Report No. 3472-lJ Turkey FILE COPY Public Sector Investment Review (In Three Volumes) Volume II: Sector Analyses December 7, 1981 Country Programs Department II Europe, Middle East and North Africa Region 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. TURKEY CURRENCY EQUIVALENTS Currency Unit Jan. 1980 /1 Oct. 1980 June 30, 1981 Sept. 1, 1981 US Dollar = TL 70.0 /2 TL 83.50 /2 TL 100.00 /2 TL 120.00 TL 1 = US$ 0.01 US$ 0.01 US$ 0.01 US$ 0.01 /1 Since January 1980, the rate is being adjusted for the differential inflation between Turkey and its major trading partners. TL 80/$1.00, the rate prevailing during the third quarter of 1980 when the 1981 Investment Program was prepared, was used for this report. /2 Except for imports of fertilizers and insecticides/pesticides, as well as raw materials and inputs for their manufacture, for which the rate was TL 55/$1.00 in January 1980, TL 70.0/$1.00 from October 1980, and TL 85.34/$1.00 from April 15, 1981. FISCAL YEAR March 1 to February 28. FOR OFFICIAL USE ONLY This report is based on the findings of a Special Economic Mission that visited Turkey in October - November 1980. The Mission consisted of the following: Robert Sadove, Mission Chief Jayanta Roy, Deputy Mission Chief Robert Bonney Sawai Boonma Sudhir Chitale Luis Hennicke Jacques Kozub Andres Liebenthal Surinder Malik Turgut Ogmen (Consultant) Helena Ribe Bernard Russell (Consultant) Jivat Thadani Hendrik van Helden (Consultant) Fan Fan Walker Bertil Walstedt (Consultant) Victor Wouters This report also draws upon research and studies undertaken by the Bank Staff and Mr. Mete Durdag (Consultant) on related areas. 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. TURKEY PUBLIC SECTOR INVESTMENT REVIEW Table of Contents Volume Is MAIN REPORT Page No. MAP COUNTRY DATA SUMMARY AND CONCLUSIONS i-xi Chapter 1: THE MACROECONOMIC PERSPECTIVE A. Introduction I B. Recent Economic Developments 1 C. Growth Strategy and Investment Perspective 1963-80 3 D. Macroeconomic Outlook for the 1980s 10 1. The Investment Program 12 2. Balance of Payments Implications of the Investment Program 1.3 3. Domestic Financing 16 4. Employment Needs 17 Chapter 2i THE 1981 PUBLIC INVESTMENT PROGRAM 19 A. An Overview 19 B. The Project Focus 23 C. Medium-Term Investment Levels Implied by the 1981 Program 30 Chapter 3: SUMMARY OF SECTOR SPECIFIC ANALYSES 33 A. Agriculture 33 B. Manufacturing 35 C. Transport 39 D. Energy 42 Chapter 4: SUMMARY OF RECOMMENDED APPROACH 48 Appendix 1: Summary Review of Priority Projects in Major Sectors 55 Appendix 2: List of Projects in Major Sectors 62 Appendix 3: Macroeconomic Model 81 Volume II; SECTOR ANALYSES Chapter 1: AGRICULTURE A. The Role and Performance of Agriculture 1 B. Public Investment and Growth and Exports Projections for 1981-85 5 1. Production and Export Potential 6 a. Import Substitution 8 b. Production Potential 9 C. The Public Sector Investment Program for 1981 and Implications for 1982-85 10 1. The Total Program 10 2. The 1981 Investment 11 3. Subsectoral Programs 13 a. Irrigation Infrastructure and Related Land Improvement 13 (i) Major Irrigation Project (DSI) 14 (ii) Small Irrigation and Land Improvement (TOPRAKSU) 16 (iii) Summary 16 b. Storage and Marketing 17 (i) Grain Storage and Marketing (TMO) 18 (ii) Sugar Beet Production and Marking (TSFC) 19 (iii) Farm Inputs (TZDK) 20 (iv) Other Marketing and Agro-Industrial Investment 20 c. Forestry 21 d. Indirectly Productive Investment of the Ministry of Agriculture 21 D. Summing-up: 1982 and Beyond 23 Chapter 2; PUBLIC MANUFACTURING SECTOR 25 A. Introduction 25 1. Industrial Objectives and Problems 25 2. Structural Features of Manufacturing Sector and Recent Developments 27 3. Government Industrial Strategy 29 B. The Public Investment Portfolio and the 1981. Annual Program 32 1. The Public Investment Portfolio 32 2. General Evaluation of the Portfolio 36 3. Comments on the 1981 Program 38 4. Long-range Implications of a Pared-Down 1981 Program 39 C. Individual Industries and Projects 41 1. Introduction 41 2. Steel 42 3. Special Steel 50 4. Aluminium 53 5. Petrochemicals and Chemicals 54 6. Fertilizers 61 7. Pulp and Paper .65 8. Trucks and Tractors 67 9. Cement 70 10. Sugar 72 11. Textiles 74 D. Some Major Policy Issues 75 Chapter 3: EXPORT INDUSTRUES 79 A. Introduction 79 B. Potential Export Industries 80 C. Financial Resources 85 Chapter 4; ENERGY 89 A. Introduction 89 B.. Indigenous Resources 90 C. Sectoral Supply and Demand Trends 91 D. Subsectoral Trends 95 E. The Government's Energy Program 102 1. Electric Power 106 2. Lignite 112 3. Petroleum 114 F. Organization and Management Issues 116 G. Demand Management and Conservation 120 H. Summary of Key Energy Problems and Issues 122 Chapter 5: TRANSPORT AND COMMUNICATIONS 125 A. Introduction 125 B. The 1981 Investment Program 127 C. Bulk Transport Needs and Services 131 1. Iron and Steel Industry 132 2. Coal and Lignite Transport Needs 132 D. Major Subsectors 133 1. Highways 133 2. Village Roads 137 3. Railways 139 4. Civil Aviation 142 5. Ports and Shipping 143 6. Telecommunications 145 Sector Tables: A. Agriculture 146 B. Energy 161 Volume III; STATISTICAL ANNEX LIST OF TEXT TABLES Volume I: MAIN.REPORT Table 1.1 Growth in Sectoral Output and Investment 1963-80 5 1.2 Fixed Investment by Economic Sector in Selected Years 1963-1980 7 1.3 Growth of GDP and Selected Sectors 1973-85 11 1.4 Total & Public Sector Fixed Investment by Sectors, 1980 and Projections 1981-85 13 1.5 Balance of Payments 14 1.6 Financing Public Sector Investment 1975-1985 16 1.7 1981 Public Investment Program 19 1.8 Summary of Review of Selected Large Projects in 1981 Program 25 1.9 Estimated Cost of Selected Very Large Projects 29 I.10 Approved and Recommended Public Sector Invest- ment Program 31 I.11 Summary Status of Large Projects as Recommended by the Report 32 1.12 Primary Energy Balance, 1980-1990 43 Volume II: SECTOR ANALYSES Chapter 1: AGRICULTURE Table 1.1 Projections of Investment in Agriculture 5 1.2 Potential Annual Volume and Value of Major Agricultural Exports in 1985-90 8 1.3 Total and 1981 Public Investment Program for Agriculture 11 1.4 Comparison of 1980 and 1981 Public Investment Programs by Major Organizations 12 1.5 Comparative Investment by Purpose 13 1.6 DSI Completion and Investment Schedule Summary 14 1.7 Investment Program and Current Budget of the Ministry of Agriculture 22 1.8 Actual and Indicative Total and Annual Investment Programs 24 Chapter 2: PUBLIC MANUFACTURING SECTOR Table 2.1 Most Important Public Manufacturing Projects 33 2.2 Subsectoral Distribution of the Project Portfolio in the Public Manufacturing Sector 36 2.3 Projections of Public Manufacturing Investments 1981-1985 40 2.4 Demand Projections for Steel 43 2.5 Status of Steel Projects in Public Sector 44 2.6 Capacity Utilization in Turkish Steel Mills 1979 48 2.7 Demand Versus Capacities in Turkish Petro- chemicals Industries 56 2.8 Aliaga Petrochemicals Complex: Assumed Domestic and Export Prices for Petrochemical Products, November 1980 58 2.9 Economic Return Calculation for the Aliaga Complex Under Alternative Estimating Procedures 60 2.10 Planned Investments in Fertilizer Production 63 2.11 Status of Priority Public Sector Cement Projects 71 2.12 Sugar - Supply and Demand Balance 73 Chapter 4. ENERGY Table 4.1 Energy Reserves 90 4.2 Primary Energy Production 1970-1990 92 4.3 Energy Consumption 1970-1990 93 4.4 Petroleum, Coal and Lignite Consumption by Major Sectors 1970-1990 93 4.5 Forest Areas by Type and Productivity 99 4.6 Annual Fuelwood Production and Estimated Consumption, 1950-2000 100 4.7 Energy Investment 1963-1985 103 4.8 Energy Sector Investment Allocations 1981 104 4.9 Proposed Electric Power Investment Ptogram, 1981-1985 108 4.10 Capital and Generating Costs of New Power Stations 110 4.11 Projected Demand Capacity and Generation Capability ill 4.12 Refinery Projects for Reevaluation 115 Chapter 5: TRANSPORT AND COMMUNICATIONS Table 5.1 Distribution of 1981 Public Sector Investment Program 129 5.2 1981 Transport and Communications Investment Program 131 5.3 Investment in Main and Secondary Highways, 1981 SPO Allocations and Bank's Recommendations 136, LIST OF SECTOR TABLES Page No. A. Agriculture Table Al Investment Proposals of Major Agricultural Institutions 146 A2 Investment Proposals of General Directorate of Agriculture Affairs 147 A3 1981 Public Sector Investment for Agriculture Approved by SPO by Purpose and Source of Funds 148 A4 DSI Proposed Investment Schedule 149 AS DSI Completion Schedule and Rates of Return 152 A6 TOPRAKSU Proposed Investment Schedule 155 A7 Planned Investment for Ongoing Projects by TOPRAKSU 156 A8 TOPRAKSU Completion Schedule 157 A9 Total Public Investment Program for Agro-Industrial SEEs and 1981 Allocation 158 A10 Proposed Increase in Sugar Production Capacity (1981-88) 159 All Area of Land Required to Produce Beet for Proposed Expansion Projects with Variable Agricultural Conditions 160 B. Energy Table Bl Energy Resources 161 B2 Interconnected Power System - Electricity and Supply, 1965-1980 162 B3 Fossil Fuel Consumption for Electricity Generation, 1970-1980 163 B4 Forecast of Fossil Fuel Consumption for Electricity Generation, 1981-1990 164 B5 Generating Capacity Reserve Margin 165 B6 Electric Power Subsector Investment, 1970-1979 167 B7 Electric Power Subsector Investment Program, 1980-1985 168 B8 Proposed Investment Program in Urban Distribution, 1981-1985 173 B9 Electric Power Subsector Investment Program, 1981-1985 174 B10 Trend of Electricity Prices 175 B11 Interconnected Power System - Forecast Electricity Sales, Generation and Capacity, 1981-1990 176 B12 Projected Electricity Requirements, 1981-2003 177 B13 Major Industrial Power Loads, 1980-1990 180 Table B14 1981 Investment Program Allocation By Project - Electric Power Subsector 182 B15 Capital and Generating Costs of Proposed New Power Stations 184 B16 Rural Electrification Program 185 B17 Prices of Lignite at Selected Mines 186 B18 Important Coal Reserves of Turkey 187 B19 Coal Consumption by Sectors 188 B20 Forecast Demand for Lignite and Hard Coal, 1980-1990 189 B21 Investment for TKI, 1981-1984 190 B22 Petroleum Products Consumption, 1970-1979 191 B23 Main Petroleum Products Demand by Sector End-Use, 1970-1979 192 B24 TPAO - 1981 Investment Program Allocations by Project 193 B25 Petrol Ofisi - 1981 Investment Program Allocations by Project 194 B26 Retail Prices of Petroleum Products (Ankara), 1974-1980 195 LIST OF STATISTICAL TABLES Table Number Section 1: Population and Employment 1.1: Demographic Characteristics 1.2; Labor Force, Employment and Unemployment 1.3; Employment in Manufacturing Industry- 1.4: Annual Emigration and Workers Employed Abroad 1.5: Employment by SEEs Section 2. National Income Accounts 2.1 Gross Domestic Production at Current Prices by Sectoral Origin 2.2: Gross Domestic Product at 1968 Prices by Sectoral Origin 2.3: Expenditure on Gross National Product at Current Prices 2.4; Expenditure on Gross National Product at 1968 Prices 2.5: Sectoral Fixed Investment at Current Prices by Government and Private Sectors, 1963-71 2.6: Sectoral Fixed Investment at Current Prices by Government and Private Sectors, 1972-80 2.7: Sectoral Fixed Investment at 1976 Prices by Government and Private Sectors, 1963-71 2.8: Sectoral Fixed Investment at 1976 Prices by Government and Private Sectors, 1972-80 2.9: Annual Growth Rates of Sectoral Fixed Investment at 1976 Prices by Government and Private Sectors 2.10: Selected Periods of Average Annual Growth Rates of Sectoral Fixed Investment at 1976 Prices 2.11; Share of Sectoral Fixed Investment to Total Fixed Investment 2.12; Share of Sectoral Public Fixed Investment to Total Public Fixed Investment 2.13: Share of Sectoral Private Fixed Investment to Total Private Fixed Investment Section 3: Foreign Trade and Balance of Payments 3.1: Balance of Payments 3.2: Commodity Composition of Exports 3.3: Commodity Composition of Imports 3.4: Invisible Receipts and Payments 3.5: Geographic Distribution of Exports. 3.6: Geographic Distribution of Imports Section 4; External Debt 4.1; Long-term Debt Outstanding 4.2: Disbursement Received from Long-term Loans 4.3: Long-term Loan Commitments Received 4.4: Average Terms of Long-Term Public Sector External Commitments Received Section 5: Public Finance 5.1: Consolidated Budget Summary 5.2: Consolidated Government Revenue 5.3: Internal Public Debt 5.4: Profit and Loss Account of SEEs 5.5: Financing of Investment by SEEs 5.6 Fixed Investment by SEEs Section 6: Money and Banking 6.1: Money and Banking 6.2; Distribution of Central Bank Credits 6.3; Consolidated Commercial Bank Credits 6.4; Composition of Bank Deposits 6.5: Lending and Deposit Interest Rates Section 7: Prices and Wages 7.1: Price Indices 7.2: Average Daily Wages of Workers by Economic Activity 7.3: Trends in Real and Nominal (Daily) Wages 7.4: Government Salaries by Grades, 1970-77 7.5; Public and Private Sector Wages 7..6: Collective Agreements and Coverage in Turkey Section 8: Agriculture 8.1: Principal Land Use 8.2 Land Areas for Cereals, Pulses, and Industrial Crops 8.3: Output of Cereals, Pulses and Industrial Crops 8.4: Yields of Cereals, Pulses and Industrial Crops 8.5; Output of Nuts and Fruits 8.6: Use of Major Agricultural Inputs 8.7: Agricultural Support Prices 8.8: Official Prices of Agricultural Inputs Section 9: Industry 9.1; Output of Selected Industrial Goods 9.2: Value of Manufacturing Production 9.3: Fixed Investment in Manufacturing 9.4; Sectoral Distribution of Establishments, Employment, Output, Value Added and Investment in Public Manufacturing Industry - 1979 9.5: Sectoral Distribution of Establishment, Employment, Output, Value Added and Investment in Private Manufacturing Industry - 1979 9.6; Production Figures for the first three months of 1979, 1980, 1981 9.7: Output of Petroleum, Coal and Major Minerals 9.8: Production of Electricity (Gross) Symbols Used in Statistical Tables Not available - Zero or negligible GLOSSARY OF ABBREVTATIONS AEK - Atomic Energy Commission BOTAS - Turkish Pipeline Corporation CHP - Combined heat and power CTC - Central Traffic Control DONATIM (TZDK) - Agricultural Supply Office DSI - State Hydraulic Works EEC - European Economic Community EIE - Electrical Survey Administration FFYP - Fourth Five Year Plan GDAA - General Directorate of Agricultural Affairs GDH - General Directorate of Highways ICOR - Incremental Capital Output Ratio IMF - International Monetary Fund IPRAS - Istanbul Petroleum Refinery Corporation LPG - Liquified petroleum gas MAF - Ministry of Agriculture and Forestry MENR - Ministry of Energy and Natural Resources MKEK - Mechanical and chemical industries M< - Medium and long-term MTA - Mining Research and Development Institute mtoe - Million tons oil equivalent NFS - Nonfactor services NPV - Net present value O&M - Operation and maintenance p.c.k. - Passenger car per kilometer PETKIM - Petrochemicals Corporation PTT - Post, Telegraph and Telephone General Directorate SEE - State Economic Enterprise SEKA - Paper Company SPO - State Planning Organization TCA - Transport Coordinating Agency TCDD - Turkish State Railways TCZB - Agricultural Bank of Turkey TEK - Turkish Electricity Authority TRI - Turkish Coal Enterprise TL - Turkish Lira TMO - Grain Storage and Marketing - Organization TPAO - Turkish Petroleum Company TRT - Turkish Radio and Television TSF, TSFC - Turkish Sugar Factories Corporation TSKB - Industrial Development Bank of Turkey TUMOSAN - Turkish Motors Industries TZDK (DONATIM) - Agricultural Supply Office WDR - World Development Report YEM - General Directorate of Feed Industry YSE - General Directorate for Infrastructure, Ministry of Village Affairs WEIGHTS AND MEASURES 1 ton (metric: 1,000 k,ilograms (kg)) 1,205 lbs m tons 1 million tons tpy = tons per year DWT deadweight ton 1 kilocalorie (kcal) 3.968 British thermal units (BTU) tpe (toe) = ton petroleum oil equivalent = 10 million kcal mtoe 1 million tons oil equivalent kW = kilowatt 1,000 watts MW = Megawatt = 1,000 kW kWh = kilowatt hour GWh = Gigwatt hour = 1 million kWh kV = kilovolt 1,000 volts m = meter = 3.281 feet km = kilometer = 1,000 meters = 0.624 mile km2 = square kilometer 0.386 square mile ha = hectare = 2.471 acres m3 = cubic meter = 35.31 cubic feet SCF = standard cubic foot liter 0.264 US gallon b/d barrells per day = 50 tons per year (approx.) CHAPTER 1 AGRICULTURE A. The Role and Performance of Agriculture 1.1 Agriculture has played a key role in the economic and social development of Turkey during the last three decades. It has made the country virtually self-sufficient in food, supplied raw materials for industry, and foreign exchange to finance imports for the development of other sectors. Nevertheless, its growth of about 3.0 percent per annum during 1962-1979 has been slower than planned (4 percent) and its share of GDP is declining relative to other sectors which have expanded more rapidly. 1.2 The decline in the growth rate of agricultural GDP since 1976 can be attributed largely to; (a) the low level and recent reduction in real terms of total investment for the sector; (b) imbalance in the composition of investment with a bias in favor of physical infrastructure and equipment and against providing comprehensive supporting research, extension, credit and marketing services needed to increase the productivity of land and labor in the sector; (c) misallocation of some investment resources toward financing current expenditures; (d) the inefficiency of the agricultural SEEs; (e) stifling of incentives to farmers and the private sector through poorly executed Government intervention in input and product pricing; and (f) restrictions on the sector's ability to use and earn foreign exchange. 1.3 The level and pattern of fixed capital formation for agriculture has historically been inconsistent with the expected rate of growth of agriculture. Total investment for the sector declined from an average of 13 percent of total investment during 1963-72 to about 11 percent during 1973-80 with total capital formation in agriculture less than 10 percent of the sector's GDP. Public investment has consistently favored capital expenditures for physical infrastructure, and therefore resulted in a high capital-output ratio, i.e., 2.3:1. As a result, larger amounts of investment relative to agricultural GDP would have been required to attain the 4 percent growth rate set in Government plans. The larger amount of investment needed could theoretically be mobilized by the private sector but such an effort could not be sustained on the scale achieved during 1973-77. There is no consistent long-term pattern regarding the respective shares of the public and private sectors. Until 1971, the private sector contributed only between 25 and 39 percent of total agricultural investment, then rose in real terms between 50 and 60 percent during 1972-77, and fell to 48 percent during 1978-80. -2- 1.4 The high capital-output coefficient for Turkish agriculture reflects a development strategy and corresponding amounts of public investment founded on the premise that irrigation and related land improvements is the cornerstone of agricultural growth. Historically, 55-65 percent of public investment has been allocated for infrastructure, mainly for the construction of large reservoirs, dams and water distribution system by the State Hydraulic Works (DSI), plus smaller works by TOPRAKSU. The proportions allocated in recent years for forestry, fisheries, and SEEs engaged in marketing have also been considerable (forestry, about 20 percent, SEEs, about 4 percent, fisheries, about 1 percent). This has left about 10-11 percent for the wide range of indirectly productive services in agricultural research, crops and livestock extension, rainfed land management, etc. 1.5 A steady but modest rate of growth of agricultural GDP up to 1976, reflects both the emphasis on irrigation infrastructure and the technical progress through the increased use of fertilizer, improved seeds, mechanization, etc. and private sector investment. Investments in irrigation have improved productivity for about 1.7 million ha of land, thereby adding weight to the contribution of irrigated agriculture to aggregate crop production. Although area in irrigated crops-represented' about 11% of total crop area (excluding fallow) in 1977, output accounted for roughly 39% of the total value of crop production. In many respects, however, irrigated agriculture operates at below its capacity. For example, for a number of reasons, including incomplete on farm development, less than 70 percent of irrigable land is cultivated under irrigation. In addition, the net value of output is reduced by lower yields of crops such as sugar beets, due to inefficient research and extension services. In other words, (a) increases in output of irrigated crops has lagged behind the expansion of irrigated areas; (b) progress of irrigated agriculture is further stiffled by the slow rate of completion of on-going projects, while new ones are started each year. During the last few years, especially since the sharp decline in public investment in agriculture beginning in 1977, the expansion of irrigated area has slowed down from a previous average of 50,000 ha annually to less than 20,000 ha in 1979. This has led to a large backlog of incomplete and stalled projects, and concommitant sunk costs, which are a source of major concern to the Government authorities. 1.6 While the high proportion of public investment spent for infrastructure helps raise the economic contribution of irrigated agriculture, the full growth potential of agriculture has not been realized because the amounts allocated for indirectly productive purposes have been disproportionately small. The imbalance in the composition of investment affects irrigated as well as non-irrigated areas since both types of agriculture require similar investment with different degrees of intensity in research, extension, storage, veterinary services, etc. However, the economic effects of the imbalance are more pervasive in non-irrigated areas where the risks of dependence on rainfall reduce farmers' propensity for technological innovation without support from government services. Consequently in rainfed areas technical progress has been limited in scope to a few areas and crops. Much land remains under-utilized because of the -3- large areas in fallow (some 7 million ha annually). Nevertheless, it has been demonstrated, e.g., the wheat improvement program started in 1967-68, or in the Corum-Cankiri Project, that rainfed land can be made much more productive by increasing yields and altering the cropping pattern toward more intensive land use, at a much lower cost in rainfed areas than with irrigation. Moreover, since outlays for public works per unit of cultivated land are small, the latter approach implies a larger share of private relative to public investment, as long as funds are available through increased amounts of credit. 1.7 In contrast, although the links between investment for infrastructure and technical services are also weak in irrigated areas, the catalytic effect of the assured availability of water has demonstrated Turkish farmers' propensity for technical innovation; In the early 1960s, yields of irrigated crops such as cotton, sugar beets and tobacco significantly increased as a result of agricultural extension from specialized agencies or SEEs, although these efforts were not sustained in the 1970s. A recent example was the massive and successful campaign to introduce the Mexican wheat varieties begun in 1967-68. The campaign, initiated in irrigated areas, resulted in planting Mexican varieties on 600,000 ha and dramatically changing wheat production techniques and raising yields from an average of 1 ton to 1.8 tons/ha during 1966/79 in Turkey as a whole. The campaign was followed by similar innovations for Turkish wheat in non-irrigated areas, as. well as the widespread use of adaptable varieties imported from other countries (e.g., the USSR). As a result, about 50 percent of Turkey's present wheat area, both irrigated and rainfed, is planted with high-yielding varieties, and Turkey became a wheat exporter in the mid 1970s. 1.8 Decisions on the composition of investment are not reduced to choices between investment for irrigated versus rainfed areas, with the implication that a smaller amount allocated for irrigation infrastructure and related land improvement would be automatically more efficiently utilized in rainfed areas. Even if the choices were mutually exclusive, such a reallocation would serve no productive purpose unless it could be founded on rigorous economic analyses. In Turkey, however, public investment in agriculture is proposed and executed according to two fundamentally different approaches. One approach applies mainly to directly productive investment requiring mainly physical construction and purchase of equipment for irrigation, drainage, forestry and grain storage and the management of such facilities. Since such projects have identifiable dimensions, time phasing and tangible economic objectives, investment proposals are sufficiently clearly formulated to enable SPO to assign priorities according to tests of cost effectiveness or economic worth. This applies to investment proposals submitted by DSI for large-scale irrigation and drainage, as well as multi-purpose water projects, and by TOPRAKSU for small-scale irrigation, drainage, and soil conservation. The second approach, practiced by the Ministry of Agriculture and Forestry's (MAF's) 19 major entities, is governed by current needs for equipment, buildings, supplies, etc., to support their on-going and new programs rather than by tangible objectives for a specific -4- area and product. With the rare exception of support to projects agreed upon with other agencies, investment resources employed by the MAF are in fact highly fungible. They are readily convertible into "overhead" activities, i.e. administrative and regulatory functions, rather than for stimulating farmers to alter the amount and composition of input use, cultivation techniques, and land use pattern, unless determined efforts are made to govern their ultimate purpose. 1.9 The dilemma is exemplified by the MAF's investment budget for 1981 and beyond. With 13 General Directorates, plus four SEEs (for wool and mohair, milk, feed and agricultural supplies) and autonomous state farms, neither the investment budget as a whole nor any major component can be related to sets of tangible objectives. For example, the bulk of investment of the largest General Directorate, Agricultural Affairs (GDAA), which is responsible for extension, consists of numerous and unrelated activities. The investment budget is a mixture of capital outlays for construction and equipment with unspecified and broad programs such as agricultural extension improvement in 67 provinces. As presently formulated, the investment program of GDAA and any other entity of the MAF, therefore, defies evaluation by any objective means, except when project objectives are well known as priorities (e.g., Ceyhan-Aslantas and Corum- Cankiri projects). 1.10 The two divergent approaches complicate the possibility of changing the composition of investment because of: (a) the "incremental" manner in which resources are allocated from one period to the next; and (b) the inclusion of current expenditures in the investment budget approved by SPO to finance outlays that either are politically expedient or to make up anticipated reductions that will be imposed by the Ministry of Finance. 1.11 The incremental approach of investment budgeting, according to which every ongoing program and entity is authorized more each year to compensate for inflation, has 'not served Turkish agriculture well. It has made it difficult to take new initiatives, much less bold ones, because "new" or reformulated programs and projects must establish an implicit "track record". Consequently, investment budgeting has unwittingly encouraged the "status quo" in terms of organizational structure, programs and projects, especially for the MAF. For all entities, it encourages seeking a high level of spending in nominal terms and, if achievable, in real terms. Increases in real terms are usually achieved by gradually introducing new projects which become ongoing projects in subsequent years. This has greatly multiplied the number of irrigation projects under study and construction by DSI and TOPRAKSU. For example, the 1981 investment program of DSI contains new projects at the total cost of TL 10.5 billion, and TOPRAKSU's includes new projects at the total cost of TL 14 billion. 1.12 The inclusion of current expenditures in the investment budget is in fact a misallocation of investment resources. It is a means of obtaining, through the investment budget approved by SPO, funds that could not otherwise be obtained from the Ministry of Finance, which reviews and approved the operating budgets of all entities. It also enables government -5- entities, including SEEs, to retain and swell the number of employees and workers that cannot be dismissed even though they are not needed. The amounts are considerable; for the General Directorate of Forestry, TOPRAKSU and DSI, which account for 85 percent of total public investment in agriculture, they are roughly at 20 percent of pubic investment. Although no data are available from other entities of the MAF and SEEs (e.g., TMO and Turkish Sugar Factories Corporation) as to the extent of paying surplus labor from the investment budget, the perpetuation of this non-productive use of investment funds in part also explains the high capital-output coefficient for Turkish agriculture. The practice should be eliminated and such surplus labor as may be required by social statutes or political considerations, should be funded from the current budget. B. Public Investment and Growth and Exports Projections for 1981-85 1.13 Since increases in public investment alone will be sufficient neither to assure a higher rate of growth of agricultural GDP than in the past, nor to raise the volume of exports, resources should be allocated to less capital intensive and more rapidly productive projects than indicated in public investment programs. A redirection is needed towards: (a) investment leading to increased crop yields and livestock production, rather than starting new infrastructure projects; and (b) expanding credit for private and quasi-private investment to the extent allowed by monetary policies. Although the shelving of 23 DSI projects and other projects proposed or underway, such as soybean production, fruit and vegetable exports, livestock development, expansion of improved seed supply, expansion of forage production, satisfy the two conditions, such redirection is presently insufficient in scope to have the desired impact on agricultural GDP. Private sector investment would have to be brought into play, as suggested in the projections below, with adequate financing secured from public institutions, commercial banks and internally generated savings. Table 1.1; PROJECTIONS OF INVESTMENT IN AGRICULTURE (TL Billion at 1980 Prices) Total Public Private Year Investment Amount Percent 1980 64.6 33.6 31.0 48.0 1981 97.8 62.7 35.1 35.9 1982 100.6 62.7 37.0 37.7 1983 111.2 62.7 48.5 43.6 1984 118.2 62.7 55.5 47.0 1985 122.9 62.7 60.2 49.0 Source: Bank Projections. - 6 - 1.14 The importance of private investment merits emphasis because of both its complementary and compensatory role with respect to the public sector. It is complementary in the sense that agriculture's contribution to GDP is achieved by the investment and production decisions of farmers and firms. It is compensatory if it can offset resource constraints limiting public investment in agriculture during 1981-85. Hence it would be expected that private investment would at least regain its 55-60 percent share of total agricultural investment attained in 1972-76. However, projections under the most plausible assumptions for 1981-85 do not indicate that aggregate private investment could increase significantly. Under the best of conditions the share of private investment could perhaps increase to about 49 percent from about 36 percent in 1981. 1.15 The pessimistic outlook surrounding private investment over the short term is not inevitable. Although concrete data regarding the multiple sources and purposes of private investment are not available, a redirection of lending policies by public financial institution such as the Agricultural Bank of Turkey (TCZB), combined with more flexible price policies, would be powerful incentives to invest. For example, TCZB has severely rationed credit for medium and long term private investment, in order to satisfy the needs for short term credit of SEEs. Protectionist policies prevent the importation of foreign equipment and parts, although those manufactured in Turkey are much more expensive and their deliveries may be delayed by months and even years. Farmers' ability to generate internal surplus for investment, which usually accounts for 40-50 percent of private investment, is subject to the uncertainty of price policies and regulation on exports and imported supplies. Consequently, to achieve a higher level of private investment in agriculture, quantitative restrictions on credit and imports should be abolished. 1. Production and Export Potential 1.16 There is scope for expanding production and exports of agricultural commodities in the near future, especially if market restrictions of previous decades are lifted, and greater intensity in directly productive public sector investment is pursued. Turkish agriculture has demonstrated greater flexibility than expected in an economic environment in which the allocation of resources was largely governed by other than market signals (i.e., prices and interest rates) and the amount of public investment has been erratic. Production and exports did increase in real terms during the 1970's as a result of technical innovations and greater input use, in spite of the dominance of SEEs over production, marketing and processing, and in some cases exports (e.g., wheat), of several commodities. Other restrictions governing foreign exchange allocation, input distribution, inflexible price supports and controls also have restricted the supply response of the sector. Import substitution of sugar and oilseeds, which had progressed well until the early 1970's, has become economically inefficient. Agronomic research and technological innovation in both agricultural production and processing - 7 - (e.g., sugar beets) for import substitution crops have not kept up with progress in other countries, due largely to trade protection against external competition, thereby preventing the import of seeds, equipment and agro-industrial processing technology and managerial know-how. 1.17 The export potential of agriculture is greater than indicated by the achievement of the last two decades of four products (cotton, tobacco, nuts and fruits) which represented about 65 percent of agricultural exports. In addition to expanding these four traditional exports over the next 4-5 years, new ones can be added, i.e., cereals and pulses; and over the longer term livestock, wool and mohair, and eventually meat. Increases in exports, however, will depend as much on improving marketing organization and performance as on reaching higher production levels and altering price incentives. 1.18 Turkey is well known to have the potential to raise output of most exportable crops, by raising yields and adjusting areas planted. The export potential, derived from production objectives given in the Fourth Five Year Plan (FFYP), remains valid, although projected output for 1979-83 will be delayed because the prerequisite investment, production and institutional adjustments were not made. 1/ Fortunately, the real increase in overall agriculture commodity prices traded by Turkey on world markets since 1977, have helped offset the shortfall in volume. During the next 5-10 years it is expected that prices for Turkey's agricultural exports will remain buoyant and, consequently agricultural exports can indeed increase considerably in value. Using 1979 as a base, the value of Turkey's major agricultural export commodities could expand by about $1.2-1.4 billion as shown in Table 1.2, assuming only minor increases in yields and adjustments in land use, and that existing export bottlenecks can be overcome. 1/ The above refers to the Bank review of the FFYP, contained in Turkey: Policies and Prospects for Growth (Report No. 2657a-TU, December 29, 1979). -8- Table 1.2; POTENTIAL ANNUAL VOLUME AND VALUE OF MAJOR AGRICULTURAL EXPORTS IN 1985-90 1979 1985-90 Annual Estimate Production Exports Production Exports Value Value Area Volume Volume Total $/ton Area Volume Volume Total $/ton (00ha) -'000 tons-- I mT (00Oha) -'000 tons-- ($m) Cotton 612 476 135 232 1,718 620 520 160 368 2,300 Tobacco 223 214 67 177 2,640 200 220 60 174 2,900 Hazelnuts - 290 90 353 3,922 - 330 110 440 4,000 Raisins - 84 65 115 1,770 - 96 70 133 1,900 Olive Oil - 180 28 39 1,392 - 193 30 60 2,000 Citrus - 1,087 120 53 442 - 1,340 180 90 500 Wheat 8,600 13,300 2,000 86 124 /a 8,000 16,000 4,000 720 180 Barley 2,600 4,800 - - 90 2,500 5,500 1,500 255 170 Pulses 445 541 145 55 379 550 670 250 100 400 Subtotal 1,110 2,340 Total Agric. Exports 1,343 2,700 /a Weighted average price of 1978-79 shipping period, which does not coincide with calendar year foreign exchange earnings. Source; Forecasts made by SPO in FFYP adjusted by for lower yield increases than deemed possible, and price increases. 1.19 Over the next 2-3 years higher agricultural export earnings can mainly be derived from cotton, wheat, barley and hazelnuts, i.e., about $500 million. No significant increase in livestock product exports is expected because to achieve such an increase, would require a longer period of investment and production adjustments to allow for the 8-10 years needed to build the quality of cattle herds and sheep flocks and simultaneously greatly increase the feed supply from pastures, range as well as crop by-products. a. Import Substitution 1.20 Although Turkey has achieved comfortable self sufficiency for most agricultural products, especially food, selective import substitution of sugar and edible oils should be possible during the 1980's, as a means of saving foreign exchange provided that such import substitution programs are carried out in economically efficient ways. Failure to maintain relative self sufficiency of these two products could cost dearly, i.e., at current - 9 - prices, about $400 million for sugar annually, and roughly $200 million for vegetable oils. Concerning sugar, self-sufficiency ended in 1980, as about 200,000 tons of sugar were imported at a cost of approximately $200 million, and will probably rise to 260,000 tons for about $250 million in 1981. This is due to three fundamental factors; (a) yields of sugar beet have stagnated, and may have declined due partly to lack of research and incentives for farmers; (b) the handling of beets, and processing into refined sugar are inefficiently done; plant capacity is insufficient and technologically outdated; and (c) poor organization and management of the Turkish Sugar Factories Corporation (TSFC), a deficiency that also afflicts other SEEs in agriculture. Nevertheless, by increasing sugar beet yields, improving processing efficiency and capacity, it should be possible to raise sugar output from about one million tons in 1979 to 1.7 million tons by 1989-90. This would not require additional land if the foregoing constraints are overcome. The production and domestic supply deficiency of oilseeds is less costly than that of sugar. Slight improvements in the yields of cotton and sunflower seeds and the planned major expansion of soybean production could reduce or virtually eliminate the $100 million import of vegetable oils within 5-7 years. This will depend not only on the availability of sufficient soybean seeds, but more importantly on the prerequisite research and trials that are needed in various regions, even though initially such seeds could be imported. b. Production Potential 1.21 It was calculated in the Bank's review of the FFYP (1979-83) that Turkey indeed had the physical potential for expanding total crop production by 5 percent annually, provided that the constraints imposed by economic policies and ineffective institutions could be overcome to influence the desired changes in land use and resource allocation. It would, however, require, over a five year period, the expansion of irrigated -area by about 500,000 ha and reduction of fallow by another 500,000 ha, and doubling fertilizer use. In view of the constraints imposed by economic policies, ineffective institutions, fiscal restraints and the time needed to make production adjustment, it appears that the maximum attainable growth rate would be 3.5-4.0 percent per annum. 1.22 The goals of expanding irrigated area by 500,000 ha and reducing fallow by 500,000 ha, however, are far from being achieved, and no innovations have yet occurred in the management of organizations responsible for agriculture. Bottlenecks in the supply of inputs have aggravated the situation. Nevertheless, the responsiveness of the agricultural sector to opportunities created by investment has been demonstrated by increases in output for export of nuts, fruits and vegetables, wheat, barley and tobacco, and more specifically for some crops in some provinces. The increases in the wheat area (800,000 ha), barley (200,000 ha) and tree crops (200,000 ha) are indicative of the production adjustments that Turkish farmers are making. Concurrently, yields increased for some crops during the last decade, most notably those of wheat and barley (50 percent), maize (38 percent), and sunflower (30 percent), as a result of input and investment combinations financed by private as well as the public sector. These accomplishments, however, have been uneven; yield increases have occurred mainly in high rainfall and - 10 - irrigated areas; yields of important crops such as cotton, sugar beets, pulses, have stagnated during the last decade. Except for poultry and milk production, very little progress has been made in livestock development and production where considerable export potential exists. Although Turkey has a sufficiently large cattle population (15 million head) to enable it to export animals, meat and meat products, production is held back by the insufficient feed base, poor veterinary care and genetic factors. Similarly the low productivity of the large national sheep flock (44 million head) keeps Turkey deficient in high quality wool (e.g., merino) and hinders the possibility of supplying lamb to neighboring countries. 1.23 Although there is little doubt that Turkish agriculture is responsive to the opportunities offered by public investment, e.g. in irrigated areas and in Corum and Cankiri provinces, the climate of uncertainty caused by government intervention in the supply of inputs, the availability of medium and long term credit, price determination and market regulation, dampen the incentives of farmers. Although the government . control over the supply of seeds, fertilizer and agricultural chemicals has become less restrictive, it needs to be further relaxed. The proportion of investment financed by credit and internally generated savings of farmers should be more carefully assessed, and provisions made for relaxing the tight rationing of institutional credit. Price support policies applicable to most commodities are intended to have an income distribution effect; they do not fully achieve this objective, and disrupt product markets for sugar beets, barley and wheat, milk and livestock products because the SEEs responsible for administering them lack the capacity to do so. A pragmatic revision in policies in all these areas could achieve the goal:s of increasing outputs to meet domestic needs, as well as earn significant foreign exchange through the exports of many of these products. C. The Public Sector Investment Program for 1981 and Implications for 1982-85 1. The Total Program 1.24 The public investment program for agriculture is a paradox for harmonizing short-term policy with long-term objectives. Although the allocation by purpose (shown below) may favor long-term growth, it provides very little basis for raising agricultural GDP over the next 3-5 years to levels sufficient to support rising domestic consumption and exports. The largest single share, 76 percent of the TL 692.7 billion program for agriculture is for large-scale projects to be built by DSI to irrigate about 1.7 million over the next 10-15 years. Another 19 percent is mainly for medium-term (i.e., about 5 years) directly productive projects by TOPRAKSU for small-scale irrigation and land improvement (TL 49 billion), TMO for grain storage and marketing (TL 19 billion), General Directorate of Forestry for forest management and logging (TL 46 million) and the TSFC for sugar beet production (TL 1.6 billion). The remainder, i.e., 5 percent, is mainly for short-term projects/activities of the MAF for indirectly productive purposes. - 11 - 1.25 Overall, the type of investments needed to balance short-term needs with long-term growth consideration do not adequately stand out in the investment program. This is largely because the program consists of a mixture of projects with long gestation periods (e.g. irrigation) with projects planned for only 1-2 years, typically those of the MAF. The TL 692.7 billion program and the 1981 allocation are approximately distributed as follows: Table 1.3; TOTAL AND 1981 PUBLIC INVESTMENT PROGRAM FOR AGRICULTURE (TL Billion at 1981 Prices) Directly Productive Total 1981 Allocation Irrigation and Land Improvement 578.0 56.2 - DSI (529.0) (37.5) - TOPRAKSU (49.0) (18.7) Forestry 46.0 15.0 TMO (Grain Storage & Marketing) 19.2 1.8 Agricultural Supply Orgn. (TZDK) 0.8 0.4 Sugar Factories Corp. (TSF) /a 1.6 0.6 Fisheries 1.3 0.5 Subtotal 646.9 74.5 Indirectly Productive Extension and Administration 23.7 4.4 Livestock Development 12.3 2.5 Research 2.0 0.6 Others 7.8 2.2 Subtotal 45.8 9.7 Total 692.7 84.2 /a Only for activities related to sugar beet production. Source: 1981 Investment Program. 2. The 1981 Investment 1.26 General. The annual public investment program ought to reflect the result of efforts at achieving some balance between short- and long-term objectives, on the one hand, and, on the other hand, between investment in physical infrastructure and the previously neglected indirectly productive investment. The 1981 program deals in some degree only with allocation between sub-sectors of agriculture without, however, upsetting the traditional pattern of allocation for physical infrastructure. It allocates 67 percent for irrigation and related land improvement, 18 percent for forestry, and 9 percent for indirectly productive activities of the MAF. The programmed increase from 9 percent to 13 percent of public investment for agriculture is a welcome sign which - 12 - could give some latitude for increasing the amount needed for purposes I other than physical infrastructure. The expected actual public investment for 1981 of TL 71 or less than 10 percent of total, however, may not be sufficient to effect a significant change on the pattern of past investment allocations. 1.27 The 1981 allopation represents, in real terms, a 100 percent increase over 1980 after allowing for 40 percent inflation between 1980 and 1981. Increases to allow for future inflation are not evenly allocated, however, since some agencies' original proposals included price increases while others implicitly or explicitly did not. Consequently, approval by SPO of TL 84.2 billion for 1981 against aggregate proposals of TL 160 billion has left every major agency, except some SEEs of the MAP, with a larger nominal amount for 1981 than in 1980, but increases in real terms vary greatly, as summarized below. Table 1.4; COMPARISON OF 1980 and 1981 PUBLIC INVESTMENT PROGRAMS BY MAJOR ORGANIZATIONS (TL Billion at Current Prices) 1980 1981 Organization Program Proposals Approved % Increase Nominal Real /c Ministry of Agriculture /a 5.0 16.6 7.9 158 13 Forestry Ia 5.3 15.0 15.0 277 103 DSI 8.0 .90.0 37.5 369 235 TOPRAKSU 3.9 27.0 18.7 379 240 TMO 0.9 3.5 1.8 100 38 Sugar Factories Corporation /b /b 0.6 - - Others 6.9 7.9 2.7 - - Total 30.0 160.0 84.2 181 100 /a Forestry is under jurisdiction of MAF, although it is budgeted separately. /b Included in others. /c The 1981 program is discounted at 40 percent rate of inflation. Sourcei SPO - 13 - Table 1.5; COMPARATIVE INVESTMENT BY PURPOSE (TL Billion at Current Prices) 1980 1981 Purpose Program Program Percent Increase Nominal Real /b A. Directly Productive Land and Water Development 11.9 56.2 372 237 Storage and Marketing /a 1.9 2.1 11 -21 Forest Infrastructure and Management 5.3 15.0 183 102 Fisheries Infrastructure and Management 0.2 0.5 150 79 Subtotal 19.3 73.8 282 173 B. Indirectly Productive Extension and Administration 1.8 4.4 144 75 Livestock Development 1.2 2.5 108 49 Research 0.2 0.6 200 114 State Farms 0.4 0.03 Decr. Decr. Subtotal 3.6 7.5 108 49 Others 7.1 2.9 -59 -70 Total 30.0 84.2 181 100 /a TMO and TZDK. /b The 1981 program is discounted at 40 percent rate of inflation. Source: SPO 3. Subsectoral Programs a. Irrigation Infrastructure and Related Land Improvement 1.28 The 1981 investment program, for this purpose, would amount to TL 56.2 billion (or 67 percent of public investment in agriculture), TL 37.5 billion of which would be for large projects designed and built by DSI, and TL 18.7 billion for TOPRAKSU for small projects plus drainage and soil improvement in DSI equipped areas. Although the investment program proposed by both DSI and TOPRAKSU was pared down by SPO, their 1981 allocation represents almost a threefold increase in real terms over 1980 and, if efficiently executed, would not impair their financial ability to operate. Although 23 of DSI projects were shelved, it appears that the allocation for DSI was made fortuitously or for the purpose of continuing - 14 - the rest of the pojects, by authorizing an amount approximately equal to sunk costs at the end of 1980. If indeed this inference is valid, the criterion is not an adequate one for annual investment decisions. As indicated below, it results in spending for marginal and/or poorly prepared projects which should be either cancelled or postponed. (i) Major Irrigation Projects (DSI) 1.29 The long-term commitment to equip 1.7 million ha for irrigation is accurately reflected in the total investment program. However, the annual investment requirements weight heavily in the annual investment program because virtually all such projects are or automatically become "ongoing" projects requiring some allocation each year. Thus, with about 470,000 ha of the 1.7 million ha equipped by the end of 1980 and hopefully approximately 500,000 ha to be completed by 1985, the remaining 760,000 ha would be stretched beyond 1985, as illustrated below, with a corresponding estimated investment schedule (Table 1.6). Table 1.6; DSI COMPLETION AND INVESTMENT SCHEDULE SUMMARY /a (hectares) Completed up to After Project /b 1980 1981 1982 1983 1984 1985 1985 "A" Projects 333,874 22,170 67,739 113,531 100,611 91,134 117,717 "B" Projects 42,413 - 3,906 1,638 4,000 53,682 151,983 "C" Projects 5,000 - - - 5,650 29,937 194,420 "D" Projects 96,272 - - - - - 262,830 "E" Projects /c .. .. .. Total 477,559 22,170 71,645 115,169 110,261 174,753 762,950 Investment 25,537 22,743 57,719 57,489 44,686 81,919 /c (TL billion) /a As of November 1980. Since investment program for "A" and "B" projects was reduced in the final 1981 program, completion would be less than area indicated. /b See below for basis for project classification. /c No firm data available. Source; DSI - 15 - 1.30 TL 37.5 billion allocated to DSI, apart from the amounts allocated for studies, 0 & M, and repairs, would be spread about evenly between projects that can be completed within 3-6 years (Categories "A" and "B" below), and projects that would not be completed until the late 1980s and later, plus equipment, salaries, etc. In view of the implicit priority assigned to projects nearing completion, which also have high sunk costs, all DSI projects can be classified as follows; 1/ (a). fifty-six "A". projects, which are under way and can be completed within 2-5 years (e.g., Ceyhan-Aslantas); (b) 14 "B" projects, which are at an early stage of construction, but contractual commitments bind the Government to continue construction;.contracts, however, are not all for the entire project but one or more stages of it; therefore, construction could be halted upon completion of a particular stage; (c) 16 "C" projects, which are at an early stage of work (e.g., Eber-Aksehir) which can be cancelled or postponed because of low sunk costs and the absence of contractual commitments; (d) 13 "D" projects, with hydroelectric as well as irrigation objectives; priority is assigned by SPO to these projects, e.g., South-eastern Anatolia, mainly because of the short-term hydroelectrical potential rather than irrigation, since new land would not be irrigated until after after 1986; and (e) 14 "E" projects, mainly for flood control and drainage, which were assigned a low priority when original proposals were prepared for SPO review. 1.31 Based on preliminary analysis, the mission would have suggested a 1981 investment program of about TL 33-35 billion for DSI which (a) selected from among all "A" and "B" projects; (b) perhaps, excluded new projects and postponed indefinitely all "C" and "E" projects; (c) reduced outlays on "D" projects delaying their completion by 4-5 years, i.e., a slower pace of investment only sufficient to fulfill contractual obligations; (d) provided for equipment, etc., to assure completion and adequate O&M; and (e) excluded repairs and maintenance as non-investment to be financed from the current budget (from Ministry of Finance). These recommendations were made on the basis of the Government's explicit priorities and a project-by-project review of sunk costs, investment and completion schedules, and estimated benefits. From data supplied by DSI on the estimated net present values (NPV) of benefits and rates of return for 56 Category "A" projects, it was estimated that 23 of these projects could either be marginal or reflected inadequate agricultural planning to extract additional benefits from investments. Priority would then have been indicated for a group of at least 47 and, subject to further analysis, up to 70 "A" and "B" projects, which would have equipped about 500,000 ha for irrigation by 1985. 1/ Project details are in Vol. II, Sectoral Tables A4 - A5 - 16 - 1.32 In the final 1981 public investment program, however, emphasis somehow shifted from the priority implicit in 56 "A" and 14 "B" projects, especially the former, to a formula that permitted the total number of DSI projects (or activities) to increase from 115 to 142. The completion of 500,000 ha in projects classified as "A" and "B" will probably be delayed with further spreading of resources over an increasing number of projects. (ii) Small Irrigation and Land Improvement (TOPRAKSU) 1.33 The nominal increase in TOPRAKSU's 1981 allocation, from TL 3.8 billion in 1980 to TL 18.7 billion, represents more than a threefold increase in real terms for land improvement (mainly drainage in DSI-equipped irrigated areas), on farm development (mainly land levelling), small watershed management, small dam and groundwater schemes and soil conservation. The amount approved would provide about TL 5.9 billion for ongoing projects, which would enable TOPRAKSU to complete 41,000 ha on DSI projects, plus about 24,000 ha of small projects. 1.34 In view of TOPRAKSU's large backlog of onfarm development works, drainage and soil improvement, it is not considered advisable to finance new projects in the magnitude (TL 11.7 billion) authorized in 1981. Since much (about TL 5 billion) of the "new project" category consists of surplus labor salaries, major expenditures for new projects should be limited to the costs of studies, design and equipment requirements of investment in the 1981-85 pipeline. Thus, an authorization of about TL 5 billion would be ample to cover the "preinvestment" needs of new small irrigation and land improvement projects. The "surplus," i.e., TL 7 billion, should, therefore, be allocated for other purposes. (iii) Summary 1.35 A more balanced contribution of investment for irrigation agriculture would be achieved by excluding TL 170 billion from the total investment program and annual allocations for DSI works on some 20 Category "C" projects listed below: Konya-Cumra TL 21.6 billion Bingol-Merhale II TL 2.7 billion Eber-Aksehir TL 19.0 billion Batman-Silvan TL 0.9 billion Tasvanli TL 2.9 billion Develi TL 29.0 billion Orencik TL 3.0 billion Uzunlu TL 3.7 billion Seyitgasi TL 6.0 billion Kralkizi TL 55.2 billion Aksaray TL 2.9 billion Yahyasaray TL 3.9 billion Zile TL 2.8 billion Mus-Hinis TL 2.2 billion Yedikir TL 3.4 billion Susehri TL 3.5 billion Cildir II TL 2.0 billion Uluborlu TL 1.7 billion Palu-Kovancilar TL 3.7 billion - 17 - Moreover, even if long-term Category "D" projects are deemed to be worthwhile, i.e., a rate of return of 25 percent, phasing of investment according to short-term budget constraints should be imposed in order to lessen their weight in the annual investment budget. Concerning TOPRAKSU, the level of investment should be compatible with its ability to execute projects over 3-4 years at most. This would reduce its total investment as indicated above, i.e., to about TL 12 billion annually, or TL 48 billion in the program. b. Storage and Marketing 1.36 Public investment in storage and marketing facilities of crops, feed and production supplies have fallen behind the slow but steady growth of output. Except for cotton and nuts, little seems to have been done by the private sector, because of, inter alia,: (a) the presence of state monopolies such as the TSFC for sugar beets, TMO for cereals and pulses, and TZDK for fertilizer distribution; and (b) competition by heavily subsidized SEEs in various activities, i.e., mohair, feed, milk, meat, fish, and seed, etc. Other reasons restricting private investment are due to the complex price support and control policies, administrative and statutory barriers for both imports and exports, and exposure to foreign exchange risks when borrowing. 