Turkey - Sumerbank Cotton Textile Rationalization Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7113 PROJECT PERFORMANCE AUDIT REPORT TURKEY SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) February 4, 1988 Operations Evaluation Department 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. ABBREVIATIONS AND ACRONYMS ASH Alim va Satim Muessesse (Sumerbank retail distribution network) CTD Cotton Textile Division DYB Dev1et Yatirim Bankasi (State Investment Bank) EEC European Economic Community ERR Economic Rate of Return FRR Financial Rate of Return PCR Project Completion Report PIU Project Im[plementation Unit PPAM Project Performance Audit Memorandum PPAR Project Performance Audit Report PPF Project Preparation Facility RMP Rehabilitation and Modernization Project SAR Staff Appraisal Report SB Sumerbank SEE State Ecomomic Enterprise SYKB Sinai Yatirim ve Kredi Bankasi (Small Enterprise Bank) TSKB Turkeyi Sinai Kalkinma Bankasi (Industrial Development Bank of Turkey) UNIDO United Nations Industrial Development Organization THE WOLD IIANK FM 9"AL u ONLY Washmaton. D.C. 20433 US.A. Ofce o. DiwCter-Gened February 4, 1988 EMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Turkey - Sumerbank Cotton Textile Rationalization Project (Loan 1947-TU) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Turkey - Sumerbank Cotton Textile Rationalization Project (Loan 1847-TU)" prepared by the Operations Evaluation Department. Attachment IThi docucment ha a retictadidtributim and may be ad by rgewson in thw pewanum of their Oftial dutie. Its contents may not otherwis be diecokW without Word Bank autboration. OR *F93" USE ONLY PROJECT PERFORMANCE AUDIT REPGRT SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) TABLE OF CONTENTS Page No. Prefice .. Basic Data Sheet ................................................... ii Evaluation Summary ................................................ iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND ................................ I II. PROJECT OBJECTIVES AND SCOPE .......................... 4 III. IMPLEMENTATION EXPERIENCE ..................... 5 IV. INITIAL OPERATING RESULTS . ... .......... 7 V. INSTITUTIONAL DEVELOPMENT .......... .................. 12 VI. FINANCIAL AND ECONOMIC RATES OF RETURN .................... 14 VII. OVERALL ASSESSMENT AND SUSTAINABILITY ... ............ 15 VIII. MAIN LESSON LEARNED .................................... 18 ATTACHMENT - Comments from the Borrower....... ................. 20 PROJECT COMPLETION REPORT I. Introduction.......................... ...... 23 II. Project Background....................................... 25 III. Project Implementation.................................... 28 IV. Operating Performance......... ..... ..... ........ 35 V. Financial and Economic Performance....................... 37 VI. Bank Role and Lessons Learned ... ...................... 38 This document hasa 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. TABLE OF CONTENTS (continued) Palte No. ANNEXES 1. Implementation Schedule ...... ............................. 40 2. Replacement and Modernization of Machinery .. .............. 41 3. Cotton Textile Division - Number of Employees .............. 42 4. Technical Assistance and Training ........................ 43 5. Procurement by Country of Origin ........................... 44 6. Project Capital Costs - Planned and Actual ................. 46 7. Disbursement of Bank Loans ................................. 49 8. Production Statistics ....... .................. 50 9. Detailed Statistics - Spinning, Weaving and Garments Production ................................... ..... ..... 53 10. Turkey's Textiles Exports ............ ............. 57 11. SB and CTD - Summary of Financial Performance .............. 58 12. Incremental Financial Rate of Return - Cost and Benefit Streams ............................... 59 13. Incremental Economic Rate of Return - Cost and Benefit Streams ........... ................. 60 PROJECT PEEPORFANCZ AUDIT REPORT SUMRAK COTTON TEXTILE REABILITATION PROJECT (LOAN 1847-TU) PREFACE This report presents an audit of performance under Loan 1847 to the Government of Turkey for a project to reconstruct selected cotton tex- tile production facilities controlled by Sumerbank, a State Economi Enter- prise, as defined in Turkish law. The loan, for the equivalent of US$ 83 million, was approved by the Board on May 20, 1980, and became effective February 27, 1981. The terms of the loan for the Borrower were for 17 years, with four years grace, at 8.250; the proceeds were relent to Sumerbank for 12 years, including four years grace, at 10.5t, with the beneficiary assuming the foreign exchange risk. Final disbursement of Bank funds was made on February 5, 1986; an undisbursed portion of US$ 0.4 mil- lion was cancelled. This Project Performance Audit Report (PPAR) consists of the Project Performance Audit Memorandum (PPAM), prepared by the Operations Evaluation Department (OED), and the Project Completion Report (PCR), pre- pared by the former Industry Department, based on a completion report sub- mAtted by Sumerbank. The PPAM is based on a review of the President's Report, the Staff Appraisal Report, the Loan Agreement and the project files, and on interviews with Bank staff. An OED mission travelled to Turkey in June 1987 to interview officials of the Government and of Sumerbank and to receive additional information, and visited several of the rehabilitated mills. The kind cooperation and assistance of the author- ities is gratefully acknowledged. The PCR provides a satisfactory review of the implementation expe- rience, the lessons learned and the initial operating results under the project. The PPAM examines in further detail the background of the project, analyses more recent data on performance of the mills, in particular the increases in efficiency achieved, and reviews progress in obtaining im- provements in the institutional framework. The Government had no comments on the draft of this report; the communication received from the Treasury is reproduced as an Attachment to the report. Additional data provided by SB have been incorporated into the text. PROJECT PERFORMANCE AUDIT REPORT SUMERBANK COTTON TUITILE RATIONALIZATION PROJECT (LOAN 1847-TU) BASIC DATA SHEET As of AUnst 31. 1987 Orisinal Disbursed Canceded Rad Outstanding Loan 1847-TU 83.0 82.55 .45 19.10 63.45 CUMMULATIVE LOAN DISBURSEMENT CY79 CY80 CY81 CY82 CY83 CY84 CY85 CY86 (i) Planned 1.0 37.0 75.0 83.0 83.0 83.0 83.0 (ii) Actual 0.1 0.5 3.9 25.3 46.4 82.4 82.6 (iii) (ii) as Z of (1) 10.0 1.3 5.2' 30.5 55.9 99.3 99.5 OTHER PROJECT DATA Original Loan/ Actual or Loan Date Re-estimated Board Approval 05/13/80 05/20/80 Loan Agreement - 05/28/S0 Effectiveness 06/20/80 02/27/81 Loan Closing 06/30/84 06/30/85 Date of Physical Completion 12/31/83 09/30/86 Completion time (in months) 45 76 Time overrun 31 Total Project Cost (US$m) 150.5 163.4 Overrun (Z) 8.6 Financial Rate of Return (Z) 25.1 21 Economic Rate of Return (Z) 23.6 15.3 MISSION DATA Montb/ .o. of No. of Date of Year Wek Persons ReDorts Identification 5/77 2 6 08/05/79 Appraisal 12/79 3 5 04/30/80 Supervision I 09/80 1 2 09/29/80 Supervision II 02/81 1 1 03/20/81 Supervision III 05/81 3 1 06/25/81 Supervision IV 11/81 1 3 01/29/82 Supervision V 05/82 1 1 06/02/82 Supervision VI 11/82 1 1 12/20/82 Supervision VII 03/83 2 2 05/02/83 Supervision VIII 08/83 2 2 09/30/83 Supervision IX 02/84 1 1 03/05/84 Supervision X 11/84 2 2 12/28/84 Supervision XI 04/85 1 2 05/28/85 Supervision XII 03/86 1 2 /a /a Completion Report STAFF INPUT (Manweeks) Cr.846-PAK FY77 FY78 FY79 FY80 FY81 FY02 FY98 FY64 FY8 FY86 TOTAL Preappraisal 54.5 23.8 26.5 91.65 - - - - - - 196.5 Appraisal - - .6 56.2 - - - - - - 56.8 Negotiation - - - 11.5 - - - - - - 11.8 Supervision _8.9 1.1 21.9 17.4 18.1 16.1 18.1 8.9 101.7 Total 54.5 23.6 27.1 180.6 21.9 17.4 18.1 16.1 18.1 8.9 368.6 OTHER DATA Borrower: Government of Turkey Executing Agency: Sumerbank Fiscal Year of Sponsor: 01/01 - 12/31 COUNTRY EXCHANGE RATE /b 1979 1980 1981 1982 1983 1984 1985 1986 31.08 76.04 111.22 162.55 225.46 356.68 521.98 599.01 [h Period average TL per US$ PROJECT PERORMANCE AUDIT REPORT TURKEY SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) EVALUATION SUMMARY Introduction i. Industrial expansion played a major role in the economic develop- ment of Turkey in the 1960s and early 1970. but this growth took place in an inward-oriented policy environment with high protection and favored treatment for State Economic Enterprises (SEEs) ignoring efficiency consid- erations. Exports represented an extremely Rmall share of GDP (some 62 in the early 1970s) and were mainly concen*.ated in basic commodities. The weaknesses in the industrial structure became manifest in the post-1973 crisis which led to serious imbalances in the country's internal and exter- nal accounts. At the same time, Turkey's interest in attaining full member- ship in the European Economic Community (EEC) focussed attention on the -adjustments which would be required to allow it to take advantage of that membership (PPAM, paras. 1 and 2). ii. Bank economic and sector work seeking solutions to these difficulties included an industrial sector study designed to identify sub- sectors capable of expanding exports to the EEC market. The selection of textiles reflected the relatively advanced state of those industries and the penetration of the market which had already been achieved. The analysis indicated that private sector plants had supplied virtually all of the foreign sales; while considerable investment had been undertaken in those facilities to increase competitiveness, there was still scope for improve- ments and Bank staff undertook to prepare a credit project which would supply funds to the sector to foster further export growth (PPAM, paras. 3 - 5). iii. The analysis also highlighted the difficulties being faced by public sector textile units organized under the Sumerbank (SB), one of the largest of the SEEs. Established in the early 19309, SB had at one time been the principal supplier of these products to the domestic market but its share had fallen to around 152. Operating with obsolete equipment and at low levels of efficiency, these units were incurring substantial losses, requiring budgetary support and thus contributing to the fiscal deficit. Similar findings emerged from SB's own study which recomended an exten- sive rehabilitation/modernization project; in 1977, the Government sub- mitted this proposal to the Bank for financing (PPAM, paras. 5 - 7). - v - iv. After review of the proposal, the Bank agreed to participate in the funding; however, in order to prepare an acceptable project, a more detailed technical study would have to be undertaken and organizational and institutional problems affecting the performance of individual mills would also have to be addressed. In justifying its participation, particularly in view of the limited success which had beer. achieved in obtaining improved performance in other SEEs through previous project lend- ing, the Bank took into account the specific market which SB was serving, the imployment impact, and the need to reduce SB's operating losses (PPAM, paras. 7 - 10). v. The more detailed technical report was completed in June 1979 and recommended a comprehensive Rationalization and Modernization Program (RMP). The basic objectives were to: increase efficiency and capacity util- ization of existing plant facilities; reduce production costs; improve product quality; and improve the institutional and management framework of SB's cotton textile operation (PPAM, paras. 10 - 12: PCR, para. 2.02 and 2.03). The report also recommended extensive technical assistance in the production, management and financial areas. Objectives vi. It was not considered feasible at the time to undertake the full program and a two-phased approach was adopted. The project, involving a Bank loan of US$83 million and approved by the Board in Hay 1980, repre- sented the first stage; its scope included replacing obsolete and worn-out machinery and components and achieving a better balance of production fa- cilities in individual mills to permit more efficient production and to increase capacity utilization. The improvements were to be mainly confined to spinning and weaving, plus one small investment in garment making; fin- ishing operations were largely left for the second phase. A major technical assistance and training component was also included (PPAM, paras. 