Turkey - Ankara Air Pollution Control Project

FILE.-COPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2544-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED ENGINEERING LOAN TO THE REPUBLIC OF TURKEY FOR AN ANKARA AIR POLLUTION CONTROL PROJECT October 3, 1979 This document has a restricted distributien and may be used by reciplents only in the performance of their official dutis. Its contents may not otherwise be disclosed without World Bank siuthorization.  CURRENCY EQUIVALENTS US$1 = TL 47.10 TL 1 = US$0.021 ABBREVIATIONS BCM - Environment Protection Undersecretariat (Basbakanlik Cevre Mustesarligi) MTA - Mineral Research Institute NATO - North Atlantic Treaty Organization TKI - Turkish Coal Board UNDP - United Nations Development Programme FISCAL YEAR Government of Turkey - March 1 to February 28  FOR OFFICLL USE ONLY TURKEY ANKARA AIR POLLUTION CONTROL PROJECT ENGINEERING LOAN AND PROJECT SUMMARY Borrower: Republic of Turkey. Amount: US$6.0 million equivalent in various currencies. Terms: Repayable in 10 years, including 2 years grace, through semi-annual installments at 7.95 percent per annum. The loan would be refinanced under any future loan which the Bank might provide for a full-scale smokeless fuel project resulting from the work financed by the proposed Engineering Loan. Project Description: The major purpose is to develop promising methods of manufacturing smokeless fuel from lignite, and investigate other possible technologies which may provide a more appropriate clean fuel to reduce air pollution in Ankara in the future. The loan will finance: (i) Consultant services to determine whether internationally known and established processes could be used to manufac- ture smokeless fuel using Turkish lignite; and, after comparing these processes with that employed at Seyitomer, a feasibility study, together with detailed designs, tender documents, and cost estimates of the recommended process; (ii) Technical and financial assistance to carry out the necessary modifications and start-up operations on the existing coking plant at Seyitomer; (iii) Development of the Mineral Research Institute (MTA) hot briquetting process by the provision of consultant services and funds for the design, construction and operation of a pilot plant of 2-3 ton/hour capacity; (iv) Consultant services to review and evaluate the feasibility of producing fuel gas using Turkish lignite as an appro- priate long-term measure, and to compare its economic viability with such other long-term alternatives as district heating, geothermal energy, desulphurization of oil and distribution of propane gas; and 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.  - ii - (v) Procurement of equipment for monitoring of pollution levels and other facilities to supplement funding from the UNDP for immediate pollution control measures. Project Cost Estimates: Local ForeiRn Total ----- US$ (Millions) ------ (i) Feasibility Study for Alternative Technologies 0.20 1.10 1.30 (ii) Technical Assistance for Seyitomer Plant 0.25 0.35 0.60 (iii) MTA Pilot Plant 3.00 3.00 6.00 (Consultants 0.50 1.50 2.00) (Equipment - 1.50 1.50) (Civil Works 2.50 - 2.50) (iv) Feasibility Study of Fuel Gas 0.20 0.35 0.55 (v) Pollution Monitoring Equipment 0.10 0.55 0.65 (vi) Contingencies for MTA Plant Equipment and Civil works: Physical (15%) 0.40 0.20 0.60 Price (39%) 1.10 0.45 1.55 TOTAL 5.25 6.00 11.25 Financing Plan: Local Foreign Total ----- US$ (Millions) ------ IBRD 6.00 6.00 Government 5.25 _5.25 TOTAL 5.25 6.00 11.25  Disbursements: Half Year Cumulative US$ (Millions) FY80 3rd and 4th Quarters 1.50 1.50 FY81 1st and 2nd Quarters 1.50 3.00 3rd and 4th Quarters 1.50 4.50 FY82 1st and 2nd Quarters 1.00 5.50 3rd and 4th Quarters 0.50 6.00 Consultants: Consultants having international experience in this specialized field have submitted proposals under items (i) and (iii) of the project description above, and the proposals are being evaluated. Terms of reference for item (iv) are being finalized and invitations will be issued shortly. The contractor for the Seyitomer plant (item ii) will perform the required services. The consul- tant services required are estimated at about 300 man- months for foreign consultants at a cost of US$9,500 per man-month including overheads, allowances, travel and per diem and 80 man-months of local experts at US$3,000 per man-month.   REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED ENGINEERING LOAN TO THE REPUBLIC OF TURKEY FOR AN ANKARA AIR POLLUTION CONTROL PROJECT 1. I submit the following report and recommendation on a proposed Engineering Loan of US$6.0 million equivalent to the Republic of Turkey, to help finance the foreign exchange costs of consultant services, materials and equipment to help reduce the severe winter air pollution in Ankara. The proposed loan would have a term of 10 years, including 2 years of grace, with interest at 7.95 percent per annum. PART I - THE ECONOMY 2. A Special Economic Mission visited Turkey in April/May 1979, to review the Fourth Five-Year Plan (1979-83) approved by the Parliament at the end of 1979. Its draft report is scheduled to be discussed with the Govern- ment in October. Meanwhile, the mission's tentative findings are reflected below. Annex 1 contains the Basic Country Data. Patterns of Past Development Policies 3. In many respects, the record of Turkish economic development over the last two decades has been good. As the result of a strong commitment to rapid growth and modernization, GDP increased 6.4 percent during the First Plan period (1963-67), 6.7 percent during the Second Plan period (1968-72), and 7.2 percent during the Third Plan period (1973-77). This compares favorably with the experience of 55 "middle income" developing countries, whose GDP grew on an average 6.0 percent per annum during the period 1960-70 and 6.1 percent per annum during the period 1970-77. The relatively high growth rate in Turkey was achieved, moreover, without the availability of significant deposits of oil or other predominant natural resources, and within a democratic political framework. 4. Rapid economic growth was accompanied by significant social changes. Population growth remained fairly high (2.5 percent per annum), but since GDP growth was also fairly high, it allowed a relatively fast growth in per capita income. However, rising income levels were not accompanied by better income distribution. Due largely to uneven land distribution, there is a high degree of income inequality in the agricultural sector. There are also significant regional inequalities in income. Nevertheless, basic needs have been satisfac- torily met in both urban and rural areas. Overall, there was a substantial improvement in living conditions, the quality of life, nutrition, housing, education, social services and health care. However, living conditions for the urban poor worsened due to a significant migration to urban areas and the resulting overcrowding and strain on urban infrastructure.  - 2 - 5. The public sector has played and continues to play a key role in economic and social development. Between 1963 and 1977, public sector fixed investment as a percent of total fixed investment increased from 50 percent to 55 percent, and its share of fixed investment in manufacturing increased from 21 percent to nearly 49 percent. The public sector dominates basic industries. Nevertheless, the private sector has emerged as an increas- ingly important and dynamic element in the economy and is beginning to shift its orientation from consumer goods to intermediate and investment goods, and from the domestic market to exports. Private sector investment has increased at nearly 11.5 percent per year in real terms during 1967-77 compared to an average annual increase of only 4.8 percent between 1963 and 1967. 6. Turkish development during 1963-77, however, exhibits a number of structural characteristics which are of great relevance for future development policy. First, for a country of Turkey's size and per capita income, Turkey has an extremely low level of exports relative to GDP, as against a more or less "normal" import level. This highlights the vulnerability of the balance- of-payments and the key importance of export development to sustain the foreign exchange needs of future investments. Second, while the level of investment relative to GDP increased rapidly and compares favorably with that for other developing countries, the mobilization of domestic savings has lagged and the ratio of domestic savings to GDP is considerably below the average for middle income countries. The growing gap between domestic savings and investment has led to a relatively high level of external borrowing (particularly after workers' remittances stagnated after the mid-seventies), and domestic inflationary pressures emanating from excess aggregate demand and deficit financing. Third, a relatively high proportion of the labor force is still in agriculture, reflecting significant disguised unemployment and the need for accelerated job creation in non-agricultural activities. The propor- tion of the labor force employed in industry is quite low compared to other large middle income countries. The relatively poor performance on employment creation has become a more serious issue following the near cessation of workers' migration to Europe since 1974. The Recent Economic Crisis and Short-Term Issues 7. These structural weaknesses of the Turkish economy made it parti- cularly vulnerable to the sharp increase in oil prices in 1974 and the simul- taneous existence of recession, inflation and rising unemployment in the industrial countries. These external factors played a major part in the deterioration of the Turkish economic situation. However, the weakness of successive governments and the policies adopted in response to these develop- ments played at least as important a role in creating the economic crisis that began in 1977. 