Turkey - Fourth Livestock Development Project

Document of FI L E COu P Y The World Bank FOR OFFICIAL USE ONLY Report No. P-2332-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR A FOURTH LIVESTOCK DEVELOPMENT PROJECT May 12, 1978 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 Calendar 1977 March 1978 Currency Unit Lira (TL) TL US$1 TL 18.00 25.00 TL 1 US$0.05 0.04 Note: The Staff Appraisal Report uses an exchange rate of US$ 1 TL 19.25 FISCAL YEAR March 1 to February 28 ABBREVIATIONS CLA - Convertible Lira Account EBK - Meat and Fish Organization EDLD - Encouragement and Development Loan Division of TCZB FSD - Fattening Subproject Division of LDP GDVS - General Directorate of Veterinary Services IDPS - Intensive Dairy Production Division of LDP LDP - Directorate for Livestock Development Projects of the Agriculture Ministry MINAG - Ministry of Food, Agriculture and Livestock SEE - State Economic Enterprise SPO - State Planning Organization TCZB - Turkiye Cumhuriyeti Ziraat Bankasi (Agricultural Bank of Turkey) TSEK - Milk Industries Organization VSD - Village Development Subproject Division of LDP  FOR OFFaL USE ONLY TURKEY FOURTH LIVESTOCK DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Turkey. Beneficiary: Agricultural Bank of Turkey (TCZB). Amount: US$24,0 million equivalent in various currencies. Terms: Seventeen years, including four years grace, at 7-1/2 percent per annum. Relending Terms: The Borrower will on-lend to TCZB in Turkish Lira, the equivalent of up to $22.0 million for seventeen years, including six years of grace, at 7-1/2 percent per annum. These will, in turn, be relent by TCZB to project benefi- ciaries for on-farm development for terms ranging from ten to twelve years, inclusive of two to four years of grace, at an effective cost of not less than 11 percent per annum. Project Description: (i) The proposed project is designed to consolidate and expand on the gains made in eastern Turkey under the village development subproject of the Second Livestock Project and to extend the improved dairy production concepts introduced in western and central Turkey under the First and Third Livestock Projects. It covers selected counties in eleven provinces in eastern Turkey, where mean family incomes are over 30 percent lower than the national average. About 50 percent of the beneficiaries will be small farmers, whose present incomes are at or below the poverty level estab- lished for Turkey. (ii) Supervised credit will be provided through TCZB, to about 5,200 subborrowers for investment in imported and local high-quality animals, farm buildings, pasture improvement and feedstuff production, and, in appropriate cases, tractors and other farm machinery. (iii) The project also provides for an expansion of technical/ extension services to farmers and training of professional staff and farmers, both in Turkey and abroad. (iv) To enable credits to be extended to small farmers, TCZB has liberalized its loan security requirements and has agreed to bear the full risk of non-payment for sub-loans made to such small farmers. This documnt has a rotrictedl distribution and may be used by recipients only in the perfonmance of their olficial duties. Its contents may not otherwise be disclosed without World Dank authorization.  - ii - (v) At full development, the total value of incremental pro- duction is estimated at about $23 million; indirect benefits include institutionalization of medium- and long-term credits to small farmers and further improve- ment of the national herd. (vi) The project faces no special risks. However small farmer participation could be less than expected, particularly in the early years of the project, in those parts of the project area where livestock development programs are being introduced for the first time and where demonstrated success on larger farms may be needed first to overcome initial small farmer hesitation. Estimated Cost: Local Foreign Total --------- (us$M) ---------- A. Village Development 23.7 16.1 39.8 B. Technical Services 10.1 1.1 11.2 C. Training and General Studies 0.6 0.3 0.9 D. Milk Industry Study 0.0 0.2 0.2 E. Price Increases 24.8 6.3 31.1 Total 59.2 24.0 83.2 Financing Plan: Local Foreign Total --------- (US$M) ---------- Bank - 24.0 24.0 Government 17.8 - 17.8 Agricultural Bank 32.4 - 32.4 Subborrower 9.0 - 9.0 Total 59.2 24.0 83.2 Estimated Disbursement: IBRD FY 1979 1980 1981 1982 1983 1984 1985 Annual 0.2 2.0 3.4 4.2 5.5 6.0 2.7 Cumulative 0.2 2.2 5.6 9.8 15.3 21.3 24.0 Rate of Return: 20 percent. Appraisal Report: Report No. 1933a-TU, dated May 12, 1978 Regional Projects Department, EMENA.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND IECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR A FOURTH LIVESTOCK DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Turkey for the equivalent of $24.0 million to finance the foreign exchange cost of a Fourth Livestock Development Project. The loan would have a term of 17 years, including 4 years of grace, with interest at 7-1/2 percent per annum. The equivalent of $22.0 million will be onlent to the Agriculture Bank of Turkey (TCZB) for a term of 17 years, including 6 years of grace, at not less than 7-1/2 percent per annum. Part I - THE ECONOMY 1/ 2. An economic report (No. 1272-TU) entitled "Country Economic Memo- randum - Turkey" dated October 21, 1976, was circulated to the Executive Directors on November 2, 1976. Since then, the economic situation dete- riorated rapidly and culminated in a serious balance-of-payments crisis and high levels of inflation. This section analyzes the situation in 1977 against the background of more permanent structural problems; it also outlines the short-term stabilization package implemented by the new Ecevit Government shortly after receiving its vote of confidence in mid-January 1978, and prospects for the short-term. This package, formed the basis of a Standby Arrangement with the IMF, which was finalized in late March and approved by the Board of Executive Directors of the IMF in late April. The determination and sense of purpose with which the new Government has faced up to the severe economic problems confronting Turkey, holds the promise that medium-term economic and debt management policies needed to build on the stabilization package, will soon be evolved with equal seriousness. The expanded Annex I attached to this Report provides insights into those developments which precipitated the present economic crisis, and analyzes them in detail in the context of trends and the structural problems of the economy. An economic mission planned in the Fall, will further review these trends and prospects. 3. In most respects, the record of Turkish economic development over the last two decades has been good. As the result of a strong commitment to rapid growth and modernisation, real output has grown, on average, by more than 6 percent per annum. Great strides have also been made towards meeting the basic needs of the population in such areas as education, health care, water supply, and rural roads. However, employment has never been at the fore of the objectives of successive Governments. Overall, this impressive economic progress has been punctuated (in 1958, 1970 and 1977) by severe balance of payments crises, which have been the product partly of extraneous factors and partly of Turkish development strategy itself, which has paid insufficient attention to the structural weaknesses of the economy, and has perhaps exacerbated some of them. 1/ Part I is identical to Part I in the Report and Recommendation of the - President on the Northern Forestry Project, dated May 12, 1978.  Structural Problems and the Situation in 1977 4. The emphasis which successive governments have laid on industrial- ization has been reflected in a doubling of the share of the industrial sector in total output between 1955 and 1977. It also resulted in comparative neglect of agricultural development, which has also been hampered by inappro- priate subsidy and pricing policies. Moreover, although some parts of Turkish industry are efficient, and more have the potential to become so, a strong emphasis on sophisticated capital-intensive technology has resulted in high- cost production in certain sectors; and unselective protection against com- petition from imports, has inhibited the development of an industrial structure well-suited to Turkey's comparative advantages in terms of loca- tion, natural resources and labor availability. One important consequence of this, as well as of a foreign trade strategy which has emphasized import- substitution, has been that Turkey has so far been unable to develop a strong industrial export base, and has relied instead on its traditional agricultural exports (supplemented by workers' remittances) to finance the imports of materials and capital goods needed for its ambitious modernization effort. This pattern of trade has been a fundamental cause of the difficulty, which Turkey has periodically experienced, in reconciling rapid growth with a viable external payments position. 