Turkey - Third Ports Project

Docuinut of The World Bank FOR OMCAuL USE ONLY Rbpot No- P-3995-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$ 134.5 MILLION TO THE REPUBLIC OF TURKEY FOR A THIRD PORTS PROJECT April 22, 1985 This documeit 1m a rbicted dis_lbuh and miay be td by recipi. aly In he perfomance of ther effie dals lb eeate ma se eeewwae be d_sim wilbeut Word Dak a"mtntlom.  TURKEY CURRENCY EQUIVALENTS Currency Unit Jan 1980 1./ Jan 1981 Jan 1982 Jan 1983 Jan 1984 Jan 1985 US Dollar - TL 70.00 TL 91.00 TL 139.60 TL 191.15 TL 309.20 TL 451.40 TL 1 - US$ 0.014 US$ 0.011 US$ 0.007 US$ 0.00! US$ 0.003 US$ 0.002 1/ Since January 1981, the rate is being adjusted for the differential inflation between Turkey and its major trading partners. The rate in effect in December 1984 (TL 428 = $1) was used for Parts III and IV of this report. FISCAL YEAR Republic of Turkey January 1 to December 31 PRINCIPAL ABBREVIATIONS A ) ACRONYMS USED DB - Turkish Maritime Bank ICB - International Competitive Bidding ILO - International Labor Organization DLH - General Directorate of Railways, Ports and Airports Construction in the Ministry of Public Works MAFRA - Ministry of Agriculture, Forestry and Rural Affairs MOT - Ministry of Transport NPMP - National Ports Master Plan NIP - National Transport Master Plan PCC - Project Coordination Committee SEE - State Economic Enterprise SPO - State Planning Organization TCDD - Turkish State Railways TCL - Turkish Cargo Lines TDI - Turkish Maritime Organization TEU - Twenty-foot Equivalent Units THY - Turkish Airlines  rOi OMCIAL USE ONLY TURKEYI THIRD PORTS PROJECT Loan and Project Sunmazy Borrower: Republic of Turkey Beneficiaries: 1. Turkish State Railways (TCDD) 2. Turkish Maritime Organization (TDI) Amout: US$134.5 million equivalent Terms: . Seventeen years including four years of grace, with interest at the standard variable rate Relending Terms: Part of the loan would be onlent to the beneficiaries on the same terms and conditions as the Bank loan. The beneficiaries would bear the full foreign exchange risk. Proiect The proposed project is designed to assist the Description: Government in introducing modern container handling technology to the ports system. The project would cover a first phase of container port development designed to meet traffic growth up to 1992. The loan would provide financing for: (i) specialized equipment for handling containers at four selected ports (Izmir, Baydarpasa, Mersin and Trabzon); Cii) renewal of high priority items of floating equipment required for the maintenance and construction of port facilities; (iii) civil works for container berth facilities; and (iv) technical assistance-for introducing container handling technology including documentation, operating procedures, maintenance and training. Benefits and The project would lead to direct savings in ship Risks: service time and reductions in cargo handling costs which would be felt in lower increases in sea freight rates and port tariffs. Benefits would also include savings from avoided damage to goods, reduction in potential congestion and reduced need for general cargo facilities. The project would generate foreign exchange earnings by providing support to Turkey's foreign trade and by facilitating international transit traffic. Adverse developments in transit traffic represent the major risk for the project. Should conditions in the Gulf area return to normal in the next 2-3 years, Gulf ports could again handle the major traffic to Iran and Iraq by early 1990. In the event that transit traffic to Iraq should decline, container capacity at the Mersin port would be taken up chrough growth in exports from Southeastern Turkey. As the transit trade to Iran provides the only container traffic in the Black Sea, a minimm development has been proposed for the port of Trabzon. Should transit traffic in the Black Sea fall substantially, the equipment at Trabzon could be relocated at other ports. Risk analysis suggests that the project would remain economic even if major reductions in transit traffic should occur. This document has a restricted distribution and may be used by recipients only in the perfrmnance of their official duties. Its contents may not otherwise be disclcsed without World Bank authorizaLtion.  - Li - $ Million Equivalent BEtimated Prolect Costs: Local Foreimn Total Equiument (a) TCDD 5.0 45.3 50.3 (b) TDI 2.9 25.9 28.8 (c) DLI 4.4 25.4 29.8 (d) Customs 0.9 8.0 8.9 Subtotal 13.2 104.6 117.8 Civil Works (a) Izmir Dredging 2.1 12.2 14.4 (b) Izmir Berth/ Reclamation 4.C' 1.7 5.7 (c) Mersin Berth 2.3 1.0 3.3 (d) Trabzon Berth 1.3 0.6 1.9 (e) Haydarpasa Berth 0.6 0.3 0.9 (f) Supporting Infra- structure 3.6 - 3.6 Subtotal 14.0 15.8 29.8 Technical Assistance/ Training 1.9 1.9 Total Base Cost 1/ 27.2 122.3 149.5 Physical Contingencies 0.3 1.8 2.1 Price Contingencies 3.5 18.9 22.4 Total Project Cost 31.0 143.0 174.0 Financing Plan: $ Million Equivalent Local Foreign Total Government 31.0 8.5 39.5 Proposed Bank Loan - 134.5 134.5 Total 31.0 143.0 174.0 Estimated Disbursements: $ Million Bank FY 1986 1987 1988 1989 1990 1991 Annual 12.8 36.9 38.3 31.0 12.5 3.0 Cumulative 12.8 49.7 88.0 119.0 131.5 134.5 1/ Equipment purchases under the project are exempt from custom duties and sales tax.  - iii - Estimated Economic . 18 percent Rate of Return: Staff Appraisal Report: No. 5467-TU, dated April 18, 1985 IhP6: IBRD 18675 IBRD 18778 i  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR A THIRD PORTS PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Turkey for the equivalent of US$134.5 million to help finance the foreign exchange cost of a Third Ports Project. The loan would have a term of 17 years including 4 years of grace, with interest at the standard variable rate. PART I - TME ECONOMY i/ 2. An economic mission visited Turkey in June 1982, and its report entitled "Turkey: Country Economic Memorandum, Recent Economic Developments and Medium-Term Prospects" (No. 4287-TU) was distributed to the Executive Directors in June 1983. The report of a mission to review the financial sector, entitled: "Turkey: Special Economic Report - Policies for the Financial Sector" (No. 4459-TU), was distributed in September 1983. A Bank mission reviewed the Government's Fifth Five-Year Plan (1985-89) in August/September 1984 and its findings are reflected in this section. 3. Turkey is about as large as France and Germany combined, with a population of around 48 million and an estimated GNP per capita of $1230 in 1983. The density of population is low (78 per square kilometer of agricultural land), and about 47 percent live in urban centers. Population growth (2.2 percent per annum) is below the median for middle-income countries. Despite rapid economic growth in the mid-1970s as well as substantial emigration of workers (to Western Europe and more recently, to the Middle East), the employment situation has deteriorated steadily with an unemployment rate currently estimated at about 19 percent. There is, however, little or no absolute poverty, although income distribution is skewed. There are considerable regional differences in income and large rural-urban disparities. Recent data indicate a probable worsening in income distribution, especially of wage and salary earners, and a sharp real decline in average earnings. Educational enrollments have expanded greatly, but the level of adult literacy remains relatively low. Background 4. During the 1970s Turkey did not make the necessary adjustments to the shocks caused by the steep rise in oil prices, stagflation in the OECD economies, and the consequent deterioration of its terms of external trade. 1/ Parts I and II are substantially the same as Parts I and II of the President's Report on the Industrial Schools Project (P-3956-TU), dated April 18, 1985.  -2- Until 1977 Turkey maintained high rates of economic growth by raising the share of public investment in GDP. This was financed initially by workers' remittances and, following the quadrupling of oil prices, increasingly by short-term borrowings. The rapid GNP growth came to an abrupt halt in 1977 as the massive external debt burden led to a sharp deterioration in creditworthiness, severe shortages of imports, and disruptions in industrial production with a rise in unemployment. By the end of 1979, domestic inflation had also become an issue of critical importance. 5. The Turkish authorities' response to the crisis of the late 1970s was a major shift in development strategy in 1980, moving towards outward orientation and giving an increased role to market forces. Policies were adopted to expand exports and increase workers' remittances which, together with liberalization of imports, encouragement of foreign investment and prudent external debt management, were aimed at alleviating the balance of payments constraint and import shortages. On the domestic front, the objectives were a reduction in the inflation rate, reform of the State Economic Enterprises (SEEs), a more efficient financial sector, improved resource mobilization and better selection of investments, especially in the public sector. 