1.37 The public investment program for agriculture provides TL 21.6 billion in total project costs only for three major SEEs engaged in agricultural marketing; (a) TL 19 billion for grain storage investment through TMO; (b) TL 765 million for agricultural supplies, mainly fertilizer, chemicals and some machinery through TZDK (also known as DONATIM); and TL 1.6 billion for sugar beet production and handling by the TSFC. The latter is as much a production support as a marketing operation because of the vertical integration of TSFC operations, but excludes investment in beet processing and sugar refining operations covered in the industrial sector. Given the contribution to agricultural GDP of sound marketing organization and the signals that its efficient performance can give to farmers, more public investment would be justified for this purpose. Total investment program of TL 21.6 billion, or 3 percent of the total seems disproportionately low, of which only one eighth, TL 2.8 billion, is allocated for 1981. Although the SEEs in this subsector have accumulated large deficits, requiring large amounts of subsidy, a larger public sector commitment would be justified, especially if the program is carried out concurrently with the reform of the SEEs, because of the weak capability of the private sector at present. The obstacles and uncertainties facing private investment in product and input marketing do not raise any immediate hope that entrepreneurs would risk venture capital on the scale needed during the next five years, even if credit were available, without the security of expectation that increasingly favorable government policies will improve and will not be reversed. - 18 - (i) Grain Storage and Marketing (TMO) 1.38 For grain marketing (cereals and pulses), existing storage capacity is insufficient to handle the expanding domestic and export markets. Present and projected capacity of the public sector should be rapidly increased to 3 million tons, which would enable TMO to handle 7-8 million tons annually. No major investments are being made by the private sector, except small regional silos and warehouses. TMO is presently carrying out Phase I of its TL 19 billion expansion plan consisting of (i) 555,000 tons, for TL 1.8 billion, to be completed at the end of 1981; and (ii) 910,000 tons to be completed by 1985, with World Bank financing. Phase II would add 1.3 million tons of capacity after 1985. Both Phase I and II are needed but the multiple aims and poor management record of TMO place in question its future role as both a grain storage and marketing SEE. 1.39 Phase I expansion of TMO facilities is at least three years behind Turkey's existing capacity to increase'wheat and barley production for exports. The delay is so serious that TMO can purchase not more than 3 million tons annually and cannot carry over any stock except for minimum domestic buffer stocks. This is one factor that prevented it from purchasing and stocking more grains through its price support programs during the good 1978-80 harvests, before the 50 percent market price increases of late 1980. 1.40 The solution to the logistical aspects of marketing through the construction of silos alone will not, however, guarantee improved performance by TMO. Appropriate price support policies together with good financial management, should be the heart of its supply and market management. This need was demonstrated in recent years by its inability to be as active in the market as implicitly required by its charter and its export monopoly position. As a result, Turkey was unable to export more than 500,000 tons of wheat in 1980. 1.41 Consequently, concurrent with the TL 19 billion Phase I grain silo expansion of TMO, additional storage and grain handling facilities and equipment are needed on a scale equivalent to about the 1.7 milion tons under Phase II. At present, TMO is clearly not suitable for assuming additional responsibility without a radical change in its role, structure and management. Some thought should be given to transforming TMO into a holding company with two subsidiaries; (a) one for storage and price supports; and (b) another for trading in world markets. While it could retain its price support functions, it should be given sufficient discretion in altering support prices to enable it to be more active in the grain and pulses market as a residual buyer. Consideration should also be given to leasing its storage and handling capacity above its statutory requirement to farmers and private traders, in order to cover costs, in ways similar to the Commodity Trading Corporation in the United States. Its monopoly to export grain should be abolished and consideration should be given to establishing a trading subsidiary that would buy grain from other TMO activities and act as export agent of private traders. - 19 - (ii) Sugar Beet Production and Marketing (TSFC) 1.42 Sugar beet is produced by some 300,000 small farmers averaging 0.8 ha of sugar beet each, for whom the crop is an important source of livelihood. No competing crop can provide income comparable with that of sugar beets. Cotton, a comparably profitable crop, does not compete with sugar beets because of different climatic requirements. 1.43 Because of the vertically integrated nature of TSFC activities, a close relationship has to be maintained between three basic factors; (a) the size of the beet crop; (b) its delivery to TSFC plants; and (c) the processing capacity of the TSFC factories. It would make little sense to improve only one phase of operations, e.g., beet production or storage, without concurrently resolving other bottlenecks upstream or downstream. At present, these three factors are not compatible, and the deteriorating conditions of recent years are expected to worsen during the next 5-8 years if no initiatives are taken through public investment. For example, even with low beet yields, there are processing bottlenecks which would be worse if only yields were increased. 1.44 With sound investment planning and efficient TSFC management, public investment of roughly TL 80 billion would enable Turkey to produce sugar efficiently. About 93 percent of such investment would be for processing plants and beet handling facilities and the remainder for beet production, harvest and storage. It would fundamentally entail the followingi (a) invest about TL 76 billion to modernize and expand beet processing capacity from 9.1 million tons/year (54,000 tons/day) to 11.5 million tons/year (89,000 tons/days); (b) raise sugar beet yields from 32 tons/ha to the previous average of 40 tons/ha, and sugar content from 12 percent to 14 percent, with new seed varieties, testing more suitable planting periods and techniques, and incentive pricing; (c) reduce campaign lengths for beet growing, storage and processing which are presently too long for attaining optimum sugar content; (d) provide adequate beet delivery facilities to protect beets against deterioration so that the experience of 1979-80 would not be repeatedd; (e) restructure sugar prices to reflect costs and product differentiation. 1.45 The preceding would entail radical reforms in the organization, management and operations of the TSFC. The TL 1.6 billion.in the total investment program and TL 550 million allocated for 1981 are insufficient for the sugar beet production and delivery requirements. At least TL 1 billion/year should be designated for this purpose. - 20 - 1.46 The benefits attained from such a program would accrue to both farmers, the TSFC and the economy: farmers would increase their share of market value as they would be paid according to sugar content; their incomes would increase 48 percent if sugar contents rise from 12 to 15 percent as yields increase from 33 to 40 tons of beet/ha; TSFC would lower its production cost approximately 25 percent through economies of scale and higher sugar extraction rates during a shorter campaign; and the economy would save a probable annual drain of US$360-400 million in foreign exchange. (iii) Farm Inputs (TZDK) 1.47 Fertilizer is the single most important input distributed and sold through the public sector monopoly of DONATIM (TZDK). Present fertilizer use does not exceed 50 percent of estimated requirements for major crops. Although the major factor limiting expanded use of fertilizer is the farmers' own incentives and susceptibility for innovation and risk taking, the last few years have shown that fertilizer supplies and logistics for its distribution constitute major bottlenecks. Similar problems also apply to other inputs handled through DONATIM, i.e., plant protection materials and seeds. 1.48 Although there is no firm basis for determining if the TL 766 million investment program of DONATIM is adequate, it seems hardly sufficient for expanding fertilizer storage capacity from 2 million tons at present to 4 million tons needed in 5-6 years, in anticipation of increase in nitrogenous fertilizer use of 6 million tons. DONATIM estimates that it will distribute about 3.5 million tons of nitrogenous and 3.5 million tons of phosphate fertilizer in 1981 with an existing storage capacity of about 1.5 million tons. Present plans, however, are based on increasing storage and handling capacity by 90,000 tons each year, requiring annual investment of TL 3,250/ton, or TL 300 million only for this purpose. Even if the estimate of the required capacity is on the optimistic side, i.e., it should be more realistically phased over 10-12 years, this would indicate that the 1981 TL 400 million allocation should be at least doubled over the next 10 years, implying total investment of about TL 8 billion. About one-half should be started over the next 4 years, or TL 1 billion/year beginning in 1982. 1.49 Concerning DONATIM's plans to expand its small tractor and farm machinery manufacturing capacity, for which TL 1.8 billion is included in the investment program, the proposal has little economic merit. The cost of DONATIM's tractors and farm implements are, on the average, 50 percent higher than similar or better grades of imported equipment, and there is excess manufacturing capacity in the private sector. (iv) Other Marketing and Agro-Industrial Investment 1.50 Investment totalling TL 135 billion for other'marketing and agroindustrial functions, viz. wool and mohair, tobacco, forest products, milk, feed,.meat and fish, is included in the industrial sector investment - 21 - program, with a TL 29.4 billion allocation for 1981. Except for the TL 29.9 billion 1981 allocation for TFSC, and the modest program for animal feeds (TL 1.2 billion) and wool and mohair (TL 0.6 billion), the remainder of the investment seems premature due to lack of a clear strategy of the public, vis-a-vis the private sector for agro-industrial development. For example, investment of TL 84.4 billion for the tobacco monopoly is out of proportion with the growth of output and markets. In the case of milk or meat, a clear strategy and concrete projects are lacking for expanding the role of SEEs. For livestock feed, it seems implicit in Government circles that the role of the General Directorate of Feed Industry (YEM) would not be expanded above its present capacity to supply the eastern provinces. Consequently, pending decision on the role of the public sector for these activities, the investment program should be reduced to the essential. It would imply raising TSFC's to about TL 76-80 billion and keeping YEM's at about TL 1.2 billion, and holding others in abeyance. c. Forestry 1.51 No change seems to be needed in the TL 46 billion public investment for forestry management and production, in view of the two major ongoing Mediterranean forestry and Northern Forestry projects. The amount for 1981, TL 15 billion, is sufficient to finance these two ambitious projects, although the capacity of the MAF's General Directorate of Forestry to manage and execute them efficiently is in doubt. Nevertheless, additional forestry investment would be justified as soon as these two projects are well underway. In the near future, i.e., 1-2 years, priority should be assigned to afforestation of about 100,000 ha annually vs. the present pace of 30,000 ha/year. This should parallel similar ongoing private sector investment for small woodlots of poplar, birch and eucalyptus, which proliferate in all ecologically suitable areas. Investment requirements for 100,000 ha annually would amount to about TL 3-4 billion/year more than at present, and would generate about 35,000 new jobs for unskilled labor. d. Indirectly Productive Investment of the Ministry of Agriculture 1.52 The TL 7.5 billion 1981 investment program of the administrative and technical entities of the MAF, i.e., excluding State Farms, SEEs, and educational institutions, is in real terms almost 50 percent higher than that of 1980. Although the amount allocated is implicitly low relative to the long-term needs of research and extension program, for 1981 this amount is probably justified in view of the MAF's inability to formulate and carry out investment programs in previous years. In 1978 and 1979, it achieved 60 and 70 percent respectively, of its authorized investment. In 1980, the proportion realized is estimated to be 60 percent at best. While the problem is inherent in the organizational structure and management of the MAF and the way in which it formulates its investment program, the divorce between investment planning channeled through SPO and budgeting for current expenditure, channeled through the Ministry of Finance, is an equally serious impediment. A consolidated budget is indispensable in an entity as large as the MAF, because of the close linkage beteween investment and - 22 - current expenditures. The latter are about twice the amount budgeted for investment. But, as shown below, for consolidated operations, a decrease in real terms of actual investment in 1978-80 for any reason is not helped by nominal increases in current expenditures. Likewise, shortfalls in the current budget, which are known to be chronic, and the effect of inflation, restrict the possibility of executing the investment program. Table 1.7- INVESTMENT PROGRAM AND CURRENT BUDGET OF THE MINISTRY OF AGRICULTURE /a (TL current billion) Investment Act./ Current Year Program Actual Pro. Budget /b Total /b 1978 1.5 0.9 60% 2.7 4.4 1979 2.0 1.4 70% 4.6 6.9 1980 3.7 1.4 /c 37% 6.9 10.8 1981 7.5 /d - 17.9 /e 25.4 /a Excludes State Farms and SEEs which are autonomous, and Forestry which was a separate Ministry until the end of 1980. /b Authorized only. No data available on actual expenditures. Total includes transfers. /c Up to September 30, 1980. /d 1981 Program. /e Requested. Source; MAF 1.53 In order to raise the proportion of public investment for indirectly productive purposes, a major reorganization of services and streamlining of management is needed to enable the MAF to formulate integrated and coherent investment programs with clear objectives for each province and major function (e.g. agricultural research). Until this is done, it is virtually impossible to suggest a desired level of investment for agricultural research, crop extension, forage production, the introduction of new crop such as soy beans, and livestock production and animal health services. Nevertheless, a simple extrapolation from public investment already calculated for other provinces, e.g., Erzurum, Corum and Cankiri, could place total investment requirement for comprehensive extension services (for both crop and livestock) at very roughly TL 100 billion over the next 8-10 years, at 1981 prices. Agricultural research would require another TL 5-5.5 billion. This cannot be automatically translated into higher annual allocations for both investment and current expenditures for the MAF than in 1980 and 1981 until the much needed reorganization and decentralization of services is carried out. - 23 - D. Summing-up; 1982 and Beyond 1.54 The analysis and main arguments of this chapter have been concentrated on finding the means of increasing the rate of expansion of agricultural GDP and exports through a more balanced allocation of public investment in the sector. Much of the evidence available on the total and 1981 public investment program has been found to be contrary to the Government's explicit priority for lowering the amount of public investment relative to increases in agricultural production. In fact, the whole weight of evidence lies in the large proportion and increasing number of investment projects with long gestation periods, mainly for irrigation infrastructure, in the total public investment program and the 1981 allocation. 1.55 In the future, investment for irrigation infrastructure cannot continue to be the main source of agricultural expansion. The slow gestation of irrigation projects not only increases investment per unit of incremental production but also fails to establish quickly enough the linkages necessary with other sources of investment, including those from the private sector, to make them pay off. In this respect, while a large share of investment in irrigation is a powerful deterrent against the risks inherent in semi-arid agriculture, it cannot take the place of an investment strategy that relies on a broader array of instruments. Although it has provided at best a slow though fairly secure low rate of growth, buttressed by a complex system of subsidies for inputs and other protective devices, related technical and institutional innovations have lagged behind because attention is directed mainly at the promises of the long-term. 1.56 A more balanced public investment program would retain a large share of total and annual outlays for directly productive purposes, including irrigation, as indicated below. It would increase the amounts for sugar beet, forestry, and export crop production, storage and marketing, subject to major institutional reform of SEEs. It would exclude, however, investment in large irrigation projects on which construction has not yet been contracted, which have low sunk costs and dubious rates of return. This is to avoid making annual commitments which would then become unbreakable covenants in future years, because sunk costs are then heavily discounted. 1.57 Investment for agro-industrial marketing and processing are not included in the following table. In this sub-sector, attention is drawn to the recommended need and rationale for modernizing and expanding the sugar industry with investment in the order of TL 80 billion over an eight year period. Other agro-industrial investment will be needed, especially in activities serving livestock products and feed, edible oils and cereals and pulses. However, it is not clear how large a proportion of investment should be left to private entrepreneurship, in view of the high cost and small share of the market and inefficiencies of SEEs. - 24 - Table 1.8; ACTUAL AND INDICATIVE TOTAL AND ANNUAL INVESTMENT PROGRAMS (TL billion at 1981 prices) Total Cost Investment Program 1981 Purpose Actual Indicative Program Directly Productive Irrigation and Land Improvement 578.0 408.0 56.2 - D.S.I. (529.0) (359.0) (37.5) - TOPRAKSU (49.0) (49.0) (18.7) Forestry 46.0 66.0 15.0 Grain Storage 19.2 40.0 1.8 Agric. Supply Organization 0.8 4.0 0.4 Sugar Factories Corp. /a 1.6 5.0 0.6 Fisheries 1.3 1.3 0.5 Subtotal 646.9 524.0 74.5 Indirectly Productive Agric. Extension (Crops & Livestock) 36.0 100.0 6.9 Research 2.0 5.0 0.6 Others 7.A 7.8 2.2 Subtotal 45.8 112.8 9.7 Total 692.7 636.8 84.2 /a Only for beet production, storage and handling. Investment for sugar production and related products (e.g., alcohol) covered under agro-industrial sector. Source: SPO, Bank Estimates - 25 - CHAPTER 2 PUBLIC MANUFACTURING SECTOR A. Introduction 1. Industrial Objectives and Problems 2.1 Industrialization in Turkey has been viewed as an instrument for achieving high rates of economic growth, structural change and greater self-sufficiency. The main thrust of Turkish industrial development has been capital-intensive import substitution in basic industries. The principal policy instruments have been large investment allocations combined with central planning and control of SEEs and generous incentives combined with high levels of protection for private industry. 2.2 The rigorous pursuit of import substitution throughout the course of planned economic development (1963-1977) produced some benefits. Value added in manufacturing, the leading sector, grew at an annual average rate of about 10 percent and its share in GDP increased from 13 to 18 percent. Substantial structural change occured in the manufacturing sector as the proportion of intermediate and investment goods in total value added increased steadily. Local production of basic commodities introduced new technologies and created valuable labor skills. Dispersal of state economic enterprises and incentives for private firms to invest in less developed regions helped mitigate regional disparities, as did a nationwide program of industrial estates. 2.3 These policies also gave rise to serious problems such as industrial inefficiency in both the public and the private sector, extreme anti-trade bias, and rapidly increasing capital-intensity in production. As a result the country is caught in an industrial impasse now that the original momentum of import substitution has been spent. 2.4 Originally conceived as a catalyst in creating basic industries beyond the scope of the private sector, the state sector became bogged down in inefficient and costly import substitution. In addition, state enterprises were saddled with social objectives such as development of backward regions, provision of employment and maintenance of price stability. 1/ Low staff salaries, political interference in the day-to-day operations, featherbidding demanded by political groups and increasingly strong and unionized labor have affected the-quality of management and 1/ By law, they are to be compensated for the additional cost involved in performing such social objectives but in practice this system has proved difficult to administer - 26 - operating efficiency and contributed to generally poor financial and economic performance. Full protection against imports has been the rule, and without the discipline of competition or adequate budgetary control there has been little or no incentive for improving efficiency. 2.5 Many of the difficulties in the state sector may also be attributed to the shortcomings of technocratic a priori planning as distinguished from business planning in a market environment. Market and feasibility studies have been deficient. Because of inadequate design and other factors, key plants never reach anywhere near design capacities. Construction periods have invariably been longer than projected, radically reducing actual as compared with projected returns. 2.6 The incentive system in Turkey, mainly relevant to the private sector, comprised of complete protection against imports and a series of fiscal and monetary instruments to promote investments in activities deemed to have high priority as laid down in the Plan and the Annual Program. A comprehensive system of quotas and import rationing has played a far more significant role in the Turkish system of protection than tariffs and shielded even very inefficient producers from competition. The whole system was heavily biassed against exports by (a) making domestic markets more profitable than exports; (b) preventing the exploitation of economies of scale; and (c) high input prices caused by the protection of inefficient supplying industries, thereby making exports less competitive. The lack of a predictable realistic exchange rate and reasonable interest rate policies, made exports extremely risky and removed any incentive for investments with a view to a permanent export commitment. In spite of these handicaps, attempts were made by the private sector to create some true export industries (e.g. leather clothing, canned tomato juice). Yet for the most part, Turkish firms export only transitory surpluses over home market needs. The fact that manufactured exports constitute about one-third of total merchandise exports reflected Turkey's anti-trade bias, until recently. Exports constituted only 6 percent of GDP in 1978 compared to a 20 percent average for 55 middle-income developing countries. 2.7 An overvalued exchange rate, propped up by high protection and the exemption and/or deferment of custom tariffs, drastically reduced the price of capital goods. The interest rate policy combined with inflation and the lack of meaningful profit criteria for the public sector reduced the financial cost of investment. While the Government's development strategy channelled a large part of industrial investment to subsectors, e.g., steel, petrochemicals, pulp and paper, fertilizers, etc., with high incremental capital-labor ratios, Government policies and institutional factors, i.e., labor legislation and increased unionization as well as a high degree of industrial strife, influenced private investment decisions and technology choices in the same direction. Manufacturing investment thus became increasingly less effective in creating employment. During the First Plan (1963-67), it took an investment of TL 267,000 (in 1976 prices) to create an additional job; in the Third Plan (1973-77) it took TL 572,000, or over twice as much. Although industry received about 37 - 27 - percent of total investment during 1973-1977, its share of total employment only increased from 11 percent to 12 percent in the same period. A further effect of the exchange rate policies and import regime for capital goods was to slow the development of the engineering industries, even though the Government tried to counteract this effect through a policy of domestic preferences. 2.8 In summary, while Turkey's growth in the manufacturing sector has been impressive and comparable to the other middle-income developing countries of the Mediterranean, this progress has been achieved at a high cost and there has been a signal failure to lay the foundation for future dynamic growth through exports. 2. Structural Features of Manufacturing Sector and Recent Developments 2.9 In Turkey, the public sector predominates in large capital-intensive ventures such as steel, aluminum, petroleum, petrochemicals and fertilizers. It is also prominent in pulp and paper (where large scale development has been reserved for the public sector) and cement and sugar (reflecting, in part, the effort at regional industrialization but largely the privileged access of the public sector to funds). The private sector, on the other hand, is involved predominantly in light industries -- fabricated metals, electrical and mechanical machinery, transport vehicles, glass and glassware, rubber and plastics, wood products, textiles and clothing and food processing -- and is, for the most part represented by small and medium scale enterprises. However, the public sector is not limited to basic industries. For example, in 1976, its share in production in some branches of light industry was as follows: textiles (15 percent), footwear (35 percent), furniture (27 percent), other wood products (29 percent), pottery, china and earthenware (20 percent), and mechanical equipment (24 percent). The public sector accounted for 46 percent of total fixed investments in manufacturing, 30 percent of the total value added, but only 20 percent of total employment. The main portion of the output in the public sector is under the control of less than a dozen giant holdings, and most of the establishments employ more than 200 workers. In contrast, only 7 percent of establishments in the private sector employ more than 200 workers. 2.10 Since 1977 the manufacturing sector has stagnated. Value added in manufacturing increased by less than one percent in 1978, and declined by almost 3 percent in 1979, and 5 percent in 1980. Despite Government efforts to sustain and even increase the level of public sector investment in manufacturing, total manufacturing investment in 1980 was below the level reached in 1975. Private manufacturing sector investment drastically declined by almost 35 percent in the last two years. - 28 - 2.11 For the first time in Turkey's planned development, the public sector now dominates manufacturing sector investments with a share approaching 60 percent 1/ compared to only 20 percent at the start of the First Plan and just,below 50 percent at the end of the Third Plan. In addition, these investments, particularly in activities such as the production of steel and aluminum, are indirectly responsible for a major portion of the investments in transportation and power. Purely as an illustration, iron ore and coal alone accounted for nearly one-half of the total transport work by the Turkish railroads in 1978. In the same year, some 75 specified public manufacturing and mining enterprises (excluding many medium-sized public enterprises and some of the large ones) were responsible for nearly two-thirds of the industrial power load. 2.12 The'differential growth in public and private sector manufacturing is a direct result of Government policies; the public sector has been favored, particularly in the access to finance and foreign exchange. To some extent, it may also be an unintended outcome of the Turkish planning philosophy which makes the plan targets mandatory for the public sector. 2.13 A proximate reason for the sharp decline in private fixed investment in the manufacturing sector is the present low capacity utilization (56 percent in 1978, and 45 percent in 1979 and 1980). It is difficult to determine to what extent this is the result primarily of the stagnation of the economy in 1979-1980 and to what extent it reflects shortages of imported inputs. A special contributing factor was labor disputes in textiles, glass and metal working industries which resulted in the loss of no less than 7.7 million man-days during the first three quarters of 1980, about 20 percent more than the total for the preceding 8 years. Other industries were affected by the power shortage. High prices and generous investment incentives may also have led to overexpansion in certain branches of private industry. Finally, the ability of the private sector to undertake new investments is impaired by a serious lack of financial resources. 2.14 In sharp contrast, the public investment program has been inflated by politically motivated projects and weaknesses in project preparation which resulted in an underestimation of both investment costs and construction periods. Because of low salaries, a number of managers and technicians have left the state enterprises further weakening implementation. As a result of all these factors, human and financial resources have been spread too thin, resulting in an abnormal proportion of unfinished projects and serious losses due to extended construction periods. Most important, there was insufficient recognition of the extent to which many large industrial projects required expansion of infrastructure often exceeding investments in the plants themselves. 1/ The share will be even higher if publicly controlled enterprises (Erdemir steel, IGSAS fertilizers, etc.), organized under private law, are included in the public sector. - 29 - 3. Government Industrial Strategy 2.15 The Government is formally committed to structural change, defined in terms of reducing the balance of payments gap through export promotion and efficient import substitution especially of energy imports. With some exceptions, industrial growth will be guided in line with the Turkish comparative advantage. An export orientation will be favored by maintenance of a competitive exchange rate, thus removing the worst of the exchange risk, and by selected export incentives so designed that they would be neutral as between exports and import substitution. In January 1981, the Government further liberalized the import regime by abolishing the quota list and approved the long awaited tax reform bill. It is hoped that the import bottleneck for industrial materials and spare parts will be alleviated or removed through the availability of foreign credits. At the same time, through the exports proceeds retention scheme, it should be possible for Turkish exporters to secure their raw materials at world prices. Most important perhaps, the private sector will be given equal access to imported equipment and finance as compared with the public sector. No industry will be barred to private initiative, and foreign investors will be welcome to join in partnership with Turkish investors. In subsectors where the state no longer has a pioneering role, state enterprises will, to the extent possible, be divested to the private sector. 2.16 The Bank believes that the above objectives are admirably designed to promote healthy industrial growth and to leave the country's economy vastly strengthened at the end of the four to five year period, within which the Government hopes to achieve the desired change of direction. They are consistent with the general guidelines by which the Bank would propose to evaluate the investment program for the state manufacturing sector below. 2.17 Because the flow of investment funds has been so strongly in the direction of state enterprises, it will of course, take time to rearrange the industrial forces of the country. In particular, it will be necessary to move ahead with certain state industrial projects, for which substantial investments have already been made, and which, considering these sunk funds, are expected to yield an adequate economic return. 2.18 In making a plan for development of Turkish industry and for the public investment program, two considerations must be kept in mind: (a) a macroeconomic standard, namely the total investment resources available for the manufacturing sector, within which both public and private investments will have to be accomodated, and (b) microeconomic criteria for acceptable economic returns. In theory, these two criteria are perfectly consistent: those project will be selected, both in the private and public sectors, which have the highest - 30 - returns until the pool of investment resources is exhausted. Implementation will follow if the private sector is provided with the necessary incentives and financial assistance and the public sector projects meeting the specified standard of economic return are approved by the Government. 2.19 Macroeconomic considerations suggest that, after a slight dip in 1981, total manufacturing investments could grow by about 5 percent per year in 1982-1985. It will be suggested below that there are opportunities for an expansion in private investments by at least 10 percent per year with good economic results. In the Bank's view, this is the absolute minimum target, to the achievement of which the Government should give its full commitment and effort. The implication of these overall and private investment targets is that there would be an opportunity for maintaining public manufacturing investments over the next five years at a maximum level of about TL 138 billion per year at 1981 prices. This is in reasonable agreement with the actual Government allocation for 1981 of TL 122 billion. The projects included in 1981 program, in turn according to a very rough caluclation by the Bank (see Table 2.3 below), would call for additional investments averaging TL 129 billion per year in 1982-1985 at 1981 prices. Though the Bank's review suggests that the 1981 program should be pared by nearly 20 percent to remove projects with insufficient economic justification, it would be possible, if so desired and dependent upon the progress in the private sector, to generate additional public projects for implementation in 1982-1985. 2.20 The Bank's recommendation are predicated on the assumption that the private sector would indeed respond to the new psychological and economic environment and would have the ability to produce for the world market. Recognizing the fundamental importance of this question, the Bank analyzed the prospects for the private sector, in particular the export opportunities for individual industries, the adequacy of existing incentives, the financial position of the private sector and its access to fixed assets and working capital financing. The Bank's conclusions on these points are as follows. (a) There is a tremendous potential for expansion in industries which would exploit Turkey's comparative advantage, such as processed foods (meat and milk products, processed fruits and vegetables), textiles and clothing, leather, shoes and other leather products, metal castings, light engineering products, mineral based chemicals and industrial equipment perhaps on a subcontracting basis. For this potential to be mobilized requires a general framework favorable to private investment and to an export commitment and also certain industry specific measures. The Government is fully aware of this, and has initiated a series of measures towards this end. - 31 - (b) The industry specific measures, to mention only a few of the most prominent ones, should cover uppgrading of cattle herds; better organization of slaughtering (with a view, inter alia, to better utilization of meat by-products and hides); better grading of fruits and vegetables combined with export promotion; improved drying of lumber, technical support and export promotion of a range of industries, 'including textiles, leather, foundries, engineering products, etc. Progress along these lines is partly dependent upon the industries themselves; they must create mechanisms capable of developing medium-range plans for the development and structural rationalization of their industries. (c) The Government has taken limited measures to liberalize the import regime. It has also embarked on a detailed study of the protection and incentives system under the Structural Adjustment Loan agreement with the Bank; a new liberal system without quantitative restrictions might be put in place by the end of 1984. (d) Nevertheless, a system which highly protects the domestic market is implicitly biased against exports. The existing export incentives, though excellent in themselves, cannot overcome this bias. 1/ Hence, there is a need to anticipate the definitive tariff schedule with an interim arrangement which throws the main burden of the adjustment between the Turkish price level and the world level upon the exchange rate and by the same token minimizes import duties and export subsidies to those absolutely justified on grounds of legitimate infant industry support and external economies. Such a rearrangement would also eliminate the subsidization of equipment purchases abroad and of capital-intensive production in general which is not the entirely intended consequence of the present system. (e) To create a focal point for the export offensive, Turkey should consider establishing an export promotion agency of the type that has served well in Taiwan, Korea and other countries. (f) The most important single condition for the new industrial strategy to work is the access of the private sector to fixed assets and working capital financing. This must be improved through measures favoring higher savings in general, through long overdue reforms in the banking system and through a revaluation of business assets thus sanctioning realistic depreciation allowances under income tax laws. To the extent that these measures prove insufficient and particularly for projects requiring very heavy investments, the Government should be prepared to enter as a financial partner without, however, aspiring to a controlling vote. It is not entirely clear whether there are legal barriers 1/ As one example only, in one project which has received an investment certificate, the product would sell at home at twice the import price. On the portion sold abroad, on the other hand, the various export subsidies would add only 36 percent to the proceeds. - 32 - to such a subordinate equity position but, if there are, the appropriate legislative remedies should be sought. Depending upon the nature of the industry and the state of development of the economy, the Government should have the option of assuming full entrepreneurial responsibility or, alternatively the role of a supporting financial partner. This theme is further elaborated below under "Some Major Policy Issues". (g) Recent institutional reform has created the necessary legal environment for healthy growth in foreign direct investment. To the foreign investor, the most important reform still to be undertaken is the one mentioned above, namely, the revaluation of assets. In the case of foreign firms this determines not only their depreciation allowances but also the capital and dividends which may be repatriated. The present system puts a premium on evasion since no business firm could exist if it adhered strictly to the rules. A foreign investor liason unit might be attached to the export promotion agency suggested above. B. The Public Investment Portfolio and the 1981 Annual Program 1. The Public Investment Portfolio 2.21 In the manufacturing sector, at the end of 1980, the total SPO portfolio included 891 projects in 26 subsectors. However, if we exclude some 13 subsectors where either the subsector totals or the individual projects are relatively small, the remaining 15 subsectors still account for about 88.5 percent of the aggregate project cost. If out of practical considerations, we also exclude a number of smaller projects within the selected subsectors, plus some projects which are in an advanced stage of construction, there remains a core of 61 projects representing about 87 percent of the aggregate project cost. From this should be subtracted also projects related to petroleum refineries (treated under the 1/ Since the total portfolio is huge, the sum total of the projects excluded is far from negligible. The most important exclusion is "chemicals, not elsewhere specified" with a balance to be spent of TL 41.6 billion at 1981 prices (about $520 million equivalent). Four other subsectors (tire manufacturing, clay and cement products, forestry products other than paper, and ceramic products) had unspent balances in the range of $100-180 million equivalent. - 33 - "Energy" Chapter), which would cut the core projects down to 56 with 75 percent of total project cost. These are summarized in Table 2.1. Column 2 gives only a rough idea of relative advancement of individual projects. Because of inflation, the expenditures to date represent a much higher proportion of the total investment in real terms than indicated by the historical cost. Table 2.1: MOST IMPORTANT PUBLIC MANUFACTURING PROJECTS Cumulative Sector and Project Total Project Exp. through 1981 Allocation Cost Dec. 1980 in % (TL billion) (TL billion) of programmed SPO Bank expenditures /a Iron and Steel 621.9 5.4 15.23 12.07 Fourth Steel Mill 191.2 0.2 0.40 0.00 Isdemir, Stage I Expansion 63.0 40.8 12.00 12.00 Isdemir, Stage II 328.0 0.0 0.07 0.07 Expansion Special Steel Plant, Kirikkale 3.0 13.7 0.21 (/b) Special Steel Mill, Izmir 13.9 2.9 0.52 0.00 Karabuk Expansion and Modernizatibn 27.5 4.2 2.03 (/b) Fertilizers 184.9 1.7 3.05 3.05 Fourth Complex 96.3 0.0 0.00 0.00 Soma (lignite-based) 44.8 1.1 0.45 0.45 Middle Anatolia urea 33.9 0.3 0.00 0.00 Gemlik Ammonia 9.9 74.7 2.60 2.60 Petrochemicals 139.0 14.6 18.44 18.26 Aliaga 131.9 35.6 17.90 17.90 Yarimca Expansion 7.1 15.5 0.54 0.36 Pulp and Paper 45.0 0.1 0.50 0.50 Integrated Kraft (Black Sea) 45.0 0.1 0.50 0.50 Non-Ferrous Metals 27.0 1.5 0.05 0.05 Aluminum Expansion 22.5 0.4 0.01 0.01 Ferro-chrome Expansion 4.5 6.7 0.04 0.04 Cement 22.4 22.8 8.22 8.22 (Eight new plants) Sugar 28.4 23.5 8.99 8.10 (Nine new plants or expansion) - 34 - Textiles 12.4 3.4 2.70 n.r (Sumerbank restructuring) Tobacco Products 79.3 9.5 1.00 n.r. (six major projects) Tire Factory 16.1 3.1 1.50 0.00 Metal Manufacturing 48.9 3.1 1.29 1.29 Fabricated steel plant 10.1 5.9 1.02 1.02 Second weapons factory 27.6 0.4 0.27 0.27 Gear boxes and rear axles 11.2 7.1 0.00 0.00 Machinery 60.9 8.4 5.32 Tractor factory 30.8 2.6 1.00 2.20 Machine tool factories 15.8 15.0 3.62 n.r. Construction equipment 4.9 14.3 0.50 n.r. Heavy industry equipment 4.0 10.0 0.20 n.r. Textile machinery (Sumer- bank) 5.4 2.7 0.00 0.00 Electrical Machinery 40.8 1.7 0.91 n.r. Electro-mech. plant I 28.2 2.2 0.80 n.r. Electro-mech. plant II 6.0 0.3 0.08 n.r. Electro-mech. plant III 6.6 0.9 0.03 n.r. Transport Equipment 56.8 6.6 2.50 1.90 Airplane manufacturing 16.7 2.3 0.60 n.r. Diesel engines (integrated manuf.) Truck engines, heavy 13.0 6.9 0.00 0.00 Engines for light trucks and mini-buses 6.1 6.6 0.00 0.00 Tractor engines 17.4 6.6 1.00 1.00 Pendik shipyard 3.7 56.2 0.90 0.90 Grand Total 1,383.8 0.5 69,70 Total for projects reviewed 1,222.3 63.87 58.04 Additional Projects to be noted /c Erdemir Steel, Stage II Exp. 24.8 - - Erdemir Steel, Stage III Exp. 260.0 0.00 13.0 (Tumosan) Foundry 6.2 0.00 0.1 (Tumosan) Forge 6.9 0.00 0.0 n.r. not reviewed in depth by the mission - 35 - /a Since pre-1981 expenditures may not fully reflect price changes, this ratio may understate the degree of completion of individual projects though it may give a rough idea as to their general state of advancement. /b The mission has serious doubts about the expansion programs at both Karabuk and Kirikkale but can make no judgement as to what investments would be allowable in 1981 without prejudging a rational long-term solution. /c The reasons these are not included in the SPO list is that Erdemir is constituted as a private sector company (though the state holds a controlling interest) and the same form is apparently envisaged for the foundry and forge projects. Source: SPO, Bank Estimates - 36 - 2.22 The Bank has examined most of the above projects, drawing also on the findings of parallel Bank project missions. The projects left essentially unexamined are the tobacco manufacturing operations (a state monopoly in Turkey as in many other countries) and the TEMSAN projects (heavy industry equipment, construction and excavation equipment, machine tools, electromechanical equipment). Two main considerations combined to justify the latter exclusions: (a) prima facie doubts about viability, e.g. for the electro-mechanical equipment factories; and (b) insufficient time considering also the rather complex nature of this type of production. The question of the appropriate strategy for Turkish entry, in a more serious way, in the engineering sector is too vast a topic to be successfully handled within the context of the present Mission. There is the additional consideration, equally applicable to the Tumosan projects as to the Temsan projects, that state enterprise in these industries should only be looked upon as the last resort after attempts of arriving at more viable solutions, involving state support of private or mixed enterprise, have been exhausted. 2.23 Another project not studied in detail by the Bank is the tire project. Assuming there would be sufficient domestic demand for the products of the proposed factory, the probable economic viability of this project may be granted. It is another question why it is necessary for the state to engage in the production of tires. Normally, it should be possible to induce private enterprise to undertake this type of project. 2. General Evaluation of the Portfolio 2.24 The bulk of the investments of the public manufacturing sector is in heavy industries even though, as the following table shows, there are substantial public investments in the engineering industries and in a wide range of other light industries. Table 2.2: SUBSECTORAL DISTRIBUTION OF PROJECT PORTFOLIO IN PUBLIC MANUFACTURING SECTOR (Percentage) Cumulative Expenditure 1981 Project Through Investment Subsector Cost 1980 Allocation Steel and non-ferrous metals 42.2 23.3 13.7 Fertilizers, and petrochemicals 20.4 29.9 19.1 Pulp and Paper, sugar, cement, and chemicals 11.7 25.4 29.5 Machinery and metal products 14.2 8.6 11.5 Tobacco and beverages 5.2 5.2 12.3 Sundry light industries 6.2 7.4 13.8 100.0 100.0 100.0 Source: 1981 Investment Program. - 37 - 2.25 Differences in the subsectoral distribution of investments in the total project portfolio as compared with investments completed to date or the 1981 allocations, reflect many factors, including longer gestation periods for investments in heavy industry and their tendency to be lumpy rather than evenly spaced over time. Investments in steel and non-ferrous metals (predominantly steel and, to a far less extent, aluminum) and in the petrochemicals/fertilizer subgroup account for about 63 percent of the total project portfolio. The drastic reduction in their total share in the 1981 allocation may suggest that the Government still has reservations about their economic justification. The Bank concurs with such reservations. 2.26 The major investments in the chemicals industries, those in borate products and in sulphuric acid, are related to the state's stake in the mining sector. In the cement sector, one encounters the paradoxical situation that a generally efficient private industry cannot expand because of lack of funds. The same public funds which could have assisted them are used instead to rehabilitate, expand, or even build new plants in the public sector. The Bank recognizes that the public presence in industries like cement, sugar, and textiles is part of a historical process of state-supported regional industrialization, and that, even today there are difficulties in inducing private investments in certain regions of the country. However, it would be of great benefit to the country if the state would concentrate on rational and efficient development of basic industries, leaving the rest of the field to the private sector, by the same token allowing it to evolve from central control to local ownership. We shall return to this theme towards the end of the chapter. Devolution of state investments in light industries, if politically acceptable, will of course be a gradual process, particularly at the present moment when the private sector is weak and decapitalized by its recent experience. It will have virtually no impact on 1981 allocations but could affect allocations for 1982-1985. One of the implications might be that state loans or equity participation with the private sector could take the place of state direct investments in the same or similar projects. 2.27 Finally, in the Bank's view, the machinery and metal products industries deserve priority attention on several grounds. Imports of machinery and equipment represent 30 percent of total imports. Turkey already has experience in the production of many types of capital equipment, such as sugar and cement mill equipment-and chemical processing equipment, and is well located for the export of such equipment. Integrated manufacture of trucks and tractors would be attractive both because of the size of the local and adjacent export markets and external economies in the development of new skills and supplier industries. It is no accident that a very high proportion of the TSKB project portfolio today is for the supply of parts to these industries. These are industries where foreign partnerships should be sought with a view to efficient transfer of technology and access to export markets for supply of parts and sub-assemblees to those foreign partners, as an interim stage of development, as Brazil and Korea have done. Another field where foreign - 38 - participation might make a substantial difference to development is the forest industries. All these projects have been included by the mission in the public investment program to mark their presumptive economic priority and claim for financial resources but without prejudice to the ultimate control of these operations, whether public or private. In fact, the Bank doubts that the truck and tractor industries could be successfully implanted in Turkey without a significant element of foreign equity participation, and without going through the above-mentioned interim stage of development like Brazil. 3. Comments on the 1981 Program 2.28 The comments given below on the overall program and on individual industries and projects are based among other things on our perception of the world market outlook and terms of competition in different industries. At this stage, they should be regarded as preliminary diagnoses to be confirmed or modified by rigorous technical, market, and economic apprisals which should always precede a decision on major investments. With this caveat, the Bank's conclusions are as follows: (a) The overall size of the 1981 allocation is not, per se; excessive. (b) For 11 out of 56 projects representing about one seventh of the investment total for the large projects, 1/ SPO has either allocated no funds or only a nominal amount. For all practical purposes these projects must be regarded as dead, dormant or, in a few cases (notably the truck engines factories) postponed to allow further study. The Bank agrees with the SPO decision. The predominant reason for removing these projects, as far as the Bank is concerned, is their lack of economic justification. For the aluminum and ferro-chrome smelters, a contributing factor is the shortage of power, and the enormous foreign exchange costs that Turkey must meet to produce power or set up power facilities. (c) There are an additional seven projects representing another 18 percent of the investment total for large projects and about 5 percent of the 1981 budget allocation, about which the Bank has serious doubts. They are (in the order of the amounts allocated for 1981) the complete rebuilding of the present metallurgical facilities of the Karabuk steel mill, the proposed state tire factory, the expansion of special steel production at Kirikkale, the construction of a new special steel plant at Izmir and finally substantial project preparation expenditure for the Fourth Steel Mill. The reasons for the Bank's reservations about these investments will be given in the subsequent review of individual 1/ These projects are the Fourth Fertilizer Complex, the Middle Anatolia Urea plant, expansion in aluminum and ferro-chrome, the Bartin cement plant expansion, two out of the three Tumosan engine projects and its gearbox and rear axles plant and, finally, the second and third electro-mechanical plants. - 39 - subsectors. Elimination of these projects will reduce the 1981 program but it should be possible, if so desired to generate other viable projects to replace them in the 1982-1985 programs. (d) For most projects, the expenditures to date are not of such a magnitude as to preclude stopping them if, in the light of today's circumstances, they would not be expected to yield a satisfactory return on the funds remaining to be spent. (e) The most advanced projects include Isdemir Steel Stage I Expansion, the Aliaga Petrochemicals Complex, three sugar factories and three cement factories. The Bank has little doubt that all these projects should move ahead. Specifically, it studied the Aliaga complex with some care since it would accout for the lion's share of the investments still to be undertaken among relatively advanced projects (see para. 2.77 onwards). (f) More important qualitatively than the large projects, there is a great accumulated demand for investment which will replace outmoded plant, balance existing facilities, achieve savings in energy, raw materials or manpower, or do away with intolerable pollution. In the process industries in industrialized countries, a very high proportion of the increase in production has always been achieved by this type of investment, which typically has a very high economic return. For the same reason, they have been given high priority in recent World Bank industrial lending to Turkey. The most important of these is the fertilizer industry rehabilitation program (Phases I and II) at an estimated total cost of TL 43 billion. The corresponding "rehabilitation" requirements for the pulp and paper and cement industries have been estimated at respectively TL 7.2 and TL 3.5 billion. The same type of investments are important in Sumerbank restructuring (textiles), in the sugar industry and, potentially, in the steel industry. To some extent they are included in the SPO 1981 program (though only exceptionally in the large projects), but mainly, they are additional to that program. They are included in the Bank investment projections in Table 2.3 below. 4. Long-range Implications of a Pared-Down 1981 Program 2.29 As stated earlier, a maximum target for state manufacturing investments might be about TL 138 billion at 1981 prices. In 1982 and 1983, on the other hand, disbursements could rise above that level due to the combined impact of ongoing investments and new heavy investments in steel, fertilizers, and possibly, tractors and truck and tractor engines. - 40 - Table 2.3: PROJECTIONS OF PUBLIC MANUFACTURING INVESTMENTS, 1981-1985 (TL billion at 1981 prices) SPO Bank Illustrative Projections 1981 1981 1982 1983 1984 1985 Base Industries 48.3 36.2 54.0 53.5 58.5 90.0 Paper, sugar, cement, textiles 33.4 26.7 29.9 32.5 23.0 11.1 Sundry industries 25.1 20.1 20.4 16.9 14.4 11.9 Metal manufacturing and engineering Trucks, tractors, engines 2.0 3.2 29.2 25.3 16.2 9.7 Other 13.5 8.0 5.0 5.0 5.0 5.0 Total at 1981 prices 122.1 94.2 138.5 133.2 117.1 127.7 Also to be taken into account Erdemir Stage III Expansion - 8.1 24.4 40.6 40.6 32.5 State investment aid to eng. industries - 4 4 4 4 4 Source: SPO and Bank Estimates. 