12 - 14; PCR, paras. 2.05 - 2.07). vii. In March 1980, prior to loan approval, SB announced a major struc- tural reform, responding to the Bank's concern over the adequacy of the institutional framework. All of the textile operations were consolidated into a Cotton Textile Division (CTD), bringing together under one umbrella the necessary functions relating to those operations while at the same time providing some autonomy to the individual mills, within the limits imposed by the existing SEE legislation (PPAM, paras. 11 and 15). viii. Loan effectiveness was delayed by some five months due to diffi- culties in finalizing a technical assistance contract which was a condition of effectiveness. The delay reflected in part problems arising from managerial changes within SB and CTD; it is likely that the unstable - vi - political climate in late 1980 also contributed to this situation. Consid- erable time was required to draft the terms of reference of and to select the consultants as a result of the slow pace in staffing CTD and its Project Implementation Unit (PIU), reflecting the impact of existing SEE regulations on recruitment. While the Government had agreed to establish a special contractual status to facilitate CTD staffing, this was only par- tially implemented (PPAM, paras. 16 and 17; PCR, paras. 3.06 and 3.11'. Implementation ix. Project implementation was adversely affected by continuing staff- ing problems in the PIU but the situation was eased by assigning additional responsibilities to consultants providing operational assistance. While mechanical completion took place 31 months after appraisal estimate, this was mainly due to the time required to install a garment plant considerably larger than originally planned; most of the equipment improvements were in place and operating somewhat earlier (PPAM, paras. 18; PCR, para!. 3.11 and 3.12). x. Actual total installed cost of the project (expenditures on fixed assets, technical assistance and training) amounted to the equivalent of US$126.6 million, some 192 above the appraisal estimate. Financing require- ments increased by only 9%; a reduction in working capital partially offset the higher installation costs as well as higher interest charges and com- mitment fees due to the completion delays. However, during implementation, the scope of the project was considerably expanded. The appreciation of the dollar and the buyers' market for textile machinery at the time permitted the purchase of substantial additional parts and components; in addition, some of the foreign exchange provided by the Bank for technical assistance and training was not used for that purpose and was re-allocated for expen- diture on equipment. As a consequence of these and other elements, the physical improvements in SB mills were considerably more than anticipated. The actual number of spindles rehabilitated was almost three times the number originally planned, permitting the scrapping of twice the original target. Similarly, in the case of weaving, new looms installed were twice the original estimate which permitted scrapping 60Z more than planned. Finally, capacity of the one garment-making plant included in the project was doubled (PPAM, paras. 19 - 21). Initial Operating Results xi. As a result of the project, output of yarn and cloth, which had been declining in the 1970s, has increased and both installed capacity and production have exceeded appraisal expectations, largely reflecting the expansion in scope. The major factor has been the improvement in capacity utilization through removal of bottlenecks, better integration of equipment and reduction in machine breakdowns. An analysis undertaken by the audit - vii - mission indicates that technical efficiency of equipment, defined as output per actual operating hour, has risen 12.62 for spinning and 10.4Z for weav- ing; on the other hand, average working time per spindle has increased by about 502 and per loom about 202. Wide variations in performance among the mills suggest considerable scope for further improvement. Output per spindle hour is estimated at about 702 of the average achieved in similar western European mills; in the case of weaving, average output per hour is about 702 of the theoretical maximum, with 85% representing an achievable norm (PPAM, paras. 24 and 25). xii. The structure of SB's market has undergone significant changes. In the 1970s, as much as 902 of its textile output had been sold to government agenzies (e.g. military and hospitals) and to its own retail network; the latter serviced mainly the rural areas with simpler, lower quality products in which SB specialized. At the present time, these markets absorb no more than 60Z of output with the remainder destined mainly for other retaiL outlets, export and garment manufacture (half of which is exported). At the inception of RMP, export expansion had not been given much importance but the improvements achieved have permitted a substantial growth in these sales. Considerable diversification has also occurred in both external markets and product mix, with garments now accounting for one-third of those sales. However, SB's export performance still lags behind that of the private sector which exports more than half its output (PPAM, paras. 28 and 29; PCR, para. 4.04). xiii. Reductions in costs of production through improved performance were important in restoring SB's profitablity; an equally critical role was played by SEE reforms adopted in the early 1980s which gave SB freedom to establish its own prices in accordance with demand and supply conditions. At current exchange rates, SB's average operating costs for finished fabrics are below comparable western European costs, lower wage rates offsetting higher labor inputs (PPAM, paras. 30 and 31; PCR, annex 11). Institutional Development xiv. Improvement in the institutional and managerial framework of SB's cotton textile operations was, as noted above, a major objective of the project and recommendations to establish a holding compLay type of arrangement emerged from the consultants' report prepared under the techni- cal assistance effort. This was not possible due to the prevailing SEE legislation; as an interim measure, SB established the Cotton Textile Divi- sion (CTD) which, as set out in the appraisal report, was expected to cen- tralize certain planning and monitoring functions with the mills being granted considerable operational autonomy. However, the actual reorganiza- tion has fallen short of expectations; while CTD is involved in production planning, virtually all other functions, including product pricing, are performed by other units within SB's structure and the extent of mill - viii - autonomy is minimal. Severe constraints on adequate staffing at senior levels continue due to prevailing SEE legislation although some improvement has resulted from introduction of a contract system. Similarly, there has been a small reduction in the labor force but employment per unit of output remains well above levels in the private sector or in comparable western European facilities (PPAM, paras. 33 - 38; PCR. para. 4.01). FRR and ERR xv. The re-estimated FRR and ERR, 21.8Z and 16.5% respectively, are somewhat lower than expected at appraisal, 25.11 and 23.6Z, but remain satisfactory. The reductions reflect the delays in completing the project, as well as actual product prices in both domestic and external markets considerably below those projected at appraisal when over-optimistic expec- tations dominated Bank and similar economic forecasts. In evaluating the economic and financial impact of the project, one must also note the con- tribution to improvement in SB's profitability and in its ability to gener- ate foreign exchange through higher exports (PPAM, paras. 39 - 41; PCR, paras. 5.02 - 5.04). Overall Assessment and Sustainability xvi. The project was the first phase of a rehabilitation and moderniza- tion program with the long-term objective to make SB's textile operations more efficient, competitive and profitable; the second phase has been post- poned pending a decision of the Government regarding the possible privati- zation of SB. The narrowly defined immediate goal of the project to improve the physical and financial performance was achieved but progress in achiev- ing the broader institutional improvements has been limited. As a conse- quence of the latter, sustainability of the accomplishments in production is uncertain. Higher output reflects the improved hardware which has per- mitted better utilization of capacity and modest increases in machinery efficiency. Future performance, maintaining high utilization rates and further increases in machinery efficiency, will depend upon the software, that is, the extent to which managerial capabilities can be applied to the operation of the mills. While some changes have been introduced in the institutional structure, an acceleration of this process is required so that adequate incentives can be provided to mill management to take initia- tives for medium or long term improvement of operations. The audit mission has found that too much emphasis has been put on hardware and not enough on operational efficiency (PPAM, paras. 42 - 48). xvii. The decision to use only partially for that purpose Bank funds set aside for training and technical assistance reflects to some extent the serious underestimate of the language problems surrounding large scale external efforts. At the same time, however, there appears to have been considerable reluctance on the part of SB officials to expend loan proceeds and foreign exchange on those activities, as well as their perception that - ix - the circumstances of Turkey were so unique that experiences elsewhere were not relevant. At the present stage of the country's development, there is awareness of the need for opening of the economy in the broadest senses of that term; the degree of openness adopted by institutions such as SB will greatly affect their ability to survive in this new environment (PPAM, paras. 47, 48 and 52; PCR, para. 3.07). Lessons Learned xviii. From the operational point of view, the principal lessons derived from this experience relate to the need for more realistic im* amentation schedules and the use of revolving funds where there are many small dis- bursements. Attention is also drawn to the benefits obtained from providing proper technical inputs from the Bank, in particular sustained supervision efforts, as well as fra the choice of an experienced technical consultant. Of special significance is the contribution of the project implementation unit which, in spite of numerous changes in SB's senior management, pro- vided strong direction to achieve the project's objectives (PPAM, paras. 53 and 54; PCR, paras. 6.01 and 6.02). xix. The most important lessoas from this experience, however, concern the ability to achieve through project lending institutional reforms which are essential to more efficient functioning of the enterprise which is beneficiary of the loan. Taking into account the limited success achieved in earlier similar projects, the Bank sought structural changes within the limits imposed by the prevailing SEE legislation. While several measures were introduced, implementation lagged and the basic objectives of the project to increase operational efficiency were only partially met. xx. Additional steps which SB has taken in recent years to improve its performance have been largely in response to measures taken at the broader level of overall SEE reform. The importance of those enterprises in the Turkish economy has led successive governments to introduce appropriate policies to increase their efficiency; these issues have been among the major areas highlighted in the program of SAL operations undertaken by the Bank in Turkey in recent years. There has thus been a convergence of proj- ect and non-project lending to achieve similar objectives. The experience supports the position that, where such public sector institutions have long historical roots, policy-based lending can be more effective in achieving efficiency adjustments, provided that there is commitment at the appropri- ate levels. At the same time, however, given the strength of those roots, the pace of change is not likely to be as rapid as may be considered desir- able. (PPAM, paras. 