Turkey - Third Livestock Development Project

FILE COPY Documlent of The World Bank FOR OFFICIAL USE ONLY Report No.P-1847-TU REPORT 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 THIRD LIVESTOCK DEVELOPMENT PROJECT May 12, 1976 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its motents may not otherwise be disclosed without World Bank authorization.  Currency Unit Turkish Lira (TL) US$ 1 = TL 16.0' TL 1 - US$ 0.0625 TL 1,000 = US$ 62.50 TL 1,000,000 = US$ 62,500 Turkish Fiscal Year March 1 to February 28 ABBREVIATIONS DANB - Directorate of Artificial and Natural Breeding and Record Keeping of MFA DVS - Directorate of Veterinary Services of MFA EDLD - Encouragement and Development Loans Division of TCZB GOT - Government of- Turkey IDPD - Intensive Dairy Production Division of LDP LDP - Directorate for Livestock Development Projects of MFA IIFA - Ministry of Food, Agriculture and Livestock SPO - State Planning Organization TCZB - Agricultural Bank of Turkey TSEK - Milk Corporation 1/ Appraisal Report is based on a rate of exchange of US$1 = TL 15.00; as a result of several recent adjustments the rate stood at US$1 = TL 16.00 as of April 2, 1976  FOft omciAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR A THIRD LIVESTOCK DEVELOPMENT PROJECT. 1. I submit the following Report and Recommendation on a proposed loan to the Republic of Turkey for the equivalent of US$21.5 million to help finance a Third Livestock Development Project. The loan would have a term of 17 years including 5 years of grace, with interest at 8-1/2 percent per annum. Up to the equivalent of US$20.7 million will be relent to the Agricultural Bank of Turkey (TCZB) on the same terms. PART I - THE ECONOMY i/ 2. An economic updating mission visited Turkey in November 1974 and its report (No. 71la-TU) entitled "Current Economic Position and Prospects of Turkey" dated June 9, 1975, was circulated to the Executive Directors on June 17, 1975. The economic situation of Turkey was reviewed anew by a Bank mis- sion in April 1976 but its findings have not yet been analyzed. A country data sheet is attached as Annex I. 3. Despite an uncertain domestic political situation resulting in fre- quent changes of Government since 1971 and, more recently, the international recession, Turkey has maintained an impressive rate of economic growth. GNP grew rapidly in the last decade, averaging an impressive 7 percent annual growth in real terms in the period 1962-72. Industry, power, transport and construction were the sectors contributing most to this growth rate. Due largely to a decrease in agricultural production reflecting poor weather con- ditions, the growth rate dropped to 5.5 percent in 1973, but recovered to 7.4 percent in 1974, and reached an estimated 7.9 percent in 1975, compared to the Third Plan (1973-77) target of an average of 7.9 percent per annum. Despite some difficult problems that the economy faces, this relatively high growth rate underlines the basic vitality of the Turkish economy. The main issues facing the Government, which require the establishment of priorities as well as of corrective measures, are: (a) high rate of inflation; (b) insufficient mobilization of public resources; (c) employment generation problems; (d) deterioration in the balance of payments; and (e) inadequate coordination among Government agencies in project implementation (discussed in para 14 below). 4. The budgetary situation in the last decade was dominated by the relatively rapid growth of public expenditures. Although tax revenues also 1/ This section is the same as that contained in the President's Report (P-1816-TU) for the Agricultural Credit and Agroindustries Project, dated April 14, 1976. 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.  - 2 - grew rapidly, the increase was more than offset by the rise in Government expenditures and transfers. As a result, the overall budget deficit widened and the Treasury borrowed increasingly from the Central Bank. In 1972 and 1973, the Treasury introduced a stricter control of current expenditures and succeeded to some degree in shifting the sources of finance for the budget deficit from the Central Bank to the sale of Government bonds to the public. However, partly due to a shortfall in tax revenues and partly due to increased current expenditures resulting from inflation and the Cyprus operations, the budget deficit rose again in 1974 to TL 7.3 billion (compared to TL 5.4 bil- lion in 1973). Central Bank financing of the Treasury rose by TL 4 billion and became a major factor in monetary expansion at a time when stricter mone- tary controls were needed. The deficit in 1975 was originally estimated at TL 9 billion, but is likely to be significantly larger. 5. Over the years, the State Economic Enterprises (SEEs) have general- ly earned low profits, necessitating an increase in budgetary transfers from public resources to meet their operating and investment needs. A significant portion of the SEEs' deficits are accounted for by the Turkish Railways and the Coal Corporation. Other SEEs have shown either small profits or small losses. During 1974, the prices of several SEE products were raised sub- stantially (ranging from 20% to 167%) to improve their respective financial situations. In addition, railway tariffs were increased by an average 56 per- cent in 1975. The savings performance of the SEEs showed some improvement in 1973 and 1974, and they were able to finance an increased proportion of their investment from their own resources. However, because of delays in implement- ation - resulting from poor managerial and limited technical capabilities - and because of difficulties in the procurement of imported materials, the gains are still below Third Plan targets. Consequently, many SEEs continue to rely on substantial budgetary transfers. The reform of the SEEs--in organization, management, executive and labor skills and pricing policies--remains crucial, especially if Turkish industry is to be prepared for competition from the ECC. Realistically, these basic reforms can only be initiated by a strong and stable Government which commands significant and coherent parliamentary support. 