Turkey - Agricultural Credit and Agroindustries Project

Report No. 987-TU Appraisal of An Agricultural Credit and Agroindustries Project Turkey April 12,1976 Agricultural Credit and Agroindustries Division Projects Department C" l Europe, Middle East and North Africa FOR OFFICIAL USE ONLY Document of the World Bank 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$1 , Turkish Lira (TL) 14.0 TL 1 = US$ 0.0714 TL 1,000,000 US$ 7,428.57 WEIGHTS AND MEASURES 1 Kilogram (kg) 2.20 pounds 1 metric ton 1,000 kilograms 1 metric ton 0.98 long ton 1 centimeter (cm) 0.39 inch 1 meter (m) 1.09 yards 1 kilometer (km) o 0.62 mile 1 hectare (ha) = l0,000m2 2.47 acres 1 decare = 0.1 ha 0.25 acres 1 square kilometer (km2) = 100 ha = 0.384 square mile 1 liter (1) 0 0.264 gallon ABBREVIATIONS DC-MVA - Directorate of Cooperatives, Ministry of Village Affairs DYB - State Investment Bank HCB - High Control Board MFO - Meat and Fish Organization SCP - Supervised Credit Program SEE - State Economic Enterprise SPO - State Planning Office TCL - Turkish Cargo Lines TCZB - Agricultural Bank of Turkey TMO - Soil Products Office TSF - Turkish Sugar Factories Corporation TSKB - Industrial Development Bank TZD - Farm Supply Organization FISCAL YEAR (TCZB) January 1 - December 31  FOR OFFICIAL USE ONLY APPRAISAL OF AN AGRICULTURAL CREDIT AND AGROINDUSTRIES PROJECT TURKEY Table of Contents jage~ No.. SUMMARY AND CONCLUSIONS ............................. i-ii I. INTRODUCTION ........................................ 1 II. THE AGRICULTURAL SECTOR ............................. 2 A. Agriculture and Land Use ....................... 2 B. Land Ownership ................................. 3 C. Agricultural Policy ............................ 3 D. Agricultural Credit ............................ 4 III. THE AGRICULTURAL BANK OF TURKEY ..................... 4 IV. THE PROJECT ......................................... 10 A. Objectives.10 A. tujcivs...................................................... t B. Project Area ................................... 11 C. Description .................................... 11 D. Cost Estimates ................................. 15 E. Financing ...................................... 16 F. Implementation Schedule ........................ 17 G. Procurement .................................... 17 H. Disbursement ................................... 18 I. Environmental Impact ........................... 19 V. ORGANIZATION AND MANAGEMENT ......................... 19 A. Project Coordination ........................... 19 B. Responsibilities for Implementation .... ........ 20 C. On-Lending Terms and Conditions .... ............ 23 D. Overall Strengthening of TCZB .................. 26 E. Audit .......................................... 27 F. Monitoring and Evaluation ...................... 27 VI. BENEFITS AND JUSTIFICATION .......................... 28 A. Production, Markets and Prices ................. 28 B. Financial Benefits ............................. 30 C. Economic Benefits .............................. 31 VII. RECOMMENDATIONS ....... ........... ................... 33 | 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.  ANNEXES 1. The Agricultural Sector 2. The Agricultural Bank of Turkey (TCZB) Chart WB 9435 3. The Supervised Credit Component (SCP) Chart WB 9434 4. The Agroindustries Component 5. The Cattle Fattening Component 6. Ferryboat 7. Supporting Services and Training Programs 8. Detailed Project Costs and Phasing 9. Projected Statement of Receipts and Disbursements during the life of the Loan 10. Disbursement Schedule 11. Economic Rate of Return Calculations MAP IBRD 11436  SUMMARY AND CONCLITSIONS i. The proposed project, the Bank's first institutional agricultural credit project in Turkey, aims to develop agriculture and auxiliary service by extending credit to a large number of farmers, marketing and agroindustry firms and to strengthen the Agricultural Bank of Turkey (TCZB) as Turkey's prircipal agricultural credit institution. ii. The agricultural sector provides about 26% of the GNP, 60% of total export income, and employs 63% of the total work force. The value added in agriculture grew at an average rate of 4% p.a. (1969-1974) and was thus only slightly higher than the population growth rate (2.5%). The agricultural growth can largely be attributed to the expansion of industrial crops, fruits and vegetables, while grain and livestock production increased at a rather slow pace. Government's main policy instruments to stimulate agricultural production are price policy for farm commodities and inputs, export and import regulations, publicly financed investments and credit policy. Incentives for cereal production improved markedlv in 1974/75 when Government's buying price for wheat nearly doubled and inptut (fertilizer) prices were significantly reduced. iii. The major project components would be: (a) Supervised investment and short-term credit to farmers in most parts of Turkey; (b) Seasonal credits for beef fattening in sugar beet areas; (c) Credits for a variety of agroindustry investments with em- phasis on fruits and vegetables marketing and processing; (d) Credit for purchase of a ferryboat for marketing perishable produce in European countries; (e) Technical services to strengthen TCZB as a whole, and to assist in the execution of the components (a) and (c), with training to be provided by UNDP/FAO and UNDP/UNIDO experts; and (f) Vehicles for TCZB's field staff. iv. The project cost is estimated at US$173 million, of which 36% or US$63 million would be foreign exchange. The proposed Bank loan of US$63 mil- lion would finance the entire foreign exchange component. The balance would be financed by Government and Government operated State Economic Enterprises (US$4.0 million), by TCZB (US$57 million) and by subborrowers (US$49 million). v. Procurement of TCZB vehicles would be carried out by TCZB under international competitive bidding according to IBRD guidelines. The ferry- boat would be procured internationally by Turkish Cargo Lines (TCL) in accordance with specifications and procedures as agreed by TCL, Government,  - ii - TCZB and the Bank. Agroindustry investments exceeding US$2 million would be procured on a turnkey basis in international competitive bidding by the sub- borrowers under supervision of TCZB. Agroindustry investments below US$2 mil- :Lion would be procured by the subborrowers under supervision of TCZB on the basis of local competitive bidding in accordance with local procedures satis- factory to the