8. The sharp worsening of the international environment was met by an effort to raise the rate of GDP growth. This was set in motion by a rapid increase in investment and consumption expenditures, spearheaded essentially by the public sector. The growth rate of public investment in 1974-77 was  four and half times higher than in 1970-73; the growth rate of public con- sumption nearly doubled. The budget deficit as a percentage of GDP increased; the rate of increase of money supply accelerated to finance the growth of expenditure and there was a sharp increase in the rate of inflation. 9. These developments were accompanied by and related to unfavorable developments in the balance-of-payments. Merchandise exports declined in volume terms and grew only slowly in terms of value, while imports continued to increase rapidly. The slowdown of exports can be explained partly by the unfavorable situation in the importing countries, at a time when the booming domestic economy provided a profitable market for substantial domestic absorp- tion of output. Similarly, about half of the explosive growth of imports was due to rising world prices, especially of oil, but the other half was due to a steep rise in the volume of imports, to sustain a booming domestic economy and an escalated investment program. The problems were aggravated by a decline in workers' remittances caused by the worsening recession in Western Europe, a holding back of remittances by workers abroad in anticipation of major exchange rate adjustments and a diversion of remittances to other channels as the difference between unofficial and official exchange rates increased. 10. The Government's reaction to the strained balance-of-payments and the exhaustion of the foreign exchange reserves was to sustain high levels of investment and growth through external borrowing, mainly on a short-term basis, given the absence of significant long-term assistance at that time. Short-term external debt increased from $1.4 billion in 1975 to $6.6 billion at the end of 1977. By mid 1977, a crisis stage was reached; the inflow of external capital dried up, and the boom collapsed, leaving in its wake a host of domestic and external problems which needed resolution before the economy could resume stable growth. Short-term Stabilizaton Efforts and IMF Standby Programs 11. In early 1978, the Government initiated a stabilization program that formed the basis for a Standby Arrangement with the IMF in April 1978. It was designed to lead towards a balance-of-payments equilibrium and reduced infla- tion through a four-pronged approach, encompassing increases in savings, stimulation of exports, higher M&LT foreign borrowing and rescheduling of short-term debts. At year's end, however, the outcome was mixed if compared to the targets and goals set forth in the stabilization package. The balance- of-payments position remained weak, although the current account deficit declined to $1.71 billion, which was less than half of the 1977 deficit and below the target set in the Standby. This was achieved through a notable increase in exports, but even more importantly through a sharp curtailment of imports, well below the Standby's goals. The resulting lack of imported inputs had a substantial adverse impact on domestic output, particularly in the manufacturing sector. At the same time, some importers made greater use of the unofficial foreign exchange market, financed largely through workers' remittances; this resulted in stagnation of official transfers of such remit- tances.  12. One cause of weakness of the balance-of-payments position was the low inflow of M&LT foreign credits. The mobilization of such capital proved more difficult than expected. Besides, slow project implementation caused disbursements of M&LT credits to be lower than was envisaged in early 1978. The net capital inflow was about $900 million in 1978; the overall balance of payments deficit was $950 million and was financed by drawings from the IMF and short-term funds from various sources. 13. More disappointing however, was the performance with regard to domestic resource mobilization. The consolidated budget deficit of TL 35 billion was significantly larger than anticipated. State Economic Enterprise (SSE) losses, at about TL 50 billion, were higher than in 1977, in spite of periodic major increases in SEE prices during the year. Wage settlements in both the public and private sectors pushed up average nominal wages by about 50 percent. There was a sizeable increase in public sector borrowings from the Central Bank; the resulting monetary expansion (37 percent growth over the previous year) combined with the cost push effects of wage increases and import restrictions, raised the price level by about 50 percent during 1978; it continued to rise at a similar rate in the first half of 1979. These developments, by far, exceeded the limits envisaged in the Standby. Discus- sions between Turkey and the IMF in late 1978 could not lead to mutually satisfactory solutions. Consequently, they were postponed and the withdrawals against the Standby were suspended by the end of the year. 14. In early 1979 the Government announced a new stabilization program, undertook a series of financial measures, and then concluded a new Standby Arrangement with the IMF in July 1979. The principal measures taken may be summarized as follows: (a) to improve the financial position of SEEs, addi- tional price increases ranging from 34 percent to 110 percent were announced for a number of important products, raising these prices above their import costs at the new exchange rate; these increases are estimated to yield an additional TL 80 billion in the current fiscal year and thus help to reduce the overall borrowing requirement of the public sector; (b) to ensure more effective mobilization and allocation of resources, interest rates for both deposits and loans were increased substantially, from up to a maximum of 16% p.a. to over 24% p.a. in key economic sectors; repatriated savings of migrant workers were allowed an additional special premium; (c) to improve the current account balance, the TL was devalued in several steps until June 11, when a new buying rate of TL 47.10 per US$1 was established for most foreign trade and all invisibles 1/; the new exchange rate represents a depreciation in export-weighted terms of nearly 75 percent since the end of 1970, and more than offsets the differential inflation rate between Turkey and its major trading partners during the course of 1978-79; and (d) to stimulate industrial 1/ Excluding exports of certain agricultural products (amounting to about 60 percent of total merchandise exports in 1978) and imports of crude petroleum, petroleum products and chemical inputs for the production of fertilizer (amounting to about 35 percent of total merchandise imports in 1978); for these products a rate of TL 35 per $1 is used.  -5 - exports, exporters of manufactured and mining products, were, in addition, allowed to retain 50 percent of their foreign exchange earnings to finance their own import requirements or those of their local suppliers. 15. The new Standby was approved by the IMF Board in midJuly, covering a twelve month period up to June 30, 1980. It foresees total purchases of SDR 250 million in three tranches--up to SDR 70 million before end of November, SDR 130 million by the end of March 1980, and then the balance of SDR 50 mil- lion. It provides for a series of specific performance targets designed to strengthen public finance, reduce inflation and improve the balance-of- payments situation in the short term. On the balance-of-payments side it: (a) stipulates continuation of an exchange rate policy conducive to the main- tenance of Turkey's competitive position in foreign markets, to be reviewed before the release of the November 1979 tranche and again before that of the March 1980 tranche; (b) excludes introduction of any new multiple currency practices; (c) places limits on outstanding foreign arrears and their repay- ments in an orderly fashion to be achieved through further debt rescheduling; (d) limits contracting of new public sector or government guaranteed foreign debt with an original maturity of less than ten years to US$1 billion during the period of the Standby, of which not more than US$500 million with maturi- ties of less than 5 years. On the public finance side, it: (a) limits total net public sector borrowing in 1979 to TL 155 billion (about 7 percent less than in 1978), with the level for 1980 to be determined in common understand- ing with IMF before the end of November; (b) limits net new Central Bank credits to the public sector to TL 94 billion during FY 1979 (about 8 percent more than in 1978), and limits net domestic assets of the Central Bank to TL 444 billion by February 1980, the level thereafter to be determined in common understanding with IMF before the end of March 1980; and (c) envisages con- tinuation of the current policy of flexible and realistic SEE prices and improved operating efficiency, to reduce the SEE deficits from 4.4 percent of GDP in 1978 to 3.5 percent in 1979. 