6. The adjustment program, which has been supported by the Bank through five structural adjustment loans, involves far-reaching changes in attitudes, institutions, and the legal and policy framework, all of which require time to put in place. Major structural changes have been made in the exchange rate system, the export and import regimes, the tax system, interest rate and selective credit policies and the public investment program. Implementation of the adjustment program was carried out under a military regime during September 1980 - November 1983 and since then by an elected government. The Structural Adjustment Program -- 1980-84 7. The Turkish economy has shown an impressive response to the structural adjustment program and actual performance met or exceeded the Government's own targets through 1982. By contrast, results in 1983 and 1984 proved to be mixed, due in part to adverse economic developments on the external front, slippages in the monetary program, a persistent shortfall in Government revenues and the renewal of inflationary pressures. 8. Real GNP expanded by 4.1 percent in 1981 and 4.6 percent in 1982. In 1983, GNP growth slowed down to 3.2 percent, due in large part to the effects of a bad harvest and a decline in the contribution of the foreign balance. The growth rate rebounded in 1984 to an estimated 5.7 percent, supported by favorable performance in the productive sectors with agricultural value added growing at 3.6 percern and industrial value added at 9.6 percent. Capacity utilization rates in private industry in 1984 are estimated to have risen by about 5 percent to an average rate of 72 percent. On the expenditure side, the average annual real rate of growth of public fixed investment has been contained to 3.1 percent over the 1980-84 period while the growth rate of private investment has improved systematically from -L7.3 percent in 1980 to 4.8 percent in 1983 and an estimated 5.4 percent in 1984. Private consumption, which had actually fallen by 5 percent in 1980, grew at 4.9 percent in 1983 and an estimated 5.0 percent in 1984. On the other hand, helped by strict budgetary discipline, the rate of growth of public consumption declined from 8.4 percent in 1980 to 1.8 percent in 1983. Estimates for 1984 suggest a modest growth of 2.4 percent.  -3- 9. Through 1982, the Government met with considerable success in reducing the rate of inflation through a combination of fiscal, monetary and incomes policies. After peaking at 107 percent in 1980, the annual average rate of increase in the wholesale price index declined to 37 percent in 1981 and 27 percent in 1982. In 1983 the downward trend was reversed and the inflation rate rose to 30 percent. This rise was fueled by an expansion of Central Bank credits to firms and commercial banks in difficulty during the second half of 1983 as well as an unexpected increase in the budget deficit. The resulting liquidity expansion, in conjunction with a lowering of nominal deposit interest rates, encouraged consumption at the expense of savings. 10. Inflation accelerated further in the first half of 1984, although it moderated in the second half. The average inflation for 1984 is estimated at a little over 50 percent. The major factors that contributed to the worsening of the inflationary situation were the lagged impact of the expansionary monetary policy pursued during the second half of 1983, and a significant increase in agriculture product prices, especially of fresh fruits and vegetables, as a consequence of export liberalization and higher export market prices. Other important inflationary factors included substantial "catch up" increases of SEE prices and higher import prices resulting from the nominal depreciation of the Turkish lira- In addition, inflationary pressures stemmed from a larger than anticipated budget deficit in 1984 as a result of a slowdown in the growth of revenues. Given the tight monetary and fiscal programs likely to be agreed upon with the IMF as part of a new standby agreement (para. 25), the expectations are that inflation will decline this year. 11. Commercial bank interest rates, which were deregulated in July 1980, have increased substantially and are now positive in real terms. As a result, total bank deposits increased by 72 percent in 1980 over 1979, and in 1981 this trend accelerated, with total deposits growing by 103 percent and time deposits by 274 percent. Growth in total deposits slowed after 1982, and in 1983 and 1984 they grew at 53 percent and 42 percent respectively. The bankruptcy in late June 1982 of a major non-bank financial institution shook depositor confidence and was followed by a shift of funds into the larger banks. The Goverrunent averted an immediate crisis in the banking sector and undertook actions to reform and strengthen the financial sector as a whole. A new banking law was enacted in June 1983 which covered many of the recommendations made in the Bank's report on the Financial Sector (No. 4459-TU). These included measures to reduce the undercapitalization of banks, place limits on the real assets and investments of banks, link the establishment of branches to the level of a bank's equity, reduce the interlocking between banks and corporations, introduce a deposit insurance scheme, and increase the role of the Central Bank in the supervision of the banking sector. A new law is currently before Parliament which will further the banking reform process by introducing standardized accounting for banks and improved procedures for handling non-performing loans. The Government also took a major step towards reducing the cost of intermediation by reducing the financial transactions tax from 15 percent to 3 percent. Separately, the Government has reduced the level of withholding tax applicable to interest payments on deposits and bonds from 20 percent to 10 percent. Other important developments in the financial sector include measures undertaken to revitalize the capital markets, for which IFC has provided technical assistance, and the sale of revenue-sharing certificates linked to the income from selected public facilities (e.g. the Bosphorus bridge).  -4- 12. The Government is committed to maintaining an interest rate structure for deposits which is positive in real terms. Time deposits have been yielding more or less positive real returns since end-1983, with interest rates ranging from 45 to 53 percent depending upon the term of the deposit. While positive real interest rates have provided an incentive to save, they have also meant high borrowing costs. Nominal interest rates range from 60 to 80 percent on non-preferential credits, in part because of the high intermediation costs of the commercial banks and their widely prevalent practice of requiring compensating balances. The interest rate differentials between preferential and non-preferential credits and among preferential credits are large and need to be reduced. The Government has reaffirmed its determination to achieve positive real rates on all lending by a combination of bringing down inflation and phasing out interest rate subsidies on preferential credits. In January 1985, it eliminated preferential interest rates on short-term export credits. High market interest rates, together with the limited availability of credit, have led to considerable liquidity problems for the private business sector, particularly for businesses supplying the domestic market. Measures are also needed to lower the operating costs of banks, which are well above prevailing levels in comparable countries. 13. In the fiscal area, progress was evident from 1980 to 1982 but there have been slippages in 1983 and 1984. The budget deficit to GNP ratio was reduced from 5.3 percent in 1980 to 2.1 percent in 1982, and the Public Sector Borrowing Requirement (PSBR) dropped sharply from 12.6 percent of GNP to 6.9 percent over the same period. However, the revenue to GNP ratio has been declining over the past three years. From a high of 20.3 percent in 1981, it has fallen sharply to an estimated 15.6 percent in 1984. Largely because of this significant short-all in revenues, overall fiscal performance has worsened since 1983 even though government expenditures have been considerably curtailed (from 24.2 percent of GNP in 1980 to an estimated 20.8 percent in 1984) and budgetary transfers to SEEs as a percentage of GNP have fallen steadily (from 4.8 percent in 1980 to an estimated 1.6 percent in 1984). The budget deficit is estimated at 5.2 percent of GNP in 1984 and the PSBR at 8.8 percent. The downward trend in the Government revenue to GNP ratio highlights the urgency of mobilizing additional public resources. As a step in this direction, the Government introduced a Value Added Tax (VAT) in January 1985. 14. Improvements in the balance of payments were systematic through 1982 with the current account deficit decreasing from $3.3 billion (5.7 percent of GNP) in 1980 to $1.2 billion (2.2 percent of GNP) in 1982. However, in 1983 the current account deficit widened to about $2.1 billion (4.2 percent of GNP) as merchandise exports and workers' remittances fell short of targets. Exports rebounded strongly in 1984, gr^wing by 25 percent in dollar terms to $7.1 billion. Remittances, too, registered a higher than expected increase, reaching $1.9 billion (up by 24 percent). Concurrently, there was a continued large inflow of deposits through the Dresdner scheme ($550 million in 1984). Under this scheme the Dresdner Bank collects deposits from Turkish workers Germany and automatically places these funds at the disposition of the Central Bank of Turkey, which guarantees the deposits and pays an interest rate commensurate with the Euro-market rate. However, these increases were offset by a sharp rise in merchandise imports to $10.8 billion (up by 16 percent in dollar terms). As a result, the current account deficit in 1984 was considerably higher than projected, reaching $2.1 billion (4.3 percent of GNP), or about the same level as in 1983.  