Bank. Items for on-farm development and cattle fattening would be procured through existing commercial channels. The selection of consulting firms and expatriate experts would be according to Bank guidelines. vi. TCZB would be the borrower and executing agency. TCZB would prepare and implement a program of improvement of its operations, financial planning Emd resources. It would also engage consultants to assist in studying a range of its problems. TCZB and the Extension Service of the Ministry of Agriculture would carry out the Supervised Credit component of the project. The agro- Industries component would be jointly implemented by TCZB and the Project U'nit of the Ministry of Agriculture (PU). The Turkish Sugar Factories Corpo- ration (TSF) would be responsible for the technical implementation of the Cattle Fattening program. Division of responsibilities between the agencies involved would be formalized in interagency protocols. A Project Coordinating Committee composed of senior representatives of the agencies involved, the State Planning Organization and the Ministry of Finance would have coordinating, reviewing and monitoring functions. vii. TCZB would be .he channel for all project funds. Accordiig to the types of investments, interest rates charged to subborrowers would vary between 8.5% and 14.4%. Maximum repayment periods have been determined through project model analyses and would range fron 4 months to 12 years. Subborrowers receiving loDans for agroindustry and ferryboat investments would assume the foreign ex- change risk. viii. The project is expected to contribute significantly to production targets outlined in the Third Five Year Plan. Its agricultural components would contribute to sustain self-sufficiency in grain and beef production. Due to the largely export-oriented agroindustry and transport components, the project would, at full development, generate foreign exchange earnings or savings of about US$65 million annually. Some 20,000 farming families would benefit from the project. It would generate employment opportunities both in rural and urban areas amounting to over 15,000 man years annually during investment. The overall economic rate of return is estimated at 36%. ix. In view of the satisfactory assurances received on all major matters during negotiations, the project is suitable for a Bank loan of US$63 million, fcor a term of 15 years including 5 years of grace.  APPRAISAL OF AN AGRICULTURAL CREDIT AND AGROINDUSTRIES PROJECT TURKEY I. INTRODUCTION 1.01 The Government of Turkey has requested a Bank loan to help finance an agricultural credit project which would include two agroindustries compo- nents. Although previous agricultural projects an Turkey have inclded credit elements, technical agencies have generally taken the lead while the Agricul- tural Bank, TC Ziraat Bankasi (TCZB) had been merely a channel for Bank Group funds. This project stems from the initiative of Government and TCZB itself to have TCZB establish a direct and larger scale borrower relationship with the Bank. Technical agencies would continue to have important project respon- sibilities, but TCZB would coordinate their activities and would for the first time bear the ultimate responsibility for project execution. The project aims to develop agriculture and auxillary services by extending credit to a large number of farmers, marketing and agroindustry firms and to strengthen TCZB as Turkey's principal agricultural credit institution. 1.02 The Bank and IDA have made the following loans and credits for agri- cultural development in Turkey: The Seyhan Irrigation Project (Loan 63-TU, Credit 38-TU, and Loan Credit 143/157-TU); The Intensive Dairy Production Project (Credit 236-TU); The Fresh Fruit and Vegetable Export Project (Credit 257-TU and Loan 762-TU); The Irrigation Rehabilitation and Completion Project (Credit 281-TU); The Second Livestock Development Project (Credit 330-TU); The Ceyhan Aslantas Multipurpose Project (Credit 360-TU and Loan 883-TU); and the Corum-Cankiri Rural Development Project (Loan 1130-TU). 1.03 The proposed project was identified by the State Planning Organiza- tion (SPO), TCZB and the respective technical agencies, with the assistance of Bank supervision missions in May and July 1974 and a Bank preparation mis- sion in October/November 1974. This report is based on the preparation report and on the findings of an appraisal mission in April-May 1975 consisting of Messrs. H. von Oppenfeld, W. Brandes, It. Wilson (Bank), H. Molina (UNIDO/IBRD Cooperative Program) and H. Unkelbach (Consultant). Mr. E. Schertz (Bank) assisted in appraising the agroindustries and ferryboat components and Mr. A. Bose (Bank) assisted in appraising TCZB. Mr. R. Newman (Consultant) contri- buted to the ferryboat appraisal. Ms. P. Fauntleroy assisted in calculating the economic rate of return. Calculations were checked by MIr. S. Khorana.  - 2 - II. THE AGRICULTURAL SECTOR - A. Agriculture and Land Use 2.01 In Turkey, the agricultural sector provides about 26% of the GNP, about 60% of total export income, and employs 63% of the total work force. From 1969 to 1974 the value added in agriculture grew at an average compound rate of about 4% per annum. The growth rates for production of industrial crops, fruits and vegetables have been greater than those for cereals and livestock, with the result that the share of the latter two categories in total agricultural production fell from 78% in 1962 to 72% in 1972. 2.02 The total cultivated area in 1972 was about 25 million ha, of which 9 million ha were being fallowed, mainly as part of the cereal/fallow rota- tion of lower rainfall areas. Turkish agriculture is predominantly rainfed, which leads to marked annual fluctuations in yields in the regions of low to moderate precipitation. 