Turkey - Drainage and On-farm Development Project

nDment of The World Bank FROMCIAL USE ONLY ,<g 2c063-r' RIep Nt. P-4188-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONIAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$255 MILLION TO THE REPUBLIC OF TURKEY FOR A DRAINAGE AND ON-FARM DEVELOPMENT PROJECT February 24, 1986 TiI d.Est h_ a wmiSsed disrIm. nu may be used by rsdpisf omy In thse perfem e of dhir SSd dUk-. lb e.tl =my us awls ieseldua withesdWelt B=n attodada I  TURKEY CURRENCY EQUIVALENTS Currency Unit Jan.1980 1/ Jan. 1981 Jan. 1982 Jan. 1983 Jan. 1984 Dec. 1985 USDollar TL 70.00 TL 91.00 TTL 139.60 TL 191.15 TL 309.20 TL 574.00 TL 1 US$0.014 US$0.011 US$0.007 US$O.0o5 US$0.003 US$0.002 1/ Since January 1980, the rate is being adjusted for the differential inflation between Turkey and its major trading partners. In this report it is assumed that this policy will continue. FISCAL YEAR Republic of Turkey January 1 to December 31 LIST OF ABBREVIATIONS ASAL - Agricultural Sector Adjustment Loan CLn.2585-TU, June 1985) DSI - General Directorate of State Hydraulic Works within the Ministry of Energy and Natural Resources GDRS - General Directorate of Rural Services within MAFRA MAFRA - Ministry of Agriculture, Forestry and Rural Affairs O& - Operation and Maintenance PPAR - Project Performance Audit Report SEE - State Economic Enterprise SPO - State Planning Organization  FOR OMCUL USE ONLY TURKEY DRAINAGE AND ON-FARM DEVELOPMENT PROJECT Loan and Project Summary Borrower: Republic of Turkey Amount: US$255 million equivalent Terms: Seventeen years including four years of grace, with interest at the standard variable rate. Proiect Description: The proposed project constitutes the first time slice of the Government's program for completing or improving drainage and on-farm development works for irrigation projects for which major works have been completed or are close to completion. It would include the following components: (a) rehabilitatioan of surface drains to restore them to their planned performance; (b) excavation of additional drains to supplement the existing drainage system; (c) installation of subsurface drainage network where appropriate; (d) installation of subsurface collector pipe drains to reinforce existing subsurface drainage installations; (e) reclamation of selected tracts of saline land; (f) construction of access roads, minor buildings, field workshops and other structures to facilitate operation and maintenance of the system; (g) installation of piezometers and other devices to monitor groundwater levels; (h) buildings and equipment for existing drainage and reciamation research stations in the irrigated areas; and i) consulting services to assist GDRS and DSI in carrying out the above program and overseas training of GDRS and DSI staff. Benefits and Risks The proposed project would support agreements reached under the Agricultural Sector Adjustment Loan (ASAL, Loan 2585-TU) for accelerating priority investments for drainage and on-farm development. The proposed investments would eliminate waterlogging and salinity, restore the existing irrigated areas to full production, and prevent further deterioration of soils and reduction in crop production. Approximately 97,000 farmers would benefit initially, plus additional farmers operating land which without the proposed investments would eventually become waterlogged. At full development, annual on-farm employment would increase by about 7 million mandays, and fcreign exchange earnings/savings would amount to about t177 million equivalent per year. Iis doumern has a rstricted distribuion and may be used by recipients only in the perfomance of Ihei offic duie. Its contts may not otherwise be discosed witout World Bank autboizatio  The main project risks concern the availability of adequate funding and the capacity of the implementing agencies to prepare, appraise, and select priority investments and coordinate overlapping implementation plans and schedules. Measures are included to minimize these risks. Provision of consultant services and training programs are expected to improve the design and implementation capacities of DSI and GDRS. To reduce the risk of funding shortfalls, the Government would give the Bank an opportunity to comment on the proposed budget allocations for the project prior to finalization of the budget. However, if delays should occur due to a shortfall in annual program funding or implementation capacity constraints, selected program elements could be deferred and the period for completing the program extended without jeopardizing individual subproject benefits or subsector objectives. - $Million Equivalent - Estimated Project Costs: Local Foreign Total (net of taxes, but including contingencies) Surface drainage 82.3 81.7 164.0 Subsurface drainage 121.0 157.4 278.4 Other on-farm works 18.8 8.1 26.9 Waterlogging monitoring and facilities for O&M 1.4 0.9 2.3 Research stations buildings & equipment 0.4 0.2 0.6 Consulting services 1.6 6.0 7.6 Overseas training - 0.7 0.7 Total Project Cost 225.5 11 255.0 480.5 1/ Financing Plan: Bank - 255.0 255.0 Government 225.5 - 225.5 225.5 255.0 480.5 1/ Excludes about $23 million equivalent of taxes and duties. Estimated Bank Disbursements: - --- $Million - Bank FY 1987 1988 1989 1990 1991 1992 Annual 11.0 40.0 47.0 51.0 51.0 55.0 Cumulative 11.0 51.0 98.0 149.0 200.0 255.0 Economic Rate of Return: 22 percent Appraisal Report: 5869-TU dated February 6, 1986 Maps: IBRD 19280 and 19281  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR A DRAINAGE AND ON-FARM DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Turkey for the equivalent of US$255 million to help finance the foreign exchange cost of a Drainage and On-Farm Development Project. The loan would have a term of 17 years including 4 years of grace, with interest at the standard variable rate. PART I - THE ECONOMY 1/ 2. An economic mission visited Turkey in June 1982, and its report entitled "Turkey: Country Economic Memorandum, Recent Economic Developments and Medium-Term Prospects" (No. 4287-TU) was distributed to the Executive Directors in June 1983. The report of a mission to review the financial sector, entitled: "Turkey: Special Economic Report - Policies for the Financial Sector" (No. 4459-TU), was distributed in September 1983. A Bank mission reviewed the Government's Fifth Five-Year Development Plan (1985-89) in September 1984 and its report: "Turkey; The Vth Five Year Plan in the Context of Structural Adjustment" (No. 5418-TU) was distributed in July 1985. 3. Turkey's area is about 781,000 square kilometers (i.e. about equal to the area of France and West Germany combined) with a population of around 50 million and GNP per capita of $1200 in 1984. The density of population is low (78 per square kilometer of agricultural land), and about 47 percent live in urban centers. Population growth (2.2 percent per annum) is below the median for middle-income countries. Despite rapid economic growth in the mid-1970s as well as emigration of workers (to Western Europe and more recently, to the Middle East), there is still substantial unemployment which, including disguised unemployment in agriculture, is estimated at about 19 percent of the civilian labor force. There is, however, little or no absolute poverty, although income distribution is skewed. There are considerable regional differences in income and large rural-urban disparities. Recent data indicate a probable increase in income inequality since the 1970s, especially a relative deterioration of the position of wage and salary earners and an improvement in the position of the trading and commercial classes, and, more generally, of capital-owners. Educational enrollment has expanded greatly, but the level of adult literacy remains relatively low compared to the European average for middle income countries. 1/ Parts I and II are substantially the same as Parts I and II of the President's Report for the Kayraktepe Hydropower Project (P-4179-TU), dated January 31, 1986.  -2- Background 4. During the 1970s Turkey did not make the necessary adjustments to the shocks caused by the steep rise in oil prices, stagflation in the OECD economies, and the consequent deterioration of its terms of external trade. Until 1977 Turkey maintained high rates of economic growth by increasing public investment. The foreign exchange requirements were financed initially by workers' remittances and then increasingly by borrowing, a large part of it short-term. The rapid GNP growth came to an abrupt halt in 1977 as the massive external debt burden led to a sharp deterioration in creditworthiness, severe shortages of imports, disruptions in industrial production and a rise in unemployment. By the end of 1979, domestic inflation had also become an! issue of critical importance. 5. In response to the crisis of the late 1970s, the Turkish authorities made a major shift in development strategy in 1980, moving towards outward orientation and giving an increased role to market forces. To alleviate the balance of payments constraint and import shortages, policies were adopted to expand exports, increase workers' remittances, liberalize imports, encourage foreign investment and improve external debt management. On the domestic front, the objectives were a reduction in the inflation rate, reform of the State Economic Enterprises (SEEs), a more efficient financial sector, improved resource mobilization and better selection of investments, especially in the public sector. 