6. The rate of domestic inflation has been high in recent years. The average rate of increase in wholesale prices rose from about 20 percent per annum in 1973 to nearly 30 percent in 1974. Inflationary pressures have been partly fueled by growth in domestic liquidity, which averaged about 25 percent per year during 1970-74. Other contributing factors include increases in agricultural support prices for domestic and export products as well as in minimum wages, and substantial increases in import prices. Measures to re- duce the growth of domestic liquidity, without discouraging investment and growth, are essential to ease inflationary pressures. The trend towards rapid increases in Central Bank financing of the public sector needs to be reexamined. In late 1974, the Government raised interest rates to encourage private savings and long-term lending. The interest rate on medium-term credit was raised from 12 to 14 percent and rates on time deposits up to one year from 4 to 6 percent. The present government of Prime Minister Demirel  regards the restoration of domestic price stability as one of the key prob- lems on which Government policy must be focused. There has in fact been a significant reduction in the rate of inflation in the last year. The whole- sale price index rose by only 11.0 percent in 1975 compared to 30 percent in 1974; and the Government estimates an average rate of inflation (as measured by their GNP deflator) of only around 16 percent in 1975, compared to 27 percent in 1974. 7. Turkey's development strategy places greater emphasis on growth of output through higher labor productivity, than on increased employment. As a result, the labor surplus, including that in agriculture, rose from an esti- mated 1 million in 1962 to 1.6 million in 1973, representing about 10 percent of the labor force. Until 1973, emigration, especially to Germany, partially eased the pressure on employment. Between 1965 and 1973, net emigration totaled about 450,000. The economic slowdown in Europe has, however, consider- ably reduced labor emigration from Turkey, from 136,000 in 1973 to only 20,000 in 1974 and 5,000 in 1975. Nevertheless, the Third Plan continues to emphasize investment in capital-intensive industries and estimates the non-agricultural labor surplus to grow to 300,000 by 1977. With prospects of further emigration of Turkish labor to Europe reduced, at least in the medium-term, unemployment should be a major concern of economic policy. A pilot land reform program is currently underway in Urfa province in the southeast where most of the larger farms are located; expropriation of land was started in November 1974. Speedy implementation of rural development programs would also help to slow migration and ease unemployment in rural and urban areas. In addition, labor intensive production methods need to be emphasized, where appropriate, in the formulation of projects. However, even with these measures, and faster growth than planned in construction and services, unemployment is likely to remain a significant problem. 8. The Third Plan constitutes the first phase of Turkey's long-term strategy for the period 1973-95. The ultimate objective is to raise stand- ards of living in 1995 to those of Italy in 1970, through rapid industraliza- tion and decreasing dependence on external resources. The Plan aims at an- nual growth rates of 8 percent in GDP, 12.7 percent in fixed investment, a marginal national savings ratio of 38 percent (compared with about 18 per- cent in the Second Plan), an annual increase in commodity imports and exports of 9.4 percent and 7.1 percent respectively, which, taken together with pro- jected growth in invisible earnings (mainly workers' remittances), is ex- pected to result in a decline in gross inflows of official external assistance. 9. Prospects for continued high economic growth remain good, although in view of the shortfall of the first two years of the Third Plan, achievement of the 7.9 percent average rate of annual growth during the Plan period seem un- likely. The Plan's projections also seem to be overly optimistic on prospects of an increased savings level and balanced external accounts with reduced levels of external assistance. Experience during the last two years suggests that present efforts to mobilize greater domestic savings to support a rapid growth of investment, especially in the public sector, need to be greatly intensified. The Plan anticipates that two-thirds of the increase in national  savings will come from the public sector, through increases both in surpluses of the SEEs and in tax revenue. Given the past performance of SEEs and delays in implementing a general reform in the SEEs (see paragraph 5 above), the expected rapid growth in their surpluses is not likely to be realized. Given the present domestic political outlook, it will also be most difficult to raise tax revenues to the extent envisaged by the Plan. There is nevertheless scope for increases, if appropriate policies are pursued more vigorously, e.g. im- proving tax administration, widening tax coverage to include agricultural incomes and service incomes, increasing the rate of property taxation and introducing a value added tax. Domestic resource mobilization in the public sector is, in any case, likely to continue to be a significant constraint in the growth of public investment. Besides improved financial performance from the SEEs, increased borrowing abroad as well as increased long-term borrowing from the domestic private sector will be necessary to achieve the ambitious public sector investment targets. As Turkey's development program requires funds in excess of savings that can be mobilized domestically, and these cannot be provided in adequate amounts if foreign finance is limited to foreign exchange cost of high-priority projects, some local cost financing by foreign lenders will be required. 10. The balance of payments projections of the Plan have not taken into account recent developments on the international scene. The sharp increase in the price of petroleum and other imports during 1974 and the prospects of further increases in import prices in the next several years, indicate that foreign exchange needs for financing imports will be much higher than projected. Commodity imports and exports in 1973 were already above the level projected for 1977. Workers' remittances in 1972 were higher than the 1977 target and continued to grow until recently. However, they decreased by 8.0 percent in 1975 as compared to 1974, and their future is uncertain, due to the temporary restriction on further entry of foreign workers into the major labor-importing countries of Europe. On the other hand, recent agreements between Turkey and Libya to send Turkish workers to Libya, and the possibility of similar arrange- ments with other oil-producing countries, should help alleviate the situation. 