Turkey - Fourth Livestock Development Project

Document of The World Bank FOR OFFICIAL USE ONLY FIlE tOP' Report No. 1933a-TU TURKEY FOURTH LIVESTOCK DEVELOPMENT PROJECT STAFF APPRAISAL REPORT May 12, 1978 Projects Department Europe, Middle East and North Africa Regional Office 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 (LT) 19.25 LT 1 = US$0.0519 LT 1,000,000 = US$51,948 WEIGHTS AND MEASURES 1 kilogram (kg) = 2.20 pounds 1 metric ton = 1,000 kilograms 1 metric ton = 0.98 long ton 1 meter (m) = 1.09 yards 1 kilometer (km) 2 = 0.62 mile 1 hectare (ha) = 10,000 m = 2.47 acres 1 decare = 0.1 ha 2 0.25 acre 1 square kilometer (km )= 100 ha = 0.386 square mile 1 liter (1) = 0.264 gallon ABBREVIATIONS AI - Artificial Insemination DANB - Directorate of Artificial and Natural Breeding and Record Keeping of MINAG EBK - Meat and Fish Organization EDLD - Encouragement and Development Loans Division of TCZB GDAA - General Directorate of Agricultural Affairs of MINAG GDAR - General Directorate of Agricultural Research of MINAG GDVS - General Directorate of Veterinary Services of MINAG GOT - Government of Turkey IDPD - Intensive Dairy Production Division of LDP LDP - Directorate for Livestock Development Projects of MINAG MINAG - Ministry of Food, Agriculture and Livestock SEE - State Economic Enterprise SOF - Special Operational Fund SPO - State Planning Organization TCZB - Agricultural Bank of Turkey TSEK - Milk Industries Organization VSD - Village Development Subproject FISCAL YEAR (GOT) March 1 - February 28 FISCAL YEAR (TCZB) January 1 - December 31 /1 The Turkish Lira was devalued to US$ = LT 25.00 as of March 1, 1978.  FOR OFFICIAL USE ONLY TURKEY FOURTH LIVESTOCK DEVELOPMENT PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. I. THE LIVESTOCK SUBSECTOR .............................. 1 A. Background ...................... 1 B. The Subsector in the Economy .... ......... . 2 General ................................ 2 Livestock Productivity ..... .......... . 3 Potential for Livestock Improvement ......... 4 C. Government Policy ...... ............. . 5 General ................................ 5 Milk and Meat Marketing ..... ........... 6 Price Incentives ...... ............. 6 Newer Technology ................- 7 II. THE PROJECT.10 I. TEPOET ........................................ 1 A. Introduction . ............. I", ......... 10 B. Brief Description ............................. 10 C. Detailed Features ............................. 11 Project Area ................................ 11 On-Lending Program .......................... 12 On-Farm Development ......................... 15 Technical Services ........................... 16- Technical Studies ........................... 18 Training .................................... 18 D. Cost Estimates ................................ 19 E. Financing ..................................... 20 F. Procurement ................................... 21 Livestock ................................... 21 Tractors and Machinery ...................... 22 Vehicles ....................... 22 Constructions, Tools, Seed and Fertilizer 23 G. Disbursements ................. ................ 23 H. Environmental Impact .......................... 24 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 Bankt authorization.  TABLE OF CONTENTS (Continued) Page No. III. PROJECT IMPLEMENTATION ............................. 24 A. Organization and Management .... ............... 24 B. On-Lending Policies and Procedures .... ........ 26 C. Technical Services ............................ 29 D. Technical Studies ............................. 29 E. Training ...................................... 30 F. Accounting and Auditing ....................... 31 G. Monitoring and Evaluation ..................... 31 IV. TECHNICAL COEFFICIENTS ............................. 32 A. Pasture and Feedstuff Production .... .......... 32 B. Livestock Development Models .... .............. 33 V. MARKETING AND FINANCIAL ANALYSIS ........ .. ......... 33 A. Production .................................... 33 B. Prices ........................................ 34 C. Marketing ..................................... 34 D. Producer Income and Financial Rates of Return .. 35 Subborrowers and Incomes ..................... 35 VI. BENEFITS AND JUSTIFICATION ......................... 37 A. Aggregate Economic Return ..................... 37 B. Beneficiaries ................................. 41 C. Project Risks ................................. 42 VII. AGREEMENTS REACHED AND RECOMMENDATIONS ............. 43 TEXT TABLES 5.1 Producers' Benefits and Financial Rates of Return ........ 36 6.1 Economic Rate of Return .................................. 40 ANNEXES 1. Estimated Schedule of Disbursements 2. Total Project Cost and Phasing 3. Income Comparisons and Investments Financed by the Project 4. Selected Documents and Data Available in the Project File  TABLE OF CONTENTS (Continued) CHART World Bank-18657 Implementation Schedule MAPS IBRD 13431R Areas Covered by Bank-Financed Projects and Public Infrastructure in the Livestock Subsector IBRD 13432 Project Areas of Second and Fourth Livestock Projects   TURKEY FOURTH LIVESTOCK DEVELOPMENT PROJECT I. THE LIVESTOCK SUBSECTOR A. Background 1.01 The Government of Turkey has requested a Bank Loan to assist in financing a six-year repeater project to consolidate and expand the moderni- zation of village livestock production in eastern Turkey which was initiated under the Second Livestock Development Project (Credit 330-TU), and to extend to the east the improved dairy production concepts which were developed in western and central Turkey under the First and Third Livestock Development Projects (Credit 236-TU and Loan 1265-TU, respectively). The project is expected to comprise the main part of Turkey's Fourth Five-Year Plan for devel- opment of the livestock subsector. It seeks generally to develop Turkey's extensive livestock resource, which is one of the largest in Europe and the Middle East, in order to maintain the country's self-sufficiency in livestock products and to improve incomes among village families in eastern Turkey who own the bulk of the livestock resource and constitute the majority of that region's rural poor. 1.02 The Bank and IDA have previously made eight loans and seven credits to Turkey for agriculture as follows: Grain Storage, Loan 27-TU (US$3.9 million); Seyhan Irrigation, Loan 63-TU (US$25.2 million), Credit 38-TU (US$20.0 million), Fruit and Vegetable Export, Loan 762-TU (US$10 million), Credit 257-TU (US$15.0 million); Intensive Dairy Production, Credit 236-TU (US$4.5 million); Irrigation Rehabilitation Completion, Credit 281-TU (US$18.0 million); Second Livestock Development, Credit 330-TU (US$16.0 million); Seyhan Irrigation, Stage II, Loan 587-TU (US$12.0 million), Credit 143-TU (US$14.2 million); Ceyhan Aslantas Multipurpose, Loan 883-TU (US$44.0 million), Credit 360-TU (US$30 million); Corum-Cankiri Rural Development, Loan 1130-TU (US$75.0 million); Agriculture Credit and Agroindustries, Loan 1248-TU (US$53.4 million); Third Livestock Development Project, Loan 1265-TU (US$21.5 million). 1.03 The preparation of the project was undertaken by the General Direc- torate of Livestock Development Projects (LDP) of the Ministry of Food, Agri- culture and Livestock (MINAG) assisted by two FAO-CP missions which visited Turkey in August 1976 and March/April 1977 and by a Bank mission which visited the country in April 1977. This report is based on the findings of a mission which visited Turkey to appraise the project in October/November 1977 com- prising Messrs. N.A. Worker, F.J. Tellez, W.H. Spall, S.K. Bhatnagar (Bank) and S. Guss (Consultant).  B. The Subsector in the Economy General 1.04 Livestock is a key resource in Turkey, contributing about 30% of the gross value of agricultural production and 8% of GNP. The livestock population is amongst the highest in Europe and the Middle East. Current estimates indi- cate the country has about 41.1 million sheep, 18.8 million goats, 14.8 mil- lion cattle and buffalo, 2.3 million horses and donkeys and 41.7 million poultry and turkeys. Despite this extensive resource, analysis of published figures indicates that the number of grazing animals has increased slowly at only about 0.7% annually since the early 1960's, due mainly to competition from crop farming and the inability of animal producers to modernize and to increase their productivity, although this slow increase has been partly offset by considerable growth in poultry and broiler numbers. 1.05 Principal livestock outputs include milk, meat, eggs, wool, mohair, hides, draft power and transport. Manure is an important by-product for fertilizer and fuel. Pig products are insignificant because of religious objections. The First (1963-67), Second (1968-72) and Third (1973-77) Devel- opment Plans had targets for growth of livestock products of 5.6, 4.8 and 5% per annum, respectively. Actual growth over the period 1963-75 was about 2.5% per annum. This barely matched human population increase and was far below the current anticipated demand for all commodities except eggs. 1.06 External trade in livestock and livestock products is limited, virtually all production being used domestically. Imports (mainly pedigree stock for breed improvement) averaged about US$2.2 million per year over the years 1971-75 and exports (mainly live sheep and cattle for slaughter, and mohair) averaged only some US$33.5 million per year over the same period. The latter figure probably underestimates the true situation due to illegal exports to Iran and Syria which, although not quantifiable, are considered to be appreciable. Demand projections for livestock products made during the Bank's recent Agricultural Sector Survey indicate that Turkey will move from its present state of relative self-sufficiency to one where in 1985 it is estimated it would need to import over 30% of its milk and meat and over 20% of its wool and mohair requirements, unless there is a major change in historical production and consumption trends. 1.07 Apart from its important direct contribution to the value of agricultural output and to the national food supply, the role of livestock in village family life in Turkey is paramount. Livestock ownership is widespread within rural families as most communities have access to common grazing lands. Livestock products, notably milk and its products, comprise a main source of food and income for most farm families, particularly the smaller ones. Livestock is thus not only a significant component of the agricultural sector but is vital in the lives of the rural poor. Since the greatest number of livestock is owned by such families, the development of the livestock subsector represents an important means for raising incomes of this group and for promoting more equitable income levels generally.  -3- Livestock Productivity 1.08 Livestock production throughout Turkey is largely traditional. Modernizing influences are limited mainly to innovations introduced under the first three Bank-financed Livestock Projects (paras. 1.20-1.23). The prin- cipal characteristic of the subsector is its low productivity. Animals subsist mainly on residues from cereal crops, on volunteer growth on fallowed crop lands, and on natural grazing on the poorer, non-cultivable areas. It is a rational system which utilizes feed resources with no alternative use. It is inefficient, however, in that this essentially low-quality, maintenance diet is insufficient to meet the production needs of animals. Further, because farmers generally lack access to technical services, credit and other inputs, they make little attempt to supplement the quality of the feed or to manipulate its supply to match animal requirements. Technical coefficients thus tend to be uniformly poor and output exceptionally low. 1.09 Statistics from municipal and Meat and Fish Organization (EBK) facilities, which account for 100% of official and an estimated 60% of total slaughter, indicate that the average adult carcass of cattle killed in these facilities weighs only 80 to 90 kg, with a markedly declining trend over recent years. Young cattle average only 30 to 35 kg carcass weight and in recent years have formed a steadily increasing proportion of total cattle slaughtered, to a point where they now represent almost one half of the total kill. The average of all cattle slaughtered is currently only some 57 kg carcass weight. Such low slaughter weights, combined with an 18-month calving interval and depressed weaning and offtake rates (41 and 18%, respectively), result in a beef output of only some 135,000 tons annually from the national herd, or only one ton of carcass per 100 cattle. Sheep and goats enjoy a small comparative advantage over cattle because they can use low-quality feed resources somewhat better. Weaning rates of sheep and goats (50 and 56%, respectively), offtake (27 and 23%, respectively) and carcass weights (16 to 17 kg for mature animals and 8 kg for young) tend, relatively, to be better. There is still room for improvement, however, as total sheep and goat meat production, estimated at about 190,000 tons per year from 58 million head, is only one ton of carcass per 300 animals. 1.10 Dairy productivity is also low. Even though milk and its products are traditional in the diet 1/, milk production is non-specialized and tends to be an incidental by-product of livestock keeping. The principal exceptions are the intensive dairy units established under the Bank-assisted First Live- stock Project and the repeater Third Project (paras. 1.21-1.22). Levels of production are poor for all species. Average output per lactation is only some 580 kg for cows, 48 kg for sheep and 70 kg for goats. The low product- ivity of cows is of particular concern to village families who are heavily dependent on cows, with their longer lactation characteristics, to supplement 1/ Annual per capita consumption of milk and milk products is estimated by FAO at about 110 liters, considerably less than Ireland's annual consumption of 218 liters per capita but more than Greece's 56 liters per capita (FAO "World Dairy Economy in Figures").  - 4 - milk from sheep and goats which tend to be seasonal breeders and to lactate for only 3 to 4 months. It is also of concern to Government who, in attempting to maintain milk supplies to the rapidly expanding urban centers, is faced with the difficulty that growth in dairy cattle numbers and in total cow milk production has increased over the past 15 years at a rate which is only about one-half that of the national population increase, with the result that milk shortages in the main centers of urban growth are becoming increasingly acute, particularly in winter. Potential for Livestock Improvement 1.11 Overall, the livestock subsector is presently operating at only some 10-20% of its potential. The scope for improvement is therefore large. There are two main reasons for this low productivity: (i) poor genetic merit of local breeds; and (ii) inadequate management, particularly veterinary health care and feeding. These aspects need addressing and the correct emphasis needs to be accorded to each if the potential of the industry is to be realised. 