2.03 In 1972, 83% of the sown area was in cereals, of which 85% was in wheat and barley. From 1961 to 1972, the total area sown increased by almost 1 million ha, and the area estimated to be fallowed by just over 1 million ha. This expansion in cultivated area was at the expense of meadows and pastures i.hose area fell from 28.8 million ha in 1961 to 26.1 million ha in 1972, However, conversion from pasture to cultivated land cannot continue at this rate since virtually all arable land is now being cultivated. Miajor crops are wheat (8.5 million ha), barley (2.6 million ha), cotton (0.7 million ha), and sunflower (0.4 million ha). Of the area sown (25 million ha) and the area planted to tree crops, vineyards and vegetables (3.2 million ha), only about 2 million ha are irrigated, which is substantially less than the area that could be economically irrigated. The high proportion of fallow and the relatively low crop yields are due mainly to the shortage of water and partly to inefficient water use. 2.04 Turkey has large livestock resources (13 million cattle, 40 million sheep and 19 million goats) which are mainly concentrated in the eastern and central regions. At present, Government is encouraging the intensification of both livestock and wheat production through price incentives and encourage- ment of improved management practices. The proposed project would significant- ly support these efforts through credit, combined with technical guidance and supervision, for on-farm development and farm inputs. 1/ Further details on the sector are presented in Annex 1.  - 3 - B. Land Ownership- 2.05 The eyisting landholding situation in Turkey is not well documented because title to much of the land has not been registered and cadastral sur- veys are proceeding slowly. According to the 1965 census, the average size of holding was 6.9 ha and most of the land was farmed in small units. However, the 1970 census shows some extremes in the distribution of land ranging from 4,000 units of 1',000 ha or more to 800,000 units of less than 1 ha. Most large farms are in southeastern Turkey. For smaller farms the fragmentation of la,dh1diL--- is a serious constraint. It is a result of inheritance laws under which holdings are divided among the heirs. More than half of the holdings consist of 6 or more parcels. 2.06 Although land reform discussions started as early as 1926, no relevant actions were taken until the land reform law of July 1973 which established upper size limits for farms varying according to climatic and soil conditions. In November 1973, Urfa, a province in southeastern Turkey was selected as a pilot area for land reform implementation. Expropriation of land started in November 1974, but there has been insufficient experience to judge the success of the land reform efforts. C. Agricultural Policy 2.07 The Third Five-Year Plan of Turkey (1973-1977) aims at achieving the targeted agricultural growth rate (4.5% p.a.) through substantial fixed capital investments which would raise the sector's productivity. With this aim in view, the Plan provides for an investment of TL 33 billion (12% of total) in agriculture. Production targets call for annual growth rates of 4.0% for crops and 5.0% for livestock. The highest annual growth rates are 5.5% for legumes and oilseeds among crops and 10.8% for eggs in the livestock subsector. The main development strategy under the Plan is to: (a) induce investments in projects with short gestation periods and low capital-output ratios, (b) allocate credit for investments and inputs consistent with over- all plan objectives, (c) adopt a price policy which leaves incentives for farmers and yet protects consumer interests through selective Government in- tervention, and (d) focus public agricultural services such as research, extension and marketing along the stated priorities. This strategy appears to be appropriate. Achievement of these objectives will however require more rigorous efforts in planning and implementation of price policies. 2.08 Projected Third Plan rates of agricultural growth appear optimistic and will more likely be of the order of 3%. Setbacks due to adverse weather in 1973 and 1974 and resulting in negative rates (-1.6%) will not be suffi- ciently outweighed by an expected bumper crop in 1975 (expected annual growth rate 8.5%). Due to the tight world food situation and the declining foreign exchange reserves, there will be even greater need for increasing agricultural  - 4 - production, mainly through price incentives and investment allocations. The proposed project would help meet general growth targets for agriculture and would support specific subsector programs, especially for fruit, vegetables, cereals and livestock. The increased output would help improve the balance of payments through exports anc import substitution. D. Agricultural Credit 2.09 Government's main policy instruments for allocating resources among sectors and especially to agriculture are price policy for farm commodities and inputs, export and import regulations, publicly-financed investments and credit policy. Over the last two decades, agricultural policy has emphasized increased production and exports, mainly through price support programs, in- vestments in irrigation systems and export incentives. Institutional credit for agriculture, which has accounted for 18% of increases in all outstanding bank credit (1963-1971), is an important credit instrument. As part of its overall policy to stimulate agricultural production, the Government has generally kept interest rates on lending to agriculture below the market equilibrium rate through prescribed ceilings on specified investment cate- gories which TCZB must observe (Annex 2 Table 1). TCZB is also required to ensure that credit is used for priority purposes and is not misused (Annex 2). It has not been possible to evaluate the impact of overall credit allocations _.. the growth in agriculture production activities; it is felt, howe-ver, that the type of institutional lending to date has not been sufficiently oriented to creating productive assets. 2.10 Despite impressive growth of institutional credit for agriculture in current terms, half of the 3.1 million farm families appear to have no access to this source - particularly excluded have been the smaller farmers. The major reasons are that a substantial portion of the increase has been for Government price support programs administered by marketing cooperatives, that coastal and irrigated areas have benefitted more than the Central and Eastern Anatolia drylands, and that many small farmers have not been reached due to basic structural problems of the sector: small volume of production and marketable surplus, insufficient loan security, and other aspects of rural poverty affecting credit worthiness. III. THE AGRICULTURAL BANK OF TURKEY 3.01 TCZB, the largest credit institution in the country, is wholly owned by the Turkish Government. It has a countrywide network of branches, numbering 855 as of May 1975, and a professional, technical and clerical staff of about 18,000. TCZB accounts for more than one-fourth of the total deposits of Turkey's banking system and provides over 90% of the institutional credit to agriculture.  