6. The adjustment program, which has been supported by the Bank through five structural adjustment loans and an agricultural sector adjustment loan, involves far-reaching changes in attitudes, institutions, and the legal and policy framework, all of which require time to be put in place. Major structural changes have been made in the exchange rate system, the export and import regimes, the tax system, interest rate and selective credit policies and the public investment program. Implementation of the adjustment program started in January 1980, continued under a military regime during the period September 1980 - November 1983, and has since been carried out by an elected government. The Structural Adjustment Program - 1980-85 7. The Turkish economy has shown an impressive response to the structural adjustment program and actual outcomes met or exceeded the Government's own targets through 1982. The overall performance deteriorated in 1983 due to a combination of factors (slowdown of export growth, slippages in the monetary program, shortfall in Government revenues), but improved again, except in the area of inflation and the budget deficit, in 1984. The improvement was maintained in 1985, as evidenced by a slowdown in inflation and a reduction in the budget deficit. 8. After expanding by 4.1 percent in 1981 and 4.6 percent in 1982, real GNP growth slowed down to 3.2 percent in 1983, due to the effects of a bad harvest, stagnant exports, and lower workers' remittances. The growth rate rebounded in 1984 to 5.9 percent, mostly on account of favorable performance in agriculture (3.7 percent growth) and industry (9.3 percent growth).  Exports also expanded strongly, by more than 25 percent in dollar terms. In 1985, according to the latest estimates, the growth rate of the economy was about 4.9 percent, as against the program target of 5.5 percent. The slowdown of growth is apparent across the board, but was most significant in agriculture (2.2 percent growth) and manufacturing (5.5 percent), due respectively to less favorable climatic conditions and slackening domestic demand. On the expenditure side, the average annual real rate of growth of public fixed investment over the period 1980-85 has been fairly stable, at less than 3 percent p.a., while the growth rate of private investment has recovered, following a 17.3 percent decline in 1980, and rose by 7.1 percent in 1984 and an estimated 5.2 percent in 1985. Private consumption, after declining by 5 percent in real terms in 1980, grew by 5 percent in 1983 and 1984 before slowing down to an estimated 3 percent in 1985. Strict budgetary discipline contributed to a steady decline in the real rate of growth of public consumption from 8.4 percent in 1980 to 1.8 percent in 1983; however, it increased to 3.8 percent in 1984 and an estimated 4.4 percent in 1985. 9. Through 1982, the Government met with considerable success in reducing the rate of inflation by a combination of fiscal, monetary and incomes policies. After peaking at 107 percent in 1980, the average annual rate of increase in the wholesale price index decelerated to 37 percent in 1981 and 27 percent in 1982. In 1983 the downward trend was reversed and the inflation rate rose to 30 percent. Inflation accelerated further in 1984, and reached 50 percent. The major factors that brought about the worsening of the inflationary situation in 1984 were the lagged impact of the expansionary monetary policy pursued during the second half of 1983, and a significant increase in agricultural product prices, especially of fresh fruits and vegetables, as a consequence of export liberalization and higher export market prices. Other contributory factors included substantial "catch up" increases of SEE prices - since January 1984 most SEEs have effectively been allowed to set their prices freely - and higher import prices resulting from the nominal depreciation of the Turkish lira. In addition, inflationary pressures stemmed from a larger than anticipated budget deficit in 1984 as a result of a slowdown in the growth of revenues. 10. Inflation declined to about 43 percent in 1985. This average annual inflation rate has been the net result of a period of high inflation during the first quarter of the year, followed by a period of deceleration starting in April 1985. Deceleration occurred despite significant increases in prices of goods produced by SEEs; it was rendered possible by the maintenance of high real rates of interest, a decline in the prices of a number of agricultural goods (mostly fruits and vegetables), and an overall slackening of domestic demand. The slowdown of inflation in the second half of 1985 reinforces the expectations of a further decrease in the average rate in 1986, bringing it close to the Government's target of 25 percent. 11. In the fiscal- area, the progress achieved between 1980 and 1982 (during which time the budget deficit declined from 5.3 percent to 2.1 percent of GNP) was not sustained in 1983 and 1984. Due to a steady decline in consolidated government revenues as a percentage of GNP, 1/ the budget deficit 1/ Although total government revenues (inclusive of extra-budgetary funds introduced in 1984) have not declined as sharply.  -4- increased to 3.2 percent of GNP in 1983, and reached almost 5 percent of GNP in 1984. The somewhat disappointing performance in the raising of revenues was accompanied, however, by significant improvements in the control of public expenditure. Overall, government expenditures decreased from 22 percent of GNP in 1983 to an estimated 16 percent in 1985, essentially due to a curtailment of personnel expenditures and government transfers to SEEs, with the latter declining from 2.5 percent of GNP in 1983 to an estimated 0.8 percent of GNP in 1985. However, the fact that improvements in the area of government expenditures were not matched by commensurate gains in the reduction of the budget deficit highlights the urgency of mobilizing additional public resources. As a step in this direction, the Government introduced a Value Added Tax in January 1985, replacing previous indirect taxes based on the value of output. The new tax has resulted in raising the share of taxes on goods in total government revenues from around 12 percent in 1983-84 to an estimated 20 percent in 1985. As a result of these measures, the budget deficit is expected to have improved to about 2.5 percent of GNP in 1985. 12. Progress has also been made in rationalizing interest rates and reforming the banking system. Commercial bank deposit interest rates, which were deregulated in July 1980, are positive in real terms. Time deposits have been yielding a positive real return since early 1984, with interest rates presently ranging between 45 and 55 percent depending upon the term of the deposit. Positive deposit interest rates have resulted in a steady increase in deposits: in 1984 private non-commercial deposits grew by 8 percent in real terms, and in 1985 the growth has continued at a rate of about 10 percent. Improvements in incentives for savings were accompanied by administrative reforms of the banking system. A new banking law was enacted in June 1983. It included many of the recommendations made in the Bank's report on the Financial Sector (No. 4459-TU), including measures to reduce the undercapitalization of banks and the interlocking between banks and corporations. The legal basis of the banking reform was strengthened with the enactment of a revised banking law in April 1985, which introduced standardized accounting for banks and specified improved procedures for handling of non-performing loans. The Government also took a major step towards reducing the cost of bank intermediation by reducing in December 1983 the financial transactions tax from 15 percent to 3 percent. Other important developmencs in the financial sector include measures undertaken to revitalize the capital markets, for which IFC has provided technical assistance, and the sale of revenue-sharing certificates linked to the income from selected public infrastructual facilities (e.g. the Bosphorus bridge, and two dams). 13. While positive real interest rates have provided an incentive to save, they have also meant high borrowing costs. Effective nominal interest rates range from 60 to 80 percent on non-preferential credits, in part because of the high intermediation costs of the commercial banks and the prevailing practice of requiring compensating balances. The Government took a number of steps in 1985 to reduce the interest rate differentials between preferential and non-preferential credits: in particular, the preferential interest rate for export credits was discontinued in January 1985, while interest rates for agricultural short-term loans and for loans to SEEs were increased in 1985 to 30 percent (from 28 and 24 percent respectively). The narrowing of the gap between interest rates on preferential and non-preferential credits, together  with the decrease in the amount of preferential credits, is expected to increase the general availability of credit and exert a downward pressure on non-preferential interest rates. 14. Improvements in the balance of payments were substantial between 1980 and 1982, with the current account deficit decreasing from $3.3 billion (5.7 percent of GNP) in 1980 to $1.2 billion (1.6 percent of GNP) in 1982. In 1983 the current account deficit increased to $1.8 billion, as merchandise exports stagnated and workers' remittances fell by one-third. These developments were reversed in 1984 as exports increased by over 25 percent in dollar terms to reach $7.4 billion. Remittances, too, registered a higher than expected increase, reaching $1.8 billion (up by 20 percent over 1983). Merchandise imports, fueled by high growth as well as a more liberal import regime put in place in 1984, grew by more than 16 percent to reach $10.8 billion (or almost 22 percent of GliP). As a result of these developments, both the trade and the current account deficits declined as compared to 1983: the trade deficit by $50 million, and the current account deficit by $350 million, to reach $1.4 billion or about 2.9 percent of GNP. Estimates for 1985 indicate a further strong improvement of the current account situation. Merchandise exports, after a sluggish start in 1985, grew by 13 percent (in dollar terms) in the first ten months of 1985, while merchandise imports grew at a moderate 6 percent. Among the invisibles, tourism revenues and investment income from abroad have increased significantly compared to 1984 and previous years. Similarly, workers' remittances have continued to rise at a rate of about 6 percent per annum. The current account deficit is now estimated in 1985 at $650-800 million (about 1.7 - 1.9 percent of GNP). 