16. The July 1979 Standby envisages that implementation of these mea- sures would prevent further deterioration in the current account balance during 1979, with essential imports projected to remain at about the same level as last year in real terms ($5.0 billion). A substantial increase in workers' remittances, which totalled over $900 million between January and June 1979 against $975 million for the whole of 1978, would compensate for the increasing interest payments on foreign debt. At the same time, disbursements of medium- and long-term foreign aid, (including the Bank's First Program Loan) were expected to increase markedly in 1979, thus sharply reducing the need for renewed, short-term borrowing. 17. Results during the first half of 1979 are in line with these expect- ations. With imports increasing by over 7 percent and exports by 22 percent, the foreign trade deficit has slightly declined (to $1,225 million) compared to the similar period in 1978, but receipts from tourism and workers' remit- tances have nearly tripled, so that the current account deficit has sharply declined from over $926 million during the first six months of 1978 to $115 million during the same period of 1979. Furthermore, net medium- and long- term borrowing increased, substantially exceeding the current account deficit  - 6 - by a considerable margin, so that there was no need for short-term foreign borrowing, and foreign exchange reserves increased sizeably. Even though growth of workers' remittances could well slow down during the second half of the year and the import bill is almost certain to go up with higher petroleum prices, the Standby goals are likely to be met for the year as a whole, as far as the balance-of-payments is concerned. Inflation has shown little sign of decline so far, and is still running above 50 percent on an annual basis. However, the Standby expects little improvement in 1979, since new measures need time to exercise their full impact, which cannot be expected before sometime in 1980. 18. This high rate of inflation remains an urgent problem. While there are many underlying "real" and institutional factors involved, the monetary aspects are particularly important from the short run policy point of view. The rapid increase in the public sector deficits, aggravated by reluctance until mid-1977 to realistically adjust prices of SSEs and by their sizeable investment programs despite large operating losses, led to resort to Central Bank credit. This contributed to excessive monetary expansion and consequent rapid inflation. 19. The critical issue is the basic role of exports in short and medium- term development strategy. Turkey's rather low export orientation in the mid-seventies is demonstrated by the 1977 ratio of exports as a percentage of GDP, which was 4 percent, i.e. lower than any comparable developing country. Recognizing the need for a fundamental structural change in this orientation, the Ecevit Government has taken, although not always in time, a series of policy and administrative measures towards this critical objective. Export incentive and rebate schemes put into operation, however, still need to be matched by further reduction in administrative procedures governing exports and establishment of institutions that. support and sustain a vigorous export effort on a continuing basis. The adjustment in 1979 in the exchange rate of the TL, to make it realistic and competitive, needs to be rigorously maintained. Such adjustments would also ensure a steady flow of worker remittances. This reorientation is crucial to strengthen the balance of payments and provide a sound basis on which investments needed to resume steady economic growth can be sustained. 20. Another major problem concerns external debt which the Government has now begun to face through: (a) slowing the growth of short-term liabili- ties; (b) debt relief arrangements; and (c) efforts to pursue new sources of credits, especially medium and long-term (M&LT) credits. In the past year the short-term external debt continued to grow; but the Government has been successful in arranging debt relief and increasing the commitment as well as inflow of M&LT funds. The first debt relief operation was arranged through the OECD consortium for Turkey in May 1978, and involved consolidation of $1.14 billion in arrears on guaranteed short-term and bilateral M&LT debt, as well as amounts due over the 18 months period May 21, 1978-June 30, 1979. A second such major rescheduling of the official bilateral and private guaran- teed credits, involving about $1.02 billion due between July 1, 1979 and June 30, 1980, took place in July 1979. A third major rescheduling arrangement was finalized in July and August 1979 with commercial banks to reschedule  - 7 - convertible lira deposits ($2.3 billion), banker's credits ($429 million) and third party reimbursement credits ($300 million). The total amount rescheduled under these arrangements is about $5.2 billion. 21. The Government has been successful, though in a limited way, in diversifying sources, and increasing the level of, M&LT commitments. Turkey secured commitments of $547 million in 1978 in program loans and oil import financing credits from Libya and Iran. Along with the rescheduling of the short-term liabilities with the commercial banks, agreement was reached in July 1979 with a group of banks for $407 million of medium-term credits. In addition, an agreement was recently reached with the Saudi Fund for $250 million in project credits. Perhaps the most important arrangement arrived at so far has been the May 1979 OECD sponsored pledging of $1.45 billion in special assistance, involving mostly M&LT bilateral credits and trade finan- cing credits. In the remaining half of 1979, nearly $750 million is estimated to be disbursed from these commitments. 22. With these debt relief operations, Turkey has arranged to consolidate a good part of its arrears and short-term liabilities, and is on the way to bringing order into an extremely critical debt situation. However, the debt service burden will remain high. Commercial creditworthiness has not yet been restored, as evidenced by the demands for full cash coverage for routine commercial transactions, and Turkey's borrowing position remains vulnerable. Beginining in the early 1980s, Turkey will be faced with a hump in its debt service, which remains a cause for major concern, before it declines. Fourth Plan and Turkey's Medium-Term Economic Recovery Strategy 23. The Fourth Five-Year Plan (1979-83) was approved by Parliament in late November 1978. This Plan, in many essential ways, carries on the tradi- tional lines of Turkish development planning. It sets out to complete the tasks of the Third Plan, but also attempts to address a number of development issues which have come to the fore during the current crisis. While the issues are recognized and addressed, not all of them are faced up to in an adequate fashion. For example, emphasis on a high growth rate, a large investment allocation for import substitution in basic industry, and reliance on administrative regulations and control rather than market incentives--the hallmarks of the previous Plans--still manifest themselves in the new Plan. 24. The Plan's growth targets are ambitious, especially when the present economic situation and short-term prospects are taken into account. Since the first two or three years of the Plan are likely to remain a period of consolidation and stabilization, during which annual GDP growth is unlikely to average more than 3 to 4 percent, an average annual growth rate of 8.2 percent during the Plan period will clearly be unachievable. However, the priority given to export development (especially of manufactured goods), implicit in the very high export growth targets of the Plan (averaging 18 percent per annum in real terms), represents a basic structural change in Turkish economic policy. However, the investment allocations in the Plan provide mixed signals, since despite dominance of import substitution objectives for manufacturing  -8- investments, medium-term investment priorities are stated to be: completion of priority on-going projects instead of several new ones; emphasis on quick- yielding productive and export earning investments; essential investments required to eliminate critical infrastructural bottlenecks; and those having a large import saving or employment impact. 25. The Plan implies a net capital inflow of about $1.6 billion per annum in 1978 prices. Assuming international inflation of close to 8 percent per year, this is equivalent to a net annual inflow in current prices of about $2 billion. Annual amortization of medium and long-term debt is projected at around $2 billion. This implies a gross external capital inflow of about $4 billion a year between 1979-83, which is a rather high and, perhaps unreal- istic, level. Given the limited access in the coming years to foreign capital, the unlikelihood of achieving the planned marginal saving ratio of 34 percent, and the conclusion (in para. 24) that the GDP growth rate is likely to be lower than the Plan target, the high level of annual investments is likely to remain only a paper objective. At the same time, to avoid a recurrence of excessive reliance on Central Bank borrowings and injudicious external borrow- ings to finance SEE investments, one cannot overstate the critical importance of improving SEE financial and economic management so that they can generate during the Plan period the sizeable resources needed to finance their invest- ments. 