15. On balance, merchandise export performance has been impressive over the 1980-84 period, growing at an average annual rate of about 26 percent in dollar terms. This growth has been led by the manufacturing sector and has involved a rise in the share of exports to the Middle Eastern countries. Industrial exports, comprised primarily of processed foods and textiles, have risen from 36 percent of total exports in 1980 to 72 percent -3- 1984. These results were achieved by a combination of indirect (flexible exchange rate policy and import liberalization) and direct (tax rebates, preferential credits) measures to enhance the relative profitability of exports and offset the traditional bias towards producing for the domestic market. The flexible exchange rate policy was one of the most important factors contributing to the growth of exports, together with the penetration of Turkish products in Middle East markets. 16. On the import side, the 1982-83 period was marked by a relative stability in the growth of merchandise imports, mostly due to exogenous factors. Imports fell by 1.0 percent in dollar terms in 1982 and rose by only 4.4 percent in 1983. This reflected price decreases in both oil and non-oil imports. Merchandise imports, however, increased substantially in value in 1984. The increase has been most significant in some of the groups (e.g. raw materials and consumer goods) that have been subjected to major liberalization in terms of both a lowering of tariff rates and a significant removal of quantitative restrictions. Medium-Term Prospects 17. The Government's Fifth Five Year Plan (1985-89) was approved by the Grand National Assembly in July 1984. The Plan reaffirms the Government's determination to pursue an outward-oriented development strategy and to liberalize the economy by relying increasingly on market forces for allocation decisions. The public sector is targeted to play a supportive role by concentrating its investments in infrastructure rather than manufacturing, while the private sector is to be encouraged to play a leading role in the growth of manufacturing and exports. Some of the key targets are: (i) an average arnual GNP growth rate of 6.3 percent; (ii) an average annual real rate of growth of merchandise exports of 10.6 percent; (iii) an average annual real rate of growth of merchandise imports of 8.2 percent; (iv) an average-annual real rate of growthL of 10.9 percent in private investment and 6.8 percent in public investment; and (v) a declining external debt service ratio, from 26 percent in 1984 to around 18 percent in 1989.  -6- 18. While the overall thrust of the Plan is in accord with the goals of the structural adjustment program, certain targets seem optimistic in view of both past performance and the immediate prospects for the economy. The Bank's projections indicate the need for a continuation of the stabilization program well into 1987, implying a lower growth rate in GDP for the early years of the Plan and a return to a higher growth path only in 1988. Key economic variables in the Bank's latest projections for the period 1985-89 are presented in Table 1: Table 1: TURKEY - SELECTED ECONOMIC INDICATORS, 1983489 1953 1934 /a 1965 9859 Noe CrGIth ate Sll Growth Mato ita Actal got. Projected 1962 1983 198 _ 193 9 CZ) CZ) GDP lb h19)3 I b 11456 12122 12700 15699 5.0 3.7 5.7 5.6 Agriculture 2058 2132 2202 21481 6.4 -0.3 3.6 3.0 liduatry 30g5 3393 35U 4732 5.0 7.6 9.6 7.0 NrW.c.. 5631 5929 6179 7771 4.1 4.0 5.3 3.7 ConsweptLon 9556 1004.4 10539 12900 3.9 4.5 4.8 5.1 Fixed iwtuae nt 21U1 2220 2400 3150 3.5 3.0 1.8 7.5 Export. ot o.de Cwr..t a * 5726 7100 *541 17576 26.0 13.9 23.1 9.4 Import of Weds 9215 10756 11500 21307 -0.1 12.0 15.5 7.2 ?tade balanc -3507 -365& -2959 -3733 Curromt accoust balance Current S . -2122 -:U5 -1750 -2003 Rating 1o.tene/tIillP 2 19.0 18.3 18.9 20.0 saving/lIP : 16.5 17.1 17.4 19.5 Exports of Soods/CDt 2 11.3 14.b 13.9 15.9 C-rrnt account deficitlCDP /b 2 -4.2 -4.3 -2.8 -1.6 Debt service ratio /c 2 25.0 25.0 23.7 19.6 Public fixed ijnweCutl 2 60.3 58.9 57.6 52.b Total fied invewtesnt 1.o it_. Cr0. capital required Id Curr.nt S * 3a U 429U 364 5905 /a At market prices; components are expressed at factor cost and will not add up due to exclusion of indirect taxes and subsidies. /b Based on constant TL. Ic Total Debt Service (excluding short-term) /Exports of Goods and NFS plus Workers' Remittances. /d Includes net IMF. Source: State Planning Organization for actuals and IBRD projections.  -7- 19. Bank projections indicate a GDP growth of 5.6 percent per annum on average for the Plan period, with a low of 4.9 percent in the initial year of the Plan (stabilization period) and a high of 6.3 percent for the final year (growth period). Achievement of these growth rates will depend on the performance of the productive sectors, namely agriculture and manufacturing. This in turn will depend to a large extent on the Government's determination to constrain the growth of the public sector in line with public resources and to create a more favorable investment climate for the private sector. This translates itself into a projected real growth per annum in public fixed investment of about 5.0 percent on average for the Plan period, starting with a modest increase in the early years. The comparable figure for private fixed investment is 10.6 percent or a little more than twice the growth rate for public fixed investment. These figures are consistent with the need to meet the infrastructure requirements of the economy through the public investment program, while providing for the capacity expansion of the private sector necessary to meet the export and growth targets. 20. Merchandise exports are projected to grow at an average 9.4 percent per annum in real terms. Merchandise imports, on the other hand, are projected to grow more slowly in real terms through 1986 and then pick up to an average 7.5 percent per annum in the terminal years of the Plan. On these assumptions, the current account deficit is projected to decrease through 1986 as stabilization policies act to contain import growth while encouraging exports. As higher growth rates set in during the middle of the Plan period, the trend would reverse and the current account deficit would rise moderately through the end of the Plan. The terminal year 1989 would show a.deficit of approximately $2.0 billion as compared to a 1985 figure of $1.7 billion. -The projected capital account is seen to remain manageable throughout the period even in the face of some sharp increases in the amortization payments in 1985-87 arising from the debts rescheduled during the 1978-80 period and an imposed constraint on foreign exchange reserves equivalent to at least two months' imports. Consistent with the above is an average debt service ratio for medium and long-term credits for the Plan period of 21.7 percent. Including short-term debt the average debt service ratio for the Plan period is 23.7 percent. Gross capital inflows required in 1989, on these assumptions, would be about $5.9 billion, or about 38 percent higher than the amount in 1984. Such an inflow is consistent with a decreasing debt service ratio from 1986 onwards. 21. The medium-term scenario presented above is, of course, only one of many possibilities and is used specifically to illustrate Turkey's potential in the light of the Government's own development strategy. Given Turkey's progress in the structural adjustment program, the favorable response which this has evoked from the international financial community and the present view nf future resources and export market possibilities, the Government's somewhat more ambitious Plan targets would be feasible provided they are supported by slightly higher export growth rates and greater success in the mobilization of public resources. This may be more difficult to achieve in the early (stabilization) phase of the Plan. 22. In view of the sensitivity of the projections to the assumptions of export and import growth rates, a downside risk case has also been developed. With Turkey's export performance heavily dependent on exogenous factors such  as the world economic outlook and movements in international prices, a slower growth of merchandise exports (an average of 6.9 percent over the Plan period) would lead to a more difficult but still manageable balance of payments situation, more external borrowing, a lower GDP growth (averaging about 4.8 percent per annum) and a higher debt service ratio (22-24 percent per annum). In such a situation the Government would have little chance of absorbing the unemployed and improving tangibly the average standard of living. However, given the Government's emphasis on export promotion aL.d the determined efforts to counter the bias towards producing for the domestic market, there is good reason to support the perspective set out in the medium-term scenario presented in paragraphs 18 to 21. External Debt and Creditworthiness 23. At the end of 1978, Turkey had $7.2 billion in short-term debt and $7.0 billion in medium and long-term debt. Between 1978 and 1980, Turkey rescheduled some $9.2 billion of outstanding obligations through a series of rescheduling