1.12 There is a general need for the genetic upgrading of all classes of indigenous livestock in Turkey but highest priority needs to be given to improving fertility, milk yield and growth rate in sheep and cattle-- particularly in cattle, where the greater potential exists. Turkey has for some years been importing pedigree stock of improved breeds such as Holstein, Brown Swiss and Jersey cattle and Merino sheep to serve as a nucleus for upgrading purposes. Under the First Livestock Project, over 3,000 pedigree Holstein heifers and bulls were imported from western Europe and over 10,000 pedigree Holstein and Brown Swiss heifers and bulls are expected to be imported under the Third Project. These will supplement the existing 5,000 or so pedigree cattle on Government farms and will form the main source of nucleus stock for genetic upgrading. 1.13 To manage existing animals better and to cater for an increasing population of improved animals, the current levels of health care and feeding need raising, through improved technical services. At present there are several health and disease problems in the country (e.g. foot and mouth, anthrax, blackleg, etc.) which are constraining production, and their effects can be expected to increase as production is intensified. Fortunately, most health and disease problems are defined and are capable of being controlled with adequate drugs, vaccines and veterinary staffing. 1.14 Important as veterinary problems are, poor nutrition is currently an even more limiting constraint and there is a need to expand the feed base significantly. There is some potential for making better use of crop residues, although they are relatively fixed in amount and generally effi- ciently utilized and have only limited possibilities for expansion. Better  -5- potential exists for increased feed production from natural grasslands, of which there are some 26 million ha, through fertilization, oversowing and better grazing management, but costs are high and returns to farmers appear marginal because most of the land on which natural pastures are found is of relatively poor quality. 1.15 By far the best possibilities for expansion of the forage base lie in making more efficient use of fallow lands, of which there are over 8 million ha available annually. Fallowing is traditional, to conserve soil moisture and build fertility. There have been few attempts to inte- grate forages into the crop rotation to replace the fallow, although a suc- cessful start has been made under the three Bank-assisted Livestock Projects. The possibilities of this approach are considerable because the areas in fallow are extensive and the average duration of fallow is about 14 months. Integrating crop and livestock production on a rotational basis, through the introduction of forage crops and legume-based pasture for grazing by livestock in place of the fallow, would provide the additional feed necessary for livestock production and improve soil fertility. Such a system would result in livestock and crop production being complementary rather than mainly competitive as they tend to be now, and would provide the enlarged feed base needed by livestock and higher crop yields. This is considered the essential long-term strategy for expanding the feed base for livestock. C. Government Policy General 1.16 Government's agricultural and livestock policies in the first three Five-Year Development Plans have emphasized increased production in order to satisfy both rising domestic demands and to encourage exports and thereby increased earnings of scarce foreign exchange. Government has also become increasingly conscious of income inequities in the country, particularly between urban and rural dwellers and between the populations of western and eastern Turkey. This has led to an awareness of the need to provide for greater development of rural resources, particularly those in eastern Turkey, which in turn has focused attention on the need to assist livestock producers in the east who comprise the bulk of the rural population there. In each of its three succeeding Five-Year Plans, Government has given increasing emphasis to developing livestock resources. Government's attempts to stimulate live- stock production have been mainly through a strategy of: (i) expanding outlets for incremental production through improved processing/marketing facilities; (ii) increasing the profitability of livestock production through price incentives; and  -6- (iii) improving the efficiency of production by the introduc- tion of new technology at the farm level through the medium of investment credit linked with technical assistance. Milk and Meat Marketing 1.17 Milk, meat and live animal marketing is currently being developed by Government in areas lacking such facilities and with potential for develop- ment. Under an extensive program to expand milk marketing, the Turkish Milk Industries Organization (TSEK), a State Economic Enterprises (SEE) is cur- rently establishing a national milk grid at a cost in excess of LT one bil- lion. Under the program, which is financed almost wholly from local sources, TSEK is building about 150 collection/cooling centers and some 40 new pro- cessing plants (Map IBRD 13431R). The plan is well intentioned but has serious shortcomings, the most important of which is the lack of feasibility studies supporting it. Decisions on the siting, number and size of plants have sometimes not been based on technical and financial considerations, but on non-technical grounds. Most plants are operating at a small fraction of capacity (many are offering only a five-day service to farmers), and they are overstaffed, with the result that they are making large losses. Government feels the losses will be of short duration as the potential of the industry is large. However, it is considered that, before more of its program is implemented, an in-depth review of the entire TSEK program is essential, and hence the review of TSEK and the milk industry sector included as a component in the proposed project (para 2.17). 1.18 A similar ambitious program to develop meat marketing is being under- taken by the Meat and Fish Organization (EBK), another SEE. Under the program, 16 new slaughter facilities were completed or were near completion at the end of 1977. A further 28 plants are scheduled for completion by 1984 (Map IBRD 13431R). Parallel with plant development, livestock markets are also being developed. Some 19 such markets have already been constructed and 10 to 12 more are under construction for completion in late 1978. A feature of EBK's activities, which constrasts with those of TSEK, is that its operations appear technically sounder and better organized to serve the interests of farmers than those of TSEK. Price Incentives 1.19 Price increases in real terms for milk and meat in excess of 25% since the early 1970's have aimed at making dairying and fattening attractive. MINAG policy has been directed to stimulating financial returns to dairy producers and fatteners to ensure increases in milk and meat output and to provide encouragement to breeders to make needed long-term investments in their herds and flocks. Floor prices paid by TSEK for milk and by EBK for meat determine to some extent minimum price levels for these products. Keen competition exists between the public and private sectors for most milk and meat produced and intermediaries frequently pay considerably above the minimum prices depending on season, quality and locality. TSEK pays price incentives  - 7 - for fat content and bulk milk pickups from cooperatives and extends feedstuff advances for winter milk production. Through such incentives, Government seeks not only to expand output but to encourage farmers to specialize in dairying, to supply better quality milk and to provide a more even seasonal spread of production. Similarly, incentive pricing for meat by EBK has aimed at lessening se-sonal swings in meat supplies and providing encouragement to farmers to undertake long-term improvement in their fattening capacity. EBK pays premiums for better-finished animals, by which means Government hopes to gradually improve carcass quality. EBK also makes advances to fatteners. Government is currently considering the payment of premiums for heavier car- casses to encourage farmers to feed animals longer and to slaughter them at heavier weights. Low slaughter weights, and the high and increasing propor- tion of immature stock slaughtered, represent an area of major inefficiency in meat production at the national level (para. 1.09). Government is currently considering adjusting its pricing policy to reverse both of these situations. Newer Technology 1.20 Government's main efforts to modernize livestock production have been through the medium of the first three Bank-assisted projects (Livestock I, Credit 236-TU, for US$4.5 million; Livestock II, Credit 330-TU, for US$16 million; and Livestock III, Loan 1265-TU, for US$21.5 million). These super- vised credit projects were the first large-scale livestock development proj- ects launched in the country. An essential feature of all three was the provision of credit to farmers for on-farm development (including improved livestock, farm constructions, tractors, machinery, forage production, etc.), along with the necessary technical assistance and veterinary health services to ensure successful project implementation. This was achieved by close and continuous cooperation between the two principal implementing agencies, LDP of MINAG, which was established by Government Decree in 1970 expressly for implementing the technical aspects of Bank-assisted livestock projects, and the Agricultural Bank of Turkey (TCZB) 1/, which undertook responsibility for the credit aspects of such projects. LDP's efforts were also partly supported in the field in the area of veterinary health by staff of the Veterinary Services Directorate (GDVS) of MINAG. 1.21 The First Livestock Project 2/, which became effective in 1971 dur- ing Turkey's Second Plan, represented the first major attempt by Government to modernize dairying. The strategy was to establish a nucleus of over 3,000 imported pedigree Holstein animals on private farms in and around the four main milk consuming centers in western Turkey (Ankara, Istanbul, Izmir and Adana), in order to provide a source of breeding stock for genetic 1/ TCZB has acted as the credit channel in several Bank-financed projects. Full details of TCZB appear in Appraisal Report 987-TU, Turkey: Appraisal of an Agricultural and Agroindustries Project (April 12, 1976). 2/ Appraisal Report PA-36a, January 26,1971.  - 8 - upgrading of indigenous herds. The project, which was completed in February 1978 1/, was successful in achieving this objective and also in setting up some 150 demonstrations of modern dairying, in promoting modern dairying through provision to farmers of credit and technical assistance, and in building LDP, TCZB and GDVS infrastructure. The 150 farms established under the project fell short of the 250-300 projected at appraisal due to a slow start-up, a longer than anticipated project implementation period, and the inevitable steep price increases which accompany such delays in an infla- tionary economy such as that of Turkey. Again, because the project was innovative, involving the importation of improved dairy stock and the intro- duction of new technology, it was more acceptable to bigger farmers better able to stand the risk, and consequently subloans were on average bigger than anticipated. Cattle imported under the project from western Europe adapted extremely well to Turkish conditions. Calving rates and milk production, on average, exceeded appraisal estimates by a considerable margin. Animal diseases on individual farms were well controlled and health problems were minor, except in a few cases where farmers failed to follow recommendations. The GDVS tuberculosis and brucellosis control scheme, under which imported dairy animals on Government farms and in Government-related projects were tested and compulsorily slaughtered (with compensation), caused problems for project farmers and was heavily resisted. They considered the scheme dis- criminatory and ineffective because native cattle were not tested unless the owners requested it, which they seldom did. Consequently, the testing program did little to control these diseases regionally or nationally and it proved a disincentive to many project participants. Calf mortality was higher than expected in the early stages of the project, but later improved to a level in line with appraisal estimates. The project has not yet reached full development but already some 500 surplus Holstein bulls are being distributed each year to local farmers for herd improvement. This number is expected to increase at the rate of some 12-15% per year in the future. Also, within a year or two, when project herds reach full development, significant numbers of high-quality heifers should also become available to the industry. 1.22 The Third Livestock Project 2/, which became effective in early 1977 during the Third Plan as a repeater to the First Project, aimed at consolidating and expanding the progress made under that project and at extending benefits to other areas of the country, notably Konya, Kayseri and Malatya. Over 10,000 pedigree Holstein and Brown Swiss heifers and bulls will be imported under the project in order to expand the nucleus of improved animals for upgrading purposes. Infrastructural development within LDP, TCZB and GDVS, which was initiated under the First Project, will be continued. A particular feature of this project is the small (5-cow) village farmer component in which an attempt is being made for the first time in Turkey to extend, on a pilot basis, credit and technical assistance to some 300 small village producers. It is the intention that this pilot component 1/ Full details of project implementation are presented in Completion Report, Turkey: First Livestock Development Project (August 9, 1977). 2/ Appraisal Report 1027-TU, May 10, 1976.  - 9 - will serve as a first step to expanded participation of small farmers in future Bank-assisted livestock projects in the country. The project is making satisfactory progress overall, although the rate of subloan processing is slower than projected due to a delay by Government in meeting effectiveness conditions; also to start-up problems occasioned mainly by TCZB headquarters' delay in adequately briefing its branch offices. Counter-balancing this, however, is the fact that small-farmer interest in the project is greater than anticipated and a higher proportion than expected of early subloans has been made to small producers. The project is expected to develop from now on without further slippage and to close on schedule in June 1981. 1.23 The Second Livestock Project 1/, which became effective in 1972 towards the end of the Second Plan period, comprises two subprojects, a fattening subproject (FSD) and a village development subproject (VSD). It represents Government's first attempt to encourage fattening on a wide scale in some 20 provinces throughout Turkey and to initiate village livestock development in three provinces (Erzurum, Kars, Agri) in eastern Turkey, through provision of credit and technical assistance to farmers. The FSD subproject is completed and the VSD subproject is scheduled to be completed in mid-1978 and the project is expected to close in December 1978. In general, technical coefficients projected at appraisal are being met on most farms and exceeded in some cases. Health problems have been well contained but some serious disease outbreaks (e.g. foot and mouth, anthrax and blackleg) were experienced on a few individual properties, either because the health program was not followed or because drugs and vaccines of poor quality were used. There is the possibility also that, because of veterinary staffing constraints, treatment in some cases was late or not provided. A disappointing aspect of the project has been the difficulty of developing the group action concept. It was envisaged at appraisal that some 430 farmer groups--tractor/machinery, irrigation, pasture improvement and bull groups--would be formed, but the concept has not so far been widely accepted by farmers and only some 20 tractor/machinery groups have been financed. Conceptually, the group action approach is considered to be sound and also relevant to the situation in eastern Turkey, but it will require more time and promotion in order to gain general acceptance by farmers of the area who are conservative. In common with the First and Third Projects, the Second Project also experienced delays in the early stages. Because it was located in eastern Turkey where recruit- ment problems were greater, delays in recruitment of qualified and experienced staff caused worse slippage than in the other two projects. Over two years were lost before staff numbers reached a level permitting the project to be implemented. Even now, staff could be further strengthened, particularly veterinary staff, to ensure increased technical servicing of project farms. Despite these shortfalls, both subprojects are generally attaining their overall technical objectives. They are also successfully building infra- structure, providing experience in farm development and building a livestock production information base to support future developments in the general area of livestock improvement in Turkey. 1/ Appraisal Report PA-122a, March 15, 1972.  - 10 - 1.24 TCZB 's contribution has been important in the success of the above projects. Branch office management is generally highly competent, although its effectiveness is sometimes reduced by lack of transport and shortage of middle-level technical support staff. Under these circumstances credit processing times can be protracted. Also, lending by TCZB to small farmers, the dominant farmer group numerically, has been negligible because collateral requirements have largely excluded such farmers, but TCZB has recently revised its eligibility requirements in order to cater more specifi- cally for small farmer lending. The revision provides for funds to be chan- nelled to selected small farmers 1/ known to LDP technicians to be reliable and receptive to change and for whom financially viable farm development plans can be made. These are considerations which have previously been given little weight by TCZB and their wider application represents a breakthrough in small farmer credit. This initiative on the part of TCZB indicates Govern- ment's interest in and commitment to ensuring that investment credit would henceforth be available to small farmers who have not previously had access to it. It is the first time in Turkey that supervised investment credits of any magnitude would be available to small farmers, and it is in this important respect that the project is expected to make its major impact. II. THE PROJECT A. Introduction 2.01 The Turkish Government has requested a Bank Loan to assist in finan- cing a six-year repeater livestock development project in eastern Turkey in order to consolidate and expand gains made under the VSD subproject of the Second Livestock Project and also to extend the improved dairy production concepts developed under the First and Third Livestock Projects. The feasi- bility studies for the project were undertaken by LDP assisted by two FAO-CP missions and a Bank mission which visited Turkey between August 1976 and April 1977. The preparation report was finalized by LDP and submitted to the Bank by the Treasury in September 1977. It was appraised in October/November 1977. B. Brief Description 2.02 The project, which is expected to comprise a part of the country's Fourth Five-Year Plan, seeks generally to encourage the development of Turkey's substantial livestock resource, through the provision of investment credit to producers for on-farm improvements and through the financing of associated technical services. Specifically, the project will: 1/ A small farmer is defined in para. 3.08.  - 11 -- (a) channel medium- and long-term supervised credits to vil- lage producers for on-farm development (including farm constructions, pasture and forage crop production, improved livestock, animal health care, and tractor, machinery and tool purchases); (b) develop lending to small farmers; (c) import improved dairy stock to increase the nucleus of genetically superior animals for upgrading indigenous herds; (d) strengthen agricultural extension and veterinary health services to participating farms and provide training facilities for technical staff and farmers in modern livestock management and veterinary health care; (e) continue the services of internationally-recruited tech- nical specialists in livestock production; and (f) finance an in-depth review of the milk industry with emphasis on TSEK, and also more general studies in the field of livestock management and production. C. Detailed Features Project Area 2.03 The project area will include the whole of the provinces of Erzurum, Kars, Agri and Mus and selected counties in Hakkari, Van, Bitlis, Bingol, Diyarbakir, Erzincan and Gumushane (Map IBRD 13432). Selection of provinces and counties was made on the basis of surveys of livestock numbers and forage production potential by LDP staff; also on the local knowledge and recommenda- tions of GDVS veterinarians, MINAG extension agents and TCZB staff concerning general area development potential, accessibility for technical servicing, availability of markets and human resource potential. There is a significant deficit of milk and meat in market channels in the area, caused partly by an absolute shortage of livestock products and partly by the constant movement of livestock and livestock products out of the area to the large consumption centers in western Turkey. Selection of provinces was based partly also on poverty grounds. The 11 provinces included are part of a group of 17 eastern provinces classified by the State Planning Organization (SPO) as having the lowest average family income in the country, which is 30% below the national average of the 67 provinces (Annex 4, C6). The 11 selected provinces are considered to be broadly representative of the 17 in terms of relative stage of development and poverty level.  - 12 - 2.04 To facilitate project implementation, one combined regional/provincial office will be established in Van along with five provincial offices in Bitlis, Mus, Bingol, Diyarbakir and Erzincan. The latter offices will be supported by four project technical groups 1/ located in Yusekova (Hakkari), Bayburt (Gumushane), Malazgirt (Mus) and Tatvan (Bitlis). These ten centers along with those already established in Erzurum 2/, Kars and Agri, are considered adequate to implement the project. The regional/provincial office in Van and three of the five provincial offices will be established and adequately staffed (paras. 2.14, 3.01) on or before December 31, 1978. The other two provincial offices and the four project technical groups will be established and staffed (para. 2.14) as soon as possible thereafter and, in any event, not later than December 31, 1979. Assurances to this effect were obtained at negotiations. On-Lending Program 2.05 Credit will be made available by TCZB to creditworthy subborrowers (paras. 3.07-3.12) for on-farm development. About 50% of total subborrowers under the project are expected to qualify as small farmers, and some 34% of Bank funds for on-lending 3/ are expected to be channelled to them (para. 3.11). Five models are presented in Annex 4, C2, which are considered typical of the various types of farmers expected to participate in the project. The models provide the basis for the financial and economic analysis of the proj- ect detailed in Chapters V and VI and summarized in Table 5.1 and para. 6.04. The different models will phase into the project at the rate of some 5% in the first year 4/, 15% in the second year and 20% in each of the succeeding four years. The rate of processing of farm plans, particularly those of small farmers, is expected to be relatively greater initially in Erzurum, Kars and Agri where VSD has already made an impact in over 300 villages. From past experience, overall start-up in the new areas can be expected to be relatively slow, although steps have been taken to minimize this (para. 3.01). 2.06 The on-lending program will provide supervised credit for: 1/ The "project technical group" concept was successfully introduced in the Second Project. It involved locating a technical group (basically, one veterinarian, one agronomist and two middle-level assistants, with sup- porting transport) in a county seat or principal local secondary town considered to be of high development potential. It was instrumental in bringing farmers and technicians in closer contact and in increasing project effectiveness significantly. 2/ Erzurum was the regional center of the Second Project. It will continue to serve as the regional office for the northeastern area under the Fourth Project. 3/ Or 31% of the total Bank Loan. 4/ Commencing in the first quarter, 1979 (para. 2.19).  - 13 - (a) Karaman and Merino sheep improvement, involving the establishment of 50-ewe units on about 2,700 farms; (b) beef cattle improvement, involving the establishment of 10-cow units on about 500 farms; and (c) dairy cattle improvement on about 2,000 farms, involving the establishment of: - 5-cow units on about 1,500 farms - 12-cow units on about 400 farms - 30-cow units on about 100 farms. 2.07 Karaman and Merino Sheep Improvement. Considerable improvement is possible in the project area in Karaman and Merino flocks by culling unpro- ductive sheep and use of better sires, of which an increasing supply is becoming available each year from government farms and private sources. By better feeding, management and health care of the more productive stock, sheep productivity can be expected to increase significantly. Higher productivity is expected to result from a combination of a 25% increase in individual flock size and better technical performance (i.e. higher fertility, lower mortality, improved wool and milk production, better growth rates and higher slaughter or sale weights). These improvements will be effected by provision of suitably- termed investment credits and technical assistance for participating farmers. Particular emphasis will be directed to expansion of forage production and improved forage utilization. While it is not envisaged that project farmers will generally be able to fatten their own sheep and lambs, the project will provide farmers with the opportunity to winter a higher number of male animals and to sell them at heavier weights the following spring when prices offered by fatteners for surplus animals are generally at a seasonal peak. The sheep improvement component of the proposed project will focus particularly on the traditional village sheep producer with a flock of some 50 breeding ewes, which is common throughout the project area. Projections for a 50-ewe model are in Annex 4, C2. Projected productivity increases are based on average increases achieved in the Second Project. Of the approximately 2,700 units planned in the project, about 2,400 will be Karaman flocks and about 300 will be Merino. Of the total, about 65% are expected to be flocks owned by small farmers as defined. 2.08 Beef Cattle Improvement. Supervised credit will be provided for improvement of some 500 beef breeding herds. The herds will be culled, non- productive animals will be slaughtered, and forage resources will be used to feed selected animals better. The use of better quality sires, which are becoming available in larger numbers from state farms and private sources, will be encouraged. Productivity increases are expected principally through a combination of an increase of about 25% in individual herd size and better technical performance (i.e. higher fertility, lower mortality, higher milk production, better growth rates and higher slaughter or sale weights). As in the case of sheep producers, expansion of forage production and improved utilization will receive special emphasis. Breeders are not expected generally  - 14 - to fatten their cattle, but the project will provide the means for them to winter more animals, particulary male stock, and sell them at higher weights in the following spring when prices for finishing cattle are generally at seasonal peaks. This will not only be financially attractive to the indi- vidual farmers concerned, but will also help offset the national tendencies to kill a high (and increasing) proportion of immature cattle and to kill mature cattle at less than optimum weights. Projections for a 10-cow breeding unit, which is considered representative of a typical village cattle producer in the project area, are detailed in Annex 4, C2. Projected increases in productivity are based on mean increases achieved under the Second Project. Because specialized beef cattle breeding is not undertaken to any significant extent by small farmers, the number of such producers expected to benefit under this component is negligible. 