposes. 4.03 Besides the above-mentioned lending operations carried on its own accounts, DYB in 1975 started to manage credits extended directly to SEEs out of Central Bank funds with Ministry of Finance (Treasury) guaranty. The Gov- ernment resorted to using DYB as a conduit for these "Managed Funds" in order to meet the SEEs urgent needs for additional working capital in 1975; also, as mentioned above, credits under special laws were no longer a legal means for doing this. These Managed Funds amounted to TL 6,255 million at end 1975 1/ and, in keeping with development finance company (DFC) appraisal stand- ards, are shown below the balance sheet proper, because DYB does not have any risk exposure. In fact, handling Managed Funds resulted in an unexpected profit for DYB in 1975 since it paid the Central Bank 8.75% on the money, which was loaned out at 11%. If this method of financing SEEs is used in the future, it is not known whether or not DYB will be afforded such a favorable yield spread. 4.04 Foreign Exchange Risk. All of DYB's recent and current lending operations are denominated in Turkish lira, except for sub-loans financed by the Bank on which the SEEs bear the foreign exchange risk. In the case of Turkish lira loans and credits, when they are to finance imported goods and services the SEEs must obtain the needed foreign exchange from the Central Bank, which in turn bears the foreign exchange risk. 4.05 Sector Distribution of Loans. A breakdown of term loan approvals by industrial sector (1973-1975) is given in Annex 9, and a breakdown of all loans outstanding to SEEs at end 1975 is shown in Annex 10. The distribution of loans is not due to any decision on DYB's part--rather, it is as a result of the Government's annual investment and financial programs. For example, in 1973, 40% of DYB's approvals of new projects went to the energy sector, 26% to telecommunications, and only 14% to manufacturing. However, during the past two years, manufacturing accounted for 66% and 70% respectively since there were no new energy or telecommunication projects programmed by the Government. Within the manufacturing sector, which had 32% of loan approvals during 1973-1975, most new loan approvals went to SEEs producing consumer and intermediate goods. This reflects Turkey's current stage of 1/ During the first half of 1976, total working capital loans more than tripled, from TL 1,870 million to TL 6,097 million. Between end 1975 and June 30, 1976 the Managed Funds doubled, from TL 6,255 million to TL 12,568 million.  - 13 - economic development. During the last three years, DYB's approvals for manufacturing were heavily concentrated in food processing (31%), pulp and paper (31%), and chemicals (12%). On the basis of end 1975 figures for all types of loans outstanding, the biggest single borrower from DYB was the iron and steel SEE amounting to 17% of DYB's portfolio. DYB's lending operations are fairly well distributed and help reduce DYB's risk to fluctuations in the economy and the business cycle. 4.06 Maturity. Annex 11 shows the varying duration of term loans approved by DYB during 1973-1975. Amortization periods are determined by DYB's Board based on the project's profitability, location, and technology of production. In general, projects located in less-developed areas and infrastructure proj- ects are given longer terms. A median amortization period for the number of loans approved during 1973-1975 was about 10 years. By amount, loans of 14-19 years accounted for 67% of the total projects approved. 4.07 Size. A breakdown of term loans by size is shown in Annex 12. Al- though DYB does not have a policy limiting its share in financing project costs, its loans usually amount to 60-70% of total SEE investment in new projects. The amount of a loan is of course determined by the capital re- quirements of the project and the SEE's repayment ability within the limits set per SEE under the annual financial programs. The size distribution can fluctuate greatly from year to year, depending on the Government's investment plans. For the 1973-1975 period almost half the number of loans approved were for less than TL 110 million ($6.9 million), most of them being for expansion or modernization projects. During this period the average loan amount was TL 244 million ($15.3 million). Furthermore, for those loans above the median of TL 110 million ($6.9 million), the average amount was TL 403 million ($25.2 million). Given the size of most SEEs and their individual invest- ments, the definition of a small-scale project falls in the $1-5 million range while medium-scale would be $5-15 million, based on projects as approved by DYB over the 1973-75 period. Actual costs of these projects will turn out to be substantially higher when all the evidence is in, due to inflation. 4.08 Geographical Distribution. For the 1973-1975 period, 23% of approvals for new projects were in the Aegean area, followed by the Mediterranean, Middle Anatolian, and Marmara/Istanbul areas in that order (see Annex 13). In 1975, about 40% of all projects approved were located in under-developed areas. This reflects the Government's policy of dis- persing new industrial projects to various centers across the country. Economic Impact of Bank Financed Sub-Projects 4.09 As of October 1, 1976, 10 sub-loan applications had been received and approved by the Bank under the first loan to DYB (see Annex 14). The Bank's total commitments for these 10 sub-loans amount to $38.3 million which, in view of subsequent exchange rate fluctuations and cost increases, will probably result in full usage of the $40 million loan; if not, the authoriza- tion date will be extended as necessary to permit full commitment. By amount approved, the distribution of the Bank's sub-loans was 25% to textiles and 20%  - 14 - to chemicals, with the rest spread over six other branches of industry. Four of the ten sub-projects were located in underdeveloped areas. Two of the sub- projects directly replaced imports with their production. The remaining sub- projects were neither explicitly export-oriented nor aimed at substituting for existing imports. Instead, they were intended to develop domestic industry in order to meet future domestic demand, primarily for intermediate goods; thus, they are import substituting in their final effect. 