2.30 The above schedule assumes that the state sector would concentrate on investment in basic industries, and would gradually reduce its commitment over a range of intermediate and light industries. The state sector expenditures would be further reduced to the extent the tractor and truck engines projects either are not found to be economically viable or, alternatively, foreign and Turkish private investors can be induced to increase their stakes in these projects. The figures below the line show what an important impact inclusion of Erdemir Stage III expansion has on the state sector investment total; in fact, with this inclusion, the desired macroeconomic balance is far from being achieved. This underlines the urgency of the most severe auditing of the whole project portfolio to weed out any project which does not provide a satisfactory economic return. - 41 - 2.31 Finally, we have included a budget item of state investment aid to the development of the engineering industries. The justification for this element of state support is the perceived backwardness of this sector in Turkey, its favorable prospects and its high development impact. This item does not entail additional projects to the public sector investment since the relevant projects would be undertaken by the private sector. It must be taken into account, however, as an additional claim on the national budget. C. Individual Industries and Projects 1. Introduction 2.32 In its analysis of individual projects, the Bank considered both the direct economic returns from the project and external economies. Only in one important case, namely the petrochemicals project, did the Bank attempt a formal calculation of the economic return, facilitated by the availability of company earnings projections and other data. In all other cases, the Bank formed its judgements based on strategic cost factors, such as investment costs and economies of scale, observed efficiencies (e.g. operating rates, manpower productivities, fuel efficiencies), and availability, quality and cost of raw materials (e.g. feedstocks for fertilizer production, electric power for aluminum, pulpwood for the paper industry). 1/ 1/ The fact that much of the analysis of competitiveness will be focussed on cost factors specific to each industry should not be interpreted to mean that the theory of comparative advantage, specifically the extent to which the relative prices of capital and labor dictate specialization, would be of limited relevance to Turkey. In reality it is a powerful factor. Generally, there is a strong correlation among the projects examined between high capital-intensity and low economic viability. Capital-intensity per se does not make, say, the Sivas steel mill or the proposed expansion of aluminum production at Seydesihir uneconomical; they become uneconomical because the balance of other cost factors is not sufficiently favorable. If pressed to take a position with respect to economic parameters the Bank would not shadow-price labor and might use a shadow price for capital of, say, 14 percent and a shadow exchange rate as of the end of 1980 of, say, TL 120 per one US dollar (resulting conceptually from the integration of the average utilized protection and export subsidies in the exchange rate). It is a safe assumption that the relative ranking of the industries and projects would be quite insensitive to relevant variations in the shadow rates for capital and labor. The same applies to variations in the shadow rate for foreign exchange because of the weight of depreciation and investment returns on imported equipment in the value added for capital intensive industries. - 42 - 2.33 External economies are likely to be substantial in export production where beachheads firmly established would normally be expected to promote a large volume of additional business. Apart from export production, a case could be made for special incentives to new industries which are not yet firmly established in Turkey assuming always that they are deemed to have a good long-run potential. Most such lines of production are probably to be found in agricultural processing industries and in certain relatively labor-intensive lines of engineering production. It is for this reason, among others, that the Bank has taken a positive (though cautious) view of the plans for integrated production of tractors in Turkey (and eventually heavy and medium trucks) in spite of the fierce competition among the world market producers of these items. The development of new supplier industries and worker skills which would follow from the establishment of these industries would have a tremendous impact on the engineering industries in general, a subsector which is presently underdeveloped in Turkey. In contrast, the burden of proof would seem to be with those suggesting that there are still substantial external economies to be had in, say, the expansion of steel production or in petrochemicals production. Whatever additional learning is required in these industries could be gained within the confines of existing capacity; hence expansion should be based strictly on immediate returns. 2.34 Comments on individual industries and projects obviously should not be regarded as final judgments but rather as the Bank's preliminary findings based on the information made available and analyses summarized below. 2. Steel 2.35 (a) Background. Steel deserves priority attention by the Government because of the sheer size of the steel investments and the related investments in infrastructure. Steel alone accounts for over one-third of the total SPO portfolio in manufacturing. If we include expansion of the Erdemir Steel mill, even though Erdemir is not legally constituted as a state enterprise, and Sivas Second Stage Expansion, the total cost of projects in this subsector would rise to over TL 1,000 billion (equivalent to over US$12 billion). This is enormous, especially taking into account the connected major investments in infrastructure. In the Bank's view, major cuts are essential. 2.36 The beginning of a modern steel industry in Turkey goes back to the 1930s with the establishment of the Karabuk Steel Plant, followed by Eregli Steel Plant (Erdemir) located on the Black Sea which began operating in 1965. A third plant on the Bay of Iskenderun (Isdemir) began production in 1976. Karabuk and Isdemir produce bars, rods, sections, etc., while Erdemir is Turkey's only producer of flat steel products. Besides these large integrated steel plants using blast furnaces for producing iron from iron ore, Turkey has about twenty smaller steel plants in the private sector, with electric arc furnaces using scrap as raw material and - 43- ferro-concrete rounds as the major end product. The private sector also includes Turkey's largest producer of special steel, Asil Celik. The present capacity of the integrated plants is 3.2 million tpy while that of the twenty smaller plants is about 1 million tpy. 2.37 Both consumption and domestic production of finished steel reached peaks in 1977. Since then, consumption has declined by 20 percent, and imports (mostly flat products, bars and rods, alloy steel) declined even faster. Imports of finished steel and semis declined from 50 percent of apparent consumption in 1975 to about 20 percent in 1980. Thanks to the increase in crude steel production between 1977 and 1979, the country's import dependence in semifinished coils and billets was drastically reduced. 2.38 (b) Planned Expansion. As the following projections illustrate, even very recent estimates of the future demand for steel seem out of line with reasonable assumptions as to the growth of the economy: Table 2.4: DEMAND PROJECTIONS FOR STEEL (Million tons of finished steel) Projections Bank Actual SPO SIDEMIR SPO Esti- Consump. Mar. 1980 May 1980 June 1980 Nov. 1980 mates 1975 3.26 1980 3.16 6.31 3.82 3.70 3.24 3.16 1985 11.92 7.69 6.75 8.67 /a 4.2 1990 20.86 14.19 12.15 15.69 /a 6 3 Annual Compounded Growth 1980-90 12.1% 14.0% 12.6% 17.1% 7.5% /a The 1985 and 1990 figures attributed to SPO have been interpolated from the original data giving estimates for 1983, and 1993 only. Source: SPO, SIDEMIR, Bank Estimates 2.39 SPO's projections are said to be based on an.assumed 4 percent growth rate in GNP between 1980 and 1985 accelerating to 6 percent between 1985 and 1990, or an average of 5.1 percent for the decade. Prima facie, this GNP projection is reasonable. Yet, if we use it as a benchmark, the SPO demand projections would imply an elasticity of steel consumption in relation to GNP of nearly 2.5, a figure so high as to be virtually without precedent in industrial development in any country. In the absence of data on the total consumption by user categories, the Bank adopted an - 44- elasticity of 1.5 as a more likely figure, yielding consumption figures for 1985 and 1990 of 4.2 and 6.3 million tons respectively. 1! 2.40 The Government's program includes the expansion of the three existing mills (the Fourth Mill at Sivas being indefinitely postponed in April 1981). On completion of these projects total crude steel capacity would rise from 3.2 million tpy to about 15 million tpy by 1990-91, or about 11 million tons of finished steel. The total cost of the program is estimated at over TL 700 billion in 1981 prices. The major elements of this program are shown below; the figures exclude special steel which is discussed separately. Table 2.5: STATUS OF STEEL PROJECTS IN PUBLIC SECTOR (Ordinary Steel Only) Capacity Crude Steel Total Expenditure 1981 Time (million tons) Cost Through 1980 Alloc. Project Frame Before After (TL bn) (% Total Cost) (TL bn) Karabuk Expansion and Modernization 1981-84 0.6. 0.9 27.5 4.2 2.03 Erdemir Stage II Expansion 1978-82 1.5 2.0 24.8 51.0 - Erdemir Stage III Expansion 1981-86 2.0 4.4 260.0 - - Isdemir Stage I Expansion 1974-83 1.1 2.2 63.0 40.8 12.00 Isdemir Stage II Expansion 1981-91 2.2 6.6 328.0 0.0 - Source: 1981 Investment Program 1/ This assumption of course, is only a preliminary working hypothesis. A serious demand projection would take as its starting point an agreed macoreconomic framework combined with more detailed analyses of prospective markets, by major user categories. The end result would be an estimate not only of the aggregate demand for steel but also its distribution by major products (bars and rods, plates, uncoated sheets, etc., with breakdowns as well between ordinary and special qualities). On the basis of past elasticity of about 2 estimated by the SPO and conveyed to the September Review Mission, the projected consumption would be 4.9 million tons in 1985 and 7.2 million tons in 1990, well below any figures suggested in Table 2.4. - 45 - The above estimates do not include the related investments in railrods and ports which might be considerable, depending upon the timing of the projects and the assumed sources of ore (domestic versus foreign). The questions of raw materials supplies and the economies, in general terms, of expanding steel production is discussed later. A preliminary observation is that the market does not justify both the proposed expansion of the three existing mills. A choice, therefore, has to be made. 2.41 The 1981 program includes allocation of TLO.4 billion for preparatory work on the Fourth Mill at Sivas. But the lack of economic justification has prompted the Government to shelve it in April 1981. The Bank agrees with that decision. 2.42 Latest SPO projections suggest that Isdemir would have an installed capacity of 2.2 million tons of crude steel by 1984 which would be extended to 2.6 million tons by 1985 and subsequently to 3.2 million tons by 1986 through the removal of certain bottlenecks, notably in the smelting plant. Since 40 percent of the investment cost for Isdemir Stage I expansion has already been disbursed and an even higher proportion firmly committed, the 2.6 million ton program should be completed. Additional expansion to 3.2 million tons would also seem desirable if indeed this can be done at a low investment cost through the removal of certain bottlenecks. 1/ 2.43 Erdemir's present capacity is 1.6 million tons of liquid steel which would be expanded to 2 million tons (1.5 million tons of flat products) by the middle of 1982. Further expansion is the subject of a feasibility study financed by the World Bank. According to preliminary indications by the company, third stage expansion from 2 to 4.4 million tons of liquid steel could be initiated in 1981 though this is likely to be deferred to 1983 with possible completion by 1986. The Government should push ahead with Second Stage Expansion to 2 million tons since the project has high economic priority. Third Stage Expansion will no doubt eventually be justified but would need to be carefully tailored to revised estimates of market growth. In this context, consideration should also be given to the rival claims for part of that market by a proposed private sector mill for the production of narrow strip. 1/ The estimates for Isdemir assume that most of the equipment would be procured in the USSR. Very little information is available on the performance of USSR-built mills as compared with equipment purchased in the world market. More important, one would have to consider the prices that Turkey would receive for those exports which would be used to repay the USSR credits. - 46 - 3.44 The SPO project portfolio includes a family of six projects for the modernization of the Karabuk steel plant. These include: (a) modernization of blast furnace stoves; (b) sinter plant modernization; (c) coke oven renewal; (d) increase in blast furnace production; (e) modernization of power plant; and (f) modernization of steel plants and rolling mills. Together, they amount to virtually a complete rebuilding of the plant and, in particular, of the metallurgical facilities. The only project, in which any significant investment has been incurred to date is project (d). As a result of this project, together with the modernization of the blast furnace stoves, with a view to raising the blast temperature (a), blast furnace production would rise from 600,000 tons to 900,000 tons and coke consumption would be reduced from 889 to 697 kg per ton hot metal under otherwise equal conditions. These investments would be quite profitable and could be amortized relatively quickly. However, the viability of the rest of the package is questionable. If there is a constraint on total financial resources, it seems fairly certain that Erdemir and Isdemir expansion would have a higher priority than the complete rebuilding of Karabuk. Also, Karabuk's rolling program overlaps to a substantial content with that of private electric furnace steel producers who have much unused capacity. Instead, the possibilities of converting Karabuk from fully integrated operations to an electric furnace producer (based on scrap and eventually perhaps on sponge iron) should be studied. This would also fit in well with the SPO suggestion that 200,000 tons out of Karabuk's crude steel capacity should be reserved for the production of special steels. Karabuk's comparative disadvantage in terms of logistics and plant size would be less pronounced in special steels than in ordinary steel. Thus it would no longer be necessary to transport one million tons of ore (1.5 million tons if the proposed modernization were to take place) nearly 1,000 km across the country. Taking all these factors into account it is questionable whether even project (b) should be implemented now, or held up pending the completion of a new master plan for steel which the Bank recommends. 2.45 (c) Raw Material Supplies. Raw materials requirements of the steel industry for 1981 are estimated at 5 million tons of iron ore, 4 million tons of coking coal and 800,000 tons of scrap. Domestic production of iron ore comes mainly from the Divrigi mines (near Sivas) in Central Turkey, with additional quantities supplied by private mines. Karabuk receives all its supplies (about one million tons) from domestic mines. Erdemir in 1979 used 1.22 million tons of domestic ore and 0.74 million tons of imported ore, whereas Isdemir in that year used about 1 million tons of domestic and 0.50 million tons of imported ore. Erdemir and Karabuk obtain the bulk of their coal from Zonguldak 2.46 Isdemir thus far has covered its coal requirements through imports from the United States. The likelihood of an increasing gap between domestic supply and demand for metallurgical coal highlights the priority to be attached to coal mine expansion at Zonguldak. - 47 - 2.47 If capacity increases as projected by the Bank, the combined production of steel at Iskenderun and Eregli could reach 5.4 million tons by 1986 and 7.6 million tons by 1990, with very similar quantities of hot metal. This would mean steeply increased requirements for iron ore. Turkey's proven and probable reserves from known deposits are substantial and estimated at 1.2 billion tons. Apart from economics, the main problem in the exploitation of domestic ores is transportation. This problem is already acute. The capacity of the Divrigi mines alone will be 4.35 million tons by 1981-1982. Taking into account private mines along the same rail lines, the potential iron ore supply is around 5 million tons. However, the Turkish State Railroads have announced that the maximum quantity they will be capable of transporting is 3 million tons. Apart from the shortfall in railroad transport capacity, the port of Samsun also presents a bottleneck. If there are doubts about the capability of the system to handle the presently available supply of ore from the Sivas region, the problems would become acute if present plans for the exploitation of the Hasab Calebi iron ore deposits in the same region were to materialize. The Hasan Celebi operation would have an initial capacity of 3 million tons of pellets (1987 at the earliest) and an eventual production of 6 million tons. These pellets are earmarked for the proposed fourth mill at Sivas, which has now been postponed. If the Hasan Celebi deposits are instead viewed as a potential supplier of pellets to Erdemir and Isdemir, the railroad capacity would have to be expanded further. 2.48 The questions of ore supplies, ore beneficiation and up-grading and ore transportation are inextricably linked to the elaboration of a master plan for the development of the steel industry. The same applies to supplies of metallurgical coking coal, domestic and foreign, and to the corresponding port development. 2.49 (d) Competitiveness in Major Cost Elements. Enormous investments in steel mill capacity and related infrastructure cannot be justified unless there are prospects for reasonable economic returns. The crucial factors determining competitiveness and economic returns are the cost of raw materials and labor, the investment per ton of steel and, most important perhaps, production efficiencies. 2.50 Raw Materials: The price of imported coal in 1980 was US$76 per ton cif Iskenderun (US$56 f.o.b. Hampton Roads plus US$20 freight) and that of iron ore US$50 per ton (US$30 f.o.b. Vitoria plus US$20 ocean freight). Based on 68 percent Fe, the latter works out at about 73 cents per unit of iron. Domestic ores are currently quoted at about US$34 per ton delivered Eregli, or 61 cents per unit, basis 56 percent Fe. Using domstic ore, however, has the disadvantage of lowering blast furnace production and increasing coke consumption. Another disadvantage is the high fines content. This means that in Erdemir Stage II, an admixture of domestic ore exceeding 30-40 percent may require additional sintering plant capacity. Estimates regarding the relative cost of using domestic versus imported ore are not available. - 48 - 2.51 Investment Costs: Even assuming investment costs for a new green field site on a par with European and Japanese mills (which is hardly realistic), Turkish steel mills would be at a decisive disadvantage with respect to this cost element. This is because the price structure of the world steel industry.is not related to the investments on green field sites but more nearly to the total net fixed assets of the industry at replacement cost. A recent study indicates that in no major steel producing nation would these exceed US$200 per ton liquid steel equivalent. Assuming equal conversion efficiency and a required gross margin of 25 percent on net assets to cover depreciation and investment return, a difference of, say, US$1,000 per ton liquid steel would correspond to a price difference of 0.25 x 1,000/.8, or about US$312 per ton finished steel which compares with a recent total import price to Turkey for long products of about US$360 per ton. In other words, the penalty in charges against the investment alone, assuming comparable efficiency, is about as great as the selling price for imported steel. 2.52 Besides, in steel mill construction, it is extremely important (a) to avoid delays at any given stage since, one year's delay is, by assumption, virtually equivalent to a 25 percent increase in the economic cost of the investment; and (b) to move towards optimum capacity with great speed since production costs in the six million tons stage are considerably lower than in the one million ton stage. There have been considerable delays in project implementation both at Erdemir and at Isdemir which have added considerably to the economic cost of the investment. 2.53 Production Efficiencies: Three aspects of production efficiencies were studied: capacity utilization, manpower costs and fuel consumption. The following capacity utilization figures were provided by SPO. Though we are fully aware of the many pit-falls in capacity comparison, internationally or even between national plants, these figures still provide a broad indication of the difficulties recently experienced. Only in Karabuk is capacity utilization satisfactory. Table 2.6: CAPACITY UTILIZATION IN TURKISH STEEL MILLS 1979 (thousand tons) Karabuk Isdemir Erdemir %. % % Stage Cap. Prod Use Cap. Prod Use Cap. Prod Use Coke Ovens 700 655 82 985 733 74 1,500 656 44 Hot Metal Production 600 514 86 1,100 691 63 1,800 762 42 Steel Shops 600 582 97 1,042 435 42 1,600 875 55 Rolling Mills 569 514 90 630 315 50 1,600 718 45 Source: SPO - 49 - 2.54 The low capacity utilization in Erdemir was attributed by the company to shortfalls in the deliveries of coal and constraints on the imports of semi-finished steel. Furthermore, according to the company, the State Railroads were only able to deliver 615 thousand tons of iron ore in 1979 as compared with programmed quantities of 1,224 thousand tons. Nevertheless, today a physical shortage of raw materials is not the overriding constraint. The company has difficulties in operating its new metallurgical facilities in a synchronized way at a reasonable level of output: instead of providing 1.8 million tons of slabs, these installations at present seem limited to about 1.2 million tons. It is not clear to what degree these difficulties are attributable to lower grade raw materials than originally projected or to some shortfall in the equipment. 2.55 The manpower complement to a steel mill is much the same whether the plant operates at design capacity or, as in the case with both Erdemir and Isdemir, has trouble reaching that capacity. Whereas, Erdemir used 22.5 man-hours per ton finished steel in 1979, the corresponding figure for Isdemir was 81 man-hours. At standard 90 percent operating rates, steel industries in industrialized countries now use 8-10 man-hours per ton steel. Isdemir' objective is to freeze the work force through the completion of the first stage so that eventually the man-hour requirements would drop to about one-sixth of their present level. Even if the target were achieved, the manpower productivity would remain well below Japanese or European standards; but the manpower cost viewed in isolation (i.e. without regard to other cost elements) would be very competitive. This is because Turkish steel workers are paid only about one-third of the Japanese or European level. With such improved productivities the employment cost per ton steel at normal operating rates in the first quarter of 1979 would have been less than US$70 per ton finished product in Turkey as compared with US$82 in Japan and about US$135 in the United States, West Germany or France. 2.56 -Energy consumption is strongly influenced by the structure of production (proportion of fully integrated operations) and the technology used (e.g. direct reduction versus blast furnace, open hearth versus basic oxygen furnace). Another important factor, particularly in blast furnace operations, is the quality of the iron ore and coke; in all major steel producing countries except Japan, three-quarters or more of the total energy consumption occurs at the iron production stage. Data for 1977 for about one dozen steel producing countries indicate that average coke rates per ton iron were on an average about 75 percent higher in Turkey, due in part to the high sulphur and ash content of Turkish coals. Not only is the energy consumption in Turkish blast furnace high but furnace production per cu.m. of useful furnace volume is extremely low. Since the charges against the investment (depreciation and maintenance, investment return) per ton of steel are inversely proportionate to the productivity of the furnace, the proposed improvements in furnace productivity for Karabuk (50 percent) and Erdemir (2 percent) would have a beneficial effect not only on production but also on production costs. - 50 - 2.57 As a result of all these cost factors, the Bank believes that the cost of producing steel in Turkey today is probably about one-third above that of internationally competitive producers. This is also consistent with the observed price differential as of June 1980 between Turkish steel and imported steel (including ocean freight). 2.58 (e) Conclusions on Steel. The high earnings requirements for a relatively new plant is only one of the reasons for the high costs of steel production in Turkey. Other factors include high energy consumption, relatively low productivities of both plant and labor and a high remuneration of steel workers compared with other social groups in Turkey. The Bank's main comments with respect to the future investment strategy are as follows: (i) There is an urgent need for a master plan for the development of the industry based on realistic forecasts of the future demand for steel and the relative costs of domestic production versus imports. (ii) This should be combined with a carefully considered program for the utilization of the country's valuable, yet relatively limited resources of coking coal and iron ore. The recommendations with respect to the utilization of domestic resources should take explicit account of the cost to the steel industry of using lower grade fuels and metallics (higher energy consumption and lower outputs from metallurgical installations, hence higher charges against capital) and of the cost to the economy in expanding supporting infrastructure, particularly the railroads. (iii) In our veiw, the elaboration of such a master plan cannot be done by Turkish consultants working alone but must engage responsibility at the highest level of technical, operating, and economic/financial expertise in the field. (iv) Even pending the outcome of the proposed study, it should be possible to push ahead with Erdemir Second Stage Expansion (to ^ million tons of crude steel) and Isdemir Stage I Expansion (to 2.2 million tons of crude steel). In fact, both projects have high economic priority. In contrast, the Bank is not convinced that the reconstruction of Karabuk Steel Mill as a fully integrated plant would be a wise decision. 3. Special Steel 2.59 Special steel in Turkey is produced by the state enterprise, MKEK (The Machinery and Chemical Corporation) at Kirikkale, along with a number of private sector producers including Turkey's largest producer of special steels, Asil Celik. Production in 1979-1980, at about 100,000 tons per year corresponds to approximately one-half of total capacity. The machinery and motor vehicle industries are the major consumers of special - 51 - steels. The.general tendency in the world market during the past two decades has been towards an increased proportion of special steels in total steel consumption and towards increased size and specialization of the production units with a consequent tendency for the price differential between special steels and ordinary steels to fall. 2.60 The SPO portfolio of projects in manufacturing includes two special steel projects: the expansion of the Kirikkale plant and the setting up of a new special steel factory at Izmir. The MKEK original Izmir project (December 1978) was based on a projected internal demand by 1983 of 422,000 tons of "high grade and quality steel" and an expected supply from existing plants of 208,000 tons, leaving a theoretical gap of 214,000 tons. Hence, the capacity of the proposed plant was fixed at 300,000 tons of liquid steel corresponding to an estimated 227,000 tons of finished product. This was considered only as the first stage. The second stage would include the production of 80,000 tons of stainless steel sheets, 10,000 tons of deep drawing steel sheets, and 40,000 tons of silicon steel sheets, or altogether 150,000 tons of flat products. MKEK has now scaled down its project to a "first step" capacity (one steel furnace only) of 136,000 tons of liquid steel, equivalent to 116,000 tons of finished product. Of this production, at least 90,000 tons would be in dimensions below 23 mm, not yet rolled by Turkish special steel producers; one of the main objectives of the project would be to close the import gap in this area. 2.61 The demand projections for special steel made available to the Bank seem to be on the high side because (i) they are based on optimistic projections of GNP and (ii) they did not take into account the fact that other things equal, the elasticities of steel demand in relation to GNP are likely to decline when there is a decline in the rate of investment. Furthermore, projections of special steel demand based upon macroeconomic regressions and largely a priori assumptions regarding the ratio of special steel consumption to total steel consumption are unlikely to provide accurate rate forecasts. The growth in the Turkish consumption of special steels will probably be largely dependent upon the growth of the machinery and equipment industries. Expansion of special steel production, assuming it is economically feasible on other grounds should, therefore, be closely tailored to firm projects for the development of the equipment industries. It seems quite likely that MKEK may have considerably overestimated the total market by the end of the decade perhaps by as much as 100 percent, and that there would be no need to build a new plant in order to produce domestically those steels which could not, at the present juncture, be made competitively in Turkey. 2.62 The conflict with the normal avenue of expansion for an existing producer could well be a sufficient reason against the Izmir project since a green field plant would be far more costly. Specifically, Asil Celik, which has a total rolling capacity in the range of 150-200,000 tons and - 52 - would be able to double its melting capacity at a very modest investment, could cover the small dimensions by adding finishing stands or a fine sector mill, at the same time achieving better utilization of its existing rolling facilities. Furthermore, Asil Celik has a blooming mill whereas only continuous casting is envisaged in the pared down MKEK project. Blooming (i.e., mechanical reduction) is apparently necessary for the production of many high-alloy steels. Finally, Asil Celik's encouragement certificate requires the company to produce the small dimensions as well. 2.63 However, the main argument against the project is its lack of competitiveness. In measuring the future competitiveness of the Izmir plant, three factors might be considered: the general character of the special steel industry, recent import prices compared to the proposed selling prices, and various cost elements in relation to international benchmarks. 2.64 On a world-wide basis, the production of special steels accounts for about 13 percent of the total steel production. The typical special steel producers and plants are correspondingly smaller in comparison with producers of ordinary steel. Bulk goods of special carbon and low alloy steels are increasingly supplied by producers of ordinary steel or special steel ingots contract rolled in the mills of ordinary steel producers. In return, they often specialize in steel quality and uses e.g., ball bearing steel, steel for valve springs, sawblade steel, razorblade steel, drill steel, needle steel, silicon sheets, etc. In many cases, such steel goes into manufacturing activities undertaken by the same concern. In this way, the traditional special steel industries are gradually being transformed into market-oriented mechanical industries drawing on sophisticated marketing and technical know-how. Competition in special steels is harsh; the published net income figures for some major producers in 1979 varied between a loss and a high return of 7 percent on sales. 2.65 The MKEK project report of June 1980 indicates a probable average future selling price of about TL 117,600 per ton, ranging from TL 68-70,000 for pre-stressed steel and electrode wire and TL 99,000 for steel for bolts and nuts to a high of TL 177,000 for case hardening steel. Using mid-1980 exchange rate of TL 80 per dollar, the price would be 20-40 percent above the present Turkish price level and very much higher than the world market prices. Even allowing for a wide margin of error in price comparisons, it would still seem that the cost of steel from the proposed MKEK plant would be far above the world market prices. 2.66 An analysis of the reasons for the presumed wide difference between the cost of producing special steels in Turkey and the international price is rendered difficult by the large variation in the types of steel produced by major special steel producers, differences in plant integration and in further manufacture of rolled.steel, etc. Nevertheless, it appears that about one-third of the difference between world prices and MKEK prices would be due to a proposed selling price more - 53 - than sufficient to ensure a reasonable return on the investment at normal capacity operations. The rest of the difference could be easily explained by the smaller size and lesser specialization of the Turkish plant, the lower efficiency and greater need for technical assistance and, possibly, higher prices for ferro-alloys and anxiliary materials. In contrast, the Turkish plant would not suffer a major disadvantage in prices for scrap or electric power. It is a separate question whether, considering the overall outlook for power supplies, some penalty on such a highly power-intensive industry would not be motivated in an economic return calculation. 2.67 In conclusion, the economics of special steel production in Turkey are not favorable at this moment. This might change as the engineering industries, one of the major consumers of special steel, grow during the next decade. It would appear more economical to double the capacity of the major existing producer, Asil Celik, than, as proposed, to build an entirely new plant at Izmir. The possibility, in the longer run, of converting Karabuk to a special steel producer must also be considered. 4. Aluminum 2.68 The only Turkish aluminum smelter, located at Seydesehir, has a capacity of 60,000 tpy of aluminum. The adjacent alumina plant has a capacity of 200,000 tpy. Since it take two tons of alumina to produce one ton of aluminum, 80,000 tons of alumina would be available for export to the USSR. In theory, these exports would help to pay for the complex which was built with Russian technology, equipment and finance. One problem has been the power supply. At capacity operations, the smelter would use about I billion kwh. This energy was to be obtained from the Oyamapinar dam but construction of the dam has been delayed. Hence, the smelter is operating at only 50 percent of capacity. 2.69 The present Turkish price for EC grade of aluminum ingot was given to the Bank as TL 550,000 (i.e. over $6,800 per ton) which compares with a world price of only about $1,600 per ton. The main reasons for the high price are poor capacity utilization, a relatively high power cost and an excessive work force (about 7,000 as compared with an estimated normal complement of at the most 4,000). 2.70 There is a proposal to expand production by an additional 120,000 tons of aluminum and 240,000 tons of alumina using USSR financing. Alternatively alumina production could be extended to 400,000 tons, with the Russians importing the additional output at the world price. The estimated project cost is about $490 million equivalent, of which $130 million would be foreign exchange. 2.71 Aluminum production is highly capital intensive. In addition to an investment of nearly $4,000 per ton in the smelter, aluminum oxide plant and bauxite mine, one would also need to consider the enormous investment in power facilities. Hence, an aluminum smelter is only economical where - 54 - cheap bauxite (or, exceptionally, imported alumina) can be combined with cheap power. The first condition is fulfilled in Turkey since the bauxite mines near Seydesihir have 35 million tons of proven reserves (enough for about 7 million tons of aluminum) of good quality and available for open cast mining. Cheap power is however unavailable in Turkey and unlikely to be available in the foreseeable future. The long-run marginal cost of power would very roughly be about 5 U.S. cents per Kwh. By comparison, the economic cost of hydropower in an aluminum project recently financed by the Bank was less than 3.0 U.S. cents, and costs in the range of 1.5-2.0 cents or below have been mentioned for a number of countries rich in hydropower (Zaire, Indonesia, Brazil, Cameroon, Guyana). Similarly, the investment in the aluminum complex itself, at $4,000 per ton is significantly above the cost of integrated aluminum complexes under construction elsewhere, for which investment costs in the range of $2,200-2,700 per ton have been reported. 2.72 If we assume, as a rough approximation, that the economic cost of power to the Seydesihir plant would be 2.5 cents higher than in typical new export plants and the investment in the integrated facilities (excluding power) would be $500 per ton higher, this would raise the cost of aluminum production by respectively $375 (without considering the possibly higher per unit consumption of power in the Seydesehir smelter) and $105 per ton aluminum, or by altogether $480. 1/ Though freight and handling charges may add as much as $200 to the import price, it seems clear that the expansion of Seydesihir plant would not be economical. 5. Petrochemicals and Chemicals 2.73 Construction of the first Turkish petrochemicals complex was initiated in 1965 at Yarimca, by a new state enterprise, Petkim. The first five units came on stream in 1970; capacities were increased and new production lines added in 1973, 1974, 1975, 1976, and 1977. The basic raw material, ethylene, is obtained by cracking naphta from the near-by Ipras refinery at Izmit. The capacity of the cracker has been expanded from originally 30,000 to 60,000 tons but the maximum operating rate reached is about 80 percent. Yarimca produces a wide range of chemical products: polyethylene, PVC, polystyrene, dodecyl benzene (a raw material for detergents), two types of synthetic rubber, carbon black (used mainly in 1/ According to Turkish experts, prices for the USSR plant would be competitive, and note that the USSR is presently supplying equipment for a 500,000 tpy alumina complex to Greece. It is not clear, however, that the technology would be comparable with the best Western plants. Thus, according to a table prepared by TEK, the present Seydesehir smelter uses 16,000 Kwh (20,000 Kwh per ton at 50 percent capacity) per ton aluminum compared to 15,000 Kwh in the most modern plants. In an energy short country, where the burden of oil imports is already heavy, a plant using such large inputs, whether 15,000 Kwh or 16,000 Kwh, does not appear to be a prudent proposition. - 55 - the production of synthetic rubber) and caustic soda and chlorine. Its two most recent investments are for the doubling of carbon black capacity to 30,000 tons (virtually completed) and of dodecyl benzene capacity (about 50 percent completed). A new carbon black plant with a capacity of 40,000 tons per year is being planned. 2.74 As compared with the two 30,000 units at Yarimca, the competitive size of a modern ethylene production unit is about 300,000 tons. Most of the intermediate and end product units at Yarimca are from one-fifth to one-half of what is normally regarded in the industry as a competitive size. Yarimca's transformation costs are correspondingly high, at least twice the normal industry standard. There seems to be general agreement that the installations are now approaching the end of their useful life. 2.75 Somewhat paradoxically, Petkim today is a profitable enterprise. The main explanation is the very high price level and (through 1979) the company's import monopoly in the products it manufactures since these imports are sold at the same prices at Petkim's own production. 2.76 There are three drawbacks to the economy from this price policy. First, it hampers the development of downstream industries, virtually excluding their becoming exporters. Second, it creates privileged financial resources for the company's expansion and completely divorce it from the discipline of the market. Third, there is a real question as to the economic viability of Yarimca even when regarding past investments as a sunk cost. 2.77 The new Aliaga complex which was initiated in 1975 is one of the most ambitious investment projects undertaken in Turkey. The two cornerstones of this complex will be a 330,000 tons naphtha cracker for ethylene and an aromatics extraction plant. Some of the major products will be identical with those produced at Yarimca, e.g., high and low density polyethylene and PVC but, in addition, Aliaga will also produce ethylene glycol, polypropylene, acrylonitrile, and aromatics. At full capacity it would produce about 1.1 million tons of end products (see Table 2.7 below). The total investment is estimated at TL 131 billion (US$1.6 billion equivalent), out of which about 45 percent had been spent by the end of 1980. The gross import savings have been estimated at US$950 million equivalent; net import savings would be less than half that sum if one regards the cost of feedstocks as a foreign exchange expenditure. - 56 - Table 2.7: DEMAND VERSUS CAPACITIES IN TURKISH PETROCHEMICALS INDUSTRY ('000 tons) Projected Consumption 1986 Projected Actual Consumption Petkim Original Revised Rough Capacity /a Product 1975 1977 1979 Estimate Estimate 1986 Polyethylene, L.D. 40.9 85.2 184 128 165 (150) Polyethylene, H.D. 6.9 21.9 42 33 64 (40) Polyvinyl Chloride 39.3 77.6 166 116 147 (100) Dodecyl benzene 14.8 17.6 18.1 38 26.4 20 Carbon black 10.4 21.5 14.0 75 32.3 30 (-) Polystyrene 4.2 20.7 15.4 33.5 31.1 13.5 () Caprolactam 17.6 15.0 37 26.4 25 (-) Polypropylene 16.0 7.5 66 24 60 SBR rubber 3.3 19.6 16.8 38.3 29.4 32 () CBR rubber 0.6 3.4 4.6 13.5 5.1 18.5 () Caustic soda (100 %) 20.2 30.5 15.2 250 85 117 (85) Phtalic anhydride 30 Terephtalic acid 70 Acrylonitrile 70 Aromatics 124 /a Figures within parentheses show the capacity for Aliaga alone, excluding Yarimca. Source: PETKIM 2.78 The basic feedstock for the Aliaga petrochemicals complex is naphta; at full capacity it would use 1.15 million tons of naphtha. The present crude oil throughput capacity of the Aliaga refinery is estimated at 3.6 million tons per year (a level actually exceeded in 1978) and "debottlenecking" investments now well advanced are expected to raise this to 5 million tons in the course of 1982. Though the original intention was to operate the Aliaga refinery to yield about 14 percent naphtha, this could be modified to about 20 percent, i.e., enough to cover 87 percent of the maximum requirements of the petrochemicals complex. An eventual small deficit in naphtha could, if necessary, be supplied by other Turkish refineries. 2.79 In the original projection it was assumed that the market for petrochemical end products would grow at a compound rate of 12 percent per year, and that the output of the new complex would be easily absorbed. The projection of rapid increase in demand (in spite of the very high prices charged by the company) was more than borne out by actual events until, in - 57 - 1978, demand was sharply curtailed by the general economic recession and the foreign exchange constraints on imports. Table 2.7 also shows the recent growth in consumption for some of the major products and compares the projected growth in demand with the prospective Turkish capacities on the assumption that the Aliaga complex would be completed in the course of 1983 and would attain full capacity by 1986. The Table suggests that for most of the production units there would be no serious problem of excess capacity. The major exceptions are polypropylene produced at Aliaga and CBR rubber produced at Yarmica. With respect to polypropylene, it seems that the market has deliberately not been developed in the past since this plastic was not produced by Petkim. Excess capacity for high and low density polyethylenes and polyvinylchloride becomes relatively insignificant if we assume that production of these items at Yarimca will be discontinued, as no longer economical, when Aliaga comes on stream. On the other hand, production of caustic soda may have to be cut unless a market can be found for 75,000 tons of co-product chlorine. Much of this chlorine is earmarked for the new paper mill at Afyon which is operating at far below capacity and may have problems of economic viability. 2.80 In view of the shortage of funds faced by Turkey, the Bank looked closely into the possibility that some portion of the Aliaga complex might be postponed. Theoretically, this would be desirable for installations with a low degree of completion and/or low economic returns. Table 2.8 suggests that, the economic return would be particularly low in end products derived from ethylene oxide, i.e., ethylene glycols and chlorethylenes. However, with the single exception of the terephtalic acid plant, at least 90 percent of the imported equipment for the production units (80 peicent for the aromatics section) has been received, and to a large extent, paid. Only in the case of an over-riding financial constraint would it make sense to cancel or postpone any production units. Since such a constraint could not be ruled out a priori, the Bank prepared a plan for the sequential completion of the project. The total avoidable investment -expenditure was found to be about TL 16 billion (about US$200 million equivalent) as compared with the total project cost of TL 131 billion. This, in itself, is no negligeable saving yet the foreign debt contracted to build the unfinished plants would still need to be served. The financial and economical losses which would result from a failure to complete the project, would in fact, be enormous. Hence, with possible minor exceptions, the best procedure is to complete the whole project as expeditiously as possible. - 58 - Table 2.8: ALIAGA PETROCHEMICALS COMPLEX: ASSUMED DOMESTIC AND EXPORT PRICES FOR PETROCHEMICAL PRODUCTS, NOVEMBER 1980 (US $ equivalent per ton) Domestic Prices Excluding Including World Prices /a Production Neutral c.i.f. f.o.b. Product Tax Tax Turkey Turkey Chlorine 210 218 300 Caustic Soda 390 406 350 Polyvinyl Chloride 1,510 1,570 1,050 950 Tri/Per Chloroethylene 690 718 1,000 Ethylene Glycol 1,020 1,612 800 700 Di Ethylene Glycol 1,^20 1,061 350 Low Density Polyethylene 1,900 1,976 1,300 1,200 High Density Polyethylene 2,380 2,475 1,400 1,300 Polypropylene 1,800 1,872 1,300 1,200 Atactic Polypropylene 560 582 400 Pure Terephthalic Acid 1,760 1,830 1,300 1,200 Phthalic Anhydride 1,280 1,331 1,050 Acrylonitrile 1,280 1,331 1,050 Benzene 940 978 650 Para-Xylene 1,080 1,123 750 Ortho-Xylene 770 801 600 500 C-4 (Butanes) 580 603 450 350 C-5 (Pentanes) 650 676 400 365 Heavy Aromatics 140 146 150 /a Based on the company's experience, a uniform $100 differential between f.o.b. export prices and c.i.f. import prices was assumed as a first rough approximation. The neutral tax incidence was calculated by the Bank and is based upon the average incidence of indirect taxes in the gross national product in 1979. At 8 percent of value added, this translates, in the case of Petkim, into roughly 4 percent of the company selling price, excluding tax. Source: PETKIM - 59 - 2.81 The employment effects from this huge investment would be negligeable; only about 4,275 would find direct employment. Hence, the project would need to be justified strictly on the basis of a reasonable economic return. The Bank asked the company to prepare a statement of their expected returns at international (border) prices for its outputs and for major material inputs on the assumption of a ten year economic life. The latter is a relatively severe criterion yet one customary for the petrochemicals industry in view of rapid technological change. The company arrived at an economic return of 16.5 percent. This would, indeed, be an acceptable, or even a good return for this class of project. However, we are not in full agreement with the method of calculation. 2.82 The Bank has prepared an alternative estimate (Table 2.9). First, it was assumed that construction would take one year longer than projected by Petkim. Second, instead of 100 percent capacity utilization, the Bank assumed that, due to a combination of market and technical factors, a more realistic projection would be a 90 percent operating rate. Third, the Bank felt that the logic of a brief economic life should be applied to the local investment expenditures as well, and that these too should be depreciated over a ten year life. The Bank included a conceptual neutral 8 percent tax on value added, as an element of economic cost. The Bank provisionally accepted Petkim's estimates of the relevant border prices for petrochemicals and for the main inputs such as naphtha and fuel oil. 2.83 In view of the stated differences in assumptions, the Bank arrives at an economic return of 4.3 percent as compared with Petkim's estimate of 16.5 percent. However, if the investment up to now is regarded as a sunk cost, the return on the incremental investment is about 14 percent, which is reasonably satisfactory. 2.84 In conclusion the Bank recommends that completion of Aliaga complex should be given a high priority. Even though the project was never an economic proposition, the incremental returns on the remaining investment are adequate. Petkim should seriously consider the postponement of the new carbon black unit to be included to the Yarimca complex. The third petrochemical complex which is being considered, should be deferred to a future date, and no expenditures should be made at this stage. - 60 - Table 2.9: ECONOMIC RETURN CALCULATION FOR THE ALIAGA COMPLEX UNDER ALTERNATIVE ESTIMATING PROCEDURES (at constant 1980 Prices) Petkim Bank US$ million US$ million TL billion equivalent TL billion equivalent Investment Cost Foreign exchange expenditure 51.7 574.7 51.7 574.7 Domestic expenditure 45.4 504.0 56.5 627.7 TOTAL 97.1 1078.7 108.2 1202.4 Annual Investment Expenditures 1979 17.0 190 18.4 204 1980 27.1 301 29.0 322 1981 28.2 313 20.9 232 1982 12.8 141 13.3 148 1983 12.0. 134 13.3 148 1984 - - 13.3 148 TOTAL 97.1 1079 108.2 1202 Net Working Capital 4.5 50 4.5 50 Operating Rates 1983 50 0 1984 75 45 1985 100 68 1986-1992 100 90 1993 0 90 Future Revenues (million US$ equivalent) 1983 476.6 - 1984 714.9 452.8 1985 953.1 648.1 1986-1992 953.1 857.8 1993 - 857.8 Annual Operating Costs (US$ million) at 100 percent capacity - 61 - Petkim Bank US$ million US$ million TL billion equivalent TL billion equivalent Feedstocks 490.6 490.6 Utilities 12.7 12.7 Manpower, unskilled (2,276) 0.0 10.0 Manpower, skilled (2,000) 10.0 10.0 Spare parts 20.0 20.0 Maintenance 10.0 10.0 Depreciation for exch. exp., 13 percent 74.7 74.7 Depreciation local exp., 5 percent 25.2 30.2 Other 4.6 4.6 Neutral incidence of indirect taxes - 26.8 647.8 689.6 at 75 percent capacity 522.2 564.0 at 50 percent capacity 396.6. 438.4 Residual values 20 percent of fixed investment 215.8 240.5 Net working capital 50.0 50.0 Economic rate of return Petkim calculation 16.5 percent Bank recalculation Petkim assumptions 15.1 percent Bank assumptions 4.3 percent Bank assumptions regarding 1979 and 1980 investments as sunk costs 14.0 percent Source: Bank Estimates 6. Fertilizers 2.85 The Turkish consumption of fertilizers, in the decade of the 1970s grew by 15 percent per year. For the 1980s a somewhat slower though still very substantial increase in consumption of about 10 percent per year had been projected, but more recent Bank studies suggest the 1977-1987 growth may be limited to about 6.4 percent per year for nitrogen fertilizers and about 5 percent per year for phosphate fertilizers. There are at present six major operating fertilizer companies in Turkey -- two in the public - 62 - sector (AZOT and IGSAS), two in the joint sector (Gubre Fabrikalari and Akdeniz Gubre), and three in the private sector (Ege Gubre and two of BAGFAS). In addition fertilizer (ammonium sulphate) is produced as a by-product by PETKIM and Turkish Iron and Steel Company on a small scale. The total annual fertilizer capacity is about 1.3 million nutrient tons of nitrogen and 850,000 nutrient tons of phosphate. In spite of streneous efforts to increase self-sufficiency, the domestic production lagged behind consumption, due mainly to failures in utilizing already installed capacity. By 1980, capacity utilization for N averaged only 48 percent, and for P it had fallen to 45 percent, necessitating substantial imports of finished fertilizers. 2.86 The failures to reach capacity outputs are attributed to a multitude of factors. Most of the companies have had difficulties in operating their plants, and these difficulties have been aggravated by inadequate maintenance and inadequately trained manpower. There have also been supply and/or quality problems with respect to local materials and utilities (pyrites, phosphate rock, lignite, power and water). Some of these problems reflect questionable planning, in particular the dependence in sulphuric acid production on local pyrites which were not produced in the expected quantities. With the benefit of hindsight, the reliance on naphta for ammonia production was also unfortunate; it has become too expensive. Shortage of foreign exchange to import timely inputs has also been a problem. Finally, the financial problems, bound to be severe at low levels of capacity utilization, were accentuated by delayed payments by the dominant customer, DONATIM, the state marketing organization. 2.87 The first priority is clearly the rehabilitation, wherever technically and economically feasible, of existing plants to enable them to attain full capacity. A program for rehabilitation is being prepared; seven projects expected to have adequate or, in several cases, very high economic returns have been identified. The first phase would cover the rehabilitation of four plants (Kutahaya II, Samsun I and II, Igsas and Yarimca) at an estimated total cost of close to US$239 million. It would include a new sulphuric acid plant, the partial conversion of Igsas to use refinery gas rather than naphta and major modification of the Kutahaya lignite-based plant. In the second phase, additional plants would be rehabilitated at a cost of about US$110 million. 2.88 The World Bank studies cited above indicate that total demand for N and P would reach 1,240 thousand tons and 930 thousand tons compared to SPO projections of 1500 thousand and 1200 thousand respectively by 1987. The Bank's estimates take into account expected increases in areas under irrigation and changes in cropping patterns. They also assume that, by 1987, fertilizer consumption would no longer be subsidized. As compared with the prospective deficit after debottlenecking of over 400 thousand tons of N and over 200 thousand tons of P, the main projects presently in the pipeline, if implemented, would result in a surplus in nitrogen fertilizers. Equipment for the Gemlik ammonia plant has been procured but has not been installed. Relatively small investments have been made in the other three plants. - 63 - Table 2.10: PLANNED INVESTMENTS IN FERTILIZER PRODUCTION Capacity (th. tons) Investment Cost Completion N P (TL bilion), Date Gemlik ammonia project 280 - 9.9 1984 Fourth fertilizer complex 560 193 96.3 1987 Anatolian fertilizer complex 280 - 35.2 1985 Soma urea project 280 - 42.8 1986 TOTAL 1,400 193 184.2 Source: 1981 Investment Program. Bank Estimates, 2.89 A major element in all the above projects is the ammonia capacity. The economics of ammonia production in Turkey, as the following summary shows, are yet to be proven. (a) The Anatolian complex would derive its feedstock (naphta) from a refinery yet to be constructed which, in turn, would derive its crude oil supply from Iraq through a pipeline yet to be built. Considering the huge investments (US$1.56 billion) required for these, which are not in consonance with severe resource . constraints in Turkey or in proportion to the expected economic returns, this complex is not a viable proposition. (b) The Gemlik plant and the Fourth Fertilizer Complex are also scheduled to use naphta for ammonia production. As shown in Chapter 4, Turkey by 1982 would have a refinery capacity of the order of 23 million tons and, even though the actual through-put may not reach capacity levels until, say, 1988, refinery operations could probably be so scheduled as to cover the naphta requirements both of the petrochemicals plants (1.15 million tons for Aliaga and 0.3 million tons for Yarimca on the somewhat questionable assumption that the latter plant would continue to operate once Aliaga goes of stream) and the nitrogen fertilizer plants (Igsas 230,000 tons, Gemlik 270,000 tons and Fourth Complex 400,000 tons). The real question is not one of naphta supplies but of the economics of converting naphta into ammonia, rather than gasoline. Naphta is in high demand for the production of gasoline and petrochemicals. It is becoming too expensive for the production of nitrogen fertilizers, the prices of which are held down by the rapidly expanding production of ammonia from natural - 64 - gas in regions where the opportunity cost of such gas is low (Middle East, Russia, Mexico, Indonesia-Malaysia). A possible alternative for Turkey would be the production of ammonia from fuel oil by partial oxidation. I/ This is said to have the advantage that, with prospective refinery capacities and demand patterns, Turkey may find itself with a surplus of fuel oil which, in the absence of a local market, would have to be exported at a relatively low price. However, the Bank is not convinced that, based upon the prospective demand for refinery products, it would be necessary or economical to organize refinery operations in such a manner that there would be a surplus of fuel oil. 2/ Even if this were so, it would not necessarily mean that ammonia production based on partial oxidation of fuel oil would be economical for Turkey. (c) In contrast, the proposed Soma complex based on lignite deserves close study. Success would be contingent upon obtaining a dependable flow of lignite, both in terms of volume and quality and also on mastering the conversion problems (quite a few lignite-based ammonia plants have run into difficulties). If these conditions can be met, the Soma lignite would presumably have a higher value as a raw material for fertilizer production than as a power station fuel, for which other lower grade deposits may be available. 