2.09 Dairy Cattle Improvement. Three dairy models--a 5-cow unit, a 12- cow unit and a 30-cow unit at full development--are presented in Annex 4, C2. These are essentially similar to the three models in current use in the First and Third Livestock Projects in western Turkey, where they have proved satisfactory. The first model, of which there are expected to be some 1,500 units, represents a small producer with an initial herd of three native cows changing in year one to a herd of five Brown Swiss cows. The second model, of which it is expected there would be about 400 units, represents a producer with 10 indigenous cows initially, converting to 12 Brown Swiss cows in proj- ect year two. The third model, of which there would be some 100 units, is that of a farmer developing from an initial herd of 20 indigenous cows to 30 Brown Swiss cows in the second project year. The latter model could also represent a group of small farmers with a communal herd under joint management within a village. This latter group-dairying concept is one considered to have possibilities in certain areas where cooperation between village families is more customary and it is an innovative concept which will be introduced under the project. Of the 5-cow units, about 55% are expected to be small farmers as defined. Of the 12- or 30-cow unit farmers, none is expected to qualify in this category, except in the case of the owners of communal herds under joint management, which are expected to number about 20 groups, or about 100 owners in total (para. 2.13). Productivity increases are expected to result from an expansion of herd size, a marked improvement in genetic quality (through use of imported Brown Swiss dairy cattle), and improved technical performance, particulary milk production. 2.10 Under the dairy cattle improvement program about 12,000 improved cattle will be imported, as stock of high dairy merit are not available locally. Imported heifers and bulls will be predominantly Brown Swiss 1/ which are known to be well adapted to conditions in eastern Turkey. The bulls will be registered pedigree animals from about 12 months to about 24 months of age at the time of importation. They will be sons of proven sires of 1/ The possibility of importing small numbers of Holstein or other breeds is not ruled out for certain parts of the project area where, in the judgement of VSD staff, they could be better suited than Brown Swiss.  - 15 - the same breed whose progeny have a positive rating (above average) in the milk production testing program of the country of origin, and will be out of dams with a certified lifetime average milk production of not less than 5,000 kg per year. Imported females will be pedigree, pregnant two-year heifers or pedigree, yearling heifers. Pedigree heifer selections will be made from registered pedigree dams with a certified lifetime milk production averaging not less than 4,000 kg per year. All pedigree, pregnant heifers will be certified as in-calf to pedigree proven sires or sons of proven sires of the same breed whose progeny have a positive rating (above average) in the milk production testing program of the country of origin. At the time of selec- tion, all cattle will be certified in general good health and free from tuberculosis, brucellosis, leptospirosis, trichomoniasis and vibriosis. Before export, all cattle will be vaccinated against foot and mouth disease (Types A and C) and brucellosis. During negotiations assurances were obtained that only animals meeting the above conditions will be imported. On-Farm Development 2.11 Farm buildings will be of simple and inexpensive construction. Whenever possible, existing buildings will be renovated; new buildings will not be financed under the project unless essential. Experience in the three earlier Livestock Projects indicated that farmers had a tendency to over- capitalize--they often failed to make use of existing structures which, with renovation, could be made serviceable; also, when new buildings were necessary, they often built structures which were too elaborate. These situations will be carefully monitored in the project. It is considered that small farmers will generally not need additional barn space as most already have it avail- able and their investment in buildings will be restricted to renovations or extensions to existing structures built at minimum cost by the farmer with family labor. The need for new constructions on bigger farm units will be considered on an individual basis, but it is expected that in all cases exist- ing structures will be utilized to the maximum extent possible, and new struc- tures will be financed under the project only after careful consideration of cheaper alternatives. On larger units, where new structures are recommended for financing by VSD staff, care will be taken to ensure that such structures are simple and practical, and built using a maximum of family labor. 2.12 Credit and technical assistance to encourage on-farm production of feedstuffs will be a central feature of the project, as it was in the three earlier Livestock Projects. Emphasis will be given to efforts to increase yields from natural grasslands and, in particular, to promote introduction of appropriate forage crops and pastures in place of fallow in the normal crop rotation. The technology for these developments has already been perfected under extensive conditions similar to those of eastern Anatolia in South and Western Australia, and a first attempt to apply the technology was made under the Second Project, with generally satisfactory results. Extended local application requires further testing and demonstration, which will be done under the general studies component of the project (para. 2.17). Sainfoin and alfalfa appear the most suitable forage crops to integrate into the rotation. Seed of both is generally available and VSD staff has some  - 16 - familiarity with them, as do also farmers. Preliminary yield data from trials undertaken at the Ataturk University in Erzurum indicate dry matter yields of sainfoin and alfalfa to be in the range of 2,000-5,000 and 5,000-10,000 kg per ha per year, respectively, which is satisfactory. Similar yields have also been obtained by better farmers in the project area. Some purchased concen- trates 1/ and other supplementary feeds will be financed for subborrowers in the first project year as an investment cost, where in the opinion of the technical officer preparing the plan and the project manager it is considered necessary, but the approach of the project generally will be to keep purchases of concentrates and other supplementary feeds to a minimum. Use of land for forage crops can reduce the production of other crops such as wheat or sugar- beet, but this need not be serious if fallow land is used for pasture or forage crop production, which the project will encourage. In each model an allowance has been made for possible loss in cash crop income foregone in producing forage. 2.13 Tractors and machinery are comparatively scarce in the project area and this greatly limits farmers' abilities to expand crop and forage produc- tion because of the short growing season, which in many areas does not exceed five months. Tractors and machinery will be financed for larger individual farmers where technically and financially justified. It is anticipated about 100 farm tractors will be financed by the project. Tractor and machinery groups of smaller farmers will also be encouraged, as in the Second Project. Even though the group action concept in that project did not develop to the extent anticipated, the approach is innovative and is considered to have potential and it should continue to be encouraged. The project will make special efforts to expand group action along the lines of the Second Project, and also to promote the development of group dairying. It is hoped that a total of some 100 or more groups will be formed under the project. Technical Services 2.14 Staffing of VSD as of November 1977 numbered 12 agronomists, 7 vet- erinarians and 40 middle-level technical staff plus 3 supporting headquarters staff and 2 technical specialists 2/. This staff will be strengthened with an additional full-time staff of 18 agronomists, 23 veterinarians, 20 middle- level technicians and 3 headquarters staff to provide a total full-time local staff of not less than 66 professionals and 60 middle-level technicians; also the 3 technical specialists posts will be continued. About half of this addi- tional local staff (i.e. 9 agronomists, 12 veterinarians, 10 middle-level tech- nicians and 2 headquarters staff) will be appointed not later than December 31, 1978 in order to staff and service the Van regional/provincial office and 1/ Concentrates are freely available throughout most of the project area although their quality is variable, since they are compounded mainly from by-products of cereal, cotton and sugarbeet processing, of which a considerable tonnage is available. 2/ Of three established posts, only two were filled as of November 1977.  - 17 - three of the five new provincial offices. Included amongst the local staff appointed by December 31, 1978 will be the project manager. It is expected that the project manager of the Second Project, who has discharged his duties satisfactorily, will continue in post as project manager. The other half of the local staff (i.e. 9 agronomists, 11 veterinarians, 10 middle-level techni- cians and one headquarters staff) will be recruited as soon as possible there- after and, in any event, not later than December 31, 1979, in order to staff the remaining two provincial offices and the four project technical groups. Furthermore, general veterinary assistance will be provided by veterinarians of GDVS as in the Second Project. Assurances on general staffing and support arrangements were obtained at negotiations. Specific assurances were obtained that: (a) LDP will employ, or continue to employ, on a full-time basis for the duration of the project a qualified and experienced project manager (para. 3.01); and (b) LDP will employ for the duration of the project three full- time internationally-recruited technical specialists (para. 3.05) approved by the Bank and under terms and conditions acceptable to the Bank; and that if the contracts of technical specialists employed under the Second Project were extended, such extension will be undertaken in consultation with the Bank. 2.15 Recruitment of qualified and experienced staff constrained the development of the Second Project for its first two years (para. 1.23). The situation improved in the early part of 1976 and, in the intervening period the project has made satisfactory progress, particulary over the last 18 months. However, there is still a need for strengthening technical staffing, particularly veterinary staffing, in order to provide a better level of extension and veterinary services to participating farmers. One problem has been MINAG's inability to offer adequate incentives to attract easily the caliber of staff it needs. The present project will seek to over- come this problem by including additional incentives as part of the staff compensation package. The principal additional incentive will be housing for technical staff provided at nominal rental by the project (para. 3.03). Supplemental per diem payments provided to staff while on duty in the field will be continued as in the earlier projects (para. 3.04). Such payments will be financed from the Special Operational Fund--SOF (para. 3.13). 2.16 Lack of transport for VSD technical staff and TCZB branch managers was a problem contributing to delayed implementation of the first three Live- stock Projects. The transport problem is currently widespread in all Govern- ment agencies and is not specific to LDP or TCZB. The main difficulty is that there is a shortage of vehicles generally in the country. To ensure adequate transport for all staff involved in the execution of the project, about 80 vehicles will be provided over the first 36 months following effectiveness. About half of the vehicles will be assigned to VSD and half to TCZB. Of the total vehicles, some 60 will be four-wheel drive crew-cab pickups and some 20 will be compact four-seater station wagons. Assurances were obtained during negotiations that Government will approve the purchase  - 18 - of these vehicles for project use and will also expedite all importation formalities into Turkey, including the issue of import licences, in the event contracts to supply the vehicles are awarded to foreign bidders under ICB (para. 2.25). Technical Studies 2.17 The technical studies component will comprise two main areas of study. The first involves an in-depth review of the milk industry, including the procurement, processing, distribution and wholesale/retail marketing of milk in both the private and public sectors, with particular emphasis on the present strategy and policies of TSEK, its organization and management and the financial viability of its main components. This will complement the study planned under the Third Project and will be an essential prerequisite to possible future Bank-assisted improvements of the national milk-marketing complex. The study will be undertaken by an international group of at least four specialists who will produce a report of sufficient depth and detail to serve as a preparation report for possible subsequent Bank appraisal (para. 3.15). The second general study component of the project will comprise a series of investigations in the broad area of livestock management and pro- duction to complement those programmed under the Second Project. The latter work is now progressing, after initial delays due to staff constraints. There continues to be a need, however, for additional management- and production- oriented studies and for surveys, practical field research and demonstrations, particularly in forage production and utilization, animal production and veterinary health care. Some of this work will be planned and implemented by LDP and GDVS staff as staff numbers are strengthened and some will be undertaken in collaboration with the agricultural and veterinary faculties at Erzurum and Elazig which have expressed an interest in becoming involved and which have the capability in certain fields of making significant contribu- tions, particularly in the areas of animal breeding, animal nutrition, forage production and disease control (para. 3.16). Training 2.18 Training under the project will be more fully developed than under the Second Project (paras. 