26. These brief comments on the Fourth Plan suggest the improbability of Turkey achieving the growth targets of that Plan. The crux of the medium- term issue is therefore the way in which the Government will continue to adjust, as it has since early 1978 through policy changes, shortfalls in any of the efforts to be made to mobilize available resources for the implementa- tion of the Plan. 27. The recent directions of Turkish economic policy suggest that, in essence, the Government is prepared to exercise flexibility in pursuance of medium-term recovery. A formal statement of the medium-term development strategy in the Fourth Plan document meets what is a constitutional require- ment in Turkey. However, actions so far indicate that this document is being pragmatically interpreted by the Government more as a statement of the general directions in which Turkey could move, rather than specific targets which must be fulfilled at any cost. The flexibility to modify Plan targets to meet the exigencies of a fluid economic situation, through the mechanism of Annual Programs approved by the Parliament pari passu with the Annual Budget, is a known feature of the Turkish developmental system. This should therefore enable the Government to respond to the need for changes in policy, to ensure sound economic recovery in both the short and the medium-term. For example, while the Government had already announced its 1979 Annual Program as required by law in February 1979, actual 1979 expenditures are expected to be signif- icantly limited by the restrictions agreed to in the Standby made with the IMF in July 1979. Similar limits on the magnitudes of expenditures and investments are likely to apply in 1980 and 1981 under future Standbys.  - 9 - 28. There is now more widespread recognition in Turkey than ever before that a rapid increase in foreign exchange earnings is essential to maintaining a satisfactory pace of economic development. If the ambitious export targets of the Fourth Plan (18 percent annual growth in real terms) are to be real- ized, it will clearly be essential to alter the traditional bias of incentives against exports, as the present Government has so far consistently endeavoured to do. 29. It is however essential for ensuring a successful export promotion policy that the exchange rate be maintained at a competitive level, taking account of the relative level of domestic inflation compared with the outside world. The Government has already expressed, under the July 1979 Standby, its determination to implement an appropriate exchange rate policy. This fundamental matter can be expected to be rigorously monitored by IMF for releasing its tranches, and is likely to be the focal point under the next Standby. 30. With gross capital inflow requirements expected to remain large, increasing from about $2.9 billion annually during 1980-82 to $4.6 billion in 1983-85, management of external debt remains critical for medium-term financial viability and hence, for the availability of the imports needed to permit resumption of growth. 31. Resumption of major inflows of capital remains a source of concern for two important reasons. First, the large overhang of debt and the recent reschedulings together raise a question regarding the need for further resched- ulings in the early 1980s. A critical element here is the likely posture of commercial creditors, which cannot easily be anticipated. Secondly, there is the issue of arrears on non-guaranteed export credits, estimated at around $1.0 billion. Several options are being considered to solve this issue, mainly involving rescheduling operations similar to those undertaken for other overdue short-term liabilities. The appropriate medium-term policies on foreign debt have their roots in the short-term measures being implemented under the current Standby Arrangement (para. 20) and will largely be an extension of these measures over time. 32. In 1977, total debt service payments amounted to 22.2 percent of exports of goods, non-factor services and workers' remittances; in 1978, it had riser. to 26.7 percent even after making allowance for the rescheduled service payments. In 1980, it is projected to reach close to 35 percent and will increase further in subsequent years since Turkey has to take on new borrowings to maintain sound economic growth. Taking these factors into account, the debt service ratio is likely to peak in the early 1980s at a high level of about 40 percent, before it begins to decline. This, however, should represent the culmination of the financial consequence of the present crisis and should be manageable, provided the export drive is sustained and, equally important, a prudent debt management policy is formulated and effectively implemented.  - 10 - 33. To stimulate private savings (and reduce distortions of investment priorities) interest rates were raised significantly in early 1979 (para. 19), but they are not yet commensurate with the current high rate of inflation. It is important that interest rates be reviewed periodically to minimize renewed distortions. The bulk of the increased domestic savings effort, however, has to be made by the public sector, in particular the SEEs. While the already substantial tax effort of Turkey, ranking it relatively high among developing countries, precludes drastic improvements from that side, there is a wide margin for improving the financial performance of many SEEs. Primary respon- sibility for their poor financial results lies in their past pricing policies, usually decided outside the enterprises and often based on political rather than economic reasoning. In the face of persistent high inflation, continuing price adjustments will be necessary to prevent renewed deterioration in the financial performance of SEEs. Further reasons for SEE losses are inefficient management, poor industrial relations, excessive labor force, and technical weaknesses in design and operations which result in low productivity and wasteful use of inputs. Operating almost exclusively in the over-protected domestic market, and with easy access to budget support and credit, they have had little incentive to improve efficiency or to earn profits. The recent institution of production and export targets for some SEEs are therefore steps in the right direction. These ought to be complimented by the establishment of annual profit targets for each major enterprise. As mentioned before, the Standby envisages that such measures will reduce SEE deficits by some 15 percent (in current US$) or about 0.9 percent of GDP in 1979. This is again clearly an area which can be monitored by IMF for releasing its tranches, and one that can be expected to be covered in the next Standby. 34. Equally important, is the issue of the composition of the investment program. This will demand imposition of rigorous vigilance to hold to the Government's stated investment priorities: (a) to promote export oriented and productive projects in general, but particularly agricultural projects; (b) to complete those priority ongoing projects which will yield speedy and substan- tial returns with modest increases in the allotment of additional funds; (c) to promote employment creating projects and only those infrastructural proj- ects which are needed to relieve serious bottlenecks to balanced recovery-- such as power, ports and the like. Implementation of these priorities will require substantial flexibility and dexterity on the part of Government. As a first step, the State Planning Office has expressed strong interest in dis- cussing the findings of the last economic mission with Bank staff at an early date, before it prepares its 1980 investment program. Conclusion 35. Continuation of prudently planned and rigorously implemented short- term and medium-term economic and fiscal policies by the Government will be crucial for Turkey to translate the progress so far made into a medium-term recovery that ensures stable growth. Continuing political difficulties will make this task by any government difficult. However, the powerful steps taken earlier this year and adherence to the additional commitments under the July 1979 Standby Agreement with IMF, which the Government seems determined to implement, should help facilitate a sound recovery on a stable basis. With  - 11 - the short-term debt reschedulings so far made on relatively hard terms, external debt management remains critical for medium-term financial recovery and the availability of imports needed to permit resumption of sound growth. It results in a relatively high, though perhaps manageable debt service ratio which is likely to peak at well over 40 percent by 1982/83, before gradually declining. With the additional borrowings which Turkey must make to maintain such a growth, the country will need the support of the international economic and financial communities, both through a further rescheduling of outstanding debt and provision of new financing, on more generous terms. With stch support and adherence to judicious economic and debt management policies, Turkey continues to be creditworthy in the medium-term for an increased level of Bank support. PART II - BANK GROUP OPERATIONS IN TURKEY 36. A large and continuing lending program for Turkey essentially began in 1970 following the success of Turkey's 1970 stabilization program. To date, the Bank/IDA have lent $2,114 million through 58 projects. Agriculture accounts for 30 percent of the funds lent, industry and DFCs for 34 percent, power for 14 percent and urban development, transportation, education and tourism for the rest. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of August 31, 1979, with notes on the execution of ongoing projects. 37. Since mid-1975, while the implementation of private sector projects was satisfactory, political uncertainty, limited coordination amongst minis- tries and staffing problems resulted in uneven and delayed project implemen- tation in the public sector. Therefore, a system of joint project reviews between Turkey and the Bank was instituted in June 1975. These resulted in distinct, but modest improvements up to the end of 1977. The situation was therefore reviewed with the new Ecevit Government in March 1978, and further discussed during my visit in April 1978. Subsequently, Turkey established a new high-level Coordination Team for Bank projects. This Team set up proce- dures for monitoring and achieving realistic implementation and disbursement targets, and reviewed possible changes in sector policy covenants which, be- cause of Turkish laws and practices, constrained effective project performance. As of July 31, 1979, disbursements increased to 73 percent of appraisal esti- mates against 51 percent in June 1975. A further successful implementation review was held in April. The encouraging progress and constructive coopera- tion which have now become manifest allow cautious optimism that performance will gradually improve further, permitting an expansion of Bank lending. 38. Bank lending is now aimed at supporting Turkey's efforts to improve its: (a) capacity to earn or save foreign exchange, through promotion of industrial and agro-industrial exports; (b) income distribution, employment opportunities and living standards, through rural and urban development; (c) lagging public sector savings, through the encouragement of improved manage- ment and financing of the investments of key SEEs; and (d) infrastructure which poses bottlenecks for development. The Bank has begun discussions with  - 12 - the Government on how its lending can best contribute to the new Plan's objectives, especially export promotion, without being handicapped by past policy and institutional obstacles. Meanwhile, agriculture and industry remain the key sectors for lending. In agriculture, projects emphasize livestock, exports, and rural development; in industry (including DFCs), the emphasis is on promotion of exports and employment, as also the gradual strengthening of the SEEs. Projects for urban development, public utilities and transportation supplement these efforts. 39. A thirteenth TSKB Loan designed to stimulate investments in export projects of the private sector, was approved by the Executive Directors on July 12, 1979, and a loan for a Private Sector Textile Project was approved on September 4, 1979. Other projects being processed for this and future fiscal years include projects for public sector textiles modernization, livestock, fruit and vegetables, livestock products, rural development, fertilizer, pilot secondary oil recovery, employment generation in selected cities, pulp manu- facture and seed production and transport and sewerage development in Istanbul. 40. At the end of 1978, the Bank Group's share of Turkey's medium and long-term external debt (outstanding and disbursed) was 12.6 percent. This share is expected to remain the same in 1981, and to increase to 13.7 percent by 1985. The Bank Group's share of the estimated total external debt (includ- ing short-term obligations) was 5.9 percent in 1978, and is expected to grow to 10.0 percent by 1981 and to 12.5 percent by 1985. The Bank's share of service payments on medium and long-term debt is projected to fall slightly from its level of 7.7 percent in 1978 to 6.4 percent in 1981, thereafter increasing to 7.6 percent by 1985. 41. IFC has invested in projects for synthetic yarns, pulp and paper, glass, aluminum, iron and steel products, motor bicycle engines, piston rings and cylinder liners, and tourism, besides in TSKB. As of August 31, 1979, gross IFC commitments totalled $206 million, of which $100 million were still held by IFC. Additional investment opportunities are being pursued. PART III - BACKGROUND ON AIR POLLUTION IN ANKARA The Air Pollution Problem in Ankara 42. Situated at an altitude of 800 meters on the Anatolian Plateau, Ankara, the capital of Turkey, is exposed to severe winter conditions. The central, heavily populated area of the city is surrounded by hills, so that it is essentially sitting at the bottom of a shallow bowl. This topographical feature and the climate combine to inhibit air dilution and make the winter air pollution problem far more serious than it is in other cities using the same fuel for domestic heating. Except when a fairly strong wind is blowing in Ankara, the pollution from the chimneys of houses, apartments, offices and industrial plants hangs over the city in a dense, poisonous, sooty cloud. Besides causing general inconvenience and discomfort, it results in serious respiratory and bronchial problems for the population.  - 13 - 43. The principal heating fuels are lignite, fuel oil and wood. Ankara currently consumes annually approximately 1.2 million tons of lignite and 350,000 tons of fuel oil; wood plays a relatively minor role. Demand for heating fuel is increasing at approximately 5 percent a year. Because of the significantly higher calorific value of smokeless coke or briquettes compared to untreated lignite, it is estimated that Ankara's annual demand for lignite- based smokeless fuel would be of the order of 700,000 tons to replace the present 1.2 million tons of lignite. 44. Turkish authorities have long been concerned with this air pollution problem, but only within the past decade have active steps been taken to try to control it. A study by NATO during 1969-72 led to the establishment of a monitoring network in Ankara and the development of a pollutant-emission inventory and dispersion model for that city. Several consultants, under the auspices of the UNDP, have visited the city and given advice to the Government, especially since 1975. Following the establishment of the Ecevit Government in January, 1978, UNDP/WHO were asked to advise on the creation of an Environ- mental Protection Undersecretariat (BCM). This has now been set up in the Prime Minister's Office, under the direct responsibility of a Deputy Prime Minister. It is currently headed by an Undersecretary, and has a small staff consisting of a Deputy Undersecretary, a Secretary General, a Technical Director and a Legal Adviser. The detailed functions and responsibilities of the BCM are still being defined. Its staff is expected to grow rapidly once the required executive decisions have been made. 45. Pollution in Ankara is aggravated because the fuel oil burned is highly sulphurous and the lignite is of poor quality. Consequently they produce sulphur dioxide (SO2) and suspended particulates (smoke), both of which are the primary causes of the pollution . These fuels account for about 95 percent of the sulphur oxides and about 75 percent of the suspended particulates measured in Ankara during the winter months. The balance of the pollution is caused by transportation, industrial processes and incineration of wastes. 46. The reports of various UNDP/WHO experts conclude that sulphur dioxide (SO ) concentrations in Ankara during winter season of 1974-77 aver- aged 300-506 micrograms per cubic meter of air (ug/m3). These levels of concentrations are unusually high, and exceed air quality standards in all countries where standards exist. During these years, 24-hour peak concentra- tion of over 1,000 ug/m3 had been observed. These levels constitute a serious health risk, especially when occurring in combination with particulate matter. When levels of SO2 exceed 115 ug/m3 there are usually higher rates of bronchitis and emphysema, increased chronic respiratory disease in older persons, reduced lung function, and increased frequency and severity of lower respiratory diseases in school children. Acute episodes with increased mortality were observed when the 24 hour SO average concentrations exceeded 715 ug/m3. Increased hospital admissions oi older persons with respiratory diseases were noted in many cities of the world when the 24 hour mean SO2 concentrations were 300-500 ug/m3. Tests in Ankara by the Ministry of Health  - 14 - and Turkish Scientific and Technical Research Institute (TBTAK) since 1970 show that peak levels of SO and particulate concentration in the air have exceeded 1,000 ug/m3 more than once each winter. This compares with WHO's recommended limit of 150 ug/m3. 47. One of the 1974 WHO studies concluded that the air pollution levels in Ankara were as high as those previously reached in London, Tokyo and other cities, where deaths from such pollution were reported during severe air pollution concentrations. Ankara could be experiencing similar hazards without recording the deaths. Controlled lung tests on children in Ankara, compared with those in the villages, as well as summer versus winter tests, show some correlation between adverse health effects and levels of air pollu- tion. 48. The longer the situation continues, the more serious it will become, as the population of Ankara grows rapidly. The elimination of the problem is a long-term objective which will take years to achieve. However, steps to control the pollution are already being initiated. The purpose of the pro- posed Engineering Loan is to intensify the search for optimum solutions both in the short and long term, leading to a construction project for a smokeless fuel plant as an initial measure, besides identification of feasible long-term alternatives for eventually eliminating the air pollution. PART IV - THE PROJECT Project Background and History 49. The conception and development of this project has been unusually rapid. Its history goes back only one year. In the spring of 1978, the Turkish authorities asked a high level Bank mission, then discussing the future course of the Bank's relations with Turkey, whether the Bank might be able to help alleviate Ankara's winter air pollution problem. Prior to that, the Bank's knowledge of the situation was only a general awareness of the seriousness of the problem, and of the studies which had been undertaken in the late sixties and early seventies. 