53 - 58). PROJECT PERFORMANCE AUDIT MEMORANDUM TURKEY SUMERBANK COTTON TEXTILE REHABILITATION PROJECT (LOAN 1847-TU) I. BACKGROUND 1. During the 1960s and early 1970s, manufacturing had been one of the growth sectors in the Turkish economy, its share in GDP rising from 13Z to 18Z. This expansion, however, had taken place within a policy framework characterized by a high degree of protection, excessive investment in capital-intensive industries, and favored treatment for the State Economic Enterprises (SEEs) which ignored efficiency considerations. The anti-export bias of the basic orientation was reflected in the low share of exports in GDP, around 6Z throughout most of this period; moreover, the lack of com- petitiveness of the industrial sector was reflected in the small share of manufactured goods in total exports with basic commodities (cotton, hazel- nuts and tobacco) accounting for more than half of foreign sales. 2. The weaknesses of the industrial structure and of the policies became manifest after the first oil-price crisis at the end of 1973 which led to rapid deterioration in the country's external and internal balances. At the same time, because of its interest in achieving in the future full membership in the European Economic Community (EEC), the Government was focussing attention on the scope of adjustments which would be required for the country to become part of such a grouping. 3. Within the Bank, as a consequence of the expansion of resources available for country economic and sector work, the decision was made to undertake studies to analyze the implications of Turkey's possible entry into EEC, especially as regards the industrial sector. In early 1976, an industrial sector mission was organized to examine the possibilities of developing exports from Turkey to EEC member countries. Identification of the textile subsector (including garments) as a potential source of exports was fairly obvious, given the domestic raw cotton supply and the stage of development which had already been reached, including the initiation of sales in European markets. 4. The analysis of the situation of the subsector noted that the major share of the cotton textile exports was accounted for by plants in I the private sector where there had been substantial new investment in pro- ductive facilities in the previous decade. On the other hand, public sector plants, which accounted for some 20Z of installed capacity, had recorded * few external sales. These units were considerably older, were operating at low levels of efficiency and were producing goods of inferior quality; moreover, minimal improvements had been introduced in productive equipment in preceding years. - 2 - 5. In considering the operational implications of these findings, it was clear that a project to help expand cotton textile exports would best focus on the private sector and work was initiated to design an appropriate operation for this purpise.1 However, in the course of the Bank's follow-up work on the sector study, attention was also drawn to the possibility of a rehabilitation project for the public sector plants to improve their pro- ductivity and efficiency, as well as to improve the quality of output. 6. The public sector cotton textile plants comprised 19 units under the control of Sumerbank (SB); 13 plants were legally established as sepa- rate entities with SB owning all the stock while it was the majority stock- holder for six others. SB was one of the largest SEEs, a conglomerate with diversified holdings in productive sectors; it is also a banking institu- tion but this has been one of its least important activities (PCR, para. 1.03; SAR, paras 4.01 and 4.02). In addition, it owned a network (ASM) of about 430 retail shops throughout Turkey which were virtually the sole outlets for the various consumer goods produced by its plants. SB was es- tablished in 1933 and, at one time, was the principal producer of textiles in the country; by the mid-1970s, however, its share in the domestic market had fallen to some 15%. In 1976, concerned with the substantial losses that were being recorded by its cotton textile operations and by the con- tinued deterioration in its market share, SB prepared a proposal for a major program for modernization/ rehabilitation (MACROPLAN). 7. In 1977, the Government requested Bank assistance to finance a rationalization program for SB. The Bank then reviewed the Macroplan and concluded that not only would a further detailed technical feasability study be required to examine the physical aspects of the rehabilitation program but, equally important, organizational and institutional problems would have to be addressed. These problems included the conditions under which SEEs operated, the particular structure of SB and the extent of mill management autonomy. 8. Considerable discussion took place within the Bank concerning the justification for assistance to SB's textile operations. It was apparent that, even after some improvement in productive efficiency, these plants could make only a minimal contribution to export growth, a fundamental objective in the Bank's lending strategy for Turkey at at the time, unless a massive rehabilitation program was undertaken. In addition, 'he economic ]/ The Private Sector Textile Project was presented to the Board in August 1979 with two elements, Loan 1754-TU for US$65 million to the Industrial Development Bank of Turkey (TSKB) and Loan 1755-TU for US$15 million to the Industrial Development Credit Bank (SYKB), both institutions serving the private sector; TSKB deals mainly with medium and large scale enterprises while SYKB deals mainly with smaller units. It should also be noted that IFC has made investments in a number of private sector textile establishments since the early 1970s. - 3 - performance of Turkey's SEEs had been of major concern in the ongoing eco- nomic dialogues with the Government since these institutions were signifi- cant contributors to the huge budget deficits which were one of the princi- pal sources of the country's fiscal imbalance. Moreover, the attempts by the Bank to improve SEE performance through various covenants in previously approved project loans with specific enterprises had had virtually no im- pact in achieving desired reforms.2 9. The Bank decided to continue with the processing of the loan in view of the contribution of SB to employment, the uniqueness of the market it was serving (PCR, paras. 1.04 and 4.03), and the prospects for improving productive efficiency which would eliminate, at the least substantially reduce, operating losses, thus contributing to a reduction in the fiscal deficit. After considerable discussion, SB agreed to contracting the ser- vices of an experienced consulting firm to undertake the necessary expanded study, covering both the physical and organizational aspects and the re- quirements for operational and financial technical assistance. Because of Turkey's extremely tight foreign exchange position at the time, resources from the Bank's Project Preparation Facility (PPF) were used to finance the associated foreign expenditures.3 10. The consultants' report was completed in June 1979. The main char- acteristics of the recommended Rationalization and Modernization Program (RMP) are summarized in the PCR, para. 2.01. Because of the substantial costs associated with the RMP and the existing financial constraints, it was decided to carry out the program in two phases (PCR, para. 2.02). It was also believed that implementing the total program would impose a heavy burden on the administrative capacity of SB, particularly in view of the 2/ Among those operations were Erdemir (steel) Expansion (Loan 818-TU, approved in April 1972) whose performance was evaluated in the PPAR, Report No. 3533, dated June 26, 1981; Balikesir Newsprint (Loan 1258-TU, approved in May 1976) evaluated in the PCR, Report No. 5664, dated May 21, 1985; Akdeniz (Antalya) Forest Utilization (Loan 957-TU, originally approved in January 1974) evaluated in the PCR, Report No.6153, dated April 21, 1986; and DYKB Banking (Loan 1024-TU, approved in June 1974) evaluated in the PCR, Report i4o. 4922, dated Feb.10, 1984. The last cited project contained major institutional objectives for reform of the SEEs in an attempt to take advantage of the fact that DYKB was the principal source of finance for those enterprises. A review of Bank lending to Turkey's public and private industry over the period 1950 to 1978 was undertaken by OED in 1979 and the results were published in the special study entitled Sector Operations Review: The Industries and DFCs Program in Turkey, Report No. 3077, dated July 18, 1980. 3/ The Facility was reimbursed with proceeds from the project loan when it was approved; technical assistance financed with these funds represented the first stage of the extensive assistance program provided to SB and covered consultant services utilized by SB prior to the contracting of a longer-term arrangement. See below, para. 14. -4- expected changes which would have to be introduced in its structure. At the same time, it was felt that, before completing the entire program, a two- stage approach would provide better opportunity to monitor the progress in achieving institutional reforms of SB, in turn dependent upon changes in the structure of the SEEs, which were essential for its longer term viabil- ity. 11. Project preparation activities had advanced parallel with the un- dertaking of the consultants' study and were focussed on the issues arising from the legal framework under which SB, as well as all SEEs, operated. Pre-appraisal and appraisal missions were in the field in September and December 1979, respectively, to review with the Government and SB officials the main features of the recommended program and the elements of the organ- izational reforms that were necessary. The project was negotiated in April 1980 and a loan for US$83 million was approved by the Board in May 1980; the loan was made to the Government and re-lent to SB. II. PROJECT OBJECTIVES AND SCOPE 12. RMP was designed to: (i) increase efficiency and capacity utiliza- tion of existing plant facilities; (ii) reduce production costs; (iii) improve product quality; and (iv) improve the institutional and management framework of SB's cotton textile operations. The original program was ex- pected to cover virtually all of SB's investment needs for the period through 1986 (SAR, para. 5.01). 13. The project, representing the first phase of the program, envi- sioned a small increase in productive capacity for yarn and woven cloth but was essentially oriented towards replacing obsolete and worn-out equipment, introducing some improvements in existing machinery, and achieving a better balance of production facilities in the individual mills; Bank funds would cover the bulk of the foreign exchange requirements. The *rehab" approach was feasible due to the characteristics of the technology then being used for textile production in SB mills which was not of the continuous process type. 4 Funds were also provided for improving some of the finishing facil- ities but these were restricted to immediate needs for modernization or replacement. Finally, equipment for one new garment plant was included, to be located in the space vacated through scrapping an obsolete integrated yarn-cloth mill (PCR, paras. 2.05 and 2.06). 4/ Recent changes in spinning technology, the introduction of "open-end" rotors, have eliminated intermediate steps between the first processing of raw cotton (carding) and the production of yarn; the introduction of shuttleless looms has modified the weaving process to a lesser extent. The original project plan did not anticipate the introduction of "open- end' spinning but shuttleless looms, which had already been introduced in some SB mills, were to be provided in some instances where obsolete or severely worn looms had to be replaced. - 5 - 14. A major technical assistance effort was planned, to help in imple- menting RMP and in introducing more efficient production techniques, as well as to help in the expected reorganization of the cotton textile opera- tions of SB; financial and accounting systems at the mill level and at SB's headquarters level were also to be improved. The program included considerable training, both within Turkey and abroad (PCR, para. 2.07). The importance attached to operational technical assistance was reflected in the fact that one of the conditions of effectiveness of the loan was the signing by SB of a contract with a consulting firm to provide the necessary services. 