5. The rate of growth of production in Turkey, unlike almost every other country, accelerated during the recent world recession. The average annual real rate of GDP growth in the period 1970-73 was under 7 percent; in the period 1973-77, it rose to nearly 8 percent. This was made possible by a rising public sector deficit, which provided a stimulus to aggregate demand and offset the depressing effect of sluggish exports and the increased outflow of payments for oil. As a result, the growth of output was con- strained not by demand, but by supply. Favorable weather and good harvests caused the average annual rate of growth of agricultural output to increase from about 2 percent in the period 1970-73 to about 7 percent in the period 1973-77, while industrial output grew at about 10 percent in both periods - principally as a result of the sustained high level of industrial investment. The pace of investment in Turkey, moreover, did not slacken during the world recession; on the contrary, largely as the result of an intensified public investment drive from 1975 onwards, the share of fixed investment in GDP increased from under 19 percent in the period of the Second Plan (1968-72) to over 20 percent in the period of the Third Plan (1973-77). 6. The favorable performance of Turkish production during the 1970's, was not matched by that of employment. Unemployment and underemployment were relatively high (12 percent of the labor force) in 1970, and have since risen to over 13 percent in 1977. This has been the result of a sharp reduction in the rate of emigration since 1973, a high rate (2.5 percent per annum) of population growth, and the adoption of relatively capital-intensive methods of production in both agriculture and industry. 7. There was a gradual deterioration in the external trading position of Turkey since 1973, which culminated in the serious balance of payments  -3- crisis in 1977. The resource gap increased from $623 million in 1973 or 3 percent of GDP, to about $4.0 billion in 1977 or more than 9 percent of GDP. Imports of goods and non-factor services increased from $2.3 billion in 1973 to about $6.5 billion in 1977, or by about 30 percent per year, as a result of: (a) significant increases in import prices since 1973, especially the price of oil; (b) rapid increase in the demand for imported capital goods due to high levels of investment and emphasis on industrial development; and (c) a general liberalization of import restrictions. The remainder of the deterioration is attributable to a decline in the rate of growth of exports, both absolutely and in relation to the rate of growth of GDP. In dollar terms, Turkish exports of goods and non-factor services grew during 1970-73 at an average annual rate of 31 percent; during 1973-77, the average annual growth rate was only 10 percent. This decline in export performance had its roots in ineffective administration of agricultural export sales, the world recession, an uncompetitivre exchange rate, and excess aggregate demand in the domestic economy. 8. The widening of the resource gap was amplified in the current account deficit, which rose from $0.7 billion in 1973 to $3.4 billion in 1977 as the result of a decline in workers' remittances, which was a consequence of the overvaluation of the lira, as well as of changes in the composition of the Turkish emigrant popu:Lation, including a decline in the proportion of relatively recent migrants. 9. The rapidly rising current account deficit was not matched by an increased inflow of mediumn and long-term external capital. Turkey has deliberately kept foreign private investment to a minimum. Borrowing from long-term official sources has also stagnated since 1970, and recourse to long-term market sources has been minimal, for lack of a dynamic and coherent external borrowing policy. In consequence, the overall balance of payments moved from a surplus of $0.9 billion in 1973 to a deficit of $2.7 billion in 1977. The cumulative deficit from 1974 to 1977 amounted to $6.6 billion. Of this, $1.3 billion was financed by running down the foreign exchange reserves which by the end of 1977 stood at $770 million, equivalent to only one and a half month's imports. The remainder, amounting to some $5.3 billion, was financed mainly by various forms of short-term borrowing. 10. An important source of short-term borrowing was the Convertible Lira Accounts (CLAs), which provided nearly $2 billion, in 1975 and 1976. These are deposits placed with Turkish banks by non-residents and commercial banks, offering a spectrum of interest rates according to maturity, and until recently were guaranteed against exchange rate risk. Various other types of short-term loans were also obtained. During 1977, however, foreign lenders became reluctant to roll over the outstanding stock of short-term debt, and even more reluctant to make further substantial loans. The Central Bank was thus driven to delaying payments for imports on a large scale. This action made it even harder to obtain credit by conventional means. Financing of the current account deficit iin 1975-77 through recourse to CLAs and other short- term borrowings is the main cause of the sharp increase in the debt burden.  - 4 - 11. This deterioration in the balance of payments position can be viewed partly as a reflection of inadequate efforts at domestic resource mobilization, especially in the public sector. The public sector deficit increased from TL 6.2 billion in 1973 to TL 77.0 billion in 1977. This increased deficit was mainly due to a deterioration in the financial position of the State Economic Enterprises (SEEs), and in particular of the operational SEEs, which dominate the transport and energy sectors and account for half the output of mining and manufacturing. Successive governments, in an effort to slow inflation, held SEE price increases below the rate at which SEE costs were rising. In addition, the scale of SEE investment was greatly escalated. The net effect has been a very rapid widening of the gap between SEE savings and investment, which has caused the overall public sector deficit to rise from 2 percent of GDP in 1972-73 to 9 percent of GDP in 1976-77. Most of this increased deficit has been financed by borrowing from the Central Bank, since administered ceilings on interest rates made it hard to attract purchasers for government bonds. As a result, the money supply increased rapidly at an aver- age annual rate of about 30 percent between 1974 and 1977. This was paralleled by a high rate of credit expansion to the private sector. 12. The rate of inflation (as measured by the wholesale price index), which had declined between 1974 and 1975, rose to about 35 percent in 1977 and accelerated in early 1978. There are important cost-push influences on the price level in Turkey, including a powerful labor union movement and a farmer- oriented agricultural price support policy. But the recent acceleration of inflation has been the result principally of excess demand. The rise in the public sector deficit caused an increase in aggregate demand well beyond the amount needed to offset the damping effect of reduced exports and an increased import propensity. The consequent upward pressure on the price level was aggravated in 1977 by ad hoc import restrictions, which reduced the avail- ability of goods requiring imported inputs, and contributed to the development of a substantial idle capacity. 13. The crisis of 1977 was thus a result of a combination of external and internal forces. The rise in the price of oil and the world recession, by increasing the cost of imports and reducing exports and workers' remittances, adversely affected Turkey's trading position which was already structurally weak. The effect of these elements on the balance of payments deficit was amplified by the increase in the growth rate after 1973, which was a reflec- tion of the basic Turkish commitment to rapid growth, manifested in an escala- tion of public sector investment without a commensurate increase in public sector savings. In addition, the seriousness of the crisis was aggravated by inadequate management of agricultural exports, an inappropriate exchange rate policy, and lack of a coherent policy to develop and tap fresh sources of medium and long-term external finance. Recent Stabilization Measures 14. The previous coalition government had initiated in mid-1977, nego- tiations with the IMF for a Standby Agreement. In the fall of 1977, it announced drastic price increases for a number of goods and services of the  -5- SEEs (ranging from 50 to nearly 300 percent), devalued the Turkish Lira by 10 percent in September with a further adjustment of 5 percent in early December. In the midst of the IMF negotiations, the new Ecevit Government came into power, with a slim majority in the National Assembly. It decided to first prepare its own stabilization package, before resuming negotiations with the IMF. Within weeks of receiving its vote of confidence, it finalized its Annual Program for 1978 and the 1978 Budget. As soon as the budget was approved on February 28, it presented its stabilization package to the IMF. The main features of the Annual Program for 1978, the 1978 Budget and the short-term economic stabilization package, which formed the basis of the IMF Standby Arrangements, included: devaluation of the Turkish Lira by a further 30 percent in March, removal of the exchange rate guarantees for new CLAs in an effort to minimize new inflows of these short-term deposits, increased interest rates on deposits of Turkish workers abroad to encourage increased remittances, increased interest/deposit rates to stimulate better resource mobilization and allocation within Turkey, introduction of new tax legislation (including a substantial increase in stamp duties on imports) which will inter alia increase public revenues by about TL 20 billion per annum (equal to about 2 percent of GDP), substantial adjustments in the prices of key SEEs products and services (with further increases expected in the near future) in an effort to improve resource mobilization, plans to limit the growth of consolidated public sector expenditures (including those of SEEs) within available resources to thus sharply reduce recourse to Central Bank financing of public sector deficits, reduction in the level of imports in 1978 to $5 billion from the peak of $5.8 billion reached in 1977, and a projected reduction in the current account deficit in 1978 to $1.45 billion. Although much remains to be done, these steps should help bring some order in the chaotic economic house which the new government inherited. 