4.10 The estimated financial rates of return (FRR) and economic rates of return (ERR) on the 10 sub-projects averaged out as follows: Sub-Loans FRR avg. ERR avg. 5 investments in new projects 22% 30% 5 investments in expansion projects 29% 33% 10 projects, weighted average 1/ 25% 29% These are satisfactory returns, since they are roughly twice the cost of capital in Turkey. It should be noted that the average returns on the five expansion sub-projects are somewhat inflated, because total real costs are understated. This occurs because the existing plants had made excess invest- ment in certain infrastructure, buildings and equipment in anticipation of expansion, which would then draw upon these facilities already available. On the other hand, in these expansion sub-projects there are significant external benefits which have also not been included in the ERR calculations, namely: four of the sub-projects have secondary employment effects resulting from increased agricultural production (cotton, sugar beets, and timber) to provide inputs for expanded processing plants; and three of the sub-projects are located in underdeveloped regions of Turkey. Thus, the external benefits of these expansion sub-projects tend to offset possible overstatement of the ERR. There are other external benefits, besides secondary employment effects and regional development, which should also be noted in SEE investments financed by DYB: introducing new technology and goods, creating skilled labor, training engineers and staff, establishing infrastructure facilities, and redistributing income. Although these external benefits have not been included in ERR calculations, they are important and in accordance with the Government's assignment of economic and social objectives to SEEs. Having sensitized DYB to externalities in Bank financed sub-projects, the Bank expects DYB to increase its efforts to identify and, where possible, analyze external benefits and costs (para 3.10). 4.11 Concerning employment creation, the Third Plan clearly states that modern and capital intensive technologies will be necessary in the industrial sector to make it competitive with EEC industry in the long run. The most noticeable result of this policy is in heavy industry where the SEEs which DYB 1/ In Turkey's private sector DFC, the weighted average financial and economic rates of return in 34 sub-projects out of the total 101 sub- projects approved in 1975 were 23.0% and 20.5%, respectively.  - 15 - lends to predominate and where technology of production is inherently capital intensive. The average cost per job-created by the Bank financed sub-projects of DYB is estimated at $75,000. However, if this analysis excludes three very capital intensive sub-projects (one.of which has high secondary employment effects), then the estimated average cost per job-created under the remaining sub-projects drops to $43,000. 1/ Most SEEs have traditionally been required to create more jobs than the technology of production legitimately justifies, to the detriment of their profitability. The emphasis now is on making them more efficient, profit producing, and internationally competitive so that they are net contributors to the Government's financial resources. The trade-off between this and the cost of direct jobs created is acceptable, particularly in view of the ERR, secondary employment effects, and other external benefits resulting from SEEs investments. Financial Performance 4.12 Profitability. DYB's financial statements and performance indic- ators for 1973-1975 are shown in Annexes 15, 16, 17 and 18. Profitability is mainly determined by DYB's spread on the interest rate charged for term loans (currently 12.5%) and the cost of DYB's bonds (currently 11%). When combined with the spread on other loans and resources (excluding Managed Funds and some other special kinds of credits), DYB's overall yield spread in 1975 was 2.0%, compared to 1.5% in 1973. Net income before taxes has doubled, from TL 334.7 million in 1973 to TL 765.2 million in 1975 (2.2% and 2.5% respectively of average total assets). Measured as return on average net worth, net income before taxes in 1973 yielded 23.4% and in 1975, 38%. DYB's performance is not as impressive as it first appears, given the relatively high price of capital in Turkey and DYB's low costs. However, for a DFC serving the public sector, DYB's profitability is adequate and reflects the following factors: a well leveraged capital base (para 4.15), a sound portfolio with no losses or ex- cessive arrears, a consistently positive yield spread on operations, and low administrative costs resulting from the relatively small staff compared to volume of operations. DYB pays a corporation tax amounting to 35% and various other taxes amounting to 6.5% of net income. 