15. Merchandise export performance has been impressive throughout the 1980-85 period, during which exports registered an average annual rate of increase of about 22 percent in dollar terms. This growth has been led by the manufacturing sector and has involved a rise in the share of exports to the Middle Eastern countries. Industrial exports, composed primarily of processed foods and textiles, have risen from 36 percent of total exports in 1980 to more than three-quarters in 1985. These results were achieved by a combin ition of indirect (flexible exchange rate policy, import liberalization) and direct (tax rebates, preferential credits) measures to enhance the relative profitability of exports and offset the traditional bias towards production for the domestic market. Successful penetration of the Middle Eastern markets has brought their share in total Turkish exports from 17 percent in 1980 to around 40 percent in the 1983-85 period. 16. On the import side, the 1982-83 period was marked by a relative stability in the growth of merchandise imports, as prices of both oil and non-oil imports declined, and the volume rate of growth remained moderate. In 1984, however, merchandise imports increased by 16.1 percent in dollar value. The increase was most pronounced in some of the groups (e.g. raw materials and consumer goods) that have been subjected to major liberalization in terms of both a lowering of tariff rates and a significant removal of quantitative restrictions. In 1985, as domestic demand eased, and the initial effects of pent-up demand for importables released by import liberalization weakened, the rate of import growth decreased to one-third of the level recorded in 1984.  -6- Medium-Term Prospects 17. The Fifth Five Year Development Plan (1985-89), which was approved by the Grand National Assembly in June 1984, reaffirms the Government's determination to pursue an outward-oriented development strategy and to liberalize the economy by relying increasingly on market forces for allocation decisions. The public sector is targeted to play a supportive role by concentrating its investments in infrastructure rather than manufacturing, while the private sector is to be encouraged to play a leading role in the growth of manufacturing and exports. Some of the key targets are: (i) an average annual GNP growth rate of 6.3 percent; (ii) an average annual real rate of growth of merchandise exports of 10.6 percent; (iii) an average annual real rate of growth of 10.9 percent in private investment and 6.8 percent in public investment; (iv) a declining external debt service ratio, from 26 percent in 1984 to around 18 percent in 1989; and -v) a decreasing rate of inflation reaching 10 percent p.a. in 1989. 18. While the overall thrust of the Plan is in accord with the goals of the structural adjustment program, the Plan targets, if viewed collectively and in the light of the developments in 1984 and 1985, appear ambitious and likely to strain domestic resources (especially in the public sector) as well as to have an adverse impact on the external balance. Accordingly, the Government is adjusting the annual programs to ensure that they remain compatible with the fight against infiation and with a growth strategy commensurate with the Government's ability to generate resources. 19. The Bank's projections indicate that GDP growth of 5.7 percent p.a. on average for the 1985-90 period may be more realistic. In the first phase of this period (1985-87), growth might be relatively slow (5.3 percent p.a.), gradually accelerating in the outer years with an average rate of 6.0 percent p.a. in the period 1988-90. The inflation targets in the Bank's projections are also more conservative, implying a reduction from about 43 percent in 1985 to around 18 percent in 1990. Key economic variables in the Bank's projections for the period 1985-90 are presented in Table 1: 1/ 1/ The Bank's estimate for 1985 may differ slightly from the Government's latest eLtimates for 1985 discussed above.  Table ls TURKEY - SELECTED ECONOMIC INDICATORS, 1984-90 (Base Case) Real Growth Rate Average Real Growth Rate 1984 1985 1990 (2) (Z) Units (Act.) (Est.) (Proj.) 1984 1985 1985-90 GP /a 1985 TL bil 25672.5 26920.2 35466.8 5.8 4.9 5.7 Agriculture " 4621.9 4728.2 5481.3 3.0 2.3 3.0 lndustry " 7138.1 7605.6 10820.4 9.3 6.6 7.3 Services " 12443.2 13040.5 17156.4 4.7 4.8 5.6 Consumption " 21578.3 22389.6 29274.5 6.9 3.7 5.5 Fixed investment " 4682.3 4921.6 6742.1 2.0 5.1 6.5 Exports of goods (fob) Curr $ mil 7389.0 7982.0 18127.6 34.6 12.1 8.5 Imports of goods (fob) " 10331.0 10810.9 21567.7 18.0 5.3 7.8 Trade balance " -2942.0 -2828.9 -3440.1 Workers' remittances " 1791.0 2190.0 2741.8 Current account balance " -1426.0 -75U.5 -809.0 Ratios Investment/GDP Z 20.2 19.8 20.5 Domestic savings/GDP X 15.5 16.0 18.3 Exports of goods/GDP A 14.0 15.0 17.1 Current acet. deficit/GDP /b 2 -2.7 -1.4 -0.8 Debt service ratio /c X 26.0 31.3 21.2 Public fixed investment/ total fixed investment X 59.0 58.8 51.8 Memo item; Gross capital required Curr $ mil 4627.3 3894.8 4507.4 /a At market prices. Components are expressed at factor cost. /b Based on constant TL. /c Total debt service (excluding short-term)/exports of goods and NFS plus workers' remittances.  - 8 - 20. Achievement of these growth rates will depend primarily on the performance of agriculture and manufacturing. This in turn will depend to a large extent on the Government's determination to constrain the growth of the public sector in line with resources and to create a more favorable investment climate for the private sector. This translates into a projected real growth in public fixed investment of about 3.8 percent p.a. on average for the 1985-90 period, starting with a more modest increase of around 3.5 percent p.a. in the early years. The comparable figure for the growth of private fixed investment (for the whole period) is 10.0 percent p.a. These figures are consistent with the need to meet the infrastructural requirements of the economy through the public investment program, while providing for the capacity expansion of the private sector necessary to meet the output and export targets. The projections allow for a modest increase of per capita consumption of about 3.0 percent p.a. on average over the period 1985-90. 21. Merchandise exports are projected to grow at an average rate of 8.5 percent per annum in real terms during 1985-90, while merchandise imports are projected to grow at an average annual rate of 7.8 percent. This is consistent with the import liberalization program of the Government. On these assumptions, the current account deficit is projected to decrease through 1988 as stabilization policies act to contain import growth while encouraging exports. As higher grow-th rates set in during the outer years of the period, the trend would reverse and the current account deficit would rise moderately through 1990. For the year 1990, the projections show a deficit of $310 million as compared to an estimated 1985 figure of $750 million. The projected capital account would remain manageable throughout the period, even in the face of some sharp increases in amortization payments arising from the debts rescheduled during 1978-80. 272. On the external front, the current expectation of lower oil prices in the next period is likely to have a positive impact on the balance of payments. The savings on direct petroleum imports could be as much as $275 million in 1986 alone. Lower oil prices will no doubt have some negative consequences for Turkey's exports to oil-exporting countries as well as on profit and workers' remittances from construction activities in these countries. Nevertheless, the overall effect on the current account is likely to be positive, due to the stronger effect of the import savings. 23. The meditum-term scenario presented above is, of course, only one of many possibilities and is used specifically to illustrate Turkey's potential in the light of the Government's own development strategy. Given Turkey's progress in the structural adjustment program, the favorable response which this has evoked from the international financial community, and the present outlook for both lower oil prices and a strong growth of Turkish exports, the GNP growth projected in the mediumrterm base case scenario could be exceeded if slightly higher export growth rates were achieved and there was an improvement in the mobilization of public resources. 24. In view of the sensitivity of the projections to the assumptions regarding export growth, a downside risk case has also been developed. With Turkey's export performance heavily dependent on exogenous factors such as the world economic conditions and movements in international prices, a slower  -9- growth of merchandise exports (an average of about 6 percent p.a. over the 1985-90 period) coupled with lower mobilization of public resources (3 percent lower revenues than envisaged under the base case scenario) would lead to a more difficult but still manageable balance of payments situation, a lower GDP growth (averaging about 4.7 percent p.a.) and a higher debt service ratio (averaging 26.7 percent during 1986-90 against 25.1 percent in the base case scenario). In such a situation the Government would have less chance of absorbing the unemployed and improving tangibly the average standard of living. However, if the Government in such circumstances were to resort to a high growth strategy, then it could witness a repeat of the situation which prevailed in the 1970s, and which led to a debt crisis. It is unlikely that the Gavernment would risk such a situation. It is therefore more probable - even if exogeneous developments are unfavorable - that the Government will continue with the structural adjustment program as implemented to date, so that the scenario of high growth fuelled by increased external borrowing seems at present unlikely. External Debt and Creditworthiness 25. At the end of 1978, Turkey had $7.2 billion in short-term debt and $7.0 billion in medium and long-term debt. Between 1978 and 1980, Turkey rescheduled some $9.2 billion of outstanding obligations through a series of rescheduling arrangements concluded with official and commercial creditors. Following the resolution of the debt crisis, inflows were mostly from official sources - OECD countries, the World Bank and the IMF. Since 1983 commitments from commercial banks have outstripped those from official sources and have reached an estimated level of $2.5 billion by end-1985. Of the estimated total debt outstanding of $22.3 billion (including IMF) at end-1984, medium and long-term debt accounted for about 79 percent. Short-term debt as a percentage of total debt outstanding fell from 51 percent in 1978 to about 11 percent in 1982, then increased to 14 percent in 1983 and to an estimated 21 percent in 1984. Much of this growth in the stock of short-term debt is due to the inflows associated with the Dresdner Bank scheme 1/. At end-1984, the outstanding liabilities associated with the Dresdner scheme amounted to $1.8 billion, constituting 39 percent of short-term external obligations. Based on the growth scenario outlined in paras. 