Turkey - Second Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4394-TU STAFF APPRAISAL REPORT TURKEY SECOND AGRICULTURAL CREDIT PROJECT May 25, 1983 Regional Projects Department Europe, Middle East and North Africa Agriculture III 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 Bakk authorization.  CURRENCY EQUIVALENTS US$1 = Turkish lira (TL) 182 la TL 1 = US$0.0055 TL 1,000,000 = US$5,494.50 WEIGHTS AND MEASURES 1 kilogram (kg) = 2.20 pounds 1 metric ton D 1,000 kilograms 1 metric ton = 0.98 long ton 1 meter (m) = 1.09 yards 1 kilometer (km) - 0.62 mile 1 hectare (ha) = 2.47 acres 1 decare = 0.1 ha = 0,25 acre 1 square kilometer (km2) = 100 ha = 0.386 square mile 1 liter (1) = 0.254 gallon ABBREVIATIONS AP - Action Plan for Improvements in TCZB's Operations FRS - Fallow Reduction Scheme FDP - Farm Development Plan GDAA - General Directorate of Agricultural Affairs of MAF GDP - Gross Domestic Product IBRD - International Bank for Reconstruction and Development (World Bank) ICB - International Competitive Bidding MAF - Ministry of Agriculture and Forestry PP - Production Plan SCS - Second Crops Scheme SEE - State Economic Enterprise TCZb - Agricultural Bank of Turkey TKK - Agricultural Credit Cooperatives TMO - Scil Products Office, an SEE TSK - Agricultural Sales Cooperatives TZDK - Agricultural Supply Organization, an SEE FISCAL YEAR Republic of Turkey - March 1 to February 28 (through 1981) TCZB - March 1 to December 31 (1982) - January 1 to December 31 (from Jan. 1, 1983) 2e Exchange rate prevailing at time of appraisal.  STAFF APPRAISAL REPORT FOR OFFICIAL USE ONLY SECOND AGRICULTURAL CREDIT PROJECT TURKEY Table of Contents Page No. I. AGRICULTURAL SECTOR ... ............... ................... 1 A. Project Background ......*..........*. . ..... . 1 B. Agriculture In Turkey ...... ......*........ . ............1..... I C. Agricultural Policies, Performance, and Prospects 2 D. Bank's Contribution and Lending Strategy in the Agriculture Sector ..... .................. 4 II. AGRICULTURAL CREDIT SUBSECTOR ......... ................. 5 A. Lending Institutions .............................. . ...o 5 B. Agricultural Credit Policy ... ........................ ..... ... 6 C. Interest Rates . ................... f 8 IIl. THE AGRICULTURAL BANK OF TURKEY (THE BORROWER) .................... 9 A. Organization, Management, and Staff . ...... ..................... 10 B. Lending Policies and Procedures . . .12 C. Lending Operations ...... . ................................. . 14 D. Financial Situation and Performance . ......................... 16 E. Performance under First Agricultural Credit Project ......... 18 F. Summary of Evaluation of TCZB ................................. 19 IV. THE PROJECT , ............. . . . . 20 A. Project Objectives ........................ . ..........20 B. Project Components . ...............20 C. Detailed Features .. ..................... 21 D. Project Cost ......26 E. Finanlcing Plan ................. ........27 F. Procurement ....................... . ..........................28 G. Disbursements ..... ................ .................... .o 28 V. PROJECT IMPLEMENTATION ....................................... 29 A. Organization and Management . 29 B. On-lending Terms and Procedures .31 C. Monitoring, Evaluation and Reporting .33 D. Accounts and Audits ................. ........................... 33 E. Action Plan for Strengtbening of TCZB .34 F. Study of Credit Cooperatives ........ ............. ..... 34 VI. PRODUCTION, MARKETS, AND FINANCIAL ANALYSIS ....35 A. Production . . . 35 B. Marketing and Processing .............................. 35 C. Financial Analysis . ....................... .36 This report is based on the findings of an appraisal mission to Turkey in November 1982. Mission members included Mr. Vinay Bhargava 'Mission Leader), Ms. Linda Likar (World bank), Mr. D. Masterton (FAO/World bank Cooperative Program) and hessrs. R. Sood and A. Stoneham (Consultants). This document has v. 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.  Table of Contents (continued) Page No. VII. PROJECT JUSTIFICATION . .. ....... . . ................. . . . . .... . ..... 37 A. Benefits ..... .................. ................. 37 B. Economic Analysis . .. . ....... .... . . ...........39 C. Risks and Uncertainties ... .. . .. . .. .. . ... . .......... .. .... 41 VIII. RECOMMENDATIONS............. .. . . *...... * ...... *. *........ 41 ANNEXES 1. Detailed Cost Estimates........................ 4347 2. Terms of References for Studies A. Study of Agricultural Credit Cooperatives .............48-49 B. Systems and Procedures Study ...................50 C. Accounting Systems Study.....................51 3. Action Plan for Improvements in TCZB Operations . ...........52-62 4. Outline of Project Monitoring and Evaluation System.... ......63-64 5. Economic and Financial Analysis: Detailed Results.... .......65-72 6. Selected Documents and Data Available in the Project File.. .....73 7. Supporting T2bles ST-i Agricultural Credit Supply and Source of Funds.... .......75 The Agricultural Bank of Turkey ST-2 TCZb: Consolidated Balance Sheets .... ..............76 ST-3 TCZB: Consolidated Income and Expenditure Statement .......77 ST-4 TCZB: Sources and Allocations of Funds..............78 ST-5 TCZB: Agricultural Lending Operations ..............79 ST-6 TCZB: Structure of Deposits ...................80 Farm Budgets ST-7 Farm Mechanization Annual Income and Operating Expenses......81 ST-8 Farm Mechanization Cash Flow ...................82 ST-9 Beef Fattening Annual Income and Operating Expenses........83 ST-10 Beef Fattening Cash Flow ..................... 84 ST-l1 Sheep Fattening Annual Income and Operating Expenses .......85 ST-12 Sheep Fatte3ling Cash Flow .......................... . 86 ST-13 Broiler Production Annual Income and Operating Expenses......87 ST-14 Broiler Production Cash Flow ........88........... ST-15 Egg Production Annual Income and Operating Expenses........89 ST-lb Egg Production Cash Flow ........... ..........90 ST-17 Orchard An.iual Income and Operating Expenses ...........91 ST-18 Orchard Cash Flow......................... 92 ST-19 Crop Improvement Inputs and Labor use per Ha ...........93 ST-20 Crop Improvement Annual Income and Operating Costs ........94 ST-21 Crop Improvement Crop Budgets................... . 95 ST-22 Fallow Reduction Component Inputs and Labor Use..........96 ST-23 Fallow Reduction Component Crop Budgets ..............97 ST-24 Corum Cankiri Component Inputs and Labor Use ............... 98 .ST-25 Corum Cankiri Component Crop Budaets .............--99 '3T-26 Second Crop Component Inputs and Labor Use ..... .I.... ....100 ST-27 Second Crop Component Crop Budgets ................101  Table of Contents (continued) Page No. CHARTS IBRD 24720 Organization Chart of The Agricultural bank of Turkey (TCZB) ................... ................................. 102 IBRD 24261 Organization Cbart of Ministry of Agriculture and Forestry (MAF) ............. .. .... ..... **** ...*....*...... 103 IBRD 24260 Organization Chart of General Directorate of Agricultural Affairs (GDAA) in MAF ..................... , 104 RAPS 1 IBRD 16766 - Agricultural Regions in Turkey 2 IBRD 17071 - Project Area and Components  I I  Staff Appraisal Report Second Agricultural Credit Project Turkey I. Agricultural Sector A. Project Background 1.01 The proposed project has been formulated with the objective to provide funds to farmers to finance productive investments at the farm level and to improve the principal agricultural credit institutions in Turkey. The investments financed under the project will be aimed at intensification of land use and establishment of more efficient livestock production in areas where the Government of Turkey has undertaken to intensify support services to farmers. The project will continue the effort started under the first Agricultural Credit and Agroindustries Project (Loan 1248-TU) to strengthen the institutional capabilities of the Agricultural bank of Turkey (TCZB). In addition, the project aims at laying the foundation for strengthening of the agricultural credit cooperatives in Turkey. The proposed project is an integral part of the Government strategy for development of the agricultural sector. 1.02 The proposed project was one of several projects identified by an agricultural projects identification mission for possible Bank financing (See Mission Report "Agricultural Development. Problems and Opportunities", Report No. 3178a-TU, May 7, 1981). A Bank mission visited Turkey in September 1981 to initiate project preparation. Subsequently, TCZB assumed responsibility for project preparation. A substantial part of project preparation was done by the Technical Cooperation and Coordination Department, in the General Directorate of Agricultural Affairs, Ministry of Agriculture and Forestry (MAF). The TCZB and MAF were assisted during project preparation by FAO/IBRD Cooperative Programme staff through 2 missions in May and September 1982. The bank missions of April and August 1982 guided the project preparation and initiated discussions of main project issues. A project preparation report was submitted by TCZB to the Bank on October 20, 1982, and a Bank mission carried out field appraisal of the project during November 1-24, 1982. B. Agriculture in Turkey 1.03 Agriculture plays a crucial role in Turkey. besides meeting domestic food needs, it accounts for about half of all export earnings and 60 percent of employment. It also supplies much of the raw materials for industry. Agriculture contributed 20 percent of the Gross Domestic Product (GDP) of Turkey in 1981. Growtb in agricultural production is of major importance in e-.panding foreign earnings and providing employment for Turkey's growing labor force. 1.04 The agricultural regions of Turkey are shown in IBRD Map 16766. Intensive crop cultivation is prevalent in the coastal regions, whicb receive plentiful rainfall or are partially equipped with irrigation iacilities. Mixed (crop and livestock) farming predominates in the eastern and central  -2- parts of the country where pastures and meadows form more than half of the agricultural land and the crop production is dependent on rainfall. The main system of cultivation in the rainfed areas consists of a rotation including fallow 1 year out of 2. The livestock production system is largely traditional, dependent on grazing lands and low productivity systems of animal husbandry. 1.05 About 56% of Turkey's agricultural land is cultivatea. The total cultivated area has been increasing at an average annual rate of 0.8% since 1968. The increase has come from conversion of other lands to cultivated land and reduction in the fallow, and has been realized mostly in field crops (except cereals which declined) and fruits. Future increases in cultivated areas are likely to be smaller and would come from the reduction of fallow in rainfed areas and double cropping in irrigated areas in the Aegean and Mediterranean coastal regions (IBRD Map 16766). Utilization of the cultivated land (based on the average for 1978-80) was: Cereal crops - 66% of cultivated area, oilseed crops - 3%, pulses - 3%, tuber crops - 1%, industrial crops - 6%, orchards and vineyards - 17%, and vegetables - 3%. 1.06 The livestock subsector in Turkey, though traditional and having a low productivity, is large and accounts for one-third of agricultural GDP. There was a steady growth in the numbers of livestock during the 1970's, but no significant improvement in animal husbandry practices or productivity. About 44% of the country's agricultural land in 1980 was occupied by permanent pastures and meadows and offers considerable potential for expansion of livestock production. However as a result of overstocking, much of the pasture areas suffer from overgrazing and are in need of rehabilitation. C. Agricultural Policies, Performance, and Prospects 1.07 Throughout the 1970's, agriculture was assigned a subordinate role to industry pursuant to the inward-oriented growth strategy adopted by Turkey during those years. Its primary role was to supply low-cost raw materials to industry and guaranteed food supplies for the urban work force., The agricultural policies stressed self-sufficiency through subsidizea inputs, preferential credit at low interest rates, and guaranteed high producer prices. As a result of these incentives, between 1972 and 197'i the real agricultural GDP increased at an average annual rate of 4.7%, and the fixed investment in agriculture increased at an average annual growth rate of 17.9%. However, during the period 1976-79, these incentives could not be sustained due to the strain placed upon the budget and the competing demand for resources from the manufacturing sector. In addition, the annual rate of increase in cultivated area slowed down, and the shift to intensive cultivation lagged. As a result of these factors, during 1976-79 fixed investment in agriculture declined to a rate of about 1.7% per annum, and the growth rate of agriculture GDP averaged only 1.4% per annum. Sectoral exports during this period increased by about 11% per annum. However, as a fraction of agricultural GDP, agricultural exports were less than 1% in 1979 and far below their potential. 1.08 Agricultural growth during the 1970's came mainly from intensification of land use. In response to the price and credit incentives, there was a considerable increase in the consumption of modern agricultural inputs and mechanization. In particular, fertilizer use tripled during the 1970's. The increased usage of inputs and mechanization resulted in higher  -3- yields which for most major crops and some fruits, generally accounted for far more of the realized growth in physical production than did increase in area. However, a similar intensification of livestock production was not realized, and the increases in production resulted from higher livestock numbers. 1.09 With the imposition of crisis management measures by the Government in 1980 and 1981, much of the incentive apparatus put in place for farmers in the 1970's was abruptly dismantled. Of particular note is the sharp reduction in input subsidies (particularly fertilizer), reduction in number of production price supports, the gradual conversion of the remaining supports from artificially high incentive prices to floor prices, and severe rationing of agricultural credit. These measures, together with deflationary demand management and the new export incentives, have forced exporters and the more commercial farmers to seek out foreign marketing opportunities. They have done so with some vigor. In 1980 and 1981 agricultural export earnings grew by an average annual rate of 29 percent, twice the average annual growth rate of the previous five years. Export growth continued at a lower level in 1982 amidst some indications that the diversion of existing production to foreign markets is being replaced as a source of export growth by a genuine supply response to the higher valued marketing opportunities which exporting represents. However, growth in agricultural production has not matched export growth. The shift in Government policies resulted in temporary disruptions in the agricultural sector: the annual growth of agricultural GDP in real terms was 1.5 percent in 1980 and fell to 0.5 percent in 1981. ln 1982, however, there were indications that farmers were adjusting to the new agricultural policy environment and, aided by good weather, real growth in agricultural GDP recovered somewhat in 1982, with agricultural value-added growth estimated at 4.7 percent. 1.10 The performance possibilities for Turkey's agricultural sector, over the medium term, were examined in a recent agriculture sector study by the Bank 1/. The analysis done in the Study indicates that during the remainder of the 1980's it should be possible for agricultural sector GDP to grow at about 3 percent per year and agricultural exports between 4-6 percent per year, provided certain key policies are pursued. The main elements of development strategy to attain these growth possibilities are as follows: (i) measures to foster a continuous growth in the factor productivity of agriculture. These include institutional changes to improve technology generation and its dissemination to farmers through strengthening of extension and research programs, and increased imports of improved seeds and farm equipments; (ii) more efficient public investment and higher levels of private capital formation; (iii) an increase in the rates of investment in quick yielding irrigation projects by completing the schemes under construction and carrying out on-farm development for areas covered by the existing schemes; (iv) provision of additional credit to encourage the uptake of improved technology at the farm level; (v) improvements in marketing and inputs distribution systems; and (vi) reform of price stabilization policies, including a continuation of the reduction in the number of commodities supported and shift from incentive pricing to floor pricing; and rationalization of the system of financial support to the diverse food procurement agencies; and (vii) continuation of the current policies of maintenance of competitive exchange rates and progressive deregulation of exports and imports. 11 Turkey - Agricultural Development Alternatives for Growth with Exports", Report No. 4204-TU, January 28, 1983, (3 Volumes).  -4- D. Bank's Contribution and Lending Strategy in the Agriculture Sector 1.11 As of January 1983, Bank/IDA have made 14 loans and 7 credits totalling $696.1 million for 18 agricultural projects. Of these projects, 5 were for livestock production, 5 for irrigation development, 2 for fruit and vegetable production, 2 for rural development, 1 for forestry, 1 for agricultural credit, and 2 for grain storage. Eight projects have been completed so far; 4 irrigation projects, 1 grain storage project, 1 fruit and vegetable project, and 2 livestock projects. 1.12 The principal objectives of the Bank program in agriculture are to help increase output, productivity, and exports, and promote structural reform in the sector. To support the country's medium term macro-economic adjustment program, the elements of Bank strategy in agriculture include: (i, rationalization of the public sector investment program, particularly in irrigation, with greater focus on quick gestating investment; (ii) stimulus for greater private investment through expanded credit supply and improved financial sector policies; (iii) promotion of the greater use of market forces through reductions in subsidies and price supports, interest rate reform and re-examination of Government policies on agricultural marketing; (iv) liberalization of the foreign trade regime, including reductions in export levels and inclusion of agricultural machinery, seeds, and selected food products on the priority import list; and (v) support to institutional reform, particularly the development of agricultural support services for research, extension, and planning reform of Government enterprises, and improvements in the efficiency of rural financial institutions. 1.13 These objectives are being pursued through sector dialogiue, the structural adjustment lending program, and the lending program in agriculture. Public sector investment will be channelled more efficiently to quick-yielding projects through the proposed IAEE Irrigation Proj,sct, which is also promoting greater private sector involvement in on-farm development, and a reduction in subsidies for water, drainage and land-levelling works. Agricultural services would be improved through an applied research and extension project which is being prepared by the Government. Support for export-oriented production and processing and further reform to public sector enterprises would be promoted in a livestock products ptoject under preparation. On-going projects are also promoting institutional development and policy reforms in these areas. The proposed Second Agricultural Credit Project constitutes a major component of the Bank's strategy in the agriculture sector. It will promote agricultural output and the adoption of new technology, expand credit availability, stimulate a reform of the principal financial institution in the agricultural sector, foster the rationalization of interest rate policy in agriculture, and initiate an investigation of ways to broaden agriculture credit and resource mobilization in the rural areas.  II. The Agricultural Credit Subsector A. Lending Institutions 2.01 Agricultural credit in Turkey is provided by toe following institutions: the central bank, the agricultural bank, agricultural credit cooperatives, agricultural sales cooperatives, commercial banks, and agroindustries--all in the organized sector, and informal groups such as money lenders and relatives in the unorganized sector. Information on the amount of credit provided by the informal groups and agroindustries is not available. However, the amounts involved are believed to be substantial and interest rates charged are high. The Central Bank of Turkey (CBT) is the most important source of funds lent to agriculture, providing about two-thirds of the funds; the balance one-third is provided by TCZB out of resources mobilized by it from commercial, household, and official deposits. The credit and sales cooperatives derive their resources from CBT and TCZB, and the funds lent by commercial banks to farmers are insignificant. 2.02 The Central Bank of Turkey (CBT) supports the agricultural sector through (i) direct credits to state enterprises for agricultural support purchases (without using TCZB as the intermediary), (ii) credits to agricultural sales cooperatives 1/ through TCZB for support purchases, (iii) credits to agricultural credit cooperatives through TCZb for on-lending to farmers, (iv) credits to the agricultural (TZDK) supply agency for purchase, distribution, and manufacture of agricultural inputs; and (v) rediscounting of agricultural loans made by TCZB. In addition, the CBT is the administrator of the Government's selective credit policies (para. 2.06). 2.03 The Agricultural Bank of Turkey (TCZB), besides acting as the channel for agricultural credits by CBT, devotes most of its own resources to agricultural loans. These credits are distributed through a network of 1,050 branches as well as 2,450 agricultural credit cooperatives. In 1981, the main agricultural sector loan beneficiaries from TCZB were: agricultural sales cooperatives with 38% of total agricultural loan amounts disbursed; agricultural supplies agency, 35%; farmers, 15%; agricultural credit cooperatives, 10%; agroindustrial enterprises, 1%. 