15. In March 1980, prior to loan negotiations and after considerable discussion with the Bank, SB announced a major structural reform, consoli- dating all of its cotton textile operations into one unit, the Co..on Textile Division (CTD), bringing under one umbrella all necessary functions relating to those operations. These changes were considered necessary to improve the performance of the mills, through better coordination and ad- ministration, within the limits imposed by the existing legislation on the SEEs. Outlines of the expected organizational framework and the relation- ship between the CTD and the individual mills were provided in the Staff Appraisal Report (see para.4.19 and Annex 4-6) including an indication of the degree of mill autonomy. Further details of those arrangements were to be elaborated with the help of consultants then engaged in the first phase of technical assistance to SB. CTD would establish a Project Implementation Unit (PIU) which would be responsible for implementing the project. III. IMPLEMENTATION EXPERIENCE 16. The loan became effective at the end of February 1981, some nine months after signing and five months after the original deadline for effec- tiveness. The main stumbling block was the delay in complying with the condition to complete a contract with a consulting firm to undertake the extensive Stage II of operational technical assistance. The delay in part reflected problems arising from managerial changes which had occurred in SB and CTD; a new managing director had been appointed in SB in early 1980 leading to further changes in the upper managerial levels while the origi- nal director of CTD, appointed shortly after its establishment in May 1980, was replaced at the end of the year. It is, moreover, likely that the un- stable political environment in Turkey at the time had an impact on deci- sion making. 17. An additional factor responsible for the delay was the time re- quired for preparing the terms of reference and for the selection of the consultants due to problems in staffing both CTD and the PIU. Regulations governing recruitment for SEEs prevented quick action; moreover, existing salary differentials made employment in the public sector unattractive. While the Government had agreed to permit the contracting of 55 staff under more favorable terms (SAR, para.4.24), actual approval of the contracts was given well after the time expected and for less than the original number anticipated (PCR, paras. 3.06 and 3.11). Finally, there appears to have been some reluctance on the part of senior level SB officials to use foreign exchange for "software purposes", as well as a widespread feeling that the use of foreign expertise was not essential to improving SB perfor- mance. 18. Once the loan was made effective, both the shortage of staff in the PIU and the turnover rate adversely affected implementation. In general, however, implementation went rather smoothly with the consulting firm at first taking over several of the responsibilities of the PIU dealing with preparation of tenders, review of bids, etc, until its staff coula be strengthened. While mechanical completion of the project was 31 months behind the schedule anticipated in the appraisal, in reality the bulk of the equipment was on line and operating somewhat earlier; the longest delay was experienced in completing the civil works and installing the equipment for the new garment plant (PCR, paras. 3.11 and 3.12). 19. In terms of US dollars, actual total installed cost (including consultancy and training) of the project at completion amounted to some US$126.6 million, as compared to the appraisal estimate of $106.0 million, an overrun of some 19% (PCR, Annex 6, Table 1). There were, however, sever- al changes in scope limiting the comparability of these two figures; while each of the changes was of relatively small magnitude, the cumulative ef- fect was significant. In the first place, the actual expenditure for con- sultancy and training was approximately 60% of the original estimate, re- sulting in a considerable savings in foreign exchange. 5 Moreover, the appreciating dollar and the buyers' market for textile machinery at the time resulted in the dollar prices of equipment well below those originally estimated. As regards the utilization of Bank funds, the savings realized and the funds set aside for price contingencies were re-allocated to permit the purchase of substantial additional parts and components. Finally, suc- cessful rehabilitation of some faulty machinery scheduled to be replaced also led to savings which were utilized for further equipment purchases (PCR, para. 3.05). Given all these additional improvements, which were to be undertaken in the second phase of the RMP, as well as somewhat higher expenditure on locally produced equipment, the actual physical rehabilita- tion of the SB plants was considerably more than originally planned. 20. To illustrate the magnitude of the additional improvements, the appraisal report (para. 5.06) indicated that, in the spinning sections, some 47,000 spindles would be rehabilitated and 63,000 obsolete spindles would be scrapped. The actual changes amounted to 142,000 rehabilitated, permitting the scrapping of 119,000 (PCR, Annex 2, Table 1). The spinning sections appear to have been the main beneficiaries of the windfall; while the appraisal mentioned that the investments would be focussed on six 5/ This issue is examined in detail below, paras. 46 and 47. - 7 - plants, substantial resources were expended on 14. 6 In the case of weav- ing, 1,439 looms were to be scrapped and 817 new looms installed (SAR, para. 5.07); the actual changes involved scrapping 2,311 loom3 and install- ing 1,639 new looms. Finally, the capacity of the one garment plant in- cluded in this first phase was almost doubled (see below, para. 26). 21. The actual total financing required, expressed in dollar terms, amounted to $163.4 million compared to the appraisal estimate of $150.5 million, an increase of 92. Because of the longer time for completion, interest charges and commitment fees during construction were considerably higher than anticipated, largely in foreign exchange. This was partially offset by a reduction in working capital requirements but these were mainly in local currency. Thus, although foreign exchange expenditures for in- stalled costs were slightly less than anticipated, total foreign exchange requirements were higher and had to be met from the export earnings of SB. IV. INITIAL OPERATING RESULTS 22. Recent production and export performance of CTD for yarn and fabrics is summarized in Table 1. In the case of yarn, the declining trend in output has been arrested and production has increased in line with the improvements in productive facilities. At the present time, yarn capacity and output exceed the levels anticipated in the appraisal, largely for the reasons explored above (para. 20). The year-to-year variations since the beginning of the 1980s are mainly explained by the movements in domestic demand; overall, however, this has been relatively static since the growth period of the previous decade. SB's yarn exports have also fluctuated; recent data indicate that these sales now represent around 13% of output. Year-to-year changes reflect in great part variations in exchange rate/ex- port incentive policies while the existence of quotas in the EEC has put limits on sales to that market. Yarn prices under competitive conditions are generally no more than 10-15% above raw cotton prices; in the past, there had been press reports that Turkish yarn had been quoted in European markets at prices below those of cotton, apparently reflecting particularly favorable combinations of export incentives and exchange rates. 7 6/ As a consequence, the age profile of spinning equipment was substantially improved; almost 50% of spinning machinery was 5 or fewer years of age in 1986 as compared to 23Z in 1980 (see PCR, Annex 2, Table 2). 7/ The Government has recently sharply reduced direct export subsidies for textiles and clothing, particularly for those destined for western Europe and the United States, reflecting in part concern over the possibility of imposition of countervailing duties in those markets. 23. Fabric production has alra improved after deteriorating during the 1970s. The data given in Table 1 understate the recen* expansion since these are given in linear meters and there has been increased use of wider looms with a resulting increase in volume in terms of square meters. Exports of cloth have significantly increased since the beginning of the 1980s when they had fallen from relatively high levels in the previous decade; although adversely affected by EEC quotas and the loss of markets in Iran and Iraq, these sales are expected to rise to over 15% of SB output due to more aggressive export promotion efforts which have included pene- tration of new markets, including the US and Canada. 24. The increased output is generally due to the improvement in capac- ity utilization of equipment as the modernization/rehabilitation improve- ments removed bottlenecks, provided for better integration of equipment in the production stream and reduced the time lost through breakdowns; there Table 1: SUMERBANK COTTON TEXTILE PRODUCTION AND EXPORT STATISTICS 1977 - 1988 Yarn Fabrics Output Exports Exports/ Output Exports Exp./ Year (th. metric tons) Output (mil. linear meters) Output 1973 52 9 17 224 14 6 1975 42 4 9.5 217 2 1 1977 38.1 1.4 3.7 183.8 2.6 1.4 1978 37.9 2.2 5.8 198.7 2.4 1.2 1979 40.5 7.3 18.0 206.6 5.7 2.8 1980 41.4 3.1 7.5 176.7 1.7 1.0 1981 42.4 1.3 3.1 220.5 0.5 0.2 1982 47.1 3.9 8.3 214.5 19.7 9.2 1983 51.2 4.5 8.8 225.1 24.2 10.1 1984 53.9 2.6 4.8 243.6 8.5 3.5 1985 50.7 2.0 3.9 212.7 9.9 4.7 1986 51.4 4.1 8.0 207.7 14.8 7.1 1987(est) 53.3 6.8 12.9 215.6 21.7 10.1 1988(pro) 63.9 ... ... 235.3 40.2 17.1 Source: SB was also a reduction in the diversification of prodact mix in individ- ual mills, permitting longer production runs. Transferring machinery among the mills contributed to the increase in the degree of - 9 - specialization. SB's analysis of technical efficiency, defined as output per operating-hour of equipment, indicated that there had been on average an improvement of 3.2Z in spinning and 6.2Z in weaving (PCR, para. 4.01) as compared to the situation before RMP. More recent data orovided to the audit mission indicate that the efficiency im- provements amounted to 12.62 for spinning and 10.4Z for weaving. On the other hand, the data also indicate that the average working time per spindle (capacity utilization) had increased by about 50Z and per loom some 201. o 25. The analysis undertaken by the audit mission suggests that average output per spindle-hour (machine efficiency) is about 70Z of the level achieved in western European mills for yarn production while for weaving the average is 701 of the theoretical maximium, with 851 representing an achievable norm. Wide variations in performance of both spinning and weaving sections among the mills visited confirm the possibility of further improvements in machine efficiency. 25. SB has experienced a substantial increase in capacity for garment production in recent years, only part of which was financed using Bank funds. The main application of Bank resources was for the establishment of a garment plant at Bakirkoy, located in the outskirts of Istanbul. The facilities had been occupied by an integrated yarn- cloth mill which was obsolete; moreover, the finishing section was creating pollution problems. It was therefore decided to scrap the entire plant. In order to reduce some of the social problems which could arise from eliminating up to 2000 jobs, the decision was made to install a garment plant on the site. The original plan was to estab- lish a plant to produce 1.7 million pieces per annum but, with the savings achieved in other partz of the project (see para. 20), the actual capacity has been raised to 3.2 million pieces which is sched- uled to be fully on stream by mid-1988. It is expected that exports will account for some 80 to 851 uf output. 