Turkey - Second Small and Medium Scale Industry Project

 Second Small & Medium Scale Industry Report No: ; Type: Report/Evaluation Memorandum ; Country: Turkey; Region: Europe And Central Asia; Sector: Small Scale Enterprise; Major Sector: Industry; ProjectID: P009057 The Turkey Second Small and Medium Industry Project, supported by Loan 3067-TU for US$204.5 million equivalent, was approved in FY89. The loan was closed in FY97, following a one year extension, and US$2.2 million was cancelled. The Implementation Completion Report (ICR) was prepared by the Europe and Central Asia Regional Office. The Borrower’s contribution is included as Part III. The project objectives were to assist further in the expansion of small and medium scale industries (SMIs), improve their competitiveness, increase their export capacity, and strengthen the financial intermediaries providing credit to the sector. The loan resources were to finance lines of credit to finance SMI investment, and a diversified technical assistance (TA) program. The TA was to strengthen the project appraisal and supervision capabilities of financial intermediaries. Other TA components that directly addressed the SMIs dealt with: (i) improvement of the quality of SMI products for exports; (ii) promotion of industrial standards; and (iii) further development of the statistical database on the SMI sector in Turkey. After a good start, loan disbursement decreased considerably in 1993 as a result of weak market demand, high interest rates and competing Government subsidized credits. In 1994, the loan was restructured to allow financing of permanent working capital, preshipment export finance and leasing. In addition, loan proceeds could be onlent on a single currency basis in US dollars as well as DMs with an adequate premium over their LIBOR rates. Following the restructuring, loan utilization increased substantially and the objectives of the credit component were reached. The technical assistance program was on balance successful, but the quality improvement and the statistics components will require further financial and technical support to be sustainable. The ICR, which is of satisfactory quality, rates the project outcome as satisfactory, achievement of institutional objectives as substantial, sustainability as likely, and Bank and Borrower performance as satisfactory. OED concurs with this evaluation. The lessons derived from this operation focus on project lending in an uncertain macroeconomic environment. Free standing permanent working capital loans with long term maturities can be vital for enterprises in economies where banks are reluctant to provide term lending in an inflationary environment. A credit line can be satisfactory in an inflationary environment for export-oriented enterprises if loans are made in foreign exchange. No audit is planned.