Turkey - Industrial Export Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4630-TU MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON THREE PROPOSED LOANS AMOUNTING TO US$ 300.0 MILLION EQUIVALENT CONSISTING OF A US$ 100 MILLION LOAN TO THE GOVERNMENT OF TURKEY, A LOAN Ol US$ 150 MILLION TO TSKB, AND A LOAN OF US$ 50 MILLION TO SYKB WITH GUARANTEE OF THE REPUBLIC OF TURKEY FOR AN INDUSTRIAL EXPORT DEVMLOPMENT PROJECT December 18, 1987 Industry, Trade and Finance Division Country Department I Europe, Middle East and North Africa Regional Office Fi docwument has a restided disbutio _d may be used by redpient only In the perforaceof thek offidia du0es. Its coatde mty awobwse be dboe whotd WddlBan notbohti  CURREINCY EQUIVALENTS Currency Unit = Turkish Lira (TL) Value of US$ 1976 a' TL 16.05 1977 TL 18.00 1978 TL 24.28 1979 TL 31.08 1980 January TL 70.00 1981 January TL 91.00 1982 January TL 139.60 1983 January TL 191.15 1984 January TL 309.20 1985 January TL 451.40 1986 January TL 586.40 1987 January TL 752.93 1987 November TL 950.00 a' Annual averages through 1979. FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS AIi Administrating Institutions CBT Central Bank of Turkey CMB Capital Market Board DYB Devlet Yatirim Bankasi EIB European Investment Bank ERR Economic Rate of Return Ex-Im Bank Export-Credit Bank of Turkey FE Foreign Exchange FERIS Foreign Exchange Risk Insurance Scheme GDP Gross Domestic Product GNP Gross National Product GO.. Government of Turkey IFRR Internal Financial Rate of Return IGEME Export Promotion Research Center IMF International Monetary Fund KfW Kreditanstalt fur Wiederaufbau PCBs Participating Commercial Banks SEEs State Economic Enterprises SPO State Planning Organization SSIs Small Scale Industries SYKB Sinai Yatirim ve Kredi Bankasi TSKB Turkiye Sinai Kalkinma Bankasi  FOR OMCIL USE ONLY REPUBLIC OF TURKEY INDUSTRIAL EXPORT DEVELOPMENT PROJECT DP PROJECT SUMMARY Borrowers: Turkiye Sinai Kalkinma Bankasi (TSKB), Sinai Yatirit ve Kredi Bankasi (sirB), and the Government of Turkey (GOT). Guarantor: Republic of Turkey (for the loans to TSKB and SYKB). Beneficiar: Private export-oriented industries. Amnout: US$ 300 million equivalent consisting of: (i) US$ 150 million for TSKB; (ii) US$ 50 million for SYKB; and (iii) US$ 100 million for the GOT for on-lending to eligible commercial banks. Terms: The three loans will carry the Bank's standard variable interest rates. TSKB and SYKB will repay the Bank on the basis of composite amortization schedules of sub-loans. The loan to GOT will have a fixed amortization schedule of 17 years including a grace period of 4 years. On-"lendingTerms: The sub-borrower under the three proposed loans will be given an option to borrow either in local or foreign currency. In case of loans denominated in TL, the sub-borrower will borrow on a fixed rate basis at the rates specified under the Foreign Exchange Insurance Scheme (FERIS). The interest rate under FERIS is currently 342 p.a. including a spread of 41 for participating banks. In case of the loans denominated in foreign currency, the participating banks will on-lend at the Bank rate plus a spread of up to 41 p.a. The maturity of the sub-loans would normally not exceed ten years including a maximum grace period of three years. Finanint Plan Private investors $248.5 million Participating domestic banks 50.0 million IBRD 300.0 million Total $598.5 million Economice rate 151 minimum economic rate of return for each Of returu: investment project. Staff Appraisa Report No. 6885-TU RePort December 14, 1987 M8p:l IBRD 19951R This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  \,,k\ It's" q< C-ltk=. :