arrangements concluded with official and commercial creditors. Approximately $6.0 billion of short-term debt, including $2.6 billion in convertible Turkish lira deposits and bankers' credits and $1.2 billion of non-guaranteed suppliers' credits, were consolidated into medium-term loans or partially converted into Turkish lira obligations. Following the resolution of the debt crisis, inflows were mostly from official sources -- major creditors being the OECD countries, the World Bank and the IMF. Of the estimated total debt outstanding of $22.7 billion at end-1984, 81 percent constituted medium and long-term debt (including IMF). Short-term debt as a percentage of total debt outstanding fell from 51 percent in 1978 to about 11 percent in 1982, then increased to 14 percent in 1983 and to an estimated 18 percent in 1984. Much of this growth in the stock of short-term debt is due to the inflows associated with the Dresdner Bank scheme (para. 14). At end-1984 the outstanding liabilities associated with the Dresdner scheme are estimated to amount to $1.8 billion, which would represent about 45 percent of Turkey's short-term external obligations and 8 percent of its total outstanding debt. Based on the growth scenario outlined earlier, debt outstanding and disbursed as a percentage of GDP is projected to fall from an estimated 41 percent in 1984 to 32 percent in 1989. This translates into a total debt outstanding forecast for 1989 of $30.6 billion, with short-term debt constituting about 23 percent of that total. Dresdner scheme inflows are projected to be around $60C million per annum throughout this period and to account for a large part of the rise in the ratio of short-term debt to total debt outstanding. 24. The debt service ratio fcr medium and long-term credits (in relation to exports of goods and-non-factor services and workers' remittances) increased from about 14.6 percent in 1981 to a peak of 28 percent in 1983 as a result of a large repayment of previously rescheduled debt under the earlier OECD agreements. Debt service obligations are likely to be high over the coming years and would average about $3.8 billion per year in 1985-89. However, the debt service ratio is seen to decrease from an estimated 25 percent in 1984 to 19.8 percent in 1989. The debt burden should rerain manageable provided current policies are successfully implemented, the export drive is sustained, and Turkey continues to receive further support from international commercial and official sources. There have been encouraging  -9- signs of Turkey's ability to enter the market for commercial borrowings. From December 1983 to November 1984, Turkey had secured a little over $500 million from commercial credits, constituting about 23 percent of the total external credits received during this period. The Central Bank of Turkey recently completed the syndication of a $500 million multi-component medium-term (seven years) facility involving a large number of U.S., European, Jaranese and Middle Eastern commercial banks as lead managers. 25. Turkey's economic program has been supported by the IMF through a series of standby arrangements. A three-year standby arrangement in an amount equivalent to SDR 1250 million was approved by the IMF's Board and became effective on June 18, 1980. The Government purchased the full amount authorized under the arrangement. The Government also purchased three-quarters of a SDR 225 million one-year standby arrangement which was approved by the IMF in April 1984 and replaced an earlier one-year arrangement terminated at the request of the Government. Discussions are presently under way on a further one-year standby arrangement. PART II - BANK GROUP OPERATIONS IN TURKEY 26. Through March 31, 1985 the Bank and IDA have lent $5383.5 million 1/ to Turkey, through 81 projects. Agriculture accounts for 19 percent of funds lent, industry and DFCs for 24 percent, power for 13 percent, structural adjustment and program loans for 32 percent, and urban development, transportation, education, tourism and technical assistance for the remaining 12 percent. Disbursements for all sectors combined (excluding structural adjustment loans) average 49 percent of appraisal estimates, as compared to 50 percent for Tunisia and 49 percent for Morocco. As of March 31, 1985, IFC commitments to Turkey totalled about $239 million, of which about $64 million were still held by IFC. Annex II provides a suimnary statement of Bank loans, IDA credits and IFC investments as of March 31, 1985. 27. Bank lending is aimed at supporting Turkey's medium-term objectives of restructuring the Turkish economy by placing more reliance on market forces and adopting a more outward-oriented strategy. The main vehicle for the Bank's operational discussions with the Government has been the structutal adjustment lending (SAL) program. SAL V, which was approved in June 1984, completed the series of five loans which the Bank had indicated would be the maximum to a country. Significant progress has been achieved in the past five years, but the task of restructuring is by no means over. The next phase will involve the broadening and deepening of the adjustment process at the sectoral level. Recent economic-developments have underlined the need for a continuation of the stabilization program without giving up the goals of 1I/ Net of cancellations.  -10- sectoral adjustment. Hence-the emphasis of Bank lending in the post-SAL period would be on striking an appropriate balance between sectoral adjustment lending designed to be quick disbursing and supportive of policy reforms in the major sectors, and carefully formulated project lending focussing on high priority projects principally in the agriculture, energy and transport sectors. 28. Efforts have already been initiated to develop a series of sectoral adjustment loans for the major sectors over the next few years, starting with agriculture. The loans for the agriculture sector would help to support a medium-term action program aimed at increasing the growth of primary production and exports, rationalizing public investment and strengthening sectoral institutions. Sectoral adjustment lending would also support measures to address the structural problems of the financial sector and enhance the utilization of industrial capacity in the public and private sectors, keeping in view the scope for the "privatization" of publicly-held assets in the manufacturing subsectors. Other sectors where sectoral adjustment loans could be developed include energy and transport. 29. Project lending, which will continue to make up the major.ty of the lending operations, will be designed to support and strengthen the adjustment process. A portion of project lending would be earmarked for the construction or rehabilitation of key projects in the energy sector. Other projects would be guided by the major policy objectives of the Government, which include generation of foreign exchange (including improving productivity in export industries and providing essential infrastructure for exports), improvement of institutional efficiency, non-inflationary output growth and amelioration of the social costs of adjustment (including provision of social infrastructure and employment generation, with some emphasis on the least developed provinces in Eastern Turkey). 30. The close macroeconomic and sector dialogue established with the Government in recent years is expected to be pursued. The economic aJ. sector work currently being undertaken includes a review of the five-year development plan and studies of housing finance, telecommunications and electronics. Topics to be covered in the future include a review of the public investment program, a study focussing on the impact of structural adjustment, a review of transport investments and studies of engineering and agro-industries. 31. This is the fourth loan to Turkey to be presented to the Executive Directors this fiscal year. Other loans being processed include an agricultural sector adjustment loan, and loans for a fourth power transmission project and power systems operations assistance. 32. Turkey's debt burden is projected to remain manageable throughout 1985-89 (paras. 23 and 24). The Bank Group's share of Turkey's total external debt was 12.4 percent in 1983, is estimated at 13 percent in 1984, and is expected to grow to about 17 percent by 1989. Official debt outstanding is projected to increase from $11.4 billion in 1984 to $14.4 billion in 1989 and private medium and long-term debt outstanding is projected to increase from $5.7 billion in 1984 to $8.8 billion in 1989. The Bank group's share of total debt service payments is projected to increase from about 12 percent in 1983 to an estimated 13 percent in 1984, and to about 17 percent in 1989.  -11- 33. IFC has invested in synthetic yarns, textiles, pulp and paper, glass, aluminum, cement, iron and steel products, heavy diesel engines, motor bicycle engines, piston rings, food processing and tourism. It has also invested in the Industrial Development Bank of Turkey (TSKB) and provided guarantees for overseas contracting firms. In addition, IFC is currently providing technical assistance to the Government with respect to the development of the capital market and a regulatory framework for leasing. PART III - THE TRANSPORT SECTOR AND PORTS SUBSECTOR 34. The Transport System. The transport sector is vital to the political, economic and administrative development of Turkey. The main centers of population are widely spread throughout the country and long distances have to be covered, frequently over difficult mountainous terrain and under severe climatic conditions. Turkey is a vital transport bridge between Europe and the Middle East. With its long sea coast, extending from the Mediterranean into the Black Sea, it offers many ports for domestic and international trade. The sector contributes about 10 percent of GDP, close to $1.0 billion in foreign exchange earnings (1983184) and about 12 percent of direct employment of the non-agricultural labor force. The backbone of Turkey's transport system is the 8,200 km railway network and the 60,000 km state and provincial road network. The road system also includes a vast network of rural and forestry roads totalling around 490,000 km. This is supplemented by private and state-owned international and coastal shipping serving approximately 12 major ports as-well as many smaller facilities, ranging from open roadsteads to small jetties. Turkish Airlines (THY), which is government-owned, provides domestic and international flights and there is also a small private charter airline. A system of civil and military oil product pipelines links refineries and ports with consumers. 35. The core of the transport system was largely completed in the early sixties. Road transport has expanded at an average annual rate of about 8 percent during the 1970's and, despite an increase in fuel costs and a period of slower economic growth, carries over 75 percent of freight traffic and 95 percent of domestic passenger traffic. Railway freight traffic has shown an absolute decline since the peak year of 1976, when it carried 20 percent of total freight traffic compared with 10 percent today. This decline has not been the result of price competition from other modes, since railway tariffs are low, but rather of the decline in railway freight carrying capacity, due to out-dated traffic management and a shortage of motive power. Coastal shipping has not grown significantly in recent years. 36. Investment in the transport sector during the 1970's did not keep pace with the development of the economy. Inadequate attention to rehabilitation and modernization of transport facilities and equipment now constitutes a bottleneck to economic growth. Roads are below standard for present traffic levels, railway track is worn-out and the railways lack adequate motive power and supporting facilities. Moreover, the imbalance between overall economic needs and the scope and direction of transport investment implies that a shift in the modal pattern of future investments is needed in order to accommodate changes in demand and technology. For instance, the current emphasis on the development of mining as well as the  -12- development of the agricultural sector, particularly in production of cereals, will lead to new bulk transport requirements, primarily on the railways. At the same time, the continued growth of Turkey's foreign trade as well as transit traffic to the Middle East requires the introduction of modern port handling equipment to accommodate the growing volumes of container traffic, expected to increase at up to 20 percent per year through 1990. 37. Transport Policy, Planning, and Coordination. Responsibility for transport sector planning, policy development and investment is divided among a large number of entities. The main agencies involved are: (a) the Ministry of Transport, which significantly contributes to transport pclicy and also oversees the main agencies in the transport sector - the Turkish Maritime Organization (TDI), Turkish Cargo Lines (TCL), Turkish State Railways (TCDD) and Turkish Airlines (THY); (b) the Ministry of Public Works, which is primarily responsible for planning and execution of all transport infrastructure projects including highways; (c) the Ministry of Agriculture, Forestry and Rural Affairs which is responsible for planning, building and maintaining the large network of rural and forestry roads; and (d) the State Planning Organization (SPO) which coordinates and helps determine project priorities. 38. The need for improved coordination in the transport sector and for ensuring an appropriate determination of modal, sector, and national priorities has been recognized by the Government and was incorporated as a major goal in its development plans. The Government's goals are embodied in the National Transport Master Plan (NTMP) prepared for the period 1983-1993. Although there have been changes in the economy which affect the conclusions of the NTMP, the basic targets remain valid and the plan provides a valuable framework for the development of the sector. To take changing conditions into account, the Government intends to update the NTMP every three years. The first revision is scheduled for 1985. The NTMP is supported by five-year programs for each transport agency. These programs are being established for the period 1985-89 and will be updated annually under the proposed rolling plan system. Specific guidelines for the development of the ports subsector are provided by a National Ports Master Plan (NPMP) prepared by consultants in 1983. 39. Bank Role in the Sector. The Bank has been involved in detailed discussions on policy and institutional issues in the transport sector and on modal investment plans through preparation and implementation of Bank-financed projects as well as through preparation of a Transport Sector Memorandum (TSM) in 1983 and Transport Investment Plan Reviews in 1981 and 1984. Through its involvement in the sector, the Bank has reached a broad agreement with the Turkish authorities on the main issues and goals of the transport sector. The Bank supports the Government plans to strengthen the planrn"g and implementation capacity of transport agencies and the policy of establishing cost based transport tariffs. The Bank has assisted the authorities with the rationalization of investment programs through project preparation and implementation in highways, railways and ports. Under the proposed project, assistance would be provided to the Government for the introduction of a modern system for handling containers, related improved documentation and customs procedures, greater autonomy for ports, strengthening of planning and accounting functions and comprehensive training programs. Similarly, improved planning and better selection of highway projects as well as a shift from force account work to construction by private contractors are being achieved  -13- under two existing highway projects. Under a proposed Agricultural Sector Adjustment Loan, one of the objectives is to achieve improved planning and subproject selection for rural roads. A railway project under preparation would attempt to remedy major deficiencies in railway operations and include arrangements to reduce railway deficits. 40. The Bank has participated in five projects in the transport sector totalling $395.8 million equivalent (net of cancellations). These include two loans to the port subsector (Loans 28-TU and 1741-TU) totalling $91.3 million. A loan of $47 million was made in 1972 for a railway project (Loan 893-TU) which is now completed, as well as two loans for highway projects (Loans 2137-TU and 2439-TU), totalling $257.5 million, both of which are ongoing and scheduled for completion in 1987 and 1990, respectively. Project implementation has generally been satisfactory in achieving physical targets although there have been some delays. Most problems have occurred in implementing policy decisions. However, recently the Government has been successful in developing a more coordinated and realistic approach towards implementing transport sector policy. 41. Only the Railway Project, which covered the first three-year tranche of the Railways 1972-1977 Investment Plan and closed on June 30, 1981, has been the subject of a Project Completion Report (PCR). This PCR is currently under review by the Operations Evaluation Department. The main conclusions of the PCR were that the project was largely successful in meeting its physical objectives, especially track renewal. However, it failed to achieve significant institutional and policy objectives, relating to improved productivity and financial viability. These issues are being addressed anew in the context of the proposed second railway project. Bank assistance in the ports subsector has helped Turkish ports to handle increasing traffic in recent years, in particular the rapid expansion of export and transit traffic, at reasonable cost and greater efficiency. However, with the development of containerized traffic in recent years, it has now become vital to introduce modern equipment and handling techniques and up-to-date procedures to support exports and reduce costs on imports and the transit trade. 42. The Ports Subsector. Turkey's long coastline of 7,300 km is served by 12 major public ports, about 30 small municipal and other public ports, and about 35 specialized ports owned by industrial complexes. Altogether, the ports handled about 22 million tons of cargo in 1983, including 5 million tons of coastal traffic and about 10 million tons of general cargo and transit traffic. The major public ports serve the bulk of the country's foreign trade handled by ship. Since 1979, foreign cargo has been growing at a rate of almost 11 percent per year, while coastal traffic has increased at only 2 percent per year. In-addition, transit traffic to Iraq and Iran has grown rapidly over the past five years, increasing from about 600,000 tons in 1979 to over 4 million tons in 1983. Despite the lack of appropriate handling facilities, container traffic has also increased sharply, from 77,000 TEU in 1979 to about 200,000 TEU at present. 