4.13 Arrears, Provisions and Reserves. The arrears situation of DYB's loans is satisfactory (Annex 19). However, this does not necessarily reflect good performance on the part of DYB's borrowers. Rather, it is mainly because the Mfinistry of Finance, when it formulates the annual financing program every year, takes into account SEEs' overdue debts and allocates sufficient funds to pay off most arrears as well as cover fresh requirements. There has been a slight decrease in the amount of principal and interest in arrears of over three months, from 1.6% as a percentage of total portfolio at end 1974 to 1.0% at end June 1976. The loans which were affected by these arrears rose slightly from 3% of portfolio to 4%. DYB had no arrears more than one year past due at end June 1976 because of the Consolidation Law enacted in 1975. 1/ In the six countries where DFCs have been recently studied in depth, highest cost per job created was $48,000, in the DFC in Greece.  - 16 - (it consolidated and re-scheduled TL 473.9 million in SEE debts, in the form of 10-year loans to DYB). 1/ There was a precedent for this rescheduling; in 1970, upon instructions from the Ministry of Finance, DYB rescheduled TL 1,260.5 million in working capital loans. 4.14 By law, DYB sets aside three kinds of provisions, appropriated out of net profit after taxes. For development banking purposes, one of these accounts can be considered general provisions for possible losses on loans, because it is calculated on the basis of a formula applied to the amount of loan portfolio outstanding and to estimated risks. At end 1975 this account amounted to TL 423.4, or 1.3% of total loan portfolio. Since DYB has never suffered loss on a loan 2/ and since the Government has a reliable system for financing and re-financing SEEs, described above, the general provisions indicated appear to be adequate. In addition, DYB at end 1975 had reserves and surplus amounting to TL 575 million. Together with general provisions this amounts to a comfortable cushion against possible future losses on loans. 4.15 Capital. Since 1973 the Ministry of Finance has permitted DYB to increase its equity base by retaining net profit after taxes and other required allocations, rather than transferring net profits to the Ministry. As a result, paid-in share capital has risen from TL 1,000 million in 1971 to TL 1,400 million at end 1975. In addition, net interest of TL 306 million received on certain credits under special laws is retained, to be converted to capital at a future date as yet to be determined. Given these sources of fresh capital, it is likely that DYB's total authorized capital of TL 2,000 million will be fully paid in by end 1977. 4.16 Financial Position and Creditworthiness. From 1973 to 1975 DYB's total assets doubled. Loan portfolio increased from TL 15,934 million to TL 32,277 million, while long-term borrowings rose at a slightly higher rate. Equity, adjusted to include permanent Central Bank deposits with DYB, did not keep pace with the increase in operations; the term debt/equity ratio rose from 4.6:1 in 1973 to 7.8:1 in 1975. Since DYB is permitted by law to issue bonds without being restricted by the amount of its capital, 1/ Under Article 7 of the Law, all the debts and credits among all SEEs, including DYB, which were overdue as of December 31, 1974 were, first, set off against each other, this process being coordinated by the Ministry of Finance. Then all such debts and credits which remained as of the above date were transferred to DYB. Such debts or credits to DYB stood at TL 473.9 million as of December 31, 1975. The creditors to DYB will set off their credits against their debts to DYB. The debtors to DYB will repay their debts to DYB over 5 years, following five years grace period, at an interest rate of 6% p.a. 2/ There is one loan inherited from the Government when DYB was created which is now in the process of being written off; it has been fully covered in a separate loss account.  - 17 - a debt/equity covenant could not be incorporated in the first Bank loan; instead, agreement was reached on a debt service coverage ratio, to be a minimum of 1.3:1 (the ratio is calculated by dividing DYB's debt payments into its loan receipts). DYB has stayed well above the 1.3 minimum, the ratios being 1.7 in 1974 and 2.0 in 1975. DYB can be considered credit- worthy because of the repayment record established by its SEE borrowers and because DYB's profitability, equity base, financial position, and management are satisfactory. Audit and Accounts 4.17 All SEEs, including DYB, are supervised by the High Control Board (HCB), an independent agency responsible to Parliament and attached to the Prime Minister's office. Created in 1938, the HCB is supposed to keep SEEs under continuous supervision and to perform an annual audit which encompasses their technical, economic, financial, fiscal, administrative, and social acti- vities. After the HCB audit report on DYB has been drafted, it is presented to DYB for comment, particularly on any criticisms or recommendations set forth. Subsequently, the report is submitted no later than end November by the Prime Minister's office to a joint Parliamentary committee. Within 90 days the joint committee forwards the report, along with its own observations, to Parliament for final consideration. Only when Parliament has approved the financial statements is DYB's Board of Directors absolved from obligation on the accounts. 