2.04 The agricultural credit cooperative system in Turkey comprises a central union, 16 regional unions, 2,450 credit cooperatives with 1.5 million members, and serves about 40% of the farm households in Turkey. It is administered by the Ministry of Commerce. The credit cooperatives finance their lending operations almost entirely from funds borrowed from TCZB while using the membership dues to cover operating expenses. Besides providing short-term and medium-term loans to their members, the credit cooperatives also purcbase and market commodities, and help with the distribution of inputs such as seeds, fertilizer, and pesticides. As of December 31, 1981, 63% of the loans by the credit cooperatives were for the purcbase of fertilizers, 21% for working capital needs, 14% for equipment purchases, and 2% for other purposes. 1/ The sales cooperatives have the principal aim of purchasing the agricultural products of their members and selling them profitably. They act as intermediaries for the price support program. To do this, they get priority in the allocation of agricultural credit and in 1981 received about one-third of the total agricultural credit in Turkey.  2.05 The share of commercial banks in total agricultural credit is insignificant. Indirectly, however, commercial banks provide support to agriculture through their export financing activities. The credit is extended to trading companies and agroindustries who in turn provide credit to farmers for purchase of goods. The banks are reluctant to lend directly to the farmers due to the higher profits obtainable in lending to industry and commerce, relatively higher transaction costs of lending to agriculture, and their lack of technical expertise. B. Agricultural Credit Policy 2.06 The Government policy is to provide loans to the agriculture sector on preferential terms. Pursuant to this policy, the Government (i) establishes the interest rates that can be charged on preferential loans to the agriculture sector; (ii) directs the CBT to provide loans to (a) selected state enterprises to finance support purchases; and (b) TCZB for on-lending directly and through credit cooperatives to farmers; (iii) approves the annual lending program of TCZB; (iv) requires that TCZB should allocate at least 801 of its total lending to agriculture; and (v) authorizes an interest rate subsidy to be paid to banks lending to agriculture out of their resources. 2.07 Almost all of the agricultural credit supply in the organized sector takes place on preferential terms and originates in CBT and TCZB. The total agricultural credit supply from CBT and TCZB resources and its distribution by main purposes during the period 1977-81 are shown in the table belowi: 1977 1978 1979 1980 1981 A. Total Agricultural Credits 1/ (TL Billions) 107.7 135.1 210.7 323.5 524.4 B. Distribution of Total Credits by main purposes (% share of A) (i) Direct credits to Producers 2/ 19 20 18 21 21 (ii) Credits for Support Purchases 3/ 74 71 63 60 62 (iii) Credits for Input Supply 4/ 7 9 19 19 17 C. Sources of Financing of Total Credits (X share of A) (i) Central Bank of Turkey 66 65 67 69 60 (ii) TCZB Resources 34 35 33 31 40 1/ For details, please see Annex 7, Supporting Table ST-1. 2/ Includes loans to farmers (directly by TCZB as well as by credit cooperatives, and sales cooperatives) and loans to other agricultural enterprises including agroindustries. 3/ Includes credits by CBT to state enterprises support purchases (para. 2.02) and credits by TCZB to sales cooperatives. 4/ Comprises of amounts lent by TCZB and CBT to the Agricultural Supply Agency (TZDK)  -7 - The distribution of agricultural credit, shown in the above table, reflects the priorities established by the Government. About two-thirds of total agricultural credits were allocated for financing of the state enterprises for agricultural price support purchases. The remainder was equally shared by input supply activities and the direct lending to the farmers. The credits for support purchase and input supply activities were short-term. About one half of the direct lending to farmers was for medium-term loans and the other half for short-term loans. 2.08 Credits for support purcbases to State Economic Enterprises (SEE) are provided mainly from the CBT resources and in 1981 were distributed as follows: agricultural sales cooperatives, 34%; Soil Products Office (1M0), 27%; the Tea and Tobacco Monopoly (TEKEL), 25%; Meat and Fish Organization (EBK), 8%; Tea Industry, 5%; and Milk Industries Organization (TSEK), 1%. All of these SEEs are granted credits directly by CBT except for sales cooperatives who are financed by the TCZB. The sales cooperatives which receive the largest share in credits for support purchases have been delinquent in repaying their loans to TCZB, thereby aggravating the overall shortage of funds available for direct lending to farmers. The problems in sales cooperatives arise due to a lack of accountability, inefficient operations, and the diversion of funds to their manufacturing enterprises. As part of a reorganization of the public sector administrative structure, the Government is considering a reorganization of sales cooperatives, to improve the efficiency of their operations. heanwhile, under this project, an agreement has been reached (para. 3.33) with the Government that TCZB woula not bear the risk of default on its loans to sales cooperatives. 2.09 Most of the direct lending to farmers is done by the TCZB and the credit cooperatives. The supply of institutional credit to farmers is far short of their needs. The limited availability of funds available for direct lending to farmers, together with the low interest rates on agricultural loans and the deficiencies of the TCZB has createa a situation in which the loans to farmers tend to be insufficient for the intended use, late in being disbursed, and often given in installments wbich lag behind needs. 2.10 The agricultural credit needs during the 1980's are projected to be substantial. It is estimated that to help achieve an agricultural growth rate of 3% per annum, a doubling of institutional credit supply (in real terms) by 1990 over the 1981 levels may be necessary. This requirement could become larger if supplemented by a strong farmer demand for investment credit. A much larger share of agricultural credit will also have to be directed (a) towards the medium- and small-sized farmers, and (b) to finance medium- and long-term credits. The present agricultural credit institutional syste1m, as well as the credit policies, would need to be modified to mobilize the resources to meet the projected credit demand and to reach farmers in the required numbers. 2.11 To meet the future credit needs and to resolve the current problems in the credit system and policies, the development strategy in the subsector should aim at; (a) strengthening of the credit institutions by improvements in resource mobilization and lending capabilities of the TCZb and credit cooperatives and involving other institutions, such as commercial banks, in lending to agriculture; (b) directing an increased amount of lending resources to meet the investment needs of farmers and curtailing the outlays for financing the support purchases; ana (c) adopting a policy of real positive interest rates on agricultural loans so as to prevent a depletion of lending resources in real terms.  -8- 2.12 In the near term, the efforts to strengthen the credit institutions would focus on TCZB and credit cooperatives. Over the longer term, the Government should consider making the agricultural credit market more competitive by establishing new institutions to tap resources from and lend to rural areas as well as to involve the commercial banks in lending to the agriculture sector. Improvements in TCZB should aim at making it more responsive to farmers needs by decentralizing its operations, increasing the flexibility of its lending policies and procedures, training its staff to improve customer services, and mobilizing more resources from rural areas. The credit cooperatives need strengthening through training of their staff, augmentation of their financial resources, deployment of professional managers, and installation of sound financial management practices and systems. The reorganization of TCZB is a major objective of this project. For the credit cooperatives, an assurance was obtained from the Government during negotiations that it would undertake a study of measures for increasing the effectiveness of the credit cooperative system. The study would examine in particular the feasibility of the credit cooperatives playing a wider role in rural areas in financial intermediation (such as collecting deposits and possible expansion of their lending programs) and suggest measures for strengthening their organization and operations. 2.13 The overall strengthening of credit institutions, as discussed above, would help mobilize additional resources available for lending to agriculture. However, care would be needed to ensure that the increased resources are not absorbed by financing requirements for the support purchases. The Government is aware of this and, in recent years (para. 1.09), bas taken action to reduce the number of supported commodities and shift from incentive pricing to floor pricing. C. Interest Rates 2.14 The Government has had a long standing policy to provide credit for agriculture at interest rates that are lower than for most other sectors. The low interest rate policy for agriculture is a part of the overall Government policy to provide selective credits at subsidizea interest rates for priority sectors such as tourism, housing, agriculture, exports, and less developed areas. Pursuant to this policy, the Government: (a) provides an interest rate subsidy to any bank, wbich makes agricultural loans out of its own resources, to compensate it for the negative spread between the cost of resources and the permissible interest rate on agricultural loans; (b) directs the CBT to provide funds, through a rediscounting mechanism, to local banks at interest rates 2-3 points below the interest rate allowed on agricultural loans; and (c) establishes the interest rate that can be charged on preferential loans (benefitting from (a) and (b) above) to the agriculture sector. 2.15 The on-lending interest rates in Turkey vary from 14% to over 70, tbe highest rates being applied to non-preferential credits and lowest to priority sectors. Interest rates on savings and time deposits range from 20-45%; no interest is paid on official and commercial deposits. The current on-lending interest rates 1/ for agriculture are 20X on short-term loans and 22% on medium- and long-term loans. The interest rates on CBT rediscounts are 16-18%, and the interest rate subsidy on agricultural loans granted by the banks from resources other than CBT borrowings is 8%. Since 1980 the 1/ For support purchases as well as direct lending to farmers.  -9- Government has revised the interest rates 4 times; 3 times to increase them from 14-16% to 22-24X in response to accelerating inflation and 1 time to reduce them from 22-24% to their current level of 20-22% as the inflation sharply declined in 1981. A notewortby feature of the current interest rate policy in Turkey is that whenever the interest rates are revised they are applicable to the outstanding loans as well as the new loans. This policy bas helped TCZB to remain financially sound and kept the subsidies lower than they would be otherwise. 2.16 The current short-term agricultural interest rate is negative in real terms as compared to the 1982 inflation rate, as measured by the Wholesale Price Index, of 25 percent. Nevertheless, it should be recognized that by holding the agricultural interest rate relatively constant while inflation rates bave been reduced from over 100 percent in 1980 to 25 percent in 1982, the Government has already achieved a substantial decrease in the negative spread. Assurances were obtained during negotiations, from the Government, that it would adjust agricultural interest rates on new short-term loans on an agreed basis and to maintain such positive rates thereafter and that preferential agricultural interest rates on new and existing medium- and long-term loans would be set at a rate at least equal to the adjusted rate on the short-term loans. The agreed basis refers to the Government's letter of development policies in connection with a proposed Fourth SAL, which stipulates that by the end of 1984 the minimum preferential interest rate will be at least equal to the rate of inflation. The rate of inflation will be! measured by the Wholesale Price Index or by such otber appropriate index as may be agreed by the Bank. III. The Agricultural Bank of Turkey (The Borrower) 3.01 The Agricultural Bank of Turkey (TCZB) is the oldest arid the largest bank in the country. Established in 1863, it is wholly Government owned. Under its Charter (Law 3202 of 1937, as amended by Law 2277 of 1979), its main responsibility is to finance the agricultural sector. In addition, it provides full banking services to the rural and urban population through its network of 1,050 branches. TqZB also acts as paymaster for Government transactions in about half of the administrative districts in the country. It has the largest volume of deposits (19X of total deposits in the banking sector) and employs about 31,000 people (almost 25% of all banking staff in the country). Since 1971, TCZB has been the ctiannel for 10 IBRD agricultural projects with loans totalling US$233 million and is the proposed borrower under this project. 3.02 The First Agricultural Credit and Agroindustries Project (Loan 1248-TU) recognized the need for reorganization and strengthening of TCZB and incluaed funds for a study by international consultants of various institutional aspects including organization, lending,'financial, and accounting systems. Appointment of consultants was delayed, but early in 1980, the Consultant (Touche Ross and Company) made a series of 10 specific studies on various aspects of TCZB's operations ana submitted their reports in June 1981. Findings of the study are reflected in the discussion in this chapter. Based on the Touche Ross Reports, Hacettepe University, Ankara, Turkey (at TCZB request) prepared a development and application plan to be pursued by TCZB. On the basis of these reports, TCZB has adopted an Action Plan (AP) for implementation of proposals for the improvement in organization, policies and procedures in TCZB. The contents of the AP and arrangements for monitoring its implementation are presented in para. 4.15 and Section E of Chapter V and Annex 3 of this report.  - 10 - A. Organization, Management, and Staff 3.03 TCZB's operations are governed by its charter as well as the Law on State Economic Enterprises. Although virtually autonomous in its organization and management, TCZB is under the control of the Ministry of Commerce. Tbe organizational structure of TCZB is presented in the IBRD Chart 24720. Its main organs are: the General Assembly; Supreme Board; Board of Directors; Managing Committee; General Directorate; Director's Committee; Regional Directorates; and Branches. Some of these organs (Managing Committee, Directors Committee and Regional Directorates) are not effective, contributing to a centralized organizational structure. 3.04 The General Assembly and the Supreme Board Under its Charter, the General Assembly of the Turkish Parliament is also the General Assembly of TCZB and is comparable to a shareholder general meeting. The Supreme Board for the Regulation of Credits determines TCZB's annual lending and investment program and ensures that TCZB's activities and policies are consistent with the Government's economic policies. The Supreme Board's members are the Ministers of Finance, Commerce, Agriculture and Forestry, TCZB's Director General, Chairman of the Central Bank, Undersecretaries of the State Planning Organization and Land and Agricultural Reform Departments, and members of TCZB's Board of Directors. 3.05 Board of Directors TCZB's full Board of Directors consists of the Director General (DG) of TCZB as Chairman, three of the six Assistant General Directors of TCZB, two members appointed by the Council of Ministers (one each designated by the Ministers of Finance and of Commerce), one member elected by the agricultural credit cooperatives, and a seventh chosen by TCZB's staff and employees. The Board determines and approves general lending and investment policies and procedures, the opening and closing of branches, operational and personnel budgets, and loans and investments beyond the authority of the Director General. 3.06 Management Day-to-day management of TCZB activities is the responsibility of the General Directorate of TCZB. In addition, the TCZB Charter provides for (i) a Managing Committee to make decisions of management and administrative affairs as delegated by the Board, and (ii) a Directors Committee to deal with the administrative affairs of TCZb employees. The General Directorate is headed by a Director General (DG) who is the chief executive officer of TCZB. The DG is assisted by 6 Assistant Director Generals (ADGs). The DG and the ADGs are nominated by the Ministry of Commerce and appointed by the Government. The General Directorate performs its functions through 35 Divisions managed by 6 ADGs as shown in the IBRD Chart 24720. The Managing Committee consists of the DG and 2 board members. The Directors Committee consists of the ADG responsible for staff, Director of the Accounting Division, Chief of the Board of Inspectors, and two other members selected from the TCZB Department Directors. 3.07 The organizational structure of TCZB is centralized. At present the Board of Directors of TCZB spends much more time on administrative rather than on policy matters. A very large amount of work is referreca to the Board since (a) the Managing and the Directors Committees are inactive, and (b) loans of more than TL 2 million ($10,000) must be approved by the Board (para. 3.20 ). Consequently there are delays in decision making. The present structure of the General Directorate is also such that it results in a heavy workload for  the ADGs and the DG and does not allow them much time for planning and poLicy formulation. TCZB management is aware of the need to decentralize the decision making responsibilities and to improve planning and policy making and, as part of the Action Plan, is taking steps to decentralize the decision making in loan approvals and other mtters within the limits set by the current banking legislation. To set the stage for further decentralization of loan approval authority in TCZB, assurances have been obtained from the Governaent that it would, by December 31, 1983, take necessary action to permit TCZB to increase substantially the minimum loan amount requiring Board of Directors' approval (para. 5.20). A banking reform decree to be issued in the near future is expected to increase from TL 2 million to TL 20 million the size of loans requiring Board of Directors' approval. 3.08 Regional Directorates TCZB's Charter provides for the establishment of Regional Directorates (RDs) to oversee the work of the branches. In 1977 seven RDs were established, but to date they have only limited responsibilities, mainly for staffing matters. In September 1982, the Government published the "Bylaws of the Regional Directorates of TCZB" to expand the role and responsibilities of the RDs and enable decentralization of TCZB operations. According to the Bylaws, the RDs would be responsible for investigation and approval of credit requests that exceed the branches' authority; overseeing accounting records; the setting of branch targets--particularly for deposits; dealing witb branch staffing matters; and opening of new TCZB branches. The Bylaws specify the duties, authority and responsibilities of Regional Directors and senior staff. The Bylaws represent an important attempt to decentralize branch operations and delegate responsibility. The Action Plan contains proposals for assumption by the RDs, over a 3-year period, of the duties and responsibilities as set out in the Bylaws (para. 4.15). 3.09 Branches The 1,050 branches of TCZB are located in both the rural and the urban areas. The branches carry out their work fairly independently according to the guidelines and regulations provided for them by the General Directorate. The supervision of branches is done through an annual programme of inspections by TCZB's Board of Inspectors (which is equivalent to an internal audit department). However, in many instances the branches do not follow the guidelines issued by the General Directorate, and this has led to inefficiencies in the lending operations of TCZB. The effectiveness of branch supervision should improve once the Regional Directorates become fully operational. 3.10 The poor communication among the various units of TCZB and the voluminous and repetitive paperwork to satisfy procedures are major impediments in TCZB's activities. The problem is present both between the head office units and between the branches and the head office. As a result, delays occur and efficiency suffers. To address these problems, TCZB would undertake (para. 5.19) a systems and procedures study with the assistance of independent consultants at an early date. The terms of reference for the study are shown in Annex 2. 3.11 Staff and Staffing Over the past five years, total staff has increased from about 25,000 to 30,700 at end-1961. Read office staff has remained at just under one eighth throughout the period. Of the total staff at end-1981 one-eighth were administrative and supervisory, and the rest office staff and ancillary workers. Four fifths of the technical staff of 700  - 12 - were agricultural engineers and technicians. Annual turnover of staff has been consistently low, averaging just over 47/ over the past 5 years, mainly because salaries are above those in the! civil service. About two-fifths of the turnover is due to staff retirements. The staff are generally well qualified and trained. 3.12 The growth in total staff has slowed down in recent years due to the Government imposed restrictions on recruiting in public agencies. The current level of staff in TCZB appears satisfactory in relation to the volume of business, and further increases should be avoided. However, strengthening of staff in three activities would be desirable. First, staff in the Projects Evaluation Division should be increased since the present strength is not sufficient to cope with the volume of work, leading to long delays in evaluating projects. Second, the branches which are dependent on other branches for technical help to operate the Supervised Credit Program should be provided with their own technical staff. Suitable norms for this purpose should be devised. Thira, the number of branch inspectors should be increased so that the internal audit of an increased number of branches can be conducted each year. Most of the above strengthening of staff can be largely accomplished by retraining and relocating existing staff of TCZB. The Action Plan contains measures to strenghthen the staffing as proposed above (para. 4.15). 