43. Turkish ports generally have adequate capacity and ship waiting time is tolerable. Although conditions vary from port to port, cargo handling performance is reasonably satisfactory with general cargo throughputs  -14- averaging about 450 to 500 tons per day. Productivity is expected to improve further upon completion in 1985 of a program of rehabilitation and equipment renewal, financed in part by the Bank. Maintenance practices are generally satisfactory. Ongoing training programs started under the previous ports project have assisted in improving port maintenance. However, container operations, throughput and traffic control need to be improved. The growth of foreign trade and the country's emphasis on exports, combined with major increases in international containerized transit traffic, require the introduction of modern container handling systems. In view of the specialized nature of container operations, this traffic is likely to be concentrated in a limited number of ports and will lead to considerable savings in ship service time, ship waiting time, reduced handling costs and reduced cargo losses. 44. Administration and Organization. Port operations are under the control of two separate institutions, namely the ports department of Turkish Railways (TCDD) and the ports department of the Turkish Maritime Organization (TDI), previously known as the Maritime Bank. Construction and maintenance of port infrastructure are the responsiblity of the Directorate of Railways, Ports and Airports Construction (DLH) in the Ministry of Public Works. Although TCDD and TDI provide satisfactory day-to-day port operations, port development has suffered somewhat from a shortage of qualified and experienced staff. Also, ports profits have been diverted to finance other activities of TDI and TCDD. Although the Bank-supported Port Rehabilitation Project (Loan 1741-TU) provided for the creation of a single ports institution, the Government has decided, and the Bank has agreed subsequently, that the establishment of one institution woul not be appropriate. The experience with similar central organizations in other sectors has been less than encouraging. Although still under the general overview of the TCDD and TDI Boards, the ports organizations have recently been made more autonomous. They keep separate accounts and their planning, project preparation and implementation departments as well as marketing and accounting departments are being strengthened. Funds adequate to cover maintenance, debt service and an adequate contribution to investment are being set aside before ports surpluses are distributed. Measures taken or about to be taken represent a major step towards making the ports depa-tments more responsive to the needs of the economy. Relevant details are included in an Action Plan for the proposed project (para. 63). 45. Investments in Ports. Investments in ports during the Fourth Development Plan 1980-84 averaged about TL 18.8 billion ($54 million) annually in 1984 prices. Although the main emphasis during this period was on the rehabilitation of ports, particularly of conventional cargo handling equipmert and storage facilities, during the latter part of the plan construction of new berth facilities began in several ports in order to cater for expected increases in general cargo and container traffic. Investments in these facilities as well as the balance of the equipment renewal program represent the bulk of the current spillover of ongoing investments into the Fifth Five-Year Development Plan 1985-89, equivalent to about TL 25 billion ($70 million) in 1984 prices. 46. It is expected that investment levels in ports during 1985-89 will average about TL 24 billion ($69 million) annually in 1984 prices, a slight increase in real terms over levels achieved during 1980-84. However, this is  -15- well below the initial proposals of the port agencies. Detailed discussions on the port investment program were held with the Bank during preparation of the propoeed project as well as during a transport investment review mission in October 1984. The current Plan for 1985-89 will be limited to the proposed container port development program and to the essential renewal of conventional cargo handling equipment and high priority floating equipment for DLH. In view of the uncertainties over container traffic flows, especially for international transit trafEic, a phased approach has now been adopted for the development of container port facilities in order to reduce the risks related to transit traffic (para. 49). This program, which covers the period 1986-88, is expected to account for about 60 percent of the 1985-89 port investment plan. In general, all items in the plan appear justified except that the proposed development of bulk mineral facilities at Izmir should possibly be deferred or reconsidered pending the probable expansion of container operations. The Government has agreed to provide the Bank with draft annual investment programs and budgets for the ports subsector during the period of project implementation; it has also agreed that large investments would be based on appropriate feasibility studies (Loan Agreement, Section 3.05). PART IV - THE PROJECT 47. Project History. The project was identified in June 1983 and prepared by the port agencies with the assistance of Bank preparation missions. The project was appraised in November/December 1984. Negotiations were held in Washington from April 1-5, 1985 with a Turkish delegation led by Mr. Tunc Bilget, Chief Counselor for Financial and Economic Affairs, Embassy of the Republic of Turkey, and including representatives of the Treasury, SPO, the Ministry of Finance and Customs, DLH of the Ministry of Public Works, TCDD and TDI. A report entitled "Staff Appraisal Report of a Third Ports Project" (No. 5467-TU), dated April 18, 1985 is being circulated separately to the Executive Directors. The main features of the loan and project are given in the Loan and Project Summary and in Annex III. Maps showing the Turkish transport network (IBRD Map No. 18675) and the main transit routes in the Middle East (IBRD Map No. 18778) are also attached. 48. Project Obiectives. The proposed project would provide assistance to Turkey in the acquisition and use of modern container facilities and procedures. These would facilitate increased exports of industrial and agricultural products and would generate foreign exchange savings on sea freight rates for both exports and imports. Moreover, the development of these modern facilities would provide Turkey with additional foreign exchange earnir"s accruing to Turkish shippers, road transport companies and port agencies by serving a growing demand for international transit traffic. The specific objectives of the project include the provision of specialized container handling facilities in selected ports as well as implementation of a comprehensive action plan for the introduction of modern container handling technology, including operational procedures, equipment maintenance and modified customs procedures. The project would assist in strengthening planning activities in the ports subsector through agreement with the  * -16- Government and the port agencies on realistic investment levels during the period of the Fifth Five-Year Development Plan, 1985-89 (pars. 39) and through appropriate technical assistance and staff training. The project would also assist in improving accounting procedures and in the introduction of commercially viable tariffs for container handling. 49. Project Description. The separate plans of TCDD and TDI originally proposed development of nine container ports as compared with a National Master Plan proposal to develop seven through 1990. Given the uncertainties of transit traffic and the specialized nature of container facilities, the Government finally decided to develop only four ports in a first phase (one port for each major hinterland area), which would be the main beneficiaries under the proposed loan. The Government also decided to monitor traffic patterns to determine which ports should be included in a second phase development, the preparation of which would be included under the proposed project. The proposed developments for each of the four ports are discussed below. 50. At Izmir, where construction of new quays is well advanced, the project would finance two standard container cranes which will work on the main 450m long berth by mid-1987. Dredging of the quays and deepening of the inner harbor and the approach channel to the port from the Aegean Sea would be carried out to permit larger container ships and bulk carriers to enter the port. TDI is providing two lightweight cranes from its own resources in advance of the project to operate a multi-purpose berth by mid-1986. Associated support equipment would also be financed under the project. 51. At Haydarpasa, the project would finance two standard container cranes for use on the recently completed 300 m berth and one lightweight container crane for an adjacent multi-purpose roll-on or roll-off berth, together with associated support equipment. 