15. The Standby Agreement was finalized on the basis of the above pack- age and was approved by the IMF Board in late April. It provides for the withdrawal of about $89 million equivalent in Compensatory Drawings, within two weeks of the signing of the Agreement. In addition, since the Witteveen Facility is not in operation, Turkey would be eligible to draw up to 150 per- cent of its quota, which amounts to about $360 million under the Exceptional Circumstances Clause. This would entitle Turkey to withdraw about $174 million in the first two tranches as follows: $60 million in May 1978; $48 million in August 1978; $36 million in November 1978 and $30 million in February 1979. IMF will review economic developments and the progress of the stabilization measures iLn January 1979. Following that, Turkey will be entitled to withdraw a further $186 million over a one year period. In other words, in calendar 1978,, Turkey can withdraw a maximum of $233 million. 16. With the signing of the Standby Agreement, it is expected that Turkey would now be in a much better position to cope with its large short- term debt currently estimated at $5.8 billion (excluding $409 million owed to IMF), much of it due in 1978. This is its most critical immediate problem. To tackle this problem, Turkey will immediately need to roll-over about $1.3 billion of CLAs falling due in 1978, but for which no major problem is expected. It has begun negotiations with leading European and US commercial banks to restructure the CLAs due in 1978 as well as an additional $1.2 billion of  - 6 - short-term debt into medium- and long-term debts. These banks, in principle, have already agreed to present viable proposals shortly. The Government has also sought the reactivation of the OECD consortium, in order to restructure trade debt guaranteed by bilateral export financing agencies and public bilateral debt. The Government is also actively pursuing other available financial sources of external medium- and long-term capital aid, including the tapping of possible new ones in the Middle East. 17. If the current account deficit in 1978 is to be brought down to $1.45 billion it will be necessary to bring about improvements in performance of Turkish exports, both agricultural and industrial. This will require the maintenance of a competitive exchange rate and an increase in the proportion of investments devoted to export-oriented industries. It will also require greater emphasis on agricultural development, together with revision of price support policies and reform of agriculture export procedures. In addition, other sources of foreign exchange earnings which have been neglected so far, such as tourism, would need to be tapped in a systematic and effective fashion. At the same time, the growth of imports will have to be kept down by much greater care in the selection of investment projects and continued restriction of nonessential imports. The 1978 Annual Program is considered by the new government to be an interim one, which will constitute the first year of Turkey's Fourth Five-Year Plan (1978-82) to be finalized by late 1978. The new government seems determined to approach the formulation of future planned targets and some of the key immediate and medium-term economic and debt management policies, on a sound and realistic basis, and not on that of ineffectual compromises which plagued the previous coalition governments. 18. In 1978 and 1979, the measures necessary to recover from the present crisis will probably cause the annual growth rate of real GDP to fall to 3 or 4 percent, but for the remainder of the Fourth Plan period (1978-82), higher growth should be possible. To achieve this, it will be indispensable to increase domestic savings, primarily by raising the rate of growth of budgetary revenues, and improving the financial equilibrium and low productivity of State Economic Enterprises. The consequent reduction in the public sector deficit should help both to maintain external equilibrium and to moderate the pace of inflation. 19. A major medium and long-term problem is the high and rising level of unemployment and underemployment. To alleviate this, will require a high growth rate to be resumed in the long run, with more emphasis than hitherto on comDaratively labor-intensive commodities and techniques of production. Moreover, increased attention to agricultural development, by reducing the dispar-,Ies of income both between the agricultural and non-agricultural sectors and between rich and poor farmers, should further improve Turkey's incom- stribution. Similarly, the tax system needs to be restructured in such L - as to make it more progressive (as proposed in the new tax law which is before Parliament), while the government continues its already rather successful policy of reducing the inequality of living standards by providing for basic needs through public expenditure. In the longer run, Turkey will have to formulate policies which would help curb the population increase which has, to a large extent, dampened the benefits of growth so far.  - 7 - 20. The extensive short-term borrowing of the past three years has greatly increased Turkey's external debt, giving it an unattractive maturity structure, and causing a sharp rise in debt service payments. At the end of 1977, the country's total external indebtedness amounted to approximately $10.0 billion, of which about $5.8 billion (excluding $409 million owed to IMF from both figures) was short-term, most of which is likely to be rerolled or restructured into mediurn-term borrowings as mentioned in paragraph 16. The remaining $4.2 billion was mainly public and publicly guaranteed medium and long-term debt. Of this, about one third was owed to international organi- zations, mainly the Bank ($0.8 billion, plus $0.6 billion in committed but undisbursed loans) and the European Investment Bank; and about one half to foreign governments and government agencies, notably those of the United States, West Germany, Canada, and the USSR. In 1977, debt service payments (including interest on short-term debt) amounted to 15.0 percent of exports of goods and non-factor services plus workers' remittances. 21. The first objective of a prudent debt management policy should be an adequate restructuring of the short term liabilities. A determined medium- and long-term borrowing effort during the next few years should restore a satisfactory balance between short and longer-term debt. But despite the Government's current restructuring efforts, a substantial increase in debt service payments is inevitable. The debt service ratio can be expected to rise to about 23 percent in 1978 and peak at anywhere between 30 to 40 percent in the early eighties, depending on the rerolling and restructuring terms ultimately agreed to by commercial banks and other bilateral creditors and export financing agencies. In these circumstances and until the outcome of the restructuring negotiations as well as the strategy of the Government in its Fourth (1978-82) Development Plan becomes available, it does not appear meaningful to venture firm projections on growth, balance of payments or debt service. However, if as the new Government intends, Turkey pursues sound medium-term and debt management policies and shows the same seriousness as it has shown in its short-term policies since assuming office, and as the financial consequences of the recent crisis are gradually remedied, the debt service ratio should decline after reaching a peak in the early eighties. Although a tight balance of payments situation is likely to remain a medium- term feature of the economy, Turkey would continue to have a substantial borrowing capacity for medium- and long-term funds provided the present short-term debt is restructured on adequate terms and future short-term borrowing is strictly contained. However the situation will need to be carefully watched and evaluated as soon as a more concrete basis for doing so becomes available. PART II -- BANK GROUP OPERATIONS IN TURKEY 1/ 22. The 1970 economic stabilization program and devaluation of the Turkish lira, which improved the balance of payments, enabled Bank Group 1/ Part II is substantially the same as Part II in the Report and Recom- mendation of the President on the Northern Forestry project, dated May 12, 1978.  - 8 - lending, which had previously been intermittent, to be established on a Di.Linuing basis at a high level. As of April 30, 1978, the Bank Group had lent $1,456 million to Turkey through 49 lending operations (or 43 projects, since both loans and credits were provided for some projects), including 14 IDA credits totalling $178 million. Fourteen of these operations have been in agriculture and rural development (including multipurpose projects), eighteen in industry (including DFCs), ten in power, and the rest in urban development, transportation, education and tourism. Agriculture and rural development account for 24 percent of the funds lent, industry and DFCs for about 42 percent and power for about 24 percent. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of April 30, 1978, with notes on the execution of ongoing projects. 23. Implementation of projects has been satisfactory in the private sector, but much less so in the public sector where significant delays resulted from political uncertainty, limited coordination among agencies, staffing problems and related administrative delays. Disbursements have consequently been slower than expected. To improve this situation, the Government and the Bank in June 1975 initiated joint reviews to identify and resolve key bottlenecks impeding satisfactory project implementation. So far, six such reviews have taken place, the most recent one in March 1978. The results have been mixed, with improvements having occurred in adminis- trative areas, e.g training programs and speeding-up of disbursement actions, but with so far only modest impact on key policy problems, whose resolution has been considerably delayed or prevented up to now by frequent changes in coalition governments. Loan disbursements as of December 31, 1977, amounted to 70 percent of appraisal estimates and 83 percent of revised estimates. A comprehensive analysis of the main sector policy constraints which lay at the root of inadequate project implementation was carried out with the new Government in March 1978, and further discussed during the President's meetings with the Prime Minister and other key ministers in April 1978. It is antici- pated that as a follow-up on these discussions, the new coordination mechanism being established in Turkey, will be able to take effective steps to improve implementation of on-going projects, and accelerate disbursements further, to provide a sound basis for expanding the Bank's future contribution to Turkey's development. The sector policy perspectives outlined by the new Government, and actions it has already initiated since coming into power, if followed by sustained efforts on the part of the administration and by Cabinet decisions to remove bottlenecks, should enable project performance to take a turn for the better and strengthen the Bank's activities in Turkey. 24. Bank lending has so far been mainly directed at supporting Turkish efforts to improve: (a) income distribution and the level of living stand- ards, through rural development efforts, urban planning, and increased employ- ment and income opportunities; (b) the long-term capacity to earn or save foreign exchange, through promotion of industrial and agro-industrial exports and tourism; (c) lagging public sector saving, through the encouragement of improved management and financing of the investments and operations of the SEEs; and (d) institution-building in key public services, through selective assistance for infrastructure. In light of the new Government's program,  which will be progressively refined and specified as the draft 5-year Plan for 1978-82 takes shape by the end of this year, it will be necessary for the Bank to review jointly with the Turkish authorities, how best its lending and technical assistance can meet the above objectives, without facing the policy and institutional obstacles encountered in the past. Pending the outcome of this review, which should be carried out in the coming months, it is proposed to continue to devote the Bank's development efforts to certain key sectors, of which agriculture and industry are the most important. In agriculture, emphasis is being put on rural development, the strengthening of agricultural credit mechanisms, livestock, forestry, and fruit and vegetables. Industry (including DFCs), where promotion of exports and employment, together with the gradual strengthening of the SEEs are the key tasks, will also receive sig- nificant support. This program is supplemented by projects in power, urban development and transportation. 25. Two projects, besides the proposed one, are being processed for presentation to the Executive Directors in the current fiscal year. They are the Northern Forestry project and the Erdemir Stage II Steel project. Projects under preparation for FY79 and future fiscal years include: in agriculture, rural development in Erzurum, a second fruit and vegetable project, seed pro- duction, grain storage; in industry, a second IGSAS fertilizer project in Central Anatolia, modernization of public and private sector textile produc- tion, and a third forest industries project in northern Turkey; in power, a hydroelectric project; in transportation, port rehabilitation; and in urban development, a possible sites and services project. 26. At the end of 1977, the Bank Group's share of Turkey's medium and long-term external debt (outstanding and disbursed) was 18 percent; its share of Turkey's estimated total external debt (including short-term obli- gations) was about 8 percent. The expected conversion of a large part of this short-term debt into medium and long-term debt will cause the Bank's share of medium and long-term debt to fall sharply, to around 10 percent by 1980. Thereafter, assuming the currently projected increase in Bank lending, the share would increase. The Bank's share of service payments on medium and long-term debt is expected to follow a similar path, dropping from 20 percent in 1977 to about 8 percent in 1980, but rising thereafter. 27. IFC has invested in the production of synthetic yarns, pulp and paper, glass, aluminum, iron and steel products, and tourism, and has an investment in the largest private development finance company, TSKB. As of April 30, 1978, gross IFC commitments totalled $157 million, of which $76 million were still held by IFC. The Corporation is currently investigating additional investment opportunities in the industrial sector, including motor bicycle engines, piston rings and cylinder liners, and possibly aluminium products.  - 10 - PART III - THE LIVESTOCK SUBSECTOR Livestock Production 28. Agriculture remains crucial to Turkey's economy, contributing in 1975 about 25 percent of GDP, while employing about 56 percent of the labor force, and accounting for about 56 percent of export earnings. Livestock contributes some 30 percent of the gross value of agriculture production and about 8 percent of GDP. Turkey's livestock population is amongst the highest in Europe and the Middle East, including an estimated 41 million sheep, 18 million goats, 14 million cattle and buffalo, 2 million horses and donkeys and 41 million poultry and turkeys. Principal livestock output includes milk, meat, eggs, wool, mohair, hides, draft power and transport. Manure is an important fertilizer and fuel. Most livestock output is used domestically, recorded exports being mainly live sheep and cattle for slaughter and mohair. These averaged only about $33.5 million per year over the period 1971 to 1975. There are, however, substantial unreported, and not quantifiable, exports to Iran and Syria. While Turkey is presently relatively self- sufficient in livestock products, by 1985, according to Bank projections, it will need to import over 30 percent of its milk and meat requirements and over 20 percent of its wool and mohair requirements, unless there is a major change in historical production and consumption trends. 29. Livestock production throughout Turkey is largely a traditional undertaking, with modernizing influences limited mainly to innovations intro- duced under the first three Bank-financed Livestock Projects. (Livestock I, Credit 236-TU, for $4.5 million, approved in 1971; Livestock II, Credit 330-TU, for $16 million, approved in 1972; and Livestock III, Loan 1265-TU, for $21.5 million, approved in 1976). Animals subsist mainly as scavengers on residues from cereal crops, on volunteer growth on fallowed crop lands, and on natural grazing on the poorer, non-cultivable areas, thus utilizing feed resources with no alternative use. This low-quality, maintenance diet is generally in- sufficient to meet animal production needs. Since many farmers lack adequate access to technical services, credit and other inputs, they are largely unable to supplement the quality of the feed or manage its supply to match animal requirements. 