19 to 22, debt outstanding and disbursed as a percentage of GDP is projected to fall from an estimated 42 percent in 1984 to 37 percent in 1990. This translates into a total debt outstanding forecast for 1990 of $28.8 billion, with short-term debt constituting about 25 percent of the total. 26. The debt service ratio for medium and long-term credits increased from about 26 percent in 1984 to an estimated 31 percent in 1985, mostly as a result of large repayments of rescheduled debt falling due. Debt service obligations are expected to be on average about $4.0 billion a year during 1/ Under this scheme the Dresdner Bank collects deposits from Turkish workers in West Germany and automatically places these funds at the disposition of tue Central Bank of Turkey, which guarantees the deposits and pays an interest rate commensurate with the Euro-market rate.  - 10 - 1986-90, a quarter of which is attributable to service obligations on rescheduled debt. However, the debt service ratio is projected to decrease to a level of about 25 percent during 1986-1990, due largely to improvements in the current account of the balance of payments. The debt burden should remain manageable provided current policies are successfully implemented, the export drive is sustained, and Turkey continues to receive support from international commercial and official sources. Confidence in Turkey's overall economic performance, its stable record in meeting debt servicing obligations and its improved debt management, encouraged commercial banks to commit about $1.8 billion in 1985. Several major American, European, Japanese and Middle Eastern banks were involved in these operations, including a $500 million syndicated loan in support of the balance of payments signed in April 1985. 27. Turkey's economic program has been supported by the INF through a series of standby arrangements during 1980-84. The Government did not ask for a new standby in 1985. The Government's decision seems to reflect the view that the favorable economic developments in 1985 constitute proof of Turkey having "graduated" from the IMF's program and that the INF presence through Article IV consultations should suffice for purposes of maintaining international confidence. PART II - BANK GROUP OPERATIONS IN TURKEY 28. Through September 30, 1985 the Bank and IDA have lent $tb185.8 million 1/ to Turkey, through 88 projects. Agriculture accounts for 21 percent of the funds lent, industry and DF(s for 22 percent, power for 16 percent, structural adjustment and program loans for 27 percent, and urban development, transportation, education, tourism and technical assistance for the remaining 14 percent. Disbursements for all sectors combined averaged b3 percent of appraisal estimates at the end of September 1985, which compares favorably with other countries in the region. As of September 30, 1985, IFC commitments to Turkey totalled about $246 million, of which about $64 million were still held by IFC. Annex II provides a summary statement of Bank loans, IDA credits and IFC investments as of September 30, 1985. 29. Bank lending is aimed at supporting Turkey's medium-term objectives of restructuring the Turkish economy by placing more reliance on market forces and adopting a more outward-oriented strategy. The main vehicle for the Bank's operational discussions with the Government has been the structiral adjustment lending (SAL) program, which was completed in June 1984, and more recently the sectoral adjustment lending program. Significant progress has been achieved in the last five years, but the task of restructuring is by no means over. The current plan involves the broadening and deepening oL the adjustment process at the sectoral level. Recent economic developments have underlined the need for a continuation of the stabilization program without 1/ Net of cancellations.  - 11 - giving up the goals of sectoral adjustment. Hence the emphasis of Bank lending in the post-SAL period would be on striking an appropriate balance between sectoral adjustment lending designed in part to be quick disbursing and supportive of policy reforms in the major sectors, and carefully formulated project le-ding focussing on high priority projects principally in the agriculture, energy, industry and transport sectors. 30. A series of sectoral adjustment loans for the major sectors is planned over the next few years. A first loan for agriculture was approved in June 1985. Further lending of this kind would support measures to address the structural problems of the financial sector and enhance the utilization of industrial capacity in the public and private sectors, keeping in view the scope for the "privatization" of publicly-held assets in the manufacturing subsectors. Other sectors where sectoral adjustment loans are likely to be developed include energy and transport, and it is expected that there would bf: a follow-up loan in agriculture. 31. This would be the fifth loan to Turkey presented to the Executive Directors this fiscal year. Other projects being processed include a second railway project, the Sir hydropower project, and a financial sector adjustment loan. 32. The close macroeconomic and sector dialogue established with the Government in recent years is expected to be pursued. The economic and sector work currently being undertaken includes a review of the public investment program ard studies of housing finance, engineering industries, transport investment and electronics. Topics expected to be covered in the future include a study in domestic resource mobilization, a country economic memorandum focussing on inflation, reviews of the health and education sectors and a study of private sector adjustment to liberalization action. 33. Turkey's debt burden is projected to remain manageable throughout 1986-89 (paras. 25 and 26). The Bank Group's share of Turkey's total external debt was 13.4 percent in 1983, is estimated at 14 percent in 1984, and is expected to grow to about 17 percent by 1989. Official debt outstanding is projected to increase from $11.0 billion in 1984 to $13.4 billion in 1989 and private medium and long-term debt outstanding is projected to increase from $5.2 billion in 1984 to $7.5 billion in 1989. The Bank group's share of total debt service payments is projected to increase from about 12 percent in 1983 to an estimated 13 percent in 1984, and to about 18 percent in 1989. 34. IFC has invested in synthetic yarns, textiles, pulp and paper, glass, aluminum, cement, iron and steel products, heavy diesel engines, motor bicycle engines, piston rings, food processing and tourism. It has also invested in the Industrial Development Bank of Turkey (TSKB) and provided guarantees for overseas contracting firms. In addition, IFC is currently providing technical assistance to the Government with respect to the development of the capital market and a regulatory framework for leasing.  - 12 - PART III - THE AGRICULTURAL SECTOR 35. While the relative importance of the agricultural sector in the economy is declining, it still represents in a typical year about 18 percent of GDP, about a third of export earnings and about half of civilian employment. The growth rates of agricultural GDP and exports are projected to remain below those for the rest of the economy. Nevertheless, the agricultural sector will continue to play a significant role in meeting domestic food needs, supplying industrial raw materials, and providing foreign exchange earnings and employment. 36. Turkish agriculture is diverse. Intensive crop cultivation is prevalent in the coastal regions which receive plentiful rainfall or are equipped with irrigation facilities. Mixed (crop and livestock) farming predominates in the eastern and central parts of the country where pastures and meadows form more than half of the agricultural land and crop production is dependent upon rainfall. In these areas much of the land is kept fallow in alternating years. While the livestock production system is largely traditional, dependent on grazing lands and low productivity systems of animal husbandry, it produces about one-third of agricultural GDP. Cereal crops occupy about 66 percent of the cultivated area, fruits and vegetables about 20 percent, industrial crops about six percent, and oil seeds, pulses and tubers the remaining seven percent. 