50. The Bank's response to the request for assistance was positive. In the late summer of 1978 the BCM sent preliminary feasibility studies on: (i) a hot briquetting plant, and (ii) a district central heating scheme. BCM expected that one or both of these schemes would be rapidly financed by the Bank as a first step in alleviating the pollution problem. The arrival of these documents was followed closely by a visit in October from the Deputy Prime Minister in charge of environmental matters, and the Undersecretary for Environment. The two schemes, together with other possibilities, were discussed at length; but the preliminary nature of the feasibility reports caused the Bank to be cautious in making commitments on the timing of any possible construction loan.  - 15 - 51. In December 1978 a reconnaissance mission went to Turkey. It visited the Mineral Research Institute's (MTA) hot briquetting laboratory test plant in Ankara and the Turkish Coal Board's (TKI) coking plant in Seyitomer, about 500 km west of Ankara. It discussed and reviewed the proposed central Ankara district heating scheme. The mission also discussed immediate short- term measures for air pollution control, which have been sponsored by UNDP and WHO over the past few years, and studies related to determining the optimum long-term solution for the provision of clean fuels. 52. This mission came to the conclusion that: (i) the hot briquetting process developed by the MTA could not be scaled up from a 200 kg/hour labo- ratory test plant to a 150,000 ton/year commercial plant, as suggested by the Turkish authorities, without taking unacceptable financial and technical risks; (ii) the Ankara district central heating proposal required considerably more investigation before any investment decision could be made; and (iii) an initial solution lay in identifying technically and economically viable pro- cesses to produce a smokeless fuel using Turkish lignite, and then building a plant to produce it. The mission also concluded that the completed TKI coking plant at Seyitomer, which had the potential of providing Ankara almost immediately with urgently needed smokeless fuel, should be put into efficient operation without further delay; the plant had been idle since construction was completed in August 1976 due to technical difficulties and legal disputes with the contractor. The Bank therefore recommended that an Engineering Loan be considered to help design and construct a pilot plant using the MTA process, for modifications and start-up operations on the TKI coking plant, together with financing for studies to identify other possible intermediate and long- term solutions. 53. In March 1979 an appraisal mission visited Ankara and discussed in detail the terms of reference for the various studies. A list of experienced consultants in this highly specialized field was drawn up by TKI and agreed by the Bank. Proposals from consultants for the Alternative Technology Study and for the design of the MTA Pilot Plant (paras. 55 and 60 below) were received prior to negotiations and discussed with the negotiating team. Negotiations were held in Washington from June 24 to 26, 1979. The Turkish negotiating team was headed by Mr. Alaeddin Yoruk, Acting Financial Counsellor of the Turkish Embassy, and included representatives from TKI, BCM and MTA. Project Description 54. A brief outline of the Project is given in the Loan and Project Summary. Annex IV contains a list of documents in the Project File. A more detailed description follows, with explanations as to why the various specific components are included in the proposed Engineering Loan. 55. Alternative Technology Study: The purpose of this study is to determine, as the basis for making future investment decisions, whether there are existing and proven technologies currently operating in other countries which could be readily used to produce smokeless fuel (such as briquettes or lump coke) from the lignite mined in Turkey. One process is currently being tested in Turkey (para. 56), but the plant has yet to be made operational. Before committing large investments to the duplication of this or any other  - 16 - plant, it would be prudent for the Government to determine whether the same end result could be achieved more economically through some other already proven and evaluated process. If this study does point to an existing process as being the optimum method for manufacturing smokeless fuel, taking into account the process used by the TKI plant at Seyitomer (para. 56), the con- sultants would prepare detailed designs and tender documents sufficient to proceed with tendering for the plant using the selected process. Furthermore, the consultants reports and analysis would provide data needed for appraisal of the project by any external agency. 56. Start-Up of TRI Coking Plant at Seyitomer: This plant was built by two contractors on a "design and construction" basis for the TKI. The first part of the plant dries and sizes the lignite from the adjacent mine. The second unit, the carbonization section, cools and stores the lignite for shipment. 57. The start-up of the Seyitomer plant commenced in September 1976. The drying unit operated satisfactorily, but there was an excess of fines at the base of the unit and the quantity of fines increased when the dried lignite was conveyed to the top of the carbonization plant. The start-up of the carbonization unit was not successful at this time, and the contractor made certain technical changes by June 1978. Another start-up process was attempted in August 1978, but frequent and lengthy power and water failures, combined with other relatively minor technical problems, culminated in the plant shutting down in September 1978. Since that time, the TKI and the contractor for the carbonization plant have been discussing further modifica- tions, and their cost, to remedy the defects. Agreement has now been reached between the two parties under which TKI will pay the contractor an agreed sum for the past modifications, and the contractor will make further modifications to put the plant into operating condition. These modifications, towards which part of the proposed loan would be used, will enable the plant to operate on a continuous or an interruptable basis, thereby overcoming the damaging effect of possible power or water failures. 58. If, as is expected, this plant can be made to work efficiently, and if the "alternative technology" study (para. 55) determines that the process used in the Seyitomer plant is the optimal solution, the construction of another plant of similar or greater capacity with suitable modifications could form the basis of a future Bank loan. However, even if the Seyitomer process is not considered by the consultants to be the most appropriate, the small amount of Bank funds spent to get the plant operating and producing smokeless fuel would be well worthwhile, as it would immediately contribute to some alleviation of Ankara's pollution problem. 59. The MTA Hot Briquetting Process: This process has been under development for the past several years to produce smokeless domestic fuel by carbonizing crushed lignite to render it smokeless, and briquetting the resulting char to provide lumps suitable for use in the domestic heating and cooking appliances currently used in Turkey. The laboratory test plant, at MTA's headquarters in Ankara, was designed to produce 100-200 kg of thin briquettes per hour, using lignite from the coal mine at Seyitomer.  - 17 - 60. MTA's laboratory plant has operated only intermittently, and never on a continuous basis. While the tests have shown that, under certain speci- fied conditions, it is possible to produce high quality briquettes from Seyitomer lignite, the Government would be taking unacceptable technical and financial risks to scale-up the laboratory test plant to a full scale commer- cial plant, without first proving the process in a pilot plant, using the exact technology to be later used in the commercial plant. In several critical areas, such as the size of the briquette, the combustion process during carbonization, the movement of hot char to the press, the speed of the press, and the cooling of the briquette, there will be substantive technological differences between the existing laboratory plant and any future commercial plant. 61. Turkey and the Bank have agreed on this approach. Current indica- tions are that if this process is proven for commercial operation, the quality of fuel produced would be considerably higher than that produced by existing coking technology. However, this is a long-term solution, since the full- scale commercial plant is not likely to come on stream until four years after the building and testing of the pilot plant. The pilot plant itself will take about two and a half years to design and construct. 