30. As a result, weaning and offtake rates are low. Consequently, output levels of beef at only about one ton of carcass per 100 cattle and of sheep and goat meat at about one ton per 300 animals are, respectively, one-eighth and one-sixth of the level in countries with advanced meat industries. The output of milk per cow (the main source) is about one-eighth the level in more ad- vanced dairy countries. Since growth in dairy cattle numbers and total cow milk production has increased over the past 15 years at only about one-half the rate of national population increase, and as incomes have also risen, milk shortages in the main urban centers are becoming increasingly acute, particu- larly in winter.  - 11 - Potential for Livestu,. .i.ovement 31. The subsector is currently operating at about ten to twenty percent of its potential. This low productivity is primarily caused by (i) poor genetic merit of local breeds; and (ii) inadequate overall management, particularly nutrition and health care. While some benefits can be expected from better feeding and managing of local animals, the latter have limited possibilities compared with improved exotic stock. There is a general need to upgrade all classes of indigenous livestock, with highest priority being given to improv- ing fertility, milk yield and growth rate in-sheep and cattle. Turkey has for some years been importing pedigree stock of improved breeds such as Holstein, Brown Swiss and Jersey cattle and Merino sheep to serve as a nucleus for upgrading purposes. Under the First Livestock Project, over 3,000 pedigree heifers and bulls were imported from Western Europe, and over 10,000 more are to be imported under the Third Livestock Project. With the existing 5,000 or so pedigree cattle on Government farms, these will meet a small part of the need for improved genetic material. 32. Production is also constrained by a wide range of controllable health and disease problemLs. However, the present tuberculosis and brucel- losis control programs are not carried out on an area-wide basis, but are restricted to government farms and government-sponsored projects, and are therefore ineffective. Retvised arrangements to handle these health problems in the project area are provided for under the proposed project (para. 53). Poor nutrition is an even more limiting constraint, and the feed base needs to be significantly expanded and improved, principally by increasing feed produc- tion from natural grass lands and making more efficient use of fallow lands. Efforts to integrate crop and livestock production on a rotational basis, through the introduction of forage crops and legume-based pasture for grazing by livestock in place of the fallow, were initiated satisfactorily under the first three Livestock Projects, and will constitute a major emphasis of the proposed project. Processing and Marketing 33. Lack of adequate meat and milk processing and marketing facilities, particularly in eastern Turkey, has been a key constraint on the overall balanced development of tlhe sub-sector. To overcome this, an ambitious and generally well-planned program of slaughterhouse and livestock market develop- ment is being implemented by the Government's Meat and Fish Organization (EBK), with 16 new slaughterhouse facilities completed or near completion, 28 additional plants to be completed by 1984, and over 30 new live animal markets expected to be completed by the end of 1978. An equally ambitious, but less well-designed program to develop milk collection and cooling centers and pro- cessing plants, is being undertaken by the Turkish Milk Industries Organization (TSEK). Although the overall objectives of the program are appropriate, the siting, number, and size of plants have not been consistently determined on the basis of milk availability studies and financial considerations. As a consequence, most of the completed plants are overstaffed, operate below  - 12 - capacity, and suffer losses. To correct these difficulties, establish a sound basis for carrying out the remainder of TSEK's investment program, and develop a satisfactory framework for subsequent growth of the dairy industry, the Government has agreed to include an in-depth study of the TSEK program as part of the proposed project (para. 44). Since the processing and marketing facili- ties already available in the Project Area, combined with the existence of substantial unmet local demand, are more than sufficient to absorb the proposed project's incremental output, completion of the EBK and TSEK investment pro- grams is not necessary for satisfactory project implementation. However, these investments will provide basic infrastructure needed for the subsector's future development and an important incentive to the wider adoption of the modern techniques of livestock production being encouraged under the proposed project. 34. Competition between public and private marketing channels for milk and meat has been active, and as a result present price levels are generally adequate. The base prices paid by TSEK and EBK for milk and meat are adjusted substantially upwards in real terms, from time to time, to encourage increased production. Moreover, private sector intermediaries often offer farmers con- siderably higher prices, depending on the season, quality and locality. Simi- larly, price incentives are paid by both TSEK and EBK to encourage higher quality and reduce seasonal fluctuations in production. These incentives have been generally successful in achieving their objectives. However, farmers have tended to sell stock for slaughter at immature ages and low weights. This reduces total national meat production, and the Government is currently considering appropriate adjustments in its pricing policy to provide incen- tives to farmers to feed and keep animals longer. Government Policy and Bank's First Three Livestock Projects 35. Agricultural and livestock policies in the first three development plans emphasized increased production to satisfy rising domestic demand and encourage exports. The Government has also become increasingly concerned with income inequalities, particularly between urban and rural dwellers and between the populations of western and eastern Turkey. This has focused attention on the need to assist livestock producers in the east. Overall, efforts to stimu- late livestock production have concentrated on: (i) improving production effi- ciency by the introduction of new technology at the farm level, through the medium of investment credit linked with technical assistance; (ii) expanding outlets for incremental production through improved processing and marketing facilities; and (iii) increasing the profitability and attractiveness of live- stock production through price incentives. 36. The two principal implementing agencies for Bank-assisted livestock projects are: (a) the Directorate of Livestock Development Projects (LDP) of the Ministry of Food, Agriculture, and Livestock (MINAG) for technical aspects, and (b) the Agricultural Bank of Turkey (TCZB), through its Encouragement and Development Loan Division (EDLD), for credit aspects. Support in the field is provided by the Veterinary Services Directorate (GDVS) of MINAG.  - 13 - 37. TCZB, which is Turkey's largest bank, and its only agricultural bank, has some 870 branches located throughout the country. It accounts for over 90 percent of institutional credit to agriculture. Total volume of TCZB agricultural lending increased at an average annual rate of 40 percent over the period 1971-75. But available credit still remains insufficient to meet farmer needs, with a large proportion of Turkey's farmers having inadequate access to institutional credit. TCZB's inadequate resources, but more partic- ularly its strict security requirements such as land title or multiple co- signers, have severely limited small farmer access to credit. To overcome this constraint, liberalized loan security requirements, and other arrange- ments, have been agreed upon to encourage substantially increased lending to small farmers under the project (para. 49). 38. The interest rate mechanism in Turkey has traditionally played a relatively minor role as an instrument of maintaining either monetary sta- bility or influencing resource mobilization. Rather, its role has been geared towards medium- and long-term development management, and as a tool for stimulating and directing investment into those subsectors, for example, agriculture, which the Government has determined are in need of development according to the priorities of Turkey's development plans. As a result, interest rates do not necessarily reflect either market conditions or the availability of capital in Turkey. The interest rate structure is centrally controlled in Turkey, and rates for each type of deposit and credit are established by Cabinet decision. In administering this policy, the Central Bank of Turkey uses a combination consisting of adjustments in the rediscount rates, different reserve requirements, and adjustment of deposit rates. In this background, although with the decline in the inflation rate in 1975, some rates moved closer to positive rates of interest, this was not the case in 1977, when the rate of inflation reached over 35 percent. There is every expectation that as a result of the stabilization policies which the new Ecevit Government has initiated, and the medium term policies which one can reasonably expect it to formulate, the rate of inflation may significantly decline over the next three to four years. Since February 1978, and as part of the short term economic stabilization package negotiated and approved by the IMF, the rate of deposit has been increased to as much as 20 percent, the lending rate for industry and agro-industry exceeds 18 percent (excluding taxes and fees). However, the maximum rate established as part of this package, for medium- and long-term credit for general agriculture, and programs of the type included in the proposed project, is 10.5 percent, which, with an annual commission of 0.5 percent brings the effective cost to 11 percent per annum. 