37. Through the 1970s, Turkey's agricultural policies were inward- looking, stressing food self-sufficiency through subsidized inputs and producer prices. This led to relatively rapid growth of production through the first half of the 1970s, averaging 4.7 percent from 1972-75. However, with a deteriorating overall macroeconomic situation, these growth rates could not be maintained, due in part to the strain placed upon the budget by the level of subsidization and the competing demand for resources from the manufacturing sector. As a result of the overall economic crisis, growth in the sector slowed to less than 1.5 percent per annum during the late 1970's. Ineffective public investment policies, weaknesses in technical services, and problems in marketing and credit also contributed to sluggish growth. During this period, sectoral exports remained a small fraction of total production (less than 1 percent of agricultural GDP in 1979) due to the overvalued exchange rate and other disincentives to export. 38. New Policies: As part of the structural adjustment program adopted by the Government in 1980, input subsidies and production price supports were reduced and market-oriented policies were introduced. The overall restraint on monetary policy forced a curtailment of agricultural credit. Exports were encouraged through the introduction of a competitive exchange rate policy and other incentives. Unavoidably, this shift in strategy produced some short-term shocks to sectoral development: the growth of agricultural GDP in  - 13 - real terms fell to an average of only 0.9 percent in 1980 and 1981. 1/ In 1982 and 1983, 1/ however, real growth in agricultural GDP recovered to an average annual rate of 3.1 percent. During 1984 it reached 3.7 percent. Due to the adoption of a realistic exchange rate and relaxation of export licensing restrictions, agricultural exports increased by an annual average rate of 17.7 percent during 1980 and 1981. If agroindustrie.' exports are included, the average annual rate of growth increases to 18.9 percent. In 1982 and 1983, while agricultural exports continued to grow in volume, the average annual rate of growth of the value of agricultural exports dropped sharply to only 1.2 percent, due to the decline in the prices of the main commodities. H{owever, for agriculture and agroindustries combined, the average annual rate of export growth remained at a healthy 9.5 percent, indicating a significant switch from unprocessed to processed exports. During 1985 the estimated agricultural growth rate declined to 2.3 percent, and agricultural exports through September decreased by about 7 percent as compared to the same period in 1984, reflecting the effects of an unusually severe drought. 39. Prospects: The potential for Turkey's agricultural sector over the medium term was examined in a recent agricultural sector study 2/. The report stated that the possibilities for growth through expansion of the cropped area or of livestock numbers under a system of extensive grazing, were largely exhausted by the mid-1970s. Growth must now come primarily from increased productivity and changing the crop mixture to reflect better Turkey's comparative advantage. Increased productivity wouLd require expansion in the irrigated area through improved efficiency of the implementing agencies (better planning, increased use of contractors), better extension and research programs, expanded imports of improved seeds and appropriate equipment, and increased availability of institutional credit, particularly for small and mediun-scale farmers. 40. The demands of an export-oriented approach have led to a change of emphasis in Government policy from food self-sufficiency to increased net agricultural contribution to the balance of trade. Thus imports of certain foods in which Turkey does not have a comparative advantage have been permitted. Increasing agricultural exports has involved appropriate pricing signals, maintenance of a competitive exchange rate, reduction of export regulations, and improved marketing. Other important issues in the sector include improved sectoral planning, continued progress in the reduction of subsidies, and reform of agricultural SEEs and marketing agencies. In parallel, general economic stabilization must continue to provide a foundation for uninterrupted sectoral growth. With continued progress on these issues and adherence to policies designed to encourage exports, agricultural GDP is expected to achieve a growth rate of about 3.0 percent annually during the remainder of the 1980s, with agricultural exports (excluding agroindustries) growing at 5-8 percent annually. 1/ In each case, one year of above average and one of below average weather has been averaged to produce an approximation of normal performance. Thus the difference between 1980/81 and 1982/83 is real and not weather related. 21 Turkey - Agricultural Development: Alternatives for Growth with Exports (Report No.4204-TU), dated June 30, 1983.  - 14 - The Irrigation Subsector 41. Irrigation investment represents about 65 percent of the public sector agricultural investment program and has been a major factor in increasing and stabilizing agricultural production. While about 18 percent of arable land is irrigated, roughly 40 percent of all plant output and about 25 percent of agricultural exports are grown under irrigation. In many respects, however, irrigated agriculture has performed considerably below its potential. Newly developed irrigation projects have often failed to produce expected benefits due to (i) lack of adequate drainage works leading to waterlogging and salinity; (ii) lack of adequate extension services and cropping systems research; (iii) delays in completing on-farm development works which are required for optimum utilization of the water supplied; and (iv) inadequate maintenance of some completed works. The increase in irrigated crop areas has therefore lagged significantly behind the expansion of irrigation infrastructure. The underutilization of this infrastructure, built at comparatively high cost, results in a large loss to the economy. 42. The irrigated area varies considerably from year to year, since wheat is not usually irrigated in years of adequate rainfall. The maximum area under irrigation in recent years is estimated at about 4.7 mill:on hectares (out of 28 million ha of arable land) and much of this area is inadequately operated with low water efficiency and less than optimal yields. The Government has estimated, based on technical criteria only, that an additional 4.0 million ha could be irrigated. However, it is likely that only a smaller area could be developed economically. The highest potential for increasing irrigated production in the near future lies in (i) concentrating resources on completing projects near to completion; (ii) providing drainage and on-farm works in areas where major irrigation facilities have been completed; (iii) improving the maintenance of completed works; and (iv) developing effective extension services to introduce appropriate irrigation techniques to first time users and to farmers currently using inappropriate methods and cropping patterns. 43. Two public agencies are responsible for the construction of irrigation facilities. The General Directorate of State Hydraulic Works (DSI) of the Ministry of Energy and Natural Resources is responsible for the construction of the basic irrigation infrastructure for large-scale projects. The General Directorate of Rural Services (GDRS) of the Ministry of Agriculture, Forestry and Rural Affairs (MAFRA) is responsible for the construction of on-farm development works on large-scale irrigation projects and the development of small-scale projects. These agencies have not been able to contribute fully to agricultural productivity increases because of the thin spread of scarce budget resources over too many projects, excessive reliance upon force account work, inadequate coordination between the two agencies in project design and implementation, and poor supporting services, resulting in slow project completion and limited agricultural benefits.  - 15 - 44. Irrigation investment levels have been growing gradually at about 4 percent per year in real terrms since 1981. The DSI investment program has averaged about twice that of GDRS. Since 1980, when DSI resources were spread thinly over 142 projects, considerable progress has been made in concentrating resources on a smaller number of projects. As a result, the new irrigation area put into operation each year by DSI has increased from 18,000 ha in 1981 to 86,000 ha in 1984. However, GDRS has recently been able to complete only 10-12,000 ha per year of the key components of on-farm development, namely farm drains and subsurface drains. The estimated backlog of subsurface drainage on completed DSI schemes would exceed 300,000 ha by 1989. This increasing backlog between irrigation infrastructure development by DSI and the completion of GDRS' on-farm development works suggests the need to revise the allocation of public resources for irrigation investment. 45. The problems referred to above are recognized by the Government, which has agreed to carry out an Irrigation Development Study and formulate a 10-year Irrigation Development Master Plan (1986-1995) using funds made available under the IAEE Irrigation Project (Loan 2433-TU, approved in June 1984). The Master Plan would be based on a detailed project-by-project inventory and an assessment of existing and projected irrigation and on-farm development investments and financial and implementation constraints. It would detail the issues and targets to be reached, including additional works required, cost and timing, arrangements for improving the sustainability of irrigation works and better cost recovery. To facilitate coordination, the Government has indicated that it intends to use the consulting firm to be selected under this project to provide assistance (financed under Loan 2433-TU) for preparation of the Master Plan. In parallel, and with financing from the Bank-assisted Agricultural Extension and Applied Research Project (Loan 2405-TU, approved in April 1984), the Government is also implementing a program to improve agricultural extension, with priority for irrigated areas. 