62. Under this component, consultants who have expertise in hot briquet- ting will be hired to design and supervise the construction of a 2-3 ton/hour pilot plant on a site about 40 km west of Ankara. TKI is currently in the process of acquiring this site, and has agreed to complete acquisition not later than December 31, 1980, by which time the construction of the pilot plant is expected to begin (Loan Agreement, Section 3.06). 63. Long-Term Measures for Pollution Control. Measures for containing and eventually reducing air pollution which are under active consideration and testing are based on currently known technology and materials readily at hand. Given the urgency of the situation, the Turkish authorities cannot delay the implementation of available, though perhaps imperfect, solutions in the hope that future, currently unproven technologies or processes may provide a more perfect solution. Nevertheless, the Government prudently plans to investigate other long-term pollution control measures, in the hope of finding a permanent substitute for lignite as a domestic heating fuel. 64. The Government's first priority is to investigate the possibility of producing fuel gas for domestic heating. A preliminary study has been prepared by the Energy Ministry to determine the feasibility of using lignite from the Beypazari mine. The investment cost has been very tentatively estimated at roughly $250 million, with a foreign exchange component of $140 million. This high cost calls for very careful technical and financial studies before any decisions are made to go ahead with such a proposal. 65. The technical and economic viability of producing fuel gas from lignite will also be compared to other long-term alternatives for pollutant- free heating, such as district central heating, the use of geothermal energy, desulphurization of oil and distribution of propane gas. The Government has agreed not to embark upon any investment project for fuel gas until these  - 18 - studies have been completed (Loan Agreement, Section 3.07). Terms of Reference for the study are being finalized and selection of consultants is expected in the near future. 66. As mentioned earlier, an initial preliminary study has been done for the Ankara district heating proposal. This scheme, still in its infancy, is to use the existing Ankara Municipality power plant in downtown Ankara as a combined power and heating plant. It is an old plant, commissioned in 1936, and is now operated only to meet peak requirements. Even if a decision is made, at a later stage, to institute district heating, it is doubtful whether it would be sound to try to modify this plant for that purpose. 67. The theory of using district central heating in high-density areas in a city with the environmental problems of Ankara is sound. However, con- siderably more investigation and evaluation is required to determine whether the large investments required for such a scheme are worthwhile. The Turkish authorities have therefore agreed to make the necessary studies. 68. Immediate Pollution Control Measures. Technical solutions for the production of smokeless fuel must be complemented with other pollution control measures. The several experts in environmental protection who have visited Ankara recommended not only the creation of the BCM but the imposition of several short-term control measures. These are either already being imple- mented and are having an immediate and measurable impact, or are being seriously considered. 69. The limited quantities of high-quality anthracite coal in Turkey are used for industrial purposes, leaving low grades of lignite for domestic heating. Until the beginning of this year, private coal distributors supplied a significant proportion of the lignite consumed in Ankara, and usually this lignite was of the lowest quality. Now TKI controls all the supply and distribution of lignite in the city, and during the 1978/79 winter all lignite supplied to Ankara was of fairly good quality. This has already resulted in some reduction in the sulphur emissions, but has not significantly reduced the suspended particulates (smoke), because the lignite is burned untreated. 70. Training courses have been instituted, and are under way, to teach boiler operators in apartment blocks and offices the correct method of burning lignite, and how to maintain the equipment to keep it operating as efficiently as possible. Attention is also being given to the modification of existing combustion devices to enable efficient burning of currently available fuel. 71. Ankara has been zoned according to levels of air pollution, and inspection teams visit the problem zones to ensure that whatever preventive measures are available are being applied, and that the least polluting fuels are sold in these areas. This program will have a significant impact when the first smokeless fuel is made available to the most polluted areas. 72. The UNDP/WHO proposes to provide additional technical assistance and training for the monitoring of polluting agents in the air. There are currently seven fixed monitoring stations in the greater Ankara area operated  - 19 - by the Ministry of Health and the Turkish Scientific and Technical Research Organization, but the lack of up-to-date equipment and trained operators is limiting their usefullness. WHO has reviewed the air pollution monitoring system in Ankara and has made proposals for the upgrading of the system. It is planned to upgrade the existing 7 stations and provide an additional 7, of which 5 will have automatic continuous recording facilities and 9 will be manually operated. One mobile monitoring van is also needed to complete the first phase of the system. The BCM or other appropriate agency will implement the monitoring program one year after the date of the Loan Agreement and annual reports will be submitted to the Bank (Loan Agreement, Section 3.08). 73. UNDP funds are not sufficient to finance monitoring equipment, and their contribution will be limited to providing technical assistance and training. Therefore, under this component of the Engineering Loan, funds will be used to purchase the mobile monitoring van, and additional equipment for the fixed monitoring stations. Project Costs 74. The total cost of the components covered by the Engineering Loan is estimated at $11.25 million, with a foreign exchange component of $6.0 million. The local currency component of $5.25 million equivalent will be borne by the Government. 75. The cost estimates for the construction of the MTA Pilot Plant were prepared by a consultant from the U.K. National Coal Board and reviewed by Bank staff. The estimates are based on outline designs of the main components. A physical contingency of 15 percent is provided in the cost component to cover unforeseen work on the plant. Provision for price increase on local costs were calculated at an average of 35 percent per annum and foreign costs at 8 percent per annum. Consultants' proposals for carrying out the Alterna- tive Technology Study and for designing and supervising construction of the MTA pilot plant have been received and the costs are based on these quotations. Foreign consultant services of about 300 man-months and local experts of about 80 man-months will be required at a cost of US$9,500 and US$3,000 per man-month respectively. Project Implementation and Management 76. The consultants' studies for all components except the MTA pilot plant are expected to be completed by the end of 1980. Design and tender documents for the MTA plant should be completed by mid 1980 and construction should commence by early 1981 and be completed by early 1982. Site prepara- tion and provision of basic facilities will commence in 1980 (para. 62). The BCM will be the overall coordinator of the project. The Bank will be notified by November 30, 1979 which agency will be responsible for the monitoring pro- gram (Loan Agreement, Section 3.04). During its short existence, BCM has shown itself to be highly motivated and influential in directing the policies of line agencies whose operations have a bearing on the environment.  - 20 - 77. TKI will be responsible for implementation of all components, except that relating to immediate pollution control measures. TKI has agreed to establish technical working groups to work with the consultants for the imple- mentation of the various components of the project. Close collaboration will be maintained with the MTA in the case of the hot briquetting pilot plant. TKI, a State Economic Enterprise responsible for developing Turkey's coal and lignite resources and for selling the end-product, has a Board of six Directors nominated by the Minister of Energy and appointed by the Council of Ministers for a term of six years. The organization is headed by a General Manager and three Deputy General Managers. The Deputy Director of the Coal Technology Department, an experienced and competent engineer and manager, will be directly responsible for implementing the Seyitomer plant component; together with MTA, he will also be responsible for the construction and opera- tion of the MTA pilot plant. 78. MTA was established in 1935 to explore and exploit the mineral deposits of Turkey. MTA, under the Energy Ministry, has a General Director and Deputy General Director, and seventeen Departments. The total profes- sional headquarters staff is about 4,000, with about 6,000 additional field staff. The Director of the Technology Department will be responsible, together with TKI, for the hot briquetting component of the project; he personally was responsible for developing the process and bringing it to its current stage of success. The Technology Department has 91 mining, chemical and metalurgical engineers; a small group will be appointed to work on the pilot plant on a full-time basis. A protocol will be established prior to December 31, 1979 between TKI and MTA to provide for technical cooperation in the construction and running of the pilot plant (Loan Agreement, Section 3.10). 