4.18 In the Bank's first loan to DYB, the HCB was accepted as independent auditors, but the Bank reserved the right to review this at any time during the period of the loan. An understanding was also reached with DYB that the HCB audit report would include an assessment of DYB's loan portfolio and an opinion on the adequacy of provisions for losses. The HCB reports sent to the Bank on DYB's 1974 and 1975 accounts were lengthy, detailed, and useful and showed gradual improvement over reports of previous years. However, these reports resembled operational reviews rather than conventional audits satis- factory to the Bank. In particular, the reports did not indicate the account- ing tests and auditing procedures employed, gave no explicit opinion on the accounts, and made no assessment of the portfolio and its risks or the adequacy of provisions. Furthermore, the reports did not follow the recommended DFC format, include all the required information, or reach the Bank by May 31 as stipulated in the Loan Agreement. The Bank has passed on its observations in detail and has received confirmation from DYB that it will give every encour- agement to HCB to meet the Bank's requirements. During negotiations assurances were obtained that (a) the HCB would continue to be considered auditors of DYB; (b) the Bank would continue to reserve the right to review this decision at any time; and (c) HCB's usual report would include an evaluation of DYB's loan portfolio and provision for bad and doubtful debts. 4.19 DYB's accounts are kept in a fashion which is an amalgam of banking system directives, Ministry of Finance practices, and DYB's own procedures based on tradition. Presentation of the accounts was properly criticized in the HCB report which, for example, recommended that DYB set aside the Managed  - 18 - Funds and loans from the Central Bank in separate accounts (see para 4.02). In fact, there were a number of accounting items requiring attention. The 1975 balance sheet presented in the HCB report showed total assets of TL 47.8 bil- lion but, after the adjustments made in conformity with DFC loan appraisal work, the total 1975 assets shrink to TL 33.4 billion. Of the many improve- ments needed in DYB's accounting procedures, the principal ones are the fol- lowing: (a) more refined classification of accounts particularly current assets and liability, Managed Funds, and equity; (b) more detailed and com- prehensive income statement; (c) elimination of double-counting; (d) correct calculation and presentation of provisions; and (e) revised format more in keeping with international standards and the Bank's "Illustrative Form of Audit Report for Development Finance Companies". In just three years DYB has grown from less than $1 billion to over $2 billion in assets--an institution of this size needs and deserves accounting, bookkeeping, and information gathering procedures consonant with its position in Turkey's financial sys- tem. After the Bank appraisal mission, DYB started to undertake the improve- ments needed. It has confirmed that it will continue this work and exchange views with the Bank about it from time to time. V. PROSPECTS Economic Forecast 5.01 The Government's Annual Program for 1976 projects GDP growth at 7.5% compared to 8.8% realized in 1975. This appears to be a physically attainable target in view of the prospect for a good harvest. As for the medium-term, the Fourth Five Year Plan has still to take shape, but the Government's target growth rate should be around 8% p.a.; the strategy is expected to continue emphasizing rapid modernization and industrialization in a mixed economy. To sustain rapid growth, investments would have to be made at a continued high rate. In 1976, aggregate investment is projected to rise by 16% and public investment by 12% in real terms, compared to 18% and 26% realized respectively in 1975; this reflects the normal cyclical decline which occurs toward the end of each Plan period. Over the next few years, investment should remain at least at these levels in order to sustain GDP growth. Since internal savings by SEEs cannot be expected to improve during the next several years, DYB will continue to be an important source of financing SEEs' capital investments. Projected Operations 5.02 As in the past, DYB's future level of operations will be a direct result of the next Five Year Plan (1978-1982) and the annual programs. Actually, DYB's project pipeline cannot even be forecast until the annual investment and financial programs reach the decision-making stage in late autumn each year. Among other reasons, this is because the profitability and liquidity of every SEE has to be considered before the Government can decide  - 19 - how to allocate funds to the public sector for the coming year. Annex 20 shows DYB's projected operations for 1976-1979 and gives the assumptions which are primarily based on past experience. Projected operations are as follows (in TL million): 1976 1977 1978 1979 Approvals of New Projects 11,681 7,930 L5,904 2,807 Commitments (Annual Tranches) 6,929 8,038 10,449 12,016 Disbursements 6,236 7,234 9,404 10,815 Average annual amount of approvals for 1976-1979 would be about TL 9,600 mil- lion, compared to TL 4,800 million during the preceding four years (1972-1975). The highly irregular pattern of approvals is a function of the five year plan cycle, given the past record. In view of the above, it is likely that DYB's share in SEEs' total fixed investments would decrease somewhat from the present level of 37%. 