3.17, 3.18). While in-service training was gener- ally satisfactory in that project, training abroad of project technical staff and project-related staff was not developed as anticipated, due mainly to staff constraints, although this position improved in the latter half of the project as staffing was strengthened. Foreign language facility also limited several staff from participating, a problem which the present project will make special efforts to resolve through in-service language classes and care- fully programmed study tours of groups accompanied by interpreters. Two successful tours were organized under the First Livestock Project to Spain and to India which proved the value of this approach. In-service technical training of staff during project implementation will also be given emphasis and in this context the contributions of the technical specialists will be crucial, as in the three earlier Livestock Projects. Along with project staff training, farmer training will be emphasized through local study tours,  - 19 - field demonstrations and extension activities. In general, farmer training was handled highly satisfactorily in the three previous projects. The possi- bilities of study tours abroad for selected individual leader farmers will also be encouraged. Government so far has not been enthusiastic of such an approach but it is felt to be one which should be explored, at least on a pilot basis, in the project. D. Cost Estimates 2.19 The total cost of the project, including taxes and price increases, is estimated as of December, 1977, at some US$83.2 million equivalent, of which some US$24.0 million (about 29%) is foreign exchange. The estimated foreign expenditure will be largely for imported livestock, vehicles, tractors, machinery, technical studies, overseas training and technical specialists. Price increases of US$31.6 million were allowed over the six-year life of the project. They provide for increases of foreign costs of 7.5% per year in 1978 and 1979 and 7.0% each year from 1980 to 1984, and increases of local costs of 20% in 1978, 15% in 1979 and 10% each year from 1980 to 1984. The latter are based on expected general price increases of 25% for 1978, 20% for 1979, 16% for 1980, and 12% for 1981-84 adjusted for lower rates of increase expected for major cost items including government salaries and expenditures, seeds, hired labor and other minor farm inputs. It is assumed that disbursements will commence in the first quarter of calendar year 1979. Total project costs are summarized in the following table; a more detailed breakdown is in Annex 2, and Annex 4, C3:  - 20 - Total Project Costs /1 Foreign Local Foreign Total Local Foreign Total Exchange -- LT million----- -----US million------ % Village Development Livestock 135.5 221.5 357.0 7.0 11.5 18.5 62 Tractors and Machinery 15.1 33.0 48.1 0.8 1.7 2.5 68 Farm Constructions 152.0 29.6 181.6 7.9 1.5 9.4 15 Forage Crops and Feeds 154.4 18.0 172.4 8.0 0.9 8.9 10 Subtotal 457.0 302.1 759.1 23.7 15.6 39.3 40 Technical Services Extension Services, Administration, Training and Studies 206.5 30.0 236.5 10.7 1.5, 12.3 13 Total Baseline Costs 663.5 332.1 995.6 34.4 17.1 51.6 33 Price Increases (61.2%) 477.3 132.1 609.4 24.8 6.7 31.6 - Total Project Cost 1,140.8 464.2 1,605.0 59.2 24.0 83.2 29 /1 Discrepancies due to rounding. E. Financing 2.20 The Bank Loan of US$24.0 million will finance the foreign exchange cost, estimated at 29% of overall cost. TCZB will finance some US$32.4 million, or 39% of total cost, and farmer contributions would amount to about US$9.0 million, or 11% of total cost. Government will contribute the remaining US$17.8 million, or 21% of total cost. Financing of investment and technical assistance costs will be shared as follows:  - 21 - /1 Subborrower TCZB Government IBRD Total Project Component Amount % Amount % Amount % Amount % Amount % ___-------------------US$ million---------------------- On-Farm Investments 9.0 14 32.4 51 - - 22.0 35 63.4 100 Technical Services - - - - 16.8 92 1.4 8 18.2 100 Training and Studies - - - - 1.0 71 0.4 29 1.4 100 Milk Industry Study - - - 0.02 10 0.2 90 0.2 100 Total Project Cost 9.0 11 32.4 39 17.8 21 24.0 29 83.2 100 /1 (i) Price increase added to each component; and (ii) discrepancies due to rounding. 2.21 As in the three previous Livestock Projects, the Bank Loan of US$24.0 million will be made to the Government of Turkey, which will assume the foreign exchange risk. The Loan will be for 17 years, including a 4-year grace period, at an interest rate of 7.5%. Government will on-lend to TCZB in local currency the equivalent of US$22.0 million at not less than the latter lending rate which, together with a further LT 624 million from TCZB's own resources (equivalent to US$32.4 million), will comprise the LT 1,047 million for on-farm lending (equivalent to about US$54.4 million). The project cash flow (Annex 4, C5) indicates that, allowing for contingent delays, a repayment period to Government by TCZB in 17 years with a grace of 6 years is appro- priate. Assurances were received during negotiations concerning the accept- ability of these terms and also that TCZB will provide the LT 624 million complementary funds necessary to finance 51% of the on-lending program to farmers. Government will make the remainder of the Loan monies (equivalent to US$2.0 million) available to LDP for technical services (including the cost of technical specialists), technical studies and training. Assurances to this effect were obtained at negotiations. F. Procurement Livestock 2.22 Imported dairy cattle will be procured in about 20 shipments of 500- 600 head. Orders for cattle for individual subborrowers will be determined by local VSD technicians and sent through the regional or provincial managers to the project manager who will be responsible for organizing bulk procurement from foreign sources. Each shipment will comprise selected groups of animals from numerous breeders in the country of origin. Because of the nature of the selection and assembly procedures, ICB is impracticable. Individual shipments will be procured on the basis of not less than three quotations from at least two countries. Details of cattle procurements will be advertised in the local press and also circulated to accredited representatives of those Bank member countries able to supply them, and Switzerland. A similar procurement proce- dure was followed in the First and Third Projects satisfactorily. Suppliers will offer for selection only cattle equalling or exceeding the minimum  - 22 - performaiice and health specifications detailed in para. 2.10. Suitable documentation will be required to verify such specifications. Individual selection will be undertaken in the supplier country by the project manager, one project technical specialist and a veterinarian of GDVS. They will be assisted by one technical specialist and not less than two VSD technicians; the latter will be included in the procurement mission not only to assist the mission but also to obtain further training and experience (para. 3.17). Purchase contracts will require the supplier to make satisfactory arrangements for delivery, and to assume responsibility for the cattle until delivered to project farms. Contracts will also require suppliers to assume responsibility for ensuring that cattle meet all veterinary and other standards of the exporting and importing countries and of countries through which the cattle traveled while in transit. Assurances were obtained during negotiations that: (a) bidding documents and purchase contracts will be sent to the Bank for comment prior to their award; (b) support will be provided by GDVS at all stages during procure- ment to assist with veterinary clearances; and (c) Turkish border entry will be expedited. 2.23 Locally procured livestock will be purchased by individual farmers at livestock markets and by private treaty. All livestock will be inspected and approved prior to purchase by project technicians responsible for super- vising individual farm plans. These procedures were followed in the Second Project and were satisfactory. Tractors and Machinery 2.24 Tractors, machinery and related agricultural equipment will be procured through ICB according to standard Bank guidelines and assurances to this effect were obtained during negotiations. Tractor and machinery/ equipment orders for individual subborrowers will be grouped by local VSD staff and sent through regional and provincial offices to the project manager who will organize bulk procurement as in the earlier three projects, where this arrangement worked satisfactorily. Bidding documents will state that suppliers will guarantee adequate servicing and spare parts for tractors, machinery and equipment in the main project centers. Up to 15% domestic preference, or the level of import duties, whichever is the lower, will be allowed local manufacturers bidding on tractors, machinery and equipment. Vehicles 2.25 Difficulties were experienced in the earlier Livestock Projects in procuring through ICB vehicles of the type assembled in Turkey; consequently vehicles used by the Projects were procured locally with local funds by LDP and TCZB. However, the number of vehicles procured was not adequate because local supplies were limited. Generally, Government continues to prefer to procure vehicles locally but, in order to avoid a recurrence of the earlier  - 23 - shortages of vehicles for project use, Government has agreed to procure them through ICB if they are not available to purchase locally when needed. Provi- sion has been made in the Loan for sufficient foreign exchange to enable vehicles to be procured through ICB in this event. Assurances were obtained at negotiations that if the vehicles needed in any project year could not be made available from local sources in the first four months of that year, they will be procured through ICB under standard Bank guidelines. Constructions, Tools, Seed and Fertilizer 2.26 Because farm constructions are small-scale and dispersed and utilize a maximum of family labor, they are unsuitable for ICB. Purchase of the few materials required for such constructions will be by local shopping. Sufficient competition exists to ensure fair pricing. Similarly, the 15 houses for project staff will be scattered over several provinces; they will be constructed of local materials with local labor and their modest cost (about US$400,000 total) and phasing do not warrant ICB. Bidding for their construction will be through standard Government procedures, which are satis- factory. Purchases of small tools, seed and fertilizer will be through normal commercial channels. Supplies are generally freely available and adequate competition exists for all items. G. Disbursements 2.27 The Bank Loan of US$24.0 million will be disbursed over a six-year period as follows: (a) 100% of foreign expenditures on livestock, technical specialists, technical studies and training; (b) 100% of foreign expenditures, or 100% of local expenditures ex-factory (less taxes and duties) on vehicles, tractors, agricultural machinery and related equipment; (c) 27% of amounts disbursed by TCZB for pasture, forage crop and feedstuff production and purchase of supplementary feedstuffs. 2.28 Disbursements will be made against normal documentation as in the three earlier projects. The anticipated phasing of commitments under the project is detailed in Annex 4, C5. Assuming project start-up by December 31, 1978, the estimated annual disbursements of the Bank Loan are as follows:  - 24 - Estimated Disbursements /I Bank FY: 1979 1980 1981 1982 1983 1984 1985 -------------------- US$ million ------------------- Annual 0.2 2.0 3.4 4.2 5.5 6.0 2.7 Cumulative 0.2 2.2 5.6 9.8 15.3 21.3 24.0 /1 A quarterly schedule is shown in Annex 1. H. Environmental Impact 2.29 Chemical fertilizers, pesticides and herbicides to be used under the project are not anticipated to have any appreciable adverse effect on local ecology. They will be utilized under the supervision of project tech- nicians at the normally recommended dosage levels in a small proportion of total farms in the project area, which represent only a fraction of the total land of the area. Effluent from project barns and dairies, which will be small in size by standards in many other parts of the world and also scattered, is not expected to have any negative environmental effect. Most solid residues from livestock operations will be spread back on the land as manure, which will be beneficial. III. PROJECT IMPLEMENTATION A. Organization and Management 3.01 Basic project administration will be similar to the three earlier projects, which was satisfactory. Overall management will be the responsi- bility of LDP. Detailed implementation of technical and financial aspects will be undertaken, as in the Second Project, by VSD of LDP, which will be headed by a project manager who will be located in Ankara and be responsible to the General Director of LDP. Regional control will be through offices in Erzurum and Van, each of which will be under the control of a regional manager responsible to the project manager. Provincial offices in Erzurum, Kars, Agri and Erzincan, each with a provincial manager, will be coordinated through the Erzurum regional manager; provincial offices in Van, Bitlis, Mus, Bingol and Diyarbakir, each with a provincial manager, will be coordinated through the Van regional manager. Project technical groups formed under the Second Project in the provinces of Erzurum, Kars and Agri will be coordinated through their appropriate provincial office. The project technical group to be formed in Bayburt (Gumushane) will be coordinated through the Erzincan provincial office and those in Malazgirt and Tatvan through their respective provincial office. The project technical group to be formed in Yuksekova (Hakkari) will be coordinated through the Van provincial office. Posting  - 25 - of staff will be the responsibility of the General Director of LDP, acting on the recommendations of the project manager. One or two experienced VSD staff from the Second Project will be posted to each of the new provincial offices and at least two senior and experienced staff from the Third Project will be posted to each of the VSD regional offices in Erzurum and Van to ealsure a rapid spread of improved livestock production concepts within the project. Assurances on the latter arrangement were obtained at negotiations. 3.02 The duties of VSD staff will include: (a) promoting the project to farmers and providing an initial screening of those farmers interested in participating; (b) preparing farm development plans for farmers approved as creditworthy by TCZB; (c) supervising plan implementation on individual farms and providing extension assistance to farmers; (d) providing veterinary and animal health services to par- ticipating farms (which will be further supported by technical staff of GDVS); and (e) keeping records of overall project progress and encouraging farmers to keep records of performance on individual farms. 