Turkey - Cukurova Urban Development Project

D_vumAnt of The World Bank FOR OMCIAL USE ONLY Report No. P-4514-TU MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$120 MILLION TO THE REPUBLIC OF TURKEY FOR A CUKUROVA URBAN DEVELOPMENT PROJECT May 4, 1987 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 = 560 Turkish Lira (TL) (December 1985) US$1 _ 750 Turkish Lira (TL) (December 1986) 100 TL = US$0.179 (December 1985) 100 TL = US$0.133 (December 1986) FISCAL YEAR January 1 - December 31 MEASURES AND EQUIVALENTS I hectare = 10,000 square meters - 2.47 acres I meter = 39.37 inches 1 square meter = 10.76 square feet 1 cubic meter = 264 US gallons PRINCIPAL ABBREVUAIONS AND ACRONYMS USED ASKI - Adana Su ve Kanalizasyon Idaresi CMTA - Cukurova Municipalities Training Association CPA - Cukurova Project Account DSF - Development Support Fund DSI - State Hydraulic Works HUDC - Housing and Urban Development Company IB - Iller Bank ICB - International Competitive Bidding ISKI - Istanbul Su ve Kanalizasyon Idaresi LCB - Local Competitive Bidding LGD - Local Government Directorate of MOI MHF - Mass Housing Fund MOI - Ministry of Interior MPWS - Ministry of Public Works and Settlement MFA - Municipality Financing Agreement PCR - Project Completion Report PCU - Project Coordination Unit PPBU - Program Planning and Budgeting Unit PPF - Public Participation Fund PRIMU - Project Review, Implementation, and Monitoring Unit PTT - Posts and Telecommunications Authority SLA - Subsidiary Loan Agreement SPA - Special Provincial Administration SPO - State Planning Organization TEK - Turkish Electricity Authority TIU - Training rmplementation Unit UEA - Urban Expansion Area WSD - Water and Sanitation Department  FOR OFMCIL Us ONLY REPUBLIC OF TURKEY CUKUROVA URBAN DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower : Republic of Turkey Beneficiaries : Municipalities, Housing and Urban Development Companies, Water and Sanitation Departments in Adana, Mersin, Tarsus, Ceyhan and Iskenderun, the Cukurova Municipalities Training Association (CMTA), and Iller Bank. Amount : US$120 million Terms : Standard Onlending Terms : US$1 million to be passed as grant to CMTA. Other loan proceeds to be lent (after deduction of 2.75 percent fee) to Iller Bank for its own use and onlending to other beneficiaries. Agencies receiving the funds would repay full amounts due to the World Bank, and will bear the full cost, including interest and foreign exchange risk. Financing Plan: Local Foreign Total Municipalities 74.7 0.0 74.7 Internal Cash Generation (WSD, HUDC) 11.2 0.0 11.2 Beneficiaries 47.8 0.0 47.8 Iller Bank 104.6 0.0 104.6 Development Support Fund 11.5 0.0 11.5 Government 37.4 9.6 47.0 Electricity and Telecommunications Authorities 42.5 8.0 50.5 IBRD 0.0 120.0 120.0 Total 3z9. 137.- Economic Rate of Return : 302 Staff Appraisal Report : 6657-TU 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.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR A CUKUROVA URBAN DEVELOPMENT PROJECT }. The following report on a proposed loan to the Republic of Turkey of US$120 million is submitted for approval. The proposed loan would carry a standard variable interest rate with a maturity of 17 years including 4 years of grace and would help finance an urban development project. 2. Background. Half of Turkey's population of over 52 million now lives in cities and towns, and the number of urban dwellers is growing at around 4.5 percent per year. Urban areas produce about three quarters of GNP and are the country's main hope of providing employment and incomes to a rapidly increasing work force. Turkey's cities suffer from inadequate urban infrastructure which constrains economic growth and imposes heavy social costs. In the past, urban infrastructure investments have been limited and policies determining design standards, pricing, and cost recovery have not been adequate. Imbalances have resulted from the division of re.,ponsibilities between Central Government agencies, which have undertaken most of the infrastructure investments, and local authorities, which have been responsible primarily for operation and maintenance. Heavy overprogramming and poor coordination among these agencies have only aggravated the problem of adequate infrastructure provision. In its recent policy reforms, the Government of Turkey has taken several initiatives to meet the urban service delivery challenge. It has decentralized responsibi- lities for key municipal services to local governments and stepped up the resource flows to municipalities. 