1/ Even the possibility of converting the half-finished Gemlik ammonia plant from naphta to fuel oil is being studied. 2/ The product composition of the Turkish market for petroleum products has historically been quite stable, and lends itself to the straigt refining, topping and reforming of light Arabian crudes. Moreover, two of the three major refineries have cracking facilities permitting the conversion of a possible excess of fuel oil into distillates. Finally, the existing refineries have substantial flexibility in operating either for maximum production of naphta or maximum production of gasoline. Hence, ammonia production is not favored by a permanent tendency towards oversupply of naphta (or, alternatively, fuel oil). Quite naturally, the Turkish Government might be concerned about excess refinery capacity--over 23 million tons by 1982 as compared with a 1980 consumption of only 16 million tons. Unfortunately, the possibilities of export refining would appear to be extremely limited in competition with the far better located export refineries of the Middle East. - 65 - 2.90 The situation is somewhat similar for phosphate fertilizers. Transportation-wise it is more attractive to bring sulphur to the phosphate rock than vice versa, and for this reason Morocco and Florida, who between them produce a very large percent of the world supply of P205, are increasingly shipping phosphoric acid instead of phosphate rock. An incidental advantage to countries purchasing acid is that they are not faced with the problem of disposing of the gypsum. The situation is, of course, different for the Samsun and Yarimca plants since their phosphoric acid plants have already been built. 2.91 In conclusion, the economics of ammonia and phosphoric acid production in Turkey do not look favorable. The Anatolian Complex should be dropped. A decision on the "Fourth Fertilizer Complex" should at least be withheld until both (a) the future energy outlook has been clarified and the corresponding policies outlined, including the refinery constellation and (b) more specifically, a conclusion reached regarding the future economics and scope for lignite-based ammonia production in Turkey. The Gemlik ammonia plant should be completed, only if it can be shown that there would be an adequate economic return on the remaining investments. 7. Pulp and Paper 2.92 Turkey has a vast forest potential. In addition to covering the country's own needs of lumber and of pulp and paper, it could easily generate substantial exports. By Government policy, large scale integrated production of pulp and paper has been reserved for the public sector. Until the early 1970's the country had only one integrated paper mill, at Izmit, making a large variety of papers on an assortment of small machines. Three new mills with capacities in the 50/60 thousand tons range were completed in 1970-1972 at respectively Caycuma, Dalaman, and Aksu. Somewhat later (1978), a fourth new mill was completed at Afyon to produce 50,000 tons of straw pulp from locally available reeds. Third generation mills are now being constructed as integrated forest complexes and of more economic capacities, namely the Mediterranean (Antalya) mill for the production of 130,000 tons of kraft paper and the Balikesir mill for the production of 100,000 tons of newsprint. A feasibility study is underway for a third new mill in the Eastern Black Sea region to take advantage of locally available timber resources. 2.93 There are four major problems facing the industry -- rehabilitation, pollution control, wood supplies and finance. For several reasons, the second generation mills are not producing to capacity. The Aksu newsprint mill was designed to produce 85,000 tons but produced only 61,000 tons in 1979. Most of this shortfall could be eliminated through better maintenance and operating practice. The capacity of the Caycuma unbleached kraft pulp and paper mill has recently been expanded to 95,000 tons per year but the present pulping capacity, without excessive and uneconomic use of chemicals, is limited to 45,000 tons per year The principal bottleneck appears to be the chemical recovery boiler. A program - 66 - for the up-grading and rehabilitation of these two mills is being prepared for World Bank financing. The same would also finance technical assistance for the start up of the Balikesir mill and, if the project proves viable, for the attainment of capacity operations at the Afyon reed and straw pulp mill. This mill, after numerous delays, was finally completed in early 1979 but operates at only about 30 percent of capacity. The total financing needed for the rehabilitaion of Aksu and Cayuma and for technical assistance has been tentatively estimated at US$80 million equivalent. 2.94 The first and second generation paper mills except Dalaman, are all faced with serious pollution problems. There is today no study available regarding the environmental impact or the cost of reducing pollution to acceptable levels. A study of these aspects should, therefore, be included in the proposed rehabilitation project. 2.95 Future expansion of the paper industry is constrained by the supply of wood. This is not a question of availability. Rather it is a question of organization of supply and necessary investments in infrastructure, mainly roads. Due to a low level of deliveries several paper mills, notably Dalaman, experienced difficulties in filling their needs, and 80,000 cu.m. of wood had to be imported, mainly from Russia but also from Canada. These imports have been avoided at the Izmit and Caycuma mills by using domestic pinewood in addition to spruce. This required only minor investments and process mcdifications. 2.96 At the present rate of output, the paper mills use only about 1.1 million cu.m. of wood per year which will increase to 2.4 million cu.m. when the existing mills have been fully rehabilitated and the new Balikesir and Mediterranean (Silefke-Antalya) mills reach full capacity. The Eastern Black Sea Integrated Forest Product Complex would use another 800,000 cu.m. One of the factors holding back the construction of this mill is uncertainties about the wood supply. This uncertainty is due primarily to plans by the General Administration of Forests to build two large new saw mills in the same supply region to be integrated with plywood and particle board facilities. 2.97 In the longer run, Turkey could consider using sawmill residues as a substitute for roundwood as is being done in the two most recently constructed mills, and is the standard in industrialized countries. Today, the first and second generation mills receive the major portion of their wood in the form of heavy and medium logs which should normally be converted to sawnwood, leaving only the saw mill waste for the paper industry. This of course will need a careful investigation, especially in view of the fact that currently sawmill residues are used as fuel wood and, without alternative energy source, demand for fuel wood will increase, perhaps, leading to nonoptimal cut of the forest for such a purpose. - 67 - 2.98 The cost of pulpwood delivered to Turkish paper mills is competitive, i.e. similar to prices paid by paper mills in, e.g., Austria and Japan. But the net return on the forest capital is very low in Turkey. This reflects three factors mainly: the low conversion efficiency (in the sense explained above), the high transportation costs for logs and an overmature forest characterized by a low annual rate of growth in wood volume. Accelerated cutting, therefore, could bring great economic benefits. 2.99 According to estimates by the General Administrtion of Forests, the annual cut of industrial wood from the present forest, could be increased from an estimated theoretical capability in 1981 of 12 million cu.m. to 16 million cu.m. through the extension of the forest road network from the existing 90,000 km to 140,000 km. In addition, through the judicious planting, the area under forest could be extended. At the present rate of plantings, it would take 150 years just to cover the immediately available land. This program should be stepped up. 2.100 The Government claims that the existing.plan for the development and exploitation of the forest and existing legislation are adequate to permit rational exploitation of the forest. Administrative roadblocks, however, have yet to be removed. Exploitation should be put on a commercial basis, with safeguards for environmental protection and with some mechanism for determining the proper rent on the forest land to be paid to the state. There is a need for introducing modern methods of management covering the whole range of activities from tree nursery, forest management and felling up to and including industrial operations. In the Bank's view, this could be best achieved by forming regional forest industries corporations which would absorb the present activities of SEKA and many of the activities of the General Administration of Forests. In other words, the ownership of the land would remain with the state and the users would pay a rent. 2.101 It might be useful to consider inviting foreign and domestic private interests to become managing shareholders in one or several of these regional corporations. This would permit a rapid transfer of capital and technical know-how and, most important, set standards of performance that would inevitably become a principal point of reference for the other regional corporations as well- 8. Trucks and Tractors 2.102 Even though Turkey has a large market, the present manufacture of trucks and tractors is largely limited to assembly, a blind alley where the economics are very poor. There is no domestic manufacture of diesel engines nor of gears and transmissions. A huge complex to be run by a new state enterprise TUMOSAN is under construction at Konya in Central Anatolia which will include a tractor factory (under Fiat license), a tractor engine plant (Fiat), medium and heavy duty truck engine plants (Mercedes and - 68 - Volvo) and a gear box plant together with a 56,000 tpy foundry and a 17,000 tpy forge. The total investment is estimated at about US$ 1.7 billion. On an average, the first four projects are only about 10 percent completed; the ones most advanced are the tractor factory and the plant for manufacture of medium duty truck engines. Both the truck and the tractor engines would be integrated in vehicles presently assembled; studies and actual road tests under way indicate that this is feasible. The foundry and the forge are still in the planning stage. 2.103 Market studies for tractors indicate a growth in the fleet by 34,000 units per year and a replacement demand for 40,000 units which gives an average annual demand of 74,000 units in 1983-1995. By 1995, Turkey would have a tractor density somewhere between today's figures for Yugoslavia and Spain. The composition of the total tractor fleet indicates that tractors below 55 hp, even by 1995, would account for about 85 percent of the total fleet, somewhat surprising considering that in Europe and the United States this ratio today stands in the 20-25 percent range. 2.104 It appears that the Tumosan tractors would sell ex-factory at about 25 percent above the corresponding Italian price ex-factory and at more than 50 percent above the equivalent import price. Truck and tractor engines and gear boxes would sell at 80-120 percent above the equivalent price at the licensor's plant. In the case of tractors this may be partly explained by the fact that Tumosan technology may be more modern and capital intensive than many of the tractors presently assembled in Turkey, including Fiat's 480 tractor. In conclusion, the prima facie evidence suggests that the Tumosan projects would not be economical, and would indeed impose an unacceptable burden on the Turkish agriculture and transportation sectors. 2.105 Nevertheless, it seems useful to continue to search for a longer-term viable solution to the integral manufacture of trucks and tractors in Turkey. Several factors favor such production. First, the market is large, and together with potential for exports to neighbours like Iraq and Iran, should be able to support plants of minimum economic size. Second, this type of production could be relatively labor-intensive, if this plant is addressed modern technology and modern lay-out, during negotiations of license agreements with some of the premier manufacturers in the world. Third, it would be a way out of the blind alley of assembly. Fourth, the truck and tractor industries are rich in "external economies"; the technical and management skills required by suppliers to these industries, particularly in operations such as casting, forging and gear-cutting, would be a tremendous asset in developing other engineering industries. Fifth, the Turkish engineering industries have now reached a stage of development (in technology, equipment, manpower) where new departures are possible; this could include development of technical knowhow and exports arrangements with major automotive manufacturers abroad, to manufacture and export to them, parts, components, sub-assemblies and even assemblies they need to their specifications, for incorporation in their products; this would provide an economy of scale and thus, a strong base for eventual manufacture of trucks, etc. in Turkey in the subsequent stage. - 69 - 2.106 Many components for diesel engines are already made in Turkey, and several suppliers are said to be competitive by world market standards. In the foundry industry, the Doktas foundry (Koc Group) has an engine block foundry with a nominal capacity of 40,000 units, primarily engine blocks for the Tofas automobile (Koc-Fiat). Its maximum production to date is 20-25,000 units. Presently, it is operating at only 40 percent of capacity, and it is fair to say that there is some uncertainty about the future of the passenger vehicle industry in Turkey. In any case there is at present some spare capacity for producing castings for the truck or tractor industries. 2.107 If the Tumosan tractor and tractor engines projects were to be implemented, the tractor industry would, in terms of technology, become a Fiat enclave. One can anticipate a similar development in the truck industry, with Tumosan in a technology partnership with Mitsubishi, Mercedes, and MAN (or Volvo) for engines and trucks. Tumosan has been exploring for about a year the possibilities for extending its technological partnership with these foreign licensors into financial partnerships. 2.108 The problem could be minimized by the following strategy: (a) Separating tractor manufacturing from truck manufacturing with no corporate overlapping, with perhaps a further division of truck manufacturing into heavy/medium and light trucks. (b) In order not to spread resources too thinly, giving priority to integrated manufacture of tractors and building the truck plants afterward; this approach also has an advantage of gaining experience in the tractor field regarding transfer of technology, productivities and costs under Turkish conditions, and the outcome of state-private and Turkish-foreign joint ventures, etc. (c) In the interim period, developing an export trade in supply of parts, components and assemblies to major automotive products abroad by manufacturing to their specifications, and thus establishing an economy of scale for eventual manufacture of trucks in Turkey, like Brazil and Korea have done. (d) Establishing a firm principle that there should be no monopoly for the local market, but on the contrary, it should be exposed to vigorous foreign competition whether through imports, assembly or partly integrated manufacture. (e) Encouraging the growth of a vigorous network of supplier industries for the tractor and truck industries leaving open the question of financial participation by Tumosan or by other corporate entities. 2.109 The main threat to the economic viability of the tractor and the truck industries in Turkey is that the international markets are highly - 70 - competitive -- in terms of technology, quality, marketing and prices. For this reason, the number of international producers will be reduced in the future, a process that is already taking place, especially in the tractor industry. It is very important, therefore, that after a proper study, the Government make a realistic judgment of the chances for competitive production and explicitly estimate the sacrifices (protection, subsidies, etc.), if any, it would deem necessary and justified to establish the tractor and/or truck industries on a competitive basis in Turkey. 9. Cement 2.110 There are at present 35 cement factories in Turkey with a total capacity of 20.6 million tpy. Fifteen factories (with a capacity of 7.8 million tpy) are in the public sector, six in the mixed sector (2.3 million tpy) and the remaining 14 (10.6 million tpy) in the private sector. Total cement production in 1980 is estimated at 13 million tons, indicating a capacity utilization rate of only 63 percent compared to 72 percent in 1979 and a peak of over 80 percent reached in 1978. Shortages of fuel oil, electricity and spare parts are the major reported reasons although decline in domestic demand also contributed to the substantial underutilization of installed capacity. Domestic consumption, after having grown by almost 11 percent per annum during 1968-1978, has registered a decline of 15 percent in the last two years, reflecting the country's current economic difficulties. 2.111 Due to changes in economic conditions, domestic demand for cement has been revised by the Government from 24.6 million tons by 1984 to between 19.5 and 21.7 million tons in 1985. As the former was based on the Fourth Plan targets which are no longer attainable, the latter appears more realistic. The low case implies an annual average growth in domestic demand of about 10 percent during 1980-1985. This growth rate may not materialize, however, if the favorable trends in economic performance are not sustained. 2.112 The private sector, which accounts for over one-half of both existing capacity and actual production, apparently has no specific plans for major expansion of capacity at present. The public sector is involved in a substantial investment program with 20 new plants included in the 1981 program. The list of priority projects includes 7 new cement plants (listed in order of priority in Table 2.11) for which foreign exchange has been secured under bilateral arrangements with OECD countries. Total investment cost is estimated at TL 30 billion (US$375 million) with total foreign exchange requirements of TL 8.5 billion (US$106 million). - 71 - Table 2.11: STATUS OF PRIORITY PUBLIC SECTOR CEMENT PROJECTS Comple- Completion Date tion Start of Full Plant /a Capacity Project Cost (TL bn) thru Produc- capa- Location '000 tpy Total Foreign 1980 (%) tion city 1. Adiyaman 695 3.5 1.2 21.5 1982 1983 2. Samsunr 682 3.8 1.2 24.8 1982 1983 3. Diyar- bakir 682 3.8 1.2 24.8 1982 1983 3. Siirt 695 4.6 1.2 13.2 1982 1983 4. Denizli 706 4.7 1.2 5.4 1983 1984 4. Urfa 650 4.8 1.2 4.0 1983 1986 4. Edirne 650 4.8 1.2 3.7 1983 1986 4,760 30.1 8.5 /a Listed according to order of priority provided by the SPO. Source: 1981 Investment Program. 2.113 In addition to the expansion program the Government has also assigned high priority to a rehabilitation program for the cement industry which includes (a) conversion of a number of cement plants from fuel oil to coal and (b) rationalization, balancing, and limited expansion of capacity in two cement plants located at Bartin and Bolu in the Black Sea region where demand currently exceeds supply. This limited expansion would add 0.7-1.2 million tpy to the country's cement supply and along with the completion of the seven priority projects total cement production capacity would increase to over 26 million tpy in 1985. Assuming capacity utilization in the 80-85 percent range, total output available may then amount to 21-22 million tpy. Thus, production would be adequate to meet domestic demand in 1985 projected under the "high" scenario. 2.114 Two main issues hampering the sound development of the cement industry in Turkey are a cumbersome system of price control and subsidies and the lack of financcial support for the private sector. Cement, until recently was classified as a basic material and subject to price regulation by Government. It is also seen as a tool for regional industrialization. The uniform ex-works price was raised to TL 4,500 (about US$56) per ton from TL 3,600 (US$45) per ton in the first half of 1980. The net selling price to the producer is determined by deducting from the ex-works selling price (a) production taxes, and (b) contributions to the Cement Fund. These contributions paid by low cost producers are used to subsidize production units in remote areas and other high cost producers, mainly in the public sector. - 72 - 2.115 The cement export price during 1980 has been in the US$40-45 range per ton FOB. In practice, exporters earn the equivalent of the domestic ex-works price on all tonnage exported since any excess of the export price over the domestic must be deposited in the Cement Fund and any shortfall is compensated for by payments out of the Cement Fund. 2.116 Because of the Government's pricing policy, the large investments required to build cement plants (in the US$75-100 million range) and the expected slow growth in the economy, the private sector has been more hesitant to make new investments in the cement industry in recent years (other than one in the Marmara region). The share of private sector in cement production capacity is thus likely to decline substantially in the 1980's. It would appear that if pricing policy were modified and finance made available, the private sector would respond favorably. It is important that funds be made available for expansion in the more efficient private sector, which, based on past performance, should continue to earn valuable foreign exchange through exports. 10. Sugar 2.117 Sugar production in Turkey is largely controlled by the State Sugar Factories Corporation (TSFC). Out of a total of 18 sugar factories with a sugar beet processing capacity of 9.56 million tons, TSFC owns 13 sugar factories with a processing capacity of 6.44 million tons. In addition, TSFC has large shares in the five privately owned sugar factories with a processing capacity of 3.13 million tons. During the 1979-80 campaign, only 8.2 million tons of sugar beet were processed yielding a total of 983 thousand ,tons of refined sugar. The decline in sugar beet processing resulted from fuel shortages which reduced throughput to an average of 43 thousand tons per day or 80 percent of existing capacity. Domestic demand of refined sugar, on the other hand, amounted to 1.15 million tons necessitating in stock drawdowns in 1979 and imports of about 200 thousand tons of sugar in 1980. 2.118 Sugar production and consumption have grown at an annual average rate of 4.5 percent and 5.0 percent respectively in the last 20 years. Per capita consumption of sugar reached 26 kg in 1979 compared to less than 11 kg in 1960. During 1960-73 Turkey was a net exporter of sugar averaging 95 thousand tons per year. After importing relatively large quantities in 1974 and 1975, Turkey was virtually self-sufficient until 1979 when consumption finally caught up with the present production capacity of one million tons, placing Turkey into the role of an importer once again. Thus unless production capacity can be expanded, Turkey's reliance on imports is likely to increase in the future. 2.119 Even on the Bank's relatively conservative assumptions with respect to the growth of per capita incomes, the Turkish demand for sugar may be expected to reach 1.3-1.4 million tons by 1985 and 1.6 million tons by 1988 compared to present production capacity of one million tons. - 73 - 2.120 The Government's revised investment plans call for the expansion of capacity in two existing factories and the construction of 7 new factories. This would increase total capacity to 1.4 million tons by 1985, roughly in line with the projected demand. Table 2.12: SUGAR - SUPPLY AND DEMAND BALANCE (Million tons) 1960 1970 1980 1982 1985 1988 Production 0.643 0.592 0.983 1.072 1.410 1.605 Consumption 0.298 0.609 1.125 1.203 1.359 1.603 Surplus (Deficit) 0.345 (0.017) (0.142) (0.132) 0.040 - Source: SPO, Bank Projections. 2.121 The list of priority projects includes the two expansion projects (Ankara and Susurluk) and four new factories located at Mus, Konya-Ilgin, Agri and Nigde-Bor. Total project cost is estimated at TL 24 billion, including TL 3 billion in foreign currency. Three projects located at Ankara, Mus .and Konya are substantially completed and production is expected to start in 1983. Production at the other three locations is expected to follow one year later, provided financing is secured. Three sugar projects, two for expansion of existing sugar factories at Ankara and Susurluk and the third for the new factory at Konya, which had economic rates of return and financial rates of return ranging between 16-23 percent and 12-23 percent respectively, have been supported by a recent World Bank loan through the State Investment Bank. However, the rate of return for the Mus plant, already 40 percent completed, was found to be unsatisfactory and was not supported. 2.122 Sugar prices in Turkey are controlled by the Government. The prices are set in a way to guarantee a 10 percent net return on the average paid-in capital of the sugar factories. Profits in excess of this return are placed at a special fund with the Central Bank; the fund is also used to compensate those factories that have been unable to attain the 10 percent net return on their paid-in capital. Since 1976, prices have been set substantially below unit costs of production which has resulted in large and increasing claims on the Sugar Fund. In 1978 and 1979, revenues from sales of sugar and by-products covered only about 67 vercent of the costs of production. The Government, however, now proposes to fix ex-factory prices to reflect full production costs, including depreciation and financial charges, and an adequate return on equity. This would obviate the need for Government to provide large subsidies from the Sugar Fund. To promote efficiency, production costs would be based on standard costs reflecting efficient plant operations and optimal production periods for each factory. - 74 - 2.123 Improvements in productivity could reduce the cost of production. Sugar recoveries reached a peak in the early 1970s of 5 tons per hectare but have now fallen to 3.7 tons (1979) a very low figure by international standards. This decline may be attributed to commencement of factory operations before the beets are ripe, excessive use of fertilizers, sugar losses during loading and unloading operations. More modern harvesting and storage techniques than those currently in use could reduce sucrose losses, and improved cultivation techniques during the growing period could raise yields to 5 tons of sucrose per hectare. Turkey has a wide range of climate and soil types which necessitate differing cultivation techniques and length of growing season. This calls for better adjustment between the capacity of the production units and beet contract acreages in the vicinity of the plants. 11. Textiles 2.124 The public sector currently accounts for between 15 percent and 20 percent of Turkey's cotton textile production capacity. Sumerbank, which is also active in the manufacture and marketing of wool, leather, chemicals and ceramics, and in banking, owns 19 cotton textile plants located throu hout the country. The annual production averages about 200 million m. of cotton fabric, mostly dyed or printed mass-produced fabrics consumed to a large degree but by no means exclusively by the rural and urban poor. Capacity utilization, productivity and product quality of Sumerbank has been declining over the past years, resulting in poor profitability. The Government has included in its priority list a project to modernize, rationalize and rehabilitate the entire public sector cotton textile industry, which is expected to restore production to levels already achieved in the early 1970s. 2.125 The project financed with a World Bank loan is phase one of a two phase approach to (i) increase efficiency and capacity utilization of existing facilities; (ii) reduce production costs; (iii) improve product quality; and (iv) improve the institutional and management framework of Sumerbank cotton textile operations. It is to be implemented between 1980 and 1983, and expected to cost TL 12.6 billion with a foreign exchange component of TL 8.9 billion. Although the foreign financing was secured in mid-1980, the project is expected to be completed on schedule. The financial rate of return is estimated at 22 percent and the economic rate of return at 24 percent. 2.126 In addition to rehabilitation of certain plants, the project will specifically concentrate on the reorganization of Sumerbank's textile operations, the reorientation of marketing, as well as technical assistance for operations, training and management systems. On completion of project, in spinning, production of yarn is expected to increase from 41,000 tpy to 52,000 tpy and will provide for significantly upgraded quality and proportions of cotton blend yarns and combed yarns. Similarly, in weaving, - 75 - production of loomstate fabrics will increase from 207 million m2 to 250 million m2, concommitant with a general increase in quality as well as increased volumes of wider fabrics, color woven materials, blended materials, and terry fabrics in line with expected market trends for those items. In finishing, in order to balance increased production of loomstate fabrics, production of finished fabrics will increase from about 152 million m2 to about 207 million m2 with increased emphasis on product quality. In garments, existing plants will be improved through technical assistance while one new plant will be installed in the phased out spinning selection of Sumerbank's Bakirkoy factory. Improved quality and increased output will increase Sumerbank's sales and its potential for exports and will absorb surplus labor resulting from the streamlining of operations. D. Some Major Policy Issues 2.127 The key to Turkish industrial growth at this stage is successful adjustment to a market economy. This, in turn, will require the rearrangement of three sets of forces: A revised incentives structure: A rearrangement of the system of import duties and export subsidies in relation to the exchange rate is required where the latter would be allowed to carry the main burden for the adjustment of the Turkish price level to the international level, and duties and subsidies used frugally as temporary incentives in the development or restructuring of certain industries. One major objective of this rearrangement would be to provide Turkish industry and agriculture with basic materials such as steel, aluminum, plastics and fertilizers, at world prices. Mobilization of private industry: The private sector has grown vigorously under the artificial and often extremely difficult conditions of the past, and there is no reason why it should not be able to regroup and perform even better under a more rational set of incentives. Its major problem is the availability of funds. In the text we indicated the order of magnitude of the annual investments which could be attained by the private industrial sector. To mobilize these investments three conditions would have to be met: some redistribution of income to the middle income groups (which would seem to be one of the purposes of proposed tax reforms), better opportunities for investments in industrial shares and better facilities for long-term financing of private industry. This is not a call for drastic institutional change but rather for the adjustment of policies and institutions to the measure of the task. The state sector: There are certain heavy (i.e. capital-intensive) industries where, for the time being, private operations might be premature. This applies specifically to ordinary steel, fertilizer feedstocks such as ammonia and phosphoric acid, basic petrochemicals and primary aluminum. A specific time frame should be set to make these basic industrial materials competitive with the Common - 76 - Market, at the end of which all protective barriers would be removed. Any remaining lack of competitiveness would have to be absorbed, as in other countries, by financial restructuring and downward wage adjustments. 2.128 Restructuring does not mean only neutrality (i.e. rationality) as between import substitution and export; it also calls for regrouping of forces within individual industries where the present structure is inadequate. Many items produced by the private sector are far too high in price such as passenger cars, truck tires, electric motors, special steel, copper wire, etc. Most countries have been faced with the task of hardening sheltered and inefficient industries to the rigors of world market competition; it is time for the Turkish Government to grasp that nettle. A gradual lowering of tariff barriers will act with slow pressure on the inefficient and monopolistic. By the same token it will identify industrial subsectors functioning below their potential but which could become competitive internationally through concerted action between the Government and the industry concerned. 2.129 In terms of administration of state enterprise, the following reforms are long overdue: - a change in the system of management. The aims should be autonomy, responsibility for results and pay for management and qualified staff equal to the highest scale in the private sector. Ideally there should be no privileged access to funds: the long-term goal should be for these giant enterprises whose needs exceed the absorptive power of the domestic capital market to establish their credit in the international market without Government guarantee. In the interim, their funding must be arranged within the overall framework of state planning. - a revaluation of the assets in line with their actual earning power in a competitive market. - a new deal in labor-management relations - a kind of social contract, whereby (a) the pay in these industries might initially bear a similar relationship to the income of other sectors of the economy as they do in other countries, and (b) future wage increases would be related in some meaningful way to differential increases in labor productivity in Turkey as compared with international competitors. 2.130 Outside the giant corporations in basic industries, continued state ownership may have mainly negative effects. As the same time, it must be recognized that the Turkish private sector lacks the resources to acquire large plants in e.g. the paper industry, production of trucks and tractors, or even in cement. The process of divesting will necessarily be a gradual one. Yet, there are many ways by which this process could be accelerated with great benefits to the economy. Foreign investors could play a key role in some industries in tripartite ownership with Turkish private investors and with the state. The latter would be a financial - 77 - rather than an entrepreneurial partner, a catalyst to help put together the necessary risk capital. In the paper industry, such a joint venture could become responsible for paper mill operations in one of the major forest regions, providing competition with SEKA and a measuring rod in terms of forest management, plant operations and marketing. In the truck and tractor industries it could serve as a vehicle for the transfer of technology, management know-how and international marketing outlets. It goes without saying that the hardest possible bargain should be struck with these foreign partners, since they, in their turn, could gain access to valuable natural resources (in the case of paper) or markets (in the case of trucks and tractors). There are a great number of international concerns in these industries; competition among them should result in an appropriate price for their participation. The nature of that counterpart would be a subject for negotiation; a financial participation by the Government may be a positive factor in some project, but a very negative factor in other cases. A general rule requiring foreign firms to enter into partnership with, say, SEKA or MKEK within their respective fields of industry would, in the Bank's view, greatly reduce the attractiveness of those fields to foreign investors. 2.131 In cement, textiles, leather, shoes, meat packing, milk processing, or even sugar, the procedure might be a different one, yet inspired by the same principles. As a common starting point there may no longer be a need for a giant holding for each one of these industries. Instead they would thrive under local sponsorship and initiative. Decentralization would in no way preclude the establishment of, say, meat institute, a cement institute or a textile institute, grouping all the enterprises in the field and dealing with matters such as technological development, quality control, or export promotion. Existing state enterprises in these fields could have a mandate to divide them into viable regional units and sell them to private interests, retaining some equity and/or advancing some of the purchase money as needed to close the deal. This may be an appropriate task for the State Investment Bank. 2.132 The Bank was told that the Government wants to give state enterprises greater freedom in pricing; to this end, the legal definition of basic commodities has been changed. Nevertheless, prices of many commodities are still under Government's influence: coal, electric power, aluminum, ferro-alloys, and fertilizers. Cement prices are in essence, still controlled, which seriously discourages expansion in the private sector of the industry. In the Bank's view there is not sufficient reason for controlling the prices of these industrial and agricultural raw materials. In principle, imports should be free since the increased production made possible by the availability of these basic inputs could only strengthen the economy and would normally take precedence over imports of investment goods. With free imports, there would be no need for price control. Textiles represents a special case since these are consumer goods. Sumerbank maintains that its prices of textiles are lower than in the private sector, i.e. lower than the market could bear. This assertion - 78 - is difficult to reconcile with Sumerbank's loss in market shares in recent years. In connection with the proposed tariff reform, it should be possible to replace import restrictions on textiles by a slowly declining rate of tariff protection such as was, in fact, instituted at the time of Turkey's adherence to the Common Market. - 79 - CHAPTER 3 EXPORT INDUSTRIES A. Introduction 3.1 Turkey for some time is likely to face a considerable foreign exchange constraint. Even if the country had so desired, the prospects of continuing along the previous path of capital-intensive import substitution would be bleak. This would put a strain on a balance of payments, already heavily weighted with equipment and oil imports, and would worsen unemployment since it would create few new jobs. The other path, the one of purposeful development of Turkish exports, rests on a far more solid theoretical foundation. The present Government has already taken several important steps along that road. Exports will not only permit fuller use of capacity and allow reductions in unit costs through the exploitation of economies of scale, but also provide stimulus for technological change through exposure to foreign competition. 3.2 The private sector has greater flexibility which would be an advantage, to increase export production where it already dominates. There is considerable potential for expansion in industries which would exploit Turkey's comparative advantage, such as processed food, textiles and clothing, leather, shoes and other leather products, furniture and wood products, light engineering products, industrial equipment, etc. All these industries have certain things in common. They are typically non-process industries. They only require small and medium scales of plants and can thus evolve from existing establishments. They generally have a low capital intensity, hence are rich in employment generation. Many of them are complementary to large industries, involving separable manufacturing operations such as craft or precision handwork, simple operations of assembly, mixing or finishing. Other may be based upon production of differentiated products for specialized markets. 3.3 Although there are some firms large enough to tackle the export market and who have achieved notable success (e.g., cotton textiles, apparel, glass, ceramics, leather jackets, etc.), most private units are of small and medium scale. In many cases, they are not equipped to handle large orders nor to meet minimum standards of quality. Many are hampered by inadequate specialization, outdated equipment, or lack of access to vital accessories, parts, chemicals, market services, etc., and their export competitiveness may be partially undermined by the high prices for basic materials supplied by the public sector (steel, pulp, aluminum, petrochemicals, etc.). 3.4 In addition to all the above constraints, the ability of the private sector to undertake new investments is impaired by a serious lack of financial resources. - 80 - 3.5 The economic and political environment in the last few years, has financially weakened the private sector and shaken its confidence. The country's economic vicissitudes have bled white many individual enterprises as well as the major long-term private sector financing institute. 3.6 High inflation coupled with disastrously low capacity utilization has eroded the internal generation of funds, and many firms are now under-capitalized. The large devaluations in the last two years have created serious problems for firms with external obligations denominated in foreign currency. At the same time it is difficult to find outside financing. Limits on the expansion of domestic credit under the IMF Standby Agreement to combat domestic inflation have created an acute shortage of local credit. In view of Turkey's limited creditworthiness the private sector has only limited access to international financial markets. Finally, a disproportionate share of bilateral and multilateral credits have been earmarked for large projects in the public sector. B. Potential Export Industries 3.7 Turkey has the potential to increase exports based on agro-industries due to its longer term comparative advantage in areas of livestock, food production and forestry. With the exception of forestry, the sector is predominantly private owned. Fixed investment in food processing has declined by over 60% in the last two years. The agriculture sector generally suffers from low productivity for a number of reasons. Nevertheless, existing supplies of natural resources in most cases, are such that opportunities abound to exploit them without major support to production activities (livestock, forestry, some fruits and vegetables). In other fields such as dairy, export competitiveness as well as sufficiency of supply hinges on raising farm productivity levels through better husbandry and improved varieties. 3.8 Turkey's livestock population is amongst the highest in Europe and the Middle East. Trade in livestock and livestock products is limited; exports, mainly live sheep and cattle for slaughter, and mohair, have averaged only about $35 million a year in the seventies. There are, however, substantial unreported exports to Iran and Syria. Production of livestock products at 2.8 percent per year during 1970-78 has lagged behind overall growth in agriculture. This growth reflects increase in the number of herd, rather than increases in productivity. Meat production, except poultry, has not significantly increased since 1970, while that of milk grew barely in line with population growth. Livestock production throughout Turkey is still largely a traditional undertaking with limited modernizing influences. As a result, weaning and takeoff rates are low. Consequently, output levels of beef, sheep and goat and milk are, respectively, 1/8th, 1/6th, and 1/8th the level in more advanced meat industries and dairy countries. The sector currently operates at 15 percent of its potential productivity. The related processing industries are also underdeveloped; lack of adequate livestock products and milk processing and marketing facilities has been a key constraint on the overall balanced development of the sub-sector. However, immediate export - 81 - opportunities can be derived from the more effective utilization of existing resources; e.g. production of animal by-products from slaughterhouse wastes now converted mainly to low value animal feed, and integrated meat processing, including feedlots, slaughterhouses and meat and by-products processing, to upgrade low value livestock before conversion into high value products (meat, hides and skins, by-products). 3.9 About one-third of Turkey's agricultural exports originate from the fruit and vegetable sub-sector. About 85 percent of these exports consist of dried fruits and vegetables (principally dried fruits, chick peas, broad beans and lentiles), with the balance consisting mostly of fresh product. More recently, export of tomato paste has also been developed. Turkey has established a modest position in Eastern European and Middle Eastern markets, and a still weak one with Western Europe where Turkey supplies only about 1 percent of the EEC's annual fruits and vegetables import requirements. Turkey could further exploit these markets to her advantage. Annual exports fluctuate from year to year depending on availability of export quality produce. Limited supplies, deficient varieities, poor quality of production, lack of coordinated export marketing policies and increasing domestic demand (per capita consumption was 127.2 kg for fruits and 149.3 kg for vegetables in 1975) has not provided a sound basis for exploiting Turkey's export opportunities. Increased production through- higher yields and lesser unit production costs; improved varietal selection and quality and, most importantly, packaging, systematic and aggresive marketing and more reliable delivery, are prerequisites to achieving substantially higher exports of fruits and vegetables. Exporters of fruits and vegetables since May 1980 are permitted to retain 10 percent of their foreign exchange earnings (as compared to 50 percent for manufacturing), in addition to interest rate rebates and other export incentives. This has alleviated some of the disparities between low returns in the export markets and more favorable returns domestically. However, the supply response has been slow. Partially, this is caused by mistrust of government initiative in the private sector, which is reinforced by the small incentive offered. But slow response is mostly due to the comparatively low prices offered in foreign markets for Turkish products, which in turn is influenced by variable quality, poor grading, improper packaging, damage in storage and transit and unreliable delivery. Until considerable attention is paid to these technical marketing problems, only marginal response to governmental promotional, and export incentive schemes can be expected. 3.10 Turkey possesses extensive forestry resources, about 20 million ha or one-fourth of the total area of the country. Ample forestry resources, combined with low-cost existing skills and low-cost local solid woods, could generate sizeable exports of furniture. However, wood-based industrial exports are below $8 million. The problems of wood-based industries, where fixed investments have declined drastically (by about 75 percent) in the last two years extend from the present forest exploitation techniques all the way to the deficiency of the furniture industry in design and accessories. Forests are managed and exploited by the General Directorate of Agriculture and Forests, an agency of the Ministry of Agriculture and Forestry. Tree felling in Turkey takes place in April-May - 82 - instead of January-February when the sap in trees is at its lowest levels, due to inadequacy of roads to areas of high forest and lack of logging ponds. Most of the lumber is improperly dried through manually controlled drying kilns and articles made thereof eventually develop chinks and cracks or tend to warp or split. In the chipboard sub-branch, difficulties have risen in the procurement of wood adhesive (urea-formaldehyde) due to the inability of the domestic production of urea and methanol to meet demand and from the inadequacy of imports. There are also difficulties in the procurement of plastic materials used in conjunction with wood in the manufacture of furniture. Besides the inferior quality of the inputs, the industry also suffers from problems in furniture design and poor quality of accessories. Consequently, furniture is inferior in quality and high in cost when compared to foreign competitors. These factors have not impeded the growth of the industry since to a great extent it is oriented to domestic market, but have precluded any significant development in exports. Some of the problems of the industry can be solved by appropriate investments in infrastructure and production methods (forest roads, modern drying kilns, procurement of machinery for producing modular furniture), others by transfer of technical and artistic know-how (rational exploitation of forests, industrial and artistic designing), and still others by import of good quality inputs (accessories like handle, hinge, lock, etc., plastic parts, varnish, wood adhesives, melamine sheets, sand-paper, etc.). 3.11 Despite the impressive resource base (practically the whole production value is generated domestically) and trend towards modern units, the leather processing industry, which is characterized by high labor-intensity, existing skills and traditions, has not realized its full potential due to structural and production problems, and poor quality of raw-materials. Inadequate feed, diseases, damage from thorns, faulty skinning and poor handling after slaughter, all contribute to off-quality hides and skins. Spoilage during transport and in storage also occurs because of inadquate control of ambient temperature and humidity, parasites and rodents. It is estimated that up to 65 percent of all hides and skins are damaged, often to the extent of being unusable to produce even low-quality leather. In addition, in the past the industry was hamstrung by severe restrictions on strategic imports like accessories, trimmings and buckles for footwear, dyes for leather finishing and tanning materials and modern machinery. Starting from a small (US44.6 million) base in 1970, hides and leather garment exports increased very rapidly in the first half of the seventies in response to the devaluation and other incentives reaching US$74 million in 1974. Exports have been declining every year thereafter to US$49 million in 1979, reflecting the loss in export competitiveness due to the overvaluation of the Lira, the decline in the export of raw and pickled skins diverted for local processing, the slowdown of economic activity in Western Europe (Germany takes about 80 percent of leather garment exports) and rising domestic demand. 3.12 While substantial potential for exports (e.g., leather garments, accessories', footwear) exists, the industry needs a comprehensive program of development, including substantial investments for restructuring. The - 83 - industry needs to drastically improve in the present system for the slaughter, preservation and grading of hides and kins. Besides the overriding problems arising from poor leather quality, the industry also suffers from delivery problems arising mostly from the large number of small inefficient producing units, and management and technical weaknesses. Accessories must also be upgraded and delivery sche'dules maintained. 3.13 The glass, ceramics and sanitaryware industries are well established in Turkey and present further opportunities for export-oriented development. Each industry is dominated by one company accounting for 00 percent of the market. Capacity utilization rates are generally higher due to greater reliance on domestic rather than imported inputs. While a higher production tax not adequately compensated for by the export tax rebate had adverse implications for planned capacity increases in the glass sector, high domestic demand and relatively higher profit margins in the home market have prevented large scale exports of sanitaryware. Exports can be facilitated through appropriate incentives and increase in production capacities. 3.14 Due to advantage in labor costs compared with European producers, Turkey has a great potential for expanding exports of garments and made-up articles even within existing market constraints. The garments/making-up segment of the textile industry is still largely undeveloped, and the productivity of this sector on the average is below European standards. For the export potential to be more fully realized there is a need to improve productivity and to upgrade the quality of output. Structural changes are not difficult to achieve in this segment of industry, because economical production scales vary widely and hover within relatively low levels of output that can be attained by medium size firms. Also capital requirements are relatively low due to the highly labor-intensive nature of the sector. A program to modernize certain segments of the sector -- especially dyeing, printing, and finishing -- to ensure the right quality of fabrics used in garments, and to extend technical assistance and training is underwayo and will contribute to the continuous expansion of garment exports. 3.15 Over the last 15-20 years the foundry industry in Turkey has achieved substantial progress and now produces castings of greater precision, complexity and quality for a variety of end-users. Ferrous-based grey iron castings constitute the bulk of castings produced in Turkey, followed by steel castings and malleable iron castings. Most foundries and certainly all small ones are of the jobbing type, i.e., supplying castings to other firms on the basis of contractual arrangements. Medium size foundries, all in the private sector, account for 75 percent of the grey iron casting capacity and almost all of steel capacity. The average size of large grey iron foundries is slightly over 5,000 tpy which compares favorably with grey iron foundries in the U.K. (4,250 tpy) and Germany (5,800 tpy). - 84 - 3.16 The foundry industry in Turkey has developed in response to government policies which encouraged import substitution in engineering industriesa. The industry thus caters principally to the needs of the domestic market. Direct casting exports are small, though there has been some indirect export of castings in the form of machinery. Major markets for castings so far have been the Middle East, although EEC holds considerable potential as a market for Turkish castings. There is considerable potential for exports of both rough and machined castings with the motor vehicle, machine tools, construction machinery, materials and handling equipment and heavy electrical machinery industries providing the potential sources of demand for export castings. Foreign markets could be penetrated through development of international sub-contracting linkages with European and Middle Eastern firms. 3.17 Slower growth in domestic demand and a somewhat higher capacity utilization rate in the future makes existing capacities adequate to increase exports without major new investments in the foundry industry. However, raw-material problems (poor quality of coke for use in cupola furnaces and shortage of synthetic moulding sand and electric power) need to be resolved. In addition, quality of casting needs to be systematically upgraded by adopting modern technology, particularly for precision casting and improved metallurgical control. At present modern technology is confined to a small percentage of foundries and only a few firms have formal licensing agreements with international firms. Similarly, while laboratory facilities are available, even the modern technology already available in Turkey is not widely diffused throughout the industry. This is partly due to the fact that major domestic users (automotive and machinery industries) have yet to set stringent quality standards and castings of uneven quality are accepted. 3.18 The engineering sector is relatively well established in Turkey and is perhaps the most inviting of all sub-sectors. It has export prospects in products like buses, bodies, castings, auto parts, appliances, agricultural machinery, etc., and its development should therefore command high priority. Considerable capacity for production of machinery for a variety of industrial uses exists, in both the public and the private sector, but it is not sufficiently coordinated. The engineering sector envelops numerous intermediate and final goods which can be produced efficiently; it is relatively less capital-intensive and highly skill-intensive and has strong backward and forward linkages. The development of this sub-sector has been constrained by an indecisive sector strategy, policy obstacles affecting the price of raw materials, and the relative attractiveness of sales to the highly lucrative protected home market. For example, a debate over whether diesel engines which are presently imported and assembled, should be produced in the public or the private sector, has held back rationalization of the industry for years. 