L le  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON THREE PROPOSED LOANS TO THE GOVERNMENT OF TURKEY. TSKB. AND SYKB FOR Ax INDUSTRIAL EXPORT DEVELOPMENT PROJECT 1. The following report on three proposed loans amounting to US$ 300 million equivalent is submitted for approval. They consist of a loan of JS$ 150 million equivalent to Turkiye Sinai Kalkinma Bankasi (TSKB), a loan of US$ 50 million ecuivalent to Sinai Yatirim ve Kredi Bankasi (SYKB), and a loan of US$ 100 million equivalent to the Government of Turkey (GOT) for on-lending to eligible commercial banks. The loans would help finance an industrial export development project through a network of private and public banks. The three loans would carry the Bank's standard variable interest rate. TSKB and SYKB would repay the Bank on the basis of composite amortization schedules of sub-loans. The loan to GOT would have a fixed amortization schedule of 17 years including a grace period of 4 years. 2. Back8tound. Since 1980, the Government has been implementing a new economic strategy aimed at stabilizing the economy, placing greater reliance on market forces and encouraging the efficient growth of the private sector. The main elements of the new strategy are: (i) maintaining a competitive exchange rate; (ii) import liberalization; (iii) export promotion; (iv) deregulation of the financial system; and (v) public sector reforms with emphasis on price deregulation. The impact on the economy of the above mentioned policy measures has been very positive. Between 1981-86 GDP increased at an average rate of 4.9b p.a. The private sector's response to the Government's program has been impressive. The adoption of a realistic exchange rate and complementary export promotion policies led to a marked increase in manufacturing exports which grew from US$ 1.1 billion in 1980 to US$ 5.3 billion in 1986, an increase of 31% p.a. in real terms. Private sector industrial investment has been growing at a rate of 6% p.a. in real terms since 1983, though it appears to have slowed down in 1987. Inflation as measured by the Wholesale Price Index (WPI) declined from a level of 107% in 1980 to 29.6% in 1986. 3. Turkey's future export growth, however, faces some uncertainties. The increase in industrial production as well as export growth thus far have been achieved mainly through increased capaciiy utilization, with  - 2 - manufacturing investments proceeding at a much slower pace. Turkey's exports are also relatively concentrated, with five countries (West Germany, Italy, Iran, Iraq, and U.S.A.) accounting for about 502 of exports. Furthermo-e, about half of the exports are consumer goods, mainly textiles and leather goods, which are vulnerable to rising protection in major importing countries. To sustain its export drive, Turkey would need to increase industrial capacity, improve the quality of its products, diversify its exports to new markets, provide adequate export finance, and intensify marketing efforts especially in highly competitive markets. Capacity utilization, especially in industries with strong export performance has now reached high levela. Without new investment in these i.dustries Turkey's export drive is likely to falter. 4. Project Objectives. The proposed Project is designed to support Turkey's drive for expanding industrial exports and to improve the policy and institutional framework relevant to export finance. This will be achieved by: (i) providing financial support to private export-oriented projects in key industrial sub-sectors where Turkey has a comparative advantage; (ii) improving the institutional framework for export finance and simplifying export finance procedures; (iii) supporting TSKB, the major private development bank in its financial restructuring and operational diversification program; (iv) improving the credit delivery system for industrial investment by including commercial banks in the Project; (v) intensifying exnort marketing and promotional efforts by strengthening the Export Promotion Center (IGEME) through greater private sector involvement; and (vi) creating a computerized trade and export credit information system at the Ex-Iz Bank of Turkey. 5. Project !!tspStion. The entire amount of the two proposed loans to TSKB and SYKB (US$ 200 million) will be used by these two institutions as lines of credit to finance private export-oriented investments. The credit component (US$ 98.5 million ) under the proposed loan to the Government will be used for the same purpose but will be channelled through TSKB and SYKB, acting as Administrating Institutions (AIs) on behalf of the Government, for use by eligible commercial banks in the provision of credit. The eligibility criteria for participating commercial banks would include: (a) sound financial conditions and results; (b) an unqualified audit by external auditors approved by the Central Bank; and (c) project appraisal capacity or an agreement