Turkey - Export Finance Intermediation Loan (EFIL) Project

Report No. PID7536 PID7536 Project Name Turkey-Export Finance Intermediation... Loan (EFIL) Region Europe and Central Asia (ECA) Sector Private and Financial Sector Development Project ID TRPE64807 Borrower Export credit Bank of Turkey ("Turk Eximbank" or "Exim"), guaranteed by the Government of Turkey (G.O.T) Implementing Agency Turk Eximbank Mudafaa cad. No:20 06100- Bakanliklar/ANKARA TURKEY Tel: 0-90-312-417 13 00 Fax: 0-90-312-425 78 96 Environment Category C Date This PID Prepared April 7, 1999 Date Initial PID Prepared January 14, 1999 Projected Appraisal Date April 12, 1999 Projected Board Date June 17, 1999 The proposed loan has two major components Project Component 1 - US$247 million Credit line: The EFIL will provide short and medium term financing for the procurement of input goods, equipment and services by private exporters. The inputs could be procured locally or externally on commercially competitive terms and will, therefore, benefit both direct and indirect exporters. Project Component 2 - US$3 million Technical assistance: The EFIL will provide financing for the procurement of consulting services and training, for the further institutional strengthening of Turk Eximbank. Country and Sector Background The Turkish economy, partly because of the macroeconomic uncertainty exacerbated by the political uncertainty, and partly as a result of the recent crisis in Russia and the Far East, has suffered a negative impact on its export effort. The impact has been felt both in the form of increased competition from the Far East in Turkey's traditional European markets and significant loss of CIS markets. Coupled with this export market turmoil, the global financial market turmoil has led to an international credit squeeze on Turkey, making the mobilization of foreign exchange funds a  difficult proposition for a large number of Turkish exporters. As a result, export growth in 1998 has virtually evaporated, declining from nearly 16% in 1997 to an almost negligible 2% in 1998. This small aggregate increase hides sharp declines or negligible growth in many individual export sectors. Additionally, the future maintenance of the current export levels and any prospective growth are going to be difficult, if not impossible to achieve in the absence of reliable availability of funds. Objectives The proposed EFIL's primary objective is to provide short and medium term working capital and investment finance to private exporting enterprises to assist the Turkish exporting sector hurt by the recent global financial crisis. Description The implementing entity for the EFIL will be the state owned Turk Eximbank, with the Government issuing a guarantee to the World Bank. Turk Eximbank will act in the capacity of a wholesale institution and will on-lend the loan funds through a pre-selected group of a maximum of 4-5 private commercial banks (including one or two development banks). Exim will take the credit risk on the banks selected for participation. The participating banks (PBs) in turn will make sub-loans to private exporting enterprises for procurement of raw materials, equipment and services in order to expand their current export volumes, or in exceptional circumstances to enable them to retain and maintain their current level of exports. The on-lending banks will take the credit risks on the borrowing enterprises. Financing In order to address this perceived economic need, the Government of Turkey (GOT) has asked the Bank to provide both short and medium term export finance to the private sector through an Export Finance Intermediation Loan. It is envisaged that the Bank's activities in this sector of the economy will act as a catalyst in mobilising further multi-lateral and private sector foreign exchange funding. Implementation In order to implement the EFIL, Exim has appointed a senior executive at decision making level as the Program Manager responsible for the implementation of the Bank loan. The Program Manager will be responsible for all day to day interaction with the Bank, the GOT and the PBs regarding matters associated with the EFIL. In addition, Exim has created a small Project Implementation Unit (PIU), drawing staff from its credit and accounting departments. The PIU will be responsible for day to day coordination and implementation, including monitoring of the PBs, maintaining of the project accounts, preparing progress reports, reviewing and verifying procurement rules and environmental compliance by the PBs and sub-borrowers, monitoring of progress and impact performance indicators for the EFIL, both in terms of disbursements as well as export growth. 19. Sustainability The sustainability of this operation is ensured by using Exim, an established - 2 -  export finance institution, as the borrower and implementing agency. Exim's wholesale lending function, already well established today, is likely to become more sophisticated as a result of this project and therefore Exim is well placed to successfully channel the project reflows to additional private sector exporters during as well as beyond the period of project implementation in line with the maturity of the Bank's loan. Turkey's past export growth record, as well as the Bank's own past experience with credit line operations in Turkey, indicate that the private enterprise sector has the technical and managerial ability to successfully tap export opportunities provided they have access to appropriate financing (e.g., in terms of pricing and maturity). Thus, expansion of existing and new export operations that will be financed by the funding to be provided by the proposed EFIL have a very high likelihood of self-sustainability. Lessons learned from past operations in the country/sector The main lessons learned during the last few years from Bank credit line operations in the ECA Region and elsewhere are that the design should be kept as flexible as possible, with a minimum number of restrictions in terms of minimum sub-loan size, maturity, currency denomination, sub-borrower cofinancing requirements, sectoral lending focus, etc., but using sensible financial indicators for the selection of both the participating banks and the sub-borrowers in line with established market practices (e.g., for participating banks, BIS based capital adequacy and other prudential ratios, for sub-borrowers established financial indicators such as debt equity and debt service coverage ratios). Restrictive procurement requirements, unsuitable for private sector borrowers, have proven to be a hindrance to expeditious project implementation, and where more flexible arrangements have been used, including the use of established commercial practice, these factors have ceased to be a bottleneck. As referenced above, another important lesson learned has been that the most successful formula for high quality and expeditious project implementation is to combine the borrower and implementing agency functions in one and the same entity if possible. Environmental Aspects All sub-borrowers would be required to be in compliance with the environmental protection requirements of the GOT. In appraising subprojects, the participating banks will be responsible for ensuring that sub-borrowers are abiding by the rules set by the relevant regulatory agencies regarding their production operations. During subproject implementation, the PBs will review compliance with environmental regulations and requirements in the course of normal subproject supervision. Project Benefits The credit line would support Turkish exporters that currently suffer from a chronic shortage of medium term funds to finance production and export activity. By injecting additional funds into the Turkish banking system, exporters would be able to increase their activity and profitability and explore new export markets. Thus the program will support employment in Turkey. Project Risks -3-  Turk EXIM has not worked with the World Bank before and could have difficulties implementing the project within Bank guidelines, however our preliminary work leads us to believe this risk to be negligible. There is a risk that the participating banks experience financial difficulties or on-lend funds for inviable export operations. However the PBs selected to participate in the credit line have long standing relationships with Turk Eximbank, which monitors their financial performance on a quarterly basis. Contact Point: Lalit Raina, ECSPF The World Bank 1818 H Street N.W. Washington, DC 20433 Telephone No.: (202) 458-2900 Fax No.: (202) 522-0078 The InfoShop The World Bank 1818 H St., NW Washington DC 20433 Telephone: (202) 458-5454 Fax: (202)522-1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. This PID processed the week ending April 9, 1999. - 4-