39. Since an across-the-board increase in interest rates (excluding agriculture) was recently implemented with the IMF stabilization package, and given the centrally regulated nature of the interest rate regime, the government considers it appropriate to review interest rate policy as part of the larger question of the financialization of savings in Turkey, con- cerning which a financial sector study is in progress. This broad study was initiated about two years ago with Bank assistance. The initial drafts of the substudies making up the Financial Sector Study are now expected to be  - 14 - completed in a few months, at which time the Government has indicated it would wish to have Bank technical assistance in their review. In this background, and also considering that some 50 percent of the project farmers are small, with per capita family incomes below the estimated poverty line for Tuikcy (pa:as. 47 and 48), the 11 percent effective cost of borrowing applicable for medium- and long-term lending for general agriculture, including under the project, has been accepted. 40. The First Livestock Project represented the first major attempt in Turkey to modernize dairying through the establishment of a nucleus of imported pedigree Holstein animals, on private farms in and around the four main milk- consuming centers of Ankara, Istanbul, Izmir and Adana, to provide a source of breeding stock for genetic upgrading. Completed in February 1978, it was generally successful in achieving this objective, in meeting production coef- ficients, and in setting up some 150 demonstrations of modern dairying through provision to farmers of credit and technical assistance. The number of farms established, however, fell short of appraisal projections, due mainly to a slow start-up and steep price increases resulting from inflation. The Third Livestock Project, aims at consolidating and expanding the progress made under the first project and extending benefits to other provinces in western and central Turkey, notably Konya, Kayseri and Malatya. Additional pedigree Holstein and Brown Swiss heifers and bulls are being imported to expand the nucleus of improved animals. With the inclusion of a small (5-cow) village farmer component, efforts are being made to extend credit and technical assis- tance on a pilot basis to some 300 small village producers. Although the rate of subloan processing is slower than projected due to delayed effectiveness and start-up problems, small farmer interest has been greater than anticipated. Overall, the project is making satisfactory progress. 41. The Second Livestock Project comprises a fattening subproject (FSD) and a village development subproject (VSD). It represents the Government's first attempt to encourage fattening on a wide scale in some 20 provinces and to initiate village livestock development in three provinces (Erzurum, Kars, Agri) in eastern Turkey. The FSD subproject is complete, and after initial delays due largely to difficulties in recruiting LDP field staff for the remote areas of eastern Turkey, the VSD subproject is scheduled to be com- pleted about mid-1978. The project has been generally successful in meeting animal production coefficients and achieving its overall objectives, although the number of participating farmers fell short of appraisal estimates as a result of implementation delays and price increases. PART IV - THE PROJECT Projec A:ory 42. The proposed project was prepared by LDP, with the assistance of two FAO-CP m ssi ns, which visited Turkey in August 1976 and March/April 1977, and  - 15 - a Bank mission which visited in April 1977. The preparation report was sub- mitted to the Bank in September 1977. The project was appraised in October/ November 1977. Negotiations were held in Washington in April 1978. The Turkish delegation was headed by Mr. Asaf Guven, Chief Economic and Financial Counselor of the Turkish Embassy, and included representatives of LDP, TCZB, and the Treasury. Project Objectives 43. The main objectives are to: (i) further improve the genetic merit of local animals, expand the use of modern management and health techniques, and provide better forage and feeding, and (ii) raise the incomes of several thousand small farmers in ithe eastern region, which contains a significant proportion of Turkey's rural poor. Project Description 44. The proposed project will provide medium and long-term credits to an estimated 5,200 village livestock producers for on-farm development, including introduction of improved animals, pasture and forage crop production, farm building construction and in selected cases, purchases of tractors and farm machinery and equipment. Forage production will be expanded through more efficient use of natural pasture and fallow lands. Supervised credit will be provided for: (a) Karaman and Merino sheep improvement on about 2,700 farms; (b) beef cattle improvement on about 500 farms; and (c) dairy cattle improve- ment on about 2,000 farms. The project will also include: (i) a technical services component to provide farm development planning and supervision and veterinary health services; (ii) a milk industry study component, focusing on the policies, investment program, organization, management, operations and marketing activities of TSEK; and (iii) local and overseas training of project and other government staff concerned with livestock development, and farmers; and (iv) surveys and field research in forage production and utilization, animal production and veterinary health care. The proposed project is de- scribed in detail in the Loan and Project Summary and in the Staff Appraisal Report entitled "Fourth Livestock Development Project" (No. 1933a-TU) dated May 12, 1978, being distributed separately to the Exectuve Directors. 45. The project area comprises the provinces of Kars, Agri, Erzurum, and Mus, and selected counties in Hakkari, Van, Bitlis, Bingol, Diyarbakir, Erzincan, and Gumushane, all in eastern Turkey. Mean family income is over 30 percent lower on average than for the country as a whole. The area was selected on the basis of LDP surveys, taking into account livestock popula- tion, feed production potential, accessibility, human resource potential and marketing possibilities. Throughout the project area there is a chronic deficit of milk and meat supplies, due partly to absolute shortages and partly to the constant movement of livestock and livestock products out of the area to the large cities in western Turkey. In view of the above, and since Bank projections indicate that domestic demand for milk and meat products, both within and outside the project area, will continue to grow during the project period and beyond, incremental production from the project will be readily marketed.  - 16 - 46. The sheep and beef cattle improvement programs will use selected, better-quality local animals, available from government farms and private sources. For the dairy program, some 12,000 purebred heifers and bulls will be imported to provide high quality dairy stock, which are not available locally. They will be predominantly Brown Swiss, which are well adapted to eastern Turkey, although small numbers of Holstein and other breeds for special areas may also be imported. Imported heifers will be primarily pregnant two-year stock with some yearling stock for those farmers who are able to rear young animals. 47. A basic feature of the proposed project is lending to small live- stock farmers, whose average per capita family income falls below the 1977 Bank estimate of relative poverty in Turkey, which is $245 equivalent. This equals only about 22 percent of the Turkish per capita GNP in 1977 of about $1,100. 48. For credit purposes, a 'small farmer' is defined as one whose net annual pre-development family income in December 1977 does not exceed TL 35,000 (about $1,820 equivalent), at least 75 percent of which is obtained from farm activity. Assuming an average family size of eight, which is the appraisal estimate for the project area, the per capita income of such a small farmer family is equivalent to a maximum of $228. Of the 5,200 farmers expected to participate in the project, some 2,600 or 50 percent would be small farmers as defined. Of the.