46. Significant progress has been made in implementing agreements reached under the TlAF Irrigation Project (Loan 2433-TU) for overcoming problems in irrigation cost recovery. Under the IAEE Project the Government agreed to (i) adjust DSI capital recovery charges under existing legislation to include interest; (ii) progressively increase DSI assessments for operation and maintenance (06M) to achieve 100 percent recovery of the preceding year's cost by 1986; and (iii) increase penalties for overdue payments. It was further agreed that action would be taken to permit GDRS to recover its capital costs for on-farm works. DSI's O&M assessments have been increased by 254 percent in real terms in 1984 over 1978 levels. These assessments were increased further in 1985 to cover 75 percent of the prior year's costs, and are scheduled to reach 100 percent this year. In 1983, the Government increased the penalties for late payment so that if payment is late by one year, a total penalty is levied equal to 54 percent of the initial assessment as compared to 10 percent previously. This penalty was increased to 75 percent in 1985. The Government has also enacted legislation in accordance with the IAEE agreement permitting GDRS for the first time to collect water charges to recover costs on its irrigation investments. Draft regulations for implementation of this legislation have been prepared and are being reviewed by the concerned ministries. The Government has agreed to colLect adequate water charges on  - 16 - both DSI and GDRS works in the area served by this loan, in accordance with the same criteria agreed for the IAEE Project, namely full recovery of DSI O&M expenditure for the prior year, recovery of DSI capital costa over a period not to exceed 50 years, and recovery of GDRS costs over 20 years. Since most maintenance of GDRS works is carried out by the farmers concerned, no O&M charge is considered necessary for such works. Arrangements satisfactory to the Bank for carrying out GDRS cost recovery obligations (expected to be established through Government approval of the regulations referred to above) would be a condition of loan effectivensss. Public Investment Rationalization 47. In a period of constrained public resources, it is important for Turkey to concentrate on projects which can be brought into production quickly and for which the incremental investment in completion would result in high economic returns. This policy is particularly appropriate for irrigation investment. In connection with the recently approved Agriculture Sector Adjustment Loan (ASAL) 1/, a Core Program of drainage and on-farm development investments was agreed, designed to bring about adequate drainage in the command area of DSI's ongoing and completed projects, the completion of highest priority on-farm works, and the provision of adequate O&M to insure the optimum utilization of the command area. The Government agreed to complete this Core Program and indicated its intention to increase the share of its investment allocations for this type of investment. Specific works to be completed under this program would be selected in accordance with criteria agreed with the Bank. The Government indicated its intent to maintain funding levels beginning in 1986 to permit GDRS to complete 100,000 ha/year of on-farm works. 2/ This would also be facilitated by increased reliance on contract construction work. In order to supplement current staff capacity for implementing this program, the ASAL provides funds to finance engineering consultants for a period of about two years to assist in operational programming, scheduling and design of approved works in the Core Program, and in monitoring their implementation. In view of the complexity of the task, the ASAL also finances independent internationally recruited consultants to review the economic, agricultural, and engineering work of the consulting engineering firms. To assist DSI in implementing its portion of the Core Program (rehabilitation and maintenance of surface drains over an area of about 1.3 million ha, and subsequent continuation of maintenance through improved O&M), the ASAL also finances the imported machinery and equipment needed for the rehabilitation and maintenance of surface drains. The draft consultants' terms of reference and equipment tender documents have been reviewed with the Bank and are being revised to incorporate Bank comments. Employment of the consultants would be a condition of effectiveness of this loan. 1/ Loan 2545-TU, approved in June 1985. 2/ The 100,000 ha/year target includes some land-leveling and other on-farm works which are not part of the Core Program.  - 17 - 48. Although the Government intends to place increased emphasis in its investment program on completing on-farm works, the construction of headworks for selected priority investments would continue. Under the indicative investment program reviewed by the Bank, it is expected that DSI would be able to complete irrigation infrastructure for about 475,000 ha during the next five to six years. Under the ASAL, the Government agreed to review during 1986, with the help of consultants, all ongoing DSI projects in accordance with the current criteria for screening new projects, based upon economic and technical viability. The findings of this review will be furnished to the Bank, to be followed by an exchange of views on the proposed 1987 irrigation investment and recurrent expenditure program. Performance under Previous Irrigation Projects 49. The Bank and IDA have provided financing for six irrigation projects in Turkey through loans and credits totalling about $274 million. Some of these projects also included power components. All but one (the IAEE Irrigation Project, approved in June 1984) have been completed. Aside from components under rural development projects, no irrigation lending took place between 1973 and 1984 due to the lack of an agreement on adequate measures regarding cost recovery. The most recently completed Project Performance Audit Reports (PPARs) on two irrigation projects found them to have been generally successful and to have yielded high economic benefits. But, in addition to the issue of cost recovery, the PPARs noted inadequate provision of extension services, initial delays in establishing project implementing units and periodic delays in providing adequate local cost financing. The proposed loan has been designed to take full account of these findings. In the areas served by the Ceyhan-Aslantas project (Loan 883-TU/Credit 360-TU, FY 1973) and the Corum-Cankiri Rural Development Project (Loan 1130-TU, FY 1975) the extension service is performing well using an improved approach pioneered under several Bank-assisted projects. The Government has recognized the need to reorganize and strengthen its extension activities and is developing programs for introducing the new extension system on a nationwide basis. Loan 2405-TU (Agricultural Extension and Applied Research Project), approved in 1984, assists in financing a first phase program to introduce improved extension and research methods in 16 of Turkey's 67 provinces. A second extension and research project is currently under preparation. Since the proposed Drainage and On-Farm Development Project would finance completion or improvement of services for on-going irrigation programs, most of the major implementat;on units required already exist. Arrangements are proposed for Bank revieh of proposed project budget provisions (para. 55), which would provide an early warning system and help to provide adequate financial support for the project. PART IV - TkiE PROJECT History 50. In connection with the preparation of the ASAL, a Core Program of high priority investments was identified to increase yields in the command areas of DSI projects for which the headworks have been completed or are close  - 18 - to completion (para. 47). The proposed loan would assist in financing the first time slice of this Core Program. The outline of the Core Program and the preliminary engineering and agricultural/economic preparation was carried out by DSI and GDRS staff, with assistance from Bank staff and the FAO/World Bank Cooperative Program. The project was appraised in May/June 1985. A Staff Appraisal Report entitled "Turkey - Drainage and On-Farm Development Project" (No. 5869-TU, dated February 6, 1986) is being distributed separately to the Executive Directors. The key features of the proposed project are listed in the Loan and Project Summary and in Annex III. Negotiations took place in Washington in January 1986, with a delegation headed by Mr. Hikmet Ulugbay, Chief Counselor for Economic and Commercial Affairs of the Turkish Embassy in Washington, and including representatives of the Treasury, DSI, GDRS, and the State Planning Organization. Project Objectives and Features 51. The proposed project would support the strategy agreed under the Core Program which involves placing priority on investments designed to improve the productivity of subprojects for which DSI headworks and irrigation systems are completed or close to completion. Waterlogging and salinity due to inadequate drainage has been identified as a major factor limiting production in irrigated areas, reducing yields by a minimum of 25 percent from those observed in similar areas having adequate drainage. These estimates do not take into account the progressive additional areas which would be affected by waterlogging without remedial measures. The Core Program involves investments to vi) overcome the backlog of on-farm drainage works (para. 44); (ii) rehabilitate existing surface drains, construct new drains where required, and improve maintenance of major drainage works; (iii) recLaim land suffering from salinity due to inadequate drainage; and (iv) provide access roads required for maintenance of the irrigation and drainage systems. 