3.03 The General Director of LDP, acting on the advice of the project manager, will organize the construction of the 15 housing units to be rented to staff at nominal Government rates. Siting of the houses will be arranged to ensure staffing in areas where there is high potential but to which staff is difficult to attract. Administration and maintenance of the units after construction will be the responsibility of the General Director of LDP. The siting of the housing units, their construction schedule and the level of the nominal rental rates to be charged to project staff occupying them were discussed at negotiations and assurances that construction of the 15 units will be expedited to ensure their completion not later than December 31, 1980, were obtained. 3.04 Per diem payments to VSD staff on field duty will be paid in part from the SOF. Payments will be administered by the General Director of LDP. Assurances were obtained at negotiations that not less than 80% of SOF resources will be used for expenditures on per diems, staff incentives and side benefits. 3.05 Three internationally recruited technical specialists will be retained for the six-year duration of the project (equivalent to 18 man years) to provide technical support for VSD, TCZB and DGVS staff. Their appointment will be finalized not later than December 31, 1978. They will be responsible to the project manager. It is anticipated that one specialist will be located in each of the Ankara, Erzurum and Van offices. They will provide technical  - 26 - advice to regional and provincial managers, particularly in farm plan prepara- tion and implementation. In collaboration with the project manager, they will also play a leading role in the planning, implementation and supervision of general studies in-livestock management and production and of the training aspects of the project. Terms of reference for the technical specialists are in Annex 4, Cl. The cost of the specialists is estimated at US$67,000 per man year, of which US$36,000 is for basic salary and US$31,000 is for allowances and expenses. 3.06 The Encouragement and Development Loans Division (EDLD) of TCZB will be responsible for the credit aspects of the proposed project. EDLD's role will involve establishing the creditworthiness of prospective sub- borrowers, setting credit limits, providing subloans, and supervising subloan disbursements and repayments. A close and cooperative working relationship developed between staff of LDP and TCZB in the first three Livestock Projects which was based on a protocol between LDP and TCZB which was negotiated be- tween them and agreed to by the Bank. The existing protocol will be appro- priately amended with respect to dates, areas of implementation, etc. of the project. The signing of an amended protocol acceptable to the Bank is a condition of effectiveness. B. On-Lending Policies and Procedures 3.07 Total lending to farmers by TCZB will be around LT 1,047 million, equivalent to US$54.4 million, derived from US$22.0 million equivalent of the Bank Loan on-lent to TCZB by Government and US$32.4 million equivalent from TCZB's own resources (paras. 2.19-2.21). 3.08 Any farmer owning livestock with experience in livestock production and with a sound development plan for livestock improvement (except the pur- chase of livestock for fattening), and who could meet the creditworthiness criteria of TCZB (para. 3.11), is eligible for a loan. Potential subborrowers should occupy, or have access to, an area of tillable land which, in the opi- nion of the VSD technician preparing the farm plan, is adequate to produce the incremental feedstuffs necessary to implement the plan. For the purposes of the project, a small farmer is defined as one whose net annual pre-development family income at December 1977 prices does not exceed LT 35,000 (US$1,820), at least 75% of which is derived from farm activity. In addition to the above criteria, to be eligible for a subloan, small farmers must be known to VSD staff as bona fide farmers of good character, for whom viable farm development plans can be prepared by such staff. Assurances were obtained during negotia- tions that only farmers meeting the above criteria will qualify for loans. 3.09 Farmers will apply for a loan to the nearest office of TCZB or VSD. After determination of the farmer's creditworthiness and credit limit by TCZB, an appropriate development plan will be prepared by a VSD techni- cian who will subsequently submit the plan to the regional manager and technical specialist for review. In accord with TCZB's existing delegation  - 27 - of authority, plans for less than LT 150,000 credit will be reviewed by the regional technical specialist, approved on the authority of the VSD regional manager and sent to the local TCZB manager for credit approval and funding, with copies to VSD and TCZB head offices. Plans for credit in excess of LT 150,000, after review by the regional technical specialist and regional manager, will be forwarded by the latter to VSD headquarters and approved by the project manager. Applications will then be submitted through EDLD to the board of TCZB for credit approval. This procedure was followed in the three earlier projects and was satisfactory. 3.10 Of total on-farm investments, farmers will contribute, in aggregate, up to 14%. Individual farmer contributions to investment plans will be at least 20% in the case of medium-size to larger farmers and at least 10% in the case of small farmers except, in special cases, where in the written opinion of the technician preparing the plan and the project manager it is justified, the small farmer's contribution may be reduced to 5%. Under the Third Project, farmers were generally expected to finance at least 75% of the cost of dairy buildings and associated structures as their contribution; credit in excess of 25% for buildings was limited to special cases. In the present project, most farm development plans will provide for only renova- tions and/or extension of existing structures, financing of new structures being limited to the larger units which will be built at minimum cost by the farmer using a maximum of family labor. Cost of renovations and/or extensions will be financed at the percentage applicable to other on-farm improvements. However, financing for new structures will be limited to 70% of the total cost of the structure, except in cases where small farmers are grouped in a com- munal project (para. 2.09), in which case the higher 90 to 95% loan applicable generally to small farmers will apply. Most farmers will be expected to pro- vide family labor (possibly supplemented by hired labor in the case of the larger farmers) as part of their contribution. Incremental labor costs asso- ciated with expanding livestock numbers are expected to be minor, as utiliza- tion of labor for livestock breeding and dairying is now relatively ineffi- cient. With technical assistance and improved planning, it is considered that the productivity of labor could be considerably increased at negligible additional cost. Credit will be provided for incremental costs of labor and forage cropping only in special cases where, in the written opinion of the technician preparing the plan and the project manager, it is considered necessary. Credit will similarly be provided, in special cases, for the purchase of concentrates and other supplementary feed in the first project year as an investment cost. Assurances were obtained during negotiations on the acceptability of these conditions. 3.11 TCZB's stringent collateral requirements have been a problem and have generally constrained investment credits of any magnitude from reaching small farmers. TCZB prefers a land title to secure its loans, but titles are not always available. In the Third Project, TCZB agreed to secure loans up to LT 100,000 (this limit was raised to LT 150,000, effective February 6, 1978) with chattel mortgages on livestock and machinery plus the guarantee of a creditworthy cosigner; loans over LT 100,000 (now LT 150,000) could be secured partially by land title, and partially by a chattel mortgage on live- stock and machinery, and/or a guarantee of a cosigner. However, lending  - 28 - with only cosigners as security has in fact been minimal, mainly because TCZB regulations required two creditworthy cosigners which most small farmers have been unable to provide, and also because such lending has been discouraged by some TCZB branch managers. Special arrangements have now been formulated with TCZB under the project to expand lending to qualified small farmers through liberalized loan collateral requirements. Under these arrangements TCZB will (a) apply to the medium-size to larger farmers the loan security requirements currently applicable in the Third Project, and (b) for the small farmers, as defined (para. 3.08), provide loans up to LT 150,000 which will be secured by chattel mortgages on livestock and machinery plus the guarantee of one cosigner, and such cosigner could also be a small farmer who could be from another village than that of the borrower and whose financial standing will not be of primary importance. TCZB will direct and adequately train its branch managers to undertake such lending to small farmers. Funds for such lending from Bank sources will amount to some US$7.5 million, or about 34% of total funds from Bank sources for on-lending to all farmers. As this will be a first attempt to channel funds of any magnitude to small farmers, there could be a shortfall in the number of small farmer applicants. To ensure that every effort will be made by TCZB to encourage smaller farmers into the project and to provide subloans to them, some US$5.5 million, or 25% of total funds from Bank sources for on-lending under the project, will be earmarked for small farmers and will be non-reallocatable and any amount not used for small farmer loans will be cancelled. Additional encouragement to TCZB to develop small farmer lending under relaxed security conditions has also recently been provided by the Central Bank of Turkey which has undertaken to refund to TCZB the equivalent of 3% on all general agricultural lending to enable it to meet the additional expenses involved in such lending and to create reserves against bad debts. An initial joint Bank-Government-TCZB review of the small farmer lending program under the project will be under- taken not later than December 31, 1980 and similar reviews will be made annually thereafter. Assurances on these conditions were obtained at negotiations. 3.12 Subloans to project farmers will be made at not less than 11% interest per annum for 10 to 12 years with 2 to 4 years of grace depending on plan size. 1/ This rate is negative but it falls within the framework of interest rate revisions which were recently implemented with the IMF stabilization package. Also, taking into account that some 50% of project beneficiaries will be small farmers with per capita family incomes at or below the estimated relative poverty level for Turkey (Annex 3), the 11% effective cost of medium- and long-term borrowing under the project is considered acceptable, pending the outcome of a further wider interest rate policy review which is being undertaken by the Government. Debt service of sub- borrowers will be in equal installments. Grace periods for small farmers will be generally more favorable than for larger farmers, but each case will be evaluated individually by project technicians, depending on 1/ Subloans under the First Project were made at 9% per annum for 12 years with 4 years grace; under the Second Project at 9% per annum for 7 to 12 years with 1 to 4 years grace; and under the Third Project at 11% per annum for 10 to 12 years with 2 to 4 years grace.  - 29 - net income generated in the investment plan. No subloans to project farmers in excess of US$80,000 will be made without the prior approval of the Bank. The appropriateness of the interest rate charged by TCZB for project subloans and other terms and conditions will be reviewed in the light of changing conditions by TCZB, the Borrower and the Bank at such time as TCZB, the Borrower or the Bank may request. Assurances on these terms and conditions were obtained at negotiations. 3.13 As in the First and Third projects, TCZB will place 0.5% of the interest received from farmers on all funds on-lent under the project in the SOF, to be made available to LDP for partial payment of miscellaneous expenses incurred in project execution. Expenditures from this fund will be authorized by the General Director of LDP or any other person duly designated by him for such purpose. Assurances to this effect were obtained during negotiations. Terms of Reference for the SOF are in Annex 4, Cl. C. Technical Services 3.14 Technical assistance to farmers participating in the project will be provided by VSD staff with support from GDVS veterinarians. VSD staff will be grouped to work from the nine provincial offices under the direction of the provincial managers who will be responsible to the two regional managers, who will in turn be responsible to the project manager (para. 3.01). This type of organization is essentially similar to that of the three earlier projects where it worked satisfactorily. The GDVS supporting service will be based on a protocol between LDP and GDVS along the lines of that in the three earlier projects. The existing protocol will be amended with respect to dates, area of implementation, etc. and will include a clause that testing for brucellosis and tuberculosis will be carried out on project farms only on the basis of a program to be drawn up by LDP/GDVS which is satisfactory to the Bank. Signing of an amended protocol by LDP and GDVS satisfactory to the Bank is a condition of effectiveness. Such a protocol will include provision for vaccination against brucellosis within three to six months of birth of all calves born on the farms of subborrowers and will specifically exclude testing on project farms of cattle previously vaccinated against brucellosis. D. Technical Studies 3.15 Organization of the milk industry study will be the responsibility of the General Director of LDP who will recruit the specialists, finalize details of their work program including field visits and report writing, and will make available all necessary local facilities needed by the group during the period of its work in the country. The group will commence work not later than May 1, 1979 according to a work program and timetable acceptable to the Bank. Individual specialists, who will be acceptable to the Bank, will be recruited under terms and conditions acceptable to the Bank. Assurances on this and on general arrangements for the organization and implementation of  - 30 - the milk industry study were obtained at negotiations. Terms of reference for the proposed study are in Annex 4, Cl. 3.16 The technical studies component in the broad area of livestock management and production will be organized by the project manager, with whom the three technical specialists will collaborate closely in the planning, implementation and supervision. Staff of LDP and GDVS will also be involved in the planning and implementation of the studies. Studies will commence within the first half of calendar year 1980. Prior to their implementation, annual plans of such studies will be sent to the Bank for comment. The first and subsequent plans will be submitted in the third quarter of the year prior to implementation. Studies executed in collaboration with the universities will be undertaken on the basis of a protocol to be drawn up prior to the commencement of the work which will be satisfactory to LDP, the university concerned and the Bank. Assurances to this effect were obtained at negotia-. tions. Progress and results of the general studies component will be reported in the semi-annual reports prepared by the project manager (para. 3.22). It is expected that, under this component, a preparation report for a possible future Bank-assisted livestock project will be developed. Terms of reference for the livestock production studies component are in Annex 4, Cl. E. Training 3.17 The training component will consist of: (a) in-service training of LDP, GDVS, TCZB and other project- related staff at all levels; (b) local training of farmers through study tours, field demon- strations and extension activities; (c) group study tours abroad for LDP, GDVS, TCZB and other project- related staff working in the public sector, and leader farmers; such trips, of which there will be not less than six, will be coordinated as far as possible with missions travelling abroad on cattle procurement; and (d) study leave for individual staff of LDP, GDVS, TCZB and other project-related Government staff to undertake advanced training in livestock production, forage production, animal health, animal breeding, agricultural credit, agroindustries and related fields. 