52. As Mersin is the main transit port for Iraq as well as serving a major export demand from south-eastern Turkey, five standard container cranes and associated support equipment would be financed. The extension of one berth to handle container shipa and bulk carriers would be undertaken and financed by TCDD; a 400 m container quay has already been completed. 53. At Trabzon, a new container quay financed from TDI's own resources is presently under construction. Traffic through the port is mainly transit traffic to Iran. A minimum development based on two lightweight container cranes and associated support equipment would be financed under the project. 54. To raise the operational efficiency of these four ports and to introduce the use of new cargo handling technology, the project would include the fiuancing of technical assistance to: (i) improve modern documentation and control systems for cpntainer handling and storage; (ii) establish new operational systems and practices in line with the new technology and equipment; (iii) improve engineering maintenance procedures and spare parts inventory; (iv) provide on-the-job and overseas training of port staff; and (v) undertake studies leading to improved accounting procedures and cost related container tariffs, the establishment of inland container depots and preparation of a second phase container port development. An Action Plan, covering the preparation of the project as well as the terms of reference for the technical assistance component, has been prepared and agreed with the authorities (para. 63).1  -17- 55. Maintenance of ports infrastructure is carried out by DLH. More than half of the equipment owned by DLH is over 20 years old and is mostly beyond its useful economic life. A priority list of equipment for port maintenance operations proposed by DLH has been reviewed by the Bank and is considered appropriate for Bank financing under the project. It includes two floating cranes, three bucket dredgers, back-hoe dredgers and new enginen for tugboats and hopper barges. 56. To accelerate the clearance of conta ners, the customs authorities are reviewing specialized surveillance equipment which would be procured under the project. It would be located at the four ports and at the border stations through which the transit traffic passes. A list of equipment to be procured has been agreed. 57. Cost Estimates and Financing Plan. Total project cost is estimated at $182 million (including physical and price contingencies) with a foreign exchange cost of $150.7 million, the balance comprising local costs and taxes on civil works. The proposed Bank loan of $134.5 million would cover 96 percent of the foreign exchange cost of equipment, the foreign cost of the Izmir dredging contract as well as the total cost of technical assistance and training. Respective amounts of the loan would be sublent to TCDD and TDI in line with the financing plan on the same terms as the proposed loan. The foreign exchange risk for these subloans would be borne by TCDD and TDI. The local currency costs including taxes and duties and the balance of the foreign exchange cost would be financed from the agencies' own budgets (Loan Agreement, Section 3.01(c) and Project Agreement, Section 2.01(a)). The financing plan is shown in the Loan and Project Summary. Provision of 10-15 percent of the cost of equipment has been included for spare parts. For costs expressed in Turkish lira, price contingencies have been based on estimated annual price increases of 30 percent in 1985, 25 percent in 1986, 20 percent in 1987, 15 percent in 1988 and 10 percent in 1989 and 1990. For costs expressed in US dollar terms, price contingencies have been based on estimated annual price increases of 5 percent in 1985, 7.5 percent in 1986 and 8 percent in 1987 through 1990. 58. Manpower requirements for technical assistance would include local and expatriate assistance. It is estimated that 72 man-months would be required for documentation and operations specialists, 55 man-months for equipment maintenance specialists, 10 man-months for organizing on-the-job training and overseas technical visits, and 20 man-months for an inland container depots study. A further 15 man-months of assistance would be required for improving accounting procedures. About 80 man months of overseas technical visits are envisaged for ports staff, DLH personnel and Customs officials. 59. Cost estimates have been basea upon recent equipment prices for similar types of equipment supplied by foreign manufacturers. Dredging costs are derived from prices for similar works undertaken in the region in recent years, but actuil costs will be subject to the availability of suitable dredging contractors at the time of international competitive bidding, and an additional 15 percent contingency has accordingly been allowed. 60. Accounting and Audit. Under their respective charters, both TCDD and TDI ports organizations follow the accounting procedures laid down for state-owned establishments and enterprises. These include budgetary control  -1B- and the use of a uniform system of accounts. The latter, while suitable for basic Einancial accounting, does not adequately cover the requirements for cost accounting or analysis. The proposed priject would include technical assistance for rationalization of the cost accounting system and generation of management information. DLH in the Public Works Ministry, the Customs Department, TCDD and TDI have agreed to keep separate project accounts in accordance with Government budgetary and accounting procedures. 61. Audits are carried out by the financ-il inspectors of the Ministry of Finance. Agreemen; has been reached on the fc smat of the reports and their timing (Loan Agreement, Section 4.01 and Proje:t Agreement, Section 4.01). 62. Proiect Coordination. With the involvement of four different agencies in the project, close coordination is essential and the Government has agreed to set up a Project Coordination Committee (PCC) for this purpose, chaired by a Deputy Undersecretary of the Ministry of Transport (MOT). Specific terms of reference and a staffing plan for the PCC have been agreed. The PCC would have a major role in implementing the Action Plan and would submit quarterly progress reports on overall project implementation, as well as maintain records of relevant data for the preparation of a Project Completion Report (PCR). The PCC would submit draft annual investment programs and budgets to the Bank (Loan Agreement, Section 3.05(a)(ii)). 63. Action Plan. A comprehensive action plan has been developed for the project. It integrates all the key elements required for successful implementation of the project and includes a procurement schedule for equipment items, an implementation program for the completion of infrastructure works, details and timing of technical assistance inputs, introduction of revised customs procedures, monitoring of traffic developments, and actions required for financial accounting and establishing container tariffs. 64. Procurement. Procurement of ports container handling equipment, replacement maintenance equipment for DLH, specialized equipment for Customs and dredging by contract at Izmir, would be by international competitive bidding in accordance with Bank guidelines. Some smaller items of specialized equipment, up to a total of about $100,000, would be procured under limited international bidding (LIB). Consultants would be recruited in accordance with Bank guidelines (Loan Agreement, Section 3.03 and Project Agreement, Section 2.02). Local manufacturers would be expected to bid for a small portion of the equipment to be procured under the loan. 65. Disbursements under the Bank loan would cover the foreign exchange costs of equipment procurement, and the foreign exchange costs of the Izmir dredging estimated at 88 percent of its e-timated total costs; disbursement for technical assistance would cover toLal expenditures excluding taxes and duties. A Special Account would be set up for this project with an initial deposit of $8.0 million. Disbursements are closely tied to delivery of equipment, and are expected to take place from FY86 through mid-FY9l. The Closing Date of the loan would be December 31, 1990. A timetable for project implementation has been agreed with the Goverrment and project agencies.  -19- 66. Environmental and Employment Impact. The greatly increased cargo throughputs achieved with modern container handling systems would reduce the need for major expansion of port facilities which would normally be necessary for general cargo operations. In addition, berth occupancy for container ships generally does not exceed 30 percent, thereby reducing the risks of pollution and oil spills in port. Although the project would reduce the need for port labor employed on general cargo operations, it is anticipated that these reductions would be achieved partly through attrition and partly through redeployment in other port activities. Also the development of container traffic is likely to create additional employment in such activities as trucking, storage and freight forwarding. 