52. The estimated total cost of the Care Program, including physical and price contingencies, is about $1.2 billion. This includes about $117 million for DSI drainage maintenance equipment and technical assistance and training financed under the ASAL. A time slice within the Core Program has been identified consisting of works expected to be initiated during the next three years and to be completed by December 31, 1991. The proposed project would finance this time slice consisting of rehabilitation and construction of new drains over about 668,000 ha, subsurface drainage over about 137,500 ha, and other related works as swmnarized below: (i) Rehabilitation of existing surface drainage systems where drains are choked with silt deposits and weed growth (resulting primarily from lack of appropriate maintenance equipment); (ii) Installation of additional surface drains in areas where the initial intensity of surface drains has proven to be inadequate to prevent salinity and waterlogging;  - 19 - (iii) Installation of subsurface drainage facilities to drain clay soils which cannot be adequately served by surface drains; (iv) Installation of additional subsurface collector drains in existing areas served by subsurface drains; (v) Reclamation of land damaged by salinity due to previous inadequate drainage; (vi) Construction of feeder roads to provide adequate access for maintenance and to otherwise connect with the public road system, and of minor field offices, stores, workshop facilities and other buildings needed for the operation and maintenance of the system; (vii) Installation of piezometers and other groundwater level monitoring devices; (viii) Provision of buildings and equipment for two drainage research stations; and (ix) Technical assistance and staff training programs. Items (i) and (ii) above would be implemented by DSI, (iii)-(viii) by GDRS, and (ix) by both. It is anticipated that the remainder of the Core Program (consisting of works to be initiated from mid-1989 to 1991 and completed by about 1993) would be considered for financing under a second Bank loan. 53. The Government's program for the first year, which consists only of rehabilitation of surface drains, would be selected from an overall program for surface drainage rehabilitation which has been reviewed (on a sample basis) by the Bank and is considered appropriate. All design work for this program for rehabilitation of surface drains has been completed. The specific list of subprojects selected to be carried out during the first year of the project would be submitted to the Bank for approval in early 1986. Criteria have also been agreed for the selection of subprojects for inclusion in subsequent years' programs. Prior to initiating procurement for the second year's program, and annually thereafter, the subprojects to be included would be selected by the Government in accordance with the agreed criteria and, together with designs prepared with the assistance of the consultants financed under the ASAL (para. 47), submitted to the Bank for approval. Since the ASAL financing of these consultants is expected to be completed in about two years, the proposed Drainage and On-Farm Development Loan includes funds for continuing the service of these consultants, who would be retained until the end of the implementation period. Riparian Rights 54. It has been agreed that the subprojects to be financed under the loan would be selected from an agreed list of 155 completed or on-going DSI irrigation and drainage schemes. None of these 155 schemes is located on an international river and therefore no riparian rights issues are involved.  - 20 - Cost Estimates and Financing 55. The estimated total cost of first time slice of the Core Program to be financed under the proposed loan is about $480.5 million, excluding about $23 million of taxes and duties and the drainage maintenance equipment, technical assistance and training financed under ASAL. The foreign exchange component, both direct and indirect, is estimated at about $255 million or 53 percent of the total cost. Physical contingencies at 15 percent of the base cost have beer. included for civil works. Price contingencies in dollar terms have been compounded annually for the years 1986 to 1991 at 7, 7, 7.5, 7.7, 7.6 and 4.5 percent respectively, for both local and foreign costs. (While local costs in TL are expected to increase at a faster rate, it is assumed that the Government will maintain current exchange rate policies which compensate for differences between local and foreign inflation.) The proposed Bank loan of $255 million would finance the equivalent of the estimated foreign exchange cost of the project. The remaining costs would be financed by the Government. The Bank has reviewed the allocations for the various project components included in the 1986 budget and found them to be adequate. For later years the Government would, by September 30 each year, provide to the Bank for comment an annual updated financing plan giving the proposed budget allocations for the project, and updated project schedules and cost estimates. Contracting and Procurement 56. The rapid increase envisaged in GDRS' implementation capacity for drainage and on-farm development works is expected to be achieved through the use of contractors for types of work previously carried out primarily by force account. About $307 million of such works would be implemented by contractors employed through international competitive bidding (ICB). Subprojects (other than about $2 million for buildings for the research stations and construction of minor buildings for operation and maintenance of the drainage systems) would be regionally combined to form groups sufficiently large to attract international bidders, with a minimum contract size of $15 million equivalent. For drainage works, contracts need to be large enough to justify the contractor's purchases of equipment. Subcontracting would be allowed. Land leveling (for which small locally tendered contracts would be appropriate) would not be financed under this loan. DSI rehabilitation of surface drains (estimated to cost about $122 million) would be carried out by force account, using equipment procured through ICB and financed under the ASAL. These works are spread throughout Turkey, and are too small to be of interest to international contractors. After rehabilitation, the same equipment would be used for periodic maintenance of the drains. The rehabilitation work would be carried out by existing DSI staff employed by its 25 regional directorates. DSI is considered fully competent to carry out these activities in an efficient manner. DSI force account would also be used for about $0.8 million of expenditure for the installation of groundwater monitoring devices. DSI has already installed such equipment in 38 existing schemes and the arrangements for this ongoing program are considered appropriate. Consultants' services (about $7.6 million equivalent) would be provided by firms recruited in accordance with the Bank's guidelines.  - 21 - Equipment for the research stations and for monitoring groundwater (about $0.20 million) would be procured after soliciting at least three price quotations. Summary of Procurement Plans ($ million equivalent) Project Force Price Total Element ICB Account Quotations N/A Cost Civil Works 307.1 164.9 - - 472.0 (166.1) (80.4) (246.5) Equipment - 0.2 - 0.2 (0.2) (0.2) Services - - 7.6 7.6 (7.6) (7.6) Training - - - 0.7 0.7 (0.7) (0.7) Total 307.1 164.9 0.2 8.3 480.5 (166.1) (80.4) (0.2) (8.3) (255.0) Note: Figures in brackets are the amounts to be financed by the Bank. Disbursement and Audit 57. The Bank loan would be disbursed against (i) 57 percent of the costs of GDRS civil works; (ii) 45 percent of the costs of DSI civil works; (iii) 100 percent of expenditures for consultants' services; (iv) 100 percent of expenditures for overseas training; and (v) 100 percent of foreign expenditure and local expenditure ex-factory for equipment and for library materials for the research stations. Disbursements would be made against full documentation, except for reimbursements for DSI force account work and contracts below $10,000 for equipment and below $20,000 for civil works, for which statements of expenditure would be used. A revolving fund Special Account woulu be established in the Central Bank of Turkey, to which the Bank would make an initial deposit of $20 million, so as to avoid the need for the Government to prefinance contracts and then await Bank reimbursement. The loan is expected to be disbursed within about seven years. This corresponds to about 95 percent of the disbursements under the standard agriculture sector profile for Turkey. 58. DSI and GDRS would each maintain separate accounts for the project. Staff of the two agencies would prepare at the end of each quarter a detailed statement of project expenditures during the period and submit each statement to the Bank within 45 days after the end of each quarter. Such statements would, inter alia, be used as the basis for Bank review of progress and  - 22 - supervision of costs of DSI force account works. An annual audit would be carried out by auditors of the Undersecretariat for Treasury and Foreign Trade and submitted to the Bank within nine months of the end of each fiscal year. Other Project Features 59. The Government would implement an agreed extension systen in the areas served by the project, upon completion of the irrigation works for each subproject area. This extension system would be based upon the model introduced in 16 provinces under the Agricultural Extension and Applied Research Project (Loan 2405-TU). A second extension and research project is under preparation and would be expected to place special emphasis on raising productivity in irrigated areas. The Government would take measures to ensure adequate maintenance of facilities constructed or rehabilitated under this loan. DSI has adequate maintenance staff, and is fully capable of providing appropriate maintenance with the provision of the equipment financed under the ASAL (para. 47). GDRS has no maintenance staff and is expected to organize farmer cooperatives to maintain the facilities it constructs. Most of the GDRS drainage facilities constructed under this project would be subsurface drains and would not require regular maintenance. However, the collector drains constructed by GDRS would require periodic inspection and occasional maintenance. GDRS operates a special fund