3.19 Turkey presently exports on a modest scale, conductors and cables and distribution devices for electrical machines, agricultural tools and machines, metal, wood and plastic processing machinery, buses, brake linings, motorcycles, bicycles, filters and valves, sewing machines, ginning machines, hydraulic equipment, twist drills, etc. Some of the - 85 - common features of the sub-sector are: (i) technology employed is generally lower than that used in Western Europe with very limited application of specialist machines; (ii) little or no concentration on selective purchasing of manufacturing technology with many companies themselves fabricating all necessary equipment; (iii) little emphasis on product support facilities, for example, quality control, testing laboratories, etc.; (iv) most firms lack any coherent product development plans which is vital for competing effectively in international markets; (v) firms have little interest in competitive product comparisons. Turkish firms need technical assistance in areas of improving productivity, closer control of production and in improved stock control, in product diversification, etc., if they want to be successful in exporting. Private direct foreign investments can play an especially important role in the development and exploitation of the export potential in the engineering sector. Joint ventures will assure economic size plants and concentrate on products that can be produced efficiently in Turkey. Incentives could be provided to foreign investors on undertaking a commitment to export a certain proportion of production as is done in Brazil. Subcontracting arrangements may be an adequate possibility to obtain the necessary technological and marketing assistance to achieve a rapid export drive. 3.20 In addition to the above industries, export potential has also been identified in certain downstream chemicals (sodium silicate, paint and varnish, micronized minerals, etc.), porcelain products, carpets, minor minerals such as marble, etc. C. Financial Resources 3.21 Lack of an orderly access to financial resources, particularly for working capital and equity financing, is a major constraint at present as high inflati6n combined with a tight monetary policy, the low capacity utilization and fall-off in domestic demand has strained the financial structure of many companies. The Government's objective to reform the economy by strengthening the private sector and restructuring it to greater competitiveness through modernization, consolidation, increased capacity utilization and the promotion of new industries with long-term competitive advantage can only be achieved through the provision of stables sources of long-term funds. 3.22 Partly due to past interest rate policies and partly due to the underdeveloped state of money and capital markets, there has not only been a paucity of savings but funds have not always been directed towards the most productive opportunities. The size of the public sector deficit had also had a strong influence on the resources available to the private sector, as a larger deficit within the overall constraints on credit creation in recent years, could only be financed through the utilization of private savings. 3.23 Roughly half of total private fixed investment in the organized sector of industry is financed by intermediaries, including commercial banks. Another 40 percent of private industrial investment is financed out of internally generated funds; about 8 percent from bond issues, and the - 86 - remaining 2 percent through direct foreign financing. The two private sector development banks provided about 8 percent of the total fixed investment requirements of organized sector private manufactures during 1977-1978. The other sources of long-term industrial finance are the new and rapidly-growing State Industry and Labor Investment Bank (Desiyab), designed to mobilize inter alia the savings of migrant workers for investment in widely-owned companies mainly in less developed regions; the Halk Bank, a Government owned commercial bank, which provides a modest amount of term financing for investment in fixed assets by small scale industry and artisans and the Investment Finance Corporation, established in 1976, which participates in the equity of large industrial firms located in the less developed regions. Commercial banks provide an estimated one-third of total fixed investment requirements, mostly through short term loans which are periodically rolled over. 3.24 The private commercial banking sector is characterized by a high degree of concentration, with three banks accounting for 70 percent of the total assets and credits in this segment of the sector. Commercial banks focus heavily on short term lending and mainly cater to the needs of larger companies in which they have equity holdings. Private commercial banks control a large share of the equity of major companies, reflecting the promotion of such undertakings by controlling interests. In turn, the principal industrial concerns in Turkey are major shareholders of private banks, which attest to the close linkage between the financial and manufacturing sectors. This has also resulted in a tendency to evaluate the firm rather than the project for which financing is sought. Turkey has been described as a "bankers' heaven" with an inefficient, unsophisticated and unresponsive banking system locked into anachronistic traditions and operating on extremely high margins. 3.25 Until July 1, 1980 Government regulated interest rates both for deposit and lending, differentiating by activity and maturity, providing increasingly negative returns to savers due to the accelerating inflation. This led to disintermediation and diversion of investments to real estate and other non-financial intermediaries. The paucity of long term savings, combined with negative real interest rates, created an excess demand for credit and resulted in a severe shortage of funds. The interest rate regime was reformed on July 1, 1980 as the Government officially deregulated interest rates giving the banks the responsibility to fix interest rates on deposits and loans. Even when the interest rates were deregulated the banks were hesitant in raising the interest rates on loans and deposits. Interest rates were finally raised on both deposits and loans as some competition emerged both from within the banks and the higher yields offered on bonds. Consequently, for the first time in many years the cost of borrowing approximated the level of inflation. Higher deposit rates -- 50 percent on one year certificate of deposit -- not only increased bank deposits substantially, but the structure of deposits changed in favor of higher yielding term deposits. The liberalization of interest rates had the desired result of stimulating savings while injecting some reality and competition into an anachronistic banking system. - 87 - 3.26 The capital market in Turkey is not a significant source of long-term financing for industry. The stock market is almost non-existent, and is characterized by a weak institutional base, very small number of brokers/dealers, as well as a weak market structure with large Turkish corporations reluctant to go public. In addition, given the economic conditions and expectations of reduced dividends, stocks lost their appeal and new stocks issues virtually disappeared. New bond issues, on the other hand, increased dramatically from TL 4.5 billion in 1979 to TL 18.0 billion in 1980, as in the face of tight credit conditions corporations turned to bond issues which also was a cheaper source of funds compared to bank credits. While yields were below the rate of inflation, bond yields were substantially above the net returns offered by bank deposit rates as security houses added various sweeteners and high discounts. Bonds, however, are relatively short-term in nature in Turkey since investors purchase bonds with a buy-back guarantee extending only up to two years. 3.27 The Government plans to shortly enact a new bill on the regulation and control of capital market. A legal framework for the issue and trading of shares and bonds will be established along with regulation of financial intermediaries. Commercial banks will also be permitted to establish stock investment funds for the purpose of operating a stock portfolio. Under the new tax reform package, the government has abolished the income tax withholding, which discriminated against distribution of profits; distribution of profits will no longer be subject to double taxation. The new corporate income tax law now provides for the investment allowance to be based on total funds invested rather than the equity portion as was the case before. However, additional measures are still urgently required. There is a need to reform tax and commercial codes and to improve the accounting and auditing profession. Most industrial firms are now undercapitalized as a result of inflation and outmoded commercial and tax codes which prevent the maintenance of the value of assets, and thus lead to overstatement of taxable profits. Similarly, there is a need.to eliminate taxes and fees on banking transactions which along with compensating balances raise the effective cost of borrowing before rebates to an estimated 60 percent. This will permit commercial banks to raise lending rates and to increase their income base without at the same time pushing up the effective cost of borrowing. Additional incentives to banks to undertake maturity transformation may take the form of an increase in the relatively low rate of return that commercial banks receive on required reserves, especially inasmuch as the reserve requirements are very high by international standards; long-term bills could be made eligible for Central Bank rediscounting and/or tax on interest income on long-term loans could be reduced. Capital market development should result in a significant increase in private savings for productive investment opportunities. A wider portfolio choice in the financial markets should enable capital flowing through it to be priced rationally, thereby improving the efficiency of resource allocation. 3.28 Private sector's foreign exchange needs for fixed investment are met in part by development banks and in part by the Government under the various foreign exchange allocation schemes. Under the prevailing conditions in Turkey, private sector's access to direct foreign sources is limited, and private direct foreign investments have never been actively encouraged in the past. The development banks, due to their limited resources, have provided about 15 percent of the direct foreign exchange needs of the private sector. The Central Bank, which determines the amount of official foreign exchange available for allocation to imports on the basis of its expected net resource position, controls final allocations of foreign exchange.' In practice, given the limited amount of foreign exchange available and the need to import essential goods (oil and fertilizers) and to meet the requirements of state industrial enterprises, the private sector receives a disproportionately small share of the official pool of foreign exchange. A conscious effort should be made to provide the private sector with equal access to imported equipment and finance as compared with the public sector. - 89 - CHAPTER 4 ENERGY A. Introduction 4.1 Modernization and industrialization in recent years have been directly linked to the widespread use of increasingly scarce and costly imported petroleum. Oil imports which were only $200 million in 1970, jumped up to $3.6 billion in 1980. In fact, one of the most important causes of the recent adverse balance of payments has been the resource drain caused by oil imports. The growth in these imports since 1970 has been among the highest in the world, as the share of imports in total energy supply (measured in tons oil equivalent) rose from 39 percent of total supplies in 1973 to 46 percent in 1978. The percentage declined to 41 percent in 1979 as a result of the severe curbs on oil imports. 4.2 The increasing dependence on imported oil, coupled with its rising price, has had a severe impact on the balance of payments as noted in Volume I. Oil imports as a percentage of merchandise exports showed little change during 1960's rising from 16 percent in 1960 to 17 percent in 1972. By 1977 the figure had risen to 84 percent, which was the highest ratio for any country in the world. Since 1977, however, the situation has got even worse, and estimates for 1980 indicate that the oil import bill was 24 percent above the value of merchandise exports (US$3.6 billion against US$2.9 billion). The Ministry of Energy and Natural Resources' (MENR) preliminary projections prepared earlier in 1981 implied a continuing deterioration, showing imports in nominal terms more than doubling by 1985 and nearly doubling again by 1990 which would increase the share of imports in total energy supplies to 48 percent in 1985 and 58 percent in 1990. The MENR projections are now being revised. They were based on relatively high GDP growth rate assumptions (about 8 percent per annum to 1990) which are nearly double those now projected by the Government and the Bank through 1985 and are not sustainable according to the macroeconomic analysis presented in Volume I. 1/ 4.3 The resulting "energy crisis" has led the Government to emphasize an energy policy based on the twin principles of energy resource development and the extent to which demand can be "managed" without penalizing economic growth. Practice, however, has fallen short of precept in the application of these principles. The slow development of resources, and the reasons for it, as well as problems in relation to conservation will be discussed below. 1/ The latest estimates presented to the Bank in September 1981 show oil consumption forecast to increase by 7 million tpy by 1990, reaching a total of about 24-25 mt/year. - 90 - B. Indigenous Resources 4.4 Turkey is relatively well-endowed with conventional energy resources, except for oil and gas, as summarized in Table 4.1 below. 4.5 The most important indigenous sources are hydropower and lignite. Only about 10 percent of the hydropower potential has been developed, although this is projected by TEK to rise to 32 percent by 1990 with the completion of plants at present under construction or planned. Lignite production in 1979 (the latest year for which data were available at the time of the Mission) was 14.5 million tons, or less than 0.5 percent of the proved reserves. Current projections of MENR show lignite production rising to 90-100 million tons by 1990, but these estimates are also being reevaluated, on the basis of the latest information. 4.6 The proved reserves of petroleum, on the other hand, would suffice for barely one year's consumption, although there are hopes they could be tripled if the enhanced recovery technology being tested in the Bati Raman project is successful. The known natural gas occurrences are also very limited. The uranium reserves could make only a small contribution to future energy supplies, since they could do little more than supply a single nuclear station of about 700 MW over its lifetime. Table 4.1; ENERGY RESERVES Petroleum Equivalent Energy Source Original Units (Million Tons) Hydropower 100,000 GWh p.a. (..) 240 /a (..) Lignite 4,140 m tons (7,343) 902 (1,610) Hard Coal 186 m tons (1,366) 112 (820) Petroleum 17 m tons (..) 17 (..) Bituminous Shale 340 m tons (2,000) 41 (240) Asphaltite 0.55 m tons (53) 0.2 (22) Uranium 2,300 tons U308 (4,600) 11 /a (22) Thorium 380,000 tons Th02 (380,000) .. (..) Note; Figures are of proven reserves (total resources, including probable and possible resources, are shown in parentheses). /a Present values of electricity output at 10 percent discount rate, converted to tons petroleum equivalent on basis of the amount of fossil fuel that would be required to generate the same quantity of electricity in new lignite stations. Sourcei MENR, TEK, TKI, TPAO - 91 - 4.7 Of the other energy sources shown in Table 4.1, the thorium reserves, though large, are of potential long-term interest only; their use would depend on the development of commercial nuclear reactors designed to operate on thorium fuel. The reserves of bituminous shale (a low grade form of oil shale) are also very large, but the use of this material at present is limited to a single power station (Seyitomer), where it is blended with lignite; additional research and development will be necessary before its use can be extended. 4.8 Turkey also has some geothermal energy, especially in western and central Anatolia, with a potential tentatively estimated at 4,500 MW. Pilot projects to test its use in electricity generation and heat supply include a 0.5 MW generating unit already in operation and a 15 MW station under construction. There is also some potential for small hydro schemes (up to 20 MW), which a very preliminary estimate puts at about 2000 MW, including a large number of sites suitable for mini-hydro schemes of 50-1000 kW. 4.9 Much more important are renewable energy resources in the form of fuelwood and agricultural wastes. Annual consumption of fuelwood is estimated at 15.5 million tons (12 percent of total primary energy consumption and most of the consumption in rural areas), and that of agricultural wastes at about 13 million tons nearly all in the form of animal dung. C. Sectoral Supply and Demand Trends 4.10 Production. Real investments in energy production have increased two and a half times since 1973, yet production of indigenous resources has not proceeded well, it increased at only about 2.5 percent per annum between 1970-1980. The production of oil and coal has actually declined, whereas that of fuelwood and biomass has increased very slowly. Output of lignite has doubled from a very low base and hydroelectric generation has more than tripled. 4.11 The outlook for the decade of the 1980s, however, is considerably more promising. The Government is attacking the problem more effectively and, if successful, by 1990 the current programs could achieve a dramatic increase in the production of lignite (13 to 15 percent growth per.annum) and hydropower (8 to 11 percent growth per annum) while that of oil could also increase substantially. Programs for fuelwood and biomass development, however, are still at an early stage. - 92 - 4.12 Overall energy output might well be raised by 7 to 9 percent per annum over the decade, raising the current level of output of about 19 million tons oil equivalent to the range of 35 to 45 mtoe (Table 4.2). Additional details regarding the specific programs are discussed below in paras. 4.45-4.77. Table 4.2i PRIMARY ENERGY PRODUCTION, 1970-1990 (Million tons oil equivalent) 1970 1980 Projected /a 1970-1980 Growth per 1990 annum (%) 1980-1990 Oil 3.1 2.3 3.0- 6.0 -2.9 2.7-10.1 Coal 2.7 2.3 3.0- 4.0 -0.8 2.7- 5.7 Lignite 1.7 4.4 15.0-17.5 10.0 13.1-14.8 Hydro 0.8 2.9 6.0- 8.5 13.7 7.5-11.4 Fuelwood and biomass 6.7 6.6 8.0- 9.0 - 1.9- 3.1 Total Primary Energy 15.0 18.5 35.0-45.0 2.1 6.6- 9.3 /a Projected on the basis of potential results from investment programs discussed in this chapter. Source; Bank estimates adjusted after discussions with SPO during September 1981 Review Mission. 4.13 Consumption. Energy consumption has grown rapidly since 1960; "commercial" energy consumption grew at an annual average rate of 9.8 percent between 1963 and 1977 while GDP grew at 6.5 percent. This ratio of roughly 1.5 between the growth of commercial energy consumption and the growth of GDP has been sustained for a long period. Most Government authorities have projected that higher energy costs will depress the ratio to about 1.2 in the future, but the Bank's view is that such a reduction may prove to be difficult. The Bank's projections presented below (Tables 4.3 and 4.4) are consistent with this view. They show annual growth in energy consumption during 1980-1990 ranging between 6 and 8 percent, associated with an average GDP growth around 5 - 5.5 percent. The projections are quite consistent with similar work being carried out in SPO. In the next decade, in general these energy consumption/GDP relationships are reasonable in comparison with expected achievements of similarly positioned countries. - 93 - Table 4.3: ENERGY CONSUMPTION 1970-1990 (Million tons oil equivalent) Average Annual Growth (percent) 1970 1980 1990 1970-1980 1980-1990 Oil 7.4 15.3 22.0-23.8 7.6 3.7- 4.5 Coal 2.7 2.5 6.5- 8.4 0.7 10.0-13.9 Lignite 1.7 4.4 14.5-17.5 10.0 12.7-19.8 Hydro 0.8 2.9 6.5- 8.5 13.7 8.4-11.4 Fuelwood and Biomass 7.0 6.6 8.5- 9.0 -- 2.6- 3.2 Total 19.6 31.7 58.0-68.0 4.9 6.2- 7.9 Memo Items Oil Imports 13.2 17.8 Coal Imports 0.5 4.3 Source: Bank Estimates Table 4.4: PETROLEUM, COAL AND LIGNITE CONSUMPTION BY MAJOR SECTORS 1970-1990 (Million tons oil equivalent) Petroleum Coal and Lignite 1970 1980 1990 1970 1980 1990 Agriculture. 0.5 0.9 1.0 0.1 0.1 0.2 - 0.3 Transport 2.6 5.5 9.3 0.4 0.1 0.3 - 0.3 Electric Energy 0.8 1.6 1.4 0.8 1.4 9.0 - 7.5 Industry 1.8 4.6 8.1 1.8 4.0 7.0 - 11.5 Domestic 1.1 2.8 4.0 1.1 1.3 6.0 - 7.5 Total 6.8 15.4 23.8 4.2 6.9 21.5 - 26.7 Source; Bank Estimates 4.14 Petroleum products account for about 95 percent of commercial energy consumption in the transport sector and undoubtedly has accounted for a significant part of the increase of petroleum use during the decade of the 1970's. This reflects the increasing dominance of road transport in both passenger and freight traffic. The number of passenger/km, for example, carried by the road system almost doubled between 1975 and 1979, while loads carried by other modes remained stable or decreased. - 94 - 4.15 Petroleum consumption in the industrial sector has also been growing rapidly. In 1979 petroleum supplied half of the commercial energy consumed in industry. In addition, the industrial sector accounts for about 73 percent of total electricity sales, and hence for an additional 1.4 million tons of fuel and diesel oil. A handful of industries, mostly public, account for a very substantial share of electricity sales; they include aluminum, pulp and paper, fertilizers, petrochemicals, cement and metalworks. 4.16 Household consumption of petroleum products (kerosene, LPG and fuel-oil) is still relatively modest but has increased very quickly during the last decade, from 1.1 to 2.8 million tons. Consumption of lignite, an important factor in the domestic market, grew more slowly during this period although this may have resulted from shortages. If current trends continue, household consumption by 1990 could increase to 4 mtoe of petroleum products and 7.5 mtoe of coal and lignite. 4.17 Future Outlook. The rough and preliminary consumption estimate presented in this report of 58-68 mtoe in 1990 can be compared to an expected potential energy output level of 35-45 mtoe in that year. To restore reasonable economic growth would require filling this gap or reducing the level of consumption per unit of GDP which might prove to be very difficult. This illustrates the seriousness of the energy problem facing Turkey and the size of the task to be met by the investment program. 4.18 Critical production and consumption problems involving each energy resource need more careful examination. If interfuel substitution fails then coal and oil imports could easily move upward towards 24-25 million tons. One of the keys to minimizing imports is the development of indigenous resources and interfuel substitution. Maximizing production of lignite, hydropower and fuelwood could contribute an additional 6-8 mtoe much of which would be used to substitute for oil imports currently used for electricity generation or consumed by the industrial and domestic sectors. 4.19 Another key to the problem is a broadly conceived program of demand management, retrofitting and conservation which could reduce consumption levels of commercial energy by 5 to 6 mtoe, 3 million tons of which might be of oil. This hopefully could be done without affecting GDP growth. Estimates based on Bank sector and project work in other countries indicate that savings of petroleum products consumption of about 0.8 mtoe in transport, 0.4 mtoe in power, 1.5 mtoe in industry and 0.8 mtoe in the domestic sector might be achieved by 1990. Similar savings might be achieved in lignite consumption, but less experience from other countries is available in this regard. 4.20 These would, of course, be massive achievements. The Bank doubts that all this will be accomplished in one decade. But, to continue present patterns, with current levels of inefficiency in transport and industry and with investment dominated by long gestation projects, could - 95 - result in an import burden well over $7 billion by 1990 (at 1980 prices), which would be difficult to support. The energy program to meet these circumstances, should stress improved implementation of hydro and lignite projects, substantial conservation and retrofitting, increased emphasis on renewable resources, improved lignite exploration and systematic coordination of energy investments with investment programs in other sectors. Coal and oil imports might reach 15-17 million tons at a cost of $4.5 - 5.5 billion, which would still be a substantial achievement. In any case, the savings resulting from reducing oil imports would more than justify the entire cost of the investment program in energy development. 4.21 The outlook for energy saving in the next decade is thus difficult at best. In the view of the Bank, Turkey has no choice but to mount a large program both for the production and conservation of energy merely to reverse the growth trend of the 1970s and maintain the oil import burden at sustainable levels. D. Subsectoral Trends 4.22 There are too many inconsistencies in the available data, particularly for coal and lignite, to be precise about the various components in the overall energy balance. The trends in the individual subsectors for which data are available, are summarized in the paragraphs below. 4.23 Electric Power. Electricity consumption accelerated over the period 1965-1976, with the annual rate of growth rising from 11.5 percent to 19.2 percent. Consumption almost quadrupled from 4,237 to 16,079 GWh. Subsequently there was a decline in growth rate to 4.9 percent .in 1980, with consumption at about 21,000 GWh. Data provided by TEK show that industry maintained its 75 percent of electricity consumption even during 1977-1980, when the economy was deteriorating and industrial output declining (which suggests the need for a more detailed review). 4.24 To meet the growth of demand, generating capacity nearly quadrupled between 1965 and 1980, rising from 1,490 MW to 5,284 MW. Up to 1973 thermal power accounted for the bulk of the additional capacity installed; the share of hydropower fell from 34 to 31 percent. This trend was subsequently reversed and the share of hydropower in generation, after declining from 44 percent in 1965 to 21 percent in 1973, rose to 48 percent by 1980. 4.25 Most of the thermal power stations installed in the period 1965-1975 were oil-fired. Apart from some gas turbines installed as an emergency measure to meet demand, they were all ordered and installed before the oil price increases of 1973. Since 1975 all the thermal stations added to the system have been lignite-fired. - 96 - 4.26 There have been growing shortfalls of supply below requirements in the interconnected power system since 1971; these rose 'from 22 GWh (about 2 percent of requirements) in 1971 to 2,175 GWh (8 percent of requirements) in 1980. The shortages would have been worse but for electricity imports (via interconnections with Bulgaria and USSR) which rose from 1975 onwards, and by 1980 accounted for over 5 percent of total supplies. The reasons for the shortages require further investigation; they include the increased proportion of hydropower capacity in the system, with firm annual output significantly below average output during this period, and plant breakdowns (particularly at thermal power stations) caused by lack of maintenance and spare parts. 4.27 The load forecast prepared by TEK for the period 1981-1990 shows consumption more than doubling by 1985 to nearly 48,000 GWh and rising to. over 83,000 GWh in 1990. This implies an average growth rate over the period of about 14 percent per annum, which would sharply reverse the downward trend of the past few years, and would also be well above the average rate of about 11 percent per annum achieved over the past 15 years. To meet this projected growth of demand, TEK's development program would provide for the installation of nearly 8,000 MW of additional capacity by 1985 and a further 10,000 MW by 1990. The total additional capacity of 18,000 MW would be divided fairly evenly between hydro and thermal capacity. These projections, although based on very optimistic assumptions about the growth of the economy during the 1980s also includes electricity shortages and building some reasonable reserve capacity. There is still an urgent need to revise- the projections to be consistent with the GDP growth now expected by the Government. 4.28 Power shortages in any case are likely to continue in the short-term, although their scale will depend on how demand actually develops. According to the TEK forecast, the shortfall in 1981 would be about 16 percent of requirements, assuming an average hydrological year, but 25 percent in the event of a dry year. These very serious shortages should be reduced to relatively small amounts by 1983 (about 1 percent) in the event of a dry year. Thereafter, on the TEK projections of demand and new capacity additions, firm generation capability would be adequate to meet demand. It is also assumed that additional capacity would result as spares are provided to repair plants not operating at present. The estimate of capacity installed assumes that ongoing projects will be completed according to the schedules presented by TEK. Because some of these projects are facing delays in implementation, there may, however, be longer shortages between now and 1985 than expected. On the other hand, there is the factor of the rate of growth of demand which may be slower than expected by TEK. 4.29 Coal and Lignite. Data provided for 1970-1979 show little change in hard coal consumption (from 4.7 to 4.9 million tons), while lignite consumption rose from 5.8 to 14.2 million tons (10.5 percent per annum). - 97 - All the lignite consumed was domestically produced, but hard coal production failed to keep pace with demand, declining from 4.6 million tons in 1970 to 4.1 m tons in 1979, when about 0.5 million tons of hard coal had to be imported. 1/ Some 68 percent of hard coal is consumed by industry (essentially for producing steel), and 19 percent by thermal power plants, with households and transportation accounting for the balance. In the case of lignite households are the biggest consuming sector, with 40 percent of total consumption in 1979, followed by thermal power plants (39 percent), industry (20 percent) and transportation (1 percent). Lignite has been extensively rationed since the winter of 1979, indicating that its share of demand would even be higher, but no estimates of the shortfall are available. 4.30 According to the latest government projections, hard coal demand would rise to over 15 million tons by 1990, representing a growth rate of 12 percent per annum, with most of the increase attributable to the steel industry. The Bank's projection is slightly below that level. The government projection for lignite in 1990 is 90 million tons, or over six times the 1979 level. Most of the increase is attributable to projected thermal power plant requirements (69 percent of the 1990 total), followed by industry (18 percent) and households (13 percent). These projections would imply a substantial decline in the share of household consumption of lignite; projections are probably on the high side because of implementation problems and urgently need to be reexamined. They should also be made consistent with the maximum GDP growth average of 4.5 percent p.a. up to the mid eighties. The Bank current review indicates that lignite production may turn out to be only 60 percent as much as estimated for 1990. Hard coal production is projected to rise to only 5.2 million tons by 1990, which implies a growing gap between domestic production and demand. TKI places a high priority on the rehabilitation and expansion of its hard coal operations, but despite many past studies, there is presently no specific plans to this end. Such plans, including reserve delineation, mine planning and design, and financial, organizational and managerial restructuring is a prerequisite to any investment and reconstruction. The gap would have to be met by imports, which by 1990 according to various government estimates would amount to 10-15 million tons. The projection for lignite production also implies a growing gap between production and demand, rising from about 1 million tons in 1981 to about 10 million tons 10 1990. Because of slow implementation of projects a much larger gap could result. 1/ This is less than the excess of consumption over production (800,000 tons). The difference is not explained, but may have come from stocks. - 98 - 4.31 Like the power projections, these coal and lignite demand projections need reexamination. In this case they are based on a projected GDP growth rate of 7 percent per annum over the period, which does not appear feasible under the current circumstances. They will also need to be reconsidered in the context of new electric power forecasts and more up to date estimates of the development of power intensive industrial projects. Household demand could conceivably be much higher than currently projected and also needs a thorough reevaluation partly because it has been rationed in recent years and also because of the potential for increased inter-fuel substitution. 4.32 Petroleum. Consumption of crude oil and petroleum products more than doubled between 1970 and 1977, rising from 7.4 to 16.9 million tons (12.6 percent per annum), but subsequently declined by 15 percent to 14.3 million tons in 1979. The decline reflected shortages of foreign exchange and the country's inability to pay for imports. Direct imports of products have accounted for a growing share of consumption, rising from 8 percent of the total in 1970 to 25 percent in 1979. Since domestic refining capacity, currently 16.2 million ton per year, has remained above consumption of petroleum products since 1972, it is not clear why more crude oil was not imported instead of petroleum products. This question needs further examination. 4.33 The percentage share of the main products in total consumption has remained generally stable over the period, with gasoline accounting for 13 percent, diesel oil 26 percent and fuel oil 44 percent. The only change was in the relative shares of LPG and kerosene, both used mainly by households, with LPG rising from 3 percent to 5 percent which was offset by kerosene declining from 6 percent to 3 percent. Transportation accounts for over 70 percent of diesel oil consumption. Industry (68 percent) and electric power (18 percent) consume most of the fuel oil. Taking these five main products together, the share of transportation showed relatively little change over the period (38 percent in 1970, 36 percent in 1979), and that of electric power remained unchanged at around 11 percent, but industry's share rose from 26 percent to 34 percent and the share of households declined from 17 percent to 13 percent. 4.34 Turkish crude oil production reached a peak of 3.6 million tons in 1969 and has since declined to 2.3 million tons (1980). This trend is associated with a decline in exploration efforts by TPAO which has taken over this task. A growing proportion of the crude oil required for refining has had to be met by imports, which rose from 3.8 million tons in 1970 to 10.4 million tons in 1980 (after peaking at 11.7 million tons in 1977). The net result of this increase, plus the increase in imports of petroleum products, is that imports now account for 85 percent of petroleum requirements, compared with only 55 percent in 1970. - 99 - 4.35 MENR forecasts of demand available at the time of the Mission show petroleum consumption rising at an annual rate of 8.8 percent during the 1980's reaching 36.2 million tons in 1990 at a cost of $12 billion (in 1980 prices). This forecast was based on a high GDP growth rate of 8.2 percent per annum. Since then new government projections appear to have considered the impact on demand of slower growth and factors such as changes in the prices of different energy sources, energy conservation, inter-fuel substitution and technological changes in energy-intensive industries and have revised consumption levels down to 24-25 mty for 1990. As with electricity and coal/lignite, the latest government projections are in general close to the the Bank's view. The revisions would indicate doubt regarding the refinery expansion program, which is now scheduled to add 16 million tons of capacity by 1984. 4.36 Fuelwood. About 26 percent of the country's area is classified as forest land. The forests are broadly divided into high forests, which produce industrial timber and fuelwood, principally as a byproduct, and low or coppice forests in which the stems have originated as shoots from the stumps of cut trees that produce fuelwood and small proportions of mine timber. Forest productivity is well below potential because of the high proportions of inaccessible, overmature and, in some cases, degraded, nonproductive forests. The Bank is assisting two projects designed to increase productivity by various measures including reforestation of nonproductive areas. 4.37 Although a large proportion of non-productive forest (11.94 million ha.) may ultimately be required for conversion to high forest for industrial purposes, there should also be adequate land for energy plantations. Table 4.5; FOREST AREAS BY TYPE AND PRODUCTIVITY Percent Type & Productivity Area of Total (million ha) High Forest Productive /a 6.16 30.57 Nonproductive /a 4.77 23.65 Total High Forest 10.93 54.22 Coppice Forest Productive /a 2.07 10.25 Nonproductive /a 7.17 35.53 Total Coppice Forest 9.24 45.78 Total Forest Land 20.17 100.00 /a Productive areas have a tree density of 11-100 percent; nonproductive areas have 0-10 percent. Sources MAF - 100 - 4.38 More than half of the wood presently produced from Turkish forests is used as fuel, accounting for some 12 percent of primary energy. It is mostly used for ,domestic heating and cooking. It is virtually the sole source of domestic energy for approximately 35 percent of the rural population (8 million people) which are among the lowest income groups in the country. 4.39 The vast majority of fuelwood comes from state forests, either directly as wood cut for fuel or indirectly from sawmill wastes. The latest estimates of fuelwood supply and demand by MAF are summarized in Table 4.6. Table 4.6; ANNUAL FUELWOOD PRODUCTION AND ESTIMATED CONSUMPTION, 1950-2000 Estimated Percent Year Production Consumption Change (million tons) /a (million tons) 1950 3.67 9.84 +24 1960 6.12 13.00 +24 1970 6.91 12.82 - 1 1980 8.20 15.77 +19 1990 - 18.79 +16 2000 21.79 +14 /a Conversion factors; 1.0 ton 2.5 steres = 1.875 m3. Actual consumption of fuelwood is estimated to be approximately twice the official production from State forests, as a result of thefts of timber from forest areas. Source: MAF. 4.40 The demand for fuelwood is considerably higher than existing consumption. In a number of areas of Turkey (notably on the Anatolian Plateau), domestic energy is met, in part, by the burning of agricultural wastes (animal dung, nutshells and cutting or husks of vines, sunflowers, cotton, olives and corn) to the detriment of soil fertility and agricultural productivity. The MENR estimates that approximately 12.6 million tons of agricultural wastes are burned annually of which 11.8 million tons is animal dung. 4.41 According to current projections of fuelwood consumption through the year 2000, approximately 11 million ha. of plantations would need to be established. Thinnings from existing reforestation programs will make an - 101 - increasing contribution to fuelwood requirements, and may somewhat reduce this requirement. In any case, the calculated target is probably beyond the existing capacity of the Forestry Directorate. MAF's present proposal is to establish 1 million ha. of fuelwood plantations. The success of this task, however, would depend on the reorganization of the Forestry Directorate. 4.42 The quantities of animal dung presently used as fuel will be replaced, according to current planning, by fuelwood plantations in treeless areas. Assuming 4 m3/year/ha are needed to meet present demands in the Anatolian Plateau, such a target would almost certainly be unattainable given existing technical constraints; a target in the region of 250,000 ha. over the next two decades is considered by the Bank to be more realistic. 1/ 4.43 The potential for the fuelwood/forest energy program in Turkey is obviously very large. Pilot schemes should be started in existing forest land of the coastal belt. The region presents no important environmental constraint to reforestation and there is no shortage of land for the planting. In addition there is undoubtedly an urgent need for afforestation on the Anatolian Plateau, but existing research would need to be expanded for some years before a viable project could be prepared. A research component of this type might be included in a pilot scheme for a national fuelwood/forest energy project. The main obstacle to achieving these objectives is environmental, due to the low precipitation. Soils are frequently eroded, relatively infertile and, in the Southeast, comprise very heavy clays. 4.44 Other Energy Sources. These comprise asphaltite, bituminous shale, fuelwood, agricultural wastes, geothermal energy, solar energy and radioactive minerals. The last two are not expected to contribute significantly to energy consumption over the period to 1990 (the nuclear fuel for the first nuclear power station according to preliminary plans would be imported, at least for a few years). The geothermal energy contribution from a 15-MW station under construction is included in the projections for the electric power subsector. With regard to the other sources, the situation may be briefly summarized as follows; (a) Asphaltite. Production by a private mine began in 1966, and reached a peak of 567,000 tons in 1978. The mine was taken over by TKI in 1979, and production was temporarily interrrupted, declining to 232,000 tons. MTA projected annual output of 600,000 tons in 1980, but it is not known whether this target was achieved. According to MENR, TKI has plans to increase production to 1.5 million tons, but there does not appear to be any specific provision for this in the approved 1981 investment program. Consumption is exclusively by nearby households. 1/ According to the Indian National Council for Applied Economic Research, the calorific value of 2.33 kg of dung is equivalent to 1 kg of fuelwood. Approximately 12 million tons of dung would be equivalent to 5.15 million tons or 0.65 million m3 of fuelwood. - 102 - (b) Bituminous Shale. Limited production began in 1965 and has since ranged between 16,000 and 105,000 tons a year. The shale is mixed with lignite as fuel for the Seyitomer thermal power station. (c) Agricultural Wastes. Annual consumption has been estimated at about 13 million tons, mostly in the form of animal dung, which is used for domestic cooking and heating. A limited research program is under way on the use of these agricultural wastes for the production of biogas, a mixture containing about 60 percent methane, which could be used directly for cooking and still preserve the value of the waste material for fertilizer. E. The Government's Energy Program 4.45 Investments in Production. The total investment expenditure on energy proposed by the various energy authorities, amounts to TL 306 billion (US33.8 billion) in 1981, including TL 140 billion (US$1.7 billion) in foreign exchange. Annual investments of TL 300-330 billion are envisaged for the succeeding four years. These ambitious energy development plans for the most part were prepared at a time when it was assumed that the Turkish economy would grow at about 8 percent a year -- nearly double the rate now projected by the government and the Bank. It is urgent for the agencies concerned, in association with SPO and MENR, to reexamine some of their proposals in the context of higher energy prices, changing consumption patterns as well as the lower economic growth rates that are now expected. Pending such a review, the Bank agrees with the somewhat cautious approach being taken by the government to the investment proposals while at the same time agreeing that energy is the highest priority sector. This chapter notes the parts of the program which particularly need careful reevaluation. 4.46 Despite a 30 percent reduction in the size of the program resulting from the Government's reevaluations in 1981, investments in energy are assumed by the Misssion to remain at about one-third of total public investment through 1985 (Table 4.7). Such levels of expenditure are the basis for the projection of output growth indicated at the start of this chapter. The following section summarizes the investment program that would appear reasonable in each subsector. - 103 - Table 4.7: ENERGY INVESTMENT 1963-1985 (TL billion 1980 prices) 1963 1973 1977 1980 Projected Average Annual Invest- ment 1981 - 1985 Total Fixed Investment 337.2 600.2 1020.0 861.3 982.6 Public Investment 129.7 281.8 550.3 482.2 482.0 Energy Investment /a 18.1 54.7 118.1 154.3 160.0 Percent of Public Investment 14.0 19.4 21.5 32.0 33.2 /a Public sector only. Excludes petroleum refinery and pipeline investment for 1963-1980. Source; Bank Estimates. 4.47 Summary of 1981 Energy Program. The main features of the Government's investment allocation for 1981 are summarized in the table below. - 104 - Table 4.8: ENERGY SECTOR INVESTMENT ALLOCATIONS 1981 (TL billion at 1981 prices) (a) foreign exchange (b) = total cost Total Cumulative 1981 Allocation Subsector No. of Project Expend. Alloca- as % SEEs Share of Subsector Projects Cost to end '80 tion Proposals Total Sector % Electric (a) 684.9 75.8 55.9 62 61 Power (b) 1,176 1,515.2 158.7 148.1 75 69 Coal/Lignite (a) 106.3 7.4 19.3 100 21 (b) 70 236.5 22.2 32.2 62 15 Petroleum (a) 121.7 25.8 16.0 -- 18 (b) 97 332.4 44.4 32.8 60 15 Other (a) 0.1 -- 25 -- negligible le Sources /a (b) 11 11.1 2.9 0.1 -- negligible le Sector Total (a) 913.0 108.8 96.1 84 100 (b) 1,375 2,095.2 228.2 213.2 70 100 /a Geothermal energy (excluding 15 MW power plant, which is included in electric power subsector), bituminous shale, asphaltite, radioactive minerals and solar energy. Source: Bank estimates based on 1981 Investment Program and data supplied by the implementing agencies. 4.48 Energy accounts for only approximately 17 percent of the total number of projects in the 1981 program, but for 49 percent of the foreign exchange cost of these projects and for 35 percent of their total cost, reflecting the capital-intensive nature of most energy projects. The cumulative expenditure on the projects to the end of 1980 represented 10.9 percent of their total cost, and the allocation for 1981 represents another 10.4 percent. These shares are somewhat lower than those for the public sector investment program as a whole (12.2 percent and 11.4 percent, respectively). - 105 - 4.49 The approved 1981 energy sector investment program is dominated by electric power, which accounts for 69 percent of the total sectoral allocation and 61 percent of the foreign exchange allocation. Coal/lignite and petroleum account for the balance of the program, with approximately equal shares; the share of other energy sources is negligible. Although the priority to electric power is justified on the ground that the subsector provides the main scope for utilizing indigenous lignite and hydropower resources, some questions arise concerning the balance of the 1981 electric power program. The balance between the coal/lignite and petroleum subsectors is also open to question; in particular, the virtual elimination of MTA's project to acquire new drilling rigs for its coal/lignite drilling program while retaining all the petroleum refinery expansion projects requires further study. 4.50 The approved 1981 program includes most of the projects which had been proposed in the individual SEEs' programs, and also contains some additional projects. In particular, the program retains all save three (Elbistan B 1/, Saray and Beysehir, all lignite-fuelled) of the generation projects in the power subsector program, although, as argued in this report, there are good grounds for deferring starts on all new generation projects. Similarly, all the refinery expansion projects are retained in the program for the petroleum subsector, although several of them, especially the Izmir expansion and the Middle Anatolian refinery, appear premature. However, it may be noted that the adverse affect of retaining too many projects, while reducing somewhat the allocations compared with the SEEs proposals, is mitigated by a greater emphasis on ongoing projects in the approved program. In the electric power subsector, for example, 85 percent of the approved allocation is for ongoing projects (as against new projects), compared with 71 percent in the TEK/DSI proposed program. 4.51 A very small proportion of the projects accounts for a large part of the total investment. Thus, in the electric power subsector, with nearly 1,200 projects, the vast majority are for small transmission, distribution, and village electrification projects, while the generation part of the sector, with a much smaller number of projects, accounts for 70 percent of the total 1981 program and is dominated by a handful of major hydro and thermal projects. 2/ Likewise, in the coal subsector three lignite-mine projects (Elbistan A, Mugla-Yatagan and Beypazari) are responsible for nearly 50 percent of the program; and in TPAO's program (which represents 90 percent of the allocation for the petroleum subsector) five 3/ out of the 59 projects account for nearly 75 percent of the total 1981 investments. 1/ Elbistan B is shown in the program, but with a purely nominal allocation of TL 63,000 compared with TEK's proposal of TL 7.5 billion. 2/ Karakaya, Oymapinar, Kelkit-Karatas and Altinkaya (hydropower); and Elbistan A, Yatagan and Soma B (thermal power). 3/ Exploration, Bati Raman production, and the IPRAS, Izmir and Middle Anatolian refinery projects. - 106 - 4.52 The rate of implementation of the projects in the program where expenditures are actually being incurred in 1981 (total cost TL 2,095 billion - including 1,515 for electric power) will for the most part determine the energy output that can be expected by 1990. The Bank has estimated that production will vary between 35 to 45 mtoe in 1990. The upper level of projected output is dependent on the program being implemented effectively starting with full funding of on-going projects in 1981 (estimated total cost for electric power of TL 534 billion). It is projected that if these projects are completed without delay substantial improvement will take place, at least in overcoming the most serious shortages, e.g. in electric power. The implementation capacity of the energy SEE's could also then be built up in the next 3 years to the point where a larger program, including many of the new projects, could be carried out effectively by 1990. This is a crucial assumption which needs much more careful review. 4.53 "Business as usual"--spreading limited funds over too many projects in the 1981 program, inadequate funding for priority projects, under estimation of the requirements for the most capital intensive power schemes, slow and inadequate improvement in the SEEs -- may in the Bank's view result in an output level in 1990 closer to 35 mtoe compared to demand levels in the range of 65 mtoe and a substantial failure in terms of holding down the oil import burden. 1. Electric Power 4.54 The electric power investment program that has been mainly prepared by TEK and DSI consists of 103 major generation and transmission projects, of which 36 are ongoing (defined as projects where the main construction has started) and 67 new projects (those on which it is planned to start main construction in the period 1981-1985). The ongoing projects consist ofi (a) 13 hydropower projects, which range in size from 46 MW (Suat Ugurlu) to 1,800 MW (Karakaya), and have a combined capacity of 4,855 MW, or more than double the existing installed hydropower capacity. Ten of the projects are for energy production only, but two also have irrigation components (Suat Ugurlu and Orta Ceyhan-Menzelet) and one has both irrigation and flood-control features in addition to its energy capability (Ceyhan Aslantas). Nine out of the thirteen are scheduled for completion within the 1981-1985 period, but the remaining four (Karakaya, Gezende, Orta Ceyhan-Menzelet and Altinkaya), with a combined capacity of 2,770 MW, are not expected to be completed until 1986-1987. (b) 14 thermal power projects, including nine lignite-fired stations, one coal-fired, one combined-cycle and one geothermal (the remaining projects under this heading are a maintenance workshop for thermal plants and a composite project covering renewals of existing thermal plants). The combined capacity of the twelve power stations is 4,145 MW, compared with the existing thermal capacity of just over 3,000 MW. All these ongoing thermal projects are scheduled for completion within the 1981-1985 period. - 107 - (c) Nine 380-kV transmission projects, mostly directly associated with one or other of the ongoing generating plant projects. They are all scheduled for completion within 1981-1985, and will add 1,522 km of 380-kV transmission lines to the 2,890 km (including some 220-kV) existing at the end of 1980. (d) Ongoing village electrification projects, as part of TEK's long-term program which provides for 17,000 villages to be electrified in the period 1981-1985, equivalent to the total number of villages already electrified since the program started in 1964. The new projects include 35 generating projects, of which only 15 have allocations in the 1981 program, and 20 have no expenditures scheduled for 1981. (a) A further 7,500 MW of identified hydropower capacity made up of 17 projects, plus provision for additional unspecified hydropower projects on which construction is expected to start towards the end of the 5-year period. The identified projects range in size from the 56 MW Derbent station to the 2,400 MW Ataturk project. Six of these are multi-purpose projects (Ataturk, Lower B. Menderes, Derbent, Seyhan-Catalhan, Pasinler-Soylemez and Batman-Malabadi), with an irrigation as well as an energy component (Lower B. Menderes will also provide flood control). Only one of the new hydropower projects (Lower B. Menderes) is scheduled for completion within the 1981-1985 period. Most will not be completed before the later 1980s or early 1990s. (b) 18 thermal power stations, with a total capacity of nearly 9,000 MW, comprising 11 lignite-fired stations (4,930 MW), 4 nuclear power stations (3,800 MW) and 3 stations designed to burn municipal waste (100 MW). Except for five of the lignite stations and the small municipal waste units, they are all due for completion in the late 1980s or, in the case of the last three nuclear stations, not until 1993-1995. (c) 32 major 380-kV transmission projects, half of which are scheduled for completion within the five-year period. These new projects would add about 8,000 km to the 380-kV system. 4.55 To the projected investments for the proposed 1981-1985 electric power development program, must be added the projected investment programs of the municipalities on urban distribution, and the program of Electrical Survey Administration (EIE), in order to arrive at the investment program for the whole power subsector. The main features are summarized below in Table 4.8, distinguishing between ongoing and proposed new projects. - 108 - Table 4.9; PROPOSED ELECTRIC POWER INVESTMENT PROGRAM, 1981-1985 (TL Billion at 1981 Prices) 1981 1985 Total 1981-1985 Foreign Total Foreign Total Foreign Total Ongoing Projects 65.3 135.3 15.9 43.4 178.7 402.9 (816) (1,691) (198) (543) (2,234) (5,037) New Projects 24.3 62.8 127.3 264.3 401.2 868.1 (304) (785) (1,591) (3,304) (5,015) (10,851) Total 89.6 198.1 143.1 307.7 579.9 1,271.0 (1,120) (2,476) (1,789) (3,847) (7,249) (15,888) Note; Figures in parentheses are US$ million equivalents at TL 80/US$1. Source; TEK, DSI, EIE, Municipalities. 4.56 Many of the power projects inevitably have long gestation periods and are very capital intensive. Some require up to US$2,500 and average well over US$1,000 per kW. Parts of this ambitious program, including some "ongoing" projects urgently need a thorough reevaluation. For example, the cost of the Elbistan "A" project is indicated as TL 91.9 billion while the Bank's most recent detailed review indicates a cost estimate of TL 130 billion. The cost of Karakaya is shown as TL 70.1 billion while the Bank's latest estimate is TL 116 billion. Inevitably a readjustment for inflation and other cost escalation is constantly necessary in current circumstances. For this reason, it is our view that a thorough review and widespread updating of cost estimates is urgently needed. 4.57 The Bank has reviewed briefly the economic analysis of more than 20 power projects and found, in most cases, benefit-cost ratios greater than one or rates of return at 14-18 percent. Some of the power projects, however, have not yet been subject to complete economic evaluation by the responsible agencies. Project evaluations, in most cases, were outdated and events such as reductions in demand growth, financial constraints, cost escalation, inter-sectoral coordination problems and delays in project completion, which are common among such projects, may have caused substantial reductions in their rates of return. The Bank recommends that most of the new power projects contained in the agencies' program (TL 63 billion of a total of TL 198 billion proposed in 1981) be deferred until their economic returns are reevaluated and TEK's demand projections can be revised. This position is similar to that of the government which has already reduced the 1981 agencies' proposals for these projects by TL48 billion. 