to build up such a capacity in a reasonable period of time. All sub-projects financed under the Project would be expected to meet the agreed target of exporting at least 20% of incremental production within 3 to 5 years after start-up. All participating banks will be responsible for appraising investment projects in accordance with agreed procedures and the appraisals will include calculation of the internal financial and economic rate of return. A minimum projected economic rate of return of 15% in real terms would be required for all sub-proJects financed under the Project. The appraisal reports will also include a statement on the environmental impact of each sub-project and, when warranted, the appropriate remedial actions. The sub-borrower under the Project will have an option to borrow either in local or foreign currency. In case of th3 loans denominated in local currency the sub-borrower will borrow on a fixed rate with the  exchange risk covered under the Foreign Exchange Risk Insurance Scheme (FERIS). The fixed interest rate under FERIS is reviewed twice a year and is currently 34% including a spread of 4? p.a. for participating banks and a commission of 2% p.a. This rate is positive in real terms (as of October 30, 1987) and is projected to be positive during the life of sub-loans. In the case of the loans denominated in foreign currency, the participating banks will on-lend the funds at the Bank's rate plus a spread of up to 42 p.a. The Government has agreed to consider by June 30, 1988, the merit of introducing a floating interest rate under FERIS. If a floating interest rate is introduced then it would be available to sub-borrowers as an option. 6. The Project includes a technical assistance component of us$ 1.5 million for strengthening the Export Promotion Research Center (IGEME), and assisting the Turk Ex-Im Bank ir setting up a trade and export credit information system, and carrying out a study of the credit delivery system for industrial finance. A breakdown of costs and financing is shown in Schedule A. Amounts and methods of procurement and disbursements, and disbursement schedules are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Turkey are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 6885-TU dated December 14, 1987, is also attached. 7. Rationale for Bank Involvement. Since 1980, through the five SALs, and the first Financial Sector Adjustment Loan (FSAL), the Bank has played a key role in assisting the Government in re-orienting its economy and strengthening the financial sector through policy and institutional reforms. The impact of the policy changes on the manufacturing sector, especially manufactured exports, has been especially impressive during the 1980-86 period. The Project will enable the Bank to assist the Government in further improving the export environme-'t and strengthening institutions engaged in export finance and trade promotion. Since the scarcity of long-term finance at a reasonable cost is a major impediment to private industrial investment, the availability of long-term funds from the Bank, which is the main source of such funding, will be very important in terms of creating additional capacity in efficient export industries. Also, the Bank's involvement is crucial in introducing commercial banks to term finance. The proposed Project will complement the proposed Second FSAL which would focus on issues pertaining to interest rates, money and capital markets, and the health of the financial system as a whole. 8. Agreed Actions. During negotiations, an agreement was reached with the Government that the following actions will be taken prior to the effectiveness of the loans: (i) signing of fund management agreements between GOT and the Administrating Institutions (TSKB and SYKB) on terms and conditions satisfactory to the Bank for the administration of the credit component under the loan to the Government; (ii) signing of a subsidiary loan agreement between GOT and the Turk Ex-Im Bank on terms and conditions satisfactory to the Bank. Agreements were also reached with the Government that: (i) only participating commercial banks which satisfy the agreed eligibility criteria would have access to funds provided under the  -4 - Bank loan, and the initial maximum limit per participating bank would