3.02 Founded by law no. 3202, TCZB is a "State Economic Enterprise" (SEE) under the jurisdiction of the Ministry of Commerce, and is governed by a six-member Board of Directors appointed by the Council of Ministers. It specializes in financing the agricultural and fisheries sectors for produc- tion, marketing and other related purposes. It can engage in all types of banking transactions, but the overwhelming thrust of its financing has been short term lending in the form of credits, advances, overdraft facilities, discounting of bills etc. TCZB is thus primarily a commercial, agricultural bank. The bulk of its beneficiaries are farmers, who receive loans either directly or through agricultural credit and marketing cooperatives. 3.03 TCZB's chief executive is its General Manager (who is also Board Chairman), and its day-to-day management is in the hands of four Assistant General Managers (two of them Board Members) and a Secretary General. The latter is in charge of divisions responsible for TCZB's presently small but growing term or investment financing, including agroindustry loans, and a supervised credit program. Units under him also handle four Bank financed projects (Fruits and Vegetables, Livestock I and II and Corum-Cankiri Rural Development) for which TCZB is the channel for on-lending. Operations 3.04 TCZB's loan portfolio, TL 36 billion as of the end of 1974, has grown at the compounded annual rate of 22% over the past decade, with over 40% annual growth registered in 1973 and 1974. H.vwever, Tasl rates of growth, after adjustments for price increases, are considerably less, and for cer- tain activities there has been very little incremental lending in the past years. Net commitments for medium- and long-term loans have been growing at a faster rate than for short-term loans. About 83% of the year-end 1974 out- standing credit was short term, 14% medium-term (1-5 years) and only 3% long- term. Loans through cooperatives dominated the year-end 1974 loan portfolio, whose composition, excluding current accounts and advances, was as follows: loans to marketing cooperatives (61.4%), to credit cooperatives (10.2%), regular agricultural loans (21.1%), loans from special funds (IBRD, AID, Government, 3.9%), supervised credit (2.6%) and development loans (0.4%). The developments in 1973 and 1974 represent a special situation which may, however, continue in some form in future. A major part of credits to market- ing cooperatives (55.5% of total loans outstanding at end of 1974) finance the purchase of certain crops by the cooperatives under the Governmept's agricultural price support scheme. The sharp increase in lending to market- ing cooperatives, under the Government's directive, is explained largely by substantial increases in support prices of most commodities in 1973 and 1974. Accounts 3.05 Like other SEE banks, TCZB's accounts are classified and presented in accordance with standard guidelines prescribed by the Government. Although the accounting principles adopted by the Government are updated from time to time, there are divergences between these principles (which TCZB follows) and internationally accepted accounting principles, e.g. in the evaluation of overdues and provisions for bad and doubtful debts. Thus TCZB's financial statements are not as informative or satisfactory as would be desirable.  - 6 - Moreover, its accounting system is not designed to generate basic management information including particulars of loan portfolio, breakdown by age of loans overdue, extent of impending loan defaults, and timely financial indicators and statements. The usage of automatic data processing equipment owned by TCZB has been very limited. An understanding of TCZB's accounts as well as operations is complicated not only by the inadequate accounting system but also by the vast scale and variety of operations. This is an area which, therefore, calls for specialized study and improvement. Finance 3.06 Resources. In terms of outstanding amounts as of the end of 1974 the resource structure of TCZB was as follows: deposits (49.9%), Central Bank rediscounts (31.7%), paid-in capital (2.3%), profit accruals (1.1%) and other resources (15.4%). Historically, deposits from private and public sources have constituted the most important source of funds, and have grown steadily at about 20% annually in the past decade. However, since 1973, most of TCZB's incremental resources have come from Central Bank rediscounting facilities, to which TCZB has privileged access. Large scale recourse to such rediscounting was needed to provide credits to agricultural marketing cooperatives. During 1975, TCZB was allowed by the Central Bank to borrow on a large scale against reserve requirement deposits of Turkish banks with the Central Bank, as permitted under law; such borrowings increased to almost the ceiling of TL 4 billion by October 1975 as compared to a level of less than TL 700 million in the past few years. In summary, while TCZB has been moderately successful in obtaining deposits, it will continue to be heavily dependent, like other SEEs, on public funds sources, given the controlled interest rate structure and narrowness of the capital market. 3.07 Equity. TCZB's equity base is small and has been dwindling relative to liabilities. TCZB's authorized capital of TL 1.5 billion, as fixed by the TCZB Act, presently constitutes a ceiling. The total equity of TL 2,069 million as of the end of 1974 was comprised of paid-in capital (TL 1,172 million), re- serves (TL 327 million) and accrued net profits (TL 570 million). None of the various types of deposits, nor Central Bank loans against reserves (which are for two-year terms), nor Central Bank rediscounts (whose terms coincide with TCZB's terms and are thus mostly short-term) can be regarded at present as "quasi equity" or equivalent. 