3. Project Objectives. The proposed project 'would help the Government to refine and implement its decentralization strategy through selective interventions in five major cities -- Adana, Mersin, Tarsus, Ceyhan, Iskenderun -- in the Cukurova region of southern Turkey. The Cukurova region was selected for the project because it exemplifies the problems of rapid urban growth and service deficiencies, and because future growth in this important area will be jeopardized if services are not provided more efficiently. The project would assist the five municipalities in directing urban growth and catching up on service deficiencies through financing infrastructure investments. It would also strengthen their ability to plan, implement, operate, and maintain these services, while improving their resource mobilization and financial management. In parallel, the proposed project would take a first step towards reorienting Iller Bank by establishing in it a capability to appraise and supervise municipal investment programs.  - 2 - 4. Project Description. The proposed project would finance part of the 1987-94 segment of the five municipalities' investment programs. The Iller Bank would establish a Project Review, Implementation, and Monitoring Unit (PRIMU) to review the investment programs on an annual basis, assess the municipalities' continiued creditworthiness, appraise subprojects submitted for Iller Bank funding, and monitor implementation. The main components to be supported would include: (a) area-based infrastructure programs which would service unbuilt land with social facilities and infrastructure suitable for residential use in urban expansion areas (UEAs); guide and regularize spontaneous private development on the urban periphery; and provide infrastructure and social facilities there and in the gecekondu (unplanned informal housing) areas. Those components would serve some 176,000 households (880,000 people). UEAs would be developed by Housing and Urban Development Companies (HUDCs) owned by the municipalities. They would aim to recover all costs through the sale of developed land and to generate profits for reinvestment in similar activities. Cost recovery in the other areas would be achieved through fees for planning regularization, betterment levies, and connection charges; (b) citywide infrastructure development programs, which would help overcome deficiencies in the main networks for water, sanitation, drainage, roads, and solid waste management, and link with the area-based programs; and (c) an institutional development program, which would support a restructuring of the municipalities and strengthen their ability to plan and implement investment programs, to operate and maintain existing facilities, and to manage their finances. The institutional strengthening, which started during project preparation, includes: creation of semi-autonomous municipal water and sanitation departments (WSDs); creation of departments to handle housing management and gecekondu upgrading programs, solid waste management, roads and drainage, and training and manpower development; establishment of planning, programming, and budgeting units; and strengthening of the municipalities' finance departments. The project would also support PRIMU, a regional training center for municipal staff, as well as technical assistance for Iller Ba.ak, and computerization of its accounts. The project would provide funds for civil works, equipment, and professional services for design, supervision, and technical assistance. The total cost of the project is estimated at US$467.4 million equivalent, with a foreign exchange component of US$137.6 million equivalent (29 percent). A breakdown of the costs and the financing plan are shown in Schedule A. Bank funds would be onlent by the Government to Iller Bank and by Iller Bank to municipalities. Ultimate borrowers would bear the foreign exchange and interest risks. About US$l million would be passed by Government to the Regional Training Institute on a grant basis. Amounts and methods of procurement and disbursements and the disbursement schedule 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 attached. The Staff Appraisal Report (Number 6657-TU) dated April 17, 1987 is being distributed separately. 