11. After substantial surpluses in 1972 and 1973, Turkey's overall bal- ance of payments experienced a deficit in 1974, with net reserves declining by about $360 million. This was due partly to a sharp increase in the trade deficit and a slowdown in the growth of workers' remittances, as well as to a reduction in official capital aid inflows. The large trade deficit resulted mainly from an 80 percent increase in the import bill (in particular, petro- leum, wheat, iron and steel), due mainly to higher prices. Imports continued to rise at a rather rapid rate in 1975, and totaled about $4.7 billion during the year. On the other hand, export earnings, which totaled about $1.4 bil- lion in 1975, registered a decline because of the recession in major importing countries, agricultural supply constraints, restrictions on exports to relieve domestic shortages, relatively inflexible export pricing policies, diversion of some goods to Cyprus, and deteriorating terms of trade. As a result, gross reserves declined to about $1.8 billion at the end of 1974, and further to about $1.0 billion at end of December 1975 (the equivalent of about 2.7 months of imports at the present rate). In the medium-term, Turkey's balance of payments is likely to come under significant presure. Such pressure could,  - 5 - however, be partly eased, by lifting quantitative restrictions on certain ex- ports, e.g. cement and olive oil, designed to accommodate domestic supply. The Government should also avoid fixing commodity prices at levels above those prevailing in international markets. Even more important are deliberate measures to contain the growth of imports. Without such measures, and in the absence of a resurgence of growth in Europe, Turkey faces the prospect of continued, perhaps intensified, pressures on its balance of payments and its reserves. In May 1974, the Turkish lira was revalued vis-a-vis the dollar from TL 14.00 per US$ to TL 13.50 per US$, without a change in parity with other currencies. In September 1974, the exchange rate per US$ was readjusted to TL 13.85, and in April 1975, it was restored to the previous parity of TL 14.00. As a result of subsequent small devaluations, the rate per US$ stood at TL 16.00 as of April 2, 1976. 12. At the end of 1974, total external debt outstanding and disbursed was estimated at $3.1 billion, of which all but 3 percent was public or pub- licly guaranteed. The share of the Bank Group was about 11 percent of total debt outstanding and about 8 percent of total debt service in 1974. The aver- age terms of new credits made available to Turkey have been hardening in recent years, and this trend is expected to continue. Debt service as a ratio of exports of goods and non-factor services plus workers' remittances was about 6.5 percent in 1974, compared to 12 percent in 1971. Despite the deterioration in the balance of payments in 1975, the debt service ratio is expected to remain within acceptable limits in the medium term, if proper policies are pursued. In view of the decline in foreign reserves and anti- cipated pressures on its balance of payments in the medium-term, Turkey should continue to exercise considerable care in its external debt management, and its resort to suppliers' credit financing should also be kept within closely monitored limits. Meanwhile, Turkey continues to be creditworthy for Bank financing. PART II - BANK GROUP OPERATIONS IN TURKEY 1/ 13. The 1970 economic stabilization program (see para 11 above) and devaluation of the Turkish lira, which improved the balance of payments, en- abled Bank Group lending, which had previously been intermittent, to be es- tablished on a continuing basis at a high level. As of May 5, 1976, the Bank Group had lent $1,148.2 million to Turkey through 45 lending operations (or 39 projects, since both loans and credits were provided for some pro- jects), of which $1,064.2 million was outstanding. Fifteen of these opera- tions have been in agriculture and rural development (including multi- purpose), sixteen in industry (including DFCs), eight in power and the rest in urban development, transportation, and education. Agriculture and rural development account for 32 percent of the funds lent, industry and DFCs for 35 percent and power for about 25 percent. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1/ This section is the same as that contained in the President's Report (P-1816-TU) for the Agricultural Credit and Agroindustries Project, dated April 14, 1976.  - 6 - 1976 respectively, with notes on the execution of ongoing projects. Imple- mentation of projects has been satisfactory in the private sector, but less so in the public sector where significant delays have resulted from political uncertainty, limited coordination.among agencies, staffing problems and related administrative delays. Disbursements have consequently been slower than expected. To improve this situation, the Government established in August 1975, a ministerial coordinating committee, supported by a new secretariat located in the Ministry of Finance, which is responsible for coordinating all aspects of Bank Group operations. In connection with this new framework, the Government and the Bank initiated in June/July 1975, joint quarterly reviews to identify and resolve key bottlenecks impeding satisfac- tory project implementation. The results so far have been encouraging, considering that these reviews were initiated only a few months ago, and the rate of commitments and disbursements in the last few months has begun to improve. 14. A serious issue continues to beset the Elbistan power project (Loan No. TU-1023). As a condition of effectiveness of the loan, the Government had undertaken to raise electricity tariffs by about 30 percent in order to enable the power authority (TEK) to earn the 8 percent rate of return prescribed by the TEK law and set forth in Loan Agreements with the Bank. Because of serious inflationary pressures faced in 1974-75 and in recognition of the Government's anti-inflationary policies, agreement was subsequently reached on a lesser tariff increase that would enable TEK to earn 6 percent in 1976 as a transitional measure. Since the Government has not yet implemented the requisite measures, the Bank has not been able to declare the Elbistan loan effective. The Bank is in close consultation with the Turkish Government on this issue, as well as with its co-lenders for the Elbistan project. 15. Bank lending to Turkey is mainly directed at supporting Turkish ef- forts to improve: (a) lagging public sector saving, through gradual improve- ment in the SEEs; (b) better income distribution and improvement in the level of living standards, through rural development efforts, better urban planning and increased employment and incomes; and (c) long-term capacity to earn fo- reign exchange, through promotion of industrial and agroindustrial exports and tourism. While the Bank continues to support gradual institutional and structural changes in the sectors in which lending is provided, continued substantial external financial assistance is equally important, in view of the increase in projected capital import requirements and the anticipated medium-term pressures on the balance of payments and on overall fiscal re- sources, mentioned in paragraphs 9-11 above. 