3.13 Staff Training TCZB has a sizeable training program, based on its training center in Ankara, although senior staff requiring special training are sent overseas. There is also considerable on-the-job training. Training courses cover banking principles, management skills, foreign affairs, foreign languages and special training courses for agricultural engineers and technicians. An average of 3,900 staff per year have received some training over the past 3 years. Under the project, training in foreign countries for about 130 staff is projected over the next 3 years (1983-85). B. Lending Policies and Procedures 3.14 The agricultural lending operations of TCZB are governed by the "Agricultural Credit Guidelines" (the Guidelines) issued in 1979. The Guidelines were developed in consultation with the Bank as part of the First Agricultural Credit Project. The Guidelines are comprehensive and cover, inter-alia, the following subjects: type of credits, lending (appraisal) criteria, sub-borrower contribution, interest rates, loan approval authorities, security for loans, loan disbursemnents and supervision, repayment terms, rescheduling of dloans, and legal remedies. The provisions of the Guideline are generally satisfactory. The critical problems in TCZB's lending operations arise due to the divergences between the Guidelines and the actual lending practices followed by the branches. The adherence by branches to the Guidelines provisions should significantly improve once the Regional Directorates become fully operational and starit to carry out their responsibilities for monitoring of branch actfivities. brief particulars of the Guidelines are described below; the full text of the Guidelines is in the Project File (Document B.4). 3.15 Loan Types The Guidelines permit lending for virtually all agricultural activities including production,, maarketing, and processing. Loans can be made to farmers, partner#hips, cooperatives, agricultural enterprises, public organizations, and local Government entities. For the  - 13 - purposes of appraisal criteria and security requirements, loans are classified in two types: Project Credits and Normal (Non-Project) Credits. Project Credits are made on the basis of a 'Project Document' whicb contains technical, financial, and if required, economic information to enable their appraisal. Normal credits do not require a Project Document and are made on the basis of a simple loan application stating the purpose and amount of credit required and availability of sufficient collateral security. For the benefit of small and medium farmers, TCZB operates a Supervised Credit Scheme. The loans under this scheme are treated as Project Credits. In addition, from time to time TCZB is given responsibility to provide credits in support of special schemes launched by the Government. Sucn credits are called Encouragement and Development Credits, and the applicable lending terms and conditions are specified in the relevant Decrees issued by the Government. Project credits include loans to credit cooperatives, sales, cooperatives, supply agency, agroindustries, and to farmers under the Supervised Credit Scheme and directly against a Project Document; these credits account for most of TCZB lending to agriculture. 3.16 Lending Criteria The Guidelines provide that the small- and medium-scale farmers and agricultural enterprises, cooperatives, and enterprises assigned a priority status by the Government, are to receive priority in approval of agricultural credit by TCZB. The main criteria for approval of loans are that the approved credit miust be in proportion to real credit requirements and must not exceed the ability to repay the credit. The repayment capacity is to be estimated on the basis of the projected income and the total expenses including living expenses. Seasonal credits are to be granted, for up to 1 year maturity, based on typical costs of crop or livestock production for a particular region as determined by TCZB and MAF. The medium-term credits for investment are to be based on the price of livestock or goods to be financed and estimated investment cost for buildings and installations. Loans to credit cooperatives, sales cooperatives, and supply agency are based on their annual activity programs as approved by the Government. 3.17 Sub-borrower Contributions for the project credits is 10% of the total production and investment cost in the case of small- and medium-farmers, 30% for other farmers in developing regions, ana 40% for all other farmers. The sub-borrowers contribution can be cash or kind including family labor. For the Encou:ragement and Development Credits, the contribution is determined by the provisions of the relevant scheme/decree. The normal credits are granted according to norms, which are established annually on the basis of typical costs of production and investment. In the current high inflation economy, the sub-borrowers frequently end up paying more than the required contributions due to the cost increases which occur between the time of loan approval and utilization. The Action Plan contains proposals for systematic annual review of the credit norms to make them adequate to cover the costs adjusted for inflation. 3.18 Security For project credits, the project cash flow and credit-worthinesss are the main security, but a mortgage of land is obtained from the loan applicant if the purpose of the loan includes land improvement. For non-project credits up to TL 750,000 ($4,000), a joint personal guarantee of 2-5 farmers is obtained. For non-project credits of more than TL 750,000, mortgage of immovable property and/or hypothecation of movable assets is obtained. The Bank has suggested that valuation of land for security and loan limits on joint guarantees should both be subject to annual review to adjust  - 14 - for inflation; and that joint personal guarantees should be accepted as security for medium- and long-term loans. TCZB, agreeing with the first part of the suggestion, has recently revised the limits upwarus but considers the use of a joint personal guarantee for medium-term loans-as too risky at this time. However, it has agreed to study the matter further. 3.19 Maturity Periods For Project Credits, 1:he loan repayment period is established taking into account the net income and the cash flow projections for the concerned project. For the normal (non-project) credits, the maximum repayment term is 5 years for investments in livestock, machinery, and equipment and 20 years for land improvement and land acquisition purposes. The maximum repayment periods are inclusive of any grace period. The basic criteria to be followed in setting the maturity period for any loan is the nature and the projected income from the investment. However for livestock and movable properties, the maturity period should not exceed one half of the normal economic life of the asset to be financed. The maturity period for 'encouragement credits' are set according to the provision of the concerned schemes. 3.20 Loan Approval Authority The current banking law specifies that loans of more than TL 2 million ($10,000) must be approved by the Board of Directors; thus effectively putting a ceiling on the delegation of loan approval authority. The regional directorates and large branches have been allowed to approve loans up to TL 2 million. Small and medium branches are given loan approval authority on a progressive scale. 3.21 Disbursement and Supervision As far as possible, TCZB disburses money direct]y to suppliers of inputs/equipment. Thus farmers receive fertilizer, seeds, equipment, etc. rather than cash. Under the supervised credit scheme, field supervision of fanns is undertaken to ensure proper use of funds. 3.22 Repayments and Rescheduling TCZB follows a strict policy regarding repayments on time, although reschedulings are permitted in case of natural disasters or exceptional individual circumstances. 3.23 As rioted above, the Guidelines are generally satisfactory. However, the interpretation and application of the Guidelines varies widely from one branch to ancither, and the farmers complain regarding insufficient loan amounts to ccver credit needs, stringent security requirements, delays in loan approvals andL disbursements, and poor customer service. The overall scarcity of loanable funds, low interest rates, and lack of adequate supervision of branches lie at the root of these problems. The Branch Managers frequently have to ration credit among large numbers of applicants and tena to give loans to as many farmers as possible but in the process are unable to meet the full requirements of each farmer. They also tend to favor large scale farmers who can provide ample security and are perceived to be most credit worthy, and the small- and medium-farmers tend to get discouraged. Supply of projecit credits to farmers is marred by the long time necessary for loan approvals. C. Lending Operations 3.24 TCZB makes an annual operations plan showing both the sources of funds and allocations of funds by type of credits and beneficiaries. This annual plan is approved by the Supreme Board. The total loan disbursements by TCZB during the period 1977-81, and their allocation by type are shown in the table below:  - 15 - 1977 1978 1979 1980 1981 A. Total Loan Disbursements 1/ by TCZB (TI. billion) 156.8 215.0 315.5 634.2 827.0 B. Distribution of Loans(X) (i) Agricultural Loans 92.5 93.3 94.0 90.4 89.9 a. Production (short term) -Direct to farmers 9.0 8.1 7.4 5.7 6.8 -Credit Cooperatives 8.0 7.7 9.9 7.7 9.0 -Sales Cooperatives 47.2 46.4 37.7 28.7 34.5 -Agric. Supply Agency 20.7 23.5 32.3 42.2 31.7 Subitotal Short-Term 84.8 85.7 87.3 84.2 82.0 b. Investment (Med/Long Term) 6.7 b.2 5.8 5.5 7.3 c. Agroindustries (All Terms) 1.0 1.4 0.9 0.7 0.6 (ii) Commercial Loans 7.5 6.7 6.0 9.6 10.1 Total (All Loans) 100.0 100.0 100.0 100.0 100.0 1/ It should be noted that these amounts represent total disbursemenlts during the year. Ihe year-end balances of agricultural loans outstanding would be much less, due to intra-year repayments. Year end balances are shown in Tables 1 and 2. 3.25 In accordance with its charter, TCZB has allocated more than 80% of its lending for agricultural purposes. Within the agricultural credits, loans to sale cooperatives for support purchases have declined from 47% to 37% of total disbursements over the period, while that to the agricultural supply agency bave increased from 21% to 31% due to increase in fertilizer prices. As a result, the direct short-term loans to farmers have remained about 15-17% of the total loans. Long term agricultural loans for investment and agroindustries as a percent of total agricultural loans have remained at under 8% over the period. However, the share of medium-term loans in direct lenaing to farmers is about 45%. The above distribution of TCZB loans reflects the priorities established by the Government (paras. 2.06 and 2.07). A significant increase in direct loans to farmers, particularly for medium- and long-term investment purposes should have a high priority to expand the production base in the agriculture sector. This would require improvements in TCZB's loan approval procedures for project credits. 3.26 TCZB's charter states that small- and medium-size farmers should be given priority in agricultural lending. However, TCZB does not maintain data to firmly document the extent to which the small and medium farms benefit from TCZB loans. By their design, the lending to credit cooperatives as well as the lending under the supervised credit scheme concentrates on small and medium farms. On this basis, it is estimated that about 50% of direct lending to farmers or abDout 20% total agricultural credit (including loans to sales cooperatives and supply agency) goes to small- and medium-size farms. 3.27 The direct lending to farmers (excluding agroindustries) by TCZB is characterized by a large number of small loans; as of the end of 1981, direct lending by TCZB comprised of about 1.4 million agricultural loan accounts with an average loan size of TL 49,800 ($274). The average loan size for loans to  - 16 - about 2,150 credit cooperatives was TL 77 million ($426,000) and for 286 agroindustries loans, the average loan size was TL 15 million ($83,600). The loan accounts for the sales cooperatives and the supply-agency are large (TL 166.8 billion and TL 87 billion respectively) and as noted above, accounted for about 70% of agricultural lending by TCZb in 1981. The mix of very small, medium, and large loans in TCZB's lending portfolio enables TCZB to keep the ratio of operating costs (including personnel and other expenses but excluding financial costs) to a volume of business lower than what it would be if TCZB was to concentrate on direct lending to farmers only. D. Financial Situation and Performance 3.28 Resources As of December 31, 1981, total resources of TCZB amounted to TL 620.2 billion, an increase of 61% over 1980 in nominal terms and were derived from Government as well as non-Government resources. The non-Government resources constitute the majority (52X of total) and mainly consist of deposits from household and commercial sectors. The remainder 48% of resources came from Government sources comprising of borrowings from the CBT (33%) and official deposits (15%). This resource structure has not changed significantly during the last five years, and it is encouraging to note that TCZB continues to finance over half of its operations through mobilization of resources from non-Government sources. At present, TCZB's market sbare in the total banking system deposits (comprising of 40 private and public deposit banks) is'about 20% (the largest of any bank). Fuirther increases in non-Government resources is possible through deposit mobilization efforts focussed on rural areas, whose savings potential bas neither been fully tapped by TCZB nor by otner financial institutions in Turkey. 3.29 Financial Performance of TCZB during the period 1977-81 has been satisfactory. Its financial statements and key financial indicators are shown in the Supporting Tables ST 2-4. Summarized 5-year income and expenditure statements are as follows: 1977 1978 1979 1980 1981 - - - - - TL billions - - - - - - A. Income - Interest and Commissions 7.4 10.4 17.3 40.4 t4.6 - Net Payments from IRDF 1/ 0.4 0.9 -0.5 1.8 9.3 - Other lncomes 0.8 1.0 1.8 2.8 7.5 Total Income (A) 8.6 12.3 18.6 45.0 101.4 B. Expenditure - Staff Expenses 2.2 3.5 7.4 12.1 14.1 - Interest Paid 2/ 3.3 4.2 * 7.0 19.3 52.1 * - Other Expenses 2.1 3.1 3.7 7.8 13.2 Total Expenses (B) 7.6 10.8 18.1 39.2 79.4 C. Net Income 1.0 1.5 0.5 5.8 22.0 1/ This is comprised of the interest rate subsidy payments (paras. 2.06 and 2.14) by CBT out of an Interest Rate Differential Fund (IRDF) to TCZB on agricultural loans made by TCZB out of resources other than the borrowings (rediscounts) from CBT. 2/ Includes interest paid on deposits as well as borrowings from CBT and other sources.  - 17 - 3.30 The financial performance of TCZB is affected by its role as the Government's agent by (a) providing loans to the agriculture sector on preferential terms (para. 2.06), and (b) the Government's treasury functions in about half of the administrative districts in the country. Due to its former role, TCZB receives an interest rate subsidy of 8% on funds lent to agriculture out of resources other than CBT borrowings and realizes a lower yield on its agricultural loan portfolio, since interest rates on preferential loans to agriculture are lower than for most other sectors (para. 2.14). The latter role of ICZB adds to its operating costs for which TCZB receives no direct compensation from the Government. However, TCZB's average cost of deposits is lowered, since the Government maintains offical deposits witb TCZB, which are mainly sigbt deposits on which no interest is payable. 3.31 In 1981, the average interest earned (including payments from IRDF) by TCZB on its agricultural loan portfolio (including loans from CBT funds as well as resources mobilized by TCZB) was 23%. For the same period, the average interest cost of deposits was 17%, and the cost of borrowing from CBT was also about 17%. The resulting spread of about 6% allowed TCZB to cover its operating costs and realize profits. However, the TL 22 billion net income of TCZB is overstated since it includes the net interest rate subsidy payments from the Interest Rate Differential Fund (IRDF). These payments represented 42% of the net income, and TCZB would have remained profitable even without these payments from IRDF, although its net income would have been smaller. As noted earlier (para. 2.14), the subsidy from IRDF is paid to compensate TCZB for the negative spread between the cost of resources and the permissible interest rate on agricultural loans. This spread has narrowed during 1982, and the payment from IRDF reduced from 11% in 1981 to 8% in 1982, and is expected to be further reduced as the agricultural interest rates under this project reach real positive levels (para. 2.17). 3.32 Loan Collections Performance The ratios of amounts collected against the amounts due for payment (Collection Ratio) for the major types of loans by TCZB are shown below: Type of Loans 1977 1978 1979 1980 1981 - - - -(Collection Ratios %)- - - - 1. Direct Loans to Farmers Normal Credits 69 74 80 82 81 Project Credits -Supervised Credits 73 76 84 86 81 -Development Credits 81 49 62 59 66 2. Loans to Credit Cooperatives 100 100 100 100 100 3. Loans to Supply Agency 100 100 100 100 100 4. Loans to Sales Cooperatives 70 55 75 80 83 The above data show an encouraging trend of improvement in collection performance. Most of the collection rates are in excess of 80% and considered satisfactory, except for development credits. However, these rates could be further improved at the field level and, with increased branch supervision by the Regional Directorates wben they become fully effective, better collection rates can be anticipated.  - 18 - 3.33 Arrears and Reserves As of end 1981, total accumulated arrears were TL 33.6 billion. Arrears as a percentage of the total agricultural loan portfolio bave declined from 23% in 1977 to 9% in 1981, reflecting both a better collection performance, as noted above, as well as a rapid increase in the loans outstanding. Over 75% of the arrears (TL 25.4 billion) are on the loans made to sales cooperatives; the balance being arrears on loans to farmers. As noted earlier (para. 2.08), TCZB loans to sales cooperatives are partly refinanced by the borrowings from the CBT. TCZB repays the loan from CBT on due dates, even though the sales cooperatives have not repaid their loan in full. Since TCZB lends to sales cooperatives under the Government directive, it is reasonable that the Government itself should bear the loss. Accordingly, in early 1982 the Government, through the Ministry of Finance, provided an amount of TL 30.2 billion to TCZB to write off a part of the accumulated arrears of sales cooperatives with the TCZB. Of this amount, about TL 12 billion was for overdue interest payments and the balance TL 18 billion tor principal repayment. Further payments to TCZB would be necessary to fully write-off the arrears of the sales cooperatives. An assurance has been obtained from the Government that it would compensate TCZB on an annual basis for losses arising from its loans to sales cooperatives. The total reserves of TCZB at end 1981 were TL 3.3 billion. These reserves are considered adequate to cover the arrears under litigation - TL 2.2 billion, excluding the arrears of the sales cooperatives. 3.34 Audit TCZB's Board of Inspectors is responsible for internal auditing. It makes regular inspections of branch accounts and special investigations as required. Large branches are currently inspectea every year and small ones every three years. An annual audit of the accounts of all branches is preferable, and would be attempted as the Board's staft is increased and some of the Board's staff is stationed in the Regional Directorate Offices. 3.35 Independent external audit of TCZB's operations is the responsibility of the Board of Sworn Bank Examiners, Ministry of Finance. The auditors are required to ensure that TCZB's transactions are conducted according to the law. The Bank has received regular reports in the past under the First Agricultural Credit Project, Loan 1248-TU. E. Performance Under First Agricultural Credit Project 3.36 A Bank loan of $63.0 1/ million was approved to TCZb in 1975 for the Agricultural Credit and Agroindustries Project (Loan 1248-TU). The prcject objectives are to raise farm production through loans to farmers, establish new and improve existing agroindustries, purchase one ferry-boat, and provide consultant services and vehicles. Except for $27 million of Bank loan proceeds earmarked for agroindustrial credit and some small amounts for technical assistance, all the other categories have been fully disbursea. The main problem with the agroindustrial component has been that borrowers have been required to assume the foreign exchange risk, which is not requirea of them under other programs. Discussions are continuing on the possibility of 1/ $8.7 million of the loan was cancelled at the Borrower's request due to (i) a Government program for cattle fattening credit at subsidized rates, which made a non-subsidized component for the same purposes redundant; and (ii) a UNDP grant for training, replacing a similar component in the loan.  -19- the Government arranging a suitable foreign exchange risk insurance scheme. The completion date for the project has been extended from September 30, 1981, to June 30, 1984. TCZB's performance under the project is satisfactory. F. Summary of Evaluation of TCZB 3.37 TCZB is the largest bank in Turkey and has operated successfully for 120 years. In an institution as old and as large as TCZB, organizational problems are not unexpected. The principal problem in TCZB is centralization. The 1,050 branches of TCZB are controlled by the head office located in Ankara. The regional directorates, though existent, are ineffective. Within the head office the decision-making is concentrated in the Board of Directors and delegation of authority is inadequate. In addition, there is overlapping of functions of various administrative units resulting in lack of coordination and excessive paperwork. The communication process between head office and the branches needs to be significantly improved and the supervision of branches needs to be made more effective. Remedial measures to overcome the above deficiencies are the main objective of the Action Plan approved by TCZB (para. 4.15). The streamlining of procedures and the flow of paperwork is to be addressed through a Systems and Procedures Study, to be undertaken as part of the Action Plan. 3.38 The lending policies and procedures of TCZB are generally satisfactory. However, the critical problem arises in application of these policies and procedures. In an atmosphere of severe credit rationing, the managers at TCZB branches resort to arbitrary rationing measures and significant divergence between official lending criteria and actual lending practices is observed. The short-term solution to these problems is increased supervision of branches and emphasis on improved customer relations. The medium-term solution lies in increasing the lending resources for farmers, through increased resource mobilization and restructuring of current distribution of available funds between direct lending and lending for support purchases. The supervision of branches is expected to be improved when tne regional directorates become fully operational. Arrangements for this are included in the Action Plan (para. 4.15). 