$22.0 million of loan funds proposed for onlending to farmers under the village development component, about $7.5 million (34 percent) is planned for small farmers, of which $5.5 million is being specifically set aside for such lending. Any portion of this latter amount remaining unutilized for small farmer lending will not be reallocated (Loan Agreement, Schedule 1, 5(b)). 49. Under the new small farmer lending system, loans up to TL 150,000 will be secured by chattel mortgages on livestock and machinery, plus the guarantee of only one co-signer. Since this co-signer can be a small farmer from another village other than that of the small farmer sub-borrower and since the co-signer's financial standing would not be of primary importance to TCZB, the new procedures will greatly facilitate TCZB's lending to small farmers. In addition, TCZB has provided assurances that it accepts the full risk of non-payment for lending to small farmers. For the first time in Turkey, a Bank project will reach such poor farmers in substantial numbers as a result of these special TCZB credit arrangements. A joint Government- TCZB-Bank review of small farmer lending will be undertaken not later than December 31, 1980, and annually thereafter to evaluate the small farmer lending component (Project Agreement, Section 2.02(a)). TCZB has also agreed to direct and adequately train its branch managers to undertake lending to small farmers (Project Agreement, Section 3.01(b)). Project Implementation 50. LDP will have overall management responsibility for the project, as in the previous livestock projects. EDLD of TCZB will be responsible for the credit aspects of the project. A protocol acceptable to the Bank, defining  - 17 - the relationship between LDP and TCZB, and similar to protocols agreed on for the previous three livestock projects, will be signed as a condition of effec- tiveness (Loan Agreement, Section 6.01(c)). 51. Implementation of technical aspects of the project will be under- taken, as in the Second Livestock Project, by VSD staff of LDP, headed by a project manager located in Ankara and directly responsible to the General Director of LDP. Three internationally recruited specialists will provide technical support. The project manager and the three specialists will be appointed by not later than December 31, 1978 (Loan Agreement, Section 3.01 (b)(ii) and (v)). Regional field offices will be located in Erzurum (the regional center of the Second Project) and Van. Provincial offices will be located in Erzurum, Kars, Agri and Erzincan, under the Erzurum regional manager, and in Van, Bitlis, Mus, Bingol and Diyarbakir, under the Van regional manager. The Van regional office and three of the provincial offices will be established and staffed with at least 9 agronomists, 12 veterinarians, and 10 middle level technicians, and headquarters by two staff (including the project manager) by December 31, 1978, and the other two provincial offices will be established and staffed by not later than December 31, 1979 (Loan Agreement, Section 3.01(b)(ii)). 52. VSD's technical servicing capability, which was considerably devel- oped under the Second Project, will be increased overall from 22 to 66 profes- sionals and from 40 to 60 middle level technicians (Loan Agreement, Section 3.01(b)(iii)). These will be sufficient to implement the project. VSD veterinary staff will be supported in the field by veterinarians of GDVS, based on a protocol between LDP and GDVS as in the earlier projects. Signing of an amended protocol, satisfactory to the Bank, is a condition of effec- tiveness (Loan Agreement, Section 6.01(c)). To strengthen project implementa- tion capacity, LDP will post at least one experienced VSD staff member from the Second Livestock Project to each of the new provincial offices and at least 2 senior and experienced Intensive Dairy staff from the Third Livestock Project to each of the regional offices (Loan Agreement, Section 3.01(b)(iv)). 53. The amended LDP and GDVS protocol will also provide that the current testing for brucellosis and tuberculosis will not be carried out on project farms unless such testing is undertaken on the basis of a program satisfactory to the Bank, with a view to developing a more balanced and effective testing system (Loan Agreement, Section 3.01(b)(vi)). Under agreed modifications to the present brucellosis control program, all cattle to be imported under the project will be vaccinated against brucellosis before shipment, unless already vaccinated, and project calves born locally will be vaccinated within three to six months of birth. Further testing of cattle vaccinated for brucellosis is technically unnecessary and will be discontinued (Loan Agreement, Section 3.01(b)(vi)). 54. Since recruitment of staff for the remoter areas of eastern Turkey remains difficult, the project provides for the construction of 15 housing units in these areas and an inducement. Assurances were received that the units would be completed by December 31, 1980, and that they will be rented to staff at nominal rates, iin accordance with normal Government practices. LDP  - 18 - will also continue to provide special staff incentives, as it has for the previous three Livestock Projecs,including supplementary per diem payments to staff on field duty, which will be financed out of the Special Operational Fund established under Livestock I. This Fund is financed by TCZB, which will transfer to the Fund 0.5 percent of the interest received from all subborrowers under the loan (Loan Agreement, Section 3.06; Project Agreement, Section 4.02). 55. A milk industry study will be carried out by LDP with the assistance of an international group of about four specialists, to be recruited by LDP by May 1, 1979. The study will be carried out according to a work program and timetable acceptable to the Bank (Loan Agreement, Schedule 2). Studies of livestock management and production will be carried out by LDP and GDVS staff in collaboration with the agricultural and veterinary faculties in Erzurum and Elazig. Annual plans for the livestock production studies will be sent to the Bank for comment in the third quarter of the year prior to their implementa- tion, with the studies to be initiated during the first half of 1980 (Loan Agreement, Schedule 2). For studies to be undertaken in collaboration with the universities, a protocol, satisfactory to the Bank, will be drawn up between LDP and the faculty concerned. Training will be implemented by LDP, building on experience gained under the earlier Livestock projects. A draft of the overall training program will be sent to the Bank for comment by April 30, 1979 (Loan Agreement, Schedule 2). Project Cost and Financing 56. The total project cost (including taxes and price contingencies) is estimated at $83.2 million. Of this, $24.0 million, or about 29 percent, is in foreign exchange to be financed by the proposed loan. The estimated foreign expenditure is for imported livestock, vehicles, tractors, machinery, technical studies, overseas training and technical specialists. TCZB will finance some $32.4 million equivalent, or 39 percent of total costs, farmer contributions some $9.0 million equivalent, or 11 percent of total costs, with the remaining $17.8 million equivalent, or 21 percent, being financed by the Government. Sub-Lending Terms and Conditions 57. All farmers applying for loans, including small farmers, will have to meet basic eligibility requirements. These include experience in live- stock production, access to land area sufficient to produce required incre- mental feedstuffs, and a viable farm development plan prepared by VSD. Farm development plans will provide only for renovation or extensions of existing barns, except for some large farm units requiring new structures, in which cases up to 70 percent of the total cost can be financed under the project. Credit can also be provided in special cases for purchase of concentrates and other supplementary feed in the first farm development plan year. Sub- loans to project farmers will be made at not less than TCZB's current maximum interest rate for livestock development of 11 percent, which include all charges and commissions. Maturities will extend from 10 to 12 years, with 2  - 19 - to 4 years of gr.. t L. _g on the cash flow generated by the farm plan. The appropriateness of the effective cost of the sub-loans and conditions thereof, will be reviewed by the Government, TCZB and the Bank, at any time any of the parties consider a review to be warranted (Project Agreement, Section 2.02(b)). 58. For medium-scalea farmers, individual farmer contributions to invest- ment plans will be at least 20 percent, with most farmers expected to provide labor as part of their contribution. TCZB's credit eligibility criteria for lending to such farmers will be the same as those applied under Livestock III. Subloans up to TL 150,000 will be secured by chattel mortgages on livestock and machinery, plus the guarantee of creditworthy co-signers in those cases where a land title is not available. Sub-loans over TL 150,000 will be secured by land title, and where such title is not sufficient, additionally by a chattel mortgage and/or a guarantee of third parties (Project Agreement, Schedule on lending procedures, paragraph 2.2). 