4.58 -Choices inevitably will have to be made in the next few years in some cases between hydro, lignite and nuclear projects. The Bank, - 109 - on the basis of data provided by the SEEs concerned, reviewed briefly the different power projects in terms of capital costs per kW installed, average and firm energy output per kW and generating costs per kWh (Table 4.10). The review pointed out that most of the hydro power projects emerged fairly well from such a rough evaluation although the range of generating costs is very wide (TL 0.62-6.1/kWh of average annual energy and TL 0.78-8.94/kWh of firm energy). The proposed lignite power stations showed a much narrower range of generating costs (TL 2.6-3.45/kWh of average and firm energy). However, there are doubts about the strict comparability of these figures, particularly those for the hydro power projects, but they suggest the need to review the justification for giving priority to some of the higher cost projects compared with what appear to be lower cost alternatives. The analysis also confirms that the proposed nuclear stations are likely to be much more costly (over TL 7.5/kWh) than the alternatives. As the new projects begin to dominate the expenditures scheduled for the 1982-1985 period as indicated in Table 4.8, the need for these economic comparisons becomes more apparent. By 1985 significant expenditures would be required according to the current investment scheduling for all the 20 new projects that did not receive allocations in 1981. Several of the larger projects soon will become critical, e.g. Elbistan C and D because they are for significant expenditures in 1982. - 110 - Table 4.10; CAPITAL AND GENERATING COSTS OF NEW POWER STATIONS (At 1981 Prices) Total Genera- Capital Cost /a tion Costs Size in MW TL/kW TL/kWh /b HYDROPOWER PLANTS /c Finkikli-Karakamis 1000 15,500 0.617 Seyhan-Catalhan 150 17,400 0.708 Kayraktepe 399 15,875 0.834 Ilisu 1200 22,500 0.958 Batman-Malabadi 129 32,208 1,114 Boyabat 500 23,500 1.543 Sir Ve Duzkesme 200 52,500 1.838 Derbent 56 79.107 2.179 Obruk 210 22,619 2.416 Pasinler-Soylemez 60 52,500 2.585 Lower B. Menderes 60 46,667 2.589 Ortasakarya Yenice 63 44,444 3.012 Ataturk 2400 89.167 3.193 Kelkit-Karatas 147 79,178 3.613 Sakarya-Kargi 303 14,637 3.732 Sakarya-Gursogut 408 16,912 4.597 Ozkoy 150 56,333 6.097 LIGNITE PLANTS Elbistan B 1200 95,833 2.602 Elbistan C 600 95,833 2.602 Elbistan D 1800 95,833 2.602 Soma B (3-4) 330 69,697 2.811 Keles 200 75,000 2.983 Beysehir 200 75,000 3,185 Saray 300 76,667 Seyitomer 4 150 93,333 3.313 Karliova 150 93,333 3.448 NUCLEAR PLANTS Nuclear 1 600 192,000 7.5 Nuclear 2 1000 192,000 7.5 Nuclear 3 1100 191,000 7.5 Nuclear 4 1100 191,000 7.5 = Not available /a Excluding interest during construction /b Assuming opportunity cost of capital of 12 percent and station lives of 40 years for hydro and 25 years for termal plants. /C For an average rain year. Sourcez Derived from DSI and TER cost data. - 111 - 4.59 Electricity generated from ongoing power projects (excluding Gezende, Menzelet and Altinkaya) will be sufficient, according to Bank estimates, to meet an adjusted "low" demand projection for 1985 and possibly for the latter part of the 1980's., e.g. on the basis of a one-fourth lower projection than that being used by TEK (Table 4.11). All these projects have substantial sunk costs, are scheduled to be completed by 1985 or sooner and, according to estimates provided by the agencies, have adequate economic returns. The Bank would, however, caution against delay in providing full funding to these generation projects which are at fairly advanced stages of construction, because they could result in more severe power shortages and increased final costs as the result of delays. Furthermore, delays in related mining projects could also lead to significant delays in the power projects. Shortages in foreign exchange allocations for mining equipment have apparently already interfered with project implementation. 4.60 To gauge the possible risk of serious shortages resulting from deferring work on new projects along the lines suggested, the growth of installed capacity and generation capability of the remaining ongoing projects, plus Soma B (third and fourth units), have been assessed, assuming these projects are completed according to current schedules. Late in the decade, clearly the risk becomes significant, but not before roughly 1987. The results are summarized below; Table 4.11; PROJECTED DEMAND CAPACITY AND GENERATION CAPABILITY 1981 1985 1990 Maximum Demand (MW) TEK Projection 6,805 9,420 16,500 Bank Adjusted "low" Projection 6,805 8,890 12,400 Capacity (MW) TEK program Installed 5,932 13,003 23,335 "On-going" oriented Program Installed 5,846 10,894 12,050 Firm /a 4,267 7,952 8,796 Generation Capability Adjusted Program, GWh Average /b 25,458 54,756 58,472 Firm /c 22,532 49,522 51,956 /a Assuming TEK's reserve criterion of 37 percent. /b Capability in average hydraulic conditions. /c Capability in dry year. Source; Derived from TEK data. - 112 - 4.61 Completion of ongoing projects, with the exceptions noted, plus the final phase of Soma B, would result in the addition of 6,766 MW of capacity, giving a firm capacity of 8,796 MW by 1987 which might begin to result in modest shortages in the face of "high" growth. The installation program shown would be sufficient to cater for an average annual growth rate of 10.7 percent in maximum demand over the period, or 15.3 percent to 1985. The corresponding firm energy capability would represent an increase, compared with 1980 requirements of 26,900 GWh, of 9.9 percent per annum to 1987, or 13 percent per annum to 1985. The costs of such a program for 1981 would have been TL135 billion as compared to TEK's proposed program of TL150 billion or a reduction of about 10 percent. Most expenditures on new projects would start after 1981. However, for the full period to 1990, TEK's program would increase capacity by 17,400 MW compared to the "on-going" program of 6,200 MW. The major costs would start building up substantially by 1984. The Bank would recommend that the current "on-going" program effectively implemented would provide a margin for the next year or two to more carefully to reevaluate the larger projects. The demand analysis could also be thoroughly reexamined during this period. 2. Lignite 4.62 The lignite program as presented by the responsible SEE, TKI covers mines related to specific power projects, with the excess output to be used for sale for domestic heating. In some cases it is envisaged that industries would locate near mines. Most of the projects have received allocations in the 1981 investment program. Three projects, Sivas-Kanyal, Elbistan A and Beypazari have received substantial allocations and are currently under construction. A large number of projects have received only nominal allocations. It was indicated by TKI that most of these projects have been ready for implementation for nearly four years but could not be started for lack of finance. The total capital cost of all these projects together is TL189 billion, with a foreign exchange component of TL 92 billion. In TKI's view, the preparatory work on the projects is completed, and construction can be started once finance is available. TL30 billion was allocated in the 1981 investment program out of the TL46 billion requested by TKI for 58 projects, 10 of which have total costs over TL 5 million. 4.63 A recent Bank project identification mission reviewed TKI's operations and found that extensive exploration has been completed for the lignite projects under development. But, the existing organization of TKI is understaffed and, since the majority of TKI's previous production has been in underground mining, TKI is also relatively inexperienced in the preparation and implementation of major new open pit mines. During the mission, TKI's general approach to feasibility work and available documentation for some of the planned new mines were discussed. These discussions indicated that the project reports being prepared by TKI do not include all the necessary data and documentation generally required by - 113 - international mining standards for full feasibility reports. For example, the TKI reports do not include lignite quality release studies, although there are wide variations in the quality of lignite in individual deposits. Instead, TKI plans to overcome problems in the variation of lignite quality by adjustments in mine plan. Given the characteristics of the Turkish lignite deposits, the TKI approach may lead to sub-optimum mine development and excessive operating costs. 4.64 An important set of projects is located in the Elbistan area which has 3.2 billion tons of low quality lignite reserves, of which 1.8 billion tons are proved. An integrated plan for the development of the entire region may well indicate a potential for four large 20m ton mines in this area. The Bank is currently financing Afsin Elbistan A mine and power plant. The detailed project report of Afsin Elbistan B is yet to be drawn up but the geological investigations are said to be complete. The lignite occurring in this area is characterized by a low overburden to coal ratio (2.7 m3/ton) and low quality (1,162 Kcal/kg). 4.65 The project list includes two projects, Afsin Elbistan B and Bursa Keles, designed primarily to supply lignite to two power station projects which the Bank recommends should be deferred pending the outcome of a review of the load forecast. To be consistent, the proposed 1981 expenditure on these two lignite projects should also be deferred. This would reduce 1981 expenditures by TL 870 million to TL 29.1 billion. Adding a proposed expenditure for drilling rigs of TL 3.3 billion, would indicate a total for the subsector of TL 32.4 billion. 4.66 -The Bank feels strongly that to support the anticipated increased output of coal and lignite, the proposed MTA investment program for 1981-1985 should include provision for a number of coal and lignite exploration projects. The main item in the program would be the purchase of drilling rigs to support the ambitious drilling program. Currently MTA has 35 drilling rigs and was able to drill a total of 80,000 meters in 1979 of which 61,700 were in coal and lignite. To fulfill the proposed drilling program, the MTA will need equipment to the tune of 163 drilling rigs costing TL 25.3 billion, with a foreign exchange component of TL 19.3 billion (US4241 million). 4.67 Given the number of prepared lignite projects in hand, the issue that needs further analysis is whether drilling planned is designed to increase the list of projects to be started in known areas, or whether it is intended to identify new projects in the eastern provinces of Turkey in order to minimize interregional transport of lignite. An important difficulty with lignite is that major transportation infrastructure is needed to link projects with their markets. This is significant not only for power projects but especially for the substantial domestic demand for lignite for heating purposes. TKI has an ambitious drilling program, for which financing is needed, but both the volume of drilling and its regional distribution between eastern and western Turkey need further analysis. 4.68 Despite the retention of all TKI's original project proposals for 1981, the approved allocation totals only TL 30 billion or 65 percent of - 114 - TKI's requested figure of TL 45.9 billion. The approved total includes TL 18.3 billion of foreign exchange, which is nearly all of TKI's requested allocation of TL 19.3 billion. These figures exclude the drilling rigs for MTA's exploration projects. Thirty four percent of the approved allocation is for ongoing projects scheduled for completion in 1981. A single project, the Elbistan A lignite mine, accounts for a further 28 percent and two other lignite projects (Mugla Yatagan and Beypazari) for another 18 percent. The remaining projects together account for only 20 percent of the total, mostly in relatively small amounts (1 percent or less). The cutbacks in the approved program compared with the allocations requested by TKI inevitably raise the question whether they are likely to jeopardize the timely completion of the projects affected, particularly those required to supply fuel for thermal power stations already under construction. This is an extremely important issue, which should be reexamined as soon as possible. 4.69 The latest projection for lignite demand amounts to 55 million tons in 1985 and 90 million tons in 1990. The projects included in the investment program for completion by 1985 would have a capacity of about 60 million tons if they are completed according to TKI's tentative schedules. The latest project list presented as "ideas" for 1985 to 1990 would incorporate an additional 35 million tons. On the basis of the latest demand projection presented to the September Review Mission and derived from projects under consideration, the large projected demand can only be supplied by 1985 if the program is implemented effectively. The hard coal demand projected will apparently have to be met by rapidly increasing imports. In both lignite and hard coal, Turkey has adequate reserves to increase production. The hard coal industry which has very difficult geological conditions is badly in need of a master plan which can lead to identification of projects. The coal industry also needs major reconstruction expenditure to sustain current levels of production. The solution for the implementation problems of the lignite industry needs to be more drastic. Nothing less than a major overhaul of the institutions involved appears suitable. 3. Petroleum 4.70 The investments proposed by the Government-owned petroleum subsector add up to TL 55 billion for 1981 and TL 165 billion for the 1981-1985. The proposed petroleum investment package for 1981 can be divided into production (TL 16 billion or 30 percent), refineries (TL 31 billion or 56 percent) and distribution (TL 8 billion or 14 percent). There are four projects related to petroleum production, including exploration and development. The Bank has (in connection with two loans) appraised these projects and found them to be acceptable. 4.71 Eight refinery projects are included in the program, with 3 near completion (within 24 months), i.e. IPRAS debottlenecking, IPRAS Second Expansion and Izmir debottlenecking. Considering the advanced state of completion of these projects, as well as the fact that they will provide 7 million tpy of additional capacity at a cost of TL 5.2 billion, which is low in comparison with the costs of the other refinery expansion projects, the Bank recommends that they be completed as planned. Their completion will raise Turkey's refining capacity to 23.5 million tons per year which - 115 - is probably sufficient to meet Turkey's petroleum product requirements until 1988 and beyond, if an effective energy program is implemented. The justification for the remaining refinery expansion projects, especially major ones at Izmir and Middle Anatolia, appear to be questionable. These projects are listed in Table 4.12; Table 4.12; REFINERY PROJECTS FOR REEVALUATION (At 1980 Prices) Capacity Increase Investments (Million tpy) Completion to Completion Physical Name From To Date (TL Billion) Completion % Izmir Refinery Expansion 5.0 10.0 1984 9.9 1.3 Middle Anatolia Refinery - 5.0 1983 51.1 22.0 Izmir Lub Oil Debottlenecking 0.18 0.27 1983 0.5 3.2 Izmir Lub Oil Expansion 0.27 0.52 1985 9.0 7.0 Izmir Calcine Coke - 0.06 1986 2.2 0.0 Source; TPAO. 4.72 The Izmir Refinery Expansion project, designed to raise refining capacity from 5 million tons per year to 10 million tons per year, is currently only 1.3 percent complete, although substantial expenditures (approximately 50 percent of project cost) have been made to purchase equipment and material. Foreign financing of this expansion has already been secured and commitments made for its construction. Nonetheless, as the demand projections underlying the project have already been reduced, the Bank recommends that difficult as this decision might be, the Government consider halting further construction until its economic feasibility can be verified. 4.73 The Middle Anatolia Refinery project is, as of the end of 1980, 22 percent complete and its financing has been obtained and commitments made to bring it to approximately 75 percent of completion. This project is much more expensive than the Izmir Refinery Expansion because of its location in the interior of the country, which requires the inclusion of substantial investment in a Middle Anatolia Crude Oil Pipeline. As a result of these higher costs, and the prospective surplus of refining capacity, the economics of this project appear to be open to serious doubt. Considering the relatively less advanced state of completion of this project, and the limited prospects for a rapid increase in petroleum products demand, the Bank recommends that it be halted immediately, difficult as this decision may be. - 116 - 4.74 The expected cost of stopping these projects will depend on the nature of the agreements and pay off that can be negotiated with the contracted suppliers. This cost will have to be compared with the benefit of not having to finance excess refining capacity. 4.75 The distribution projects involve largely the Middle Anatolia Pipeline (87 percent of the total). Since the Middle Anatolia Pipeline is to serve the Middle Anatolia Refinery, the recommended postponement of the latter also may imply the postponement of the pipeline although the requirements for the transport of petroleum products to the center of the country should be assessed even if the refinery project is not implemented. 4.76 The total cost of the projects in the petroleum subsector program is TL 332 billion (including TL 122 billion in foreign exchange). However, the approved allocation for 1981 is only TL 31.8 billion, or about 10 percent of the total cost of the projects. The allocations for TPAO is 56 percent of the proposed program (TL 18.6 billion against an original proposal of TL 54. billion). The main difference is in the provision for the Middle Anatolian refinery (TL 6.8 billion allocated, against TL 21.6 billion proposed), and the associated crude oil pipeline has only a nominal allocation. Petroleum exploration received an allocation of TL 4.5 billion against TL 8.6 billion proposed by TPAO. In addition, there is TL 1.5 billion in the MTA for petroleum project studies. The total allocation for the subsector of TL 32.8 billion represents about 5 percent of the total public sector investment for 1981. 4.77 The benefits of the petroleum exploration and production program are likely to be substantial. Turkish petroleum production reached a peak of 3.6 million tons in 1969 and declined slowly to about 2.3 million tons in 1980, as a direct result of the decline in exploration in the 1960's and 1970's. Production is expected to remain fairly stable over the next two years as an extension to the Raman field comes on stream, and to decrease by 15 percent per year if there are no additions to recoverable reserves. Large-scale enhanced recovery projects involving the Raman and Bati Raman fields could, reverse the decline, and are planned to come on stream in the mid 1980's. The Bank is already financing several projects in this program. Latest Bank estimates indicate likely output of 3-4 million tons by 1990. The government's projections presented to the September Review Mission indicate a possible increase in output by 1990 to 6 million tons. F. Organization and Management Issues 4.78 The discussion of production potential underlines the question of how the Government will deal with the problem of SEE reform. The energy sector is predominantly under public management and control, as illustrated by the fact that the public sector accounts for about 97 percent of total investment in the sector. However, the degree of public sector dominance varies among subsectors. In electric power it is virtually complete. TEK is responsible for electricity generation and transmission in 63 out of the 67 Turkish provinces, while power operations in the other four are under - 117 - two concessionary companies in which TEK is the largest individual shareholder. DSI, is responsible for the construction of hydropower stations, which it hands over to TEK on completion. Urban electricity distribution is the responsibility of the public authorities in the municipalities. Similarly, in the coal/lignite subsector, TKI's control of production and distribution is complete, and it is also responsible for exploration, together with MTA, for the exploitation of coal/lignite deposits. Some privately owned lignite mines were taken over by TKI in 1978 and there are no private companies producing hard coal. The private sector plays a larger role in the petroleum subsector, doing exploration, producing most of the crude oil (66 percent in 1978) and distributing products. However, the state company, TPAO, owns 77 percent of the current refinery capacity and a Government agency, Petrol Ofisi, responsible for the distribution of petroleum products in the public sector, accounts for about 75 percent of total sales in Turkey. 4.79 The MENR has overall responsibility for the energy sector, exercising supervision and control over all exploration, development, production and distribution activities related to energy. In discharge of this responsibility, one of its departments coordinates the plans and activities of the various agencies in the sector; another is concerned with the pricing of coal and lignite, and environmental problems connected with the use of these fuels; a third department of the Ministry administers the mining law and issues exploration and production licenses for coal and lignite; and a fourth is concerned with the petroleum subsector, issuing licenses for exploration, production and refining, determining crude oil and product prices and administering the Fuel Price Stabilization Fund and the Exploration Fund. 4.80 The MENR has the prime responsibility for the formulation of energy policy and for ensuring its implementation, and also for the coordination of plans and programs in the sector. The SPO is also involved in the planning for the sector in connection with its preparation of the annual and five-year national plans. Within each subsector, the SEEs and agencies are responsible for preparing their own plans and programs in accordance with national objectives, subject to review by MENR and SPO. 4.81 Some of the main issues and problems which arise in relation to the organization and management of the sector are; (a) There are problems in coordinating the activities and programs of TEK and DSI in relation to hydropower development, and of TEK and TKI in relation to thermal power projects and the associated mining developments. These problems are recognized by the Government, which agreed, under the Karakaya loan agreement, to complete a review of existing arrangements by the end of 1981, with a view to their solution. - 118 - (b) Changes of top management have been too frequent in recent years, as a result of the convention that the chief executive and senior directors of SEEs should be changed with each change of Government. There has also been too much political interference in the running of the SEEs, severely limiting their autonomy in practice. It is hoped that these problems will be addressed in the reforms now being considered by the Government. (c) Key departments in the SEEs are seriously understaffed because of low salaries. In TEK, for example, the major construction departments responsible for thermal power stations, transmission and subtransmission projects are alarmingly under strength, and many of the staff they have are inexperienced because of high turnover. It is understood that this problem is also being addressed urgently. The income tax reforms may help, since the existing income tax regulations are thought by SEE staff to favor the private sector at their expense. TKI is also subject to strict regulations regarding salary levels and has difficulty attracting suitably qualified staff. Furthermore, because of very strict Government controls on public sector employment, TKI presently has 900 vacancies out of 5,500 professional positions (Grade I-KV), including 431 vacancies out of 1,164 positions in. the top four management levels (Grades I-IV). Shortages of experienced middle managers and professional technical staff seriously hamper TKI's project work, but TKI has been given permission to fill only 150 of the vacancies. While exact details of the staffing requirements of all of TKI's new lignite operations are not available, the continued application of such a restrictive hiring policy for managers and senior engineers is inconsistent with the targeted future production growth. (d) Coal lignite prices for TKI are set by the Government. Prices to households have a built-in element of subsidy, but prices to other consumers should cover costs. In practice, prices have not kept pace with inflation, thereby creating losses and shortages of funds within TKI. From 1975 to 1979 TKI lost TL 42.5 billion of sales of TL 29.8 billion. These losses include subsidies and so-called "duty losses" due to household prices for coal/lignite being held down for social reasons. About TL 37.0 billion of these losses were made up by Government subsidies and credits. By conventional accounting standards, TKI's Balance Sheet at the end of 1979 represents an insolvent company with TL 60,885 million debts and only TL 55,298 million assets. (e) The transfer of the private lignite mines to TKI in 1978 does not appear to have resulted in any improvement in their performance. It is understood a draft bill is being prepared, under which TEK would operate only the large mines supplying industrial users and power plants. The smaller mines would be operated by private companies, who would supply all domestic users except those in - 119 - close proximity to TEK's mines. If this reallocation of responsibilities is made, it is important that it should be accompanied by adequate safeguards for the rights of the private companies to encourage them to undertake investment -to expand output. (f) The desirability of leaving urban electricity distribution in the hands of the municipalities has been reviewed, and a draft bill is said to be nearing completion to provide for the formation of several autonomous companies--to operate under TEK as holding company--with responsibility for urban distribution of power. Apparently, it is the intention that they should operate profitably to generate sufficient funds for investment in their networks, in which case they should be free to set their own prices. 4.82 To sum up the institutional problem, the SEEs are subject to a wide variety of interference and control from different sources, not only on policy questions but also for day-to-day operations. In particular, "overstaffing" problems in the SEEs are traditionally traced to political pressures. Prices and production decisions are usually made outside the enterprise. The rather frequent changes in governments has been often accompanied by changes in management. The lack of continuity in top management because of non competitive salaries, and of experienced middle level administrative and technical personnel has had a deleterious effect in many cases. 4.83 General reforms have been discussed and bills considered in Parliament over more than a decade, but little action has occured other than occasional and belated price increases. Reforms have been agreed in the context of Bank-financed projects of SEEs, but implementation has been uneven. Without aiming at a complete overhaul of the SEE structure in the short run, the decisions already taken by the Government point to a number of urgent steps that can be taken to cure the most serious problems; first and foremost, increasing the autonomy of SEEs and enabling them to assume the corresponding responsibilities; subjecting them to marketing forces to the extent possible; improving SEE management capability by attracting more professional managers through improved compensation and by delegating more operating authority to them and to their operating units; ensuring the continuity and professionalism of SEE management; reducing the considerable overstaffing that exists in most SEEs; and improving physical and financial management through better cost accounting, performance standards and auditing systems. The Bank has tried to support such improvements under a number of projects. However, a stage has been reached where more fundamental action on these critical issues must be taken in the sector at large by the Government. Long-term plans will be needed by most SEEs to correct the present situation; overstaffing, in particular, cannot be easily reduced unless alternative job opportunities are created. - 120 - G. Demand Management and Conservation 4.84 The changes in pricing policy are the most effective conservation measure taken so far. During most of the 1970's the Government controlled energy prices essentially to maintain price stability. After doubling the consumer prices of all major petroleum products in February 1974 in response to the quadrupling of world crude oil prices, the Government then held them constant in local currency terms under the financial crisis of late 1977. During this period consumption grew at nearly 13 percent per annum while GDP rose at 7.2 percent per annum. Subsequently, however, prices of most products were raised increasingly often (six times in 1980, for example) in accordance with a Government policy to move towards West European price levels. Similarly, the prices of lignite, which remained relatively stable up to 1977, have since been increased sharply in real terms. Prices of hard coal, are now roughly at world levels, although TKI claims that current prices still do not cover costs. The average price of electricity supplied by TEK has kept consistently ahead of general inflation, although the reverse is true of the retail prices charged by the municipalities. 4.85 The somewhat belated recognition of the role of prices in restraining demand was made formal by the Government decision in January 1980 to leave the SEEs free to set their own prices. However, the prices of coal and lignite for domestic use were specifically excluded, and left subject to Government control, as were the prices of electricity supplied by TEK to the aluminum and ferrochrome industries, and the municipal electricity rates for retail customers which still do not cover costs. Shortages of lignite in domestic markets and inefficient use of electricity by retail consumers may have resulted from these exclusions. Since the January 1980 liberalization, petroleum product prices have been increased by percentages ranging from 132 percent (premium gasoline) to over 300 percent (LPG). However, the wellhead price of domestic crude oil from wells on stream before 1978 is still based on the end-1973 figure of US$5.21/barrel. The average price of electricity supplied by TEK in 1980 was nearly 160 percent above the 1979 level. Even coal and lignite prices, although still subject to Government control, rose about 100 percent. 4.86 Pricing policy, therefore, has been moving in the right direction, but outstanding issues remain. These include the rationale for the remaining Government controls. In addition, under the Karakaya loan agreement, the Government is required to have electricity tariffs reviewed by a committee of experts. Their report, to be submitted to the Bank by end-1981, should provide the basis for a more rational tariff structure for the whole power subsector, including the municipalities. With regard to petroleum products, the Government should make more use of relative prices as a tool to encourage substitution for petroleum products of domestic energy sources such as lignite and hydropower.' - 121 - 4.87 The design of programs and pricing policies to influence trends in petroleum consumption would be made much easier by a better understanding of energy demand in transportation and manufacturing -- in particular, the responsiveness of demand to price changes and the possibilities and costs of substituting other fuels for petroleum. For example, if an effective retrofitting program is implemented, along with appropriate pricing policies, energy consumption in transport and manufacturing could theoretically be reduced by over 4 mtoe by 1990 without affecting output. Similarly, savings of about 3 mtoe could be obtained in the domestic sector by 1990. (See Table 4.4). 1/ In practice, such demand management will involve institutional and investment burdens which would result in only a fraction of the saving being achieved by 1990. 4.88 The potential for interfuel substitution would be a key factor in any solution to the energy problem at present. Lignite, the most promising of all domestic energy sources, has had difficulty in supplying the domestic market where it has considerable potential to substitute for petroleum-based products for cooking and heating. In this respect there is need to reconsider the required transportation facilities as well as increased drilling in diverse regions of the country to minimize transport requirements. The power subsector, as mentioned above, provides the main scope for utilizing lignite and hydro resources. However, large power projects, the bulk of the investment program, have been notoriously delayed and increasingly costly. A benefit from the strategy to build hydro and lignite based power plants, in spite of all their shortcomings, is that the growth in the use of petroleum for power generation has already slowed down. 4.89 Fuelwood and biomass development have obviously received insufficient attention in Government programs, even though fuelwood for example, noy accounts for about 95 percent of energy consumption in rural areas. There are a number of improvements to traditional forestry operations, such as greater control of filling and cross-cutting in high forest and improved management of coppice forest, and new technologies, such as new methods of charcoal production and bio-energy conservation plants that could be introduced. Under fuelwood conservation, there is room for improved housing insulation and burning stoves. 4.90 In the non-pricing area, a number of studies undertaken by MENR have aimed at determining the scope for reducing consumption of petroleum products. Various circulars on the subject of conservation have been issued by the Prime Minister's office and the Ministry of Energy, but a practical program of action, including appropriate incentives to consumers, such as tax concessions and financial assistance, to use all forms of energy more efficiently, has yet to be developed. Little appears to have been done to collect data on actual energy utilization in different 1/ These projections are based on estimates of savings in consumption of commercial energy resulting from efficient demand management and conservation programs for developing countries which appear in Energy in the Developing Countries (World Bank, August 1980). - 122 - industries, particularly the major energy-using industries, as a basis for determining the possible scope for energy savings and the costs of achieving them. Such information as is available suggests there is plenty of room for improvement (e.g. some major energy-intensive industries such as steel and cement use 40-60 percent more fuel oil per ton of output than in West Germany). The program of sample industrial energy audits financed out of the Bank loan for the petroleum exploration project represents a useful start in remedying the information gap, but such audits should be extended to other industries as quickly as possible. 4.91 It would be desirable to set up a special energy conservation unit in MENR, whose functions would include the preparation of energy audit programs and the monitoring of the results. It is understood that the Government is considering placing this responsibility with the EIE, in which case it will be essential to ensure it is adequately staffed for the purpose. 4.92 Conservation policy also appears to have neglected somewhat the scope for more efficient use of energy through load management and improved operating procedures in the power subsector, reduction of the large losses in urban electricity distribution and combined heat and power schemes (CHP). The latter offer the possibility of much more efficient utilization of lignite, by using waste heat from lignite-fired power stations for industrial purposes or district heating. This possibility should be taken into account when planning the location of new industries, which does not appear to be the case at present. H. Summary of Key Energy Problems and Issues 4.93 Besides the main issues related to institutional organization mentioned above, key problems and issues relating to the development plans and investment programs for the sector are as follows; (a) A general problem affecting all subsectors, has been a tendency to start too many projects for the resources of finance and staff available, resulting in inadequate supervision and delays in implementation. The proposed programs suffer from the same defect. (b) TKI has had particular difficulty in achieving its planned investment targets for lignite. Realized investment has fallen short of programmed investments in every year but one since 1970. TKI's investment expenditure pattern for 1979 also indicates an inability to meet programmed expenditures on large projects, with expenditures on priority projects (apart from Elbistan A) accounting for only 5 percent of total expenditure, while 40 percent of expenditures went for marginal schemes. - 123 - (c) TKI's project preparation capabilities are inadequate relative to their proposed coal/lignite development plan. A Master Plan is needed before any rehabilitation/expansion of their hard coal operations can be initiated and many technical issues need further work in the feasibility studies undertaken for various lignite projects. Consideration needs to be given to the most suitable type of organization for the new lignite operations so that they can be financially viable; the possibility of setting up independent companies should be examined in view of TKI's organizational and financial difficulties. (d) A major issue in the power subsector is the proposed nuclear power program, which provides for a start on construction of the first station. This proposal seems unjustified in present circumstances because generation costs are higher than with the alternatives and will require imported raw materials. Its future implementation should be subject to reevaluation. (e) Some of the hydropower stations in the proposed program also have long gestation periods, and their inclusion in the 1981 program should be reviewed. (f) The balance of the investment programs should be reviewed, e.g. as between expenditure on new projects and provision for the purchase of spare parts, and between exploration to prove new reserves and production from existing resources. It seems inappropriate, for example, to allocate large sums for nuclear power development when MTA is seriously short of drilling equipment to prove new lignite reserves. Lack of foreign exchange for the purchase of replacement parts has been a particular problem in the power subsector, although the sums involved are small compared with the amounts of foreign exchange allocated to new projects. Another issue in the power subsector is the wide disparity in the proposed share of resources going to generation projects (over 70 percent of the 1981-1985 TEK scheduled program), on the one hand, and to transmission and urban distribution on the other. Urban distribution, in particular, has been starved of funds in the past and the proposed provisions seems quite inadequate to correct present deficiencies, particularly the high level of losses in urban networks. (g) Most of the projects in the program have been subject to delays, often considerable. This has been due partly to the financial constraints and management/staff problems already discussed, but bottlenecks of an administrative or bureaucratic nature have also played a part e.g. delays in obtaining approval of land acquisition for transmission lines and substations; delays in arranging for the expropriation and resettlement of farmers facing inundation as a result of hydropower projects. - 124 - (h) The methods for forecasting future energy demand should be reviewed. At present there seems to be undue reliance on assumed relationships between the growth of GDP and energy requirements, which provide a very uncertain basis for future projections, particularly in view of the large increases in energy costs in recent years and the instability of the Turkish economy. (i) Projects and the research and development devoted to the renewable resources of mini-hydro, fuelwood and agricultural wastes have received insufficient attention. Reforestation and afforestation programs are inadequate, despite the importance of fuelwood as a primary source of energy in rural areas. As far as the use of animal and agricultural waste, only two experimental biogas units have been established, and the current effort devoted to further development appears to be minimal. Some studies of mini-hydro potential are said to be underway, but need to be pushed more vigorously with a view to identifying projects for early construction. (j) The lignite exploration program has been inadequate. Of an estimated 110,000 km2 of lignite-bearing geological structures, only 20,000 km2, or less than 20 percent, have been drilled so far. This is despite the demonstrated high returns to exploration effort, as indicated by the fact that, as a result of drilling totalling 176,000 meters between 1977 and 1979, reserves increased from 5.9 billion tons to the current figure of 7.3 billion tons. Exploration has hitherto focused mainly on central and western Turkey, to the relative neglect of eastern Turkey. More attention is needed to diversify the geographic distribution of mines in order to minimize transport needs for the domestic market. The inadequacy of the exploration program partly reflects shortage of drilling equipment. The program to acquire additional equipment appears to be an urgent priority, but has been virtually eliminated from the 1981 program. (k) The exploration of the bituminous shale resources has been delayed because of technical and economic questions arising out of the unfamiliarity of TKI with large-scale mining of shale. A closer look at this issue,is warranted by the potentially large contribution that bituminous shale can make to Turkish energy supplies. - 125 - CHAPTER 5 TRANSPORT AND COMMUNICATIONS A. Introduction 5.1 Turkey has an area of 777,000 sq.km. of which about 50 percent rises over 1,600 meters. The construction of the transport system has been difficult because of the rugged topography. Nevertheless, the network extends to all major provincial centers, although access to some regions is constrained by the difficult terrain. Some rural areas, especially in the eastern regions, do not have access to transport facilities. Until recently, the extent of the system had been generally adequate in relation to the geographic distribution of the population. However, this balance is changing due to the rapid population growth in the large urban centers caused by the increase in rural-urban migration. 5.2 Until the late 1940's the major emphasis was placed on developing the railway network. Since then, the railroads have remained essentially unchanged in size at around 8,000 km, although a small line extension was built in 1971 to connect Turkey with Iran. Considering the large size of the country, the railway network is small compared with other European countries. This reflects the ruggedness of the terrain where road transport which can negotiate much steeper gradients has a distinct advantage. The construction of a high-speed line to link Istanbul with Ankara was recently initiated, but further work has been postponed as part of the reduction made in the 1981 investment program. The initial emphasis on rail development was replaced by large scale efforts to develop the country's road network, which today constitutes the main transport mode. During 1950 to 1977, state and provincial roads increased from 24,000 km to over 59,000 km. In 1980 there are about 60,000 km of state and provincial roads of which about 34,000 km are paved. Since the late 1960's Government efforts have concentrated on improving the existing infrastructure as well as on developing a network of village roads, which in 1980 consists of 172,000 km with about 6,000 km paved. 5.3 The present pattern of transport use reflects the rapid growth and dominance of the road network. The share of highway freight traffic in total transport increased from about 40 percent in 1960 to about 75 percent in 1979. In the same period the share of highway passenger traffic increased from about 73 percent to about 94 percent. Total railway traffic remained fairly stable in absolute terms until 1976, although its relative share decreased. During the past four years, however, railway freight traffic, which is the most important part of their operations declined by about 25 percent. Conversely railway passenger traffic increased approximately 50 percent. In 1978, the railways carried about 13 percent of total goods traffic and about 2.5 percent of total passenger traffic. The other modes carried even less; coastal sea transport accounted for about 7.5 percent of total freight traffic and less than one percent of passenger traffic, although its share has been increasing rapidly in the last two years. Air transport handles a very small portion of either traffic. - 126 - 5.4 In spite of the relatively good coverage of the transport network, in many instances the quality and capacity of the system are not adequate. There are two key issues for the future. First, and most important, whether investment in transport will be able to respond effectively to growing and changing demand from other sectors especially of the new orientation of the economy towards exports and exploitation of indigenous energy resources. Second, whether the institutions in this sector will be reformed to achieve better coordination between modes, taking into account relative transport costs to improve the quality and capacity of the system where economically justified, and to increase capacity utilization in the railroads. 5.5 Transport investment during the past decade has averaged nearly 20 percent of total gross fixed capital formation. However, few extensions or major improvements have been made to the transport system, with exception of the Bosphorous bridge and the Izmit-Istanbul road. Expenditures have been concentrated on maintenance and localized improvements. At the same time, land freight traffic, especially on the road system, has increased by 80 percent. Consequently, in many instances traffic demand has reached, or exceeded, structural and capacity limits resulting in deteriorating services with severe congestion and vehicle overloading problems. A program of pavement strengthening and rehabilitation and capacity increase to avoid very high maintenance costs and transport bottlenecks in the next years should be implemented as a priority. A basic feature of this program is the identification of road section where pavement failures are likely to occur where capacity expansion is economically justified in light of changes in demand for transport and increases in petroleum prices. 5.6 In the railway subsector, investments have not been used effectively. Quality of management and operations are low and declining and the services have been unable to meet the demands placed upon them. There has been a tendency to attempt to correct these failures through infrastructure investments. In the most part, instead of increasing capacity, there is need for revised operating methods, recruitment of skilled and experienced personnel, and provision of needed inputs. This strategy will increase service availability and reduce the need for large investments in infrastructure in the existing network. At the same time, a longer term strategy should be prepared. 5.7 Over the last decade the public sector has executed about 70 percent of the investment in transport. (Only during 1976-1978 the Government's share decreased to about 60 percent due to increased private expenditures, especially in transport equipment). Transport has generally accounted for about 20 percent of total public investment, but the proposed 1981 investment in the sector would reduce its share to about 18 percent. Since 1978 there has been a steady decline in transport investment in real terms, from TL 142 billion in 1977 to TL 88 billion in 1980 (in 1980 prices). Investment figures, however, are a misleading indication of executed physical investment. Substantial resources have been allocated to long gestation projects yet to be completed. In addition, investment has generally included the cost of maintaining a large and underutilized work - 127 - force. In roads for example, 1980 investment expenses include about 40 percent labor costs. This relationship continues in the 1981 investment program and need to be re-examined. 5.8 Transport planning, policy and regulation have been largely on an ad hoc basis, with only limited coordination between modes and even less with other production sectors. There has been a lack of adequate coordination between developments in manufacturing, energy and agriculture and planning of investments in the transport infrastructure which would be required to permit those developments to be effective. SPO and the Ministry of Finance coordinate expenditures in the sectors but their influence has usually been limited to identifying deficiencies in project planning and preparation, as well as monitoring implementation problems. The Transport Coordinating Agency (TCA), set up within the Ministry of Transport and Communications for this purpose, has not been able to fulfill its functions. This agency is seriously understaffed and has no effective authority to influence either subsector agencies or ministries. Unless explicit consideration to the transport investments needed to assure that deiands are met, structural changes in the economy, the expected growth in exports and the increased exploitation of coal and lignite, will continue to face bottlenecks. Consequently, strengthening TCA, or a similar instiution, should receive priority in formulating a transport strategy for the 1980's. B. The 1981 Investment Program 5.9 The 1981 investment program in transportation is not adequately based on technical and economic studies of the existing capacity of the system and possible changes in demand. It is mostly a collection of relatively small projects designed to alleviate urgent problems or to improve existing implementation constraints in some of the subsectors. The distribution of investment resources among modes does not appear to be based on the structural shifts in demand that will result from changes in the orientation of the economy and higher energy prices. These changes, and the increased urbanization of the country, will greatly affect demand for transport. Consequently, an immediate priority for the sector should be the preparation of an integrated program to address these issues, as well as provide a basis for an investment program for the sector during 1982-1985. While the analysis to support this program is being prepared, investments in the sector should continue to be directed at solving urgent bottlenecks. 5.10 The 1981 investment program in transportation covers some 829 projects at a total cost of TL 878 billion (excluding pipelines), in 1981 prices. The total cost estimate can only be regarded as a rough approximation, since, some of the original cost estimates are several years old and, although they have been adjusted for inflation, may deviate significantly from their current costs. On the other hand, the program includes some projects on which expenditures will proceed very slowly and only nominal allocations have been included. - 128 - 5.11 The total foreign exchange expenditures for the program are estimated at TL 140 billion, representing 16 percent of its total cost. However, this estimate reflects only the direct foreign currency expenditures and does not cover the cost of imported materials, spare parts and equipment that can be bought on the local market. For highways, for example, the foreign costs are estimated at only TL 2.2 billion equivalent, representing less than 1 percent of the total cost of TL 394 billion of the highway program. In comparison, if both direct and indirect imports are included, foreign costs would be of the order of 45 to 55 percent of the total cost. In other words, the foreign cost estimate included in the program seriously under-estimates the foreign exchange component. 5.12 The program contains information on hundreds of individual projects. However, this information is quite disparate and difficult to analyse. For example, the program lists over 400 individual road projects for the main highway network, with an average expenditure in 1981 of about TL 100 million, or about 41.3 million per project; in comparison the 1981 allocation for village roads covers only about 10 general categories of expenditure with no information on individual roads. Another example is that the cost of railway track overhaul does not include the cost of related ballast and other materials, which are listed separately. Therefore, it is not possible to obtain an accurate estimate of the cost of such overhaul. 5.13 Total expenditure on the program, up to the end of 1980, amounted to only TL 126 billion, or 14 percent of its total cost. The most advanced completion was achieved in Aviation and Airports, Highways, Ports and PTT and TRT, while the lower record levels were in Railways and Shipping. The state of program completion is discussed further in the context of the modal distribution of the 1981 Program Allocation. 5.14 The resources allocated for transport and communications in 1981 amounted to TL 119 billion, i.e. or 13.5 percent of the total cost, or 15.8 percent of the total remaining blance of the program. However, it should be noted that many projects in the transport sector represent large scale programs such as the rehabilitation of 1,000 km of roads, or railway track, or the purchase of 2,000 railway freight wagons. In contrast to more specific projects such as the construction of railroad lines between two points, these programs can be phased out over time, making it difficult to evaluate the current state of progress. 5.15 To provide some perspective on the 1981 allocation for transport, it may be noted that it represents 17.8 percent of the total allocation for public sector investments in 1981, compared to over 20 percent in the 1960's and about 25 percent during 1973-1977. In real terms, transport investments started to decline in 1978 and estimates for 1980 show an overall decline in real terms of more than 13 percent. The 1981 allocation constitutes a further decline in real terms of about 3 percent. Hardest hit were the investments in the railways and highways (40 percent decline or more) and communications (35 percent); with little if any decline in ports, shipping and aviation. - 129 - 5.16 Of the TL 119 billion allocation for 1981, TL 77 billion is to be spent on ongoing projects and TL 42 billion on new projects. The expenditures on new projects cover mainly allocation for salaries, materials and equipment which are to be used in force-account road construction. Much of these expenditures are actually on ongoing projects. If this is taken into account, about 90 percent of the 1981 allocation is earmarked for ongoing projects and only about 10 percent for new works. 5.17 The allocation of resources within the sector and in 1981 could only be evaluated in very broad terms. In the absence of consistent indicators of economic and financial returns, it was not possible to evaluate the status of each project and the priority of the works to be carried out with the available resources. The table below shows the distribution among modes, in percentage terms, of the total cost of the program, of the expenditures up to 1980, and of the total allocation for 1981. Table 5.1; DISTRIBUTION OF 1981 PUBLIC SECTOR INVESTMENT PROGRAM (percent) Transport Mode Total Expenditure 1981 Program up to end 1980 Allocation Highways 44.8 56.4 50.7 Railways 23.7 11.6 15.6 Ports 3.7 4.6 5.5 Shipping 4.9 3.6 2.5 Aviation and Airports 4.0 5.3 7.2 PTT and TRT 18.9 18.5 18.5 Total 100.0 100.0 100.0 Sourcei 1981 Investment Program. 5.18 The modal distribution of expenditures up to 1980 and according to the 1981 allocation provides a more realistic picture of the pattern of investments than the breakdown of the total program. This is because the program does not cover certain annual expenditure for salaries, materials and equipment for force account road construction and because the railway program includes the very high construction cost of the high-speed line between Istanbul and Ankara, which has been postponed indefinitely pending further study. - 130 - 5.19 Taking the 1981 allocation as a benchmark, the modal distribution of investments can be summarized as follows; (i) The 1981 allocation for highways is low, but is acceptable as a temporary corrective measure provided priority is given to urgent remedial works. During the next two years, careful planning of a longer term work program will have to be completed and the level of expenditure will probably have to be increased to avoid permanent pavement failures and to reduce congestion on major road sections. (ii) The 1981 allocation for the railways is reasonable considering that, besides track-overhaul, it covers mainly investments to increase the carrying capacity of several links on the railways, which are presently a serious bottleneck. However, future railway investments should be reassessed in the light of possible major improvements in their operation and, thereby, in railway carrying capacity. Furthermore, future investments should also take into account the possible increases in bulk freight transport demand from the major new projects in mining, energy and industry. (iii) The 1981 allocation for ports is consistent with current needs and the vital role that ports should play in the country's foreign trade. The 1981 allocation covers, besides some justified infrastructure investments, mainly expenditures to improve port operations, including equipment procured under an ongoing Bank project. A major revision of port investments is dependent on the completion of a ports master plan in about two years, under this project. (iv) The 1981 allocations for airports and for PTT and TRT are relatively high, but are consistent with the need to complete important ongoing projects. (v) The 1981 allocations for shipping, is relatively modest, and are unlikely to create difficulties but shipping investments should be reviewed in the light of possible economic benefits. 