16. In support of these objectives, it is proposed to continue to devote the Bank's development efforts to certain key sectors, of which agriculture is the most important. In this sector, emphasis is being put on rural devel- opment, the strengthening of agricultural credit mechanisms and livestock, as provided for under the proposed project. Loan 1248-TU to the Agricultural Bank of Turkey (TCZB) signed May 5 supports these objectives. Industry (in- cluding DFCs) and power, where industrial and power development as well as the gradual strengthening of the SEEs are the key tasks, are also receiving significant support. The Balikesir Newsprint Project scheduled for the con- sideration of the Executive Directors on May 18, furthers this effort. This  - 7 - program will be supplemented by future projects in selected sectors including tourism, urban development, and transport. Until recently, Bank lending was also focused in two geographical areas: (i) the Istanbul region, with em- phasis on urban planning, water supply, power distribution and industrial fi- nance; and (ii) the Cukurova region around Adana on the southern coast, with emphasis on power, irrigation, and fruit and vegetable production. Lately, the focus has been gradually broadened, especially to include the Anatolian plateau and eastern Turkey, in support of efforts to widen the geographical base of development, develop rainfed agriculture, improve the distribution of income, and discourage rapid urban migration and encourage tourism development. The latter will be supported through the proposed tourism infrastructure proj- ect in the south Antalya coastal area which is scheduled for negotiations in mid-May. Other projects under preparation and being processed towards ap- praisal include wastewater disposal in Istanbul, a hydroelectric project, a second DFC operation with the State Investment Bank (DYB), and a second rail- ways project. 17. IFC has invested in the production of nylon yarns, pulp and paper, glass, aluminum and steel pipes. As of March 31, 1976, gross commitments totaled $118.1 million, of which $70.8 milion were still held by IFC. IFC is currently investigating investment opportunities in the industrial sector, including textiles, synthetic fibers and inorganic chemicals. PART III - LIVESTOCK SUBSECTOR Introduction 18. Although agriculture's share in Turkey's GDP has gradually declined since the early sixties, it remains a crucial sector in the economy. In 1974, it contributed about 26 percent of GDP, accounted for 60 percent of commodity export earnings, and employed about 63 percent of the Labor force. Turkish agriculture is predominantly rainfed, but is characterized by signif- icant regional differences. The coastal areas are humid (700-2,000 mm rain- fall per year) and the interior semi-arid (250-400 mm rainfall per year.) Most of the irrigated agricultural development has taken place on the coast where most of the land suitable for irrigation is to be found. The high, semi-arid central Anatolian plateau and eastern highlands, where the majority of the rural poor live, produce mainly cereals under rain-fed conditions, and livestock. 19. Turkey's major crops include cereals (mainly wheat and barley), industrial crops (such as cotton, tobacco, sugar beet and oilseed), and fruit and vegetables, which together account for about two-thirds of the value of agricultural output. Livestock products account for about 30 per- cent; forestry and fishing make minor contributions. Growth of value added in agriculture averaged a compound rate of about 4 percent from 1969 to 1974, as a result of substantial increases in the use of fertilizer, mechanization and irrigation during the Second Plan period. Productivity per unit of land improved gradually but was largely confined to the export crop sector (cotton and sugar beet) and was not matched by comparable increases in per capita food production.  -8- 20. Turkey's Third Plan (1973-77) aims at an average annual growth rate in agriculture of 4.5 percent, based on a strategy favoring investments in projects with short gestation periods and low capital-output ratios, supported by a price policy balanced between providing incentives to the farmers for increasing production, and protection of the consumers. The Plan also aims at strengthened agricultural research, extension and marketing services, and adequate credit allocations. This strategy appears to be appropriate, but negative growth (-1.7 percent) in 1973, as a result of adverse weather conditions, is likely to result in an overall growth rate of only about 3 percent for the Plan period. Livestock Production 21. Turkey has one of the highest livestock populations in the Middle East. Although accurate census figures are not available, the livestock popula- tion is estimated at about 13 million cattle (about 4.5 million of which are dairy cows), 40 million sheep, 19 million goats and 3 million other animals. Partly as a result of a steady conversion of meadows and pastures to cultiva- tion, the size of the herd has remained roughly constant since the mid-1960s. In general, animal productivity is low. Breed quality is generally poor and husbandry and marketing techniques are largely traditional. The present cat- tle, sheep and goat populations are in equilibrium with the available feed supplies coming from about 26 million ha of natural pasturelands and relative- ly small amounts of forage crops and prepared feeds. The pasture-lands are being fully utilized, and pressures from cropping and forestry preclude signif- icant extensions. If national production is to be raised, the carrying capa- city of the natural grassland must be increased through intensification. Also, livestock and cropping need integrating, through more efficient use of fallow lands in the central and western Anatolian region and in the fertile coastal regions. The wider adoption of mixed farming and the use of fallow lands (some 9 million ha) to expand the forage base to intensify fattening and dairy opera- tions in these regions, is a sound strategy given Turkey's national resource base, and is being adopted by the Government. The rate of growth of livestock output (including d-airy products) was only 2.6 percent in the First Five Year Plan period (1963-67), and 3.2 percent during the Second Plan (1968-72). Al- though the Third Plan target is 5 percent per annum, present indications are that a growth of only about 2.5 percent is likely to be achieved. Milk Production 22. Total annual milk production in Turkey is around 4.3 million tons; of this, 58 percent, about 2.5 million tons, is cow's milk, with the rest coming from sheep, goats and buffalos. Annual per capita consumption of milk and milk products is estimated at about 110 liters. 