be US$ 15 million; (ii) the maximum aggregate amount per sub-project under the three loans would be US$ 15 million; (iii) the Government would by June 30, 1988, consider the merit of introducing the floating interest rate under FERIS; (iv) the proposed changes in IGEME's management strueture and procedures will be effected by December 31, 1988; and (v) the Government, with the assistance of consultants, will carry out a study of the credit delivery system for industrial finance by December 31, 1988. Agreement was reached with TS'B that it would: (i) ensure that full payment of the second tranche of the capital increase of TL 12 billion takes place by September 30, 1988; (ii) implement the agreed operational restructuring program by December 31, 1988; and (iii) maintain a debt service coverage ratio of at least 1.1:1 and a maximum debt/equity ratio of 10:1 at all times. An agreement was reached with SYKB that it would maintain a debt service coverage ratio of at least 1.1:1 and a maximum debt/equity ratio of 1001 at all times. 9. Benefits and Risks. The principal economic benefits under the proposed Project would be: (i) an increase in export capacity; (i") provision of more efficient financial services to investors through the involvement of commercial banks in the Project; and (iii) better export market information and advisory services to exporters. The minimum economic rate of return of sub-projects financed under the Project would be 152. Based on the experience of previous industrial projects in Turkey, the Project would create about 20,000 new jobs at an investment cost per job of US$ 30,000. The potential project risks would be: (i) unwillingness of the private sector to invest if the investment climate becomes less favorable; (ii) introduction of inappropriate trade policies resulting in reduced incentive to export; and (iii) excessive caution among the commercial banks because of lack of familiarity with project finance and the Bank's procedures. However, given the safeguards, conditions and commitments received from the Government and the Administrating Institutions, the Project risks are acceptable. I 10. Recommendations. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the loans. Barber Conable President Attachments Washington, D.C. December 21, 1987  Schedule A TURKEY INDUSTRIAL EXPORT DEVELOPMENT PROJECT ESTIMATED COST AND FINANCING PLAN ESTIMATED COSTS: Local ForeiRn Total -------(US$ million) Sub-project Investments 298.5 298.5 597.0 Technical Ass is tance - IGEME 0.0 0.5 0.5 - Ex-Im 0.0 1.0 1.0 Total project costs 22 3Qk 21ai FINANCING PLAN: Private investors 248.5 0.0 248.5 Participating banks 50.0 0.0 50.0 IBRD 0.0 300.0 300.0 Total z2L9. 300.0 _98  -6- Schedule B TURKEY INDUSTRIAL EXPORT DEVELOPMENT PROJECT PROCUREMENT METHOD AND) DISBURSEMENIS Procurement Anticipated Method of Procurement Project Element LIB ILS bl Others Total Cost -------------(US$ million)- Sub-project Investments 200 397.0 0 597.0 of which IBRD: 100 198.5 0 298.5 Technical Assistance 0 0 1.5 a/ 1.5 of which IBRD: 0 0 1.5 1.5 Total 200 397.0 1.5 598.5 of which IBRD: 100 198.5 1.5 300.0 8' Consultants to be engaged in accordance with Bank Guidel!.nes on use of consultants. bf International Limited Shopping. DISBURSEMENTS Category Amount % (tJS$ million) Machine and equipment 298.5 100% (of foreign expenditures) 60% (of local expenditures) Consultants 1.5 100% (of foreign expenditures) Estimated Disbursement Schedule Bank Fiscal Year FY88 FY89 FY90 FY91 FY92 ---- (US$ Million) - Annual 5.0 100.7 112.5 61.3 0.5 Cumulative 5.0 105.7 218.2 279.5 300.0 Z 1.7 35.2 72.7 93.2 100.0 0007R  -7- Schedule C TURKEY Industrial Export Development Proiect Timetable of Key Project Processing Events (a) Time taken to prepare: Eight months (b) Prepared by: TSKB, SYKB, and the Goverr.nent of Turkey with Bank assistance. (c) First Bank missicn: October, 1986 (d) Appraisal mission departure: April, 1987 (e) Negotiations: November 17, 1987 (f) Planned Date of Effectiveness: April 30, 1988  -8- Page 1 of 2 STATUS OF ANK GROUP OPERATIONS IN TURKEY A. STATEMENT OF BANK LOANS AND ID CREDITS /a (As of September 30, 1987) Loan Fiscal Amount M millions) /t Number YeIr Borrower eruose Ik % Undiahurse Fifty-seven loans, four 8-Loans, and fourteen credits fully disbursed 3508.90 196.15 