5.20 The 1981 investment program and the Bank's recommendations, wich are discussed in detail below, appear in the following table; - 131 - Table 5.2: 1981 TRANSPORT AND COMMUNICATIONS INVESTMENT PROGRAM /a (TL billion at 1981 prices) Bank Subsector 1981 Allocation Redommendation Railways 18.5 18.5 Highways 40.0 40.3 Village roads 20.0 20.0 Ports and Shipping 11.1 11.1 Telecommunications 20.7 20.7 Civil aviation 8.6 8.6 Total 118.9 119.2 /a Pipeline related investments are excluded; they are included in energy sector. Source : 1981 Investment Program; Bank Estimates 5.21 In light of the problems created by Turkey's heavy dependence on imported oil to meet its energy demand, conservation of energy should be an important objective in the transport sector, which in 1979 accounted for 36 percent of consumption of petroleum products. This implies an emphasis on public transportation, and on pricing policies consistent with the objectives of minimizing the use of private vehicles and maximizing the efficient use of mass transport. 5.22 Another important objective of the transport sector investment program should be the improvement of the financial condition of the SEEs in the transport sector and the need to modernize their management. The establishment of appropriate road user charges, for example, could be considered in the roads subsector. In the railways, the emphasis should be on increased efficiency and productivity. Accounting procedures should be reviewed in order to separate current expenditures such as routine and periodic maintenance, and substantial surplus labor costs, from investment. C. Bulk Transport Needs and Services 5.23 Current development plans, especially as they concern the iron and steel and mining sectors, will place a large burden on the country's bulk transport capacity, particularly the railway, ports and coastal shipping subsectors. Available data on iron and steel production and coal and iron ore production are very tentative and make it very difficult to produce reliable flow diagrams to form the basis of sound transport planning and investment. It is clear that the Government should give priorityto an input-output study of the iron and steel and mining industries, perhaps - 132 - supported by a linear programming exercise. A detailed study may well lead the Government to reconsider its strategy for development of the iron, steel and mining industries in view of the heavy transport investments that may be necessary, which have not yet been taken into account in the financial and economic analyses of the industrial projects. Using the limited data available, the Bank has attempted to indicate areas where transport limitations could result in serious bottlenecks. 1. Iron and Steel Industry 5.24 The transport of iron ore will be critical in the follwoing areas* (a) Rail transport between Divrigi and Karabuk, currently at about one million ton capacity will need to increase to 1.5 million tons by 1986; (b) Output of the Divrigi mine going to Erdemir, shipped via the Samsun Port, will be constrained as the Divrigi/Samsun rail line has a capacity of only 250,000 tons and the Divrigi/Direkli line can carry 1.25 million tons; (c) The further development of Divrigi will increase the output to 4.35 million tons and together with output of the private mines, the transport requirement will be about 5 million tons. The Turkish State Railways have announced that their maximum capacity can increase only to 3 million tons; (d) The current port capacity at Samsun is about 1.75 million tons; (e) In addition to the potential shortage of port capacity at Samsun the ports at Eregli and Iskenderun will need to be studied carefully in view of: (i) by 1986 iron ore plus coal passing through Eregli may amount to about 10.4 million tons and in 1990 to 14.4 million tons; and (ii) by 1986 the Iskenderun port may require about 8 million tons of iron ore and coal capacity. With the possible execptions of the Iskenderun port, the railway between Direkli and Karabuk and between Zonguldak and Karabuk, it is clear that major investment programs would be required to support iron and steel programs, although pruned down to exclude most components of Karabuk modernization and the Fourth Mill at Sivas, if they are to be implemented effectively. 2. Coal and Lignite Transport Needs 5.25 The most important energy sources requiring bulk transport are coal and lignite which are used in industry, power generation and domestic heating. Production in 1979-1980 is estimated at about 4.8 million tons of saleable hard coal and 14 million tons of lignite. Hard coal production is limited to Zonguldak on the Black Sea coasts. Increases in production beyond the current level are uncertain. Lignite production, however, has considerable potential for expansion and a major development program is under consideration. Hard coal from Zonguldak will continue to be used mainly by the power stations at Silahtar and Catalogzi (about 1 million tons per annum), the iron and steel plant at Karabuk (about 0.7 million tons per annum in 1980 and 0.9 million tons in 1986) and the steel plants of Iskendrun and Eregli, which will consume most of the balance of the 4.8 million tons. Karabuk is supplied by rail and Iskenderun and Eregli by coastal shipping. Although temporary transport bottlenecks may occur, and - 133 - rugged terrain limits the Zonguldak-Karabuk line capacity, no major transport problems should constrain the present level of operations at Zonguldak. 5.26 Lignite demand is tentatively projected by the MENR to increase from the present 19 million tons to 120 million tons in 1990. Current plans call for an increase in production of about 40 million tons. The 1985 demand is estimated at 75 million tons, which compares with a possible domestic supply of about 55 million tons. However, the Bank's views indicate that demand and supply will not increase as quickly as currently anticipated. If lignite production expands to match total demand, the transport industry would be called upon to transport at least an additional 12 million tons a year by 1985, an increase of about 50 percent. The transport industry which currently moves an estimated 1 million tons by rail and 5 million tons by road and coastal shipping could not meet such a demand, especially in eastern Turkey. It is clear from this analysis that the present reliability of future production and consumption figures, together with information on origins and destinations, is inadequate for transport planning purposes. In view of Turkey's critical need to develop these domestic energy sources, the Government should coordinate its planning for their development which should include transport requirements and investment costs in the technical and economic feasibility studies. D. Major Subsectors 1. Highways 5.27 Turkey's road system consists of approximately 232,000 km of which about 60,000 km are state and provincial roads. The remaining 172,000 km are village roads. In addition there is an unspecified kilometrage of municipal-, agricultural and forestry roads. Most of the state and provincial system was built in the 1950's and 1960's. Since it was built, the network has had very few improvements in design or capacity. State and provincial roads are mainly two lane, varying between 6 meters and 10 meters in width between shoulders. About 40 percent of their length is paved, mostly by surface dressing. Most of the village road system is single lane of no specific standard. 5.28 Historically, traffic on the state road system has grown at a rate of about 40 percent higher than the growth in GDP. Since 1977, however, estimates indicate a decline in the traffic growth of about 4 percent to 5 percent per annum. This trend is the result of higher fuel costs and the general slowing down of economic activity. At the same time the problems in the road system probably have also contributed to aggravate the economic situation in the country. Fuel shortages and difficulties in obtaining spare parts have created bottlenecks in the sector. The deteriorating road conditions and congestion have limited vehicle use in some areas. In addition, traffic has been reduced due to the conditions in European economic activity and the private car fleet, which in the past had been augmented considerably by migrant workers, has also been growing at a slower rate during the last three years. - 134 - 5.29 A substantial portion of the road network is suffering from severe traffic congestion. Estimates indicate that more than 5,000 km of the state road system 1/ are carrying in excess of 5,000 vehicles per day, with about 40 percent to 50 percent of the traffic consisting of overloaded heavy vehicles. This traffic is equivalent to about 11,000 p.c.v.'s per day while the normal daily traffic capacity of this type of road (mainly two-lane) is only about 8,000 p.c.v.'s. The Izmit-Ankara section of the Istanbul-Ankara road which is mainly two-lane, has an estimated average daily traffic in excess of 10,000 vehicles, with over 50 percent heavy vehicles. This traffic is equivalent to 20,000 p.c.v.'s, while under favorable terrain conditions and little roadside development, the capacity of a two-lane road is only about 9,000 p.c.v.'s. Unofficial estimates indicate that this road may be carrying about 1.5-2.0 million standard axle load annually. 2/ 5.30 Considering the weak structural strength and low geometric designs of much of the state roads, the prevailing heavy traffic volumes are likely to lead to major road failures within the next five years. These roads have been kept operating only with very high maintenance costs, which average at least US425,000 km per annum. These costs may be much higher in some cases such as the Istanbul-Ankara road where they may be equivalent of US$75,000 km per annum. The congestion also causes high and increasing vehicle operating costs as well as more frequent road accidents. 5.31 It is considered unlikely that the system will be able to provide adequate service for much longer. Clearly, a major road strengthening and improvement program for the roads with excess demand is urgently needed. Even though such a program has not been subject to standard technical and economic feasibility studies, they should be economically justified on the basis of current traffic levels. In addition, engineering studies have shown that failure to undertake this work will lead to serious permanent failure. This program is estimated to cost about TL 36 billion (US$450 million equivalent) over a four year period. Only after completing this program, will it be possible to address the important issues of increasing capacity and improving geometrical standards on these roads. A comprehensive program that considers relocation of some roads and possible inter-modal substitution to minimize transport costs should be prepared simultaneously. This is the strategy that GDH intends to implement during the next years. 1/ Close to 30 percent of the network, excluding sections of road constructed or being constructed to expressway standards. 2/ A comprehensive traffic survey of Turkish state roads is carried out each year and the results are published. Traffic data have generally been of good quality. However, the most recent analysis available refers to 1977. The estimates presented here are based on tentative traffic figures for 1980. - 135 - 5.32 While the road strengthening and improvement program is being prepared, it is necessary to continue the ongoing maintenance operations which involve surface dressing, repairing and replacing bituminous concrete overlays, as well as pavement strengthening in relatively small road sections. Reparations of roads affected by landslides, which are common in some areas of the country, should also be carried out. Theseoperations are included by GDH in its investment budget for 1981. 5.33 Although there are no traffic data for provincial and village roads, observations made during Mission's field trips indicate imbalances in this network. Some provincial roads seem to be overdesigned while some village roads serving important villages, and potentially productive agricultural areas, are almost impassable. Consequently, investment and maintenance in this subsector should be aimed at reinforcing the sections of the system most in need. 5.34 The GDH equipment park is extensive and largely adequate in size with exception of the crushing and bituminous concrete mixing plant. Although most of the equipment is old (average about 6 years), efficient mechanical workshops keep average equipment downtime to less than 5 percent. However, this performance is only achieved with high maintenance costs which are increased by shortages of spare parts that often force GDH to pay high prices in the local "grey" market. Although a major equipment renewal program is very desirable during the next two or three years, efforts should concentrate on the procurement of spare parts and on equipment needed to carry out the pavement rehabilitation and strenthening program. This strategy would reduce maintenance costs while an equipment program that responds to the needs of the longer term road investment and maintenance program is prepared. 5.35 Investment Program. The initial 1981 investment proposals presented by GDH, including new and ongoing projects, amounted to TL 111.6 billion. GDH's proposals were based on perceived needs for the subsector and on their theoretical implementation capacity. After allowing for inflation, the investment would have represented more than 100 percent increase over the 1980 program. This is considered unrealistic in light of current financial constraints. These proposals were more a bid for resources than a program which gives careful consideration to economic priorities and the changing transport needs of the economy. The allocations approved by SPO amounted to 36 percent of the original request and, in general, they coincide with the Bank's recommendations. 5.36 The 1981 program concentrates on projects which are of immediate urgency to preserve the existing system, particularly the road sections that carry heavy traffic volumes. The program also allocates resources to complete a limited number of ongoing priority construction projects. A similar package should continue in 1982. These years are considered as a transition period in which the scarce resources available are used to reinforce the pavement of the existing system where it is most needed and - 136 - to avoid the further deterioration of these roads. In the meantime, an integrated longer term investment program would be developed and complementary work such as equipment procurement and, most importantly, coordination with other sectors would be completed. The recent 1981 program allocations for investments in the subsector and the Bank's recommendations appear in the following table; Table 5.3; INVESTMENT IN MAIN AND SECONDARY HIGHWAYS, 1981 SPO ALLOCATIONS AND BANK'S RECOMMENDATIONS TL Billion 1981 Prices Total Project Spent to SPO 1981 Bank Ongoing Projects Cost End 1980 Allocation Recommend. 1981 Motor & Expressways 20.21 5.09 3.00 1.60 (Cost & Heavy Maintenance) Works Associated with Proposed Bosphorous 20.95 0.10 insig. - Bridge II 100% 1% Bridges 2.96 1.65 0.45 0.45 100% 56% 15.2% Equipment & Materials 46.00 15.20 6.55 7.00 100% 33% 14.2% Trans Turkey Hwy 4.73 1.48 0.91 1.00 100% 31.3% 19.2% Strengthening, Heavy Maint. 108.07 24.16 8.87 10.00 and Minor Improvements 100% 22.3% 8.2% Miscellaneous & Studies 7.49 0.997 1.00 1.00 100% 13.3% 13.0% Sub-Total 210.41 48.6 20.8 21.05 100% 23% 9.8% New Projects Labor Costs 15.74 - 15.74 15.74 /a Fuel Costs 2.02 - 2.02 2.00 Miscellaneous Costs 0.43 - 0.43 0.50 Bridge Works 0.65 - 0.38 0.40 TTH Strengthening 33.00 - 0.65 0.65 Sub-Total 51.84 - 19.22 19.29 GRAND TOTAL 262.25 48.6 40.00 40.34 /a The actual cost of existing labor force estimated by SPO, although the actual labor need to carry out the program may be only TL 8 billion. Source; SPO, Bank Estimates. 5.37 The SPO allocations for motorway construction (TL 3.0 billion) are for sections of the Istanbul-Izmit expressway and for the road between Torsos and Pozonte. The Bank recommends continuation of construction in - 137 - the Istanbul-Izmit area (TL 1.7 billion) where more than 50 percent of the work has been completed and should be finished in 1983. Studies have shown the economic viability of this road. Construction of the Torsos-Pozonte road may be postponed but, as it will be over 50 percent complete by the end of 1981, progress should be reviewed together with an assessment of economic viability before any decision is taken. 5.38 The Bank supports the overall SPO allocation for the continuing road rehabilitation and maintenance operations. In particular, this program will consist of heavy maintenance, rehabilitation and some pavement strengthening of about 1,800 km per annum, and continuation of paved surface maintenance covering about 5,000 km per annum. In addition, the SPO allocations include urgent bridge maintenance (TL 0.8 billion) and procurement of spare parts and some equipment replacement (TL 2.1 billion) and the Bank supports these allocations. 5.39 The Bank strongly recommends that the allocation made available for technical and economic studies be increased to TL 0.5 billion. In addition, at least a sample of typical state and provincial roads should be subjected to standard technical and feasibility studies described in GDH document entitled "Yatirim Programina Teklif Edilen Proje". 5.40 Total recurrent investment expenses, which include labor force, fuel and other costs amount TL 18.1 billion, or about 45 perceft of the total SPO allocation for investment in transport during 1981. The original GDH proposal included TL 14 billion of additional labor cost which very likely is still in their payroll. The Bank feels that these costs are excesively high given the levels of investment that this sector is currently capable to undertake and the financial constraints that Turkey faces today. The Bank estimates that the real labor cost may amount to only TL 8 billion, or 30 percent of the allocation for investment and recommends that for future practice the extra finance needed to pay the surplus labor force be treated separately. In the past GDH has attempted to employ their labor force in labor intensive operations but (a) technical standards in the majority of highway work on state and provincial roads require'equipment intensive work; and (b) attempts to use labor in other areas such a village roads require expensive complementary services for the workers and have met resistance from workers who are reluctant to move to rural areas. In spite of this, a very serious effort should be made to overcome these obstacles and to utilize this labor force efficiently, either in this or in other sectors of the economy. In addition, current expenses should not be part of the investment but of the operational budget. The investment program should be re-examined so as to change this pattern. 2. Village Roads 5.41 The system of village roads is the responsibility of the Infrastructure Directorate (YSE) of the Ministry of Village Affairs. The YSE is divided into 18 regional divisions which are responsible, in cooperation with local authorities, for preparing and executing programs - 138 - for construction, improvement and maintenance of village roads. The contribution of rural roads to rural development is clear. Turkey has had a high degree of local interest and participation in road works. 5.42 The current village road network consists of approximately 172,000 km, of which 40,000 km are in "good" condition, 30,000 km are in "poor" condition and would require reconstruction to reach a maintainable standard and about 100,000 km are primarily unmaintained tracks. It was estimated that the bulk of the network carried between 10 and 400 vehicles per day. Clearly, a road inventory including traffic counts and related rural development, current and potential, is an important prerequisite for the development of a viable village road program. 5.43 The construction of rural roads is financed from three sources; (a) local population which provides resources, materials and labor; (b) local governments; and (c) state allocations. The investment figures available only include the state contribution and thus actual.expenditure cannot be identified. In 1979, investment from state sources was about TL 8.54 billion (in 1979 prices) and during 1980 it decreased to about TL 6.6 billion (in 1979 prices, equivalent to TL 11.7 billion in 1980 prices). Similarly with GDH's investment budget, these figures include substantial maintenance expenditures, as well as the costs of maintaining a large underutilized labor force. 5.44 As part of an overall strategy for this subsector, rural road construction and improvement should give priority to integrated agricultural projects such as the Erzurum integrated rural development project which has a road component estimated to cost TL 5 billion. 5.45 Investment Program. The investment proposals for 1981 presented by YSE amounted to about TL 51 billion, including approximately TL 17 billion for labor. These proposed expenditures were unrealistically large given YSE implementation capability and lack of planning. Project selection has been governed largely by political considerations rather than by detailed analysis of costs and benefits from road construction. 5.46 SPO allocations for investment in village road construction trimmed down YSE's proposals to TL 20 billion, of which TL 10 billion constitute payments for permanent and seasonal workers. The remaining TL 10 billion include: (a) TL 1.2 billion for spare parts and tools; (b) TL 6.4 billion for projects of road construction and maintenance and improvement which are scheduled to be completed by 1983, and (c) TL 0.8 billion for miscellaneous facilities; (d) TL 0.54 billion for bridges and routine maintenance operations; and (e) a separate item of TL 1.0 billion for fuel. The Bank recommends a similar program which increased emphasis on maintenance and studies and program preparation. Accordingly, the recommended investment budget amounts to TL 10 billion and would include; (a) about TL 2 billion for routine maintenance; (b) TL 1.5 billion for spare parts and tools; (c) TL 0.5 billion for road inventory, studies and program preparation; and (d) TL 6.0 billion for road construction and improvement. It also recommends that for future practice, payments for surplus labor, estimated at TL 6.0 billion for 1981, be excluded from investment budget. - 139 - 3. Railways 5.47 The Turkish railway network comprises about 8,200 route km of mainly single standard gauge line. It provides access to most major towns and links the European system (via the Bosphorous ferry) to those of Iran, Iraq and Syria. The operations and development of the railway system are constrained by the difficult topography. The railways on relatively easy alignments were built long ago, further extensions or shortcuts will be much more difficult and very costly to build. Consequently, it must be expected that the share of rail traffic will continue to be relatively modest, even with an increase in the efficiency of their operations. It should also be pointed out that the railways relative advantage in energy consumption per ton/km is frequently limited by the longer railway route compared with that of road transport (e.g. Ankara-Samsun is 417 km by road and 736 km by rail). 5.48 Railway freight traffic, which is the largest component of their operations, has shown a decline of about 25 percent during the past four years. Passenger traffic has conversely shown nearly a 50 percent increase. In the absence of urgent remedial actions, railway freight traffic will continue to stagnate. The most immediate short term problem has been the shortage of operational traction; one-third of the diesel locomotives are under or awaiting repair. This has been partly the result of shortage of foreign exchange for spare parts, which is aggravated by the Turkish Railway's (TCDD) poor financial performance (1979 losses including Government subsidies amounted to TL 16.4 billion, and increases to TL 27 billion in 1980). That has caused serious shortages of local funds. Passenger traffic has been little affected by factors such as locomotive shortages because it has received priority over freight traffic. 5.49 TCDD can no longer accept all the potential traffic. This deficiency leads to serious bottlenecks in industrial and agricultural programs and, most importantly, could place severe restraints on the development and use of domestic energy resources such as lignite. It is estimated that during the next five years bulk transport demand, for the iron and steel industry alone, could rise to about 5.5 million tons. This compares with approximately 2.0 million tons carried currently by rail, out of a total freight volume of about 15.0 million tons. In 1980 less than 1 million tons of lignite were moved by rail and, although much of the new mining output will be used on site for electricity generation, mining development plans indicate that rail transport demand for lignite and coal could rise to at least 11 million tons in 1985 and possibly 16 million tons by 1990. It is clear that the railway presents a bottleneck in the transport sector and one which will represent a serious constraint on correcting the country's economic woes. Government must therefore take urgent steps to remedy the situation by (i) integrating transport demand and supply by all modes; (ii) taking immediate steps to improve operations; and (iii) preparing a long term economically justified operational and development strategy. 5.50 Investment Program. In 1980 the TCDD submitted an ambitious 1981-1985 investment program for railway investment, which amounted to TL - 140 - 517 billion in 1981 prices (about $6.5 billion). Given the probable financial resources available and their implementation capacity, such a program was clearly unrealistic. In addition, 1981 expenditure of TL 2.9 billion was suggested for the Ministry of Public Works to execute infrastructure works largely related to the proposed Ankara-Istanbul high speed railway which, following Bank examination of a feasibility study, was considered economically unjustified and of very low priority. The entire program was based on inadequate studies and analysis which neither addressed the critical problems of operational efficiency nor was related to solving the serious bottlenecks mentioned above. 5.51 The total cost of the proposed investment program in the railways is estimated at TL 220 billion, of which TL 113 million is to be carried out by the General Directorate of Railways in the Ministry of Public Works, mainly for new line construction of major improvements, and TL 100 billion by the Turkish Railways for improving the existing system. Both programs were overly ambitious and they clearly exceeded the implementation and financing capacity of the country. Expenditures up to the end of 1980 represented less than 5 percent of the total program cost of the Directorate for Railway Construction and 10 percent of the total program cost of the Turkish Railways. Similarly, the 1981 allocation represents about 3 percent of the Directorate's program and again about 10 percent of the Railways' program. 5.52 The program proposed by the Directorate for Railways Construction consisted mainly of three projects; (i) construction of a new high-speed line between Ankara and Istanbul; (ii) improvements to increase the capacity of the Divrigi-Sivas line; and (iii) construction of a double-track on the commuter line Alliaga-Menumen (near Izmir). 5.53 The single most important project is the high-speed line between Ankara and Istanbul, estimated to cost TL 95 billion, plus approximately the same amount for complementary line equipment and rolling stock. The principal project component is the construction of a 250 km section of a more direct route between Arific and Sirican, which would shorten the distance by 150 km compared with the existing line. However, since the financial and economic viability of this project remains to be proven, the Government has decided to postpone its construction indefinitely and has allocated TL 1.15 billion in 1981 to cover the cost of terminating ongoing contracts. 5.54 The principal reasons for this decision are; (i) the high cost of construction per km since the line runs in very rough mountainous terrain, requiring large earthworks and many tunnels (about 70 km total length); (ii) the high cost of complementary investments to make the line operational; (iii) the need to maintain the existing line in operation; (iv) new operational solutions could increase the capacity of the existing line, which earlier had been expected to become a bottleneck in the mid-1980's; (v) the low traffic volumes expected on the new line in its planned opening year; and (vi) that the financial resources to build the line efficiently are not available. - 141 - 5.55 The improvement of the Divrigi-Sivas line has high priority, since it is a vital section between the iron ore mine at Divrigi and the steel mill at Iskenderun. The current production capacity of the mine cannot be fully utilized because of the limited capacity of the railways. A study to increase the line's capacity, either by introducing CTC signalling or doubling the line is being completed. 5.56 The Bank does not have detailed information on the Alliaga-Menemen line. This is apparently an important commuter line where capacity needs to be increased to meet expected traffic growth. 5.57 The Bank recommends that a financial allocation to TCDD for long term program for the railroads be delayed until a careful survey of transport needs has been carried out. Such a review should be based on the study of railway operations completed recently by consultants which has indicated that the capacity of the existing traction and rolling stock would be adequate to meet all traffic currently offered if: (a) the number of diesel and electric locomotives under or awaiting repair was reduced from the current 30 percent to 10 percent, which could be achieved if the necessary spare parts (requiring foreign exchange) were procured; (b) traffic operations were rationalized and modernized, for example, employing a system of long distance freight expresses serving about 24 distribution centers; (c) planning and construction of two modern marshalling yards were completed by 1990; and (d) the speeds of various train/traffic categories were equalized, leading to a significant increase in line capacity. The function and impact of passenger services on main line operations and capacity should also be reviewed. 5.58 In the meantime, the 1981 allocation provides for continuation of a number of priority sub-programs such as track renewal, replacement of antiquated rolling stock and of steam locomotives by diesel electric or electric locomotives, etc. Signalling and telecommunications should continue to be improved to increase line capacity where there are bottlenecks. The Bank supports this stragegy. 5.59 The 1981 program of TL 18.5 billion comprises; (i) TL 0.2 billion for studies; (ii) TL 6.0 billion for spare parts, equipment and rolling stock including the purchase of 25 diesel locomotives and 10 self-propelled passenger trains; and (iii) TL 12.3 billion for infrastructure investment. The budget also includes the TL 1.5 billion for delayed'charges related to the postponed Ankara-Istanbul high-speed railway. TL 3.5 billion of the allocation are for the Directorate of Railway Construction and TL 15.0 billion for the Turkish Railways. Of this total, TL 12.3 billion is allocated to ongoing projects and TL 6.1 billion on "new projects". This latter breakdown is somewhat arbitrary, however, in that the new projects category represents; (i) the current operating budget for the Directorate; and (ii) a customary annual allocation for the acquisition of rolling stock by the Turkish Railways, mainly of wagons and locomotives manufactured in Turkey. - 142 - 5.60 The program appears to be appropriate provided the necessary technical assistance for improving railway operations is included. The Bank estimates that approximately TL 8 billion will be required in foreign exchange compared with nearly TL 5 billion estimated by the Government. The difference between these two figures is due tot (i) underestimating the foreign exchange content of civil works; and (ii) assuming by the Bank of greater proportion of spare parts, rolling stock and other equipment being imported (as opposed to domestic manufacture) in the short run. The Bank proposes that, to carry out the necessary studies and to implement necessary changes, the TCDD acquire technical assistance of at least three experts for a period of 24-36 months each. 5.61 The major part of the infrastructure investments is for track-overhaul, including the repair of railway corssings, signalling, electrification, and stations. The cost of individual activities cannot be determined precisely, because such related items as ballast, sleepers and equipment are listed and costed separately. Overall, the allocation for these infrastructure works seems insufficient to make up the backlog of track overhaul. The 1981 allocation for infrastructure investments includes, however, TL 1 billion to straighten out certain line sections. These works are relatively costly per km and their economic and financial justification remains to be proven, especially on lines carrying low traffic volumes. 5.62 The 1981 allocation of TL 5.5 billion for the acquisition of rolling stock manufactured in the country is adequate, considering the age structure of the existing equipment and to keep the domestic manufacturing enterprises functioning. 5.63 The serious deficiency in the railways' ability to handle bulk commodities (especially iron ore, coal and lignite) is clearly an issue which must be addressed urgently. However, it is equally clear that until and unless coordination with projects in other sectors is undertaken, (commodities, quantitites, origins, destinations and phasing), railway planning can at best be only ad hoc and not effective. Furthermore, the question must be specifically raised in each case whether major industrial and mining developments are economically justified considering the large transport investments that they may require. The Government should establish as soon as possible an intersectoral working group to study these issues. 4. Civil Aviation 5.64 Domestic air traffic was growing rapidly up to 1977 but has since declined along with economic activity. International traffic has continued to grow at about 2 percent per annum. Investments in civil aviation have been examined very carefully and with a few exceptions have been delayed when safety of operations is not endangered. Within the ongoing investment program, three major projects will be completed between 1980 and 1982: (i) Istanbul Airport, which has incurred expenditure of TL 2.4 billion by the - 143 - end of 1980, will be completed in 1982; 1981 allocation is TL 3.2 billion, with TL 1.5 billion to be spent in 1982; (ii) Adana Airport improvements, on which TL 108 million had been spent by the end of 1980, will be completed in 1982 at an additional cost of TL 800 million with 1981 allocation of TL 640 million; and (iii) Van Airport improvement, on which TL 82 million had been spent by the end of 1980, will be completed in 1982 at an additional cost of TL 568 million with 1981 allocation of TL 180 million. Development of the special tourist airport at Antalya, on which TL 2.87 billion had been spent by the end of 1980, will be completed in 1981 at an additional cost of TL 1.25 billion; this will be financed from the Ministry of Tourism investment budget. 5.65 Parallel to these basically civil and structural engineering works, navigational aids and air traffic control systems are being modernized. The infrastructure and equipment investment program appears to be well balanced in relation to needs, and new investments will be the subject of economic studies. Excluding the cost of Antalya airport, the Government's investment program for 1981 of about TL 8 billion should be achievable and justified. However, the schedule of aircraft procurement amounting to TL 8.08 billion during 1981-85 should be reviewed in the light of traffic demand trends. 5. Ports and Shipping 5.66 Turkey's 7,300 km of coastline are served by; (a) 10 major public ports which handle most of the country's international freight traffic; (b) about 30 small municipal and other public ports mainly engaged in domestic coastal traffic; and (c) about 35 specialized port facilities owned by industries which manage their own traffic. 5.67 These ports handle over 90 percent of the country's foreign trade and an estimated 13 percent of domestic freight traffic. The efficient operation of these facilities is clearly crucial to the country's economic activity and future development. The Bank is playing an important role in the subsector through a Second Port Project (Loan 1741-TU). This project will finance the foreign exchange content of key areas of port rehabilitation and will include support for improving ports coordination and management and technical assistance for the preparation of a ports master plan. 5.68 Operations in the main public ports are severely hampered by; (a) obsolete and inadequate cargo handling equipment; (b) shortages in storage capacity and other quay facilities; and (c) relatively untrained port work force and outdated management techniques. These issues are being addressed by the TCDD and Maritime Bank who are responsible for port management and superstructure; the Ministry of Public Works (Ports Division) is responsible for civil works. 5.69 Major investments in these subsectors should not be undertaken until the ports study and master plan are completed in mid 1982. - 144 - Investment in 1981 and probably the next two or three years should be limited to the ongoing program of equipment renewal and procurement and important storage and ship handling facilities. Particular attention should be paid to the demand for bulk commodity shipments (especially iron ore, coal and lignite). 5.70 Developments in the industry and energy sectors must be closely coordinated with port development. In this respect, potential port bottlenecks which may arise are: (i) iron ore shipments through Samsun by 1982; (ii) coal shipments from Zonguldak by 1985 or earlier; (iii) iron ore and coal shipments through Erigli which could reach 15 million tons per annum by 1990; and (iv) iron ore and coal imports through Iskenderun by 1986 or earlier. In view of the large investments that would be required to meet these demands, it is recommended that they receive special and urgent study to avoid the mis-allocation of scarce investment resources either in ports or steel production and coal mining, or in the railways serving the ports. 5.71 Investment Program. The Government's allocations for investment during 1981 in port management, superstructure, facilities and equipment amount to about TL 7.9 billion comprising; (i) studies, including a master plan, TL 0.4 billion; (ii) civil works TL 3.0 billion; and (iii) equipment TL 4.5 billion. Although the overall balance of the program appears to be adequate, it is not certain that a program of this size can be implemented in the time available. 5.72 Past public investments in ships have been large. Currently more than 30 percent of international trade is carried in Turkish ships and existing capacity has potential to increase this volume. Further major investments would not represent a wise use of resources in view of the uncertain opportunities for increased cargoes, the limited foreign exchange earnings potential of shipping and the large and immediate outlay in foreign exchange required for their procurement. Therefore 1981-1985 investments, estimated at TL 33 billion in 1981 prices, should be reduced to the minimum level that will ensure survival of the Turkish ship-building and repairing industry. Should an urgent need for additional shipping services arise, it could be met most economically by chartering vessels or by contracting with foreign lines. The Government proposes the construction/procurement of about 125,000 DWT of vessels in 1981 at a total cost of about TL 3.2 billion. Since it is very likely that such a program will be beyond the capacity of the Turkish industry, the Government should consider postponing the import of vessels and restricting investment to the domestic industry. Moreover, future major shipping investment, especially as it affects bulk transport, should be closely coordinated with an integrated multimodal planning study. - 145 - 6. Telecommunications 5.73 As the amount actually spent for this subsector in 1980 was considerably higher than the original SPO allocation, it is probable that the proposed 1981 level of investment can be achieved. The Bank believes that a program of TL 25 billion (1981 prices) could be justified by the existing unfilled demand. The 1981 Government allocation amounts to about TL 20.7 billion which should be well within implementation capacity and should concentrate on priority components. 5.74 The project for the installation of inter-city telephone cables and village cable will replace existing radio links of 7,500 villages, 2,400 of them have already been completed. Since the existing radio links function reasonably well, this project is considered to be of lower priority and consequently the 1981 allocation has been reduced. 5.75 The projects for the 1,450,000 (about 250,000 completed) automatic switchboards and for the 1,730,000 (about 650,000 completed) pairs of distribution networks are inter-related. At present the total capacity of the telephone system is 1.4 million lines, serving 1.2 million subscribers. However, there is a waiting list of an additional 1.6 million subscribers. These could be connected with the,1,730,000 pairs of connections included in the project, although at the current rate of progress limited by finance, especially foreign exchange, it would take some 10 years until the total demand for telephones would be satisfied. In order to speed up this program, a Canadian credit of Canadian $170 million has been agreed, and a French credit of FF 230 million is being negotiated. This could advance the completion of the two inter-related projects to respectively 1985 without, and 1983 with the French credit. 5.76 The project for the long distance satellite telecommunication system will increase its capacity and reduce the waiting time for long distance telephone calls. The new project for the installation of the underground coaxial cable and related equipment has strategic implications and has received external financing of about US$45 million. 5.77 The 1981 program for this subsector included 4 major and 15 minor projects. The 1981 allocation includes 3 major and 10 minor projects and it is intended that the 1982 program will include only six major projects. This policy of collating and limiting projects in the program will facilitate more realistic planning and project monitoring. - 146 - Sector Tables Table Al: INVESTMENT PROPOSALS OF MAJOR AGRICULTURAL INSTITUTIONS /a (TL Million) Organization 1980 1981 1982 1983 1984 1985 Progr. Actual to 9/80 Minister's Office Agric. Affairs (Ext.) 1,560 699 5,354 6,676 6,612 333 100 Veterinary 485 158 921 640 326 219 .188 Plant Protection 159 55 709 - - - - Artificial Insemin. 745 196 1,329 1,626 1,245 494 864 LDP 22 7 192 240 239 274 250 Cotton 41 7 94- - - - - Fisheries 224 64 506 612 70 37 12 Food Affairs 59 21 311 200 26 - - Feed Control 20 16 60 - - - - MEYSEB 7 5 278 800 726 855 869 Agric. Research 205 136 921 - - - - Forestry 5,305 8,477 9,324 10,257 11,283 12,411 State Farms 355 86 490 - - - Agric. Supply (TZDK) 281 226 1,350 343 400 400 400 Milk Ind. 450 173 2,480 5,410 2,241 476 870 Wool & Mohair 30 18 1,141 - - - - Feed Ind. (YEX) 250 157 512 244 119 - - Ataturk State Farm 24 6 51 - - - - Subtotal 10,231 2,030 25,176 26,115 22,261 14,371 15,964 DSI Large projects 6,550 43,048 61,672 62,466 50,384 111,125 Small projects .. 11,685 9,894 - - - Buildings ** .. 721 - - - Machinery .. 5,550 - - - Vehicles .. 300 - - - Recreation Area . 100 - - Repairs and Maintenance .. 1,221 - - - Salaries 7,700 - - - Price Increases .. 450 Others .210 Subtotd1 8_050 70,985 71,566 62,466 50,384 111,125 TOPRAKSU Ongoing Projects 3,929 .. 9,113 - - - - New Projects .. 18,046 - 8,768 __ 27,159 - - -- TMD (Grain Storage & Marketing 850 .. 3,500 - Total 27L899 ** 126,820 97,681 84.727 64j755 127L089 /a As of November 1980 prior to final review by State Planning Organization. Totals may not coincide with the breakdown shown in detailed tables becauses non project items are included. Source: SPO, proposing organizations. - 147 - Sector Tables Table A2: INVESTMENT PROPOSAL OF GENERAL DIRECTORATE OF AGRICULTURAL AFFAIRS (TL Million) Total Spent Project to Code Project Cost 1980 1981 Projects to be Finished 1981 a) Miscellaneous construction 280 142 127 b) Corum-Cankiri 52 16 36 Projects to be Finished after 1981 0430 Improve Agricultural Extension (Construction) 1,065 336 450 0250 Improve Agricultural Extension (Buildings) 526 - 100 0260 Corum-Cankiri (Building, Equipment, Vehicles) 118 23 50 0110 Cereal Improvement (Vehicles, Machinery) 516 32 113 0050 Oil Reed Improvement (Vehicle, Machinery, Facilit.) 326 30 188 0070 Improve. Vineyard & Horticulture (Machinery, Bldings)2,147 154 316 0080 Meadowland & Pasture Improve (Machinery, Vehicles) 1,484 141 375 0090 Livestock Improve. (Construct, Machinery, Livestock) 1,175 242 318 0110 Poultry (Construct., Machinery, Vehicles) 1,510 73 260 0120 Honey bee & Silk (Construct., Machinery, Vehicles) 1,002 43 355 0130 Agricultural Mechanization (Machinery, Construct.) 486 36 125 0150 Seed Prod. & Distribution (Mach., Constr., Vehicles) 521 31 275 0200 Improve Irrig. & Soil Cons. (Constr., Vehicles) 669 33 140 0230 Agricult. Supervised Cr. (Mach., Constr., Vehicle) 643 60 154 0250 Agric. Ext. Improve in 67 provinces 3,606 203 299 0260 Corum-Cankiri 728 41 154 0160 Ceyhan Aslantas 86 24 40 0190 Berdan Irrigation Project 13 2 7 0070 Village Agric. Extension (Vehicles) 2,136 240 431 Misc. Projects (Under TL 1 million) 2,913 192 465 Subtotal 21,670 1,936 4,615 Others /a 488 - 576 Total 20 /a Excludes funds for agricultural schools and revolving funds. Source: GDAA. - 148 - Sector Tables Table A3: 1981 PUBLIC SECTOR INVESTMENT FOR AGRICULTURE APPROVED BY SPO BY PURPOSE AND SOURCE OF FUNDS (TL Million) 1981 Total Revolving Organization Allocation Budget Funds Agricultural Affairs 3,280.0 3,220.0 60.0 Veterinary 968.3 960.0 8.3 Plant Protection 480.0 420.0 60.0 Artificial Insemination 1,433.7 1,380.0 53.7 LDP 100.0 10o.o - Cotton 65.0 65.0 - Fisheries 515.3 515.3 - MEYSEB 50.0 50.0 - Agricultural Research 600.0 600.0 - Forestry 15,050.0 4,600.0 10,450.0 Agricultural Supply (TZDK) 400.0 400.0 - Ataturk State Farm 33.0 33.0 Subtotal 22,975.3 .12,343.3 10,632.0 DSI Project Related Studies 600.0 600.0 - Ongoing and new Projects 27,050.0 27,050.0 - Machinery & Equipment 3,600.0 3,600.0 - Recreation Area 90.0 90.0 - Repair Maintenance 1,110.0 1,110.0 - Salaries 4,300.0 4,300.0 - Price Increases 400.0 400.0 - Others 350.0 350.0 - Subtotal 37,500.0 37,500.0 - TOPRAKSU Ongoing Projects 5,857.2 5,857.2 New Projects 11,708.2 11,708.2 Others 1.134.6 1,134.6 - Subtotal 18,710.0 18,700.0 10.0 TMO (Grain Storage & Mkting) 1,750.0 1,750.0 - Sugar Corporation 550.0 550.0 Others /a 2,749.7 2,749.7 - Total 84,235.0 . 73,593.0 10,642.0 In Others, 22% is for lower & higher education in the agricultural sector Source: SPO. - 149 - Sector Tables Table A4: DSI PROPOSED INVESTMENT SCHEDULE (TL Million) Sunk Total Cost to Investment Schedule Projects Cost Area 1980 198L7a 1982/b 1983k 1984. 1985/b (ha) 'A"Projects: Eregli 2. Merhale 265 12,100 212 105 - - - - As. Seyhan 2.M. 697 48,600 614 80 - - - - Suloglu 323 3,235 288 70 - - - Niede-Bozkir 244 971 150 70 - - - - Egridir Senirkent 327 9,340 251 150 - - - Bozcay-Karatas 328 7,500 284 200 - - - Gelendost 508 4,816 348 400 - - - - Caygoren 1.M. 639 17,816 322 50 88 68 76 - M. Kemalpasa 1.M. 446 19,255 201 109 120 - - - Iznik 1.M. 1,356 7,896 124 80 437 428 - - Demirtas 1,252 2,365 189 110 749 - - - As. Gediz 3,090 101,934 1,432 350 489 235 131 340 Gediz Alasehir 1,485 15,478 692 467 168 195 - - Orta Sakarya Pamukova 2,286 8,707 405 200 97 421 496 398 Tavsanli 2,584 6,917 383 120 358 532 281 430 Y. Sakarya 1.M. 3,519 23,684 251 350 789 565 490 1,171 0. Sakarya 1.M. 1,263 5,249 64 300 392 291 272 - Eregli Ivriz 3.M. 7,040 26,651 398 860 2,378 2,368 472 141 Kesik Kopru Roprukoy - 289 7,668 140 65 63 - - - Asartepe 602 2,639 176 230 232 15 32 - Corum-Cankiri Kirsalalan 2,885 10,948 347 550 1,017 862 - - Duzce-Efteni 1.M. 911 22,250 582 160 97- - Bolu Buyuksu 2.M. 198 2,805 144 180 32 41 - - Samandae 300 2,165 82 123 90 - - - As. Seyhan 3.M. 2,400 17,780 395 410 903 - - - As. Ceyhan Andirin 900 3,476 228 75 394- - - As. Ceyhanmisis 1.M. 126 5,073 49 18 36 47 - - As. Ceyhan Aslantas 15,200 118,076 2,412 2,520 4,425 3,182 2,000 - Ceyhan-Sarikiz 1,750 8,015 165 280 - - - . Amik-Tahtakopru 1.M. 1,350 11,900 457 170 416 100 150 - Berdan 2.M. 3,200 15,171 1,152 930 570 734 - - Ulukoy 310 1,200 111 100 - - - - Erzincan 6,450 34,971 568 530 1,704 1,450 910 379 Igdir 15,700 67,904 583 800 2,955 3,045 3,050 3,590 Uluova 2.M. 4,334 11,600 218. -.410" 1,263 672 515 609 Bingol 1.M. 310 3,981 78 80 117 - - - As. Tomma Medik 2.M. 582 6,000 236 120 130 - - - Silopi-Nerdus 350 3,730 173 90 97 - - - Ipsala Altinyazi 406 8,627 355 250 15 - - - Hayrabolu 2.M. 1,800 12,000 778 330 226 258 - - Teke Kayalikoy 1,769 14,220 395 700 340 225 - - Kirsehir-Cogun 206 4,443 188 30 4 4 - - Kirsehir-Kultepe 435 2,741 216 180 122 - - - Manavgat 2.M. 485 8,000 263 175 7 5 - - Ercis Kockopru 1,955 10,335 148 200 478 570 441 - 150 - Sector Tables Table A4: DSI PROPOSED INVESTMENT SCHEDULE (cont.) (TIL Million) Sunk Total Cost to Investment Schedule Projects Cost Area 1980 1981 / 1982 1983/ 1984./ 1985 Uluborlu 1,250 1,290 78 300 424 361 - Egridir-Aksu-Yilanli 340 2,856 95 210 60 50 Burdur-Kozagaci 145 464 44 40 60 - Sarkisla-Yapialtin 519 2,600 117 i5 217 Yk. Ceyhan Goksun 876 6,161 139 350 108 - - - As. Buyuk Menderes 12,788 78,823 1,512 660 ,094 2,688 2,132 2,233 Curuksu 1,830 15,503 163 200 337 438 594 127 Esen-Konak Fethiye 2.M. 2,083 5,889 170 120 412 770 133 425 Cine-Topcam 767 4,010 253 560 105 - - - Gokirmak-Katacomak 241 2,133 183 25 33 - Germectepe 273 765 70 95 45 67 - - Total 113,967 861,226 18,882 16,397 26,693 20,687 12,175 9,843 "9'Projects: Gokceada 428 737 92 170 176 - - - Gonen 12,687 19,675 93 155 835 1,449 1,460 8,109 K. Cumra 1.M. 4,964 30,720 644 210 1,908 1,778 - - Konya Karaman 6,631 29,261 10 300 966 1,619 1,985 1,947 Lamas 1,000 9,324 141 157 286 200 145 - 0. Yesilirmak 450 2,490 119 66 125 132 - - Develi 21,367 56,434 537 395 4,741 4,647 3,671 5,264 Uzunlu 2,707 7,800 77 220 720 682 637 - Finike 2,042 10,360 150 100 597 650 242 - As. Aksu 2.M. 4,130 8,882 235 450 1,244 851 885 90 Van Engil 2.M. 2,197 17,743 - 90 339 691 782 295 Mus Arincik 900 10,150 177 60 233 213 - - Gildirim 1.M. 220 3,251 72 20 78 - - - Isilki Baklan 9,015 5 133 200 857 1,59 2,167 809 Total 68,738 257,724 2,480 2,593 13,105 14,506 11,974 19,514 "C"Projects: Bakircay Bergama 1.M. 2,149 4,077 67 75 839 464 - - Orencik Gavdarhisar 2,269 7,544 39 10 689 648 485 - Seyitgazi 3,313 14,518 130 95 624 887 1,079 416 Konya Guara 3.M. 15,375 81,039 - 3Q 2,198 3,819 3,099 5,584 Aksaray Uluirmak 2.M. 1,805 4,582 33 13 301 498 525 423 Zile 2,000 6,900 102 280 726 765 - - Yedikir Suluova 2,500 6,100 411 300 759 557 220 - Gildir 2.M. 1,580 14,396 IO 30 275 90 59 - Palu Kovancilar 2,800 10,600 102 70 1,019 572 140 - Bingol 2.M. 2,000 3,200 &1 IaQ 641 425 321 - Batman Silvan 673 8,790 183 100 177 154 - - Derik Dualuca 843 1,860 90 75 271 326 - Yahyasaray 2,843 4,061 30 - 635 635 910 Mus Hinis Ulush 1,600 7,615 26 424 600 250 - Eber Aksehir 13,000 54,190 34 - 729 900 1,259 9,863 Susemri 2,600 5,535 113 80 638 680 614 300 Total 57,350 235,007 1,521 1,458 10,945 12,020 8,961 16,586 - 151 - Sector Tables Table A4: DSI PROPOSED INVESTMENT SCHEDULE (cont.) (TL Millions) Sunk Total Cost to Investment Schedule Projects Cost Area 1980 1981/1 1982 /2 1983/2 1984/2 1985/ (H7a - "D" Projects Y.Yesilirmak 1.M. 501 17,613 487 14 - - - Atabey 288 13,976 288 40 - - - E Gridir Bogazova 98 1,916 70 20 - - - - Seyhan Catalan 9,000 56,400 - 10 1,865 2,475 1,790 2,475 Sarimsakli 104 12,425 96 4 4 - - - Kirkgozler Duden 272 10,160 68 10 37 46 44 67 As Aksu 1.m. 416 15,978 130 26 68 70 117 - Guney Dogu Anadolu 1.M. 46,653 160,000 1,007 1,900 3,340 4,674 6,500 28,834 Or. Reyhan Menzelet 12,466 46,430 36 100 1,365 2,765 3,061 4,600 Irgilli 218 5,400 49 36 51 81 - - Akcay 1.M. 447 18,450 132 25 101 105 64 - Erbaa 225 3,750 132 35 58 - - Amasya 380 4,081 159 75 87 60 - -- Total 71,068 366,579 2,654 2,295 6,976 10,276 11,576 35,976 "E" New Projects Muhtelif Etudler - 600 Sevisler Projesi 536 810 Taskin Koruma 859 525 Taskin ve Rusubat Kontrolu 7 15 Drenja ve Kurutma 16 10 Yerustu Sulumalari 284 150 Yeralti Sulumalari 1,050 850 Kucuk Baraj 502 280 Tesisler 117 250 Taskin Koruma 439 255 Taskin ve Rusubat Kontrolu 166 60 Yerustu Sulumalari 112 160 Kucuk Baraj 122 245 Tesisler 110 150 Total 4.320 4,360 Project Related Studies 600 Machinery & Equipment 3,600 Recreation 'Area 90 Repair Maintenance 1,110 Salaries 4,300 Others 297 Ic Grand Total 37,500 /a As of January 1981 /b DSI estimates as of November 1980 Q Estimated, to compensate for statistical error in original program. Source: DSI. - 152 - Sector Tables Table A5: DSI COMPLETION SCHEDULE AND RATES OF RETURN (TL Million) Completed Net Rate up to Area (ha.) Present of Projects 1980 1981 1982 1983 1984 1985 Value Return (%) "A" Projects Eregli 2. Merhale - 2,000 6,100 4,000 - - 1,052.5 45.4* As. Seyhan 2.M. 48,000 - 600 - - - 20.1 15.9 Suloglu - 2,235 1,000 - - - 140.5 18.9* Niede-Bozkir - - 971 - - - 36.8 18.3 Egridir Senirkent 4,940 - 4,400 - - - 320.2 25.8* Bozcay-Karatas - - 7,500 - - - 650.0 38.1* Gelendost - - 4,816 - - - 344.7 32.4 Caygoren 1.M. 13,787 3,100 - - 929 .- 264.3 31.4 M. Kemalpasa 1.M. 16,640 1,635 - 980 - - 182.5 25.7 Iznik 1.M. 1,879 - - - - 6,017 -710.3 - 2.2 Demirtas - - - 2,365 - - -645.4 - 3.3 As. Gediz 96,_159 975 - - - 4,800 -569.5 5.3 Gediz Alasehir 8,140 - 7,338 - - - 830.3 22.2* Orta Sakarya Pamukova - - - 5,883 - - -333.5 6.9 Tavsanli - - - 5.165 752 1,000 -1,194.4 - 4.6 Y. Sakarya 1.M. - - - 8,074 - - -1,602.3 - 4.7 0. Sakarya 1.M. - - - .2,882 - - -603.1 - 1.8 Eregli Ivriz 3.M. - - - - - 21,166 -2,677.0 3.1 Kesik Kopru Koprukoy 5,835 - 1,833 - - - 109.8 23.9 Asartepe - - 1,000 1,639 - - 6.1 12.3 Corum-Cankiri Kirsalalan 532 - - 3,135 6,615 - -1,482.3 - 3.3 Dusce-Efteni 1.M. 10,000 - 6,000 6,250 - - 510.7 19.7* Bolu Buyuksu 2.M. - - 2,805 - - - 281.6 35.5* Samandae - - - 2,165 - - 487.2 39.8 As. Seyhan 3.M. - - - 7,000 10,780 - 32.6 12.2 As. Ceyhan Andirin - - - 3,476 - - -212.1 5.7 As. Ceyhanmisis 1.M. 2,573 1,000 - - 1,500 - 140.7 27.8* As. Ceyhan Aslantas 36,664 - - - 40,000 29,422 -2,611.6 7.8 Ceyhan-Sarikiz 1,500 - - - 6,515 - -268.4 6.9 Amik-Tahtakopru 1.M. 5,700 - 2,000 4,200 - - - 31.3 11.3 Berdan 2.M. - - 1,245 7,055 6,871 - 2,475.8 28.7 Ulukoy - - - 1,200 - - 25.3 16.7 Erzincan 9,400 - 1,500 3,400 - - -3,954.5 -11.2 Igdir 26,502 - - - 8,403 - -6,417.7 2.2 Uluova 2.M. - - - - - - n/a n/a Bingol 1.M. 1,000 1,000 1,981 - - - 194.3 25.9 As. Tomma Medik 2.M. - - 3,000 3,000 - - 330.9 25.6 Silopi-Nerdus - - - 3,730 - - 207.3 28.2 Ipsala Altixyazi 2,331 - - 6,296 - - 547.1 31.11 Rayrabolu 2.M. - - 3,000 5,900 - - -87.9 10.8 Teke Kayalikoy - - - - - 14,220 -454.3 6.2 Kirsehir-Cogun 1,700 2,743 - - - - 264.5 33.1 Kirsehir-Kultepe - - 2,741 - - - 133.6 22.4 Manavgat 2.M. - - - 4,000 4,000 - 38.6 14.2 Ercis Kockopru - - - - 2,780 6,940 -825.9 0.8 * Sunk costs were iticluded for calculating NPV and Returns for these projects. - 153 - Sector Tables Table AS: DSI COMPLETION SCHEDULE AND RATES OF RETURN (cont.) (TL Million) Completed Net Rate up to Area (ha ) Present of Projects 1980 1981 1982 1983 1984 1985 Value Return (%) Uluborlu - - 1,790 - -799.2 -9.5 Egridir-Aksu-Yilanli - - - -- 2,856 - 16.5 12.9 Burdur-Kozagaci 464 - - - -25.4 6.7 Sarkisla-Yapialtin - - - 2,600 - - -111.9 6.7 Yk. Ceyhan Goksun - - - 6,161 - - -145.4 8.9 As. Buyuk Menderes 34,643 7,140 3,000 7,000 5,000 5,000 -4,918.4 -0.9 Guruksu 4,158 - 4,445 - - - 124.6 13.6 Esen-Konak Fethiye 2.M. - - - 1,500 1,820 2,569 -936.9 -2.9 Cine Topcam - - - 4,010 - - 51.2 13.5 Goktrak-Karacomak 1,791 342 - - - - 5.2 14.0 Germectepe - - - 765 - - -82.5 3.1 Total 333,874 22,170 67,739 113,831 100,611 91,134 "B" ProLects Gokceada - - - 737 - - Gonen - - - - - - K. Cumra 1.M. 30,720 - - - - - Konya Karaman - - - - - 14,000 Lamas - - 1,416 - - - 0. Yesilirmak - - 2,490 - - - Develi - - - - - 18,000 Uzunlu - - - 7,800 Finike - - - - - 5,000 As. Aksu 2.M. - - - - - 8,882 Van Engil 2.M. 3,193 - - - - - Mus Aruncik 6,150 - - - 4,000 - Gildirim 1.M. 2,350 - - 901 - - Isilki Baklan - - - - - - Total 42,413 3,906 1,638 4,000 53,682 "C" Projects Bakircay Bergama 1.M. - - - - - - Orencik Gavdarhisar - - - - - - Seyitgazi - - - - - - Konya Gu-ra.3.M. - - - - - 5,094 Aksaray Uluirmak 2.M. - - - - - 4,582 Zile - - - - - 6,900 Yedikir Suluova - - - - - 6,100 Gildar 2.M. - - - - - - Palu Kovancilar - - Bingol 2.M. - - - - - 3,200 Batman Silvan 5,000 - - - 3,790 - Derik Dumluca - - - - 1,860 - Yahyasaray - - - - - 4,061 Mus Hinis Ulush - - - - - - Eber Aksehir - - - - - - Susemri - - - Total 5.000 --- 5.650 29,937 - 154 - Sector Tables Table A5: DSI COMPLETION SCHEDULE AND RATES OF RETURN (cont.) (TL Million) Completed Net Rate up to Area (ha.) Present of Projects 1980 1981 1982 1983 1984 1985 Value Return "D" Projects Y. Yesilirmak 1.M. 17,613 - - - - - Atabey 13,976 - - - - - E Gridir Bogazova 1,916 - - - - Seyban Catalan - Sarimsakli 12,425 - - - - - Kirkgozler Duden 2,683 - - - - - As Aksu 1.M. 15,978 - - - - - Guney Dogu Anadolu 1.M. - - - - - - Or. Ceyhan Menzelet - - - - - Irgilli. 