3.39 The financial performance of TCZB has been satisfactory. During the period 1977-81, it financed more than half of its operations from non-Government resources, consistently realized profits, and increased its net-worth, in real terms by 62%. The profitability and gain in net-worth of TCZB remain valid even when adjustments are made for the interest rate subsidy payments to TCZB and the injection of TL 11.4 billion in 1981 in TCZB share capital by the Government. In looking at the financial performance of TCZB, it should be notecd that the performance is conditioned by the Government's intervention in TUZB operations as discussed in paras. 3.30 and 3.31. The financial condition of TCZB is also satisfactory with the exception of arrears of sales cooperatives. Excluding the loans to sales cooperatives, the quality of the lending portfolio of TCZB appears to be good; the collection ratios are in excess of 80%, the turnover ratio is satisfactory, the overdues in excess of two years are d,eclining and the reserves cover the overdues over two years. In the past, the Government has borne losses on account of loans to sales cooperatives and has agreed (para. 3.33) to compensate TCZB for such losses in the future.  - 20 - 3.40 The accounting and audit procedures of TCZB are acceptable though they can be improved. There is an urgent need for automation of the accounting system and introduction of a functional cost accounting system to provide the information needed for management and to enable more realistic pricing of various functions performed by TCZB. The Action Plan includes a study on accounting systems. As regards the audit, an effort is underway to improve the overall audit standards and capabilities in Turkey. Results of this effort could improve the auality of audit of TCZB. In the meantime the current arrangements have been accepted for audit of all Bank-assisted projects and are acceptable for this project too. IV. The Project A. Project Objectives 4.01 The main objectives of the project would be to: (a) increase agricultural production and to raise the productivity and income of farmers by supporting TCZB in its lending activities in those areas where the Government has undertaken to intensify support services to farmers; (b) further encourage institution building of TCZB tbrough: (i) an agreed Action Plan for its reorganization and strengtbening; and (ii) provision of staff training and eauipment; (c) address sectoral issues of on-lending interest rates and strengthening of credit cooperatives through seeking agreement with the Government to (i) achieve real positive on-lending interest rates in the agriculture sector by end 1984, and (ii) arrange for a study to develop a 5-year plan for development of the credit cooperative system, which may form the basis of a future project for possible Bank financing. B. Project Components 4.02 The project would be implemented over a four-year period (1983-86) and would include loans by TCZB under the following project components: (a) On-Farm Development Loans to about 76,500 farmers in 10 selected provinces of Turkey (IBRD Map 17071), where the Government plans to intensify general extension services, including 6,500 medium-term loans to farmers for livestock and horticulture production and purchase of farm machinery, and 70,000 short-term loans for working capital needs; (b) Second Crops Scheme Short-term loans would be provided to about 60,000 farmers to grow a second crop on about 220,000 ha of irrigated areas in 15 provinces; (c) Fallow Reduction Scheme Short-term loans would be provided to about 50,000 farmers to grow crops on about 265,000 ha of cultivated areas, in 12 provinces, which are currently left fallow;  - 21 - (d) IAEE Irrigation Component Short and medium-term loans would be provided to about 25,000 farmers, to meet their on-farm development and short-term credit needs in the areas covered by the Government's irrigation development scheme which has been proposed for a loan from the Bank (Report No. 4299-TU). (e) Corum-Cankiri Project Short-term loans would be provided to about 60,000 farmers in areas covered by a Bank assisted Corum-Cankiri Rural Development Project (Loan 1130-TU). These loans would belp in the further reduction of fallow areas and intensification of crop productions in the Corum and Cankiri provinces of Turkey; and (f) Strengthening of TCZB through an Action Plan (AP) for its reorganization and improvement in its operations. Funds would tie provided to TCZB for (a) overseas training of its staff, (b) purchase of vebicles and eQuipment to facilitate its work, and (c) consultants' services to assist TCZB in carrying out a systems and procedures study, an accounting systems study, and any such other studies as may be agreed between the Bank and TCZB. 4.03 Overall, t:he project would cover 29 provinces (in some provinces 2 or more components would be simultaneously implemented) as shown in the IBRD Map 17071. C. Detailed Features On-Farm Development Loans 4.04 The 6,500 medium-term loans under this component of the project are expected to include 2,100 loans for farm mechanization, 1,400 each for cattle fattening and orchard establishment, 840 for sheep fattening, and 420 each for broiler and egg production. These loans would finance the purchase of machinery and equipment, construction of farm buildings, initial livestock reQuirements, planting materials, permanent working capital reQuirements. and start-up expenses as needed in each case. The 70,000 short-term loans vculd finance expenditures for seed, fertilizers, animal feed, as well as other operating expenses relating to crop and livestock production by farmers, The scope of this component would be limited to 10 provinces where the Goverrtmerlt proposes to strengthen the extension services. In 7 out of these 10 provinces, loans for livestock development would also be provided under the ongoing Livestock Ill, IV and V Projects (Loan Nos. 1265-TU, 1586-TU, and 1862-TU). The lending targets for livestock production purposes, under this project, have been established after taking into consideration the objectives of these ongoing livestock projects and taking note of TCZB's past performance and future lending program in these provinces. An assurance has been obtained from TCZB that, in those provinces where the Bank-assisted livestock credit projects are operating and wbich are included under this component, it would make loans for livestock activities only after the funds for similar purposes under the livestock projects are utilized and will thereafter lend on on-lending procedures similar to those for livestock projects. 4.05 The Government's extension service is active in the 10 provinces and includes 150 agricultural engineers and 980 agricultural technicians. ]:t is planned to intensify the extension services in these provinces by providing additional extension staff, improving the applied agricualtural researcb, and  - 22 - introducing a training and visit system for agricultural extension. A project for this purpose is being prepared by the Government for possible Bank financing. The existing extension staff in the provinces, with the planned training and better organization, would be sufficient to serve the needs of the farmers receiving loans under this component. However, when the propsosed extension project is effective, the credit provided under this component would complement the extension activities under that project. 4.06 The 10 provinces include about 730,000 farm households in 6,150 villages. These farm households own about 6.35 million ha of agricultural land of which 94% is rainfed. Under rainfed farming conditions, cultivation in many areas must await the onset of autumn rains with the result that timeliness and speed of land preparation is critical. In 1980, there were about 75,000 tractors in these provinces, but it is estimated that about 5,000 of these would become due for replacement during the project period. The agricultural eauipment, in relation to the number of tractors, appears to be insufficient, and there is a strong demand for the purchase of this eQuipment. Under the project, a provision for purchase for about 1,400 tractors with ancillary farm equipment has been made. Implementation of the extension services and the short-term loans to be provided under this component are expected to increase the supply of fodder as well as protein concentrates. There is already a strong interest from farmers in the livestock production. With the increased availability of livestock feeds, interest in these activities can be expected to grow steadily. The current orchards are low producing. The availability of high yielding fruit varieties offer a good income opportunity to farmers, and in recent years there is increasing interest in establishment of new orchards, mainly apple orchards, where annual yields up to 20 tons/ha can be realized, as opposed to the current average yield of 5 tons/ha. Second Crops Scheme 4.07 Under this component, short-term loans would be provided to support a nigh priority land use intensification scheme of the government, Second Crops Scheme. The basic objective of the Scheme is to ensure better utilization of irrigated lands, generally located at low elevation wbere winters are sborter than elsewhere in the country, and consecuently a growing season long enough to permit: second cropping is available. Accordingly, the Government has initiated the Scheme in 15 provinces in the Aegean, Mediterranean, and Southeastern Anatolia regions of Turkey and plans to bring 380,000 ha under second crops over a 6 year period (1983-1988). The farmer interest in the Scheme is strong, judging from the response received during the pilot phase in 1981 and 1982 when areas of 13,000 and 52,000 ha respectively were planted with second crops. During the proposed project period, it is expected that an additional 220,000 ha would be planted with second crops by about 85,000 participating farmers. The loans would finance the purchase of seed, fertilizer, and other inputs. Tentative targets for areas and crops to be planted under the project are indicated in Annex 1. These targets would be subject to annual adjustments. 4.08 Experiments under the government's National Second Crops Research Project have establisbed that second crops can be successfully grown in irrigated areas presently left unsowD following cereal crops of wheat and barley in lowlands with mild winters. The crop rotation normally followed in irrigated areas over a 2 year cycle is a cereal crop of wbeat or barley during  - 23 - winter, followed by no cropping during the following summer or winter, followed by cotton in spring. The strategy for the second crop provides for the cultivation of maize, soybeans, peanuts, sesame, sunflower, sorghum, rice, or sudan grass following the harvest of wheat and barley as an additional crop in the 2 year wheat/barley-cotton rotation. The research program has to date identified varieties suited to most regions and has tested the technology package tbrough an extensive field demonstration program tbroughout the 15 provinces. The information already available is adenuate for the proposed scheme. Fallow Reduction Scheme 4.09 Under this component of the project, it is proposed to provide 50,000 short-term loans to farmers participating in the government's fallow reduction scheme in 12 provinces. The scheme is designed to increase land use intensity by introducing crops on land otherwise left fallow. It is estimated thal: about one million ha of fallow land in the 12 provinces are suitable for cropping. Out of these areas, the Government has set a target to cultivate 325,000 hectares over a period of 1982-87, and thus reduce the fallow areas by about 30%. The crops which will be planted on the fallow land include lentils, chickpeas, cow vetch, and sainfoin. The actual mix of crops will be decided by the farmers according to technical possibilities and market prospects. Tentative crop and area targets under the project are shown in Annex 1. Under the component, the loans would be provided to cover about: 80% of the production cost including the purcbase of inputs and labor charges. 4S.10 The practice of fallowing originated from the farmers belief that in areas with annual precipitation below 500 mm, it is advisable that land should be left fallow for one year to conserve moisture and nutrients for autumn-winter sown cereal crop. The applied research bas demonstrated that if the recommended crop husbandry practices (suitable varieties and timely preparation of seedbed) are followed, it would be possible to substantially reduce fallow without undue risk of reduction in grain yields. The results achieved under the Bank-assisted Corum-Cankiri Rural Development Project (Loan 1130-TU) confirm the feasibility of fallow reduction. Under this project, the fallow area has been reduced from about 46% to about 28%. Encouraged by the farmers' interest in fallow reduction, the Government has formulated the Fallow Reduction Scheme. IAEE Irrigation Component 4.11 This component of the project is designed to meet the medium- and short-term credit needs of farmers in areas covered under an IAEE Irrigation Project (Report No. 4299-TU, dated May 13, 1983), wbicth has recently been submitted for consideration by the Executive Directors. Medium-term loans would be provided for orchard establishment, purchase of machinery, and construction of greenhouses. In addition, sbort-term loans would be provided for meeting the production expenses. It is expected that a total of 25,000 farmers would receive loans. The credit requirements of the farmers would follow the implementation scbedule of the irrigation works. It is anticipated that farm developments begun during the 1982-86 period will involve investments continuing through 1994. Under this project, only 38% of these investments, expected to take place during the project's disbursement period, are included.  -24 - 4.12 IAEE Irrigation Project includes four irrigation schemes, which would bring about 113,000 hectares net area under improved irrigation and benefit about 25,000 farm families. The credit component under this project would complement the IAEE project by assisting the farmers to make the necessary investments on farm. Full details of the project are presented in the staff appraisal report no. 4299-TU. Corum-Cankiri Project 4.13 This component of the project has been designed to provide funds for incremental short-term lending in the area covered by the Bank-assisted Corum-Cankiri Project (Loan 1130-TU) and continue the momentum of development achieved under that project. All available funds for short-term lending under the Corum-Cankiri Project are expected to be fully utilized by fall, 1983. This project would provide the funds to continue the sbort-term loan program, which has been successful in assisting farmers to increase crop yields. Funds are available for medium- and long-term loans under the Corum-Cankiri project, and these funds would be utilized until the project closing date of June 30, 1984. Strengthening of TCZB 4.14 This component of the project aims at institution building of TCZB through an Action Plan (AP) for its reorganization and strengthening including two studies aimed at improvements in accounting system and procedures of TCZB, provision of funds for staff training, and purchase of vehicles and equipment for TCZB use. Tne Action Plan has been developed on the basis of the findings and recommendations of the studies done by TCZB to improve its operations as well as studies aone with bank assistance under the Agricultural Credit and Agroindustries Project (Loan 1248-TU). These studies covered TCZB's organization and policies and procedures (para. 3.02). The Action Plan includes proposed improvements aimed at making TCZB more responsive to farmers needs through decentralization of its operations, increasing flexibility of its lending policies and procedures, and training of its staff to improve customer services. 4.15 The Action Plan has been developed in consultation with the Bank and is satisfactory. A summary of the measures included in the Action Plan is presented in Annex 3. The key areas of intended improvements proposed under the Action Plan are as follows; (a) delegation of increased responsibilities to the Regional Directorates over a three year period ending December 31, 1986, so as to permit most of them to exercise responsibilities specified in the bylaws for regional directorates whicb were published on September 12, 1982. This transfer of responsibilities from the General Directorate to the RDs would greatly facilitate decentralization of decision making, improve branch supervision, and reduce delays resulting from required approvals from the head office; (b) a review of the organizational structure of the General Directorate with a view to improve its efficiency, and increasing delegation of responsibility and preparation of updated organization charts to show the lines of responsibility at bead office, regional directorates, and typical branch offices of various sizes;  - 25 - (c) enunciation of the short-term and long-term objectives of TCZB including growth targets and strategies to achieve the targets. The objectives would include resource mobilization, lending operations, income goals, and cost estimates; (d) introduction of annual and 5-year financial planning system; (e) introduction of annual budgeting system for brancbes and regional offices, and preparation of a budget manual for this purpose; (f) a system for annual review and adjustment of credit norms and loan approval authorities of branches and Regional Directorates to keep them at levels adequate to meet farmers requirements; (g) proposals for bringing up to strength tecbnical staff in the Projects Evaluation Division and brancbes operating the Supervised Creciit Program; (b) measures to achieve conformity between official and actual lending criteria and improve the access of small- and medium-scale farmers to loans; (i) measures to improve the internal auditing system, so as to audit an increased number of branches every year; (j) a study of systems and procedures throughout TCZB aimed at the streamlining of procedures and paperwork so as to increase efficiency of operations. As part of the study, the farms and the reporting procedures in use will be examined in particular to simplify them and make them more useful to the users; (k) a study of the accounting system in TCZB which would, inter alia, specify the accounting system needs for TCZB, assess the deficiencies in the present system, and make proposals for improvements in the accounting system. An accounting plan will be developed and implemented covering the basis of internal accounting reports, informational needs of all managerial levels, functional cost accounting, and automation needs; and (1) training of existing and new staff in tte changes in procedures and systems whicb would be introduced as part ot the AP; The A? consists of many programs and includes timetables for their implementation. The implementation will extend over a 4-year period. The monitoring arrangements for the Action Plan are outlinei Ln para. 5.19. 4.16 The studies under items (j) and (k) in the paragrapb above would be undertaken with the assistance of consultants, whose qualifications and terms and conditions of employment would be satisfactory to the Bank (para. 5.19). These studies would cover subjects which were not included tor in-depth review under the previous studies (para. 4.14). The Systems and Procedures Study will require about 20 man-months of consultant services and the Accounting Systems Study about 15 man-months. The total cost for bol:h studies is estimated to be US$350,000 at an average man-month of $10,000. The estimated average man-month cost includes salary costs, fees, international travel, local transportation, subsistence, and local office operating expenses. It is  - 26 - expected that both international and local experts would be involved in the studies which would take about 18 calendar-months to complete. Funds would be provided under the project to finance expenditures relating to consultants employed to assist with the conduct of these studies as well as any other consultants services required with the Bank agreement, to assist in implementation of the AP. The proposed terms of reference for the studies are presented in Annex 2. 4.17 To improve the quality of its staff, TCZB proposes to send about 130 of its management level administrative and technical staff for short training courses in developed countries during 1983-85. Under this component, funds would be provided for this staff training. Assurance has been obtained from TCZB that details of the training program and courses would be submitted to the Bank prior to sending the staff for training. In addition, funds would be provided for the purchase of 81 vehicles (74 trucks for cash movement and 7 minibuses), 57 micro computer systems, 15 programmable calculators, and 7 photo copying machines. Study of Credit Cooperative System 4.18 With a view to further develop and strengthen the agricultural credit cooperative system in Turkey, the Government has agreed (para. 2.12) to undertake a study. The Study would evaluate the past performance of the agricultural credit cooperative system and propose a development plan covering a 5-year period. The Study would examine the feasibility of the credit cooperatives playing a wider role in financial intermediation. The draft terms of reference for the Study are in Annex 2. The Study would, inter alia, make proposals for: improvements in lending policies and procedures; putting credit cooperatives on sound tinancial footing; strengthening the management and administration; training and recruitment of personnel; external control and supervision of the credit cooperative system; and appropriate changes in laws and regulations governing the cooperatives. The Study would be completed by March 31, 1985, and would be carried out with the help of consultants supervised by a Steering Committee to be appointed by the Government by November 30, 1983 (para. 5.21). The Government has expressed its interest in financing the costs for the Study tbrough the Project Preparation Facility, since the study may lead to a possible future project for Bank financing. D. Project Cost 4.19 The total project cost including physical and price contingencies is estimated to be US$363.l million equivalent and includes an estimated US$9 million in taxes and duties. The foreign exchange component, which includes both direct and indirect foreign costs, is estimated at US$150.0 million or about 41% of the total cost. The base cost represents the estimated cost of investment items during the 4 year (1983-1986) project implementation period in November 1982 terms. Price contingencies average about 18% of the base cost and have been applied to botn local and foreign costs in US dollar terms at the following annual rates: 8.070 in 1983, 7.5% in 1984, 7.0% in 1985, and 6% in 1986. By measuring both foreign and local price contingencies in US dollar equivalents, it has been assumed, in line with the government's policy, that the Lira exchange rate would change so as to offset the inflation differential between Turkey and its major trading partners. The Lira has been devalued roughly in accordance with this pattern since 1980, and is now adjusted daily on a floating system. A summary of the project cost is given in the table below, with details in Annex l.  - 27 - PROJECT COST SUMMARY TL Million US $ Million Foreign Project Componen1: Local Foreign Total Local Foreign Total Exchange A. On-Farm Development a. Medium-Term Loans 14,313 8,772 23,085 78.6 48.2 126.8 38 b. Short-Term Loans 3,685 2,896 6,581 20.2 16.0 36.2 44 B. Short-Term Loans for Second Crops 4,967 4,064 9,031 27.3 22.3 49.6 45 C. Short-Term Loans for Fallow Reduction 3,782 2,318 6,100 20.8 12.7 33.5 38 . IAEE Irrigation Project a. Medium-Term Loans 2,358 1,780 4,138 13.0 9.8 22.8 43 b. Sbort-Term Loans 1,008 672 1,680 5.5 3.7 9.2 40 E. Short-term Loans for Corum-Cankiri Project 2,515 1,976 4,491 13.8 10.9 24.7 44 F. Strengthening of TCZB a. Training - 43 43 - 0.2 0.2 100 b. Eauipment 195 781 976 1.1 4.3 5.4 80 c. Studies 9 64 73 0.1 0.3 0.4 80 Total Base Cost 32,832 23,366 56,198 180.4 128.4 308.8 42 Price Contingencies 1/ 5,954 3,935 9,889 32.7 21.6 54.3 40 Total Project Cost 38,786 27,301 66,087 213.1 150.0 363.1 41 Front-End Fee - 73 73 - 0.4 0.4 100 Total Financing ReGuired l/ 38,786 27,374 66,160 213.1 150.4 363.5 41 1/ Estimated in dollar terms at an exchange rate of US$1 = TL 182. Because local inflation is expected to higher than international inflation, the actual TL amounts will be higher, the difference being offset by changes in exchange rates. E. Financing Plan 4.20 The proposed bank loan of US$150.4 million equ'ivalent will finance 100% of the foreign exchange costs of the project (41% of total costs) and the front-end fee. TCZB, as the borrower, will contribute US$138 million or 38% of the total project cost. The remaining 21% would be contributed by the sub-borrowers. Assurances were obtained during negotiations from TCZB that it would includ,e sufficient funds in its annual lending program for financing the estimated project expenditures for each of the project years and would submit its annual lending program to the Bank by March 31 of each year. Assurances were also obtained from the Government that it would ensure that TCZB bas or is provided funds necessary to implement the project. In previous Bank projects involving on-lending to farmers, the Government and TCZB have agreed that the Government would bear the foreign exchange risks on Bank loan  - 28 - proceeds, and TCZB would be allowed a 3.5 percent spread on the on-lending of Bank loan proceeds. The difference between the interest: rate on Bank loan and the on-lending interest rate to farmers, after allowing for the 3.5% spread to TCZB, goes to the Government. This arrangement would apply to this project also, and the Government and TCZB would enter into a Subsidiary Agreement to this effect. Signing of the Subsidiary Agreement, satisfactory to the Bank, would be a condition of effectiveness. F. Procurement 4.21 The goods and works to be financed by the Loan proceeds will be purchased over a 4-year period by thousands of farmers located in 29 provinces through established commercial channels. There are private dealers in Turkey who sell and service a variety of tractors and farm equipment, most of which are assembled in Turkey from imported components under licensing arrangements with the foreign manufacturers, These dealers have competitive prices and provide farmers with a choice of farm machinery. The 81 vehicles for TCZB use, at an estimated cost of $5 million, would be procured through ICB according to Bank guidelines. Other equipment for TCZB, estimated to cost about US$400,000, would be procured through local and/or limited international procurement. Procurement documentation in respect of goods for TCZB use would be subject to prior review by the bank. Assurances to this effect were obtained during the negotiations. G. Disbursements 4.22 Disbursements of the Bank would extend over an estimated five-year period and would be made in accordance with the following allocations: Amount Allocated Loan Categories i m (1) On Farm Development (a) Medium-Term Loans 60.4 (b) Sbort-Term Loans 17.0 (2) Second Crops Component 24.0 (3) Fallow Reduction Component 16.5 (4) IAEE Irrigation Project (a) kedium-Term Loans 10.0 (b) Short-Term Loans 4.b (5) Corum-Cankiri Project 12.0 (6) Strengthening of TCZB (a) Iraining 0.4 (b) Equipment 4.7 (c) Studies 0.4 (7) Front-End Fee U.4 (8) TOTAL 150.4 The Bank loan would be disbursed against (i) 507% of medium-term loans, (ii) 50% of incremental short-term loans, (iii) 100% of foreign expenditures, 1007/ of local expenditures ex-factory, or 60% of other expenditures for vehicles and equipment procurec, locally; (iv) 100% of foreign expenditures for overseas training, and (v) 100% of total expenditures for consultant services.  - 29 - 4.23 Disbursement requests for foreign expenditures would be supported by full documentation. Disbursements against all sub-loans would be for local expenditures only, and the Bank would disburse against statement of expenditures since these would involve on-lending for a large number of small sub-loans. Disbursements against short-term sub-loans would be on an annual incremental basis defined as the excess of the amount disbursed by the TCZB in any calendar year over the maximum amount disbursed for the same purposes in any prior calendar year and claimed for withdrawal from the Bank. TCZB is fully familiar with the statements of expenditure procedure, and its accounting and internal control procedures are satisfactory in ensuring that Bank funds are used for the purposes for whicb they are granted. The documentation in support of statements of expenditure would be retained by TCZB and would be available for inspection by the Bank during the course of project implementation. Assurances on these disbursement procedures were obtained during negotiations. 4.24 The schedule of disbursement is estimated as follows; US $ Million - Bank FY FY 84 FY 85 FY 86 FY 87 Annual 20.9 35.1 42.6 51.8 Cumulative 20.9 56.0 98.6 150.4 The schedule of disbursement is based on the phasing of the lending program and is consistent with the experience for similar activities under the first agriculture credit project. V. The Project Implementation A. Organization and Management 5.01 TCZB would be the borrower under guarantee of the Republic of Turkey. The project would be administered by the Encouragement and Development Loans Division of TCZB (Chart 24720) through TCZB branches located in the provinces covered under the project. This Division of TCZB currently manages the credit components of 5 World Bank assisted projects in the agriculture sector. Ihe Division is satisfactorily staffed and well experienced in management of on-lending operations in Bank assisted projects. 5.02 The applicants (individual farmers or credit cooperatives) for loans under the On Farm Development and Irrigation Schemes component would submit their loan applications to the nearest TCZB brancn. TGZB would appraise and approve the loan applications according to the requirements under TCZB's Agricultural Credit Guidelines (Document b-4) and on-lending policies and procedures described in paras. 5.07 to 5.13. TCZB will provide to the extension service staff of the Ministry of Agriculture and Forestry (MAF), at least monthly for short-term loans and quarterly for medium-term loans, a list of farmers who have been approved to receive loans. The list will show the name and address of the borrower as well as purpose and amount of loan, to enable the extension staff to provide these farmers with technical advice.  - 30 - TCZB has 213 branches in the provinces where these components would be implemented and in 1981 had loans totalling $183 million. The additional lending of $35 million per year under the project can be handled without any special arrangements. Assurance was obtained from TCZB during the negotiations that it would staff the branches in the project area with qualified staff in adequate numbers to carry out the lending under the project. 5.03 The Second Crop Scheme (SCS) and Fallow Reduction Scheme (FRS) are special Government schemes whose administration would be governed by relevant decrees issued by the government. These decrees are satisfactory 1/. In terms of the decrees, the MAF would be responsible for implementation of these schemes. Within MAF, the General Directorate of Agricultural Affairs has the lead responsibility for implementation. The role of TCZB in these schemes is to provide short-term credit to participating farmers, provided they are creditworthy. The total amount of credit to be allocated to each of the schemes will be jointly determined by the MAF and TCZB during February of each year, and the Bank will be notified. The MAF will select the participating farmers, adopt measures to encourage planting, and organize services involving extension work, provision of seeds, production, and distribution. The crops to be included in the schemes, the planting areas, and the amount of credit per hectare will be determined by the MAF and TCZB. The participating farmers would apply for loans to the extension service staff and/or TCZB branch. The extension staff would forward all applications to the TCZB branch. TCZB would determine the creditworthiness of the applicants, and if satisfactory, approve the loan. MAF will be notified by TCZB of all loan approvals. Adequate harvesting, drying, and processing facilities would be needed to handle the incremental output from these schemes. Assurance was obtained from TCZB to provide adequate credit to qualified borrowers for the purchase of harvesting, drying, and processing equipment. 5.04 For the successful implementation of SCS and FRS components of the project, assurances were obtained from the Government that it would cause MAF to (i) assign adequate staff for implementation of the schemes; (ii) continue its current applied research program to improve the technology for these schemes, and (iii) review annually (a) the cost of production of various crops included under the schemes to ensure that credit norms would be set on a realistic basis for the following year, and (b) the market prospects (including the adequacy of drying and processing facilities) and economic justification for the crops to be supported under the schemes; and prepare and furnish to the Bank and TCZB an annual report detailing the results of the annual review. Assurances were also obtained from the Government that it would: (a) provide to MAF adquate budgetary support for implementation of these schemes, and (b) take all necessary actions to make available sufficient amounts of chemical fertilizers and improved seeds for crop varieties included' under the schemes. 5.05 The existing arrangements for provision of seasonal loans to farmers rander the Corum-Cankiri project have worked satisfactorily and would be continued under this project. At present, the farmers needing credit submit their loan applications to the extension staff or a TCZB branch. The extension staff are responsible for confirming the adequacy of inputs required and providing technicaL advice to farmers. TCZB staff confirm 1/ Decree Number 8/4535, dated May 2, 1982, for SCS and Decree Number 8/5713, dated November 28, 1982, for FRS.  - 31 - creditworthiness of the farmers and handle the on lending and loan repayment arrangements. Over a period of 5 years, US$23.0 million of Bank loan proceeds were disbursed under the Corum Cankiri Project, and the $5.7 million on lending proposed under this component is expected to be handled in a similar fashion over the next 4 years. 5.06 A dratt Protocol has been prepared by TCZB and MAF defining the respective roles of TCZB and MAF (as described in paras. 5.02-5.05 above) in implementation of the project. In terms of the Protocol, TCZB would be responsible for full implementation of the project, ana MAP would assist in identification of participating farmers under the SCS, FRS, and Corum Cankiri project and would provide technical advice to (i) all farmers participating in the project, and (ii) TCZB staff in review of technical aspects of loan applications and in setting norms for seasonal credits. The draft protocol has been reviewed and commented upon by the Bank. Signing of the Protocol, satisfactory to the Bank, would be a condition of effectiveness of the proposed loan. An assurance to this effect was obtained during the negotiations. B. On-lending Terms and Procedures 5.07 Assurances were obtained from TCZB that in making loans under the project, it would apply the on-lending policies and procedures as described in paras. 5.08 to 5.14 below. 5.08 Eligibility In order to qualify for a sub-loan under the project, each applicant (farmer or credit cooperative) would have to satisfy the criteria under the Agricultural Credit Guidelines and, in addition, each applicant under SCS, FRS, and Corum Cankiri components of the project would have to be certified by the agricultural extension service staff of MAF as a participant in the government's special schemes. Further, the sub-loans under SCS and FRS scheme for any given agricultural year will be approved only for crops and areas to be agreed among the MAF, TCZB, and the Bank on the basis of the annual reviews referred to in para. 5.04 (iii). 5.09 Lending Criteria Each applicant for a medium-term loan will submit a Farm Development Plan (FDP) with the loan application. The FDP will contain minimal information necessary to demonstrate the technical feasibility and financial viability of the proposed investment. At present the TCZB technical staff and, in their absence, extension service staff assist the loan applicants in preparing the FDP; this arrangement would be continued under the project. Each applicant for a short-term loan will submit a simple Production Plan (PP) showing the type of crops to be planted during the year and area under each crop type or input requirements and expected production for livestock activities. TCZB will approve sub-loans in accordance with its normal procedures after a satisfactory appraisal of credit worthiness of the applicant and the FDP or PP. 5.10 Amount of Loan and Sub-borrower Contribution The sub-borrowers would be required to contribute a minimum of 10% of investment and/or production costs shown in FDP or PP; sub-loan by TCZB would be sufficient to cover the balance of the costs. The farmer's contribution may be in cash or kind, including the value of family labor. TCZB would ensure that the investment costs in FDE' include a base cost estimate at prices prevailing at time of sub-loan approval and price contingencies estimated for the duration of  - 32 - investment. The short-term loan amounts would be based upon standard per hectare production costs for various crops or per animal established by GDAA and TCZB. TCZB would ensure that the loan amounts are disbursed in a timely fashion and that the aggregate amount of sub-loans approved to any single sub-borrower under the project does not exceed $150,000. 5.11 Interest Rates At present the interest rate charged on short-term loans is 20% and for medium-term loans it is 22% per annum. As a condition for this loan, the Government has agreed to attain positive real interest rates on agricultural loans by end 1984 (para. 2.16). The interest rates established by the government, pursuant to the above agreement, shall be applied to the on-lending under the project. 5.12 Security All lending under the project would be considered "project credits" as defined in Article l(g) of the Guidelines. In accordance with the Guidelines, the expected casb flow from the FDP and the PP would be the required security and the main consideration in approval of the sub-loan, rather than availability of land security of adequate value to cover the amount of sub-loan. For the medium-term loans which involve land improvement (including construction of barns, sheds, greenhouses, and other installations on land), a mortgage of sub-borrowers' land would be obtained. For all other sub-loans under the project, the machinery, equipment, crops, and animals and materials financed would be hypothecated to TCZb as security up to the amount of the loan, and mortgage of sub-borrowers' land would not be necessary. 5.13 Repayment Terns for medium-term loans woula be decided in accordance with the projected cash flow in the FDP and for short-term loans woulai be a maximum of 1 year. Normally the repayment terms for medium-term loans would be as follows: Grace Repayment Total Term including Investment Period Period Grace Period Farm Mechanization 2 4 6 Cattle/Sheep Fattening 2 8 10 Broiler/Egg Production 2 8 10 Orchards 5 7 12 Greenhouses 2 8 10 Since the repayments from the sub-borrowers would follow different amortization schedules from that for the Bank loan, TCZB may roll-over Bank funds in its financing program, provided the sub-loans are made for purposes and in areas covered under the project. 5.14 Supervision 'TCZB requires the sub-borrowers to utilize the credits for the purpose for whi.ch they were provided. lt attempts to ensure this through direct payment to suppliers of inputs and materials, as far as practicable, and through periodic field visits to sub-borrowers' farms. In accordance with its normal practice, TCZB staff are expected to supervise regularly the medium-term loans. Regular supervision of each sub-borrower of sbort-term loans would not be cost-effective. For the short-term loans under the project, TCZB would supervise them on the basis of field visits to a small sample of farms. The focus of such supervision would be on ascertaining any  -33 - common problems affecting the farmers and initiating remedies. In addition, the extension service staff, who are expected to be in regular touch with the farmers receiving loans under the project, would also advise TCZB abcut problems faced by farmers in utilization of sub-loans and execution of FDP and PP. C. Monitoring, Evaluation, and Reporting 5.15 TCZB would be responsible for monitoring and evaluation of the On Farm Development and Irrigation Schemes components of the project. GDAA in MAF would be responsible for monitoring and evaluation of the SCS, FRS, and Corum Cankiri components of the project. The key indicators and variables to be monitored and the scope and framework of evaluation are presentea in Annex 4 of this report. A semi-annual report on monitoring and annual reports on evaluation would be submitted to the Bank by TCZB and GDAA. Assurances to this effect were obtained during the negotiations. 5.16 TCZB would prcvide six-monthly progress reports to the Bank in an agreed format in line with the similar reporting requirements in other Bank financed agricultural projects in Turkey. In addition, TCZB would prepare and submit to the Bank a project completion report not later than 6 months after the closing date. The PCR would be prepared on the basis of the monitoring and evaluation reports prepared by TCZB and MAF as specified in para. 5.15 above. Assurances to this effect were obtained during negotiations. D. Accounts and Audits 5.17 TCZB would establish a clearly identified account for transactions relating to this project. It would also ensure that all loans made under the project are readily identifiable. In previous Bank-assisted projects, TCZB has maintained sucn accounts satisfactorily (para. 3.36). Project accounts would be maintained, in accordance with sound and generally recognized accounting principles and practices satisfactory to the Bank, to annually provide a clear picture of financial transactions under the project. An auditor's opinion and report, satisfactory to the Bank, on the project accounts would be provided by TCZB. The auditor's report would include (i) a statement on the adequacy of the accounting system and internal controls, and (ii) an opinion on the reliability of statements of expenditure as a basis for loan disbursements. In addition to the audit of project accounts as discussea above, TCZB would provide its audited annual financial statements (balance sheet and income expenses statement). The above audit report would be submitted to the Bank within 6 months of the close of the financial year of TCZB. The annual audit of the project accounts, as well as TCZB's annual financial statements, would be done by the Board of Sworn Bank Examiners (para. 3.35). The audit would be done in accordance with tne "Illustrative Form of Audit Report for Development Finance Companies". The audit capability of the Board of Sworn Bank Examiners is considered satisfactory. Assurances were obtained during negotiations from TCZB that it would follow the accounting and auditing requirements outlined above.  -34 - E. Action Plan for Strengthening of TCZB 5.18 Improvements in TCZB's organization and procedures would be implemented in accordance with an Action Plan for strengthening of TCZB (AP), which has been approved by the TCZB Board of Directors on April 20, 1983 (para. 4.14). 5.19 For the implementation of the AP and the studies (para. 4.15 and 4.16), assurances were obtained from TCZB during negotiations that it: would: (a) take all necessary steps to implement the AP in accordance with the agreed implementation schedule; (b) prepare and furnish to the Bank six-monthly progress reports on implementationj of the AP, not later than each April 15 and October 15, beginning October 15, 1983, through the loan closing date; (c) from time to t:ime, review the progress in implementation of the AP with Bank and take mutually agreed actions to improve the implementation of AP; and (d) carry out the Systems and Procedures Study and the Accounting System Study, referred to in paras. 4.15 and 4.16 and employ, not later than June 30, 1984, consultants to assist in the conduct of the studies The qualifications, experience, and terms and conditions of employment of the consultants would be satisfactory to the Bank. They would be selected in accordance with the Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency, August 1981. 