5. Rationale for Bank involvement. The project is an integral part of the sector development strategy of supporting Government's decentralization policy and would help in building up the capabilities of municipalities and their subsidiary organizations to manage municipal services efficiently and economically. The project closely follows the Cukurova Region Urban Engineering Loan (2537-TU), which financed its preparation and helped develop proposals for municipal reforms. Reforms which have already been implemented are the modification of laws to simplify regularization of land tenure and  - 3 - planning status and to increase levels of cost recovery. Other reforms which would strengthen municipal organization, modernize financial management, and develop municipal staff, are to be introduced under the project. 6. Agreed Actions. Agreement was secured at negotiations: (a) that ratification of the Loan Agreement and Project Agreements, and conclusion of the Subsidiary Loan Agreement between Government and Iller Bank, and Municipal Financing Agreements between Iller Bank and the project municipalities would be completed as a condition of effectiveness; (b) that financial regulations would be changed by September 30, 1987 to require the project municipalities to introduce the proposed accounting improvements; (c) that recruitment of the principal PRIMU staff including its principal TA staff would be completed by September 30, 1987; (d) that PRIMU would allocate resources and appraise projects according to procedures and criteria agreed with the Bank; (e) that municipalities would appoint consultants for design and supervision to assist with implementation; (f) that municipalities would take measures for cost recovery on area-based investments and WSD operations; (g) that municipalities would formally approve policy statements governing the operations, financing, and cost recovery policies of their HUDCs; and (h) that Goverument would cause finances to be made available for implementation of the social facilities and electricity and telephone components of the area-based infrastructure programs. 7. Justification. The project would help refine and implement the Government's decentralization policy. It would support in Iller Bank the building of capacity to appraise and supervise municipal investment programs. The project would demonstrate a strategy which promises to enable Turkey to handle its urban growth problems in a more cost-effective manner without large net additions to investments allocated for this purpose. Thus, the project municipalities are forecast to draw a smaller share of Iller Bank and Central Government resources earmarked for municipal investments than would be warranted by their share in the urban population. The package is believed to be of sufficient scale and importance to make a substantial impact on urban growth, to retain the close interest of the concerned authorities, and to provide lessons which are representative enough to be applied generally in Turkish municipalities. Benefits of the specific project components would include higher land and rental values in area-based infrastructure programs, improved water and sanitation services, higher land values from drainage and road works, cost savings and increased safety to road users, and environmental and health benefits from improved sanitation, solid waste management, and drainage. More than half of project expenditures would be on components which benefit families with incomes below the urban poverty level. The ERR on components accounting for 53 percent of costs and for which benefits could be quantified would be 30 percent. 8. Risks. (a) Adverse changes in incomes and/or interest rates might threaten the financial viability of project entities. The financial policies to be implemented under the project, together with the conservative nature of the basic financial forecasts, provide some assurance that the project entities will be able to weather considerable "macroeconomic" adversity without adverse effect on the investment program. Moreover, the strengthened programming, planning, and budgeting capabilities in the municipalities, and the institution of PRIMU in the Iller Bank, should enable the municipalities, Iller Bank, and Government to respond flexibly to changed circumstances. (b) The risk that Iller Bank would be unable to retain staff of the caliber needed  -4- to manage PRIMU has bten minimized by having the PRIMU director appointed before negotiations, and also by providing finances to staff PRIMU with specialist personnel on contract terms so as not to be limited by public sector payscales. (c) There is some risk that the cost recovery objectives might not be pursued forcefully. Although political pressures may cause some unevenness in cost recovery performance, the continuous monitoring of municipal greditworthiness and municipal performance by PRIMU would provide a safeguard. In the longer term, project success would depend upon continued Government support for the decentralization strategy: reversal of that policy would signal the need for a thorough review, and possibly a restructuring of the project. 9. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. B. B. Conable President Attachments Washington, D.C. May 4, 1987  -5- REPUBLIC OF TURKEY CUKUROVA URBAN DEVELOPMENT PROJECT SCHEDULE A Project Costs SuMnary: -US$ million---------- MunicivD1 Level Programs. Area-Based Infrastructures * Urban Expansion Areas 47.9 13.5 61.4 Gecekondu Upgrading Areas 62.7 19.0 81.6 Housing Management Areas tS.l 4.6 J2.L Subtotal 125.7 37.0 162.8 Citywide Infrastructures Water and Sanitation 80.6 50.7 131.3 Drainage, Solid Waste & Roads 69.3 2Z7 9s.0 Subtotal 149.9 76.4 226.2 Municipal Finance & Management 3.7 2.7 6.4 Subtotal, Municipal 279.3 116.1 395.4 Regional and National Comgonents Training of Municipal Staff 1.2 0.9 2.1 Iller Bank Technical Assistance and Equipment C.S 2.7 3.2 Project Management 4.8A 1.1 _i9 Subtotal 6*.. 34.7 11.2 Total Baseline Cost 205.8 120.8 406.6 Physical Contingencies 24.5 9.2 33.6 Price Contingencies 19.. 7.6 27.1 Total Project Cost A/ g/ of which taxes are US$36.8 million Financing Plan: Municipalities 74.7 0.0 74.7 Internal Cash Generation (WSO, HUDC) 11.2 0.0 11.2 Beneficiaries 47.8 0.0 47.8 Iller Bank 104.6 0.0 104.6 Development Support Fund 11.5 0.0 11.5 Government 37.4 9.6 47.0 Electricity and Telecomnunications Authorities 42.5 8.0 50.5 IBRO 0.0 120.0 120.0 Total A13Z5 Estimated Disbursements: ----in US$ million-----------------_ Bank Fiscal Year 1988 1989 1990 1991 1992 1993 1994 1995 Annual 14.0 19.5 22.0 22.5 18.5 13.0 8.5 2.0 Cumulative 14.0 33.5 SS.5 78.0 96.5 109.S 118.0 120.0 Economic rate of return is 30 percent on the 53 percent of costs for which benefits could be quantified.  - 6 - REPUBLIC OF TURKEY CUJKUROVA URBAN DEVELOPMENT PROJECT SCHEDULE B PROCUREMENT ARRANGEMENTS (USS millic) | (Estimated) - Number of . rgcu!rect efthod Total Controgts tC CI tCcaq Land N/A I - 27.9 27.9 .___ i. --I Civil Worksi IUrban Expanson Areas I 6 17.0 __ I __ 17.0 (S.4) (S- ) (5.4) Gecekondu Upgrading 45 __ S4.0 54.0 8 Housing Mngt. 1-- 1t7.3) (-) (17-3) Water and Sanitation 49 33.7 | 46.5 7.7 87.9 (10.8) (14.9) (25.7) Other Eng. Services 60 __ 101.2 -- 101.2 1 (32.4) (-- ( (32.4) Subtotal Civil Works 160 50.7 201.7 ?.7 260.1 (16{2_ (64.6)_(--) (80.8) E4Jipment 0 2152 22.9 19.0 4.0 45.9 (12.7) (10.6) (2.20 (25.5) Power. Telecommuni- I I I cations. Social I N/A _97. 97.S Facilities I (--) (- (-) -- | Prof. Services and 34i1 |Tt&hnircal Assist. | o0 i - - 34.1 134.11 t | (--) (__) | ~~(13.6) (13.6) Overheads N/A | (1.76 i 1.7 ! _ _ I I - - ,- - J ~ ) t ( ~ , . t ~ ~~ ~ ~ ~ I . .--)_ |Fellowshtips N N/A -2 0.2 _ _ __ _ _ __ __ M (-I __.1) _ (0. _ TOTAL | 475 6 220.7 | 173.1 1 467.4 (28.9) it(75.2) (15.9) (120.0) 1 _ _ _ _ _ *_ -(8 . ) . I. . I _ .I 3tsburserent Arranoements: (i) 32 percent of total expenditures for c vil works contracts; (ii) 100 percent of foreign expenditures. 100 percent of ex-factory costs of locally manufactured. and 65 percent of expenditures on off-the-shelf purchases of equipmen-. tools, and vehicles; (1it) 40 percent of total expenditures for professional services and technical assistance; and (iv) 100 percent of foreign expenditures on fellowships.  - 7 - REPUBUC OF TURKEY CUKUROVA URBAN DEVELOPMENT PROJECT SCHEDULE C TDIETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare: 2 1/2 years (b) Prepared by: Government and Consultants (c) First IBRD Mission (Identification): March 1984 (d) Appraisal Mission Departure: September 1986 (e) Date of Negotiations: March 30-April 3, 1987 (f) Planned Date of Effectiveness: September 30, 1987 (g) List of Relevant PCRs and PPARs: Istanbul Urban Development (PPAR/PCR No. 4872) Istanbul Water Supply (PPAR/PCR No. 4853)  -8- SCUjIUE D RPUBLIC OF TURKEY Page I of 2 CUKUROVA URBAN DEVELOPMENT PROJECT StATI OF BAM( UW8-kPOPE2AK WM IN Me:Y A. Sf.Ml OF BAkK IDA& AND IM tAEDiS la loa Fiscal Aivut ($ millios) /b Nmber '-ea Brower Bari IDA Uhdiburs Fifty-five loms, four B-Loans, and fDurteen creaics fully aisbursew 3447.35 196.15 1585^-IU 1978 86eptilic of Izicey rwthern Forestry 86.00 25.47 160b-1 1978 Republic of Turkey F:air Steel Stag II 95.00 2.50 1742-IU 1979 Repulic of Turkey Grain Storage 79.00 t4.06 W44-4U 1980 Republic of Turkey ar aiydro 120