5.03 Resources. Based on the disbursements forecast, total resource needs for 1976-1979 would be TL 33.7 billion. Assuming the Government con- tinues to supply DYB with funds using the same mechanisms as in the past, resources would come from the following: (TL billion) (% of total) Bond Issues 14.8 44 IBRD Loans I and II 1.3 4 Other Foreign Borrowings 2.4 7 Net Collections 11.1 33 Retained Earnings (excluding a portion to be transferred to share capital) 1.8 5 Other cash generation 0.4 1 Share Capital Increases paid-in 1.9 6 Total 33.7 100 Besides selling bonds to government pension funds, DYB is expected to have another source in the newly created social security fund for self-employed workers. For the first time, DYB is borrowing in the Euro-market: a medium term Eurodollar loan of $150 million, at 1.75% over LIBOR, with the Govern- ment's guaranty has just been obtained. As for paid-in share capital, the Government has indicated that DYB can continue to retain its net earnings for conversion into capital, along with the conversion of tax free income from Credits under Special Laws. This should raise paid-in capital to its autho- rized level of TL 2.0 billion by the end of 1977. DYB's capital base will  - 20 - then require further strengthening. The Government recognizes this and a Parliamentary committee has already discussed an increase in DYB's authorized capital by TL 3.0 billion, to be paid in over a five year period so that total paid-in capital would amount to TL 5.0 billion by end 1982. 5.04 During negotiations, the Government and DYB confirmed the intention to obtain an increase in DYB's capital from TL 2 billion to TL 5 billion. (This will require legislation so no time limit could be fixed to bring this about.) The Government and DYB have also confirmed that the unpaid balance of DYB's currently authorized capital of TL 2 billion would be paid in during 1977. These objectives recognize that the financial strength of DYB, which lends only to the state sector as an integral part of the Government's financ- ing system, fundamentally rests on the Government itself; but that, neverthe- less, improvement of DYB's capital base is sound development banking and should help in present and future efforts to borrow funds in the international capital market. The Bank welcomes any effort by DYB to obtain funds from the international capital market but does not intend to seek any agreement on the mobilization of such resources in connection with the proposed loan. This is because, when DYB borrows, it is tantamount to an obligation of the Ministry of Finance whose borrowings are of course a function of the Government's own policy for managing the public debt. 5.05 Financial Statements. Projected financial statements are given in Annexes 21, 22, and 23. DYB's net profit after tax would grow at an annual average rate of 26%. This is mainly due to the growth in DYB's loan portfolio and specifically due to improvement in the margin on DYB's in- vestment credits, resulting from the roll-over of resources derived from DYB bonds issued earlier at lower interest rates and re-loaned at higher rates. Administrative expenses are projected to grow at an annual average rate of 60% but would still remain below 0.2% of the average total assets in 1979. As a result, DYB's profitability before tax as a percentage of its average net worth would improve from 38% in 1975 to 42% in 1979. 5.06 Total assets would grow at an annual average rate of 12%, in line with the increase in loan portfolio. Assuming that the Government policy regarding the allocation of DYB's net profits remains unchanged, DYB's net worth is projected to grow at an annual average rate of 22%, much higher than the long-term debt (11% p.a.) and a welcome development in view of the need to build up the capital base. Treating the permanent Central Bank deposits of TL 1,297 million as quasi-equity, the debt/equity ratio would improve gradually from its peak at 7.8:1 at the end of 1976 to 6.3:1 at the end of 1979. How- ever, the future debt/equity ratio really depends on the way in which the Government will finance SEEs, that is, whether it increasingly resorts to using the mechanism of Managed Funds through DYB, as it started to do in 1975, or whether DYB's increased business is handled for its own account in the usual manner. Projected debt service coverage ratio would range between 1.6 and 1.8 during 1976-1977, well above the minimum limit of 1.3.  - 21 - VI. THE PROPOSED LOAN Performance under First Bank Loan 6.01 Given the SEE system and the role assigned to DYB in financing public sector industry, DYB's performance of commitments concluded under the first Bank loan has been satisfactory. DYB's appraisal work has improved. The financial, technical, and economic analyses have become more comprehensive, and the Bank's guidelines on the ERR calculation have been properly employed. The deficiencies worth noting were in DYB's reluctance to discuss SEEs' man- agement and policies and the lack of adequate description on unquantifiable external benefits. DYB can and does perform a screening function with regard to proposed SEE projects which do not meet the Government's criteria. DYB has devised and employed a contract for sub-loans financed by the Bank which meets Bank requirements. Supervision of projects has not been adequate and reflects DYB's staff constraints. The lack of a General Director for almost one year and the difficulty in hiring staff to fill allocated positions have caused problems which the new General Director is now trying to resolve. The Bank's audit requirement has not been met, though some improvement in HCB reports has been noted. With regard to the SEE sector, the projects financed out of the proceeds of the Bank loan have an estimated economic impact which is demonstrable: the weighted average FRR and ERR were 25.1% and 29.0% respectively, considerably above most projects financed by the Bank in Turkey on a direct basis. Furthermore, the rate of return on DYB's own operations has been very good, with its net income before taxes yielding 38% on average net worth in 1975. From the point of view of transferring resources quickly and efficiently, the first loan to DYB was also successful since it was almost fully committed