5.20 To facilitate decentralization of TCZB's lending operations, an assurance was obtained from the Government that it would, by December 31, 1983, take all action necessary to permit TCZB to increase substantially the minimum loan amount requiring approval by its Board of Directors. A banking reform decree to be issued in the near future is expected to increase from TL 2 million to TL 20 million the size of loan requiring Board of Directors' approval. The decree is also expected to contain other changes designed to facilitate decentralization and other improvements in the banking sector. In addition, the Government is planning to issue a decree for reforms in SEE to improve their efficiency. In terms of this decree, the TCZB is expected to be placed under the control of the Ministry of Finance instead of the Ministry of Commerce at present. These decrees, which encompass the whole of banking and public enterprise sectors, are expected to have a beneficial effect on TCZB's efforts to decentralize its operations through the implementation of the AP. An assurance was obtained from the Government that it would take all actions necessary to facilitate implementation of the AP by TCZB. F. Study of Credit Cooperatives 5.21 An assurance was obtained from the Government that it would undertake this study. The study would be carried out by consultants with suitable experience with rural credit cooperative institutions in other countries. The study would be supervised by a steering committee, under the chairmanship of a representative of the State Planning Office of the government. The committee would consist of representatives of the Ministries of Finance, Commerce and  -35 - Agriculture, Central Union of Credit Cooperatives, Central Bank of Turkey, and TCZB. For implementation of the study, assurances were obtained during negotiations from the Government that it would (a) appoint the steering committee latest by November 30, 1983; (b) employ suitably qualified and experienced consultants by Marcb 31, 1984, to carry out the study. The terms of reference for the study and the qualifications and experience of the consultants should be satisfactory to the Bank; and (c) submit the study to the Bank promptly upon its completion. An interim report on the study would be submitted by the consultants to the Government by December 31, 1983, and a final report by March i1, 1984. The terms of reference for the study are at Annex 2. VI. Production, Markets and Financial Analysis A. Production 6.01 As a result of investments under the project, substantial increases in primary agricultural production, valued at TL 59.4 billion ($326 million) annually in constant 19,82 prices, would result, as shown below and in Annex 4: Incremental Output and Value of Primary Agricultural Products Incremental Incremental Production Value at Full at full Development Product Unit Development (Millions TL) Pulses 1/ Tons 320000 13150 Cereals 2/ Tons 536000 14770 Industrial Crops 3/ Tons 455000 14880 Fodder 4/ Tons 219000 3780 Vegetables Tons 334000 4430 Fruit Tons 7000 280 Cotton Tons 25000 1990 Beef Tons l.w. 16212 3890 Sheep Tons l.w. 3306 930 Broiler Tons l.w. 4269 910 Eggs No. 1. 957 1150 1/ Pulses; dry beans, lentils, chickpeas 2/ Cereals: wheat, maize, rice, sorghum 3/ Industrial crops: soya, sunflower, sugarbeet, ground nuts, sesame 4/ Fodder: vetch, sainfoin, alfalfa, sudan grass. B. Marketing and Processing 6.02 Marketing of farm products is mainly handled by private traders. In addition, a number of State Economic Enterprises are directly involved in processing and purchasing. The soil products office (TMO) is the main public sector marketing agency in the country and active in the marketing of maize, sorghum grains, rice and lentils and has a storage capacity of 390,000 tons in  - 36- the project area. Sales cooperatives are responsible for purchases of oil seeds at the support price. The Sales Cooperatives then redistribute the oilseeds to local factories for processing. The oil seed industry has ample storage and processing facilities with 71 oil extraction factories out of 198 such factories in the country, representing 67.7% of the country's extraction capacity. The project area also has 36 out of 123 fodder factories in the country representing 26% of total capacity. Livestock products are sold to the private sector which has a solid domestic market and good export opportunities throughout the Middle East and North Africa. 6.03 Most of the crops included in the Fallow Reduction and Second Crop Schemes are well known crops to farmers and have established markets both locally and internationially. The only crops which could pose marketing problems are lentils, maize and soybean. Lentil exports increased rapidly from 97,000 tons in 1979 to 228,000 tons in 1981. However, since then an estimated 600,000 tons of production in 1982 seems to have outpaced Turkey's present export market. Consequently, the lentil market situation would be reassessed each year with the objective of providing production financing when the market stabilizes. The incremental output under the Second Crop Scheme may encounter difficulties if adequate harvesting and drying facilities are not available for maize and soybean which are harvested in late autumn. This could cause loss of grain by shattering and difficulties io marketing due to high moisture content. Assurance was obtained from TCZB (para. 5.03) that adequate funds would be found under the normal agro-industries program. In addition, assurances were obtained from TCZB and the Government (paras. 5.04 and 5.08) that the annual targets for the crops to be financed under the Second Crop and the Fallow Reduction Schemes would be established after taking into account the adequacy of drying and processing capacities. 6.04 In addition to pulses, other significant exports supported by the project are sheep and beef meat. In 1981 Turkey exported 80,000 tons of meat (10% of total meat production) and trade analysis for the region estimates a meat export potential of up to 500,000 tons by 1990. The rapid increase in livestock exports and the opportunities to expand international sales even further would require farmers to supply greater volumes of animal feed, particularly winter vetch. Therefore, the increased production of vetch, sainfoin, alfalfa and cereals encouraged by the project would find ready markets and allow increased livestock production. Prices 6.05 Annex 5 gives the financial and economic prices of the various commodities in the project. Financial prices have been collected in the field in October/November 1982 while economic prices have been calculated for tradeable inputs and outputs. Commodity support prices have been set largely on the basis of production costs. As a result of successive devaluations since 1980, most support prices have been brought in line with or below export prices. C. Financial Analysis 6.06 The financial viability of the project has been examined through representative models for each major investment type to be financed and through representative crop budgets and cash flows. Actual investments may differ from the models since they may be of different size and the local  - 37 - conditions and sub-borrower demand may vary by province. The results of financial analysis are presented in Tables 3 and 4 of Annex 5. Financial rates of return were estimated for medium term investments. For short-term investments the net income and benefit-cost ratios for main crops were estimated to analyze tbe attractiveness of these investments to the farmers. With the exception of the Orchard Model, all other representative models show Financial Rates of Return (FRR) from 19% to 35%. Despite a marginal FRR (10.3%), the orchard model was not excluded because the incremental output is intended for export and. the Economic Rate of Return (ERR) was satisfactory (38%). Moreover, the negative cash flow during the early years would not preclude farmers who devote only a small part of their land to orchards or farmers who have other income sources. The switching values for the cost and revenue streams are low for the beef, sheep and broiler models. This is not uncommon for livestock models. The effect of delays in implementation is tested by lagging the operating costs ana benefits which does not significantly alter the base case results. The permanent working capital requirements have been included in the investment costs for the livestock activities. The selected crop budgets for those farmers participating in crop improvement, second cropping or fallow reduction confirm that these production activities have positive net incomes and provide attractive incentives to farmers. (See supporting tables 19-27.) The benefit-cost ratios range from 2.6 to 1.7 for the Second Crop Scheme; 1.9 to 1.4 for the Fallow Reduction Scheme; and 8.2 to 1.9 for the Corum Cankiri Component, see Table 4, Annex 5. The underlying assumptions for each of the models are described in Working Papers 1-4 and are based on interviews with farmers and operational experience obtained under similar Bank-financed projects in Turkey. VII. The Project Justification A. Benefits 1/ 7.01 The main project benefits would derive from the improved productivity of farmer holdings and higher farm incomes. The goal is to increase intensification of land use and establish more stable yields on an area of 485,000 ha which are presently either fallow or under-utilized for all or part of the year. The project investments would help farmers to increase their output of industrial crops, cereal, animal feed, beef, chicken and sheep meat, vegetables, fruits and eggs. A large part of the production would augment the country's capacity to export, particularly cereals, pulses and livestock. The production of other cereals and certain industrial crops will help to meet the domestic demand and decrease imports. 7.02 The project would generate considerable employment in the 29 provinces where additional credit would be extended. Based on the technical parameters of the models, it is estimated that at full development, the project investments would result in 63,000 permanent tull-time jobs. 2/ The breakdown according to project component is as follows: 1/ Benefits to the estimated 25000 farmers receiving credit in the areas for irrigation completion are not discussed here but can be reviewed in the Appraisal Report No. 4299-TU for the IAEE Irrigation Project. 2/ A full time job is defined as 200 working days a year at 8 hrs. a day.  -38- Number of Component Full-time Jobs (a) On farm development 7,500 (b) Fallow Reduction 22,900 (c) Corum Cankiri 8,500 (d) Second Crop Scheme 24,100 Secondary and tertiary industries such as food processing, sales and transportation services would also develop further, tbereby increasing opportunities for economic growth and employment and reducing under-employment and pressure to migrate from the project area. 7.03 The effect of the project on farmers' incomes would be substantial. Under the first component, some 6,400 farm families would receive long term loans for mechanization and farm development, and about 70,000 farmers would receive short-term credit for annual crop improvement. The gross value of production by the time of full project implementation would increase by about 82% compared to the pre-project value for those farmers participating in the On Farm Development component. The Second Crop Scbeme would provide sbort-term loans to about 60,000 farmers resulting in an increased value of production of TL 22,470 million or US$123 million. Most farmers will probably participate with one type of crop only and the average plot size is expected to be 2.5 ha. Therefore, the average net incremental farm family income for a family growing 2.5 ha of second crop would range from TL 124,500 (US$684) for those introducing soya to TL 345,000 (US$1895) for groundnuts. Under the Fallow Reduction Component short-term loans would be allocated to about 50,000 farmers to grow crops on fallow land with an incremental value to the farmers of TL 9,560 million or US$ 52 million. Since the crop will be grown on otherwise unused land, the additional net family income would be TL 81,000 (US$445) in the case of cow vetch and TL 108,000 (US$593) for chickpeas. Another 60,000 farmers in the Corum-Cankiri provinces would benefit from short-term credit which would help bring about a 55% increase in the gross value of production. The total number of loan beneficiaries under the project is estimated to be about 271,000 including 25,000 farmers under the IAEE Irrigation Project. However, some of the beneficiary farmers may receive more than one loan. 7.04 Foreign Exchange; About balf of the 950,000 tons incremental primary crop production would be for export which would contribute to foreign exchange earnings of an estimated US$173 million. Higher fodder production and expanded exports of sheep and beef would provide an estimated US$25 million. In addition, increased self sufficiency in the production of such commodities as maize, rice, industrial crops, and poultry meat will also help to save foreign exchange by reducing imports. The agricultural sector's contribution to an improved trade balance is significant in view of Turkey's 1981 trade deficit of US$ 4.2 billion and the sector's large (50%O) share in export earnings. 7.05 Institution Building: The non-quantifiable benefits of this project are substantial. One of tbhe project's main objectives is the institutional strengthening of Turkey's largest Bank TCZB. The principal purpose of its reorganization is to maike it more responsive to farmers by decentralizing its operations, increasing the flexibility of its lending policies, and training  - 39 - its staff to improve customer services. In addition, the project seeks to strengthen and expand the involvement of credit cooperatives particularly in financing small farm activities. The Government bas agreed to undertake a study, as part of this project, to examine credit cooperatives in order to assess their past performance and present operating policies and to recommend measures for improving and expanding their operations over a five year development period. B. Economic Analysis 7.06 The economic evaluation of the project has been done using internal Economic Rate of Return (ERR) estimations for medium-term investments. The economic analysis of the short-term annual crop production investments has been done using benefit-cost ratios since these investments are fully recovered each crop year and have substantial positive cash-flow. Therefore, the economic benefits for these investments have been evaluated using Benefit-Cost ratios and switching values for the revenue and cost streams. 7.07 For all the project components, benefits auantified include gross revenues from sales or consumption of incremental output from project investments. Costs ciuantified include all capital, including permanent 8orking capital reGuirements as appropriate and operating costs, excluding price contingencies ancl transfer payments but including physical contingencies for the medium-term investments. All benefits and costs were calculated using constant 1982 prices, adjusted to represent benefits or costs at the farm level. The cost of extension services bave been included based on GDAA's estimated incremental budget for extension strengthening in the ten provinces. The research and extension costs in the areas covering the Second Crop and Fallow Reduction programs have also been taken into account in the analysis. 7.08 Economic prices for tradeable outputs of cereals, meat and industrial crops and of fertilizer and concentrate feed inputs are based on World Bank commodities and Export Projections Division forecasts. Prices for otber tradeable commodities are based on recent average unit values of Turkish foreign trade. The prices of all non-tradeable items are those presently prevailing in Turkey and are converted to economic values by applying the appropriate conversion factors. Key economic prices and conversion factors used in the economic analysis are presented in Annex 5, Table 5. 7.09 The medium-term investments under the On-farm Development component represent 41% of the total base cost of the project. The ERR has been estimated for each type of investment and is shown below, together with the sensitivity of the ERR to variations in selected cost and benefit changes. The overall ERR for the medium-term investments is estimated to be 28%. The ERR for broiler and beef production activities are Quite sensitive to changes in benefits and costs which is typical for such operations.  * - 40 - On-farm Development Component Sensitivity Analysis Switching Values for 3/ ERR when X of Total Benefits & Type 1/ Cost of the Invest Operating Op. Costs of medium-term ERR NPV 2/ ment Costs Benefits Lagged 1 yr Investment Investmeots % TL 000 cost _ % _ Beef 40 23 3453 70 6 -5 15 Sheep 8 38 2489 157 12 -10 22 Broiler 2 14 88 10 1 -1 15 Egg 9 25 3517 92 28 -18 20 Orchard 15 38 8372 565 350 -65 32 Mechanization 26 29 8743 138 - -58 - Overall ERR 100 28 1/ Medium-term Investments 2/ Net Present Value based on Opportunity cost of Capital (OCC) of 12%. 3/ Switching Value at 12%. 7.10 The Benefit Cost Ratios and switching values for the Second Crops, Fallow Reduction and Corum Cankiri components and the Crop Improvement investment in the On-farm Development Component are presented in the table below. These components represent 47% of the total project cost and involve short-term investments in annual crop-production on lands which are currently not cropped or are under-utilized for all or part of the year. A satisfactory technology package for these components has been developed (para. 4.06 and 4.10) and adequate arrangements for supply of inputs and extension services to farmers have been agreed (para. 5.03 to 5.06) with TCZB and the Government. The benefits from credits granted from these investments to the economy will be substantial since, the net returns per hectare on these investments are very high and the lag between the investment outlays (purchase of inputs) and returns is short--usually 9-12 months. Even after allowing for the lag between the cash-inflows and outflows, the returns for these investments are high and remain so in response to cost increases, implementation delays, or decreased benefits. Economic Analysis for Short-term Investments Switching Present Values 1/ Values 2/ Benefit Cost -X - - - Components Ratios Benefits Costs Benefits Costs On Farm Development, Crop Improvement Model 2.1 -52 108 .844 .405 Second Crop 2.3 -56 128 194460 85430 Fallow Reduction 1.7 -40 66 86818 52296 Corum Cankiri 3.2 -70 221 10853 3382 1/ Opportunity Cost of Capital at 12% 2/ TL Millions  - 41 - 7.11 The IAEE Irrigation component of this project provides medium and short-term loans to far-mers in areas covered by 4 irrigation schemes to be completed with Bank-assistance under IAEE Irrigation Project (Report No. 4299-TU). The expectecl benefits from the investments to be financed under this project have already been taken into account in the estimation of the ERR for the IAEE Irrigation Project and are not included here. The ERR on the Irrigation Project is estimated to be 20%. The remaining 2% of the project cost relates to technical assistance to TCZB. Benefits from these components are not auantifiable and therefore an ERR bas not been estimated. The results of the economic analysis as discussed in the above paragraphs indicate that the project is expectecl to be highly beneficial to the economy of Turkey. C. Risks and Uncertainties 7.12 There are no significant risks relating to the project. However, marketing prospects give rise to some uncertainties since they would affect demand for loans under the project components. At present the Government is committed to support the Second Crop and Fallow Reduction Schemes. But if this policy should change, it would seriously hinder project implementation of these components. However since the project is a credit operation, other components of the project could utilize the funds released by the second crop and fallow reduction scheme. Marketing presents some uncertainties. The Government is aware of the problems for maize, soybean, and lentils (see para 6.03) and recognizes the need to review the cost of production and the marketing situation on an annual basis in order to plan which crops are to be eligible for financing based on realistic credit needs and market possibilities. Considering the potentially large benefits, both direct and indirect, to the economty and farmers, these uncertainties are not critical. VIII. Recommendations 8.01 Conditions of effectiveness of the loan would be: (i) the signing of a Protocol, satisfactory to the Bank, between TCZB and MAF (para. 5.06); and (ii) signing of a subsidiary agreement between the TCZB and the Government (para. 4.20). 8.02 During negotiations, assurances have been obtained from TCZB that it would: (i) follow the financing and disbursement procedures described in paras. 4.20 and 4.22-4.23; (ii) undertake overseas training of its staff in bccordance with arrangements satisfactory to the Bank (para. 4.17); (iii) procure the goods and services to be financed under the project as described in para. 4.21; (iv) deploy sufficient staff to enable implementation of the project (para. 5.02) (v) make available adeuuate credit to qualified borrowers for harvesting, drying, and processing facilities for incremental output under SCS and FRS (para. 5.03);  - 42 - (vi) follow the on-lending terms and procedures described in paras. 4.04 and 5.07 to 5.14 while making loans under the project; (vii) follow the reporting, monitoring, and evaluation procedures as set out in paras. 5.15 and 5.16; (viii) follow the accounting and auditing arrangements described in para. 5.17; and (ix) implement the Action Plan for strengthening of TCZB, and report on its progress ais described in paras. 5.18 and 5.19. 8.05 During the negotiations, assurances have been obtainea from the Government that it wou2Ld; (i) undertake a study of its credit cooperative system (para. 2.12); (ii) take steps necessary to achieve real positive interest rates, in accordance with an agreed schedule, on loans to agriculture sector (para. 2.16); (iii) undertake to compensate TCZB on account of losses on loans to sales cooperatives (para 3.33); (iv) ensure thait TCZB is provided with sufficient funds to implement the project (para. 4.20); (v) set up a committee and take steps necessary to carry out a stucLy of the credit cooperative system according to terms of reference and implementation arrangements agreed with the Bank (paras. 2.12, 4.18, and 5.21); (vi) take steps as described in para. 5.04 to facilitate successful implementation of SCS and FRS components the project; (vii) cause MAF to prepare monitoring and evaluation reports specified in para. 5.15; and (viii) by December 31, 1983, take all action necessary to increase substantially the minimum loan amount requiring Board of Directors approval (para. 5.20). 8.06 On the basis of the above assurances and agreements, the project is suitable for a Bank loan of US$150.4 million to the TCZB, with the guarantee of the Government of Turkey.  - 43 - ANNEX 1 Table 1 APPRAISAL OF SECOND AGRICULTURAL CREDIT PROJECT TURKEY Project Cost TL Million 1983 1984 1985 1986 Local Foreign Total FE% A. ON-FARM DEVELOPMENT a. Medium Term Loans 3297 6596 6596 6596 14313 8772 23085 38 b. Short-Term Loans 1040 2260 2540 741 3685 2896 6581 44 B. SHORT-TERM LOANS FOR SECOND CROPS 2114 2305 2305 2307 4967 4064 9031 45 C. SHORT-TERM LOANS FOR FALLOW REDUCTION 1279 1768 1469 1584 3782 2318 6100 38 D. IAEE IRRIGATION PROJECT a. Medium Term Loans 23 770 1456 1889 2358 1780 4138 43 b. Short Term Loans 22 274 386 998 1008 672 1680 40 E. SHORT-TERM LOANS FOR CORUM CANKIRI PROJECT 4U8 8b0 1361 1862 2515 1976 4491 44 F. STRENGTHENING OF TCZB a. Training 10 14 19 - - 43 43 100 b. Equipment 482 494 - - 195 781 976 80 c. Studies - 29 44 - 9 64 73 80 Total Base Cost 8675 15370 16176 15977 32832 23366 56198 42 Price Contingencies 1/ 346 1855 3269 4419 5954 3935 9889 40 Total Project Cost 9021 17225 19445 20396 38786 27301 66087 41 Front End Fee 73 73 lot Total Financing Required 38786 27374 66160 41 1/ With price contingencies of 8% in 1983, 7.0% in 1985 and 6% in 1986-90  APPRAISAL OF SECOND AGRICULTURAL CREDIT PROJECT TURKEY ON-FARM DEVELOPMENT COMPONENT Investment Costs 1983 1984 1985 1986 Sub-Project Total Uost Per Model No. of Cost No. of Cost No. of Cost No. of Cost No. of Cost TL 000 Units TL Million Units TL Million Units TL Mllion Units TL Million Units TL Million 1. Mechanization 2827 300 848.0 600 1696.0 600 1696.0 600 1696.0 2100 5936.1 2. Cattle Fattenlng* 6535 .200 1307.1 400 2614.2 400 2614.2 400 2614.2 1400 9149.6 3. Sheep Fattening* 2095 120 251.4 240 502.9 240 502.9 240 502.9 840 1760.1 1 4. Broiler Production* 1222 00 73.3 120 146.7 120 146.7 120 146.7 420 513.4 > 5. Egg Production 5545 00 332.7 120 665.4 120 665.4 120 665.4 420 2329.0 6. Orchard Establishment 1/ 2427 200 485.3 400 970.6 400 970.6 400 970.6 1400 3397.1 Totals 3297.9 G595.8 5595.8 6595.8 23085.3 1/ Year 1 - TL 923,000 Year 2 - TL 256,200 Year 3 - TL 323,600 Year 4 - TL 217,500 Year 5 - TL 389,700 * Includes Working Capital. m 1  APPRAISAL OF SECOND AGRICULTURAL CREDIT PROJECT TURKEY SECOND CROPS COYPONENT Phasing of Production Costs Production Target 1983 1984 1985 1986 Foreign Cost Area Exchange TL/ha Ha'000 Ha'000 TL million Ha'000 TL million Ha'OOO TL million Ha'000 TL million TL million Maize 67545 50 10 675.4 25 1688.6 40 2701.8 50 3377.2 1621.1 Soya 59080 50 10 590.8 25 1477.0 40 2363.2 50 2954.0 1477.0 Groundnuts 79680 20 6 478.1 11 876.5 16 1274.9 20 1593.6 557.8 Sunflower 49105 10 6 491.1 8 392.8 10 491.1 10 491.1 304.5 Sesame 48340 15 5 241.7 8 386.7 11 531.7 15 725.1 203.0 Sorghum 43810 10 2 87.6 4 175.2 6 262.9 10 438.1 205.9 Sudan Grass 61905 5 1 61.9 2 123.8 3 185.7 5 309.5 136.2 Rice 72195 10 5 361.0 7 505.4 9 649.8 10 721.9 252.7 Wheat 45790 50 5 229.0 15 686.8 25 1144.8 50 2289.5 1007.4 Total Areas & Production Costs 220 50 2916.6 105 6312.8 160 9605.9 220 12900.0 5765.6 T_7) % 1. Total Production Costs 2916.6 6312.8 9605.9 12900.0 2. Less 30% not requiring credit 875.0 1893.8 2881.8 3870.0 3.*Balance: Cumulative Production 2041.6 4419.0 6724.1 9030.0 costs under the project 4. Annual Production Costs under the project 2041.6 2377.4 2305.1 2305.9 * Line 3 - Line 1 - Line 2. m1i  SECOND AGRICULTUPAL CREDIT PPOJECT TURYEY FALLOW REDUCTION COMPOPENT A. Phasing of Production Costs and Operating Credit Requirements Production Costs Production Target 1983 1984 1985 1986 Cost Area TL/ha. TOTAL Foreign Exchange ha 000 ha 000 TL million ha 000 TL *il. ha 000 TL mil. ha 000 TL ail. US$ dil. US$ il.x Lentils SE 32390 50 - - 20 647.8 35 1133.7 50 161.9 8.90 3.47 39 Lentils (CA&TZ) 32b80 50 - - 20 653.6 30 980.4 50 163.40 8.98 2.96 33 Chick Pea 36110 100 35 1263.8 60 2166.6 80 2888.8 100 3611.0 19.84 7.54 38 Vetch 32225 50 15 483.4 25 805.6 40 1289.0 50 1611.2 8.85 3.70 42 Sainfoin 15905 15 5 79.5 5 79.5 10 159.0 15 238.6 1.31 0.51 39 265 55 1826.7 125 4353.1 195 6450.9 265 8714.3 47.88 18.18 38 B. Operation Credit Requireme'nts 1. Total production Cost 1826.7 4353.1 6450.9 8714.3 2. Less 30% not requiring credit 548.0 1305.9 1935.3 2614.3 3.* Balance Cumulative Production Costs under the Project 1278.7 3047.2 4515.6 6100.0 4. Annual Production coats under the Project 1278.7 1768.5 1468.4 1584.4 * Line 3= Line 1 - Line 2.  APPRAISAL OF SECOID AGRICULTURAL CREDIT PR(JECT TURKEY CORUM-CANKIRI SHORT-TERM CPEDIT COMPONENT Phasing of Project Costs and Credit Requirements 1952 1983 1984 1985 1986 Prod. Total Prod. Total Prod. Total Prod Total Prod. Total Area Cost Cost Area Cost Cost Area Cost Cost Area Cost Cost Area Cost Cost TLOOO TLOOO TLOO0 TL 000 TL 000 Ha 000 ha TL Mill Ha 000 ha TL Mill Ha 000 ha TL Mill Ha 000 TL Mill Ha 000 ha TL Mill Cereals 475.5 - - 458.2 - - 458.9 - - 459.6 - - 460.3 - - Lentils 42.4 32.68 1,385.6 42.4 32.68 1,385.6 42.4 32.68 1,385.6 43.6 32.68 1,424.8 44.8 32.68 1,464.0 Chick peas 9.5 34.90 331.5 10.5 35.20 369.6 11.5 35.50 408.2 12.5 35.80 447.5 13.0 36.11 469.4 Peas 8.5 31.27 265.7 9.4 32.90 309.2 10.3 34.52 355.5 11.3 36.15 408.4 12.2 37.77 460.7 Vetch 41.6 26.50 1,102.4 46.9 27.93 1,309.9 52.2 29.36 1,532.5 57.4 30.79 1,767.3 62.7 32.22 2,020.1 Sainfoin 7.9 15.90 125.6 8.3 5.90 131.9 8.7 15.90 138.3 9.0 15.90 143.1 9.4 15.90 149.4 Sunflower 6.1 49.10 299.5 6.6 49.10 324.0 7.1 49.10 348.6 7.6 49.10 373.1 8.1 49.10 397.7 Sugarbeet 8.9 100.01 890.0 9.5 108.73 1,032.9 10.2 117.44 1,197.8 10.9 126.16 1,375.1 11.5 134.88 1,551.1 Potatoes 4.7 117.0 549.9 5.0 123.4 617-.0 5.4 129.9 701.4 5.8 136.3 790.5 6.1 142.70 870.5 Alfalfa 2.6 42.74 137.1 3.5 54.49 190.7 4.4 56.24 247.4 5.2 58.00 301.6 6.1 59.75 364.4 1. Total Production Cost 5,087.3 5,670.8 6,315.3 7,031.4 7,747.3 2. Incremental Prod. Cost Cumulative 583.5 1,228.0 1,944.1 2,660.0 3. Less 30% not requiring credit 175.0 368.4 583.2 798.0 4. * Balance : Cumulative Production Costs 408.5 859.6 1,360.9 1,862.0 under the Project 5. Annual Production Costs under the Project 408.5 451.1 501.3 501.1 * Line 4 = Line 2 - Line 3 IS4  - 48 - Annex 2 TURKEY DRAFT TERMS OF REFERENCE FOR A STUDY OF THE CREDIT COOPERATIVE SYSTEM 1. The Study would be commissioned by a Steering Committee to be appointed by the Government. The committee will be headed by a representative of State Planning Office and include inter alia representatives of the Central Union of Credit Cooperatives, the Ministries of Finance, Agriculture and Commerce, the Central bank, and TCZB. The study will be carried out by consultants, supervised and assisted by the committee. An interim report would be submitted to the Government by December 31, 1984, and a final report by March 31, 1985. 2. Its purpose would be to evaluate the past performance of the Credit Cooperatives, the Regional Unions and the Central Union, with detailed information covering the last five years, and to propose a rehabilitation and development plan covering the next five years. The Study would be in three sections, dealing separately with the Credit Cooperatives, Regional Unions and Central Union. 3. Evaluation of Past Performance: The Study would pay particular attention to: (a) cooperative laws, eligibility for membership, equity contributions, audit performance, and external control and supervision; (b) financial policies and performance, including capitalization, sources and application ot funds, interest rate structure, profitability and arrears; (c) lenoing policies, procedures and performance, incluaing application and approval of loans, security, eligibility criteria, term-structure of lending, and share of loans going to small- and medium-scale farmers; (d) management and administration, including typical organization charts, managerial capabilities of senior staff, training programs, recruitment, salary scale and accounting system; and (e) external control and supervision. 4. Future Development Program The study would present a five-year program that would identify elements for inclusion in a project for strengthening the credit cooperative system. It would examine the feasibility of the credit cooperatives playing a wider role in financial intermediation (such as collecting deposits on its own behalf or on behalf of an existing banking institution, expanding lending programs, or extending credit with a longer maturity for investment purposes). Dependent upon the conclusions reached on the above possibilities or other possible changes in the role and function of the cooperatives, the study would, inter-alia, include proposals for:  -49 - Annex 2 (a) appropriate changes in laws and regulations governing the cooperatives; (b) improvements in lending policies and procedures; (c) proposed changes in financial arrangements necessary to ensure financially viable and strong cooperatives; (d) proposed changes in managerial and administrative arrangements within the system; (e) staff recruitment and training requirements; (f) proposed changes in the external control and supervision of the system; (g) an implementation plan and schedule including proposed sources of funds.  - 50 - Annex 2 Draft Terms of Reference for a Study of TCZB's Systems and Procedures 1. The S_udy will examine in detail the systems and procedures employed thoughout ' .13 and make recommendations for their modernization and improvement. It will include; (a) an analysis of the volume and flow of paperwork, including correspondence, memoranda, forms and questionnaires, and proposals for improving the system; (b) an analysis of the procedures and communication system, particularly the flow from branches via regional directorates to head office and return, and proposals for improving them; (c) a study of the forms used at branches for loan and credit applications and their processing, together with proposals for their simplification; (d) drafts of the procedures manuals necessary to ensure that statf throughout TCZB follow the system; (e) a time schedule for phased implementation of the proposals; and (f) estimates of the capital cost of any necessary machinery and equipment. II. An Interim Report will be submitted to TCZB by -/-/- and the Final Report by /I/I.  -51 - Annex 2 Terms of Reference for a Study of TCZB's Accounting System 1. The Study will exarnine in detail the complete accounting system employed throughout TCZB and make recommendations for its modernization and improvement. It will include; (a) proposals for reorganizing tne system with particular reference to the need to supply regular and up-to-date and information for management purposes; (b) arafts of the accounting manuals necessary to ensure that staff throughout TCZB follow the improved system; (c) a time schedule for phased implementation of the proposals, particularly the extension of computerization throughout the system; and (d) estimates of the capital cost of the necessary machinery and equipment. II. An Interim Report will be submitted to TCZB by -/-/- and a final report by -/I_/,_.  -52 - Annex 3 TURKEY Second Agricultural Credit Project Summary of Action Plan for Improvements in TCZB Operations 1/ I. Scope of the Action Plan (AP) 1. The AP covers improvements in (a) lending policies and procedures, (b) financial planning system, (c) annual and 5-year budgeting system, (d) management information system, (e) accounting system, (f) staff training, (g) decentralization of operations, and (h) organizational structure. 2. To achieve the improvements in items (a) through (f), TCZB staff have formulated 18 Action Plans - one for each of the 18 directorates dealing with these matters. These 18 plans have been approved by TCZB Board of Directors on April 20, 1983, and implementation on them would commence in June 1983. Specific actions to be taken are summarized in Section II of this Annex. 3. To achieve decentralization of operations, two major actions are envisaged. First, assurances have been obtained from TCZB (see Supplemental Letter No. 5 in the legal documents) that it would delegate the responsibilities from the General Directorate to Regional Directorates (RDs) so that by December 31, 1986, most of the RDs can perform the duties and responsibilities envisaged for them in the bylaws governing RDs, as published in the official Gazette on September 12, 1982. Second, assjrances have been obtained from the Government that it would, by December 31, 1983, take necessary action to increase the minimum loan amounit requiring approval of TCZB Board of Directors from TL 2 million to TL 20 million. These two actions should enable a substantial decentralization of TCZB operations, as discussed in Section III of this Annex. 4. Improvements in organizational structure of TCZB, particularly in the General Directorate and the Board of Directors have been formulated by TCZB but would be put into action only after passage of two important legislations affecting TCZB. These legislations are (i) an SEE reform decree, and (ii) a banking reform decree. Both of these decrees are expected to be issued by July 1983. The measures envisaged in both of these decrees are aimed at improving the efficiency of the SEEs and the banking sector. Since TCZB is an SEE as well as a bank, it would benefit from both decrees. These aspects are discussed in Section IV of this Annex. 1/ This summary has been prepared on the basis of (i) a TCZB letter, dated April 20, 1983, containing proposals for reorganization, etc., and (ii) a detailed Action Plan submitted by TCZB during negotiations. Both of these documents are available in the Project File as Document B-6.  - 53 - 5. The AP has been formulated by the staff who will be implementing it; thus a high degree of commitment to implement the AP was assured. In formulating the AP, TCZB staff utilized the following documents/materials: (i) 10 studies prepared by consultants (Touche Ross), hired under the First Agriculture Credit Project (for their reports see Document B-2 of the Project File); (ii) 2-volume report prepared by experts from Hacettepe University and TCZB covering Development and Implementation Plan for TCZB; (iii) reports of the Evaluation Committee formed by TCZB to review Touche Ross and Hacettepe Studies; (iv) Directives of the General Director of TCZB appointing 15 preparation committees for formulating AP and indicating the terms of reference, and (v) the detailed suggestions and comments made by the World Bank appraisal mission for this project and the supervision missions for the first agriculture credit project. TCZB will require the assistance of outside consultants in carrying out the AP. These needs are discussed in Section V of this Annex. II. Improvements in TCZB's Policies, Procedures, and Systems 1. This AP contains 18 separate APs distributed as follows: (a) AP Nos. 1-6, 11, and 13-18 deal with improvements in lending policies and procedures; (b) AP Nos. 7 and 14-18 deal with improvements in financial planning and budgeting; (c) AP Nos. 8-10 and 14-18 deal with improvements in the accounting system, (d) AP Nos. 12-13 deal with improvements in the management informaltion system, and (e) AP Nos. 14-15 deal with staff and training. 2. A common methodology (Precedence Diagram Method, PDM, of network scheduling of tasks) was established for presentation of each the Actioni Plans and, therefoire, each Action Plan consists of the following parts: (a) a list of activities (task) with a brief description of work to be done. A maximtum of 50 tasks in an AP was specified to ensure controllability. Each task must be a clearly defined activity; (b) a network diagram showing sequence of tasks, time required for each task, elapsed tii1e, and critical path; and (c) a histogram showing personnel and time required for each task. 3. The APs were prepared by the unit which will implement them and were finalized after lengthy discussions - close involvement of staff was thus ensured. Each activity has been defined in such a way that it could be treated separately and be assigned to a different individual or group. 4. The work on implementation of AP would begin in June 1983. Each directorate will then assign staff to work on each task in accordance with the network diagram and the histogram. As soon as one activity is finished, the next will start. The staff assigned to complete tasks(s) will be relieved from their other responsibilities and will work full time on completion of task. 5. Quarterly progress reports will be submitted by the directorate regarding the implementation of AP. A committee will be formed to coordinate and monitor the implementation.  - 54 - 6. Specific actions included in each AP are discussed below. AP No. 1 - The Encouragement and Development Directorate will: l. Annually compare credit requirements of farmers with personal limits (credit norms), and establish norms at adequate levels. Realistic norms are necessary to overcome the problem of an inadequate amount of credit; 2. recommend revision in lending authorization limits of branches to enable them to grant loans up to personal limits. Authorization limit means discretionary power of branch to approve loans; 3. distribute authorization limits to branches, regional directorates, and general directorates within the framework of overall authorization limit on size of loans which, by law, must be approved by the TCZB Board of Directors; 4. conclude a protoco]L with Ministry of Finance regarding bearing of foreign exchange risk on all foreign credits including WB loans for agroinduistries; 5. determine new kind of guarantees which will take account of farmers circumstances; 6. review and amend the loan application and appraisal forms in use by the Directorate to simplify them and ensure that only necessary and usable information is included; 7. determine criteria for project evaluation so that projects can serve as the guarantee and no other guarantee is required; 8. review arrangements for supply of inputs under schemes administered by the Directorate and conclude protocols with the supply agencies. Also conclude protocols with marketing agencies which will handle the output under the schemes; 9. hold quarterly regional meetings with TCZB General Directorate Staff and MAF staffs.; and 10. AP No. 1 consists of 32 tasks and is expected to take 22 months to implement. In general it will take 1-2 months to finish a task using 2-4 persons working full time. Several tasks will be carried out simultaneously. Total number of man-months required is 210. AP No. 2 - Directorate c,f Agricultural Credits will: 1. Revise credit norms (personal credit limits) to make them realistic; 2. revise authorization limits to ensure consistency with personal credit limits; 3. determine number and type of staff required to carry out ag. credit work at branches;  - 55 - 4. arrange for traininzg of new and existing staff; 5. determine new kind of guarantee; 6. review loan application and appraisal processing forms to simplify them and make them useful; 7. define criteria for project evaluation so that projects serve as guarantee; 8. conclude protocols with input supply and marketing agencies; and 9. AP No. 2 consists of 32 tasks and is expected to take 45 months. Tasks will be done simult:aneously. Total staff assigned to the tasks will vary from 8-27. Total man-months required for implementing the AP is 769. AP No. 3 - Directorate of Credits for Fishery Products will: 1. Determine number and qualifications of staff to carry out directorate activities at the various branches; 2. arrange for training of new and existing staff; 3. review and determir,e credit demand at the branches; 4. annually compare credit requirements and current credit limits to assess adequacy of these limits; 5. revise lending authorization limits; 6. determine new types of guarantees; 7. review and amend loan application and evaluation forms; 8. define criteria for project evaluation to ensure that projects can serve as guarantee; 9. monitor the implementation of the above activities; and 10. Total number of tasks = 26; time per job ranges from 1-12 months; total man-months required = 255; implementation time = 25 months. AP No. 4 - Directorate c,f Supervised Agricultural Credits (SAC) will: 1. Determine the numbe!r of branches with adequate number and type (qualifications) of staff and vehicles to carry out directorate activities; 2. establish Supervised Agricultural Credit Units in these branches; 3. procure the required vehicles; 4. recruit and train the staff;  -56 - 5. release selected branches from dependence on other branches for technical staff; 6. determine credit requirements of farmers; 7. revise personal limits based on credit requirements; 8. revise credit limit:s of branches; 9. revise and determine authorization limits to ensure alignment between those and personal credit limits; 10. prepare regulations, define responsibilities and rotation program for technical staff; 11. prepare criteria for project evaluation; 12. authorize technical staff to prepare project proposals; 13. review and amend loan application and evaluation forms; 14. determine new types of guarantees; 15. determine interest rates on overdue and current credits; 16. determine inputs required by farmers, select supplying agencies, and prepare and conclude protocols with suppliers; 17. determine sales schedule of farmer produce, select and prepare protocols with marketing agencies; 18. promote SAC to farmers; 19. discontinue the system of having Selection Committees including Representatives of Ministries of Finance, Trade, Agriculture and Forestry, State Planning Organization and TCZB; 20. monitor above actions; and 21. total number of tasks = 46; time per job 1-6 months; total implementation time = 41 months; total manpower required = 706 man-months. AP No. 5 - Directorate of Commercial Credits will: 1. Review and simplify loan application and evaluation forms; 2. determine criteria for delegation to Regional Directorates of authority to grant credits; 3. abolish 'group credits'; 4. determine staff needs and arrange for its training; 5. prepare transitional program for the delegation of authority to Regional Directorates;  - 57 - 6. monitor the proposed actions; and 9. total number of tasks = 11; range of time per job = 1-6 months; total implementation time = 21 months; manpower required = 80 man-months. AP No. 6 - Directorate of Participations will: 1. Define criteria for participating in equity investments (profitability, productivity, value added, employment, targets, other factors); 2. determine standardized forms to report and monitor equity participations; 3. determine promising types of businesses for investing; 4. identify and evaluate potential companies which would qualify for participation; 5. define and implement program for equity participations for qualified companies; 6. prepare guidelines for the preparation of performance report form; 7. prepare training program for the use of the new forms; 8. evaluate performance reports in order to monitor performance of companies in which TCZB is participating, and inform TCZB's management on status of participants; 9. establish control system to monitor implementation of the equity participation policies and program; 10. prepare and submit to TCZB management proposals to deal with external factors affecting TCZB equity