1/ Between 1962 and 1972, the increase in milk production averaged less than 1 percent an- nually, well below the population growth rate. As a consequence, the access of the very rapidly growing urban populations, particularly the poorer ones, to milk and its products has been gradually decreasing. 1/ Higher than Greece's 56 liters/year and lower than Ireland's 218 liters/ year ("World Dairy Economy in Figures", FAO).  - 9- 23. The bulk of Turkey's milk is produced by small and widely scattered small farmers, who produce for themselves and their immediate neighbors. The only modern dairy farms, excluding a few Government farms, are those estab- lished under the Bank's First Livestock (Dairy Production) Project (Credit 236-TU), which is being satisfactorily completed. The productivity of local cows - less than 600 liters of milk per year on average - is only about 20 percent of that of imported cows. The quality of local milk animals is poor and needs considerable upgrading if the productivity of the dairy industry in Turkey is to be significantly improved. The standards of animal housing, veterinary care and management also need to be improved. Therefore, to im- prove milk availability, not only the total number of milk animals needs to be increased, but their quality and productivity of milk output need to be enhanced, through breeding and better management. Milk Marketing 24. Besides the absolute decrease in milk production per capita, the major obstacle to availability of milk and its products in urban centers, is the lack of a well-integrated marketing infrastructure. At present, over 90 percent of all milk (and milk products) is marketed through small-scale, gen- erally uncontrolled peddlers, whose standards of milk handling are low. Milk is frequently dirty and adulterated with water. Milk production is seasonal with peak supplies in spring and summer and minimum in winter. There is gen- erally keen competition for all milk produced, except in isolated localities. A recent 50 percent increase in farmgate prices of milk, due to increased floor prices offered by Government processing plants, has greatly enhanced farmer interest in dairying. Floor prices for milk average around TL 3.5 per liter ($0.23 per liter) and prices paid by intermediaries are frequently higher. The overall prospects for milk producers are good. 25. Government milk plants handle only a minor fraction of total produc- tion and marketing. A national program to construct over 150 Government-owned cooling/collection stations and 40 processing plants is currently underway and by 1978 is expected to provide modern processing and storage capability for about 20 percent of milk marketed. However, because of problems of market or- ganization and transportation, it may take longer before all of these plants are able to run at full capacity. Under the proposed project, milk marketing would be studied, with a view to encouraging improved coordination of pro- duction, cooling/collecting, transportation, and processing, as well as higher quality (Part C of Schedule 2 to the Loan Agreement). Government Policy Towards Dairy Livestock 26. High priority is given to livestock, and particularly to dairy devel- opment, with a strategy aimed at increasing the supply of milk and improving its quality by: (i) providing market outlets through expanding collection and processing facilities; (ii) increasing profitability and quality through the use of price incentives; and (iii) introducing improved technology at the farm level through provision of both better technical services and increased access  - 10 - to credit. The basic constraints in developing dairying are low dairy merit of the national herd, lack of feed supplies, shortage of credit and an absence of technology. Government livestock planning, therefore, emphasizes intensif- ication through improvement in the productivity of natural grasslands and in- tegration of livestock and forage cropping as a complement to cereal and in- dustrial cropping, crossbreeding, provision of technical services, and wider availability of credit for farm modernization and development. Credit for Livestock 27. To meet its objectives, the Government has used TCZB as its major in- strument for transferring substantial financial resources to stimulate agri- cultural growth. TCZB is a State Economic Enterprise (SEE) under the Ministry of Commerce. It is Turkey's largest bank, and its only agricultural bank. It accounts for over 90 percent of the institutional credit to agriculture, which accounted for 18 percent of the increase in total outstanding bank credit be- tween 1963 and 1971. Despite this substantial increase, there has not been sufficient credit made available to farmers for agricultural purposes. Half of Turkey's 3.1 million farm families still do not appear to have access to institutional credit, in particular the small farmers, who have generally been considered uncreditworthy largely because of the lack of clear land title or other traditional loan security. This problem has particularly affected the livestock sub-sector, in which the relative shortage of medium- and long-term funds makes long-term investment difficult for small and medium sized farms. 28. TCZB has some 850 branches, located throughout the country. The im- plementation of TCZB's credit functions under several Bank loans and IDA cred- its are the responsibility of three well-established TCZB operating divisions under the responsibility of TCZB's Secretary General: the Project Evaluation Division, the Supervised Credit Program Division and the Encouragement and Development Loans Division. All three divisions will have responsibility for on-lending credit operations under different components of the Agricultural Credit and Agroindustries Project (Loan 1248-TU). The Encouragement and De- velopment Loans Division is responsible for sub-lending operations under the First and Second Livestock Projects (Credits 236-TU and 330-TU) and will administer credit operations under the proposed Loan. 29. The Government uses specialized governmental institutions, such as TCZB, as a channel for fiscal resources to stimulate the growth of various sectors of the economy, including agriculture, to obtain planned objectives. These institutions benefit from special rediscounting facilities through the Central Bank and access to various sources of Government funds. The Govern- ment has provided TCZB with access to substantial sources of public funds such as, Government advances, Central Bank rediscount facilities, official deposits and social security premiums. Interest rates do not, therefore, play as marked a role in the allocation of resources in Turkey, as they do in other market economies. The rates are fixed as a matter of Government policy, to achieve the desired sector goals established in Turkey's current Development Plan; within the agricultural sector, rates can also vary in accordance with  - 11 - objectives at the sub-sector level. TCZB 's nominal lending rates, as fixed by Government, therefore vary depending on the type of sub-sector activity concerned. The effective cost of its credit to subborrowers, inclusive of the additional fees, commissions and taxes, ranges from 8 to 14.4 percent. The maximum rate fixed by the Government for agricultural activities, such as livestock development, is 11 percent. These rates allow TCZB an average spread of about 4 percent, which is adequate to cover its administrative ex- penses and risks, and is acceptable under present interest rate relationships prevailing in the country. 