within two years of effectiveness, and disbursements are gen- erally on schedule. The Bank's first loan was admittedly an experiment in institution-building and, summarizing from the above record, it can be con- cluded that the results have been clearly favorable. Objectives and Criteria of Proposed Loan 6.02 The proposed loan has, as one set of objectives, the continuation and expansion of institution building efforts initiated under the first Bank loan. As indicated above in para 6.01, DYB can effectively use Bank support in order to carry forward needed improvements already under way--in appraising projects, in carrying out post-construction supervision, in hiring and training required staff, and in obtaining audits which meet international standards. A second set of objectives makes much more explicit the general purpose of the first loan to expand DYB's role in the SEE system. The proposed loan strength- ens DYB's hand in the Government's decision making process on SEE investments, promotes DYB as a key spokesman sensitizing the Government and SEEs to the full economic benefits and costs o_ projects, and increases DYB's influence in screening out and modifying questionable projects. A third set of objectives, not included in the first Bank loan, concern efforts to increase DYB's equity base, to improve its accounting system, and to fulfill the assignment of  - 22 - effectively allocating resources raised by the Government in foreign markets. The end result of these objectives should be a stronger intermediary in DYB, better SEE projects and thus more efficient and profitable SEEs. 6.03 The 1977-78 pipeline of projects for DYB will not be clearly defined until January. The notional 1977-78 pipeline (Annex 24) shows the average size of projects to be $66.4 million; the median is $23.6 million, indicating how much the average is skewed by very large projects. A second Bank loan, of $70 million, would cover 6% of DYB's projected commitments during the 1977-78 period. During negotiations, DYB and the Bank reached agreements and under- standings on the following criteria to be applied to sub-projects submitted for Bank financing under a second loan: (a) the loan would be restricted primarily to projects in manu- facturing and processing industries and, to a limited extent, in non-fuel mining; these are the same sectors which were eligible under the first loan; (b) the Bank's contribution to DYB's individual project fi- nancing would be within the range of $1 to 9 million, com- pared to $1 to 6 million in the first loan, the increase being justified by the rate of inflation in Turkey over the past three years and the increasing average size of projects undertaken by SEEs (during the 1977-78 period it is expected that projects financed by Bank sub-loans will generally be in the $10-25 million range, total cost, which is still below the size of industrial projects which the Bank would consider financing on a direct basis in Turkey). Bank financing would cover at least 10% of sub-project costs and would only be used for foreign exchange expenditures; (c) both the FRR and ERR would be reasonably above the interest rate charged on sub-loans (currently 12 1/2%); furthermore, DYB would attempt to approximate the FRR and ERR levels of sub-projects submitted under the first loan (para. 4.10); DYB would also try to submit sub-projects with an average cost per job of less than $50,000. (d) there would be a free limit of $2 million and an aggregate free limit of $14 million; the number of projects above the free limit to be sent to the Bank would be a minimum of 12, thus making the theoretical average Bank sub-loan equivalent to $5.8 million. 6.04 The covenants and conditions to be part of the second loan would be those customarily included in DFC loan agreements. Given DYB's complete dependence on the Ministry of Finance for resources, the Government would cover any additional need for funds when DYB finances sub-projects approved by the Bank. DYB's interest rate on Bank financed sub-projects would be 12.5%,  23 - subject to review, and the foreign exchange risk would continue to be borne by sub-borrowers. The debt service coverage ratio of 1.3 would continue to apply. There would be an adjustable composite amortization scheme, and the loan term would be 17 years, including up to 3 years grace. Agreement on all of the above points was reached during negotiations and included in the Loan and Guaranty Agreements. The projected disbursement schedule is shown in Annex 25. Justification 6.05 The first Bank loan to DYB was admittedly an experiment and had limited objectives. It has succeeded well enough to justify a second loan which not only continues the objectives of the first but significantly expands them, defines them with explicit measures, and introduces new objectives (see para 6.02). Loans to DYB permit the Bank to get involved in projects, and with SEEs, with which the Bank would otherwise not have any association because of their smaller size. 1/ The results of this relationship with DYB should be improved projects and increased profitability for SEEs, as well as a better opportunity for the Bank to learn about the overall problems of SEEs and how to solve them. The Bank's association with DYB, by working within the existing SEE system, is thus designed to produce a catalytic effect on the eventual reform of public sector industry in Turkey. This is an admittedly long-term process. In the meantime, DYB can work as an effective intermediary for transferring resources from the Bank to economically sound projects. VII. RECOMMENDATIONS 7.01 During negotiations, agreements and understandings were reached on the following issues: (a) plans for hiring additional staff (para 3.03); (b) review of interest rates (para 3.08); (c) DYB's role in project preparation cycle (para 3.09); (d) uniform standards of sub-project appraisal work and the substance of appraisal work (para 3.10); (e) dual signature on DYB contracts with its borrowers (para 3.14); 1/ The Bank's five most recent direct loans to SEEs, DYB excluded, averaged $75 million, and the projects averaged $362 million in cost. This should be compared against sub-projects financed under the first DYB loan having an average cost of $14 million and an average Bank sub-loan of $3.8 million.  - 24 - (f) post-construction supervision of all projects (para 3.15); (g) auditing arrangements (para 4.18); (h) accounting (para 4.19); (i) capital increases (para 5.04); (j) eligibility criteria for sub-projects submitted to the Bank for financing (para 6.03); (k) Government allocation of sufficient funds to meet needs of sub-projects financed by the Bank (para 6.04); (1) sub-loan interest rate of 12 1/2% and foreign exchange risk (para 6.04); (m) debt service coverage ratio (para 6.04). 7.02 The project is suitable for a Bank loan of $70 million to Devlet Yatirim Bankasi, with Guaranty of the Turkish Republic, to be relent to selected SEE sub-borrowers. An appropriate term for the loan is seventeen years, including up to three years of grace, with an adjustable composite amortization scheme.  TURKEY: DEVLET YATIRIM BANKASI BASIC DATA (as of December 31, 1975) Year of Establishment: 1964 Ownership Turkish Government TL 1,400.6 million (100%) (Authorized capital TL 2,000 million) Resource Position (Disbursement basis) TL Million Equity and Quasi-Equityl/ 3,578.2 Credit from Treasury 1,195.3 DYB Bonds 17,831.0 Credits from the Central Bank 7,068.9 Other Long-term Debts 1,756.1 Total Long-term Resources 31,429.5 Loan outstanding (Net of Provision 31,852.7 for Possible Loss) Operations (TL Million) 1973 1974 1975 Approvals of New Projects Number of Projects 37 21 7 Amount 10,621.8 1,532.1 3,981.8 Commitments (Annual Tranches) Number of Projects 64 64 53 Amount 4,468.5 4,832.4 5,973.2 Disbursements 2,823.3 5,291.2 6,892.5 Earnings Record Profit before tax/Average total assets 2.2 1.9 2.5 Profit before tax/Average net worth 23.4 25.6 38.0 1/ Includes Central Bank deposits of TL 1,297.0 million which can be regarded as quasi-equity.  1973 1974 1975 Financial Position Total debt/Equity!/ 4.9 8.3 8.4 Long-term debt/Equity 1/ 4.6 7.5 7.8 Reserves and Provisions/Portfolio outstanding 3.3% 2.7% 3.2% Interest rates and charges Loans before October 1974 10.5% Loans after October 1974 12.5% Commitment fee 0,75%X/ BASIC DATA ON BANK GROUP LOANS A. Status of Bank Loans ($ million) as of December 1, 1976 Date of Interest Amount Commit- Disburse- Out- Effectiveness Rate of Loan ments ments standing 1024-TU 9/30/74 7.25 40.0 38.3 14.6 14.6 B. IFC Investments none 1/ Central Bank deposits of TL 1,297.0 million are treated as equity 2/ Applicable only to loans financed by IBRD ENENA/IC & DFC December, 1976  ANNEX 1 Page 1 of 3 TURKEY: DEVLET YATIRIM BANKASI Brief Review of Industrial Sector Structure 1. Turkey has followed a system of a mixed economy since the 1930's. At present the public sector accounts for about 50% of value added in manu- facturing and mining and has a virtual monopoly in steel, petroleum refining, fertilizers, petrochemicals, pulp and paper. The public sector accounted for about 53% of industrial investment during 1972-75. 1/ Even in the private sector, the Government can greatly influence manufacturing growth through a combination of import restrictions and investnent incentives. The historical reason why the Government is in industry is that the development of certain basic fields is considered vital to the country; also, the Government invests where the private sector is unwilling or unable to do so because of inadequate financing, excessive risks, or low financial return. 2. Industrialization has been given high priority over the last 15 years. Industrial growth averaged about 10.5% during the First Plan, 9.7% during the Second Plan despite virtual stagnation in 1970, and so far 10.1% in the Third Plan (1973-77). Industry has absorbed a growing portion of the nation's resources, as the number and size of projects have been stepped up both in the State and private sectors. The share of manufacturing in total gross investment rose from 24% in 1962 to an estimated 42% by 1975. As a result Turkey has acquired a very diversified industrial sector. However, the growth of output and investment in industry has been accompanied by a high capital-output ratio and a slow growth of employment. Employment in industry increased to about 12% of total employment in 1975, compared to 8% in 1962. Industrial Development Policy 3. The Five Year Plans have aimed at rapid industrialization as the leading factor in sustained economic growth and as a means to absorb surplus manpower from agriculture and reduce dependence on foreign aid. In the pur- suit of these objectives, industrial development policy has emphasized import substitution, often through capital intensive investment. The policy tools have been high protection and generous incentives for domestically-oriented industry. The main results of this policy have been threefold: fast growth in industries catering to the home market, establishment of many industries which cannot compete in the international market and, until recently, a slow growth of industrial exports. Turkey has now achieved a high degree of self- sufficiency. Industries such as cement, oil, refining, steel, fertilizers, 1/ Industry is comprised of manufacturing, mining, and power.  