participation program and policies, including strengthening relations with State Planning Organization; and 11. total number of tasks = 14; time per job ranges 1-6 months; total implementation time = 37 months; total manpower 72 man-months. AP No. 7 - Directorate of Planning, Programming, and Budgeting will; 1. Prepare a report defining short- and long-term objectives of TCZB including growth targets and income and cost obj,ectives. Strategies to achieve goals will also be detailed; 2. prepare financial planning and budget forms - annual and 5-year timeframe. For General Directorate divisions, branches, RDs; 3. prepare manuals for use of financial planning forms (12 months); 4. test the forms, organize training in use of forms, and monitor and evaluate completion of forms; 5. prepare 5-year financial plan and budget, and submit to Board of Directors;  - 58 - 6. establish monitoring (control) system for budget and plan implementation, and prepare quarterly progress reports; 7. AP No. 7 comprises of 16 tasks and will take 28 months to finish. Time for each job varies from 1-4 months. A total of 102 man-months required; and 8. The Systems and Procedures Study under the project will serve in implementation of this AP. AP No. 8 - Directorate of Accounting will; 1. Determine the extent to which the present accounting system meets the legal and management information requirements. A survey will be done for this purpose; 2. define the requirements (specifications?) for a new accounting system taking into account systems in use by other Turkish and foreign banks; 3. prepare an Accounting Plan which will form the basis of internal accounting reports and satisfy the informational needs of all managerial levels; 4. prepare instruction book for implementing new Accounting Plan; 5. program and organize training of personnel in new Accounting Plan; 6. monitor the implementation of the new Accounting Plan and solve problems; 7. AP No. 8 comprises of 14 tasks and will take 43 months to finish. Time for each job varies from 1-12 months.. A total of 169 man-months will be required; and 8. the basis of this AP will be the Accounting Study proposed under the project. AP No. 9 - Directorate of Automation will: 1. Will install a B-2930 computer and computerize all activities of the Directorate; 2. prepare programs and computerize selected activities of Ankara (Central) and Tandogan branches; 3. prepare programs and computerize selected activities of Personnel and Supplies and Procurement Directorates; 4. purchase and instal:L small computer systems in 13 branches, in a phased manner over a 4-year period, to computerize foreign transactions; 5. establish a data bank for use of the TCZB by January 1, 1985; 6. adapt an IBM package to TCZB computer to facilitate project evaluation work; and  - 59 - 7. the above tasks will require 64 months to accomplish them. However, many tasks will be finished in 1-2 years. Total manpower required will be 409 man-montbs. AP No. 10 - The Directorate of Control (Audit) will: 1. Revise the present system of control to make it more efficient; 2. prepare new forms, reports, and manuals for control; 3. determine personnel and equipment requirements to implement the system; 4. program and organize required training of staff; 5. monitor and evaluate the working of new system; and 6. AP No. 10 comprises of 11 tasks and will take 37 months to implement. Time required for each task varies from 2-6 months and most of the tasks have to be done in a sequence rather than simultaneously. Total manpower required is 155 man-months. AP No. 11 - Project Evaluation Directorate will; 1. Prepare simplified forms for loan application, appraisal, evaluation and monitoring of projects. 2. recruit new staff for the Directorate according to new salary scales and on basis of a qualifying examination; 3. program and organize training for new staff and branch staff in project evaluation techniques; 4. review and redefine the functions and responsibilities of the Directorate and seek Board of Directors approval for them; and 5. the AP No. 11 comprises of 14 tasks, many of which can be performed simultaneously. Total time required is 17 months and total manpower required is 176 man-months. AP No. 12 - Design of Daitabase System 1. The AP outlines the structure and uses of the database system. The database covers not only the data on TCZB activities, it also contains a library and data on economic and sector-wise data; 2. in addition to periodic reporting of data on TCZB operations, the system will also provide the data for the following periodicals published by TCZB; (a) Daily Economic Bulletin, (b) Monthly Economic Bulletin, (c) Annual Economic Report, (d) Values of Agricultural Production, and (e) Special Research Reports; and 3. the creation testing of the database will take about 60 months.  - 60 - AP No. 13 - Project for Agricultural Production Calendar 1. The calendar will show timing of all aspects of agricultural activities, including land preparation, planting, cultivation operations, harvesting, production feeding, relating to crop and livestock activities. The calendar will also show input providing and input-using industrial linkages; 2. the calendar will be used for planning TCZB operations as well as in agricultural planning; 3. work was started 12 months ago and will take a further 48 months to complete; 4. the information used for calendar will be obtained through a questionnaire, field survey, survey of literature; 5. as part of calendar, data on costs will also be compiled. Also deposit mobilization strategy will be designed to intensify drive during periods of crop sales; 6. The calendar for Agricultural Production will have five components: calendars for (a) activities of agricultural production, (b) agricultural inputs by crops, (c) agricultural credits by crops, (d) marketing by crops, a nd (e) loan repayment by crops. In a second phase, a calendar for anim31 products and a calendar for fishing will be prepared; and 7. The Action Plan describes the methodology of preparing the calendar and lists 34 tasks to produce the calendar. AP No. 14 - Directorate of Personnel will: 1. Carry oul: recruitment/assignment of staff, required for carrying out AP or indicated by AP; and 2. staffing functions should be over in 12 months. AP No. 15 - D-Lrectorate of Training will: 1. Prepare and conduct the training programs as required by respective directorates; 2. the tasks will take 1-3 months per job; and 3. in all, 9 training ;?rograms are envisaged over a period of 40 months. AP No. 16 - The Directorate of Organization and Methods will: 1. ]?repare and revise I:he forms in consultation with the 10 concerned directorates which have undertaken to simplify and streamline the forms under their APs; 2. it will take 1 to 5 months to finish revision in each directorate; and  - 61 - 3. The Systems and Procedures Study will make a major contribution in this AP. No. 17 - Directorate of Printing will: 1. Arrange printing of forms, circulars, and manuals for use in loan processing, accounting, and financial planning and budgeting; and 2. time required for each task will range from 2-6 months. AP No. 18 - Directorate of Supplies and Procurement will: 1. Arrange for distribution of revised forms and manuals prepared by otber directorates; and 2. the timing of AP depends upon work finished by otbers. Distribution will take I month in each instance. III. Decentralization of TCZB Operations 1. TCZB will delegate the responsibilities to the Regional Directorates (RDs) over a 3-year period, ending December 31, 1986, so as to permit most of the RDs to fully exercise the duties and responsibilities specified in the bylaws governing operations of RDs, as published in the official Gazette, dated September 12, 1982. A program for such delegation of powers will be prepared by TCZB and submitted to the Bank. 2. In terms of the bylaws, the RD can, inter alia, perform the following duties: administratively control and supervise the work of branches; approve loans exceeding branch's approval authority; organize loan recovery program; organize deposit mobilization efforts by branches and set targets for branches, carry out studies of deposit potential and credit requirements; approve expenditures in excess of branches authority; recruit clerical and support level staff; temporarily assign staff from one brancn to another depending on work requirements; make proposals for opening new branches; foster improved customer relations at branches; investigate and settle, as far as possible, complaints about personnel; follow up on comments in branch audit and inspection reports; organize staff training; and supervise procurement and supplies for branches. 3. At present TCZB has 7 RDs, but it is proposed to raise the number to 17. The present RDs carry out only a limited number of responsibilities described in para. 2 and the General Directorate (Head Office of TCZB in Ankara) controls the i,065 branches. The proposal to make most of the proposed 17 RDs fully operational according to the bylaws would allow a substantial decentralization of TCZB operations and increase efficiency. 4. The APs described in Section II contain proposals for increasing the loan approval authority of branches and RDs, on a selective basis, up to the levels permitted by the banking law. The current provisions allow delegation of responsibility only up to TL 2 million; any loan above TL  - 62 - 2 million must be approved by the TCZB Board of Directors. TCZB has already delegated the powers to branches and RDs to approve loans up to TL 2 million. However, a substantial number of loans have to be sent to head office for approval by the Board. This creates delay. The Government and the banks are aware of the need to increase the limit of TL 2 million. A banking reform decree is expected to be issued by July 1983 which contains proposals to increase the current limit of TL 2 million to TL 50 million. When the decree is issued, TCZB will review and increase the loan approval limits set for the branches and RDs.. IV. Improvements in Organizational Structure 1. The Government is planning to issue a decree for reform of public administration, including SEEs. The SEE reform decree will most likely continue the status of TCZB as an SEE, although TCZB has proposed that it should be considered exclusively as a bank and not an SEE. The composition of the TCZB Board of Directors, TCZB's relationship with Central Bank, control of TCZB by the Ministry of Finance instead of the Ministry of Commerce, and some other powers and responsibilities of TCZB, would be settled once the decree is issued. Thereafter, TCZB plans to put into effect improvements in its organizational structure. The decree is expected to be issued in the end of May 1983. The decree will not interfere with the implementation of the parts of the AP referred to in Sections II and III of this Annex. The provisions of the decree are also not expected to affect the internal organization of TCZB, i.e. the General Directorate, RDs, and branches. However, it may affect personnel regulations and composition of the board of Directors. TCZB management considers it prudent that the improvements in the internal structure should be put into place only after the SEE reform decree and banking reform decree are issued. The Bank concurs with this position. 2. In the meantime, TCZB has formulated proposals for division of authority and responsibility at General Directorate, RD, and branch levels. The authority and responsibilities of all existing organizational units have been defined and codified in draft statutes. As soon as the decrees are issued, these statutes will be finalized. TCZB will, within a maximum period of 12 months from the date of issue of the decree, finalize the revised organization structure including organization charts and duties and responsibilities of each unit. V. Consultant Assistance for Carrying out the AP 1. At the present time, TCZB and the Bank have agreed that as part of the AP, TCZB will carry out a study of the accounting system and a study of the systems and procedures. TCZB will require Consultants' assistance and shall employ consultants by June 30, 1984, to assist in the conduct of these studies. The Bank loan proceeds will finance the expenditures for these consultants. 2. Further consultant assistance requirements for implementation of the AP may be financed under the project if mutually agreed between the Bank and TCZB. 3. For implementation of the AP, TCZB also plans to utilize the services of 2-4 man-months of consultant services which are being provided to it by OECD under a technical assistance program.  - 63 - Annex 4 TURKEY SECOND AGRICULTURAL CREDIT PROJECT Project Monitoring and Evaluation System Purpose 1. The purpose of the system is to improve implementation of the project by reporting and monitoring the key variables. Main areas to be covered are status of transactions under the loan, progress in project implementation, operational results of representative investment projects, the financial condition of TCZB and micro/macro economic trends relating to investment projects for which this loan has been made. The reports will be prepared in 3 parts as described below. Part A: Semi-annual Monitoring Report 2. This report will be prepared by the Encouragement and Development Division of the TCZB for the On-Farm Development and IAEE Irrigation Project components and by the Extension Department General Directorate of Agricultural Affairs, MAF (GDAA) for the Fallow Reduction, Second Crop and Corum-Cankiri components. Each report will consist of a textual part highlighting the main achievements and problems encountered during the semester in project implementation (i.e. delaiys in construction or delay/shortages in availability of goods and inputs such as fertilizers, seeds herbicides, etc.) and list actions and recommendations proposed to resolve the proDlems. The following tables will be attached to these summaries. (i) On-farm Development IAEE lrrigation Project (TUZB) - Processing of investment loan applications by type and provinces Loan amounts approved and disbursed, by province - Overdues on project loans, by province - Procurement status for TCZB, equipment, training, personnel - Loan supervision activities of TCZB staff (ii) Second Crops, Faillow Reduction, and Corum-Cankiri Components (Responsibility GDAA) - Progress of construction and procurement for extension service - Number of participating farmers and areas planted by crops and, by province I - Loan amounts approved, by province (TCZB to provide) - Summary Report on extension and research activities 3. These semi-annual reports will be submitted to the World bank within two months from the end of the six-month period. The last report will be made when the last investment project is completed.  - 64 - Part B Annex 4 Annual Financial Statements 4. The certified copies of the following financial statement relating to TCZB and the project will be submitted to the World Bank annually not later than six montbs after the end of the accounting year of TCZB: - Statement of income and expenses ot TCZB - Movement of balance sheet accounts of TCZB - Annual report on project account transactions - Annual report on rescheduling of loans for investment projects financed under the Bank loan - Audit Reports of TCZB and project accounts Part C Annual Evaluation Reports (AERs) 5. The focus of AERs will be on operational results of representative investment projects. The AER will be prepared on the basis of a sample 2/ of subborrowers, to be selected according to methodology agreed with the Bank. The methodology and sample size woula be preparee by the Economic Researcb Division of the TCZB for the on-Farm Development and IAEE Irrigation project components and by the Technical Assistance and Coordination Department of GDAA for the other project components. The methodology and sample plan will be agreed with the Bank. 6. The textual part of the AER will compare the actual operational results for the representative investment project with the projections made at the time of appraisal. Thle summary will also comment whether the expected results are being achieved surpassed or not being achieved and analyse the reasons why. 7. The following information will be included in the data collection from the sample farms 1/; Crop Related Activities Livestock Activities - Access and timely arrival of - Sheep Purchase (weight & cost) necessary inputs: - Feed Purchase/Quantities (i) Fertilizer, Seed - Average weight gain in 6 months, 1 yr. (ii) Pesticides, Herbicides - Mortality Rate, Causes of Loss (iii) Water for irrigated crops - Sales - Crop Yields (tons/ha) - Prices - Application Rates for major inputs (tons/ha) General Social and Economic - Losses due to: Background of the Farmer: (i) harvesting (ii) improper storage - land holdings (iii) other reasons - sources of income Amounts of Losses - family size and composition - Marketing of Crops (Sales) - family labor Prices 1/ Sample farm group will include some farmers who are not participating in the project, but who are participating in the various schemes. 2/ Sampling will be on the basis of a stratified sample but using purposive selection of farmers based on appropriate criteria.  Annex 5 Table 1 APPUASAL 01 SECOD AG4IlCULITUR4L CYEDIT PROJcT TUIMKE! PRODUCTI0N. GCOSS VALUE *D INCWSTAL PRODUCTION I . ON PARK DEVELWNENT before Proiect After Project Incresental Area Yield Production Value 1/ Gross Value 1/ Area Yield Production Value 1/ Gross Value 1/ Production Value 1/ Mechanisetion ia 000 Watha Ton 000 SJljl Tn lillion Ha 000 V.a Ton 000 T SL Billion Ton 000 TL BillTon Wheat 63 1525 96 27 2.59 63 2530 160 27 4.32 64 1.73 Chick Peas 21 715 15 38 t 0.57 21 1200 25 38 0.96 10 .39 Cotton 21 1600 38 71 2.99 21 3000 63 79 4.98 25 1.99 Soya 10.5 1135 12 52 0.62 10.5 1900 20 52 1.04 8 0.42 Annual Crops Cereal Grain 140 1900 266 2J 7.18 140 2300 316 27 8.53 50 1.35 beans 70 1200 84 49 4.12 70 2300 161 49 7.89 77 3.77 Sunflower - - - - 35 1300 45 50 2.27 45 2.27 Vegetables 35 18000 630 13 *.19 35 25000 875 13 11.37 245 3.18 Total Subproject (360.5) (1141) (26.26) (395.5) (1665) (41.36) (524) (2I.IO) Investment Models (No Units) (tons) (tons) Beef - _ _ .. _ 1400 11580LW 16212 L1 240 3.24 16212 LW 3.89 Sheep - - - - 840 3936LW 3306 LW 280 0.79 3306 LW .93 broiler - _ _ . 420 S500LW 3570 LW 220 0.76 3570 LW 0.78 Layer# E - - - . - 420 227950No 96 Nok 96 1.15 96 moll 1.15 Layers Heat _ _ _ 420 1665Ltl 699 LW 190 0.13 699 LW 0.13 Orcherd _ _ _ , 3500 20000 7000 tona 40 0.28 7000 tone 0.28 Total 360.5 1141 26.26 47.73 22.26 71. Fallow Reduction Lentil SE - - - - 30 1100 55 40 2.20 55 2.20 Lentil CA.T2 - - - - S0 100 50 40 2.00 S0 2.00 Chick Paes Seed - - - . 100 1200 120 38 4.56 120 4.56 Vetch Seed - - . - 50 goo00 40 25 1.00 40 1.00 Seinfoin Fodder - - - - - 15 5000 75 18 1.35 75 1.35 Total 265 340 11.11 340 11.11 Ill.Coru-Connkiti Lentils 42.4 1100 47 40 1.87 44.8 1100 49 40 1.97 2 0.10 Chick Peas 9.5 1200 11 34, 0.36 13.0 1300 17 38 0.49 6 0.13 Peas 8.5 1200 10 SO 0.42 12.2 1400 17 SO 0.61 7 0.19 Vetch 41.6 800 33 25 0.83 b2.7 1000 63 25 1.56 30 0.73 sainfoin 7.9 73i5 58 IS 1.04 9.4 7315 69 18 1.24 11 0.20 S,itlower 6.1 1300 8 50 0.40 8.1 1300 11 SO 0.53 3 0.13 Sugarbeet 8.9 36000 320 5.5 1.76 11.5 48000 552 5.5 3.04 232 1.28 Poatoes 4.7 15000 70 13 0.92 6.1 25000 152 13 1.98 82 1.06 Altalfe 2.6 6500 17 l 0.30 6.1 7315 45 18 0.80 28 0.50 Total 132.2 574 7.90 173.9 975 12.22 401 4.32 IV. Second Crop maize - - - 50 4000 200 25 5.00 200 5.00 Soya - - - - 50 1900 95 52 4.94 95 4.94 C u.,ts - - - - 20 2000 40 85 3.40 40 3.40 Sunflower - - 10 2000 20 50 1.00 20 1.00 sc*c ze - - - - 15 0OO 12 120 1.44 12 1.44 Sorghum - - - 10 3200 32 25 0.80 32 0.SO Sudan Grass - - - 5 7000 35 - - 35 - Rice - - - 10 4000 40 46 1.84 40 1.84 wtlcat - - - - 50 3000 150 27 4.05 150 4.05 lotal Subproject 220 - 624 - 22.47 624 22.47 Pr ject Totals 492.7 2/ 1715 2/ 34.16 1054.4 3604.0 1/ 93.53 1889 2/ 6U.16 1/ Financial Prices. Fodder crops and by-products for Livestock reeding not included except alfalfa in Corum-Caakiri. 2/ Crop Totals only. 31 ancremental velue of all project related investments eacludina the irrigation completion subproject which is discussed in the IAEE Appraisal Report.  -66- Annex 5 Table 2 SECOND AGRICULTURAL CREDIT PROJECT FINANCIAL PRICES AND INIPUT COSTS A Prices Financial B Costs Produce Seeds Lentil Red Steeds (S) 40 Lentil Red 52 F odder (F) 4 Green 52 Green S 40 Chick pea 50 F 5 Vetch 42 Chick Pea S 38 Sainfoin 55 F 5 Peas 56 Vetch S 25 Maize 140 F 15 Soya 90 Sainfoin F 15 Groundnut 100 Alfalfa F 15 Sunflower 56 Sesame 140 Maize S 25 Sorghum 30 F 3 Sudan grass 75 Soya S 52 Rice 80 Groundnut S 85 Wheat Existing wo 40 "I F 10 Cotton (Seed Cotton) 35 Sunflower S 50 Potato (Existing) 20 With Project 25 Sesame S 120 Bean Existing 50 With Project 60 Sorgham S 25 Alfalfa 300 F 3 Fertilizer (Units N,P205KO) Sudan Grass F 15 Ammonium Sulphate N.P205 60 Rice S 46 Triple Super PhosphateK20 45 Wheat S 27 Potassium Nitrate 42 F 8 Cotton 79 Farm Yard Manure 5 Peas 50 Chemicals Vegetables Insecticides 1.4 630 Potatoes 13 Fungicides 1.4 425 Sugar beet 5.5 Herbicides 1.4 750 Beans 49 Insecticide (Fruit Trees) 1.4 965 Apples 40 Irrigation Water Ha 4000 Livestock Products Fat cattle LW 240 Labour Fat sheep LW 280 Tractoroperator al 600 Wool (greasy) 300 " b/ 800 Broilers LW 220 Field Labour a/ 400 Cull Layers LW 190 b/ 500 Eggs ea. 11-13 Fuel Cattle manure 3 Petrol super. lit 94 Sheep " 5 " regular lit 89 Poultry" 5 Diesel lit 58  - 67 - Annex 5 Table 2 (continued) B Costs (cont.) Livestock Purchase Store cattle per kg l.w. 220 " sheep " 230 Chicks broiler each 68 it layer each 126 a= Corum Cankiri and Fallow Reducation Area b= Second Crop and on Farm Development Areas Livestock Feed Barley grain 15-20 Maize grain 18 Bran 13-15 Sunflower cake 22 Sugar beet pulp dry 15 "1 "1 1" wet 1.5 Wheat-broken 16 Lentil-broken 7.8 Meadow hay 12 Alfalfa hay 15 Lentil straw 8 Cereal straw 5 Poultry Feed Broilers A 34.5 "1 " "I B 33.5 Poultry Feed Layer A 29.5 "I II to B 26.0 "I li " C 26.0 Transport Freight (Sea) $/Ton in bags Turkey to N. Europe I/s $50 ,, ,i II L $25 Turkey to S. Asia2! S $60 It of II L $30 Chemicals White Oil lit. 140 Copper Sulphate kg. 60 Lime (Slaked) kg. 15 Chlorobenzylate kg. 640 Hydrolizing protein kg. 100 S= Small Consignment less than 5-10,000 T L= Large Consignment greater than 10,000 T 11FOB Liner Terms 2/FOB Stowed on Charter Terms A= Chick B= Growing C= Laying  APPRAISAL OF .SECOND AGRICULTURAL CREpIT PROJECT TURKEY Summary Results of Financial Analysis 1/. Financial Rates of Return Switching Values 2/ Operating Investment Benefits Benefits & Base Benefits Costs Costs -10% Operating Costs Investment Operating NPV Models Case (-10%) (+10%) (+20%) INV.(+1O%) Lagged 1 year Benefits Costs Costs TL 000 Beef 26 3 7 21 2 21 -7 87 8 4736 Sheep 29 3 8 24 2 23 -7 105 8 1846 Broiler 19 - - 15 - 1 -3 41 4 436 Egg 29 21 25 24 19 23 -22 109 37 4974 i Mechanization 35 29 33 28 26 26 -39 134 123 3375