3.18 The project manager will be responsible for organizing the training program and in ensuring its timely execution. He will be assisted in this respect by the technical specialists who will play a key role in the planning, implementation and supervision of training, in recommending suitable staff for training and in identifying suitable programs and centers of study. Selection of trainees and study programs will be the responsibility of the General  - 31- Director of LDP. The training program will become fully operational by the beginning of the second year of the proposed project and operate through the sixth year. A draft of the overall training program for the duration of the project will be drawn up by the project manager and sent to the Bank for comment by April 30, 1979. Assurances on this were obtained during negotia- tions. Terms of reference for training are in Annex 4, Cl. F. Accounting and Auditing 3.19 EDLD will open a separate account for the project, as it did for the previous three projects. Each six months, a summary of the account will be included in the semi-annual project report prepared by the project manager and submitted to the Bank through TCZB (para. 3.22). The account will be audited annually by the Sworn Bank Controllers of the Ministry of Finance, which procedure is satisfactory. Copies of the certified accounts and audit report in English will be sent to the Bank within seven months of the end of TCZB's financial year. Assurances on these matters were obtained during negotiations. 3.20 The project manager will maintain accounts of VSD expenditures on technical services, studies and training, as in the Second Project, and details will be included in the reports prepared by him to the Bank (para. 3.22). This arrangement worked satisfactorily in the three earlier projects. The accounts will be subject to annual audit by the Financial Inspectors of the Ministry of Finance, which is satisfactory, and copies of the certified accounts and audit report in English will be sent to the Bank within seven months of the end of LDP's financial year. Assurances on these procedures were obtained during negotiations. 3.21 The accounts of the SOF will be maintained by the General Director, LDP. He will be responsible for providing the Bank with a detailed accounting of expenditures from the Fund by March 31 of each project year. Assurances to this effect were obtained at negotiations. G. Monitoring and Evaluation 3.22 Routine records will be kept on all farm plans, as in the earlier projects. In addition, VSD staff will monitor the progress of not less than 20% of farm plans intensively in the course of implementation. Staff will collect and analyze sufficient technical and financial data to evaluate the effects of the project and to follow its progress against the project imple- mentation schedule (Chart 18657). The project manager will submit six-monthly progress reports to the Bank through TCZB who will include a summary of the project account (para. 3.19) and forward the report to the Bank within two months from the end of each six-month period. Quarterly reports were prepared  - 32 - in the earlier projects but for eastern Turkey, with its long winters during which farm development activity stops, semi-annual reports are considered adequate. In addition to the latter reports, the project manager will prepare a draft completion report for submission to the Bank within three months of the Closing Date of the project. LDP is already familiar with completion report requirements as its Intensive Dairy Production Division (IDPD) satis- factorily assumed major responsibility for the completion report of the First Project. Assurances were obtained during negotiations on the acceptability of the monitoring, evaluation and reporting procedures. IV. TECHNICAL COEFFICIENTS 4.01 Farms to be developed under the project are represented by five basic models (para 2.06 and Annex 4, C2). All farms will have in common: some dairy, cattle or sheep activity at the preproject stage; adequate rain- fed land or access to irrigated land to provide for near self-sufficiency in forage; and improved management through technical servicing. A. Pasture and Feedstuff Production 4.02 In the project, emphasis will be given to increased alfalfa or sainfoin production, for both green feed and hay. These forages will supple- ment straw and native pasture and, in combination with them, are expected to provide the principal production requirements. Concentrates will be used sparingly to complement these feeds, usually only during the winter months. Forage crops have been fully costed and imputed to the project. Increases in pasture, forage crop and feedgrain production will be achieved mainly by more effective use of fallow lands, but some reduction in output of cash crops such as sugarbeet will be inevitable and this has been allowed for in the analysis. Wheat production is continued, with modest increases in yields through fertili- zation. It will be largely utilized on the farm as a food staple. Some meadow lands, which are extensive in eastern Anatolia, will be reseeded and fertilized for pasture, making the farm model largely self-sufficient for roughage. Assumed crop yields are as follows: Yield (t/ha)- Without Project With Crop Years 0-20 Project Sugarbeet 30.0 - Wheat: non-irrigated 1.0 1.5 Wheat: irrigated 1.5 - Meadow (hay) - 0.5 Alfalfa (hay) 7.5 Sainfoin (hay) 3.5 /1 Based on mean yields currently being achieved by upper quartile of farmers in the project area.  - 33 - B. Livestock Development Models 4.03 Production and other technical coefficients are based mainly on the performance of the beneficiaries under previous and on-going projects. Net sales of cow milk is expected to increase from 600 to some 3,500 kg per cow annually at full development, while net sales of sheep milk is expected to increase from 35 to 50 kg annually per ewe reflecting mainly the smaller genetic improvement which is expected in sheep. Output prices of livestock increase slightly at full development to account for the improved stock. The incremental herd values are credited to the last year in the financial and economic analyses. Selected coefficients for cattle, the main livestock component, are as follows (details are shown in Annex 4, C2). Without Project ---------------Year------------- Coefficient Years 0-20 1 2 3 4 5 Cattle weaning rate (%) 65 80 85 90 90 90 Calf mortality (%) 20 15 15 10 10 10 Cow mortality (%) 10 5 5 5 5 5 Dairy Improvement Lactation yield (kg/cow) 700 3,000 3,200 3,500 3,800 3,800 Net milk sales (kg/cow/yr) 600 2,700 2,900 3,200 3,500 3,500 Beef Cattle Improvement Lactation yield (kg/cow) 700 1,500 2,000 2,000 2,000 2,000 Net milk sales (kg/cow/yr) 600 1,000 1,000 1,100 1,200 1,400 V. MARKETING AND FINANCIAL ANALYSIS A. Production 5.01 Considerable production increases are expected in liquid milk, cattle and sheep for breeding, wool and forage crops. The increases will result from improved livestock, better animal husbandry and general farm management through the application of suitably-termed credit and technical assistance, as in the Second Project. The key to livestock production increases is the expanded forage base, principally through the better utilization of fallow lands, which currently produce very little useful livestock feed between successive cereal crops. This more efficient land use and the resulting additional forage should allow farmers to increase their overall feeding and to become less dependent on purchased feeds, particularly concentrates. Five models -- a sheep improvement, a beef improvement and three dairy improvement models -- have been used to illustrate project impact. Each has its own individual mix of cropping, livestock and physical inputs (Annex 4, C2). At full development (year 12) incremental production from the project is estimated to be:  - 34- Without At Full % Product Unit Project Development Increase Cow Milk Million 1 8.7 61.1 602 Sheep Milk Million 1 3.5 6.2 77 Dairy Cattle Thousand Head 4.1 11.3 275 Breeding Cattle Thousand Head 1.5 3.0 100 Sheep Thousand Head 70.2 97.2 38 Wool Tons 226.0 604.0 167 5.02 The total value of annual incremental production at full develop- ment, using December 1977 farmgate prices, is estimated at US$23 million, of which US$13 million will be from milk. B. Prices 5.03 Project input and output prices are based on local and farmgate prices as of December 1977 gathered in the project area from producers, tech- nicians working in the Second Project, commercial houses and foreign bidders. For economic analysis, financial prices of tradeables were adjusted on the basis of projections in real terms provided in the list of the Bank's Economic Analysis and Projections Department and, for non-tradeables, allowances were made for transfer payments. C. Marketing 5.04 The project is expected to stimulate milk supplies in the project area where there is currently a chronic shortage of milk for processing of some 100,000 tons per annum 1/ which cannot be supplied from adjacent areas where there is also a shortage. Demand projections indicate, furthermore, that due to current increases in the demand for milk of 5.4% annually, defi- cits in milk are expected to amount to 2.6 and 4.9 million tons nationally in 1985 and 1990, respectively 2/. Incremental milk production from the project, totalling some 55,000 tons per annum at full development should be readily absorbed, as buyers for both public and private sector plants and private dealers are active throughout the area. Most of the milk currently produced in the project area is consumed as milk products such as cheese, butter, 1/ Mission estimates based on excess capacity of existing processing plants in the project area as of December 1977, and FAO/CP study 36/77 TUR 22, August 1977 (Annex 4, B3). 2/ Turkey Agricultural Sector Survey (1976) estimates. FAQ, through the International Schemes for Meat and Dairy Development (1976), indicate a somewhat lower increase in demand annually (4%) -- Annex 4, B2.  - 35 - yoghurt and ayran; very little is consumed as liquid milk. Most of the milk produced in the eastern villages is either processed in the home or in the nearby village by private milk traders. Only 1% of total milk produced currently in the project area reaches milk processing plants (with the exception of Kars, which is 3%). As there is a large unsatisfied local demand for wool and breeding and fattening stock, no difficulties are envisaged in marketing the incremental outputs of these. D. Producer Income and Financial Rates of Return Subborrowers and Incomes 5.05 Increases in income for the various subborrowers participating are estimated to be as follows: Per Capita Annual /1 Income /2 Farm Size Number of Without With Type of Farm (Head) (Decares) Subborrowers Project Project -------US$- Sheep Improvement 50 Ewes 90 2,700 244 326 Beef Improvement 10 cows 130 500 308 607 Dairy Improvement 5 cows 140 1,500 260 636 Dairy Improvement 12 cows 290 400 573 1,347 Dairy Improvement 30 cows 660 100 816 2,927 5,200 /1 At full development. T2 From all farming activities; from livestock activities alone these income levels will be slightly lower in the with-project situation, much lower in the without-project situation, as there is a shift away from cropping income towards livestock-related activities. Official statistics give the range of family size as 5.5 to 6.0; mission estimates show family size in rural eastern Anatolia ranges up to over 20 and an average of 8.0 was considered appropriate for calculation purposes (Annex 4, C6). 