30. Even with the reduced rate of inflation (see para 6), the present ceiling on interest rates in the sector merits adjustment. The Government recognizes the desirability of ultimately achieving a positive real interest rate structure. However, an abrupt change in the present complex financial and interest rate system could be disruptive. To establish a sound factual and analytical basis for a more responsive sytem of financial mobilization and allocation in Turkey, the Government has initiated, with Bank assistance, a broad study of the financial sector. The Bank is hopeful that as a result of this study it will be possible for the Government to consider such changes in the financial sector as the study might indicate, including adjustments in the interest rate regime. Technical Services for the Livestock Development 31. The technical services for the livestock subsector (including dairy), are provided by several agencies. Important among them is the Directorate of Livestock Development Projects (LDP) of the Ministry of Food, Agriculture and Livestock. Three operating divisions of LDP administer the technical aspects of the First and Second Livestock Projects. The Intensive Dairy Production Division (IDPD) of LDP will continue supervising sub-projects financed under Livestock I, and will be responsible for preparing and approving farm develop- ment plans under the proposed Project. LDP established regional offices in Ankara, Istanbul, Izmir and Adana to execute Livestock I. Under the proposed Project, LDP will open additional offices in Konya, Kayseri and Malatya in east-central Anatolia (Loan Agreement Section 3.01(d)). 32. Prior to 1975, LDP faced considerable difficulty in recruiting staff. As a result, both Livestock I and Livestock II encountered extended delays. Livestock I and the fattening sub-project of Livestock II are now being im- plemented satisfactorily. The village development sub-project of Livestock II is still moving slowly; but a major recruitment effort in the past six months, supported by use of authorized special staff incentives, has now brought actual staff close to full complement, and, as a result, accelerated implementation is hoped for this year. IDPD now employs 30 professional and sub-professional staff who would be largely available to work on the proposed project (except for supervision responsibilities under Livestock I). Assur- ances were given that in Turkey's fiscal year 1976 (beginning March 1) an additional 18 and in 1977 an additional 16 such professional and sub-profes- sional staff would be recruited (Loan Agreement Section 3.01(c)), which would bring total IDPD staff to 64, a level and phasing considered satisfactory for  - 12 - effective implementation of the proposed project. During negotiations, the Government confirmed that the 34 additional positions had already been ap- proved as had budgetary funds for special staff incentives in FY1976. 33. Assurances were also given that three internationally-recruited technical specialists, satisfactory to the Bank, would be on post by January 1, 1977 to assist the Project Manager (Loan Agreement Section 3.01(b)). Two internationally recruited technical specialists are assisting the Project Manager under Livestock I through the end of 1976. Arrangements would be made by the Government to ensure that they will also assist with Livestock III dur- ing their remaining tenure. Agreement was also reached that all veterinary assistance needed for the proposed project would be provided by the Veterinary Services (DVS) of the Ministry of Food, Agriculture and Livestock, as in Livestock I (Loan Agreement Section 3.01(e)). LDP/IDPD would submit a staff training program to the Bank for comment within six months after loan effec- tiveness (Loan Agreement Section 3.07(b)). Annual plans for technical studies in the areas of livestock production and milk marketing would be submitted to the Bank for comment not later than the third quarter of the year prior to the year of implementation of such plans (Loan Agreement Section 3.07(a)). PART IV - THE PROJECT Project History 34. The proposed Project is the Bank's second dairying project in Turkey, based on the experience of the Livestock I Project and designed to consolidate and extend its achievements. It was prepared by staff of IDPD with help from a mission of the FAO/IBRD Cooperative Program which visited Turkey in July/ August 1975. The project was appraised in October/ November 1975. Negotia- tions were held in Washington in April, 1976. The Turkish delegation was headed by Mr. Muammer Akinci, Chief Economic and Financial Counselor of the Turkish Embassy. Project Description and Features 35. The major objectives of the proposed Project are: (i) further de- velopment of dairying infrastructure begun under Livestock I, with particular emphasis on increasing the nucleus herd of genetically superior dairy animals, to produce heifers and breeding bulls for upgrading local herds, and on intro- duction of modern dairy management techniques, strengthening the dairy exten- sion services through further recruitment and training, and financing studies for dairy production and marketing; (ii) introduction of a pilot sub-lending and technical assistance program to assist very small dairy farmers; (iii) expansion of milk production in the increasingly milk-deficient major metro- politan regions of Istanbul, Izmir, Ankara, Adana and Konya, which were also assisted under Livestock I; and (iv) limited geographic extension of the dairy modernization program to the provinces of Balikesir and Denizli in the Izmir  - 13 - region and eastward to the provinces of Kayseri, Malatya, and Adiyaman which have high potential for dairy development and face major milk deficits in their rapidly growing capital cities. 