79. An overall Steering Committee has already been set up to deal with all aspects of environment protection in the country; technical groups deal with the everyday details. This Committee, headed by a Deputy Prime Minister, is composed of BCM, Energy Ministry, TKI, Turkish Electricity Authority, MTA, Ministry of Finance, Turkish Petroleum Organization, State Planning Organiza- tion, Petrol Office, Turkish Scientific and Technical Research Organization, Ministry of Health, Ankara Municipality, and Ministry of Local Administration. 80. The Steering Committee meets once a month. A Coordinating Committee, drawn from the same organizations and composed of functionally-oriented groups, meets every two weeks, under the Chairmanship of the Undersecretary of BCM. A special sub-committee and working group have been established to work on the components of the Engineering Loan and will ensure that TKI receives technical assistance from other state enterprises and institutes as required. 81. Consultants, appointed under terms and conditions acceptable to the Bank (Loan Agreement, Section 3.02) will carry out all studies financed by the loan, under the general supervision of TKI. Their recommendations will be reviewed by the Government and the Bank. Procurement 82. The contract for equipment for the MTA Plant will be awarded on the basis of International Competitive Bidding (ICB) in accordance with the Bank's  - 21 - guidelines. Purchase of monitoring equipment will be based on limited inter- national tendering. Contracts for civil works for the MTA Plant will be awarded in accordance with TKI's procurement procedures which are satisfactory. No Bank funds will be used for civil works. Retroactive financing of not more than $500,000 will be provided on costs incurred for consultants and monitor- ing equipment after August 1, 1979. Financing and Disbursement 83. $5.45 million of the proposed loan of $6.0 million to Turkey will be on-lent to TKI on the same terms as the Bank loan. The execution of a Subsidiary Loan Agreement, acceptable to the Bank, is a condition of loan effectiveness. The balance of $0.55 million will be retained by the Govern- ment for the purchasing of monitoring equipment. The proposed Engineering Loan would be refinanced under any later loan the Bank might make for the construction of a full-scale commercial plant to produce smokeless fuel to reduce air pollution. 84. Disbursements from the Engineering Loan would be at the rate of 100 percent of foreign expenditures for consultants' services and imported equip- ment and the ex-factory cost for locally produced equipment. The estimated schedule of disbursements is shown in the Loan and Project Summary. Project Justification, Benefits and Risks 85. In the medium-term, the Government must rely on lignite as the raw material for the manufacture of smokeless fuel. The unavailability of natural gas, the current critical shortage of foreign exchange for the purchase of low-sulphur oil, the considerable expense of establishing desulphurization plants for high-sulphur imported oil, and the long-term nature of developing other clean fuels, eliminate all other alternatives. The Engineering Loan is designed to assist the Government within these imperatives, and taking into account the urgency of the situation described in Part III of this report. 86. By providing $350,000 to modify the Seyitomer coking plant, the Bank's contribution will activate a $16 million investment which has been idle since August 1976 (paras. 57, 58). There is a reasonable probability that the MTA process, after testing in a pilot plant will provide a high quality smokeless fuel (hot briquette) at an affordable cost. The $3.0 million allo- cated for this purpose in the Engineering Loan will enable this vital inter- mediary step to be accomplished (paras. 59, 60). The studies on alternative technologies and long-term measures are included to try to ensure that future investments for clean fuels are directed to the most appropriate technology. The huge investments necessary to tackle the air pollution problem in Turkey as a whole over the long term demand a sound knowledge of all the practicable possibilities (para. 63). The UNDP and WHO have been active in providing funds and advice for measures which can be implemented immediately to monitor and control some of the smoke and sulphur resulting from the improper combus- tion of lignite, and from the previously uncontrolled sale and distribution of the lowest grades of lignite. The allocation of $550,000 will supplement and help expand these programs (paras 68, 73).  - 22 - 87. ProJect Risk. The major purpose of the funds provided under this project is to further develop promising methods of manufacturing smokeless fuel from lignite, and to investigate other possible technologies which may provide a more appropriate clean fuel in the long-term. It is remotely possible that neither the TKI plant at Seyitomer nor the MTA process will turn out to be technically and economically feasible, and that the search for alternative solutions will be fruitless. This risk is considered to be well worth taking in view of the significant economic, social and health benefits which will result from a successful, or even partially successful, project. PART V - LEGAL INSTRUMENTS AND AUTHORITY 88. The draft Loan Agreement between the Republic of Turkey and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. Features of special interest are referred to in appro- priate paragraphs of this report and summarized in Annex III. 89. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 90. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by A. David Knox Attachments October 3, 1979 Washington, D.C.  - 23 - ANNEX I TASLE 3A Page 1 of 6 TURKEY - SOCIAL INDICATORS DATA SHEET TURtE RZFERrNCE C20UtPS ( AD.7USTD AIWAES LAND AREA (THOUSAND S O. Dl.) -x F EN GROUPS DSTl A ED - TOTAL 780.6 SAME SAE NE.XT HIGER ACRICULTULAL 552.0 MDST RECENT GEOGRAPHIC INCOn# IcoMe 1960 /b 1970 /b ESTL'ATE /b REGION /c GROUP Id GROUP /I CNP PER CAPtTA (US$) 290.0 520.0 1200.0 2906.3 1097.7 1942.6 ENERGY CONSUMPTION PER CAPITA (UILOGRAMS OF COAL EQUIVALENT) 245.0 479.0 743.0 2033.2 730.7 1646.7 POPULATION AD VITAL STATISTICS FOPULATION. .IID-YEAR (MULLONS) 27.5 35.3 41.9 UUAN POPULATION (PURCENT OP TOTAL) 29.7 38.4 42.9 56.3 49.0 51.2 POPULATION PROJCTIONS POPULATION IN Y*AR 2000 (MILLIONS) 64.0 STATIONART POPULATION (MILLIONS) 98.0 YEAR STATIONARY POPULATION tS REACD 2070 POPULATION DENSITY PER SQ. KM. 35.0 45.0 54.0 81.5 44.6 28.2 PER SQ. K#. AGRICULTURAL LAND 51.0 64.0 76.0 138.8 140.7 100.5 POPULATION AGE STRUCTURE (PZRCxNT) 0-14 YRS. 41.3 41.7 41.0 25.6 41.3 35.4 15-64 YRS. 55.2 54.0 54.0 62.9 55.3 56.3 65 YRS. AND ABOVE 3.5 4.3 5.0 10.2 3.5 5.1 POPULATION GIW! RATE (PERCENT) TOTAL 2.8 2.5 2.5 0.9 2.4 1.7 URBAN 5.1/t 5.1 4.7 2.6 4.3 3.0 CRUDE StRTR RATE (PER THOUSAND) 43.0 38.0 30.0 18.5 31.1 27.5 CRUDE DEATH RATE (PER THOUSAND) 16.0 13.0 10.0 9.2 9.2 9.1 GROSS REPRODUCTION RATE 2.9 2.6 2.1 1.2 2.2 1.8 FAMILY PLANNING ACCEPTORS. ANNUAL (TROUSANDS) .. 65.6 66.6 USERS (PERCENT Of MARRIED WOMEN) 5.3 8.2 38.0 .. 34.7 FOOD AND NTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 91.5 100.0 105.0 115.7 104.4 102.0 PER CAPITA SUPPLY OF CALORIES (PERCENT Of REQUIlRDIR ) 110.0 112.0 113.0 134.2 105.0 120.8 PROTEINS (GRAMS PER DAY) 78.0 78.0 75.7 95.4 64.4 80.9 OF WH2IC ANIMAL AND PULSE .. Z2.0OL 24.7 45.4 23.5 31.3 CHILD (AGES 1-4) MDRTALM RATE 24.0 16.0 10.0 1.3 8.6 5.1 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 51.0 57.0 61.0 70.0 60.2 65.6 INFANT MORTALITY RATE (PER THOUSAND) 187.0/f 153.0/i 118.0 31.5 46.7 65.5 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 52.0 75.0 .. 60.8 69.4 URliAN .. 51.0 70.0 .. 75.7 85.1 RaRAL .. 53.0 80.0 . 40.0 *3.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TMTAL .. .. .. .. 46 0 70 1 URBAN .. .. 19.5 *. 46.0 88.3 RURAL .. .. .. .. 22.5 33.2 POPULATION PER PHYSICIAN 3OOO.0L 2250.0 1720.0 661.6 2262.4 1363.2 POPULATION PER NURSING PERSON .. 1880.0 1430.0 677.1 1195.4 765.0 POPULATION PER HOSPITAL ReD TOTAL 590.0/1 490.0 460.0 180.1 453.4 197.6 URBAN 190.0L. 200.0 210.0 .. 253.1 260.2 RURAL .. 5890.0 5750.0 .. 2732.4 1055.0 ADMISSIONS PER HOSPIT-AL RED .. 20.0 20.0 15.3 22.1 17.3 ROUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.7 5.9 .. .. 5.3 4.7 URBAN .. .. .. .. 5.2 4.4 RURAL .. .. .. .. 5.4 5.1 AVERACE 1tS#8ER OF PERSONS PER ROOK TOTAL .. 2.2 .. .. 1.9 1.1 URBAN 2.0 1.9 .. .. 1.6 1.2 RURAL .. .. .. .. 2.5 1.2 ACCESS TO ELECTRICITY (PERCENT OF OWELLINCS) TOTAL 29.0 40.0 57.0 .. 50.0 66.0 L'RBAN .. .. .. .. 71.7 85.1 RURAL 2.0 186.0 .. .. 17.3  -24 - ANNEX I TABLE 3A Page 2 of 6 TUR7E - SOCIAL INDICAtORS DATA SHEET REFEENCE GROUPS (ADJUS5tD ).jRaCES - 0lST RECENT EStIATE ) - SAME SAME NE1T HIHCiE .MIT RECENT GEOGRAPHIC LiNCOM LiNCO0m 1960 /b 1970 /b ESTIMATE /b REGION /c GROUP /d GROUP /a EDUCATION ADJUSTED E0ROLL.(ENT RATIOS PRMARY: IOTAL 75.0 109.0 104.0 105.7 102.5 101.7 .ALE 90.0 124.0 114.0 107.1 108.6 110.0 FEMALE 58.0 94.0 94.0 104.5 97.1 92.8 SECONDARY: TOtAL 14.0 28.0 29.0 65.9 33.5 51.2 MALE 20.0 39.0 39.0 70.3 38.4 56.4 FEMALE 8.0 16.0 19.0 62.2 30.7 43.7 VOCATIONAL