59. Based on the agreed small farmer definition, small farmer credit applicants will be eligible for project credit provided they meet the basic criteria (paragraph 57), are known to LDP extension staff as bona fide farmers of good character, and can comply with TCZB's liberalized security arrange- ments for small farmer lending (paragraph 49). In addition, to further encourage small farmer borrowing, individual small farmer contributions to investment plans have been reduced to 10 percent in general and to 5 percent in cases of special need (Project Agreement, Schedule on lending procedures, paragraphs 2.1, 2.2 and 4.1). Procurement and Disbursement 60. Dairy cattle will be procured by LDP in about 20 shipments of 500- 600 head and purchased on the basis of not less than three quotations from at least two countries, a procedure followed satisfactorily in Livestock I and III. Suppliers will be responsible for delivery to project farms and for ensuring that cattle meet all veterinary and other standards. During nego- tiations agreement was reached on livestock procurement conditions, and on expediting border entry of animals (Loan Agreement, Section 4.04). Tractors and other farm machinery will be procured under international competitive bid- ding in accordance with the Bank's guidelines. In bid comparisons, domestic manufacturers will receive a margin of preference equal to 15 percent or the actual level of import duty, whichever is less (Loan Agreement, Schedule 4 A and B). The additional 8I0 vehicles required to support project field staff will be procured locally with Government funds, except that if, due to local shortages, the vehicles needed in any one project year cannot be delivered by the end of the fourth month of the year, the vehicles will be procured by ICB under standard Bank guidelines, and will be eligible for financing out of the proceeds of the loan. Agreement was also reached that importation formalities, including the issuance of import licenses, would be expedited for all goods procured abroad (Loan Agreement Section 3.04(c)). 61. Local livestock will be purchased by individual farmers at livestock markets and by private contract, all such livestock being approved by project  - 20 - technicians before purchase. This is in line with procedures followed satis- factorily under Livestock II. Purchase of small tools, seed and fertilizer will be through normal commercial channels. Housing for project staff will be constructed using local materials and, given its modest cost and phasing, will be carried out following normal government bidding procedures, which are satis- factory. 62. The proposed loan will be disbursed over a six-year period, against 100 percent of foreign expenditures for livestock, technical specialists and training; 100 percent of foreign expenditures or 100 percent of local expendi- tures ex-factory for vehicles, tractors, agricultural machinery and related equipment; and 27 percent of amounts disbursed by TCZB for pasture/forage crop production and purchase of supplementary feedstuffs. Benefits and Risks 63. The economic rate of return is estimated at 20 percent. Principal benefits will accrue from incremental production of milk and livestock for breeding and fattening. The total value of annual incremental production at full development is estimated at about $23 million, of which about $13 million will result from incremental milk production totalling about 55,000 tons per annum. Incremental output of cattle and sheep is estimated at about 8,700 and 27,000 head respectively. Other benefits are difficult to quantify, but are perhaps even more significant for the economy over the long term. These include institutionalization of medium- and long-term credit for small farmers, genetic improvement of the national herd, introduction of improved methods of animal husbandry and management, improved land utilization and animal productivity, further development of institutional infrastructure, and increased utilization of Government milk plants. 64. The direct beneficiaries will be some 5,200 farm families (about 41,600 persons) whose farm incomes will increase substantially, and whose financial rate of return will vary from 23 to 43 percent, with the higher return going to the smaller farmers. The main indirect beneficiaries will be some 500,000 additional consumers of milk. 65. Since basic institutional infrastructure for the project has been well established under the first three livestock projects, the principal risk stems from the possibility of reduced small farmer participation. In those parts of the project area served by Livestock II, where livestock development benefits have already been clearly demonstrated, small farmer participation can be expected to be satisfactory but it is less certain in the new project areas, which will benefit from this demonstration effect for the first time during the initial years of the project. While the targeted small farmer participation cannot be totally ensured, the safeguards which have been built into the project to strengthen the Government's and TCZB's commitment to this objective are believed to be satisfactory.  - 21 - PART V- LEGAL INSTRUMENTS AND AUTHORITY 66. The draft Loan Agreement between the Republic of Turkey and the Bank, the draft Project Agreement between the Bank and TCZB, and the report of the Committee provided for in Article II, Section 4(iii) of the Articles of Agree- ment, are being distributed separately to the Executive Directors. Features of special interest are referred to in appropriate paragraphs of this report and summarized in Annex III. 67. A special cond:ition of effectiveness is the submission to the Bank of acceptable protocols between LDP and GDVS, and LDP and TCZB (Loan Agreement, Section 6.01(c)). 68. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 69. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 12, 1978 Washington D.C.   TABLE 3A ANNEX I TURKEY - SOCIAL INDICATORS DATA SHEET Page lof 21 LAND .-EA (THOU KM2) ------------------------------------------------- --------------- TURKEY REFERENCE COUNTRIES (1970) TOTAL 780.6 MOST RECENT AGRIC. 55b.4 1960 1970 ESTIMATE COLOMBIA IRAN ITALY** GNP PER CAPITA (US$) 270.0* 500.0* 990.0* 350.0* 670.0* 1910.0* POPULATION AND VITAL STATISTICS _______________________________ POPULATION (MID-YR. MILLION) 27.0 35.6 41.2 20.6 29.0 53.7 POPULATION DENSITY PER SQUARE KM. 35.0 46.0 53.0 18.0 18.0 178.0 PER so. KM. AGRICULTURAL LAND 52.0 65.0 74.0 93.0 107.0 266.0 VITAL STATISTICS CRUDE BIRTH RATE I/THOU. AV) 44.8 40.6 39.4 44.3/a 45.9 18.6 CRUDE DEATH RATE (/THOU.AV) 16.9 14.4 12.5 11.0 18.5 9.7 INFANT MORTALITY RATE (I/THOU) l87.0/a b153.0/a 70.0/b 140.0 29.6 LIFE EXPECTANCY AT BIRTH (YRS) 49.3 54 4 56.9 58.5 48.8 71.9 GROSS REPRODUCTION RATE 2.9 2.S/b,c 2.3 3.2 3.4 1.3 POPULATION GROWTH RATE (%) TOTAL 3.0 2.5 2.5 2.9 3.1 0.8 URBAN s.1/a 4.9/d 5.5/c 4.8 0.8 URBAN POPULATION (% OF TOTAL) 31.9 38.7 42.6 60.3 41.0 51.5 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 41.3 41.7 41.7 46.6 46.0/a 24.4 15 TO 64 YEARS 55.2 54.0 53.9 50.4 50.07a 65.2 65 YEARS AND OVER 3.5 4.3 4.4 3.0 4.07W 10.4 AGE DEPENDENCY RATIO 0.8 0.9 0.8 1.0 1.0/a 0.5 ECONOMIC DEPENDENCY RATIO 1.0 1.1/e 1.2 /a 1.6/d 1.9/a 0-9/a FAMILY PLANNING ACCEPTORS (CUMULATIVE. THOU) .. .. , 306.9 662.4 USERS (% OF MARRIED WOMEN) 5.3 8.2 . .. 10.0 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 13000 .0 0/ 40000.O/fl 6400.0/b 6200.0 8700.0 19600.0 LABOR FORCE IN AGRICULTURE 1%) 71.7 63.4 52.5/c 39.0 43.0 19.0 UNEMPLOYED (% OF LABOR FORCE) 9.7/d 11.9_/ 13.37T 7.0 2.1 3.1 INCOME DISTRIBUTION % OF PRIVATE INCOME RECOD BY- HIGHEST 5S OF HOUSEHOLDS 33 . /ef 32.8 A 28.0/e 3i.9 /e 29.7 /b HIGHEST 20% OF HOUSEHOLDS 61 o7e-T 60.67oi 56. lTe 60.1 7r 54.4 7 * LOWEST 20% OF HOUSEHOLDS 4:2/e-t 2-97E 335.e 3-5 4.0 LOWEST 40% OF HOUSE)JLDS 10.67 9:4 9- 11. 57e 12.7 7F DISTRIBUTION OF LAND OWNERSHIP % OWNED BY TOP 10% OF OWNERS . 39.0 /| *- % OWNED BY SMALLEST 10% OWNERS 0.7 7T - HEALTH AND NUTRITION POPULATION PER PHYSICIAN 3220.0 j 2250.0 1880.0 2110.0 3300.0 550.0 POPULATION PER NURSING PERSON 3260.07fh 1770.0ZI 1140.0 /f *- 3230.0 470.0/b POPULATION PER HOSPITAL BED 550.0 500.0 470.0 430.0 780.0 90.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 110.0 112.0 113.0 92.0 90.0 126.0 PROTEIN (GRAMS PER DAY) 753 78.0 76.0 51.0 53.0 100.0 -OF WHICH ANIMAL AND PULSE .. 22.0/k 24.7 29.0/f 14.0/C 42.0 DEATH RATE (/THOU) AGES 1-4 16.o/e 14.7/1 *. 8.4 .. 1.0 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 75.0 10B.0 108.0 100.0 83.0 110.0 SECONDARY SCHOOL 14.0 28.o 30.0 23.0 26.0 60.0 YEARS OF SCHOOLING PROVIDED (PIRST AND SECOND LEVEL) 11.0 11.0 11.0 11.0 12.0 13.0 VOCATIONAL ENROLLMENT (% OF SECONDARY) 18.0 14.0 15.0 20.0 3.0 26.0 ADULT LITERACY RATE (%) 40.0/i 55.0/r .. 73.0 .. 97.0 HOUSING PERSONS PER POOM (URBAN) 2.0 1.9 .. .. 2.2/a d OCCUPIED DWELLINGS WITHOUT PIPED WATER (%) 81.0 66.0 52.0 *- B7.0/a,e ACCESS TO ELECTRICITY (% OF ALL DWELLINGS) 29.0 40.0 57.0 .. 25.0/a RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) 2.0 18.0 *- *- 4.0/a CONSUMPTION RADIO RECEIVERS (PER THOU POP) 49.0 89.0 107.0 105.0 93.0 218.0 PASSENGER CARS (PER THOU POP) 2.0 4.0 8.0 11.0 10.0 190.0 ELECTRICITY (KWH/YR PER CAP) 102.0 247.o 400.0 414.0 246.0 2262.0 NEWSPRINT (KG/YR PER CAP) 0.8 0.7 2.3 2.7 0.4 5.3