for repairs financea through annual budget allocations, and has agreed to use this fund for financing such occasional maintenance work by contractors. Environmental Impact 60. The proposed project is confined to areas which are already developed and served by fully or partially completed irrigation and drainage systems. In the coastal areas, which predominate, the project is likely to have beneficial effects by providing drainage to the waterlogged land in several subproject areas with effluent Woing into the sea. In the case of inland rivers which open into lakes, the salts and other pollutants carried would be inconsequential and there would be no significant detrimental effects. The improved drainage provided under the project would also be expected to reduce mosquito breeding areas and lead to a reduction in the incidence of malaria. Benefits and Risks 61. The proposed program, at full development, would lead to improved agricultural production on 220,000 halY of waterlogged land which would benefit from improved drainage. The project is expected to benefit directly 1/ This estimate and the resulting economic benefits are conservative in that they exclude the additional areas which would progressively become waterlogged without the project. The extent of such area is difficult to predict. The estimated benefitted area is less than the 668,000 ha shown in para. 52 since only part of the total area without adequate drainage becomes waterlogged, through collection of the excess water from other parts of the area.  - 23 - over 97,000 farm families. The net disposable farm incomes of these farmers at full development would average about three to six times higher than without the project. In addition, as a result of the intensification of cropping patterns and practices under the project, the annual demand for seasonal labor would increase; it is estimated that at full development, about 350,000 more people will find temporary employment on farms in the project area during the off-peak farm labor season. Additional non-quantifiable benefits inciude a strengthening of irrigation operations and investment management through provision of staff training and improvements in investment selection criteria, and a reduction in malaria incidence due to the improved drainage. 62. Full development would be achieved in the tenth year of the project (1996). At that time total incremental production would amount to about $107 million per year equivalent in i985 economic prices. Of this, about 70 percent would be derived from increased production of cotton, 15 percent from wheat, and the remainder from fodder and broad beans. No problem is anticipated in the marketing of the additional output. Additional exports of cotton and pulses and reduced imports of wheat are expected to generate about $160 million of foreign exchange earnings/savings (net of about $11 million of incremental imports of fertilizer and other inputs). 63. The economic rate of return for the first time slice of the Core Program is estimated at about 22 percent. Sensitivity analysis indicates that satisfactory returns would be achieved even with substancial increases in investment costs or farm production costs. The benefits are sensitive to variation in assumed yield levels and prices. However, the assumed yield levels have already been achieved in similar areas not affected by waterlogging, and do not take account of expected improvements through improved technology. Changes in international prices are considered more likely to affect the cropping pattern than to affect the economic viability of all suitable crops in the project area. Thus the economic benefits from the proposed investment program are relatively secure. Project Risk; 64. The proposed investment program would entail lower risk than many others in Turkey because it would support tested technical improvements in areas already supported by major irrigation infrastructure. Projected cropping practices and yield levels for the areas to be improved already are achieved in adjacent areas not effected by waterlogging and salinity. Domestic and export market prospects are good and marketing channels are well established. The main risks to achieving project objectives are: (a) Institutional capacity to prepare, evaluate and select priority investments; (b) DSI and GDRS' ability to coordinate overlapping implementation plans and schedules; (c) Availability of funding for the irrigation and drainage subsector and the Core Program; and (d) Availability of adequate funding for 0&M.  -24 - Measures are included to minimize these risks. Consultants' services and training programs financed under the ASAL and this proposed loan are expected to make a major contribution in increasing the capacity of DSI and GDRS to carry out the selection and preparation of subprojects. DSI and GDRS would evaluate the individual subprojects using criteria and methodology agreed with the Bank. The availability of adequate local budgetary support, the absence of which delayed some projects in the past, would also be a risk under the proposed subloan. However, current economic conditions are substantially improved over conditions in the past. The Government's indicative planning figures for the irrigation subsector, in line with Government's policy statements recorded in connection with the ASAL, show agriculture receiving about 10 percent of the public investment budget, with about two-thirds of this amount allocated for irrigation and drainage. Within the irrigation subsector, the Government' s planning figures provide for progressive increases in real terms of the share allocated for drainage and on-farm devclopment. To minimize the risk of a funding shortfall, assurances have been received (see para 55) that the Government would, for each year of the implementation period, give the Bank an opportunity to comment on the proposed allocations for the project prior to finalization of the budget. If a shortfall in annual program funding should occur, selected subprojects in the program could be deferred, thus extending program completion, without jeopardizing the realization of individual project benefits or subsector objectives. Recent progress (para. 46) in assessing and collecting water charges should also be helpful in increasing availability of funds for maintenance. PART V - RECOMMENDATION 65. I am satisfied the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachment February 24, 1986 Washington D. C.  -25- Annex I Page 1 of 6 T A aI L L 3A TM - SOCAL IISICATONS DATA INET n7UWn uzCzct GRours (wsczGru vin as-I MAuzfl MY EW F CZNT EII U) lb 1pGoLb 1b70tLb fRUM CU KIUL fsm MTL a (sums .. mn TOTAL 780.6 710.1 780.. AUCIILSTUUAL 368.7 361.3 36.6. Wif CAPITA C(os) .. .. 1240.0 2144.3 1x0a2.g CmoOGRAMS OF OIL IUIVALDT) 170.0 362.0 370.0 1119.5 4991.3 POPUUU m PDTAL sAtur voniaIouID-uLA (xTuUSaos) 27509.0 3532L.0 47279.0 UU. POPULAION CZ lF TOTAL) 29.7 32.9 13.3 17.5 76.7 POPulAno* PIOJEOTIOUs POPILAIon in TZAR 2000 CHILL) *5.4 STATIONA POPULATION (NILL) ti1.0 POPULATIOE ICISI 1.8 POPULATON 31ls6m En sq. A. 35.2 45.2 0.6 64.7 14D.b PER Sq. KL AGE. LAND 74.6 92.5 126.3 166.9 521.Z POPULATION AGE SMUCIU3 CZ) 0-14 Y5 41.2 41.0 37.6 31.2 11.3 1315 3S 35.2 51.3 57.9 61.5 6b.b 65 AM MOVE 3.5 4.6 4.3 7.2 12. POPULATION GCVE RATE (Z) TOTAL 2.8 2.5 Z.2 1.6 u.6 cUtl 6.1 3.6 4.6 3.7 1.3 OCED 1I1 RATE (PEt 2IB0M) 43.1 37.9 30.6 23.4 13.5 claU DAXt3 * (PER TuOS) 15.8 12.2 8.6 8.9 5.9 GaoS WoCTIOU RATE 2.9 2.6 2.0 1.5 0.9 PAISLY PLANIDIf ACWGT0S. SA.bL (21WS) .. 65.6 .. It 0S31S CZ OF c As I oWsDa) 5.3 Ic 32.0 Id. 38.0 it .. 71.1 InEX OF1000 PDOD. PER CAPITA (1969-71-100) 96.0 100.0 110.0 109.1 107.2 PE CAPITA 509HZ OF CALOeS (a OF EEQ rsUUE ) 109.0 112.0 125.0 131.5 13Z.s pRTINS (case Pa DAN) 84.0 80.0 63.0 92.4 101.0 OP WIOl AflIAL AND PULSE 25.0 23.0 25.0 is 34.5 61.' C1WD CAGES 1-4) DEASE RAUT 2.5 27.5 5.0 1.7 0.4 LI EXPECT. Al KM (TEAmS) 50.5 55.9 63.2 671 15.5 13AM? MORE. KATE CP( rOUS) 177M 138.Z 07.0 53.3 9.9 ACCESS TO SAFE fhfl (1109) TOTAL .. 52.0 78.0 lb 70.2 URa .. 51.0 95.0 Th 89.4 RAL.. 53.0 62.0 7iT 57.0 ACCQSS TO 13011A DISPOSAL CZ OF POPULATION) TOTAL .. .. .. 59.6 UA .. .. 60.1 lb 45.9 EIBML .. ., .. 47.6 POPULATTM PE PHYSICIAN 2800.0 2230.0 1630.0 lb 1070.6 553.2 POP. PEE IURSIIC PERSON 16300.0 Ii 1880.0 1130.0 7 769.5 ab.. pOp. FM HmOSIAL BED TOTAL 600.0 490.0 490.0 It 32B.3 12U.9 1U3lm 340.0 Ilt 270.0 27 O T.0 201.9 143.2 PlEAL S100.0 W 6510.0 7V 5650.0 4 '519.7 775.8 AD130SI16 PM HOSPITAL 0D .. 20.2 22.3 jg 20.u 17.8 -SIgg AEIAE btze or mstst TOL 5.7 Ik 5.9 Ulm .. .. EDL- .. .. . . AVUAGr NO. OF PERSONSIROOH TOTAL 2.4 nt 2.2 UEm 2.0 W 1.9 RRL 2.7 Ik .. naairCAM or GWELLISNS Wr. zuia. LZ-.AL 29.0 '1.1 U .. 78.2 31KM. 2.0 18.0  -26 - Annex I Page 2 of 6 TABLE 3A nRKE - SOCIAL lfDICATORS DATA SMElT TURUY RSmUsci GOU ES (cZTD AERAn S) a sosr SOT EENT ESTIMATC) Ab 196iL 1970! /b IRECUT SOLS INEU DIDUSTRIAL ,sso& 1979/b iTmhlTZ& EUOP ARERT EC0SaRU ADJOSr&ED ZIXROLUGO ArLOS PRnLARY: TOTAL 75.0 110.0 102.0 101.9 101.2 KALE 90.0 124.0 110.0 106.2 102.6 rou Lse6.0 95.0 95.0 97.5 102.4 SECOMDT: TOTL 14.0 27.0 39.0 57.5 87.1 KALZ 20.0 38.0 50.0 64.9 80.3 FINALE 8.0 15.0 Z7.0 50.0 86.1 VOCATIONAL CZ O SEONDART) 17.7 13.7 Z1.9 21.0 15.4 vupn.mc uric PRInMr 46.0 38.0 Z8.0 25.1 16.7 ScoNDART 19.0 28.0 19.0 19.1 11.6 PASSENa CARS/THOUSAND POP 1.7 3.9 11.5 nl 54.2 366.3 RADIO RECIYILSTROUSAND POP 69.1 87.7 93.0 170.7 1093.2 TV RzCEIVERSJTNOUSABD POP 0.0 1.5 105.8 149.3 492.3 NSrAPS (-0A1 2CCRAL INERST) CIEoCXIN PER T8OUSASD POPULATION 51.3 40.6 89.1 A 97.0 320.4 CINDA ANNUAL ATIUnAfCE/CAPlTA 1.1 7.0 1.6 2.7 3.3 TOTAL LABOR FORC (185S) 13782.0 15829.0 20660.0 PZKUB (PERCENT) 40.2 37.0 36.3 36.3 36.2 ACICUi.TUE (PERCENT) 78.5 67.7 53.5 /h 40.8 6.2 139DUS1 (PERoCET) 10.5 12.I 12.8_ 23.3 37.7 PARTICIPATIO RzE (RCENT) TOTAL 50.1 44.8 43.7 43.1 46.0 HKAL 58.7 55.7 54.8 55.1 59.5 FENALE 41.2 33.6 32.2 31.4 32.7 ECh:MC DEPENDENCY RATO 0.9 1.0 1.0 0.9 0.7 3~ DIZRSl PERCENT OF PRIVATE INCOM ICZST sz OF HOUSENOLDS 33.0 Ic 32.8 /d QIRST 2zm 0= EOr SUOIDS 61.0o7r 60.67w .. ..