5,400 - - - - Akcay 1.M. 18,450 - - - - Erbaa 3,750 - - - - - Amasya 4,081 - - - - Total 96,272 Source: DSI; Mission Estimates.. - 155 - Sector Tables Table A6: TOPRAKSU PROPOSED INVESTMENT SCHEDULE (TL Million) Pro ects 1981 1982 1983 1984 1985 Ongoing Projects On-farm Development 2,163.633 1,952.294 1,846.028 1,822.973 4,497.155 Drainage & Soil Improve. 220.993 75.429 44.000 26.723 36.000 Dev. of Small Water Res. 3,502.466 959.082 402.611 172.594 - - Small Dams 2,019.550 842.347 255.400 - - Land Improvement 206.600 275.400 145.500 16.000 14.000 Others 1,000.000 - - - - Subtotal 9,113.242 3,262.205 2,693.539 2,038.290 4,547.155 New Projects On-farm Development 836.367 Drainage & Soil Improve. 328.578 Dev. of Small Water Res. 6,497.534 Small Dams & Land Improve. 1,559.950 Equipment 1,500.000 Labor 5,000.000 Project Studies 1,500.000 Others 823.300 Subtotal 18,045.729 Grand Total (rounded) 27,159.000 Source: TOPRAKSU. - 156 - Sector Tables Table A7: PLANNED INVESTMENT FOR ONGOING PROJECTS BY TOPRAKSU /a (TL Million) Exen 1981 1982 1983 1984 1985 up to Invest. Area Invest. Area Invest. Area Invest. Area Invest. Area Purpose 1980 Cost (ha) Cost (ha) Cost (ha) Cost (ha) Cost (ha) On-farm Development 2,432 2,164 41,211 1,952 36,837 1,846 34,831 1,823 34,396 4,947 95,343 Drainage & Soil Improvement 54 221 4,125 75 1,400 44 820 27 500 36 670 Develop. of Small Water Resources 1,023 3,503 19,422 959 5,328 403 2,250 173 950 - - Small Dame 1,361 2,020 5,413 842 6,517 255 990 - - - - Soil Conservation 294 207 3,648 275 4,957 146 1,500 16 300 14 360 Total 5,164 8,115 719 55,039 2,694 36,146 4L963 La Differences in totals due to rounding. Source: TOPRAKSU. - 157 - Sector Tables Table A8: TOPRAKSU COMPLETION SCHEDULE /a (ha.) TOPRAKSU Completion Schedule Projects 1981 1982 1983 1984 1985 Total On-Farm Development - 28,380 6,667 8,900 15,465 59,412 (5) (2) (1) (2) Drainage & Soil Improve. 5,651 3,320 1,950 1,000 - 11,921 (10) (5)- (2) (1) Dev. of Small Water Resources 23,333 16,424 7,525 5,036 - 52,318 (140) (43) (16) (6) Small Dams 11,435 6,517 990 2,922 - 21,864 (45) (11) (2) . (2) Soil Conservation 28,233 64,719 11,790 104,742 (14) 9 4 Total 68,652 119,360 28,922 17,858 15,465 /a Numbers in parenthises refer to numbers of projects. Source: TOPRAKSU. - 158 - Sector Tables Table A9: TOTAL PUBLIC INVESTMENT PROGRAM FOR AGRO-INDUSTRIAL SEEs and 1981 ALLOCATION (TL Billion) Total SEE Investment 1981 Proaram Allocation Food Affairs 0.95 0.60 Heat and Fish (EBK) 5.10 1.10 THO (flowailling) 0.50 0.20 Milk Processing (TSEK) 8.00 0.70 TS? (sugar, alcohol, etc.) 29.90 10.60 Animal Feed (YEM) 1.20 0.50 Tobacco 84.8 14.00 Wool and Mohair 0.60 0.50 Forest Products 3.70 1.20 TOTAL 58.43 29.40 Source: SPO. - 159 - Sector Tables Table A10: PROPOSED INCREASE IN SUGAR PRODUCTION CAPACITY (1981-88) ('000 tons) Standard Investment Proposed Beet Campaign Require- 1980 1981 1982 1983 1984 1985 1986 1987 1988 Throughput Length L ment I (tonnes/day) (days) (TL Billion) Mua a 3,000 105 6.5 - - - 19 19 - - - - Hlatya 1,700 170 3.7 - - - 35 - - - - - Burdur Lc 2,300 160 5.0 - - 45 - - - - - - Ilgin 6,000 152 13.0 - - - 50 60 - - - - Ankara L 1,500 161 3.7 - - - 29 - - - - - Susurluk /9a 3,000 83 6.5 - - - - 30 - - - - Kastamonu YL 1,400 . 155 3.0 - - - - 20 - - - - Agri 1 3,000 105 6.5 - - - - 19 19 - - - Nigde (Bor) 3,000 166 6.5 - - - - - 30 30 - - Eregli (Konya) 6,000 152 13.0 - - - - - - 55 55 - Careamba (Samoun) 3,000 100 6.5 - - - - - - 18 18 - Van (Ercia) 1,500 52 3.7 - - + - - - - 10 9 Additional Capacity 1,027 77.6 - - 45 133 148 49 103 83 9 Agricultural Investment 5.0 Total Capacity -1027 1.072 1,207 1.355 1.410 1,513 1.596 1,605 Output Projection 82.6 1,125 1,163 1,203 1,244 1,287 1,359 1,437 1,518 1,603 Surplus -142 -228 -131 -37 68 51 76 78 2 /a Denotes expansion project T Assuming current extraction rate of 122 on beet Assuming US$24,000/ton/day (TL 2.2 million at the exchange rate of TL 90 $1) Source: DYB; Hission Estimates. - 160 - Sector Tables Table All: AREA OF LAND REQUIRED TO PRODUCE BEET FOR PROPOSED EXPANSION PROJECTS WITH VARIABLE AGRICULRUAL CONDITIONS 1981 1982 1983 1984 1985 1986 1987 1988 Sugar Requirement - ('000 tonnes) 1,027 1,072 1,207 1,355 1,410 1,513 1,596 1,605 Condition 1,1a Beet Yield (In m. tonnes) 8.56 8.93 .10.06 11.29 11.75 12.61 13.30 -13.40 Area Required ('000 ha) 262 273 308 345 359 387 406 410 Increase ('000 ha) - 9 46 83 97 125 144 148 Condition 2 'lb Area Required ('000 ha) 214 223 251 282 294 315 332 335 Increase ('000 ha) -48 -39 -11 20 32 53 70 73 Condition 3*/e Beet Yield (In m. tonnes) 7.33 7.66 8.62 9.68 10.07 10.81 11.40 11.50 Area Required ('000 ha) 224 234 264 294 308 331 349 351 Increase ('000 ha) -38 -28 2 32 46 69 87 89 Condition 4/d - Area Required ('000 ha) 183 191 215 242 251 270 285 287 Increase ('000 ha) -79 -71 -47 -20 -11 8 23 25 /a 12% sugar extraction rate; 32.7 tonnes beet per ha (current conditions) lb 12% sugar extraction rate; 40 tonnes beet per ha (1970 beet yield) Fc 14% sugar extraction rate; 32.7 tonnes beet per ha (achievable extraction rate with current equipment and well stored beet) /d 14% sugar extraction rate; 40 tonnes beet per ha Source: Mission Estimates. 2/12/81 - 161 - Sector Tables Table Bl: ENERGY RESOURCES Reserves Proven Reserves Total Reserves Energy Source Original Units Million tpe Original Units Million tpe Hydropower 100,000 GWh p.a. 86-240 100,000 GWh p.a. 86-240LA Lignite 4,140 m tons 902 7,343 m tons 1,610 Hard Coal 186 m tons 112 1,366 m tons 820 Petroleum 17 m tons 17 Natural Gas 8 m SCF/day Bituminous Shale 340 m tons 41 2,000 m tons 240 Asphaltite 0.55 m tons 0.2 53 m tons 22 Uranium 2,300 tons U308 4-11 4,600 tons U308 8-2Z'4 Thorium 380,000 tons Th02 .. 380,000 tons Th02 Calorific values assumed 106kcal/ton Petroleum 10 Lignite - Elbistan 1.16 - Other (average) 3 Hard Coal 6 Bituminous Shale 1.2 Asphaltite 4.3 /a Present values of electricity outputs at 10% discount rate. Lower end of ranges based on heat equivalent (1 kWh = 860 kcal), upper end on amount of fossil fuel that would be required to generate the same quantity of electricity in conventional steam power stations, assuming specific fuel consumption of 2,400 kcal/kWh (the approximate average for new lignite-fuelled stations in Turkey). Notes (1) Hydropower figure is latest estimate of economically exploitable potential with current technology. Theoretical potential is 430,000 GWh. (2) Bituminous shale figures relate to shale with heat value exceeding 850 kcal/kg (average 1,200 kcal/kg). Source: MENR, TEK, TKI, TPAO - 162 - Sector Tables Table B2: INTERCONNECTED POWER SYSTEM - ELECTRICITY SALES AND SUPPLY, 1965-1980 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 (est.) SALES (GWh) Residential 560 1010 1127 1286 1390 1602 1933 2347 2637 2845 2911 3053 Commercial 264 396 467 547 621 713 860 1015 1129 1219 1247 1308 Industrial 3080 5327 6070 7005 7721 8200 9781 11693 13075 13741 14585 15307 Government 163 302 342 393 491 525 566 616 655 669 709 733 Street Fighting 116 193 200 208 217 222 251 296 325 335 355 377 Transport 54 80 83 88 90 97 101 112 117 158 177 190 Total sales 4237 7308 829 9527 10530 11359 13492 1.6079 17938 18967 1.9984 206 Increase % p.a. 11.5 13.4 15.0 10.5 7.8 18.8 19.2 11.6 5.7 5.4 4.9 GENERATION (GWh) Hydro 2179 3033 2610 3204 2603 3356 5904 8375 8592 9365 10304 11348 Thermal 2774 5590 7171 8038 9822 10121 9719 9908 11972 12361 12218 11927 Total generation 4953 8623 9781 11242 12425 13477 15623 18283 20564 21726 22522 23275 NETIMPORTS (GWh) -7 - - 9 332 492 621 1042 1342 TOTAL SUPPLY (GWh) 4953 8623 9781 1.1242 12425 13477 15719 18615 21056 22347 23564 24617 LOSSES GWh 716 1315 1492 1715 1895 2118 2227 2536 3118 3380 3580 3649 % total supply 14.5 15.2 15.3 15.3 15.3 15.7 14.2 13.6 14.8 15.1 15.2 14.8 INSTALLED CAPACITY (M) Hydro 505 725 872 893 985 1449 1780 1873 1873 1881 2131 2131 Thermal 985 1510 1706 1818 2207 2283 2407 2491 2854 2988 2988 2988 Total capacity 14920 235 2578 711 3192 732 4187 4364 4727 4869 511.9 rflT PLANT FACTORS (%) Hydro 49 48 34 41 30 26 38 51 52 57 55 61 Thermal 32 42 48 50 51 51 46 45 48 47 47 46 Overall 38 44 43 47 44 41 43 48 50 52 50 52 MAXIMUM DEMAND (MW) 2/ 1684 1950 2169 2366 2729 3135 3290 3641 3667 3947 SYSTEM LOAD FACTOR (%) 2/ 66 66 65 65 65 67 71 68 70 67 INSTALLED CAPACITY MARGIN 2/ MW 894 761 1023 1366 1458 1229 1437 1228 1452 1172 As % of maximum demand 53 39 47 58 53 39 44 34 40 30 1/ Via interconnections with Bulgaria and USSR 2/ Data for 1965 and 1970 not available Source: TEK and Bank calculations based on TEK data - 163 - Sector Tables Table B3: FOSSIL FUEL CONSUMPTION FOR ELECTRICITY GENERATION, 1970-1980 '000 Tons a/ (a) TEK (b) Total 1970 1975 1976 1977 1978 1979 1980 Hard Coal (a) 691 1043 1019 957 954 813 696 (b) 986 1098 1069 1012 1046 888 745 Lignite (a) 927 2372 3280 3748 4798 5550 5351 (b) 1122 2593 3381 3910 5019 5896 5957 Fuel Oil (a) 420 977 889 947 942 857 936 (b) 685 1395 1282 1533 1644 1267 1275 Gas Oil (a) 216 226 472 260 134 165 (b) 102 262 286 530 345 200 235 .. = not available a/ Actual tons (figures in petroleum equivalent tons not available) Source: TEK - 164 - Sector Tables Table B4: FORECAST OF FOSSIL FUEL CONSUMEPTION FOR ELECTRICITY GENERATION 1981-1990 '000 Tons a/ (a) TEK (b) Total 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Hard Coal (a) 760 922 222 641 641 641 641 641 641 641 (b) 834 996 296 715 715 715 715 715 715 715 Lignite (a) 7460 15955 27800 41,276 46324..54070 63719 76371 87406 96132 (b) 7632 16127 27973 41448 46496 54243 65891 76543 87578 96304 Fuel oil (a) 993 1061 1061 1061 1061 1061 1061 1061 1061 1061 (b) 1796 1864 1864 1864 1864 1864 1864 1864 1864 1864 Gas oil (a) 169 361 361 - - - - - - - (b) 432 625 625 - - - - - - - * nil or negligible a/ Actual tons (figures in petroleum equivalent tons not available) Source: TEK - 165 - Sector Tables Table B5: GENERATING CAPACITY RESERVE MARGIN 1. For the purpose of calculating the margin of reserve generating capacity needed to ensure meeting the projected peak demand, to an accept- able standard of risk, TEK takes into account the following items: (a) scheduled annual maintenance and unscheduled outages; (b) possible delays in commissioning new plant; and (c) below-average water flows, resulting in reduced output from hydro- power plants. 2. The calculation is as follows: Annual maintenance and repairs Based on past experience, TEK allows 4 weeks per year, rising to 8 weeks every 4th year, for scheduled maintenance of thermal power plants. The corresponding allowance for hydropower plants is 3 weeks per year, increased to 6 weeks every 4th year. This results in an average annual figure for thermal plants of 5 weeks (i.e. 3x4+8) and for hydropower plants of approximately 4 weeks 4 (3x3+6). To these allowances TEK adds 2 weeks in the case of 4 thermal stations and 1 week for hydropower stations to cover unscheduled breakdowns, giving total annual allowances of 7 weeks and 5 weeks respectively. These correspond to 13.5% for thermal and 9.5% for hydro, or an average of approximately 12% of projected peak demand. Plant commissioning delays The reserve margin to cover this contingency is estimated at 8-10% of projected installed capacity, the upper end of this range being adopted for planning purposes. Below-average water flows TEK planning caters for a 30% power deficit under this head for hydropower plants, which are assumed to represent 33% of total capacity. - 166 - Table B5: (Contd...) This results in a potential capacity short-fall of 9.9% (0.30 x 0.33), for which additional thermal capacity has to be provided. Since thermal capacity is assumed to represent 67% of total capacity, the resulting extra margin of thermal capacity is 14.7% (0.099 - 0.67). 3. This results in a total reserve margin of approximtely 37% of peak demand, derived as follows: Writing, K = Total intalled capacity (Mw) KT =Installed thermal capacity (Mw) KH = Installed hydro capacity (Mw) T = Total peak demand (Mw) TT = Peak thermal demand (Mw) TH = Peak hydro demand (Mw) Then, K = KT+KH KT = 0.10 KT + 1.12 TT + 0.147 KT 1.12 TT 1.487 TT 0.753 = 1.487 x 0.5T a= 0.744T KH = 0.10 KH+1.12 TH 1.12 TH 1.244 TH 0.9 = 1.244 x 0.5T a= 0.622T K = 0.744 T + 0.622 T = 1.366 T 4. Although the calculated reserve margin for planning purposes is 37%, in some years the projected margin will exceed this figure because of: (a) the "lumpiness" of generating plant investments; and (b) the fact that in their first year of operation (first two years for nuclear) new plants will not be able to generate at their rated capacity (for hydro 90% is assumed for the first year, and 60% for lignite; for nuclear 50% is assumed for the first year and 75% for the second year). /a It is assumed that hydro and thermal each meets 50% of peak demand. - 167 - Sector Tables Table B6: ELECTRIC POWER SUBSECTOR INVESTMENT. 1970-1979 (a) In Milions of TL at Current Prices 1970 1971 1972 1973 1974 1975 1976 197 1978 1979 GENERATING PLANT Hydropower 585 752 931 1,219 1,027 1,612 2,380 4,629 6,937 13,133 Thermal 646 628 oa503 554 167 1717 3 10 609 28 178 Total 1,231 1,31 0 1,1434 1,732,2 3,329 6,7 lO'16 1,1 TRANSMISSION AND SUBTRANSNISSION 532 392 543 623 797 1,287 1,691 2,071 3,053 4,322 URBAN DISTRIBUTION Istanbul 38 65 44 123 130 172 290 220 295 405 Ankara 43 31 37 30 39 42 22 104 115 184 Izmir 6 9 6 10 14 23 19 48 70 219 Other 96 8 J 2148 1478 702 14 1 576 945 2 50 Total 129 2 2 Mf6 916 9 T2Z;8 VILLAGE ELECTRIFICATION 22 124 220 354 479 891 1,591 1,575 2,062 5,446 OTHER INVESTMENTIV 83 88 93 144 138 343 463 638 813 1 TOTAL INVESTMENT 75 2,277 2,572 T 79 796 11,397 16 25,W 55,557 (b) As % of Total Subsector Investment GENERATING PLANT 52 61 56 54 56 49 54 62 68 74 TRANSMISSION AND SUBTRANSMISSION 23 17 21 19 17 19 15 13 12 8 URBAN DISTRIBUTION 12 13 11 12 14 14 13 12 9 6 VILLAGE ELECTRIMEATION 9 5 8 11 10 13 14 9 8 10 OTHER INVESTMENT 4 4 4 4 3 5 4 4 3 2 1I Including Electric Research Institute Source: TEK, DSI, IETT, EGO, ESHOT and Iller Bank 1 - g 88 fl -- - : y r NUESN i 3i fb m- -g <8-p 88 db 28i 5 N-- Ibbegnang si i as 8888 88 -- 48s 4 -: = , , 4 88- . ..... i sa .- - ~ ~ 8 - -- Ig Affi 411 IKä'l -- i- g 6 1iN:iiEO Ii - - - - -- -8 88488, a8 8 8 8 48 - - - IN i .. . L ni i - ....L S-- 8 a **tOr "Wl.a taba ,8> cTR>88C 500ER SU0SEC008t Iot9ES't?æaT 1980 5 5800IN8 488 608 r803Ec5 al 5 (Ia Iaio 8f 5L at 811 Pt8ices)8.. (a) =ire16n exchlaange cot at T1,0 - 811 (55 >8) (3 (4) (5) (6) (7> <a> 08 (11) (12) (13) (14) 5) (16) (058 ca nictt ( fata tt 5 8 SyattaL Ea stim ed Project E8peniture - . - . . - - t et . t T- - -------------------- 50toat 0508tt)y 84 >88 s .ta osat OaapeoIa n >5) 0-attatlts Data 88ota,1 sta5t June 1080 Eastint8 t 0.2.too 098 188 '' jjlj 19_ ,1_ 085 (sot 198_8-85 Aftr 1988 5o58(ftÅ naa 8attsOt Potat å 40 . .0 Rto Data Start at 31-12. otat> 18800Orai (nalOa> 0> (1 00 (a) >4 (a> (b (a) <(8 (a) (b) (a) (t) oa> (b) (a) (b) 881 . M. 0RJ3 -18 55,lOtotO (O))080> 5,,528046t5 55 1-8 ) 81 .. -1992 -5858 8880 07080 1280000 230880 - 0000 120 950 42O 1900 70 086788 7988 08088 7980 240001480 8058 88598 13858 31, loeta . 0<830at <ta) >1 2,649,7 1988 85 tt 81 - j985 1985 550 00 1880 2800 - 500 8 55 880 1037 - 273 - 10 t - - 1600 12880 - - 38 oe . edtO(x3 )S 99 y 9s 66 90 20 0435 - 77 550 13 400 1082 850 1060 580 1012 350 646 2680 4050 - - 39. 8att t a. 8 00180 1 80 19 - 586 1980 1500 8000 3960 11540 -- 350 - 2862 485 5282 8805 15 907 050 1 50 807 2210 804 1758 0 85 48 0 8aaaktKaratat>O (3 t tot 1977 09802 198 586 t8 0700 970 2800 - 26 - 88 - 504 818 80 285 1888 25 501 8110 820 t6t 370 40. rSa0 at8Yeic (35) 80>0 197 >982 - 119 88 1175 1850 2i00 8608 - - 135 481 508 505 850 t2M 336 8 3 1777 2236 323 38 420ehacubaOx0m 90 24 983 1901 1887 105258 58 2088 8480 - - - - - 055 0) 5 64 1 984 3290 1778074806 280 81044 13. Oaloy (3051 8') 0953 0905 098? 2802 3t00 0805 8800 .. 2 - -- --.. 5 8588 026 84>8 1026 l49t 25 0081 >98 88537 45,4.80ekryaOursog0ut (31362 80 88)1 188 080 - 1988 198600800150 .970 0888 - 275 - -- -- 5 8500014 800 44 309 850780896518048 45 aslr-almt3xD -26 1g 0986 88 04880 2880 2420450 ,- - - -4 0 4 107 405599555 9802 8085 300751500860 80.~is 2"04015 80 46. 80b80* (3800m) >4059070< 08 05 5883 - 1990 1990 0708 0800 0555 18780- .. - - - - - -- ,- 88501493 8030 8980 0080 2008 OS25 5908 2650 5041 471oaa Kps 4158/ 99l83t 1900 0989 8800 3080 0008 4435 - 3- - --- 42 809 800 8064 880 1t73 002 2976 0220 0450 48. ak0rya-Ea0gi (3*101 801 19803 8580 898) 2800 840 4150 9350 - - ----48 5 554 1800 1400 100 02 205 185102045 240 48.1 1aOtoO 13500 «W 1430>~2 49. aaar 8a1p a13 >Sa4 801909880 00 583 - 908 189 950 0,01 1650 400 5 . - -53 85 822 280 827 57088 1 5 180 240 k. u ola8d 10058 801977 1- 20 912 989 0000 4250 88880 1000 - 2 - ---25008 15 0000 20000 270 308 5168 41200110 >.8i50D - 1(45)N0)¡97 1 89 098 8820 4700 00 03580 - ---- - - - -- - 1050 0844 2580 000 550 4084 8950 Itt76 58501100.80209010 84 269)0 1889 8100 550 60Q 0 . 117 2 2 2 1 1 .8. .8101ta>81 ta2t 80>-1 80. l d Pow 12 er80 Pr-jel1 221857 349 - 5 55 14 2 TIO-i - 6-77 13829 3 --6 Q 15930 49917 31675 6160 D 82691 173546 138466 20%48 g - 9eg 25 232 00010 1 5000 5 0 0 081 00 8000> 00 1 57000 2500 05800 42 000895 88828 82810 >9141 --48 88 -4 , 7taer 0) 80>L8,8,0 5 18 1855 8 - 83 95 4000 820 900 82080 80 508100500 00 28008 350 800 90 1 50 4 10 . . 7 (0' - 098 198 1 3000 85004 23800 08 10 4000 300 0000 900 -0890 ---1 4 8-- - 1 0 0 - - 8. 8 - < ) 8 - 0150 4250 9000 505 9000 1050 800 -ot 0800 2 50- 0 200 450 40240030-- -2 -0 900 80 59. 0e hr(200 80) 1 0952 7 08 808 8480 0088 - 0 200 4000 300058 --898 00 2o08 1- 2300 $8 50r069 a ( 50>) 82 - 9981 1984 300 08000 3 580 1002 - - - -00 2088100 3000 600 1082 2000 7 0 020 4900 3 7 89. Elat| >(r3008 8L 99 1982 19 080 49.8 50 14080 52080 11082-- -- - -- 150 200 2888 1008 1005 5000 100 2000 3301 11008 90- 2248 80. 085a)0n12 1-3880 (4D 183 0588 1989 085010 57000 05880 55000 - - -- ,5 - 0 - 1\ 0- - 207 4050 >8800 10008 5000 10080 000 4080 23000 1780 8.5 0458 ' 0 4 > 2 30 0 80> ) 8 88 8 81 - 19958 0250 0800 2900 188900 8 200030ø-8889 8 ,- - 000 290 0 0 0 1 2 005 2 000 108 0 1 000 55080 50 50888 0.. 12. 1880 08- 3- M,Ebstn6 (30 -= 182 483 1987 1580 26)0 9000 t1000 40 300 011 4166 408 1000 1880 808 8880 80000 15000 000 36651 5e166 58309 560 t65 iu-e 8 > (00> W2,9 890 .. 490 8025 >80092000 1 620 800 19200- -- - - - - - - 3000 5800 14008 84805 2080 21008 41800 13980 188888 66. *1-lea0 4 (10001 0955 - 199 1995 97500 08080 -500 2800- - -·- - .. - -,-- - - 000 6000 4800 8080 17100 8008) 27. 8051a1 <8(100 J80 195 - 2190 158 015000 2 0 - - - -- - - - -- - - 4082 8080 48)0 6800 1780) 280) 68. - -tla 4 (110Ø05 t 0alW5aste 181 .. 1985 8850 200 4800 8880 000 -- - 508 0000 8500 2000 500 8080 - - - . 25)0 4000 - 89. 8*688088l 0085 80> 81 - 1980 l9t3 8802 2500 100 8500 - 00 200 1 000 1550 - 8500 200 - - A )90 1151 015 )18 .05_0 450 50 -4 - - -> 1 20 55 80*0250 1808,50 204M53)58500458071 7357 1-500 900 12 1M 95 2756 24707 79 7 -4 r88*4 9,88 98r85 oe:r <nve0l.800 68,027 1,872,695 8048 7008 os301 20158 48007 72971 01>588 111288 98331 2518 11055 518080 858048 64 2 80455 788082 8000 90 5EE8Ï'05004000I' 800 0(01 156 0009 09W091 011 0069 0(11 191Ilt 009 £.96 00 - 919 06.Le 060 116 9961 ! L 111 699 60(0 0001 (001 (6co 166 1169 66011 m9' t%9 969 666101 0910(111011601001062911 9109 9611 _____ 6019W" 99 9SSw- 0 W901 ____ __ _ - - - - - - - - - "'100 060 190w51 019 61 -6 9661 1(910 61, 001 11 90 901 999 osr- os" 001 09g 666 1191111 0110 69909010916 0 6(0 0191 991 01 os£ 0110 110 009 09 - - - - - -016 911 0091 i91.01 960 966K191(M , 0901110101 19(161110 6 060 0! (11 01 00 00 001 09- - - - - - - - - - - - 99 191 09 190 9961 601 - 96Kl 19 9)01099109 1 1i1 011 000 019 001 01 01 0 - - - - - - - - 01 10 111 91 90 91 - 96 1 , 11 1(1111191110 1(0 91lz 001 00.10 1 011 01 01 0 - - - - - - - 16011 1 11 1 "196 90(901 01 11910 1 0 00I 1119 110o 00 01 01 09 00 1 .11 11 -- 69 11 1691 910 96 00 - 101( 60)09019009190 -9 - 191 09 19 0 99 01 099 911 119 11( .1-66 19 91 01 9011 196 - L1 9111 9099-11999 '9 IL - m1 001 -K 0 91 00 00001 ( 11 0 1 00 101 09 96 09601 - 06ox< 91 (90) 01 0 -'6 001 06 0 01 01 011 01 10 0- 0110 006 09 009L 9961 990 - 01101 1O 01Z)10911919911 0 S.0 00 009 00 1 - 09 001 011 10 0 009 w 1 0. . L01 1061 (00 091 961 (261 9011 1900 1061,-1910 1 - ~ m N- 011 01 - - - - - 00K 0 1 0111 00 09100 061 099 O.L 191,111001911011 61 0-1 -l 0091 9111 .1001 ,0 1101 09 l0 1 00 0 0 11 0:00 01 1 999169019æl 010~11000 6 OK -0 10 091 - "t - .90 10 009 00 010 i1 011 W 001 01 10 01 06 161 -Q 191(9 11S;s100-11116 '1 ffl - 09 91 - - - - - 01 09 0111 911 011 90 019 0111 9 09 09116 901 1,0)-eg00001-1!1l01o '1 50511~~~~~119116 0 LVO m£ 001We0000 55(0011(1"1e9116 i6ý 0000660961. 00911011 6009(061 00991161 51 ~ ~ ~ ~ ~ 00 119 Oel 19) £ ' L6 : '6 " 16S - 060 90 (0011 t0( 90 (59>(0 5 - 0,~9919 066 (00, 11 69 ,O0000 WO99)z) . ... 633(011061oll 931 -1(0 19000 - 1(6-06 1906 ti0301 g)0 0 --06 .(0.0...90u 0 6 1999019, , De.51, 9 "I4* b.611610£ - 171 - Table B7: (Contd.,...) Electric Power Subsector Investment Program 1980 - 1985 Notes to Table Column (2) F = Flood Control I = Irrigation L = Lignite mine The numbers refer to the corresponding projects in the table. Column (3) The mission was informed that the thermal power projects had been the subject of internal TEK feasibility studies, but the dates of the individual studies were not available. Column (4) The benefit: cost ratios for hydropower projects were calculated by DSI using a discount rate of 9.5% (Note: TEK used a rate of 11.5% for its long- term plan. According to a Bank study,.1/ the opportunity cost of capital in Turkey is 12%.) Column (5) The dates shown are supposed to be those when the main civil works construction started (e.g. on the dam, in the case of a hydropower project), rather than purely preliminary works. This information was not provided by TEK for thermal and transmission projects. Column (6) These are best estimates by engineers associated with the projects. Column (7) Numbers in parentheses refer to months of year. Where the year only is shown, completion date is end-year. Columns (8) & (9) Foreign exchange costs shown are direct foreign exchange costs only. There are also some in- direct foreign exchange costs associated with locally procured equipment and materials paid 1/ "Shadow Prices for Project Appraisal in Turkey" - World Bank Staff Working Paper No. 392, May 1980 - 172 - Table B7: (Contd...) for in Turkish lira. In the case of the Karakaya hydropower projects, for example, these were estimated at about 5% of the local currency component. (ii) Including interest during construction. (iii) In the case of multipurpose hydro projects, the costs shown are for the dam and power station only. - 173 - Sector Tables Table B8: PROPOSED INVESTMENT PROGRAM-a/ IN URBAN DISTRIBUTION 1981-1985 (In million TL at 1981 prices) Total 1981 1982 1983 1984 1985 1981-1985 a/ Ongoing Projectsa Istanbul 1750 1500 1250 1000 1000 6500 Ankara 457 650 700 763 848 3418 Izmir 430 420 380 380 380 1990 Other Municipalities 6150 7557 6497 8791 8791 37786 Total Ongoing 8787 10127 8827 10934 11019 49694 New Projects.b/ Istanbul 1750 1500 1250 1000 1000 6500 Ankara 443 400 432 472 615 2362 Izmir 430 415 380 380 380 1985 Other Municipalities ' 6000 7500 6500 8750 8750 37500 Total New 8623 9815 8562 10602 10745 48347 'Total Ongoing and New 17410 19942 17389 21536 21764 98041 al Foreign exchange component not given, but it is thought to be very small (about 5%, including direct and indirect, according to Iller Bank). / The breakdown between ongoing and new projects was not provided. It has been assumed arbitrarily that it is approximately 50:50. C/ This is the proposed program of Iller Bank, which is responsible for urban distribution projects in the remaining municipalities, totalling about 1750. Source: Iller Bank, IETT, EGO and ESHOT. - 174 - Sector Tables Table B9: ELECTRIC POWER SUBSECTOR INVESTMENT PROGRAM, 1981-1985 (a) Million TL at 1981 Prices Total 1981 1982 1983 1984 1985 1981-1985 GENERATING PLANT Hydropower 39584 43700 51332 66358 75434 276408 Thermal 95151 120408 125461 127550 151910 620480 Total 134735 164108 176793 193908 227344 896888 TRANSMISSION AND SUBTRANSMISSION 22731 29600 30700 31300 34511 148842 URBAN DISTRIBUTION 17410 19942 17389 21536 21764 98041 VILLAGE ELECTRIFICATION 12863 15800 15900 16000 16000 76563 OTHER INVESTMENT 10373 9088 10898 12180 8125 50664 TOTAL INVESTMENT 198112 238548 251680 274924 307744 1271008 (b) As % of Total Subsector Investment GENERATING PLANT Hydropower 20 18 21 24 25 22 Thermal 48 51 50 ARE Ado. TOTAL GENERATING PLANT 68 69 71 70 74 70 TRANSMISSION AND SUBTRANSMISSION 12 12 12 12 11 12 URBAN DISTRIBUTION 9 8 7 8 7 8 VILLIAGE ELECTRIFICATION 6 7 6 6 5 6 OTHER INVESTMENT 5 4 4 4 3 4 100 100 100 100 100 100 Source: (a) TEK, DSI, EIE, municipalities (b) Mission calculations - 175 - Sector Tables Table B1O: TREND OF ELECTRICITY PRICES (1970 100) 1970 - 100 Year (a) (b) (c) (d) (e) 1970 100 100 100 100 100 1971 116 131 122 119 122 1972 136 155 141 137 149 1973 164 169 163 156 156 1974 214 256 188 194 211 1975 235 260 224 235 216 1976 272 274 261 276 216 1977 337 366 320 347 276 1978 514 540 490 562 467 1979 843 721 793 919 524 1980 (prelim.) i836 1854 1737 1939 1600 (a) = General wholesale index (b) = Index of average electricity price realized by TEK c) Ankara cost-of-living index (d) = Istanbul cost-of-living index (e) = Index of average electricity price realized by ESHOT (Izmir) Source: Turkish Statistical Year Book, TEK and ESHOT - 176 - Sector Tables Table 811: INTERCONNECTED POWER SYSTEM - FORECAST ELECTRICITY SALES, GENERATION AND CAPACITY, 1981-9990 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 SALES (GWh) TEK Municipalities 10850 12390 13860 15200 16400 18100 20750 23400 25900 28700 Villages 950 1450 1600 1950 2400 2750 3150 3550 3950 4350 Industry 8722 13550 16000 18500 21600 25200 28900 32600 36100 40000 Irrigation 100 150 230 360 410 460 500 560 630 700 Concessionary Power Companies 1/ 700 835 1107 1841 2727 3525 4045 4545 5115 5616 Total TEE sales 21322 28375 32797 37851 43537 50035 57345 64655 71695 79366 Others 2/ 3444 3/ 4210 4210 4115 4115 4115 4115 4115 4115 4115 Total sales 24766 32585 37007 41966 47652 54150 61460 68770 75810 83481 Increase % p.a. 18.1 31.6 13.6 13.4 13.5 13.6 13.5 11.9 10.2 10.1 LOSSES Net.ork 1369 1715 1948 2209 2808 2850 3235 3629 3990 4394 Station supply 1188 1700 1945 2325 2640 3000 3405 3810 4200 4625 Total loeees 2557 3415 3893 4534 5148 5850 6640 7430 8190 9019 % total supply 9 9 10 10 11 11 10 10 10 10 NET IMPORTS (GWh) 1865 2000 2000 - - - - - - - REQUIRED GENERATION (GWh) 25458 34000 38900 46500 52800 60000 68100 76200 84000 92500 TOTAL SUPPLY (GWh) 27323 36000 40900 46500 52800 60000 68100 76200 84000 92500 NXIMUM DEMAND (MW) 5730 6420 7300 8290 9420 10700 12150 13600 15000 16500 SYSTEM LOAD FACTOR (7.) 51 60 61 64 64 64 64 64 64 64 INSTALLED CAPACITY (MW) Hydro 2576 3269 4044 4356 5034 6634 7234 7726 9511 11510 Thermal 3356 5511 6672 7219 7969 8569 9725 10925 11525 11825 Total capacity 5932 8780 10716 1575 1303 15203 16959 18651 21036 23335 INSTALLED CAPACITY MARGIN MW 202 2360 3416 3285 3583 4503 4809 5051 6036 6835 As % of maximum demand 4 37 47 40 38 42 40 37 40 41 GENERATION CAPABILITY (GWh) (a) Average hydro Hydro 11325 12334 14092 15757 19551 23717 26332 28017 31241 38237 Thermal 14133 22699 28968 36012 41446 45633 52196 59016 64726 68528 Total generation 25458 35033 43060 51769 60997 69350 78528 87033 95967 106765 Margin-GWh - 1033 4160 5269 8197 9350 10428 10833 11967 14265 -% - 3 11 11 16 16 15 14 14 15 (b) Firm Hydro Hydro 8399 9009 9598 10661 14250 16968 18435 19654 21535 27808 Thermal 14133 22699 28968 36012 41446 45633 52196 59016 64726 68528 Total generation 22532 31708 38566 46673 55696 62601 70631 78670 86261 96336 Margin-GWh -2926 -2292 -334 173 2896 2601 2531 2470 2621 3836 -% -11 -7 -1 5 4 4 3 3 4 1/ CEAS and KEPEZ 2/ CEAS, KEPEZ, Municipalities.and Autoproducers 3/ Excluding 74 GWh to TEK (included in TEE sales) Source: TEK - 177 - Sector Tables Table B12: PROJECTED ELECTRICITY REQUIREMENTS, 1981 - 2003 Electricity Supply Capability, GWh Peak Requirement Hydrol Thermal Net Demand Installed Capacity, MW Year GWh Generation Generation Imports MW Hydro Thermal Total 1981 32,100 11,325 14,133 1,865 5,730 2,576 3,356 5,932 1982 36,000 12,334 22,699 2,000 6,420 3,269 5,511 8,780 1983 40,900 14,092 28,968 2,000 7,300 4,044 6,672 10,716 1984 46,500 15,757 36,012 - 8,290 4,356 7,219 11,575 1985 52,000 19,551 41,446 - 9,420 5,034 7,969 13,003 1986 60,000 23,717 45,633 - 10,700 6,634 8,569 15,203 1987 68,100 26,332 52,196 - 12,150 7,234 9,725 16,959 1988 76,200 28,017 59,016 - 13,600 7,726 10,925 18,651 1989 84,000 31,241 64,726 - 15,000 9,511 11,525 21,036 1990 92,500 38,237. 68,528 - 16,500 11,510 11,825 23,335 1991 102,000 45,601 70,914 - 18,200 13,205 11,869 25,074 1992 112,400 51,396 74,329 - 20,100 15,272 12,469 27,741 1993 123,800 55,481 83,269 - 22,100 16,349 14,619 30,968 1994 136,500 65,734 87,664 - 24,350 19,882 14,619 34,501 1995 150,400 73,571 95,854 - 26,850 20,020 16,819 38,839 1996 164,100 80,775 103,054 - 29,300 24,396 18,119 42,515 1997 177,200 87,437 112,204 - 31,600 26,633 19,419 46,052 1998 191,400 89,804 120,004 - 34,150 27,166 20,719 47,885 1999 206,700 36,900 2000 223,300 39,850 2001 241,100 43,000 2002 258,000 46,000 2003 276,100 49,200 1/ Average hydraulic year - 178 - Sector Tables Table Bl2: (Contd..) Load Forecast Methodology 1. In preparing its current long-term development program, covering the period through 2003, 1/ TEK made a projection of future electricity requirements based on the past relationship between the growth of GDP, industry and electricity demand. For the period 1962-1978, the average annual growth rates were as follows: GDP 6.48% Industry 9.11% Electricity 12.56% These growth rates implied the following relationships between GDP and industry growth rates and between industry and electricity growth rates: Industry: GDP - 1.41 Electricity: Industry - 1.38 2. For the period 1981-1983, TEK took as a starting-point the GDP projections in the 4th plan, but reduced these to take account of the actual rates achieved in the first two years of the plan, which were below the projected rates. From the resulting GDP growth rates, industry and electricity projections were made, as shown below, using the factors derived above: 1981 1982 1983 GDP, % Increase 5.2 6.2 7.0 Industry, % Increase 7.3 8.8 9.9 Electricity, % Increase 10.1 12.2 13.6 1/ - 179 - Sector Tables Table B12: (Contd..) 3. For subsequent years, TEK adopted the long-term projections of GDP and industry growth rates made in the 3rd plan, but modified it in the light of actual realizations in the period since the projections were made. The resulting 5-year average growth rates for industry are shown below, together wit-h the corresponding projections of electricity require- ments, based on the 1962-1978 electricity: industry co-efficient of 1.38: Projected Average Annual Growth Rate, % Period Industry Electricity Requirements 1983-1987 9.9 13.6 1988 8.6 11.9 1989-1995 7.4 10.2 1996 6.6 9.1 1997-2001 5.8 8.0 2002-2003 5.1 7.0 4. The corresponding detailed projections through the year 2003 are shown in the attachement. Sector Tables Table R13; MAJOR IDUSTRTAL POER LOADS, 1980 - 1990 1980 1981 1982 1983 1935 1986 1987 1988 1989 1990 A. EXISTI]G CONSttERS Nub Cimento (Cement Plant) Istanbul 90 90 100 100 100 100 100 100 100 100 100 MetallurJ1 (Metal Industry), Ismir 140 150 150 150 200 200 200 200 200 200 200 ME (Heavy Machine Plant), Krikkale 150 250 835 835 835 835 835 835 835 835 835 Alsan (Aluminum), Seyclisehir 600 600 600 1,000 1,200 1,200 1,200 1,200 1,200 1,200 1,200 TKI (Coal), Zonguldak 500 500 500 500 500 500 500 500 500 500 500 Erdemir (Iron Works), Zonguldak 325 325 325 325 750 750 750 750 750 750 750 T.D.C. (Iron and Steel), Zonguldak 270 270 560 560 560 560 560 560 560 560 560 G.L.I. (Lignite) Tunabilek 80 80 80 80 80 80 80 80 80 80 80 Azotsan (Fertilizer), Kutahya 270 300 565 565 565 565 565 565 565 565 565 T. Cimento San (Cement Plant), Ankara 60 15 115 115 15 115 115 15 115 115 115 Dogu Insaat (Tunnel Construction), Urfa 50 50 50 50 50 50 50 50 50 50 50 Aliaga (Petrochemical), Izmir 200 200 200 300 300 300 300 300 300 300 300 Cinkur (Zinc and Lead), Kayseri 183 183 183 183 183 183 183 183 183 183 183 Ferro-Cron (Ferro-Chrome), Elazig 150 150 150 150 150 150 150 150 150 150 150 0 Cimento (Cement), Canakkale 40 40 40 140 010 1o0 Cement Plant, Afyen 45 45 50 90 50 50 50 50 50 50 50 Cement Plant, Balikesir 47 50 50 50 50 50 50 50 50 50 50 Cement Plant, Gultas 45 50 50 50 50 50 50 50 50 50 50 Cement Plant, Ak 105 120 120 120 120 120 120 120 120 120 120 Cement Plant, Aslan 65 65 70 70 70 70 70 70 70 70 70 Cement Plant, Aftatolu 45 50 50 50 50 50 50 50 50 50 50 Cement Plant, Batianapolm 75 75 100 100 100 100 100 100 100 100 100 Cement Plant, Eskisehir 40 40 40 40 40 40 40 40 40 40 4o Industrial Complex, Bursa 180 200 200 200 250 250 250 250 250 00 300 Paper Plant, Aksu 135 150 150 150 200 200 200 200 200 200 200 Paper Plant, Izmir 145 150 150 150 170 170 170 170 170 170 170 Paper Plant, Dalaman 90 90 100 100 100 140 140 140 140 140 140 Building Materials, Yibitas 50 60 60 80 80 100 100 100 100 100 100 Metal Works, COlak0glu 140 140 150 150 150 150 150 150 150 150 150 Ceramics Works, Canakkale 42 50 50 50 50 50 50 60 60 60 60 Petrochemicals Complex, Imir 250 250 300 300 300 450 45o 450 450 450 450 Ipras Oil Pefinery, Istanbul 85 90 90 100 100 100 120 120 120 120 12) Iraq/Turkey Oil Pipeline 150 180 180 180 200 200 200 200 200 200 200 Other 940 9 5S50 95 950 9 950 950 950 Other Total ExistiniuConsumers 5,782 7 3 7A9 8 8-,919 5 45 85 8946 Incremental Load 326 1,581 2,111 2,926 3,136 3,156 3,166 3,166 3,166 3,166 Sector Tables Table B13: IMTd- MAJOR INDUSTRIAL POWER LOADS, 1980 - 1990 (GHw 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 B. fROJECTED NEW LOADS Pendik (Ship Yard), Istanbul 361 397 427 436 441 445 450 450 450 450 450 D. Palet (Construction Equip.), Elazig 80 160 160 160 160 160 160 160 160 160 16o D.A. Celik (Steel) Ankara 280 300 380 450 450 450 450 450 450 450 450 Filyos (Ferro-Silicone), Zonguldak 90 90 90 90 90 90 90 90 90 90 90 Tunosan (Motor Industry) 70 70 70 70 70 70 70 70 70 70 70 Ferrokrom (Ferro-Chrome), Elazig 400 400 400 600 600 600 600 600 600 600 600 Igoas (Fertilizer) Istanbul 55 55 55 55 55 55 55 55 55 55 55 Temean (Electromechanic), Ask 30 120 120 120 120 120 120 120 120 120 120 Cimento (Cement), Canakkale 56 56 56 56 56 56 56 56 56 56 56 Petlas .(Plastic) 70 70 70 70 70 70 70 70 70 70 70 Cukurova Lesikend AS (Steel), Aliaga - 210 24o 300 420 480 480 48o 480 480 480 Bilecik Organize San - - 200 200 200 200 200 200 200 200 200 Aksaz (Military, NATO), Mugla - - 20 40 50 50 50 50 50 50 50 Taksam (Takistergablars), Kayseri - - 40 60 90 90 90 90 90 90 90 Temsan (Electranechanic) Diyarbakii - - 30 120 120 120 120 120 120 120 120 Aliaga (Petrochemical), Izmir - 240 610 770 770 770 770 770 770 770 770 Adiyaman Cimento (Cement) 20 20 4o 50 80 80 80 80 80 80 80 Sandeli Dogmefab (Iron Plant) - - 60 60 120 180 200 200 200 200 200 Keskin Kalip Fab - - 20 40 60 60 100 100 100 100 100 Corun Agirmak FB (Heavy Machinery) - - 10 25 50 50 50 50 50 50 50 Kayseri Kesici Takim FB - - 10 10 10 10 10 10 10 10 10 Gaziantep Macina (Machines) - - 10 20 40 40 60 60 60 60 60 Kulu is Makinalari (Machine Construction) - - 30 50 50 50 50 50 50 50 50 Lignite Mine, Orhaneli - 6 25 25 50 50 85 85 85 85 85 Lignite Mine Afsin - Elbistan 5 10 20 4o 40 40 60 60 60 60 60 Gas Field, Dodan - - 10 35 35 35 35 35 35 35 35 Industrial Complex, Cor=m- - 10 40 40 80 so 1001510 InutilCmle,Mlts--10 30 50 50 70 70 100 100 150 Car Assembly Plant, Otacan - 5 30 30 30 60 60 60 60 60 60 Irn and Steel Plants, Izmir - - 10 40 40 80 .80 120 120 200 250 Steel Plant, Istan - - 5 10 20 20 30 30 30 30 30 Metal Castings Plant, Akaas - - - 6 20 40 80 80 100 100 120 Cement Plant, Denizli - - - 10 40 40 90 90 90 90 90 l9th May University - - - 5 10 20 40 40 70 Total New Loade 1,517 2,209 3,2 117093 4 5,091 s31 5 57 Aditional Loads 62 171,56 3.030 3,254 3 P4I 3,614 3, 714 3,8M. 3,964 Total Major Industrial Loads 7,299 8,317 10,621 12986 13,255 13 ,689 14,029 14,0 14 ,179 14309 14,429 Incremental Load 1,018 3,322 4,687 5,956 6,390 6,730 6,780 6,880 7,010 7,130 Source: TEK . - 182 - - 182 -Sector Table. Table 814: 1981 INVESTMENT PROGRAM ALLOCATIONS BY PROJECT - ELECTRIC POWER SUBSECTOR (TL Million at 1981 Prices) Note: (1) Project nuibers relate to corresponding projects in Table B7 (2) Projects marked * are additional to those in Table B7 Pro eatProject SEE's 1981 Proposals Project Cost Expenditure to End-1980 1981 Allocation -- No. Name Foreign Total Foreign Total Foreign Total Total I ONGOING PROJECTS Generation Hydropower Plants 1. Hasan Ugurlu I 1,160 4,000 1,160 3,649 - 136 - 150 2. Keban II 4,700 6,670 3,072 3,920 60 1,660 900 1,746 3. Suat Ugurlu 1,270 3,150 740 1,172 430 1,140 430 784 4. Oymapinar 12,000 23,375 3,975 5,405 1,000 5,834 3,700 4,469 5. Kizildere-Kokluce 1,430 5,466 200 602 405 1,624 405 1,286 6. Ceyhan-Aslantas 4,600 7,145 1,267 2,219 500 2,043 1,804 1,874 7. Hasan Ugurlu II 2,4oo 3,867 - 180 600 631 665 807 8. Urfa Tuneli 2,500 12,015 - 1,100 - 2,570 675 2,002 9. Kapulukaya 865 4,135 - 296 - 475 163 303 10. Karakaya 41,250 109,555 6,105 10,303 2,000 6,503 2,850 7,388 11. Gezende 2,336 18,544 - 354 - 1,381 42 1,014 12. Orta Ceyhan-Menzelet 2,163 5,865 - 200 - 608 855 1,359 13. Altinkaya 17,300 40,750 - 1,046 100 3,000 1,410 2,210 Lamas (59 NW) 1,038 1,955 - 95 - 30 - - Erzincan (15 Mw) 259 2,068 - 182 - 63 - Tohma (13.5 Nw) 259 2,166 - 50 - 50 - Kockopru (3 MW) 43 231 - 11 - 204 - - Van Engil (5.6 Nw) 36 1,500 - 31 - 172 - - Aksu II (30 MW) 519 1,595 - 544 63 363 - Susehri (27 MW) 500 1,986 - 34 - loB - - Egrid - 905 - 204 - 252 - - Keban I - 513 - 101 - 76 - - Other 8 915 67,567 215 1,454 - 1 566 - - Subtotal 325,023 16,73T 33,152 5,5 025,392 Thermal Plants 14. Soma B 1-2 7,250 18,250 4,989 14,686 2,487 4,051 2,261 3,564 15. Tuncbilek B 5,500 8,500 3,653 5,955 1,365 2,045 1,847 2,545 16. Yatagan 1-2 10,500 20,000 6,692 11,504 4,189 9,814 3,806 8,496 17. Elbistan A 66,472 91,929 23,273 36,213 10,000 15,000 16,o32 21,153 18. Yatagan 3 6,000 11,000 500 1,200 3,500 4,500 3,500 6,ooo 19. Orhaneli 8,000 14,000 763 1,308 2,000 3,000 3,4oo 5,500 20. Cayirhan 12,000 21,000 5,930 7,754 3,500 6,ooo 4,500 8,ooo 21. Kanagal 12,000 21,000 2,976 4,217 3,000 4,800 3,500 6,500 22. Yenikoy 15,300 35,500 1,100 2,4oo 1,000 3,000 1,850 3,850 23. Yenicatalagzi 5,500 11,500 1,232 1,805 2,300 3,500 2,500 5,000 24. Aliaga Comb. Cycle 2,000 3,500 1,279 1,842 793 1,917 721 1,658 25. Geothermal 1,000 2,500 303 456 810 2,400 697 2,044 26. Renewals - - - - - - 201 428 27. Maintenance Workshop - 2,000 - 53 - 300 - 547 Other 400 700 199 274 221 493 100 200 Subtotal 151,922 251,379 52,M9 89,7 35,165 0 W,917 Transmission 370-kV 28. H. Ugurlu-Carsamba 88 176 80 150 - 9 - 10 29. Carsamba-Kayabasi 275 605 150 300 70 175 100 250 30. Keban-Elbistan 330 935 290 600 3 165 10 250 31. Elbistan-Osmaniye 352 990 260 600 58 170 60 300 32. Soma-Aliaga-Izmir 385 825 100 200 175 329 250 550 33. Elbistan-Kayseri 330 825 50 200 180 270 200 300 34. Yatagan-Izmir 550 1,320 150 200 180 630 200 500 35. osmanca-Bogazatlama 660 1,54o 80 150 356 792 75 220 36. Osmaniye-Seydisehir 990 2,831 100 400 450 630 500 700 Additional 380-kV 7.795 13,383 771 1 695 277 5,109 - - Subtotal 11 755 23,430 2,031 4,949 8,279 1,395 37TO0 154-kv 6,870 16 154 544 3,072 2,344 5,295 2,745 5,350 Subtransmission 1116 18,975 21 2 500 195 2900 212 3 012 TOTAL ONGOING PROJECTS 277,206 634961 72,219 M-- 46,911 107,783 3527 112,319 - 183 - Table B14: (Contd...) Table 814: 1981 INVESTHENT PROGRAM ALLOCATIONS BY PROJECT - ELECTRIC POWER SUBSECTOR (TL Million at 1981 Prices) Note- (1) Project numbers relate to corresponding projects in Table B7 (2) Projects marked * are additional to those in Table B7 Project Project Cost Expenditure to End-1980 1981 Allocation SEE's 198 Proposals No. Name Foreign Total Foreign Total Foreign Total Foreign Total IT NEW PROJECTS1/ Generation Hydropower Plants 37. Ataturk 173,000 354,353 - 7o - 5004, 9,550 38. Lower B. Menderes 1,730 3,638 - 555 500 1,033 800 850 39. Derbent 1,557 5,059 - 7 - 134 800 810 40. Kelkit-Karatas 3,028 25,467 - 350 - 3,538 250 613 41. Ortasakarya Yenice 1,038 12,859 - 26 - 264 - 2,862 42. Seyhan-Catalhan 2,163 3,763 - 36 - 304 182 * Other 2 000 9 242 - - - 100 - 135 Subtotal 1-,51, 17 500 ,5,3 173 5, 15 4,1 Thermal Plants 54. Elbistan B 70,000 115,000 50 90 - - 7 55. soma B 3-4 15,500 23,000 1,100 2,000 2,500 4,ooo 2,000 7,500 56. Seyitomer 4 8,000 14,oo 800 1,000 1,000 2,000 2,500 4,000 57. Keles 9,000 15,000 50 200 50 150 1,000 2,000 58. Saray - - - - - - 100 200 59. Beysehir - - _ _ 100 200 65. Nuclear 1 89,330 40,629 4o 298 2,175 2,577 100 200 69. Istanbul / - - - - - 4,166 70. Ankara /2-- - - 500 1,000 71. Izmir -: - - - 10 20 * Other 0 15 200 - - 150 300 100 200 Subtotal 200,930 2W N 3,5M 5,75 9 13,151 Transmission 380-ky 72. Oymapinar-Seydisehir 330 715 125 130 113 315 73. Sincan-Osmanca 1,100 2,200 - 10 473 945 125 350 74. Elbistan-Sincan 1,874 5,400 1 10 315 1,350 75 150 75. Balikesir-Bursa 495 1,100 120 130 135 315 350 500 76. Balikesir-Soma 275 660 75 85 72 180 150 350 77. Kayabasi-Osmanca 2,200 4,400 - 1 225 450 80 200 78. Oymapinar-Kepes 385 880 175 180 45 180 250 500 79. Cankiri-Ankara - - - - - - 50 200 80. Yenikoy-Aliaga - - - _ _ 150 300 81. Karakaya-Kayabasi 1,980 4,180 - - -9 100 301 82. Karakaya-Elbistan 880 3,446 - - - 9 - 10 83. Karakaya-Keban 330 715 - - - 9 - 10 84. Karakaya-Ataturk-Osmaniye 1,540 3,300 - - - 9 - 10 85. Balikesir-Babaeski 935 2,090 - 1 - 6 - 10 86. Bursa-Adapazari 440 1,100 - - - 9 - 5 87. Yatagan-Denizli-Kepez 880 2 200 - - - 18 - 10 Subtotal 13644 1,378 W - 20 154-kv 1,847 4,130 - - 216 634 1,330 Subtransmission 117 2 275 - - 5 100 2,745 5,350 TOTAL NEW PROJECTS 6 212 3 013 WE B3~S I. 2,536 -5,FO- 7,974 19,438 22,58M 5,147 VILLAGE ELECTRIFICATION L3 762 44,242 46 5,315 - 5,000 6o6 12,863 O HER INVESTMENT 3 3,511 27,887 94 2,432 582 11,334 2,115 7,926 Total TEK and DSI 682,533 1,445,091 74,895 146,442 55,467 143,555 88,837 178,255 URBAN DISTRIBUTION Ankara (EGO) . . . . , , Istanbul (IETT) .. .. .. .. .. .. .. 900 Izmir (ESHOT) /4 3,500 Iller Bank O243 11,546 119 5 86 Subtotal .. .. .. .. *150 EIE 652 3,338 202 519 232 1,960 34 17,410 S ATOMIC ENERGY COMMISSION 454 1,41l 235 41o 48 510 415 2,447 GRAND TOTAL ELECTRIC POWER SUBSECTOR 684,917 1,514,723 75,575 158,917 55,866 151,025 89600 19112 == == =====9,6o 198,11 1/ Includes projects listed in this category in Table B7, i.e. those on which main construction would not start until 1981 or later. The 1981 Program, however, includes all the projects shown in the "ongoing" category, except on the last two 380-kv projects, the 154-kV and subtranesission items, and the "other" generation -tems. 2 Steam stations which w1ld use munItipal waste as fuel, Comprising ongoing and new projects. Not identified in 1981 Program. Source: 1981 Program (Energy Sector - Atomic Energy Commission includes small item feam Yining Sector), SEEs proposals fcom SEEs. - 184 - Sector Tables Table B15: CAPITAL AND GENERATING COSTS OF PROPOSED NEW POWER STATIONS (At 1981 Prices) Generating Costs, TL/kWh Capital Output per kW Cost in kWh year Capital Op. & Maint. Total TL/kW Average Firm Average Firm Fuel Average Firm Average Firm HYDROPOWER PLANTS Finkikli-Karkamis 15500 3300 2600 0.570 0.723 - 0.047 0.060 0.617 0.783 Seyban-Catalhan 17400 3227 264o 0.654 0.799 - 0.054 o.o66 0.708 0.865 Kayrakteve 15875 2500 1625 0.770 1.185 - 0.064 0.098 0.834 1.283 Ilsu 22500 3083 1971 0.885 1.384 - 0.073 0.114 0.958 1.498 Batman-Malabadi 32308 3808 1008 1.029 3.887 - 0.085 0.321 1.114 4.208 Boyabat 23500 2000 1850 1.425 1.541 - 0.118 0.127 1.543 1.668 Sir Ve Duzkesme 52500 3750 2040 1.698 3.121 - 0.140 0.257 1.838 3.378 Derbent 79107 4768 3589 2.013 2.674 - 0.166 0.220 2.179 2.894 Obruk 22619 1229 .. 2.232 .. - 0.184 .. 2.416 Pasinler-Soylemez 52500 2667 2367 2.388 2.691 - 0.197 0.222 2.585 2.913 Lower B. Menderes 46667 2367 .. 2.392 .. - 0.197 .. 2.589 Ortasakarya Yenice 44444 1937 1460 2.783 3.692 - 0.229 0.304 3.012 3.996 Ataturk 89167 3667 2600 2.950 4.161 - 0.243 0.343 3.193 4.5o4 Kelkit-Karatas 79178 2877 .. 3.338 .. - 0.275 .. 3.613 Sakarya-Kargi 14637 515 413 3.448 4.300 - 0.284 0.354 3.732 4.654 Sakarya-Gursogut 16912 483 343 4.247 5.981 - 0.350 0.493 4.597 6.474 Ozkoy 56333 1213 827 5.633 8.262 - 0.464 o.681 6.097 8.943 LIGNITE PLANTS Elbistan B 95833 6500 6500 1.880 1.880 0.291 0.431 0.431 2.602 2.602 Elbistan C 95833 6500 6500 1.880 1.880 0.291 0.431 0.431 2.602 2.602 Elbistan D 95833 6500 6500 1.880 1.880 0.291 0.431 0.431 2.602 2.602 Soma B (3-4) 69697 6000 6000 1.481 1.481 0.825 0.505 0.505 2.811 2.811 Keles 75000 6000 6000 1.594 1.594 0.854 0.535 0.535 2.983 2.983 Beysehir 75000 6000 6000 1.594 1.594 0.898 0.693 0.693 3.185 3.185 Saray 76667 6000 6000 1.629 1.629 .. .. seyitomer 4 93333 6000 6000 1.983 1.983 0.669 0.660 0.660 3.313 3.312 Karliova 93333 6000 6000 1.983 1.983 0.773 0.692 0.692 3.448 3.448 NUCLEAR PLANTS Nuclear 1 192000 6000 6000 4.080 4.080 0.630 .. .. 75 75 Nuclear 2 192000 6000 6000 4.080 4.080 0.630 .. .. 75 75 Nuclear 3 191000 6000 6000 4.080 4.080 0.630 .. .. 75 75 Nuclear 4 191000 6000 6000 4.o8o 4.o8o 0.630 .. .. 75 75 . Not available 1 Excluding interest during construction 2 Assuming opportunity cost of capital of 12% and station lives of 40 years for hydro and 25 years for thermal plants. Source: Derived from DSI and TEK cost data Sector Tables Table B16: RURAL ELECTRIFICATION PROGRAM (At Current Prices) (a) Completed Program 1964 - 1980 (At Current Prices) Actual Average Cost Number of Villages Estimated Cost Approved Allocation Expenditure Number of Villages Per Village Year Programmed TL Million TL Million TL Million Connected TL'O0O 1964 147 16.60 14.039 8.16 2 1965 165 20.30 22.005 14.70 99 140 1966 249 23.10 30.266 23.06 120 187 1967 259 32.40 30.266 28.27 147 176 1968 1.112 202.32 200.406 72.29 256 229 1969 1,445 302.20 126.000 143.24 420 383 1970 226 45.40 115.406 222.17 601 333 1971 314 60.70 150.778 127.00 533 249 1972 1,646 398.87 237.393 229.10 834 237 1973 1,747 466.06 270.304 332.98 918 378 1974 1,507 500.05 421.488 403.70 1,066 326 1975 1,515 935.00 895.957 843.13 1,403 557 1976 2,732 1,568.00 1,484.416 1,591.30 1,653 975 1977 2,668 2,289.33 2,152.662 1,575.06 1,992 796 1978 3,668 3,169.00 2,135.233 2,062.00 1,747 1,180 1979 3,048 4,000.00 4,524.001 5,445.86 2,460 2,235 1980 3,74 6,000.00 4, 661,663 12,839.52 2,832 4,450 Total 26,234 17,083 - 186 - Sector Tables fable B17: PRICES OF LIGNITE AT SELECTED MINES CTL/ton) Domestic Heating NAME OF THE MINE INDUSTRY NORMAL SUBSIDIZED Mugla Yatagan Lumps 1,080 620 560 Fines 480 - - Run of Mine (ROM) 840 480 440 Beypazari Lumps 1,440 840 760 Fines 720 - - ROM 840 640 580 Balkaya Lumps 1,800 1,040 940 ROM 1,200 Source: TKI - 187 - Sector Tables Table B18: IMPORTANT COAL RESERVES OF TURKEY (million tons) Proven & Pos- Lignite Proven Probable Probable 'sible. Total ganakkale-Qan :(S) 115.118 - - - 115.118 (U) 13.168 - - - 13.168 Qankiri-Orta 122.200 - - - 122.200 KUtahya-Seyitbmer: 203.021 - 24.181 227.202 "-Tav§anl1-Tunqb.: 213.051 - 40.053 - 253.104 Manisa-Soma- Eynez : - 100.000 - - 100.000 Manisa-Soma- Ethiler : - 35.000 - - 35.000 Manisa-Soma . 121.400 - 59.300 - 180.700 Manisa-Soma- Deni: 100.000 - - - 100.000 Mugla-Milas- HUsamlan : - 14.000 30.000 - 44.000 Mugla-Milas- Sekkby : 90.000 - - - 90.000 Murla-Milas- Ekizk6y :(S) 84.000 - - - 84.000 (U) 4.000 - - - 4.000 Mugla-Yatagan- Bayir - 109.000 109.000 Mugla-Yat aan- Eskihisar : 128.566 - - - 128.566 Mugla-Yatagan- Tinaz :(s) 42.000 - - - 42.000 (U) 750 - - - 750 Mugla-Yatagan- Baggaka : 19.558 - - - 19.558. TOTAL 1.256.832 258.000 153.534 - 1.668.366 Afqin-Elbistan 1.850.000 - 1.376.000 - 3.226.000 Others 1.033.164 758.775 194.540 461.730 2.448.209 TOTAL 4.139.996 1.016.775 1.724.074 461.730 7.342.575 0-.trip U-Under6round Hard Coal Zonguldak 186.154 70.000 255.233 854.604 1.365.966 Source: Ministry of Energy and Natural Resources - 188 - Sector Tables Table B19: COAL CONSUMPTION BY SECTORS ('000 tons) /a lb a. Hard coal 1970 1971 1972 1973 1974 1975 1976 1977 1 29_ 122 Industry : 2510 24'?5 2513 2521 2535 2663 2700 33'+4 3058 3317 Residential : 369 " 332 251 208 383 365 345 190 224 245 PowerPlants : 986 978 1040 1118 1130 1098 1069 963 898 938 Transport : 812 886 826 725 767 620 551 386 180 243 TOTAL : 4677 4671 4630 4572 4815 4746 4665 4883 4360 4743 b. Lignite industry : 1626 1941 1784 2027 2335 2261 2602 2525 1950 2875 Residentidil : 2914 3085 3385 3831 4350 3749 5203 5428 7289 5602 PowerPlants 1122 1187 1166 1490 2114 2593 3381 3766 4935 5559 Transport 93 177 127 156 143 100 151 127 245 150 TOTAL 5755 6390 6462- 750L 8942 9703 11337 11846 14419 14186 /a Including owm consumption (90,000 tons) (bard coal) /b " " (111,000 tons)(hard coal) Source: Ministry of Energy and Natural Resources - 189 - Sector Tables Table B20: FORECAST DEMAND FOR LIGNITE AND HARD C'AL, 1980-1990 (million tons) Lignite. Jesidential Industry Power Plants Transport TOTAL 1980 7.029 5.596 7,016 100 19.741 1981 7.662 7.275 9.186- 100 24.223 1982 8.352 8,496 20.776 100 37.724 1983 9.103 10.027 36.826 100 56.056 1984 9.877 11.677 43.503 100 65.157 1985 10.716 12.958 )1.353 55 75.082 1986 11.627- 14.568 65.658 55 91-908 1987 12.616 15.6(2 72.758 55 101.091 1988 13.688 16.255 75.558 55 105.556 1989 14.783 20.109 82.558 55 117.505 1990 15.966 21.280 82.558 . 119.804 Hard Coat 1980 176 4.508 815 263 5.762 1981 176 6.904 815 255 8.150 1982 176 7.792 815 244 9.027 1983 176 9.215 700 137 10.228 1984 176 11.911 800 51 12.938 '1985 176 13.721 800 - 14.697 1986 176 14.992 800 - 15.968 1987 176 16.651 800 - 17.627 1988 176 20.765 800 - 21.741 1989 176 22.740 800 - 23.716 1990 176 24.705 800 - 25.681 Source: Ministry,of Enetgy and Natural ResoVrces Sector Tables Table B21: INVESTMENT PROGRAM FOR TKI, 1981-1984 (TL billion at 1981 prices) Date of Date of Expenditure INVESTMENT REQUIREMENTS PROJECT CAPACITY Cons.start completion Project Cost p 1981 1982 1983 1984 mli (a) (b) 31.12.80 (a) (b) (a) (b) (a) (b) (a) (b) (A) ' (a) (b) I. Investigations and Margi- 1981 . - - .053 .071 .033 .09 investments to be nal initiated in 1981 II. ONGOING PROJECTS: A. To be completed in 1981 - 1981 5.38 17.57 0.64 5.38 16.93 B. To be completed after 1981 Bl. Projects in the SPO List 1. Mugla Ya agan 3.46 - 1984 5.28 10.13 .10 1.8 2.8 1.63 2.89 1.39 2.44 .46 1.9 2. Canakkale Can 1.28 - 1984 7.2 13.64 .10 .52 1.86 2.67 4.67 2.81 4.0 1.2 3.0 3. Sivas Kangal 4.14 - 1984 6.47 11.95 .175 .39 .8 2.43 4.39 2.55 3.95 1.09 2.63 4. Beypazari 2.95 - 1984 6.6 12.96 .24 .33 2.0 3.0 2.3 4.14 1.3 3.2 .7 2.0 5 Afain E1bistan A 20.0 - 1982 20.54 44.18 6.66 16.04 5.76 12.47 8.13 15.67 - - 6. Afsin Elbistan B 20.0 - 1984 18.34 34.34 - .06 .1 9.14 17.12 6.66 10.70 2.48 6.48 7 Zonguidak Exp I ' - - 1982 .45 3.58 .23 .12 .98 .33 2.37 8 Tunebilek Omerler 1.385 - 1984 .31 2.4 .05 .13 .55 .08 .81 .068 .59 .03 .4 9. ursa Orhaneli 1.385 1984 2.48 5.8 .19 .51 .92 .97 2.34 .7 1.41 .3 .94 10. Bursa Keles 1.45 1984 3.94 7.07 1.8 .8 1.1 1.57 2.9 .94 1.79 .63 1.16 11. Soma Iskilar 3.70 4.79 11.3 .015 .95 1.35 1.91 4.78 .7 1.9 1.15 2.87 Total 59.75 76.4 157.35 6.90 19.03 13.04 25.93 31.16 62.08 17.12 29.98 8.04 21.38 12. Projects not in the SPO List 1. Transport Vehicles 1981 1981 0.35 1.181 - 0.35 0.99 2. EKI Mining M/C Plant 1978 1982 1.0 2.45 0.13 0.22 0.51 0.78 1.80 3. Tuncbilek Lawar 1976 1982 .05 0.25 0.005 .015 0.03 0.15 0.015 0.085 4. Ersurum Ispir .05 MT(L) 1977 1982 .025 0.22 .05 .01 0.138 .015 .032 5. Van Ercis .1 HT(L) 1977 1982 .018 .16 .030 .01 .105 .007 .025 6 Erzurum Balkarya .2 Mr(L) 1977 1982 .065 .35 .055 .016 .205 .048 .09 7. Erzurum Oltu .2 MT(L) 1977 1982 .026 .24 .020 .015 .165 .010 .055 8. Tekirdag Saray 2.21 W(L) 1980 1985 . 8.70 15.92 *2 .43 4.23 6.16 2.54 5.55 . 1.69 3.7 9. Yozgat Sorgun 0.1 MT(L) 1981 1983 .201 .722 .018 .286 .109 .261 .073 .179 Total 10.435 21.49 .005 0.3 .889 2.98 5.214 8.51 2.61 5.729 1.69 3.7 Grand Total 92.22 196.46 '6.91 20.04 19.31 45.87 36.37 70.68 19.73 35.71 9.73 25.08 (a) = Foreign exchange (at TL 80 = US$1) (b) = Total expenditure Source: TKI - 191 - Sector Tables Table B22: PETROLEUM PRODUCTS CONSUMPTION, 1970-1979 (thousand tons) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 Refinery fuel gas 160 172 252 184 185 190 176 178 186 172 LPG 218 283 333 440 478 541 645 697. 745 739 Naphtha 121 135 129 165 189 227 235 368 379 390 Premium gasoline 31 58 88 133 145 214 236 312 231 86 Regular gasoline 904 878 1.005 1.207 1.261 1.547 1.733 1.992 1.944 1.706 Jet fuel 45 98 143 142 170 152 176 186 174 .183 Kerosine 463 471 505 548 468 460 533 592 568 468 Solvent 5 9 10 11 13 17 17 24 22 21 Diesel oil 1.884 2.076 2.374 2.735 2.995 3.211 3.730 4.382 4.436 3.647 Fuels-oils 3.210 4.022 4.705 5.549 5.666 6.164 6.618 7.530 7.144 6.310 Asphalt 200 184 213 233 236 287 297 370 433 325 Lubricants 126 130 138 176 137 177 214 241 249 230 Others 6 10 14 12 12 14 25 10 12 12 Total 7.373 8.526 9.909 11.535 11.955 13.201 14.635 16.882 16.523 14.289 - 192 - Sector Tables Table B23: MAIN PETROLEUM PRODUCTS DEMAND BY SECTOR END-USE, 1970-1979 (thousand tons) Sector 3,122. In21. _-L2- 122L3 1974 ' 12275 .1226. 1977 1978 1979 Agricultrre 8,7 8,4 8,7 8,6 8,5 8,7 7,9 9,2 8,7 7,2 "Triaoot 80, 9n Trand0ort 890,9 892,5 10A4,5 1.293,8 1.358,1 1.708,4 1.909,7 2.234,6 2.109,6 1.738,0 oInd-ostry and ctherz 34,9 35,4 36,4 38,2 40,0 44,0 52,0 60,o 56,6 46,5 Tv 934,5 936,3 1.092,6 1.340,6 1.406,6 L.761,1 1.969,6 2.303,8 2.174,9 1.791,7 ' 1 Agriculture 20,0 20,0 20,0 20,0 18,6 18,4 14,9 - 16j6 - 17,1 14,0 roestit 443,2 451,2 434,7 528,3 449,2 441,7 518,6 575,3 550,8 453,8 Total1 463,2 471 2 504,7 548,3 467,8 460.1 533,5 591,9 567,9 467,8 Agriculture 490,0 586,3 586,1 630 o 616,8 625,9 707,4 832,6 842,6 693,0 Tranz;ort 1.289,5 1.401,5 1.527,6 1.76A,1 1.917,2 2.236,3 2.650,0 3.14,4 3.149,4 2.590,J riec Energy 102.0 54,0 36,0 212,0 272,0 262,0 285,5 350,6 354,8 291,0 Indus~tryard Othere 55.0 65,0 75,0 89,0 82,8 87,o 88,o 87,6 89,0 73,0 Total 1.936,3 '2,106,8 2.224,7 2.699,1 2.888,8 3.211,2 3.730,91 4.385,2 4.435,8 3.647,0 and tAL 217,7 282,6 332,6 440,5 478,3 541,1 645,o 697,4 745,3 732,6 - jDomeatUe 450,0 600,0 752,8 873,0 1.016,6 1.165,5 1.695,7 1.594,4 1.18F14 520,0 a Transport 405,6. 430,0 46o,o 479,0 490,0 503,7 443,4 429,2 4o,2 3553,4 SElec.Energy 685,0 1.C05,0 1.212,0 1.435,0 1.299,0 1.299,0 1.216,1 1.103,8 1.286,0 1.136,6 G ind.and.0thet670,0 1.987,3 2.280,1 2.762,4 2.860,0 3,195,8 ;.263,0 4.402,9 4.264,4 4.300,0 potal 3.210,6 4.022,3 4.704,9 5.549,4 5.665,6 6,164,0 6.618,2 7.550,3 7.144,0 6.310,0 (1) LPG Consumption in industry is negligible. - 193 - Sector Tables Table B24: TPAO - 1981 INVESTMENT PROGRAM ALLOCATIONS BY PROJECT (TL Millions at 1981 Prices) Project Cost 1981 Allocation S 1981 Proposals Project Foreign Total Foreign Total Forei Total Exploration 2,400 4,500 2,400 4,500 .. 8,641 Hamitabad Gas Field Development 899 1,068 200 250 .. 341 Development of Existing Oil Fields 1,159 2,661 730 900 .. 2,201 Bati Raman Production Increase 5,973 11,824 2,050 3,300 .. 5,356 IPRAS Refinery Debottlenecking 529 1,415 236 390 -. 394 IPRAS Refinery Expansion 9,738 16,042 2,615 3,600 .. 4,708 Izmir Refinery Debottlenecking 348 877 12 100 103 Ismir Refinery Inbe Oil Debottlenecking 320 631 - 50 ** 302 Izmir Refinery Lube Oil Expansion 16,574 50,511 - 5 . 8 Izmir Refinery Expansion 9,609 36,797 2,123 3,700 .. 3,935 Izmir Refinery Calcine Petroleum Coke 6,843 18,8(2 - 5 ** 5 Middle Anatolian Refinery 25,850 100,585 3,290 6,790 .. 21,6o7 Middle Anatolian Refinery Pipeline 7,884 15,903 5 10 ** 6,785 Drilling Capacity Expansion 12,894 19,012 15 20 Well Cementing 754 1,296 35 4c Drilling Tower Transport & Assembly 4,896 8,o4o 413 500 Drilling Equipm5nt Renewal 8,052 11,452 150 170 Other Projects L.a .K.30 !38L S42n Total ll#.852 320,805 15.856 29.759 54,386 /aIncluding studies. Source: 1981 Program (Refinery Projects from Manufactpring Sector - Petroleum Products; Pipeline Project from Transport Sector; Remainder from Mining Sector). - 194 - Sector Tables Table B25: PETROL OFISI - 1981 INVESTMENT PROGRAM ALLOCATIONS BY PROJECT Project Cost 1981 Allocation Petrol Ofisi's 1981 Proposale Project Foeg Total Foreign Total -Foreign Total Iziir-Aliaga Petroleum Products Storage - 794 - 265 75 Tanker Construction 60 525 78 - Izmir-Aliaga Lube oil Blending Unit 130 480 - 150 150 Lube Oil Additives Plant - - - - 477 Immir-Yarimea Fuel-Oil Storage 24 711 - 25 124 Batman Storage Facilities 25 422 - 48 98 Communication System - 84 - Z2 . 84 Other Projects A.602 4.413 110 -92 . - Total 1,841 7,429 110 1,580 .. 1,008 /a Intluding studies. Sourcel 1981 Program Onufqcturing Ser v Petroleum Products, except Tanka CoUstrUctAon P9ject Transport Sectorl. - 195 - Sector Tables Table B26; RETAIL PRICES OF PETROLEUM PRODUCTS (ANKARA) 1974-1980 TL/Liter Feb. 1974 JM. 1975 Sept. 197 Sept. 1978 Mr. 1979 Je 197 Jan. 1980 ar. 198 Apr. 198 June 1980 Sept. 198 Dec. 198 Premim Gasoline 3.45 3.45 6.50 11.00 20.00 25.00 36.00 37.00 42.0o 48.oo 53.00 58.oo Regular Gasoline 2.80 2.80 5.50 9.00 17.00 22.00 32.00 33.00 38.00 43.00 48.00 53.00 Keroseve 2.47 2.47 3.50 5.00 10.00 10.00 20.00 20.50 23.50 26.oo 31.00 36.oo Diesel 011 2.51 2.51 4.10 5.25 9.00 9.00 20.00 20.50 23-50 26.00 31.00 36.oo Fuel oil No. 6 - 1.50 2.30 3.15 6.00 6.00 12.00 12.50 15.50 18.50 21.00 24.00 Fuel 011 No. 5 - 1.55 2.64 3.54 6.64 6.64 13.90 14.30 17.30 20.24 23.32 26.84 Fuel oil for Heating - 1.62 2.83 3.77 6.99 6.99 14.70 15.20 18.20 21.00 24.35 28.10 Marine Diesel oil - 2.26 3.89 4.98 8.58 8.58 19.20 19.60 22.60 24.85 .. 34.34 LPG (12 kg) . - - - 125.00 125.00 200.00 225.00 300.00 350.00 425.00 510.00 Source: MOR (to Sept. 1980) and Ebanewsletter (Dec. 1980)
Groupe de la Banque mondiale · Pre-2003 Economic or Sector Report
Turkey - Public sector investment review (Vol. 2 of 3) : Sector Analyses
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