67. Traffic Forecasts. The main focus of the traffic analysis has been to obtain forecasts of cargo suitable for containers, for both Turkish foreign trade and transit traffic, and to estimate the penetration of this traffic by containers following the introduction of modern container handling systems. Forecasts of national general cargo traffic are based on a continuation of the macroeconomic stabilization program through 1985, followed by a strategy aimed at a 5 to 6 percent per year growth in GDP through the end of the decade. Exports are forecast to increase at 8-10 percent per year with the main increases coming from exports of industrial goods. Import growth is expected to increase at about 7-8 percent per year during the period 1985-90. For transit traffic to Iran and Iraq, it is difficult to make any accurate forecasts in view of the changes which could occur in the Gulf area. In view of the fluctuations in this traffic in recent years, average transit volumes for the 1981-83 pe*riod of 2.4 million tons for the Mediterranean route and 800,000 tons for the Black-Sea route are assumed to remain unchanged. On this basis, total container cargo through Turkish ports is forecast to increase from a current level of 4.9 million tons to at least 5.7 million tons in 1990, of which just over 30 percent would be transit traffic. 68. Forecasts of container movements were established for each port for national and transit traffic, based on the dominant flow patterns. With the development of modern container handling systems, penetration of potential container cargo as a whole is forecast to increase from a current level of 20 percent to about 60 percent in 1990; the share of total general cargo handled in containers would increase from 8 percent to 25 percent over the same period. Total container movements are estimated to increase from the present level of about 200,000 TEU to about 420,000 TEU in 1989 and 740,000 TEU in 1992, an average increase of about 18 percent per year. Forecast traffic levels for 1989 were used to establish equipment requirements at each of the project ports; container movements in 1989 are estimated to reach 200,000 TEU at Mersin, 40,000 TEU at Trabzon, 88,000 TEU at Haydarpasa, and 88,000 TEU at Izmir. 69. Benefits. One of the main benefits of the project would be savings in ship service time and port handling costs which will ultimately be passed on to producers and consumers through slower increases in sea freight rates and port tariffs. Other benefits would include reductions in potential congestion in the ports, net reductions in cargo losses, and the value placed on reduced transit times and the increased security of shipments. It is expected that about half the savings in ship service time would accrue directly to Turkish shipping lines, while a large share of the savings  -20- accruing to foreign shipping would ultimately be felt in lower sea freight rates to the general benefit of Turkey. In termJ of indirect effects, the project would also have a major impact on foreign exchange earnings on exports which might have been forgone in the absence of containerization. Similarly, in facilitating transit traffic, Turkey receives important foreign exchange earnings. 70. Economic Rate of Return. The quantification of benefits has been limited to savings in ship service time and reductions in cargo handling costs. However, savings in ship service time have been included in full, even though part of these benefits would remain with foreign shipping lines. These benefits are included as surrogates for benefits accruing to Turkey in other indirect forms, such as the impact of modern container systems on export earnings and on foreign exchange revenue accruing to Turkish shippers, road transport operators and port agencies engaged in transit traffic. For labor cost savings, only half of these benefits are included because of uncertainties as to whether labor savings would be achieved in full through redeployment to other activities. Individual ERRs for the four ports range from 12 percent to 21 percent with an overall average for the container port program of about 18 percent. The procurement of equipment for DLE to replace old worn-out equipment, required for essential maintenance of existing and proposed port facilities, is expected to provide an ERR of at least 20 percent. 71. Risks. Uncertainties over the development of transit traffic to Iran and Iraq represent the main risks for the economic viability of the project and specifically for the proposed programs at Mersin and Trabzon. Should there be a return to normal conditions in the Gulf area, the Gulf ports would be rehabilitated and would again handle a major share of current transit traffic through Turkey. However, the rehabilitation of Gulf port facilities will take a number of years and both Iran and Iraq are likely to continue to use the Turkish transit routes in the longer run to a certain extent for strategic reasons. As transit traffic at Mersin represents less than half of the total container traffic, the economic viability of the proposed development there would not be significantly affected by any reductions in the transit trade because any reductions would be offset by steadily rising Turkish exports. On the other hand, the port of Trabzon has no local traffic potential and any fall in the transit trade to Iran would require the relocation of equipment to meet traffic demand at other ports. Because of this uncertainty-, the proposed facility at Trabzon, based on two lightweight cranes, represents a minimum level of development to provide satisfactory container handling operations. 72. Another risk relates to the rate of penetration of container cargo. The assumptions used in the traffic analysis imply that all incremental general cargo from about 1988 onwards would be handled by containers, the overall growth in container traffic being about 18 percent per year. As this  -21- rate is about twice the forecast growth rate for general cargo traffic, it appears to represent a reasonable pattern of development. Even if this growth rate were reduced to 14 percent per year, all project ports would still remain economically viable. 73. Financial Analysis. The major ports have been profiltble since the introduction of realistic tariffs in i981. The tariff structure is generally adequate. Tariffs which are expressed in US dollars are at a level which ensures the continued profitability of the ports. It is estimated that operating ratios would not rise above 65 and that the return on net fixed assets would not fall below 25 percent. 74. While there have been some improvements (supported by the Ports Rehabilitation Loan 1741-TU) in establishing a cost-accounting system for TCDD and TDI port organizations, the present systems are not yet adequate for management decision making. The accounting systems are being modified to bring them in line with current legislation which requires transfer of surpluses to the Treasury (para 75). Beyond this, further improvements are planned under the project, with assistance provided by local consultants, in order to rationalize the accounting systems and to establish them as management tools. These improvements would be implemented by January 1, 1988 (Loan Agreement, Section 4.02 and Project Agreement, Section 4.04). In view of the introduction of equipment to facilitate container traffic, TCDD and TDI would review the adequacy of tariffs related to container operations and as necessary implement revised tariffs in accordance with a schedule incorporated in the Action Plan. 75. In the past, the profits of the ports were used by the parent organizations for funding their own activities. Following the establishment of semi-autonomous port organizations with a requirement for separate accounts, it is now possible to identify surpluses as well as any appropriation by parent organizations. It is now the responsibility of the Treasury to decide on the disposition of the surpluses. It has been agreed that the port organizations would manage their financial affairs so that revenues from tbeir respective operations would be sufficient and be retained to cover operating, maintenance and overhead costs, debt servicing and working capital as well as at least 15 percent of the annual capital requirements on average (Project Agreement, Section 4.02). PART V - LEGAL INSTRUMENTS AND AUTHORITY 76. The Loan Agreement between the Republic of Turkey and the Bank, the Project Agreement between the Bank and TCDD and TDI 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 listed in Annex III of this report. The execution of loan agreements passing on a portion of loan funds for TCDD and TDI would be a special condition of effectiveness (para. 57).  -22- 77. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 78. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments April 22, 1985 Washington, D.C.  AUM I -23- Pag of 5 T A I L * 3A NTnny - SOCIAL t*'i5il J1 (WETGTE AWRAIE) 1 MOST (CMIT UCC55 EBTIUATE) Q L TNT NICOLE INCN RUUTRAL b1 1 bT IITMA 1"S C 1960L. jp ESDGAIK_ IDImp HAIRS 10010W? 13 AM (VuaD . 111) TOTAL 730.6 730.6 730.6 ACtClULTURAL . 364.7 31.3 3N30.9 cop CAPITA ton) 240.0 440.0 (370.0 235.3 11071.0 sumsr aume..ou-m CAPA - C1CLOGNB OF OIL EQUIVALENT) 170.0 322.0 569.0 1122.3 4996.9 innnanm -D VITma UTlC5 POPULATI0N0HID-YlAR (THOUSANDS) 27509.0 35321.0 46459.0 11t3AM PopUl ATION (H or TOALI 29.1 32.9 43.9 44. 73.3 POPULATION IPROJICTIONS POPJLATION IN TER 2000 (HILL) 65.4 STATIONA"Y POPULATION (HILL) 110.3 POPULATION NHNmTIRI L.a POPULATION 1USITY PR EQ. P. 35.2 45.2 53.2 32.9 139.3 PER SQ. Cl. AQtI. LAND 74.6 92.5 119.1 158.9 513.2 PONULATtON AE STUURZ (2) 0-14 *RS 41. 41.0 3.2 31.6 22.l 13-44 IRS 55.2 54.3 57.3 61.1 46.1 65 A