3.08 The Government and TCZB are now cognizant of the need to increase TCZB's capital and to thereby improve its equity position relative to debt. Several measures have been or are being taken in this connection. First, the Government has prepared a legislative proposal which would give the Cabinet power to decree increases in the authorized capital of SEEs, of which TCZB is one. Once passed as law, this measure would obviate the need for amending the TCZB Act for purpose of increasing its authorized capital. Sec- ond, in conjunction with the above, the Government has a proposal to increase TCZB's authorized capital by TL 3.5 billion to TL 5 billion. The need for in- creased capital has become acute for most SEEs, so that the Government is giving this matter high priority for legislation and, for TCZB in particular, has indicated its intention to take all action within its powers to obtain iapproval of the proposed authorized capital increase. The Government has  estimated that the necessary Parliamentary action will be taken in 1976, but because of uncertainty inherent in the legislative process, this schedule is tentative. Third, the Government has prepared measures to increase TCZB's paid-in capital to the authorized level of TL 1.5 billion, mainly through the transfer of accrued profits. Fourth, in regard to the need for recurrent action to keep TCZB's capital at levels required for a sound finan- cial structure, the Government has indicated its intention to take necessary steps to provide funds through its annual investment and financial program, including transfer of accrued profits and other means. Fifth, a reduction in TCZB's debt obligations was effected recently, as indicated in paragraph 3.10. 3.09 Conventional debt/equity ratios cannot be applied rigidly to TCZB, a public bank with commercial operations. As a commercial bank, it has been complying with financial requirements set by the Central Bank intended to safeguard its liquidity and solvency. As a general indication, the debt/equity ratio for TCZB as of December 31, 1974 would be about 16:1 after adjustment for liabilities on account of cooperatives assumed by the Central Bank (para- graph 3.10), the equity increase and short-term deposits. 3.10 Portfolio. TCZB's present accounting svstem does not provide the detail required for a comDrehensive evaluation of its loan portfolio. However, a large proportion of its loans outstandino (e.e. TL 5.3 billion or 18.4% of loans outstanding as of December 31, 1974) have been classified as overdue. Bad debt provisions amounted to only TT 9 million at the end of 1974, and write-offs have been insignificant. However, there are mitigating factors. Analysis of 1974 arrearages indicates that over half were owed by cooperatives wqho were required to administer price support policies. In order to deal with a rapidly growing part of the indebtedness of SEFs reDresenting financing undertaken by them under directives from the Government, a Law (No. 1902) was adopted in May 1975. In accordance with the provisions of this law as they apply to TCZB, a part of TCZB's debt to the Central Bank on accotmt of loans to marketing and/credit cooperatives, amounting to TI. 3.9 billion, was con- solidated and assumed by the Treasurv (thus reducing TCZB's debt hy a like amount) recently but with retroactive effect as of December 31, 1974. It is estimated that the bulk of the above debts of the cooperatives are loans in arrears. Thus, the Government's action improved the portfolio significantly, reducing outstanding loans in arrears from over 18% to an estimated 7%-8%. 3.11 Despite the recent reductions in TCZB's overdues, its loan collection performance leaves room for improvement. TCZB's practice has been to continue to make short term credits to farmers (who are considered as being essentially '~trustworthy") regardless of repayment performance, except for loans under the Supervised Credit Program (SCP). This confidence in borrowers is reflected also in insignificant bad debt provisions. Although TCZB is likely to be able to safeguard itself against any possible large scale defaults, the quality of its portfolio and its policies in regard to loan collections raise concern, calling for specialized study and remedial action.  -8- Policies and Procedures 3.12 TCZB operates on the basis of annual credit programs which allocate funds for its various activities and to branch offices, with at least 80% set aside for agriculture as required by law. As of 1975, TCZB charged interest at 10.5% on purely agricultural credits, and at rates ranging between 8% and 14% on other types of loans 1/; the rates are equal to or near the maxima set by the Government. In Turkey's inflationary situation, the demand for credit at these rates usually exceeds available loan funds. TCZB has thus had to ration its funds, mainly by limiting the amounts of short-term production cred:Lt to farmers through a prescribed scale of finance, based on maximum credit amounts available per unit area under individual crops, supplemented by credits in kind of seeds, fertilizers and fuel. These short term credits requiLre verification by agents of the Ministry of Agriculture. 3.13 TCZB adheres to a legal provision ir Turkey specifying that loans in excess of TL 150,000 (USS10,714) must be approved by TCZB's Board of Directors. Below that level, there is a further set of prescribed limits down the organization. The limit of TL 150,000 was established in the 1950's, and has thus become too low to allow for meaningful delegation of authority in as large and complex an organization as TCZB. 3.14 In considering TCZB's capability to implement the proposed project, attention was focussed on divisions which would handle the present project, viZ Encouragemennt and 'levelopient Division, Project Evaluation Division and the SCP Division, all of which report to the Secretary General. The Project Evaluation Division is responsible for technical and financial appraisal of loans in excess of specified limits, including supervised credits and term loans for agro-industries and farm development. The Encouragement and Develop- ment Division carries out overall evaluation of such proposals except SCP loans. The Project Evaluation Division, and to a lesser extent the Encouragement and Development Division, have a nucleus of qualified professional staff. The appraisals prepared between these two Divisions apply many acceptable tech- niques, but could be improved. The size of investment loans is frequently determined by the value of collateral, and loan repayment terms are often set without reference to prospective earnings or repayment capacities of borrowers. In addition to the above, another division of TCZB which will be involved in the project, viz the Research Division, carries out a range of studies and in- vestigatfons as directed by the managemert. 