27. In a number of other mills, SB has used internally generated funds or resources available from domestic banks (including a Bank credit line with DYB) to improve and expand production lines producing garments; these have low capital requirements. From a total production of some 2 million pieces in 1978, SB output of these items reached almost 20 million in 1986 and further increases are expected from the facilities expected to come on stream in the imediate future. As a consequence, more than 10? of SB's fabric output is now used in gar- ment manufacturing as compared to well under 5Z prior to the initia- tion of RMP; moreover, at least half of this production is expected to be exported, the balance being sold through SB's retail distribution network. 8/ The total improvement in capital efficiency is thus the product of the improvements in machine efficiency and in capital utilization. - 10 - 28. Overall, the period has seen a significant shift in the market structure for SB's output. At the end of the 1970s, between 85 and 902 of cotton fabric sales, the main final product, were made through the retail distribution network of SB (the ASM) or to public institutional buyers such as the military, hospitals and postal service; the remain- der was for export, for use in garment manufacture or sold to local wholesalers (SAR, para. 4.34). In recent years, ASM has taken only some 352 of cloth output and public institutions some 252; exports and garment manufacture (more than half for exports) have substantially increased their shares and sales by individual mills to local whole- salers for distribution through private retail shops have also expand- ed sharply. However, SB's exports have not increased to the same ex- tent as those of the private sector (PCR, para. 4.04). 29. SB's export performance has exceeded that expected at ap- praisal. At that time, expansion of exports was not considered an important objective of the RMP; nevertheless, the improvements which have been brought about have enabled SB to increase substantially its foreign sales (see Table 2). Of particular importance are the efforts to diversify both markets and product mix. In the past the tradition- al markets had been Iraq and Iran which have now sharply curtailed their imports and promotional measures have been undertaken to identi- fy new purchasers. This has been combined with a movement towards increasing the export of garments. Some success has been achieved, notably in garment sales to both the United States and Canada. Data for the ten month-period January through October 1987 indicate that SB's textile exports have reached an annual level of some $65 million as compared to $19 million in 1980 and it is expected that the level will be maintained, if not surpassed, during the next few years. Moreover, garment exports, with their high value added, now account for about one-third the value of external sales as compared to the negligible amounts recorded before the rehabilitation project.9 How- ever, SB's foreign sales still represent a small share of both total exports from Turkey's textile industry, as well as its total output. It is estimated that the industry at present is exporting half of its production. 9/ See the additional data provided by SB in its comments on the draft PPAM, reproduced as an Attachment. - 11 - Table 21 TURKISH TEXTILE EXPORTS, TOTAL AND SB (millions of US dollars) Year Total SB SB as Z of total 1973 105.6 14.4 13.6 1975 135.5 3.5 2.6 1978 321.6 2.6 0.8 1980 439.8 18.5 4.2 1981 802.8 9.1 1.1 1982 1056.3 24.5 2.3 1983 1229.1 29.5 2.4 1984 1875.4 27.3 1.5 1985 1789.5 20.1 1.1 1986 1850 42.7 2.3 Source: Turkish trade statistics and SB. 30. The project his made an important contribution to the restoration of CTD's profitability (PCR, Annex 11). Aside from the improvements in output and productive efficifucy which led to a substantial reduction in costs, the major factor has been the freedom given to SB to set its own prices in accordance with costs and demand conditions. At the time of SEE reform in 1984, SB also experienced a financial restructuring; moreover, injection of additional equity had been a condition of effectiveness (PCR, para. 5.01). 31. It is difficult to compare the costs of production for SB's tex- tile products with those produced in the private sector given the differ- ences in the characteristics of their output mix. Few of SB's items direct- ly compete with products of the private sector, the major markets being the ASH retail network (generally lower quality goods) and public sector pur- chasers such as the military. There is some evidence that ex-factory prices of SB fabrics are slightly higher than private sector fabrics but the final sales prices to consumers remain favorable due to low ASH markups (PCR, para. 4.04).10 Exports, largely undertaken by the mills which have up- graded considerably their productive capability through the project, are 10/ Items produced by private sector mills for the domestic market generally move from the factory to the market first through large wholesalers and then smaller regional wholesalers; as a consequence, the total mark-up for these items may be as high as 40% as compared to 10-12% in the case of SB products distributed through ASH (SAR, para. 3.09). - 12 - profitable at the present time; although export incentives have been sub- stantially reduced, the current exchange rate is highly attractive, par- ticularly for western European markets. Average operating costs for fin- ished fabrics are presently below comparable western European costs; while labor inputs for SB are considerably higher, this is more than offset by lower wage rates. V. INSTITUTIONAL DEVELOPMENT 32. One of the principal objectives of the loan (see para. 12) was the improvement in the institutional and managerial framework of SB's textile operations. The original feasability study prepared by the consultants under the PPF recommended the consolidation of all SB's cotton textile operations under one umbrella, essentially a holding company type of arrangement. This was not possible under the existing legislation regarding SEEs. Prior to the approval of the loan, SB announced the formation of a Cotton Textile Division which was expected to bring together all of the functions associated with those activities, providing elements of central- ized administration combined with a certain degree of mill autonomy (see para. 15). Moreover, this arrangement was seen as an interim one pending an overall reform of basic legislation for the SEEs which would permit more efficient structuring (SAR, para. 4.19). , 33. While the CTD was established, the actual reorganization has fal- * len far short of expectations. At the present time, CTD performs the func- tion of production planning but virtually all other functions (marketing, finance, purchasing, personnel management, etc.) are controlled by other units within the structure of SB and Lhe degree of mill autonomy is mini- mal. In the specific case of production planning, CTD reviews with the Marketing Department the estimates of sales and production targets are assigned to individual mills on the basis of known productive capability. If a mill is able to meet those goals, it can sell to any buyer any output in excess of that amount; if a mill feels that it is unable to meet its targets, it may request some adjustment. Similarly, employment levels are set centrally and, if a plant encounters skill shortages, it cannot di- rectly recruit the required personnel. 34. Since prices are also set by SB's central office in Ankara, the main responsibility of the mill managers is essentially to try to minimize costs. A recent revision of laws governing the SEEs has permitted the pay- ment of bonuses to managers of enterprises earning profits. Mill managers cannot use operating profits for plant improvements but must transfer those funds to SB; expenditures for improvements can only be made from the mill's budget which is determined in Ankara. SB's administrative costs are allo- cated among the mills under an arbitrary formula. Thus, the basic problem of the mills, as identified in the appraisal report (SAR, para. 4.18), remains - there is little incentive for mill management to take responsi- bilities or initiatives for medium or long-term improvement of operations. - i3 - The tendency in the past for SB to frequently rotate mill management did not help the situation; few mill managers spent more than three years in any one assignment. 35. Staffing, particularly of senior mili managerial positions, has been, and remains, one of the major problems facing SB's textile opera- tions. While there had been agreement by the Government to permit SB to hire 55 high level staff under special contracts, with terms of employment more favorable than normal SEE conditions, this was inadequately imple- mented and affected project implementation (see para. 18). Contract re- cruitment has now been extended to all the SEEs but, in the case of SB, there has been little success in attracting new managerial level personnel and limited success in keeping qualified staff from leaving. For a time, the difficulties which were being confronted by private sector plants tend- ed to reduce the catflor. from SB, as well as to improve its capacity to attract qualified stafr. But the recent expansion of activity in that sec- tor has once again created problems for SB in retaining and attracting qualified senior stati. 36. Some progress has been made in reducing the excess of manpower employed in the individual mills (PCR, Annex 3), with operating personnel estimated to have declined by some 42 during the period of implementation of the project. An analysis of employment and production data undertaken by the audit mission indicates that labor productivity, defined as operator hours per unit of output, in SB yarn production is currently some 40% of the level achieved in western European plants while, in the case of weav- ing, the comparable figure is 15 - 202; some of the differences reflect lower machinery efficiency (para. 24) but the magnitudes of the residuals suggest that there remains substantial overmanning. 37. At the level of general policies governing the performance of the SEEs, thus affecting the overall behavior of SB, several reforms have re- cently been undertaken designed to improve the economic efficiency of their operations. One of the major elements has been the removal of the require- ment for Government approval of price changes and granting autonomy to the SEEs to set their own prices in accordance with costs and market condi- tions; as noted above, price adjustments by SB have played an important role in restoring its profitability. Moreover, these institutions are no longer guaranteed access to government budgetary support. Financing of operations and of necessary improvements is provided by self-generated funds or by borrowing from financial institutions which presumably would evaluate credit-worthiness. The board of each SEE is responsible for prepa- ration of its own budget but major investments require Government approval.11 Finally, as noted in preceding paragraphs of this report, SEEs have been given the facility to recruit senior corporation and operating staff through contracts which offer improved terms of employment and to provide bonuses related to enterprise profitability. 11/ Some of these issues are discussed in a recent Bank economic memorandum entitled Turkey: Adiusting Public Investment, Report No. 6603-TU, dated March 30, 1987. - 14 - 38. A number of other measures which have recently been taken may also have considerable impact on the functioning of SB, more likely in the longer-run than in the immediate future. The ASH distribution network is now permitted to sell products other than those produced by SB, provided that the items do not directly compete with the latter; in the broad sense of opening SB to competitive forces, this is clearly only a first step. In this same connection, the Government has recently established a system of open tendering for a wide range of goods required by Government agencies; this would, in principle, enable private sector plants to compete with SB for institutional orders such as uniforms and bed linens for the military and hospitals. However, the effectiveness of this system in promoting com- petition would depend upon the precise formulation of bid specifications which could discourage rather than encourage interest among other potential suppliers. VI. FINANCIAL AND ECONOMIC RATES OF RETURN 39. In rehabilitation/replacement projects, calculations of financial and economic rates of return (FRR and ERR) require consideration of the remaining productive capacity of the equipment which is to be improved in order to identify the increment to output which results from the invest- ment. In this case, the appraisal drew upon the rather detailed analysis of the conditions of the individual mills which had been undertaken in the feasability study prepared by the technical consultants (SAR, paras. 