36. The proposed Project consists essentially of: (i) financing by TCZB over a 5 year period, of about 750 dairy farm development plans prepared by IDPD; (ii) training of IDPD technicians in modern dairying both in Turkey and in countries with well-developed dairy industries; (iii) training of farmers through study tours and extension activities; and (iv) provision of technical assistance, studies in dairy production and marketing and studies for prepara- tion of a future intensive dairy development project in additional provinces. The project's features are amplified in the succeeding paragraphs, and other details are provided in the Loan and Project Summary in Annex III. A report entitled "Appraisal of the Third Livestock Development Project" (1027-TU) dated May 10, 1976, is being distributed separately to the Executive Directors. 37. The first objective described in para 35 above--to strengthen the dairy production infrastructure and especially the genetic merit of the national dairy herd--would be pursued through lending to farmers with small and medium-sized dairy enterprises having six to ten cows before development. The medium-sized enterprises are represented by two basic dairy farm models: (a) 200 farmers, whose herds would increase from 6 indigenous milking cows to 12 genetically superior cows over a four-year period; and (b) 250 farmers, whose herds would increase from 10 indigenous milking cows to 40 genetically superior cows over a development period of four years. These 450 farmers would receive the bulk of the 10,000 pure-bred in-calf heifers and all of the 450 pure-bred bulls to be imported under the Project (during the first three years). They would also be expected to supply each year after full develop- ment (beginning with the seventh year for 40-cow farmers and the fifth year for 12-cow farmers),- some 10,000 purebred genetically superior heifers and breeding bulls for upgrading the low-yielding indigenous herds throughout Turkey, on the assumption that none of these higher quality animals would be slaughtered. The second objective stated in para 35, would be supported by sub-lending to 300 very small farmers (per capita income from farming based on an average family size of six is only $90, of which $50 is from dairying) and whose herd would increase from 3 indigenous cows to a genetically superior herd of 5 cows over a development period of three years. 38. Sub-loan financing of farm investment plans would also cover the construction of animal housing and purchase of tractors, farm machinery and equipment, including milking machines. Most of the very small farmers have the necessary barns for the animals and would, in most cases, not need addi- tional barn space; where needed, these would be constructed at minimum cost with family labor and consequently, sub-loans to them would normally not in- clude such building investment. Farmers with initial herds of six cows would generally need some additional barn space, which would be provided wherever possible using family labor to the maximum. -All farmers with initial herds of ten cows would need extra buildings, and they would be expected to provide not less than 75 percent of construction costs, which would be their principal  - 14 - contribution to the cost of such sub-projects. A key aspect of all sub-proj- ects would be the on-farm production of forages, which would usually require provision of farm machinery and other related inputs. Most of the ten-cow- herd farmers would need tractor-mowers, and other farm machinery. Similarly, those with six-cow herds would need a small (12 H.P.) tractor, mower and trailer. For three-cow-herd farmers, only minor mechanization is anticipated. 39. In respect of provision of breeding animals, farmers with initial herds of ten and six cows would have a herd bull, which would be replaced every second or third year. Some of the bulls would be imported and some would be available from herds established under the Livestock I project. As mentioned in para 47 below, the incomes of all participating farmers, in vary- ing degrees, will increase substantially after full development. It is an- ticipated that a significant portion of the dairy farmers' increased income, will be reinvested in their farms. Project Cost and Financing 40. The estimated total cost of the proposed project, based on current input prices and including price contingencies, is about $35 million, of which $21.5 million, or 62 percent, is in foreign exchange. The proposed loan will cover 100 percent of foreign exchange costs. 41. Up to the equivalent in Turkish lira of $20.7 million of the pro- ceeds of the proposed loan would be onlent to TCZB on the same terms as those of the proposed loan, under a subsidiary loan agreement satisfactory to the Bank. Its signing would be a condition of effectiveness. TCZB would provide the equivalent of $6.9 million or 20 percent of Project costs from its own resources, and sub-borrowers would finance the equivalent of $6.3 million or 18 percent of project costs. The Government would take the foreign exchange risk. The remaining proceeds of the proposed loan would finance technical specialists' services ($500,000) and training ($300,000). Sub-Lending Terms and Conditions 42. Sub-lending terms for the different types of dairy farmers would include the following. Farmers would have to meet basic eligibility require- ments of experience in dairying, a minimum herd of three dairy cows, and ac- cess to 0.5 ha. of forage land per milking cow. They would normally finance about 18 percent of their on-farm investment plan, including at least 75 per- cent of the cost of buildings. Requirements for sub-loan security would essentially follow the pattern established for the Corum and Cankiri Rural Development Project (Loan 1130-TU) and the Agricultural Credit and Agroindus- tries Project (Loan 1248-TU) in which TCZB agreed to liberalize in part its traditional requirement of land title so as to encourage wider borrowing by smaller farmers. Thus, sub-loans up to TL 100,000 would be secured by chattel mortgage on livestock and machinery and the guarantee of creditworthy cosign- ers. Sub-loans over TL 100,000 would also require a land title as partial  - 15 - security. Sub-loans would be made for 10-12 years, including 2-4 years of grace (depending on farm size and income generated) and at a rate of interest (including all charges) not less than TCZB's current maximum rate (fixed by Government decree) of 11 percent for loans for livestock development. Sub- loans over the equivalent of $80,000 would be submitted to the Bank for approval. TCZB would place 0.5 percent of the interest received from sub- borrowers into the Special Operational Fund created under Livesock I for financing certain incentive payments, side benefits and special needs