ANNEX 1 Page 2 of 3 paper and road vehicles have developed fast. The possibility of import sub- stitution has now become very limited, except in the area of semi-finished and capital goods, where value added domestically is often obtained at a high cost and the size of the domestic market is often smaller than the output of economic sized plants. As a result of the import substitution policy and the control system in external trade, the share of consumer goods in industrial imports has fallen considerably and that of intermediate and investment goods risen. By 1975, substantial import dependence existed only in machinery and transport equipment and in basic metals and chemicals and fertilizers. To- gether these groups accounted for over 70% of Turkey's industrial imports. 1/ 4. Inward-oriented policies initially led to slow growth of industrial exports. Incentives for export oriented industries in the mid-sixties were insufficient to offset the disadvantages of an overvalued currency, high costs of imported and domestic inputs and insufficiently developed export channels. The import substitution policy also led to the manufacturing of goods of low- quality, and offered no encouragement to Turkish entrepreneurs to export their products. During the Second Plan period and particularly after the 1970 de- valuation, industrial exports increased sharply, from $237 in 1972 to $503 million in 1975. 5. Industrial development policy also puts a strong emphasis on heavy industries and advanced technologies as a base for future industrial growth. Thus, projects for an aluminum smelter, a third integrated steel mill, a petro- chemical plant, a diesel locomotive factory and a shipyard were promoted, in some cases despite economic disadvantages. While leading to a rapid growth of output, such a policy has resulted in the development of some industries in which Turkey may not be able to compete freely with the EEC unless and until greater efficiency can be introduced. Protection and Incentives 6. Various instruments are used for the protection of domestic indus- try, including tariffs, other charges and taxes on imports, quota restric- tions and absolute prohibition of some imports. To some extent these mea- sures have caused costly import substitution and rather slow export growth because of the relatively high profitability to produce for the home market. Other effects of the control system have been to raise substantially the do- mestic prices of imported goods, to cause delays which reduce production, and to inflate inventories in order to protect against import uncertainties. This is not a unique situation for a developing country. It is a result of the development strategy of import substitution, the chronic shortage of foreign exchange, and the State industrial sector whose large investments are partly geared to non-economic goals. 7. Export and investment incentives in Turkey include tax rebates for exports, exemption from custom duties or their deferral for 2-5 years, sub- sidized investment credits for export oriented production, and tax allowances 1/ Including petroleum products.  ANNEX 1 Page 3 of 3 for investment. Higher rates of incentives are offered for investment in re- gions that are classified as underdeveloped. The total incentive package has been considerable and has undoubtedly encouraged private investment in indus- tries, particularly textiles, processed food, chemicals, metal products and machinery, and transport vehicles. However, despite the extent of these in- centives to industry, their cost and their distribution between sectors is only partially known. The Government has not evaluated the effects of the incentives in relation to its objectives, nor attempted to develop a system which would achieve the desired objectives at least cost.  TURKEY: DEVLET YATIRIM BANKASI Income and Frofitability of Major Industrial SEEs, 1972-197L4 Net Operating Net Profit Total Sales Income After Tax Profit/Sales Net Profit/Equity 1972 1973 1974 1972 1973 1974 1972 1973 1971 1972 1973 1974 1972 1973 1974 Agricultural Sector ~~(------------------ TL Millions --------------------------) (--------- % --------- Aigricultural Sector T ilos) ( Turkish Sugar Company 3,194 3,708 2,809 100 108 95 73 82 75 2.3 2.2 2.7 17.0 13.0 10o.6 Foil Products Office 2,061 3,238 4,683 -70 -63 23 -14 4 17 - - o.4 - - 2.h Meat and Fish Organization 1,079 1,033 1,359 13 15 12 - 4 -13 5 _ - - - - 1.0 Agricultural Supply Office 1,546 3,033 3,874 65 97 -41 84 147 63 514 4.7 1.4 18.0 22.0 8.1 Milk Industry 61 73 98 -8 - 5 -11 -12 - 8 -15 - - - - - - Wool and Mohair 27 43 71 3 2 9 2 2 1 7.4 4.6 12.6 9.0 6,0 1.9 Feed Industry 189 264 368 8 11 26 5 5 7 2.6 1.9 1.9 8.0 4.0 4.6 Sub-Total 8,157 11,392 13,262 111 165 113 134 219 153 Mining and Power Etibank 817 1,310 2,029 66 74 -88 201 log -116 26.9 6.1 - 100 5.0 - TEK 2,o54 2,467 4,o6g 773 497 336 365 80 53 17.8 3.2 1.3 8.0 1.0 0.4 Sub-Total 2,871 3,777 6,098 839 571 308 566 189 -63 Coal, Petroleum and Steel Turkish Coal Corporation 2,167 2,119 4,054 86 -234 -847 -62 -335 -1,010 - - - - - - Turkish Iron Steel Mills Corp. 2,600 2,7b6 3,388 524 289 1,040 304 57 617 11.7 2.1 18.2 12.0 2.0 19.8 Turkish Petroleum Company 1,373 2,767 12,289 388 382 1,466 366 402 1,032 26.7 14.5 8.4 18.0 14.0 3.04 Petroleum Office 2,822 3,869 7,535 - 2 65 384 36 35 56 1.3 0.9 0.7 6.o 4.0 5.0 Petrochemical Industry 614 952 1,589 74 143 363 75 136 268 12.2 14.3 16.9 10.0 14.0 19.8 Sub-Total 9,576 12,453 28,855 1,070 645 2,406 719 295 963 Manufacturing Sumerbank 3,061 3,486 7,513 285 309 571 108 145 208 3.5 4.2 2.8 4.0 5.0 3.0 Turkish Cement Industry Co. 828 900 1,190 150 - 4 62 110 - 7 48 13.3 - 4-0 14.0 - 5