7.02 and 7.03) in order to determine "output without the project" and "output with the project". These estimates were used for recalculating the rates of return in preparing the PCR, adjusting for the actual changes in output as well as for changes in other financial and economic parameters. 40. The reestimated FRR is 21.82 compared to 25.12 at appraisal. The reestimated ERR is 16.5Z compared to 23.62 at appraisal. The reduction in both cases reflects in part the longer implementation period and the in- crease in capital costs. In both instances, moreover, weak domestic and international demand for these consumer goods resulted in substantially lower prices as compared to those expected in the appraisal (PCR, paras. 5.02 and 5.03); high prices projected at the time of appraisal reflected the over-optimistic expectations which characterized Bank and other econom- ic forecasts during that period. 41. In evaluating the economic and financial contribution of the proj- ect, one must also take into account the favorable change in the overall profitability of SB's textile operations, from net losses in the period before implementation to net profits in recent years (see above, para. 30), and the significant increase in the ability of SB to generate foreign ex- change (see above, para. 29 and PCR, para. 5.04). - 15 - VII. OVERALL ASSESSMENT AND SUSTAINABILITY 42. As noted in the earlier description (paras. 12 and 13), the proj- ect was the first phase of a rehabilitation/modernization program with the long term objective to make SB's textile operations more efficient, more competitive and profitable. The short-term goal of the project was, there- fore, to provide a reasonable level of fixed asset improvements which would prevent further deterioration in productive capacity and would have quick returns through immediate increases in output and productivity in the basic processes of spinning and weaving. At the same time, longer-term viability would be promoted through institutional and administrative re- forms under the project but the additional major investments required, notably for finishing and garment manufacture, would be dealt with in a second phase. The narrowly defined immediate goal of improving the physical and financial situation was achieved but progress in achieving the broader institutional objectives has been limited. 43. The sustainability of these improvements in performance will to some extent depend upon the undertaking of the second phase of RMP which has now been suspended pending the decision of the Government on the future of SB. Consideration is being given to privatization; the particular form that the process will take, at the level of individual mills or for SB as a single entity, as well as the timing, are yet to be determined. 44. Abstracting from any fundamental structural change in SB and con- sidering only the results of this project, sustainability of the perfor- mance improvements is uncertain. This assessment is based on the limited success in achieving improvements in the institutional and managerial framework of SB's textile operations (see above, paras. 33 and 34); while some favorable developments can be observed, there is need to accelerate the process. Higher output at this time reflects primarily the improved hardware which has permitted a striking increase in capacity utilization. There has been only moderate improvement in machine efficiency. Future performance, maintaining high utilization rates and, in particular, further raising machine efficiency, will depend upon the software, the managerial capabilities which have been developed and the extent to which they will be applied to the production process at the level of the individual mills; the existence or lack of adequate managerial incentives is critical in this respect. 45. The audit mission has found that too much emphasis has been put on hardware and not enough on operational efficiency. To illustrate, in one of the visited mills, some difficulties were being experienced in obtaining specified yarn quality from newly reconditioned equipment; since that qual- ity yarn was required by the weaving section of the mill, it was obtaining the necessary yarn from another mill, whose spinning section had undergone the same rehabilitation, without trying to determine why performance of the latter was better. Similarly, in several mills, where specific equipment investments had been undertaken, insufficient attention was being given to the possibility of operational improvements in either upstream or down- stream production processes. - 16 - 46. The overemphasis on hardware is also reflected in the failure of SB to utilize more fully the technical assistance and training funds pro- vided under the project. It was anticipated at appraisal that some 300 man- months of operational and 100 man-months of financial technical assistance would be provided under the project; this was in addition to the 80 man- months which had been made available under the PPF as well as from UNIDO and which had been used in the preparation and intitial stages of project implementation. Total assistance used from project funds amounted to about 250 man-months (PCR, paras. 3.08 and 3.09), some 60Z of the original goal. 47. Underutilization of the training component was even more striking. Although the details were to be worked out after approval of the loan, the appraisal report indicated a major effort at external training for 50 tech- nical instructors (who would then conduct in-plant courses for operating personnel) and for at least 40 qualified personnel in textile technology and plant management. The program which was developed anticipated 1,800 man-weeks of training abroad but the actual amount used totalled some 380 man-weeks; however, there was some increase in the formal programs con- ducted at the training center sponsored by SB at Bursa, near Istanbul (PCR, para. 3.07). 48. As noted in the PCR, language problems were seriously underesti- mated by the Bank when the size of the external assistance program was originally proposed. It is also the case, however, that SB was reluctant to spend foreign exchange on these matters (PCR, para. 3.07). As regards SB's domestic training programs, a number of mills indicated to the audit mis- sion that inadequate attention had been paid to the timing of operator training for new equipment which was on occasion programmed after the arrival of the machinery. There is need to approach training in a more systematic fashion at both the mill and SB headquarters level. 49. SB is facing a difficult market situation. Total domestic demand for textiles in the 1980s has increased very slowly after the substantial growth during the previous decade but, more significantly, the structure of the domestic market continues to be undergoing major changes. For SB, this is reflected in the declining importance of sales to its retail distribu- tion network (para. 28) which is oriented primarily to the rural areas, and thus absorbs the simple, lower quality cloth produced by its mills. Follow- ing the pattern observed in other developing countries, after reaching a certain plateau, per capita consumption has shown little increase but there is a shift towards higher quality goods and ready-made garments which until now have been largely supplied by the private sector. In the past, the inability of SB to adapt to this situation resulted in a sharp drop in its market share; the improvements brought about by RHP have permitted SB to maintain its relative position. At the same time, the substantial protec- tion from external competition that the entire textile sector still re- ceives is expected to change in view of the commitment of the Turkish Government to liberalize imports. - 17 - 50. SB is now elaborating a longer-tem strategy to deal with these developments. It is planning further expansions in garment production capa- bility, not only within its present facilities but also through the estab- lishment of new corporations, essentially joint ventures with domestic and/or foreign private investors. The intention is to construct new plants in less developed areas, also contributing to regional development pro- grams. Some of the resources required for these investments would be ob- tained from the special funds which have been created for that particular purpose. Although it is expected that output from these plants would be primarily for export, domestic market potential is also being considered. Success of these operations will in great part depend upon the ability of SB mills to provide adequate quantities and qualities of yarns and cloth. The long-term program anticipates that some 502 of SB's fabric output will be used for garment making. 51. SB has made an effort to improve its marketing capability for textiles as well as for its other consumer products but within the frame- work of centralized operations rather than at the mill level. A central Marketing Directorate has been established, with separate units for domes- tic and export sales. The export group is attempting to identify new mar- kets, as well as the possibility of developing new products to meet chang- ing market demand conditions. Contacts with individual mills to become better aware of production capabilities are indirect, mainly through the central production planning group. Nevertheless, informal relationships with mills have developed in the less than three years that the export marketing unit has been in operation and, as it gains more experience, these contacts can be expected to be strengthened. In the case of garment exports, there is need for close relationships between mills and buyers given the importance of meeting buyer specifications for those items which are not standard; the new facility at Bakirkoy, for example, has made a major effort in involving buyers in reviewing style and fabric selection. In the case of domestic sales, predominantly with the retail network ASM and public institutional buyers, feedback with mills remains a major prob- lem. Some mills have engaged in their own sales efforts in local markets . where the production program assigned to them may leave underutilized capa- city. 52. In assessing the adjustment process which SB is currently undergo- ing, one has to take into account its long history. It was, as noted earli- er, the forerunner of the modern textile industry in Turkey and provided an important training ground for a significant number of managerial and senior production staff who subsequently entered the private sector. Until recent- ly, it had considerable difficulty in facing the challenges arising from changes in economic conditions, in certain respects attempting to isolate itself from those events. It did not fully capture the benefits available from external assistance provided under the project due to its perception that the particular circumstances of Turkey - political, economic and social - were so unique that experiences elsewhere were rot relevant. At - 18 - the present stage of Turkey's development, there is growing awareness of the need for greater opening of the economy in the broadest sense of that expression. Survival of institutions such as SB will, in turn, depend to a great extent on the degree of openness each will adopt. VIII. MAIN LESSONS LEARNED 53. The main lessons derived from this experience relate to the insti- tutional objectives. From the operational point of view, the principal lessons relate to more realistic implementation schedules in appraisals which take into account possible delays due to time required for effective- ness and the use of revolving funds for small disbursements particularly in an operation of this type which involved many small purchases (PCR, para. 6.02). 