3.15 Under the supervised credit program (SCP), investment and production loans are granted to carefully selected farmers, who are required to operate under the guidance of TCZB's agricultural technicians. The SCP is a well con- ceived program with satisfactory standards both in preparation of farm plans and suDervision of implementation. The well managed SCP Division is supported by a field staff of competent agricultural engineers and technicians now num- bering 230. The SCP, initiated in 1964, now covers 43 of Turkey's 67 provinces, 1/ The actual rates paid by borrowers are different from these rates, re- flecting commission charged by TCZB, transfer taxes on interest and certain rebates by Government.  - 9 - but has only been able to benefit about 35,000 farmers so far, because of limited resources, selective criteria (land size limits and past loan repayment record) and high staff inputs. Summarv Evaluation 3.16 TCZB is the major agricultural financing institution in Turkey, with a long history and a large widespread organization. Its antiquity, status and size endow it with both strengths and weaknesses. TCZB's ex- perience in agricultural financing is unique, yet it has unfulfilled po- tential as a developmental organization commensurate with its size and powers. TCZB has certain characteristics of most large public organiza- tions: it has to be socially responsible, and accountable to the State; at the same time it is constrained by aspects of legislative and Govern- mental procedures, and by calls made on it to implement programs considered by the Government to be in the public interest. Generalizations about the management of this large organization are apt to be misleading, but it is clear that, overall, the management is conservative. Yet over the decades, the TCZB management has had the image of being an independent force, albeit through various links with the country's political and economic leaders. 3.17 While TCZB's strong points are recognized, the analysis made during appraisal, as presented above, identifies the following characteristics or shortcomings for which remedial action is indicated: (i) The necessity for overall strengthening of management and or- ganization is apparent from the present knowledge of policies, procedures and practices and, generally. from the unexploited potential for TCZB in promoting agricultural development. (ii) TCZB's financial structure has not been satisfactory, mainly because of a relatively small equity base. However, both the Government and TCZB have now recognized a real need for im- proving TCZB's equity position. Concrete steps in this di- rection have already been taken (paragraph 3.08) and further action would lie with the legislature, which the Government intends to pursue vigorously. (iii) TCZB's potentially serious financial situation is signified by a high proportion of overdue loans against very small provision; this situation has been mitigated by the Treas- ury's recent assumption of part of cooperative debts. Never- theless, further study and action are needed in this field, to gradually achieve a stronger portfolio in the long term. (iv) TCZB's accounting system has shortcomings, It does not generate adequate management information. Accounting principles followed are at variance with generally ac- cepted accounting principles.  - 10 - 3.18 The divisions indicated in para 3.14 have achieved a competent level of operation. They are handling satisfactorily a number of agricultural deve- lopment financing programs, but there remains scope for further improvement. The core of their professional staff is of adequate quality, although there is need for training to improve particular skills. The quality of appraisals needs to be improved, especially in regard to assessment of borrowers' credit- worthiness, financial analysis and economic evaluation. Some of TCZB's lending policies such as loan maturities and eligibility criteria (especially colla- teral requirements) need to be revised. 3.19 In the light of the foregoing, TCZB has been evaluated from two angles. Firstly, TCZB is judged to have the capacity to carry out this proj- ect, with certain technical assistance (para 4.13) and adjustments in or- ganization, policies and procedures associated with the project, as indicated in subsequent parts of the Report. Secondly, from the long-term perspective of TCZB as a whole, there are several areas of shortcomings which needed to be properly studied and then remedied in stages. Both the Government and TCZB are interested in carrying out such a long-term program, intended to improve TCZB's competence as a development institution. For a start, TCZB's management would be responsible for studying, proposing and carrying out a program for improvement of its operations and finances (para 5.21). Concur- rently, by carrying out the specific project on-lending responsibilities for high priority investments, TCZB is expected to grow in strength. These two paths are expected to lead to a vigorous and ultimately self-sustaining ef- fort for a long-ter= strenothening of TCZB. IV. THE PROJECT A. Objectives 4.01 The project would help finance part of TCZB's agricultural invest- ment program over three years. Its principal objectives are: (a) to raise farm production and incomes through supervised credit and cattle fattening loans to small- and medium-scale farmers; (b) to improve domestic and export marketing through loans for aRroindustrv and transport investments; (c) to strengthen, through Government and TCZB action, staff training and technical assistance, the institutional capabil- ities of TCZB, Turkey's major source and channel for institu-- tional farm credit; and other project agencies; (d) in general to help reduce some of the interpersonal, inter- regional and intersectoral ircome disparities by expanded credit onerations to reach target group subborrowers in less developed regions.  - 11 - The project outlined below contains the specific means to achieve these ob- jectives and would, thus, help alleviate some constraints to agricultural development and contribute to Turkey's food production, export and income distribution goals. B. Project Area 4.02 Components financed under the project would be located in many parts of Turkey, including less developed areas of Central and Eastern Turkey. TCZB's supervised credit program extends over 43 of Turkey's 67 provinces and has been authorized for 7 additional provinces (Map 11436). Further expan- sion depends upon availability of qualified staff and would be enhanced through training under the project (para. 4.13). Livestock fattening of Turkish Sugar Factories Corporation (TSF) is widely distributed through pro- duction areas of 17 sugar beet factories in all regions including tile areas of lower rural income in Eastern Turkey. Although agroindustries investors tend to locate their plants primarily in the fruit belt and irrigated areas along the Marmara. Aegean and Mediterranean coast, there are good prospects for agroindustries (fruit juice production or fruit drying, olive or sunflower oil extraction, feed mills and slaughterhouses) in Central and Eastern Turkey. C. Description Supervised Credit Program (SCP) 4.03 The SCP combines certain technical, especially farm management services with investment credit, supplemented by short-term loans up to five years. Based on farm business analysis, an agricultural engineer or techni- cian works with the farmer to prepare an integrated farm development plan which supports the loan application. Upon loan approval, the engineer/ technician continues to advise the farmer and supervise progress of farm development. Release of subsequent loan tranches and short-term loans is subject to satisfactory performance, actual performance being compared with farm plan projections. Poor performers are eventually excluded, while the remaining participants are "graduated" upon completion of the development program, normally after three to five years. Thereafter they have access to TCZB's regular credit facilities. An evaluation of 2,000 graduated farmers' performance showed that 90% of planned investments were realized and achieved substantially increased farm output and income due largely to technical guid- ance, credit and supervision. Further details about SCP are in Annex 3. 4.04 On-farm investments supported by SCP fall into five broad catego- ries (a) farm equipment, (b) purchase of livestock, (c) improvement of land and buildings, (d) establishment of new farm enterprises and (e) working capital financed by supplementary short-term loans. Selection of specific crop or livestock investments depends on farm resources, marketing potential and farmer preference in accordance with national priorities. Although the program has stimulated demand for improved technology and increased partici- pant incomes, its overall impact has been limited. Particioants have not  - 12 - exceeded 35,000 or 1% of Turkish farmers and have included more medium- than small-scale farmers. Principal constraints have been loan funds, qualified supervisors (engineers/technicians), staff mobility and, in some regions. the availability of farmers without overdues to TCZB. 4.05 Subloans proposed under the project would be for investments similar to those supported by previous SCP loans. This would reach approximately 4,000 new farmers over three years, with a special focus on small farmers (paira 5.09). While farm mechanization in general may have an adverse impact on rural employment in Turkey, the proposed investments are expected to serve primarily as machinerv replacements that now form part of existing farming systems, and be limited to basic power mechanization rather than mechanization of extensive labor cultivation or harvesting practices. The proposed mechaniza- tion investments would comprise no more than 5% of the projected SCP program, or 1% of total project costs. Staff competence would be upgraded through special training in farm management and loan appraisal under a proposed new UNEIP/FAO technical assistance program. Staff mobility to reach farmers would be improved through provision of vehicles under the project (para 4.13). 4.06 To broaden participation especially among smaller farmers and in less developed regions, the project would introduce a new short-term SCP lending program. Commencing in two to three provinces (year 1) this program would gradually expand, in line with staff capabilities, to cover 10 to 12 provinces by year three. Subloans would benefit about 14,400 farmers in three years. In contrast to conventional SCP investment loans (para 4.04), which require detailed analyses and projections, these short-term production loans would be based on standard loan amounts per crop and/or livestock unit, as determined (and annually reviewed) by SCP management and under supervision of village agricultural extension agents (para 5.09). Agroindustries 4.07 Subloans would be for four main categories of agroindustries: (a) handling facilities for perishable commodities (fruit, vegetables, eggs) to improve their quality and presentation on domestic and export markets; (b) cold stores generally associated with such handling facilities to help extend the marketing season of the respective commodities; (c) food processing facilities (fruit drying, juice concentration, canning, freezing, oil extrac- tion, slaughtering by-product utilization facilities) to improve existing and establish new outlets for farm commodities, and (d) manufacturing of simple farm implements, feed mills for local and imported ingredients and similar facilities to help increase availability of farm implements and inputs. Private sector firms, groups of farmers or small investors (cooperatives or firms) and, to a lesser extent, public sector firms (SEEs) would be eligible for subloans. Further details on the agroindustry component are in Annex 4. Cattle Fattening of Turkive Seker Fabrikalari (TSF) 4.08 Cattle fattening by sugar beet growers under contract with TSF commenced in 1969. Farmers participating in the program buy feeder cattle individually by using credits they receive from TSF. The fattening contracts specify that groups of farmers, who generally utilize TSF by-products (beet  - 13 - pulp and molasses) along with other feed, will (a) submit to guidance and supervision of TSP technicians and veterinarians, (b) receive up to 70% of their estimated cash operating cost as short-term credit, (c) agree on a joint liability system, (d) market the finished cattle through the Meat and Fish Organization (MFO) at agreed prices and (e) have loan repayments deducted from their sales revenues by TSF which receives payments from MFO. The rela- tively small scale of operations, averaging 21 head per fattening unit, has made this program eminently suitable for small farmers. Daily weight gains obtained by 4,500 participating farmers under the program have averaged approximately 0.8 kg per head. Analysis of farmers' returns has shown good results, and further evidence of their profitability is reflected by the keen demand for these loans. Limitation of loan funds has been the principal con- straint to further expansion of the program. 