of the LDP (farm demonstrations, field days, local training costs, etc.). Project Implementation 43. LDP, through IDPD, would have overall responsibility for the proposed Project. IDPD would carry out the technical functions, and the Encouragement and Development Loans Division (EDLD) of TCZB would handle credit aspects. A farmer's application for a sub-loan would be submitted to a locaL branch of- fice of IDPD or TCZB. After determination of the farmer's creditworthiness and credit limit by TCZB, a dairy development plan would be prepared by an IDPD technician and reviewed by the IDPD regional consultant. Sub-loan proposals under TL 150,000 would be approved by the IDPD regional manager and the TCZB branch manager;- proposals of TL 150,000 or more would be approved by the IDPD project manager in Ankara and forwarded through EDLD to the Board of Directors of TCZB for credit approval. These procedures were successfully followed in Livestock I. The project manager would submit quarterly progress reports to the Bank through TCZB. Procurement and Disbursement 44. Dairy cattle would be procured in 12-15 shipments, averaging about 800 head made up of selected lots of pure bred animals purchased on the basis of not less than three quotations from at least two countries, a procedure followed satisfactorily in Livestock I. Suppliers would insure the animals and be responsible for their safe delivery to project farmers. During nego- tiations, an assurance was given that the border entry of animals to be im- ported would be expedited (Loan Agreement Section 4.04). Tractors, sowing and harvesting equipment and milking machines would be procured under inter- national competitive bidding in accordance with Bank guidelines. In bid com- parisons, domestic manufacturers would receive a margin of preference equal to 15 percent or the actual level of import duty, whichever is less. 45. The proposed loan would be disbursed over 5 years against 100 per- cent of foreign expenditures for livestock, technical specialists, and train- ing, and 100 percent of-foreign expenditures or 100 percent of ex-factory cost of domestic manufacture, for tractors, sowing and harvesting equipment and milking machines, the orders for which local manufacturers might win on the basis of international competitive bidding.  - 16 - Economic Justification 46. The economic rate of return is estimated at 22 percent. Direct economic benefits of the proposed Project at full development would arise from the incremental production of 45 million liters of milk valued at some $10 million per year and around 10,000 quality cattle for dairying and breed- ing worth $3.3 million per year. However, the greatest benefits to the econ- omy would be long-term and indirect and difficult to quantify. These include improvement in the milking quality of the national herd, improved land utili- zation and animal productivity, improved institutional infrastructure for future dairy development, pilot lending to very small dairy farmers, and greater utilization and increased operating efficiency of Government milk plants. 47. The direct beneficiaries would be 750 farm families (about 4,500 persons), who would receive increased and more evenly distributed income, and whose financial rate of return is estimated to range from 17 to 41 percent, with the latter return accruing to the very small farms. Farmers with ini- tial herds of three cows would not be expected to maintain a bull, and provi- sion of facilities for natural service or artificial insemination would be arranged by project technicians. At full development, and as a result of the inputs provided through the sub-loans, the herds of the very small farmers would increase to herds of five genetically superior cows each. The farm family (6 persons) income from milking is expected to increase on average from $300 to $2,940, i.e. an increase in per capita income from milking from about $50 to about $490 per year. The small farmers whose herds would increase from six to twelve genetically superior cows, would have a farm family income from milking of about $4,555, i.e. a per capita income from milking of $760 at full development, compared to their present family income from milking of $900 or $150 per capita. Those whose herds would increase from ten to forty geneti- cally superior animals, and whose present farm family income from milking is about $1,013, would have at full development an income of $20,331, i.e. a per capita income from milking of about $3,400 compared to their present per capita income from milking of $170. A thousand workers and 200 skilled workers would benefit from permanent employment. Indirect beneficiaries would include about 400,000 additional consumers of milk. PART V - LEGAL INSTRUMENTS AND AUTHORITY 48. The draft Loan Agreement between the Republic of Turkey and the Bank, the draft Project Agreement between the Bank and the TCZB, the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, and the text of a Resolution approving the proposed loan are being distributed separately to the Executive Directors. The draft agreements con- form to the normal pattern for loans for livestock dairy development. A special  - 17 - condition of effectiveness is: the submission to the Bank of a satisfactory interagency protocol defining the agreed division of responsibilities between TCZB and LDP for implementing the project (Section 6.01(c)) of the Loan Agree- ment). 49. Features of the draft Loan Agreement of special interest are referred to in paragraphs 25, 32, 33, 35-38, 42, and 44. 50. I am satisfied that the proposed loan would comply with the Arti- cles of Agreement of the Bank. PART VI - RECOMMENDATIONS 51. I recommend that the Executive Directors approve the proposed Loan. Robert S. McNamara President   ANNEX I Page 1 of 6 Pages TABLE 3A TURKEY - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KN2) -------------------------------------------- -------------- rTURKEY REFERENCE COUNTRIES (1910) TOTAL 780.6 MOST RECENT AORIC. 51L3.3 1960 1910 ESTIMATE COLONBIA IRAN ITALY GNP PER CAP ITA (US$) 250.0 450.0 600.0 330.0 600.0 1980.0 POPULATI4N AND VITAL STATISTICS POPULATION (M10-YR. HILLION), 21.5 35.2 3r.9 21.6 29.1 53.6 POPULATION DENSITY PER SQUARE KM. 35.0 45.0 49.0 19.0 18.0 1r8.0 PER SQUARE KM. AGRIC. LAND .. 70.0 VITAL STATISTICS CRUDE BIRTH RATE PER THOUSAND 45.0.b 38.0 39.0 45.0 45.0 16.8 CRUDE OEATH RATE PER THOUSAND 18.0 73 13.0 t 1.0 11.0 17.0 9.1 INFANT MORTALITY RATE (/THOU) 181.0 C145.0 .. 70.0 140.0 29.6 LIFE EXPECTANCY AT BIRTH (YRS) 55.0 as 55-0/ 58.0 59.0 50.0 71.9 GROSS REPRODUCTION RATE 2.9 2.6 .. 3.2 3.4 1.3 POPULATION GROWTH RATE 12) TOTAL 3.0 2.5 2.5 3.2 3.2 0.8 URBAN 5.5 4.5 5.5 5.5j 5.0 0.8 URBAN POPULATION (t OF TOTAL) 32.0 39.0 39.0 60.o 41.0