54. The progress in achieving the physical improvements in this com- plex type of project with its many components underlines the benefits ob- tained from providing proper technical inputs from the Bank, in particular comprehensive supervision, and from the choice of an experienced technical consultant. Of special significance is the role of the Project Implementa- tion Unit which, in spite of its own staff turnover and the frequent changes in management of SB, was able to provide strong direction in imple- menting the various elements. 55. A number of Bank operations in the productive sectors, not only in Turkey but in many of the industrializing countries, have financed invest- ments undertaken by relatively long-established public sector corporations. Attempts have been made in virtually all these instances to promote im- provements in the institutional and/or managerial structure which may be essential to the longer-term viability of the enterprises concerned, as well as to provide the hardware associated with new or expanded production facilities. These agencies have established their own operating practices, often with limited flexibility, and have developed personnel structures and regulations, relationships with customers and sources of political support. Moreover, the individual public sector corporations receiving Bank funding are usually among many similar institutions in the country all of which are subject to broad common policies; the problems ident:fied by the Bank as adversely affecting the loan recipients may require considerat3,n at higher policy levels. 56. In some instances, the Bank attempted to obtain the desired re- forms for improving performance, at both the enterprise and policy levels, through covenants in loan agreements for the individual projects. Few suc- cesses were achieved; reference was made earlier (para. 8) to the difficul- ties experienced in prior operations with SEEs in Turkey. What has been observed in the best of circumstances is the beginning of a time-consuming, often painful process of adaptation as the dynamics of economic development has its impact. The policy changes introduced by the Turkish Government, as well as those additional measures which are being considered, oblige SEEs - 19 - to seek greater efficiency, whatever will be the final decisions on the privatization of these agencies. For a conglomerate such as SB, with its many holdings, it is increasingly important that efficiency at the level of the individual mills be improved; it is not clear that its present orienta- tion is adequate to meet that objective. 57. In the face of the limited success of project lending to achieve the broader objectives of increasing efficiency in public sector enter- prises, the Bank has turned to non-project approaches through structural and sectoral adjustment lending. SEE reforms were included among the objec- tives of the series of SAL9 which Turkey received in the first half of the 1980s; the basic changes which have been noted in this review of SB experi- ence - the lifting of price controls, cutting the budgetary support and limiting access to bank financing - derive in great part from the implemen- tation of those SAL conditions. 12 58. There is thus a coincidence of experience under project and non- project lending as regards this one policy area. Without prejudging the results of the broader review of the various elements of conditionality under the SALs, the conclusion relating to this component remains the same. Given the political support which public sector enterprises have developed, it is very difficult to achieve through project conditionality those re- forms which efficiency objectives woald require. While such improvements are more likely to occur under policy based lending such as SALs, it is still the case that the pace of change may not be as rapid as desirable and the Bank must examine more carefully than in the past its expectations in this respect. 12/ OED is currently undertaking a broader review of the experience under the SAL program for Turkey which is expected to be available in early 1988. ATTACHMENT 20 Pace 1 of 3 T.C* COM2ENTS FROM THE BORROWER BASBAKANLIK HAZINE ve DIS TICARET MUSTESARLIGI FACSIMILE MESSAGE 22 Aralik 1987 Say: DEI-IV-4-27 Mr. Alexander Novicki Division Chief Policy Based Lending, Industry, Public Utilities and Urban Sectors The World Bank Washington, D.C. Re: Your letter dated Nov. 18, 1987 about the Project Performance Audit Report on Turkey-Sumerbank Cotton Textile Rationalization Project (Loan 1847-TU) Dear Mr. Nowicki, Thank you for sending us the report mentioned above. We would like to thank all your staff who have worked on the preparation of this report. We believe that the Sumerbank Cotton Textile Rationalization Project has greatly contributed to the improvement realized in textile industry in Turkey. We would like to inform you that we have no objection to the contents of the report. You will find attached some additional information to PPAR prepared by Sumerbank. Best regards, Tuncay Altan, Deputy Director General of International Economic Affairs, Undersecretariat of Treasury and Foreign Trade. Tuncay Altan Dis Ekonomik Ils. Genel Mudur Yard. 21 ATTACHMENT Page 2 of 3 SOME ADDITIONAL INFORMATION TO PROJECT PERFORMANCE AUDIT REPORT Modernization and Rationalization of Sumerbank Cotton Mills has been realized between 1980-1986. After realization of this project production figures increased. These increases have been given below. % increases in yard production: 25% - 1986/1980. % increase in weaving production: 18% - 1986/1980 % increase in processing prod. : 45% - 1986/1980 % increase in garment prod. : 264% - 1986/1980 When we look at the export figures, Sumerbank export increased from 1980 to 1986 both in amount and in. value. Especially cloth (grey and finished) and garment exportation increased great amount. At the end of October (1987), Sumerbank export (in value) reached to 55.800.00$. The share of cotton textile group export in a/m.- figure is about 98Z. Our 1987 export target was 56.000.000$. As it has been seen from the above figures, Sumerbank reached to this target at the end of October. 22 ATTACHMENT TABLE 1 Page 3 of 3 PRODUCTION FIGURES BEFORE RMP AND AFTER RMP (1) (2) 1987 1987 2/1 1980 1986 Jan.-Oct.) pr. % Yarn 41.400 51.396 44.404 60.578 125 (ton) Av. Ne. 18.9 18.6 18.8 18.8 Weaving 11ilyon mt. 176.7 207.7 179.7 232.0 117.5 ends/cm 18.8 19.0 19.6 19.6 Processing milyon mt. 162.2 236.3 190.6 248.5 145 Garment Milyon pieces 2.5 19.3 6.9 8.7 772 TABLE 2 EXPORT FIGURES BEFORE AND AFTER RMP (Jan.-Oct.)(Jan.-Oct.) 1987 1986/ 1987/ 1987/ 1980' 1986 (Jan.-Oct.) 1980 1980 1986 C.T.D. Yarn 3.100 4.023 5.707 129 184 142 (000 $) - 11.467 16.811 - - 147 Finished + Grey Cloth (milyon mt.) 1.7 14.8 18,1 770 1.064 138 (000 $) - 14.357 .17.688 - - 133 Garment + Others (milyon pieces) 1.5 (4.2 pie.gar.)(4.9 pie.gar.)280 326 116 44.2 . 23.0 (000$) - 16.876 20.290 - - 160 Total (CTD.) 18.500 42.700 .54.789 202 296 146 Sumerbank Total Export (000$) - 43.034 55.719 - - 130 23 PROJECT COMPLETION REPORT TURKEY SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) June 17, 1987 Industry Department 24 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) I. INTRODUCTION 1.01 Textiles continues to be among the leading industrial subsectors in Turkey. In 1985, it accounted for 11% of production, 30% of exports, 35% of employment and 30% of investments in the manufacturing sector. Turkey has comparative advantage in cotton textiles arising from the availability of local cotton fiber resources, geographic proximity to European and Middle East markets, and significantly lower wage rates than in Europe which more than offset the lower productivity. However, constraints that have prevented the realization of this advantage include structural imbalances (overcapacity in spinning, inadequate capacity in weaving/finishing); lack of higher-productivity equipment (e.g., open-end rotors in spinning and shuttleless looms in weaving) and obsolete equipment especially in dyeing, printing and finishing; and inadequate institutional support for research and development and quality improvements. These constraints were exacerbated by the import substitution bias till the late 1970s with heavily protected domestic markets and inadequate incentives to exports. 1.02 In early 1980, the Government introduced its new economic strategy aimed at stabilizing the economy, placing greater reliance on market forces than on quantitative controlj and encouraging the efficient growth of the private sector. To implement this strategy, the Government adopted wide-ranging reforms involving a number of key policy areas notably the exchange rate, import liberalization, export promotion, price liberalization and public sector reforms accompanied by a number of steps to reduce bureaucratic regulations and institutional rigidities. 1.03 Sumerbank (SB), established in 1933, is among the largest SEEs in Turkey. It is a conglomerate with operations consisting of cotton and woollen textiles, ceramics, leather goods and banking. SB owns or controls (as majority shareholder) 19 cotton textile mills and is the largest single producer of cotton textiles in Turkey though its market share has declined to less than 20% due to the more rapid growth of the private sector. 1.04 While the primary purpose of establishing SEEs was the production of goods and services, the SEEs have also been charged with other goals, such as the development and generation of employment in the less developed regions of the country. In the case of textiles, SB had to satisfy a number of additional, sometimes conflicting, objectives such as providing mass-consumption fabrics to the rural and urban poor, stabilizing prices in the domestic market, and training technical and managerial personnel beyond its own requirements. All these factors contributed to the generally poor performance of the textile operations of SB. The existing statutes and regulatory framework concerning SEEs which applied to SB and various political pressures also contributed to low, government controlled salaries for management and supervisory staff, relatively high wages for 2> labor, and overstaffing which adversely affected the quality of management and SB's operating and financial results. 1.05 To improve the efficiency of the subsector and to increase its domestic and export competitiveness, the Government approached the Bank to finance two projects, one for the private sector and the other for SB. The Private Sector Textiles Project (PSTP) was financed under loans 1754/1755-TU (signed in February 1980) which extended lines of credit to two Turkish development banks, TSKB and SYB, The principal objectives of PSTP were to improve the structural balance, promote expansion and value added in the subsector; improve productivity, upgrade technological efficiency, upgrade product quality, and increase competitiveness; induce modernization where appropriate; promote directly exporting projects in promising subsectors; and improve the policy and institutional framework as it relates to textiles. The PSTP had components for financing equipment, training and technical assistance, and special studies to be carried out by the financial intermediaries. It also provided for a dialogue with the Government with regard to the adequacy of the level, and appropriateness of the structure, of investment and export incentives. The complementary SB project (the Project), addressing the needs of the public sector cotton textile operations, was aimed at increasing the productivity and efficiency of SB through appropriate investments, as well as certain institutional and organizational improvements in CTD. 1.06 The Project was to encompass a self contained Phase I of the overall RMP aimed at tackling the most immediate needs of rehabilitation and modernization, to be followed by Phase II to implement the longer term structural changes required (paras 2.01-2.02). Total financing required for the Project, including incremental working capital and interest during construction was estimated at US$150.5 million, including US$106.0 million in foreign exchange. The proposed IBRD loan of US$83.0 million was to cover 55% of the total project financing and 78% of the foreign exchange costs. The balance of the foreign exchange costs were to be met by supplier's credit (US$5.0 million) and SB's own export generated revenues. The local costs financing (US$44.5 million equivalent) was to be made available 40% by equity and 60% through internal cash generation. 