4.09 TCZB would channel project loan funds through TSF for distribution of subloans to individual farmers. Subloans would cover similar short-term investments, mainly cattle and feed purchases, as under the ongoing fatten- ing program of TSF. To broaden participation among small farmers, TSF has agreed to channel at least half of the subloans to farmers with no more than 20 head per cattle unit. Subloans would thus benefit about 8,100 additional farmers over three years. Close supervision and marketing agreements would minimize problems of subloan recovery enabling TSF to assume the risk of non-repayment and to guarantee full repayment for project loans to TCZB which would establish a special revolving account. The resources of this account would be used for sustaining repeater operations in subsequent years (para 5.10 and Annex 5). Roll-on/Roll-off Ferryship 4.10 Loan/Credit 762/257 TU contains provisions to finance two new ferryships for establishing roll-on/roll-off (Ro/Ro) service between Turkish and Italian or Yugoslav ports for over-the-road trucks and semi-trailers. The service was to be primarily for transporting perishable produce for mar- keting in European countries and carry general cargo during off-season and on the return trip. The Loan Agreement provided that the ferryships were to be procured only after the Bank and the Association had approved the subborrower and its management and the overseas arrangements. 4.11 No potential subborrower had shown an active interest in the ferryship subloan until 1974 when the PU, assisted by Turkish Cargo Lines (TCL), an SEE, prepared a feasibility study for the ferryship component which was updated with a supplement in 1975. After thorough analysis by Bank staff assisted by specialized consultants, TCL was found to be a suitable subbor- rower and the proposed ferryboat investments were found technically feasible and financially viable and would provide Turkey with an alternative route for perishable produce to European markets. However, instead of investing in new ferryships, the studies proposed to purchase used or resale Ro/Ro type ferry- ships which could carry both over-the-road trailers and special Ro/Ro ship trailers which expedite loading and unloading of containers and reduce turn- around time in port. Two such ferryships with ancillary equipment are esti- mated to cost about US$17 million. US$6.9 million would be financed from  - 14 - Loan/Credit 762/257 plus US$1.6 million from Government and TCL for one of two vessels required. For the second vessel, which is essential to establish an effective fruit and vegetable ocean shipping system, this project would provide US$6.9 million while TCL would provide the balance (US$1.9 million equivalent). During negotiations, assurances were obtained that Government would make specific financial resources available to TCL to complete the financing plan for the ferryboat. 4.12 It was considered important to arrange for the simultaneous procurement of the two similar vessels (sister ships) as required to establish regular and frequent service. Accordingly, the Bank and the Association concurred in TCL proceeding with the various steps involved in the procurement of two Ro/Ro ferryboats, subject to the conditions and procurement procedures specified in Annex 6. 4.13 Technical assistance would be provided to TCZB, and to PU as follows: (a) Assistance to TCZB for institutional improvement. An ex- perienced firm of consultants meeting international standards would be employed to assist TCZB in studying inter alia its lending, accounting system and finances, and in introducing reforms (para 5.22). (b) Training SCP staff in farm management, loan .apraisal and supervision and in monitoring the impact of SCP loans. A proposed UNDP/FAO Training Project would provide farm manage- ment and farm credit specialists experienced in training (para 5.09). 1/ (c) Assisting PU in training small teams that would provide engineering, marketing and financial planning services to agroindustries subborrowers. A proposed UNDP/UNIDO Training Project would provide engineering, financial and marketing experts experienced in training (para 5.06). 1/ 1/ The UNDP Representative in Ankara has indicated availability of UNDP funds for two projects for training project staff. Under the proposals now being formulated, UNDP/FAO and UNDP/UNIDO experts would carry out the tasks listed in (b) and (c), respectively. Because these UNDP projects have not been finalized, Bank financing of these items is provisionally provided under the project. If the proposed UNDP proj- ects are eventually approved, the designated Bank funds would be can- celled. If the UNDP project for task (c) is not approved, tasks (c) and (d) would be combined and performed by the same consulting firm.  - 15 - (d) Assisting PU and TCZB in evaluating feasibility studies for agroindustries subprojects and subloan applications, writing functional specifications, evaluating suppliers' bids, and supervising implementation. An agroindustrial engineering consulting firm meeting international standards would be employed by TCZB. The firm would provide services to PU, TCZB (if required) and to subborrowers; 50% of the fees (about US$580,000 equivalent or 1% of their estimated investment cost) would ultimately be borne by subborrowers (para 5.07). If required, the firm would also assist TCZB and PU in preparing a second agricultural credit/agroindustries project. The agencies involved would employ the consultants with qualifications and on terms of reference satisfactory to the Bank: - Consultant services outlined in (a) not later than December 31, 1976. - Consultant services outlined in (b) and (c) above, through UNDP assistance or with financing from the proposed Loan - not later than 6 months after sign- ing of the loan. - Consultant services outlined in (d) above - not later than September 30, 1976. In addition to the technical assistance, about 150 vehicles to improve mobil- ity and effectiveness of SCP field staff would be financed under the project. Government would assume the repayment obligations of the cost of the technical assistance program less the cost to be borne by sub-borrowers (4.13d). Assur- ances on the foregoing were obtained during negotiations. Further details on supporting services are in Chapter 5 and Annex 7. D. Cost Estimates 4.14 The estimated total project cost based on 1975 prices, including physical and price contingencies, would be TL 2.4 billion (US$173 million), of which 36% (US$63 million) would be foreign exchange, Detailed unit cost estimates are shown in Annex 8 and summarized below:  - 16 - Local Foreign Total Local Foreign Total Foreign ------TL Millions-- -