5.06 Producers' benefits, classified for each farm category, and the finan- cial rates of return derived from the models are summarized in Table 5.1. All incomes are expected to at least double, with the exception of the ewe breeding activities which will increase by 34% which is relatively modest but typically reflects sheep-related activities in eastern Anatolia. All financial rates of return indicate that it should be financially rewarding for farmers to undertake the investments and to introduce the supporting technology. Sensitivity tests are in general satisfactory. The analysis indicates that in the worst general  Producers' Benefits and Financial Rates of Return Estimated Net Operating Estimated Net Operating Income from Livestock Income from all Farming Activities Activities Unit Size Without Project With Project Without Proiect With Project at Full Before After /2 Before After 2 Before After 2 Before After /2 Financial Rie A Development Taxes Taxes - Taxes Taxes Taxes Taxes Taxes Taxes of Return snitivity Tet ----___________---------------------- -- US$ --------- ---------------------w 30-Cow Dairy 2,213 2,213 21,517 18,182 6,530 5,518 23,413 19,784 23 20-19-15-15 12-Cow Dairy 2,068 2,068 8,540 7,597 4,582 4,076 10,779 9,589 42 36-38-28-24 5-Cow Dairy 566 566 4,810 4,449 2,078 2,078 5,091 4,709 43 37-38-29-24 10-Cow Beef 1,901 1,901 4,286 3,965 2,462 2,462 4,857 4,493 36 33-33-24-24 50-Ewe Sheep 1,673 1,673 2,364 2,364 1,953 1,953 2,608 2,608 24 21-19-8-14 /1 Full development reached in year 4 for the 5-cow unit, year 7 for the 10-cow beef improvement and year 6 for all others. /2 Income tax calculated on the basis of sliding scale according to law for incomes other than from personal earnings. Farm incomes under LT60,000 are exempted from tax. /3 Calculated on income from all farming activities before taxes. /4 Financial rate of return as investment costs increase 10%, operating expenditures increase 10%, gross returns decrease 10% or there exists one year lag in start-up, respectively. U, January 30, 1978  - 37 - situation (a one year lag in all revenue-producing activities under the with- project situation and all on-farm investments completed), no financial rate of return will fall below 14%. In the case of the 50-ewe model only, the worst situation (a 10% reduction in gross returns) will result in a financial rate of return of 8%. The trends in prices paid to farmers and in the technical coefficients indicate that the best estimate of the basic rate of return is more likely to be the case than the lower values indicated by the sensitivity tests. 5.07 The breakdown of the number of subborrowers and their income levels with comparisons to the poverty level is shown in Annex 3. It is estimated that 50% of the subborrowers are expected to be at or below the relative poverty level in December 1976 terms. Of the total funds on-lent under the project for on-farm investments amounting to about US$54.4 million, some US$18.8 million, or about 35%, will be utilized for subloans to small farmers as previously defined. Funds for such lending from Bank sources will amount to some US$7.5 million, or about 34% of total funds from Bank sources for on-lending to all farmers. VI. BENEFITS AND JUSTIFICATION A. Aggregate Economic Return 6.01 The project is expected to generate the following annual production outputs 1/: With Project at Full Development Percent Without Project Year 12 Increase ------------US$ million-------------- ---%---- Cow milk 1.6 11.6 625 Sheep milk 0.8 1.5 80 Wool 0.6 1.6 167 Livestock 3.5 10.7 204 Wheat 3.8 4.0 5 Sugarbeet 3.2 0 -100 6.02 The bulk of the benefits derive from the incremental production of cow milk and from the production of livestock for breeding or finishing by other producers. The irrigated areas allocated to sugarbeet production are shifted to the production of forage crops while the production of wheat increases slightly through modest increases in fertilization to compensate for areas dedicated to forage crops. 1/ More detailed data are in Annex 4, C7.  - 38 - 6.03 The rate of return to the economy has been calculated on the basis of five farm models assumed to be representative of the different participating subborrowers. The following assumptions underly the rate of return calculations: (a) domestic prices of non-traded goods and labor were adjusted by the standard conversion factor (0.82) to translate them to border prices; 1/ (b) all on-farm project components and their costs have been phased in at the rate at which the individual category of farms enters the project, i.e., year 1, 5%; year 2, 15%, years 3-6, 20%. Annex 4, C5 shows the expected number of farmers being phased in, classified by farm categories. Other project components were phased in as follows: costs of training and studies were charged over the six years of the project; costs of the new field offices were phased into the project over the first year of implementation; cost of vehicles and housing for field staff were spread over the first three years of the project; and the milk industry study was assumed to be implemented in the first two project years; (c) investment and operating costs were calculated using December 1977 prices, adjusted to represent costs at the farm level. Relative costs and prices were assumed to remain unchanged so that any changes resulting from increases in the general price level in the economy would be self-compensating; (d) current yields and farm gate prices have been applied in calculating the returns, adjusted on the basis of Bank pro- jections. The same technical coefficients have been applied to all farm models within the same farm category, with the exception of the mortality and calving coefficients, and con- centrate requirements; (e) benefits and costs were adjusted for all apparent transfer payments such as taxes, duties, tariffs and the social benefit payments to labor; (f) family labor was costed at the same value as that of its nearest alternative which is LT 25,000 annually for a skilled livestock farmhand in rural areas, equivalent to employment of 280 days at LT 90/day (or US$4.68/day); and (g) a project life of 20 years was assumed in the analysis of all project components. Incremental herd values were credited to the benefit stream of the farm models at the end of the project life. 1/ This is equivalent to using a shadow exchange rate of LT 23.5 per US$1.0.  - 39 - 6.04 Based on these criteria and on the data of Table 6.1, the economic rate of return of the project is estimated to be 20%, with the following ranges for the sensitivity tests: On-Farm Project On-Farm Operating Operating Cattle Sheep Livestock Rate of Investments Expenditures Expenditures Milk Milk Output Return + 5% - - - - 19.7 +10% - - - - - 18.8 - + 5% - - - - 19.7 +10% - - - - 18.7 - + 5% - - - 20.4 - +10% - - - 20.0 - +10% +10% - - - 17.9 - - 5% - - 19.2 - - - -10% - - 17.7 - - - -10% -10% - 17.4 - - - - - - 5% 19.7 - - - - - -10% 18.6 +10% +10% - - - - 16.8 6.05 The sensitivity tests show a relatively small variation in the eco- nomic rate of return as a result of 10% variations in costs or returns. An increase in real terms of 10% in either on-farm investments or operating expenditures reduces the economic rate of return to about 18%. Decreases in real terms in milk output affect negatively the rate of return somewhat more than return from livestock (17% as compared with 19% for a 10% decrease in milk and livestock returns, respectively). An increase of 10% in real terms in the operating expenditures of the project unit has no significant effect on the rate of return. 6.06 A concurrent increase of 10% in both on-farm investments and operat- ing expenditures decreases the rate of return to about 17%. Cow milk prices would need to decrease to LT 4.00/1 and sheep milk to LT 4.95/1, or overall net milk yields at full development decrease from 3,500 to 3,150 1/cow/year and from 50 to 45 1/ewe/year, before the economic rate of return would fall to 17%. The probability of milk prices decreasing appreciably is very unlikely given the overall milk shortage. Also, production data from the First and Second Projects indicate a much higher likelihood of the higher output being obtained rather than the lower.  Economic Rate of Return (LT Million) ----------------------------------------------------------------__ -----------__ ------------------ YYe -------------------____________________________-____________---------------------------------------- it- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Icrennnea&l Econonic BeneOfits 1. Cnttle milk 6.50 24.0 54.9 89 159 6 163.8 178.6 187.6 191. 2 192 9 193. 4 193 4 193.4 193 4 193.4 193.4 193.4 1932.4 193.4 193.4 2. Sheep Ilk 0.5 2.9 4.3 86. 8 9.3 11.6 12.2 112.2 112.2 12.2 12. 2 12.2 12.2 12.2 12. 2 12. 2 12.2 12. 2 12. 2 12. 2 3. Livestock 7.5 23.0 39.8 60.1 85.7 110.0 113.2 132.1 136.6 137.9 138.3 139.8 139.8 139.8 139.8 139.8 139.8 139.8 139.8 503.6 4. Wool 0.8 3.2 6.6 10.3 14. 17. 8 18.5 188 18.9 199 18. 9 18. 9 18 9 18.9 18.9 18 9 18 9 18 18 9 18 9 5. W'heat 0.2 0.8 16 2.5 3.3 4.1 14. 4.1 4.1 4.1) 4,1 4.1) 4..1 4.1 41 4.1 41. 4.1 4.1 6. Slgarbeet (2.7) (12.0) (21.0) (31.4) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0) (42.0 Total 12.3 41.0 86.2 137.8 229.9 265.3 284.6 312.8 321.0 324.0 324.9 326.4 326.4 326.4 326.4 326.4 326.4 326.4 326.4 690.2 On-Farmn InveatmRnt8 1. Livestork 16.7 49.8 66.5 66.5 66.5 66.5 - - - - - - - - 2. Machinery 1.8 5.4 7.2 7.2 7.2 7.2 - _ _ _ 1.8 5.4 7.2 7.2 7.2 7.2 3 Farm Bnildi.g. 7 7 23.2 30.8 30.8 30.8 30.8 - - 4. mi.cella.eoe 7.2 21.6 28.9 28.9 28.9 28.9 - - Total 33.4 100.0 133.4 133.4 13.4 133.4 - - - - 1.8 5.4 7.2 7.2 7.2 7.2 - - - - Incremental operating Coate 1. On farme 0.4 7.5 27.1 53.5 82.2 112.5 140.1 143.1 145.5 147.8 145.2 145.8 147.3 149.3 146.2 145.1 145.5 147.1 142.1 145.4 8 2. Technical Rervice. 20.7 30.5 30.5 27.3 27.3 27.3 25.2 25 2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25,2 25.2 25.2 25.2 3. Training ann etodine 2.6 2.6 2.6 2.6 2.6 2.6 - - - 4. Milk markating tndy 1.5 1.5 Total 25.2 42.1 60.2 83.4 112.1 142.4 165.3 168.3 170.7 173.0 170.4 171.0 172.5 174.5 171.4 170.3 170.7 172.3 170.3 170.6 Economic Rota of Ratorn: 20.4 Senaicivity Tact. Inveet ..cL ...t ploe 107.: 18.7 Operating ...te Ploe 507,: 17.9 Project ben. fite - milk niece 10%: 17.4 - liveetock mince 107.: 18.6 Standard convereion factor = 1.0: 23.7 April 18, 1978  - 41 - B. Beneficiaries 6.07 The direct beneficiaries of the project are the approximately 5,200 farm families (about 41,600 persons) who increase their farm income, mostly from livestock sources. They will have not only a higher income but a more even annual distribution of income. Employment in livestock activities will be provided for 5,200 farm families plus about 100 families providing labor, benefiting a population of some 42,400 persons. Better utilization will be made of the labor of the farm families directly involved. 6.08 Indirect beneficiaries include the suppliers of goods and services widely scattered throughout the project area, especially those dealing with farm building construction, machinery services and feedstuff supplies. 6.09 The incremental milk production of over 55,000 tons annually at full development will provide milk for an additional 500,000 indirect benefi- ciaries at the present level of per capita national consumption (110 liters annually). This contribution is considered particularly important since the major part of this production is expected to be marketed in small urban clusters within rural areas where milk is scarce. 6.10 The annual incremental output of livestock (7,200 head of dairy cattle, 1,500 head of breeding cattle and 27,000 head of breeding ewes) at full development will assist to meet the scarcity of high quality stock in Turkey needed for herd and flock buildups. Annual incremental output of the project represents in the case of cattle about 1% of the region's output, and in the case of sheep, 0.5% (Annex 4, C8). 6.11 Other non-quantifiable benefits and beneficiaries include the following: (a) genetic improvement of the national herd through upgrading of indigenous livestock with improved exotic breeds--the 2,900 breeding bulls produced annually by the project at full development, for example, will provide for mating of a potential 87,000 local cows per year 1/; (b) introduction of newer methods of husbandry and management resulting in better land utilization and overall higher animal productivity; (c) establishment of infrastructure at the national level, providing trained manpower, technical studies and services directed to development of eastern Turkey; 1/ Assuming a 4-5 year working life for each bull, the potential could be as high as 348,000-435,000 cows over the working life of 2,900 bulls.  - 42 - (d) increased supplies of milk for processing by Government plants which are currently operating under capacity, thereby increasing their efficiency of operation; and (e) institutionalization of credit facilities in Turkey's poorest areas, especially by giving small farmers access to medium- and long-term investment credits which are currently not available to them. C. Project Risks 6.12 A risk which could affect project viability concerns possible delays in the implementation of the package of investments and on-farm activi- ties on each individual farm. There are examples in the earlier Livestock Projects in which occasionally a farm plan was started and commitments were made by the subborrower and a key input (foreign shipments of livestock or machinery) was delayed. Fortunately, such examples were few but, for reasons often beyond the control of the project implementing agency, this situation could still occur and it could have serious consequences in individual cases. The financial analysis (para. 5.06 and Table 5.1) has taken into account, under the sensitivity tests, the conservative alternative of a one-year lag in the implementation of the package, with satisfactory financial viability. With the accumulated experiences of LDP in purchases of foreign livestock, tractors and machinery in the three earlier projects, delays in arrivals of foreign shipments are expected to be minor. 6.13 The risk of reduced small-farmer participation could also be important. The success of the small-farmer component will depend upon the willingness of small farmers to enter the project and upon the commitment of TCZB to the con- cept of small-farmer lending. Small farmers, particularly in the new project areas, can be expected to be somewhat hesitant to enter the project until there is a demonstration of project concepts on the farms of larger subbor- rowers. This was the experience in the three earlier Livestock Projects in which leader farmers, who were usually the best established financially, were invariably the ones to show the greatest initial interest in participating in the project. What is considered to be a reasonable allowance for this has been made in the phasing of the farm development component. Again, unless TCZB fully commits itself to the undertaking and it instructs its branch managers accordingly, there is a danger that small-farmer lending will not develop as envisaged. For this reason it was considered essential to earmark a non-reallocatable sum for small farmer subloans and to ensure that any funds not so used will be cancelled.  - 43 - VII. AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 Agreement having been reached on the principal issues referred to in Chapters II and III, and subject to the conditions of effectiveness in paras. 3.06 and 3.14, the project is suitable for a Bank Loan of the equivalent of US$24.0 million to the Government of Turkey for a term of 17 years at 7.5% interest per annum with a grace period of four years.  - 44 - ANNEX 1 TURKEY FOURTH LIVESTOCK DEVELOPMENT PROJECT Estimated Schedule of Disbursements IBRD Fiscal Year Disbursed During Quarter Cumulative Disbursements and Quarter --------------------US$'000