1S85-TU 1978 Repubhic of Turkey Northern Forestry 86.00 7.20 1742-TU 1979 Republic of Turkey Grain Storage 79.00 61.10 1844-TU 1980 Republic of Turkey Karakaya Hydropower 120.00 .03 1862-TU 1980 Republic of Turkey Fifth Livestock Development S1.00 8.10 1917-TU 1981 Republic of Turkey Oil Recovery 62.00 8.80 1985-TU 1981 Republic of Turkey Fertilizer Rationalization 110.00 25.30 1998-TU 1981 State Investment State Industrial Enter. Fin. 70.0J 9.50 2093-TU 1982 TSKB Export-Oriented Industries 100.00 1.20 2094-TU 1982 Republic of Turkey Erzurum Rural Development 40.00 20.80 2131-TU 1982 Republic of Turkey Second Fert. Rehabilitation 29.80 3.30 2159-TU 1982 ISKI Istanbul Sewerage 88.10 17.20 2318-TU 1983 TCZB Second Agricultural Credit 150.40 40.10 2322-TU 1983 TEK TEK III 163.00 107.30 2327-TU 1983 TPAO Thrace Gas Exploration 55.20 23.30 2399-TU 1984 Republic of Turkey Industrial Training 36.80 30.00 2400-TU 1984 Republic of Turkey Technical Assistance for SEEs 4.65 1.40 2405-TU 1984 Republic of Turkey Agr.Extension and Research 72.20 48.80 2433-TU 1984 Republic of Turkey IAEE Irrigation 115.30 99.:0 2439-TU 1984 Republic of Turkey Second Highway 186.40 132.80 2535-TU 1985 Republic of Turkey Third Ports 134.50 102.40 2536-TU 1985 Republic of Turkey Industrial Schools 57.70 55.70 2537-TU 198S Republic of Turkey Cukurova Reg. Urban Devt. 9.20 0.30 2585-TU 1985 Republic of Turkey Agric. Sector Adjustment Ln. 300.00 148.30 2586-TU 1985 TEK Fourth TEK Transmission 142.00 130.70 2602-TU 1986 TEK Power System Operations Asst. 140.00 130.40 2647-TU .986 Republic of Turkey Small & Medium-Scale Industry 100.00 58.30 2650-TU 1986 TEK Elbistan 0 and M 10.00 6.5S 2655-TU 1986 Republic of Turkey Kayraktepe Hydropower 200.00 188.60 2663-TU 1986 Republic of Turkey Drainage & On-Farm Develop. 2ss.00 235.00 2714-TU 1987 Republic of Turkey Financial Sector Adj. Loan 300.00 8.00 2739-TU 1987 Republic of Turkey Railways rI 197.00 184.10 2750-TU 1987 Republic of Turkey Sir Hydropower 132.00 115.20 2776-TU 1987 Republic of Turkey Non-Formal Voc. Training 58.50 SS.SO 2818-TU 1987 Republic of Turkey Izmir Water Sup. & Sewerage r/ 184.00 184.00 2819-TU 1987 Republic of Turkey Cukurova Urban Development r/ 120.00 120.00 2856-TU 1987 Republic of Turkey Energy Sector Adjust. loan 32a.o0 220.5 Total 7793.65 196.15 2588.83 of which has been repaid 1185.9Q 24.97 Total Outstanding and Undisbursed 6607.75 171.18 Amount sold 3.55 of which has been repaid Total now held by 8ank and IDA g/ 6607.7s 171.18 Total undisbursed 2588.83 /a The status of the projects listed in Part A is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulat.d to the Executive airectors on April 30 and October 31. /g Net of cancellations. /a Not yet effective. /d Prior to exchange adjustments. October 23. 1987  -9- .SCHgoULE. D Page 2 of 2 STATUIS OF BANK GROUP OPERATIONS rN TURKEY S. STATEMENT OF IFC INVESTMENTS (As of September 30. 1987) Fiscal Amount S Millions Year Obligor Type of Business TL ___ 1964/67/69/ TSKB DFC 60.00 4.77 64.77 72/73/75/76/ 77/80/83 71/72 1970/71,/ Viking I Pulp and Paper 2.50 0.82 82/83 ?70,'So,"? ACS Glass 20.79 t . EF 1971/761 NASAS Aluminum 8.58 1.46 1u.C4 S3/J4 1976/79 As-.1 Celik Steel 12.00 4.00 16.00 1979/80/82/84/85 ISAS Motor Vehicles & Access. 8.85 2.34 l."a 1986 Cam Elyaf Fiber Glass 7.94 - 7,94 1979/811 Trakya Can Glass 33.15 3.23 i6.32 8"/84 1980 MENSA Textiles and Fibers 4.00 - 4..o 1981 K1rklareli Cam Sanayii A.S. Glass Tableware 12.95 -2.SS 1982 M.A.N. Motors Motor Vehicles & Access. 7.89 - 7.a9 1984 Pinar Food and Food Processing 3.90 3.9&9 1985 MANAS Motor Vehicles & Access. 6.47 6.47 1986 Silkar Turizm Yatirim Tourism 5.81 - S.aI ve Isletmelari A.S. 1986 Eska Turizn ve Tourism 2.38 - 2.3k Ticaret A.S. 1987 Guney Sanayl ve Textiles 16.49 - 16.4S Ticaret Isletmeleri A.S. Total Cross Coimitments 213.70 18.30 232.00 Less Cancellations, Terminations. * Exchange Adjustments. Repayments and Sales 128.85 _.i7 134.92 Total Coanitments now held by IFC 84.8S 12.23 97.08 Total Undisbursed 2.16 .2 2.162  h 3 3 R BUL6ARIA . / Sv,h,~~~g ~XIR/ RELISINOP iixNE KIRKLARELI ZONGULDAK. KASTAMONU OPncrlpr sor, ZONGULDOA KKslo4rA . I ( obosk> '9 ISTANBUL SA PAEAL ozi 'SANe KOCAELI KABU |\GREECE ( 5rTEKtRDA ' AE C A . ~okTrdok l ISTANBUL 0)"o AR AN RI CORUM Atheb RN N- ~ 1 - Athens D