1.07 In addition to the PSTP and SB projects (Loans 1754/1755-TU and 1847-TU respectively) mentioned above, the Bank's past involvement in the Turkish public sector cotton textiles operations included loans to DYB in 1974 (1024-TU) and 1977 (1379-TU). In 1984, the Bank made a loan (no. 2400-TU) of US$7.6 million for the Technical Assistance for SEEs Project which included a component of US$2.45 million for SB. The technical assistance to be financed included consultancy services, training and related supporting equipment aimed at improvement of SB's sales and retail organization; management information systems; and preparation of a feasibility study for modernization of SB's woollen textile operations. The assistance in the first two areas was to be complementary to improvements in the CTD already being carried out under the Project. However, SB's top management changed in 1985 and the new management decided to utilize SB's own resources to carry out the studies with the assistance 26 of local institutes and consulting firms. At the request of SB and the Government, the technical assistance component was cancelled in 1986 and the funds reallocated for carrying out subsector development strategy studies under the Industrial Restructuring Project then being discussed with the Government (para 1.08). 1.08 In 1985-86, the Bank was involved in assisting the Government in the preparation of a possible Industrial Restructuring Project that envisaged the inclusion of a number of components one of which was a restructuring program for the cotton textile subsector. This was expected to cover both the private and public sectors. A detailed subsector strategy study was prepared by a U.S. consulting firm with the assistance of local firms. Based on the recommendations in this study, the Government was considering possible privatization, in part or in whole, of SB's cotton textile operations. The project is currently in abeyance pending the Government's decision as to how it wishes to proceed further. II. PROJECT BACKGROUND A. Project Preparation, Appraisal, Approval and Loan Effectiveness 2.01 In 1977, the Government requested the Bank's help in financing the rationalizatian and modernization of SB's cotton textile operations. A technical project proposal had been prepared earlier by SB in 1976 under the heading of "MACROPLAN". In 1977, a Bank mission reviewed this document and recommended that a modernization program should address not only the physical rehabilitation but also the rationalization, reorganization and institutional aspects of the operations. Subsequently, SB agreed to undertake a detailed feasibility study to be financed under a Project Preparation Facility (PPF). The feasibility study was prepared by a Swiss firm of textile consultants (the Consultants hereafter) and was completed in June 1979. The study recommended a comprehensive Rationalization and Modernization Program (RMP) to be implemented over the period 1980 to 1986 consisting of modernization and more efficient use of existing facilities through provision of spare parts and modern machine assemblies; replacements of obsolete machinery; rationalization of equipment between different plants; improved maintenance through provision of spare parts and training of personnel; and a technical assistance program to improve institutional efficiency and management effectiveness. The RMP was expected to increase CTD's yarn production from 41,000 tons per year (tpy) to 62,000 tpy and fabrics production from 207 million square meters (msm) to 300 mam by 1986. 2.02 The overall RMP was estimated to have a base cost US$192 million (in 1979 terms). Due to constraints in the availability of local and foreign currency funds, it was subsequently decided to carry out the RMP in two self-contained phases. Phase I (US$77 million) covering selected mills, was to address the more immediate needs of modernization. Phase II (US$115 million), expected to be implemented during 1984-86, was to address the remaining needs, notably in finishing and garments. (Phase II was subsequently postponed and is currently in abeyance pending the 27 Government's decision whether to privatize, in part or in whole, SB's cotton textile operations.) Production targets for Phase I were accordingly reduced to 52,000 tpy (from 62,000 tpy) and 250 asm (from 300 masm) respectively. Phase I was to consist of: (i) rehabilitation measures and provision of spare parts; (ii) replacement and/or modernization of obsolete machinery and equipment; (iii) expansion of garment production; and (iv) organizational, operational and managerial improvements to be supported by appropriate technical assistance. 2.04 The project was preappraised in September and appraised in December 1979 (SAR 2887-TU dated April 30, 1980). During preparation and preappraisal, the Bank had identified that, in addition to physical investments, organizational and institutional improvements in SB's operations would be essential for the success of the Project. Considerable preparatory work was therefore carried out related to the identification and examination of major issues and constraints to SEE reform, notably in the areas of the legal framework, relationships with Government agencies, extent of management autonomy, etc. A key recommendation of the Consultants was that, to provide a more cohesive organization with better coordination among the operating cotton textile units, SB should consolidate all the functions related to cotton textile operations under a single organization. The Bank urged the Government to consider various options in this regard including the possibility of setting up CTD as a separate company and selective privatization, e.g., divestiture of SB's shareholdings in mixed sector plants. However, given the Government's policy at that time of establishing holding companies for different industries and the political difficulties in undertaking more substantial reform, it was subsequently agreed under the Project Agreement to form a Cotton Textile Division (CTD) within SB to assume full responsibility for the implementation of the Project as well as all major future investment, production and financial planning, marketing, procurement, personnel management and administration policies of SB's cotton textile operations. In September 1980 SB management delegated to CTD the autonomy and authority required to carry out these functions and SB's Board of Directors officially approved the establishment of CTD on March 3, 1982. However, a major area outside CTD's and S8's jurisdiction remained the salary policy (still applicable under the SEEs' Law 440 and the State Personnel Law 657, until these were finally superseded by Government Decree No. 233, dated . June 18, 1984). 2.04 The loan was approved by the Bank's Executive Directors in May 1980 and became effective in February 1981. An issue that emerged after the Board's approval of the Project and caused a nine-month delay in loan effectiveness was SB's protracted negotiations with the Consultants of the contract to provide technical assistance to CTD during project implementation. The combined delay as a result of this, the additional work that was required to be carried out to augment SB's MACROPLAN, and reaching agreement on the scope of the Project to be included in Phase I amounted to about 28 months out of the total 47 months which elapsed between the date of the Government's original request and the date of loan effectiveness. 28 B. Project Description and Objectives 2.05 The Project was designed to (i) increase efficiency and capacity utilization of existing plant facilities; (ii) reduce production costs; (iii) improve product quality; and (iv) improve the institutional and management framework of SB's cotton textile operations. This was in line with the Government's stated policies to rehabilitate and reorganize SEEs along sound business principles, to restore their competitiveness in the domestic and export markets, eliminate financial losses, and thereby reduce dependence on budgetary support from the Government. 2.06 The objective of the Project in spinning was to increase the production of yarn from 41,000 to 52,000 tpy by rehabilitation and modernization of existing facilities through provision of spare parts and modern machine assemblies as well as the rationalization and standardization of production within and among the 18 plants. With respect to weaving, the Project envisaged scrapping of 1,439 obsolete looms, rehabilitation of 766 looms and installation of 817 new looms resulting in raising the production from 207 to 250 msm and increasing the volume of wide fabrics, color woven and terry fabrics in line with the market demand for such items. Due to the severe local funds shortage in SB and the country, no new wet processing facilities were to be included, and the Project focussed on the immediate needs for modernization and/or replacement of obsolete bleaching, dyeing, printing and finishing machinery as well as service equipment for water treatment and steam generation. The civil works also have been limited to rehabilitation and repair of floors and roofs in the existing mills, as well as work connected with improvements of lighting, ventilation, humidification, energy conservation and the effluent disposal system. The Project also included one new garment plant with a capacity to produce 1.7 million pieces (mp) per year, to be located in the space vacated through scrapping of the obsolete spinning equipment at the Bakirkoy plant as well as technical assistance to SB's existing garment manufacturing operations. 2.07 The Project was to include 360 man-months of operational technical assistance (OTA) and 120 man-months of financial technical assistance (FTA). OTA was to provide expert consulting for finalizing of the project preparation and implementation schedules, procurement, erection, rehabilitation and commissioning of machinery, as well as the organization, corporate and production planning, and reorientation of marketing of the newly formed CTD. In addition, FTA was to provide assistance in the establishing of CTD financial and accounting systems and improving financial planning, control and cost accounting in the individual plants. The Project was also to provide training for supervisors and operators in engineering, operating and maintenance procedures for textile machinery and equipment as well as crash language courses for selected senior personnel to be trained abroad in textile technology and plant management. 29 III. PROJECT IMPLEMENTATION AND MANAGEMENT A. Achievement of Project Objectives 1. Increase in Efficiency and Capacity Utilization 3.01 The Project was completed only in September 1986 two and half years behind the appraisal schedule (Annex 1) for the reasons discussed later (paras 3.09-3.10). Nevertheless, the principal objective of increasing production by increasing the efficiency and capacity utilization in yarn and fabrics production through reorganization of the cotton textile operations was achieved by 1985. Actual production of yarn and fabrics exceeded appraisal estimates by substantial margins (20% to 40%). Capacity utilization increased substantially in both spinning and weaving. Significant achievements were also achieved in technical efficiency in spinning and weaving (para 4.01). The mechanical completion of the project was delayed, however, by the later than estimated installation of the garment manufacturing facilities. Additional facilities for manufacturing woven garments started production only in 1986 and by the end of 1987 are expected to reach full production thereby increasing SB's garment production by 70% (from 4.6 mp to 7.8 mp) 2. Production Costs 3.02 As a result of increased capacity utilization, higher machine efficiency and higher productivity of labor, the Project has resulted in significant reductions in unit production costs in real terms in spinning, weaving and finishing in the mills covered under the Project (para 4.01). 3. Product Quality 3.03 Improvements in product quality have also been secured. In spinning, this has resulted in better quality yarn with less breakage and interruptions. Product quality has also improved in weaving and garment-making with the production of higher valued finished fabrics (yarn dyed, piece dyed and printed) increasing by over 40% (para 4.01). The increase in quality has made it possible for SB to expand its level of exports though, overall, export performance has not been as good as in the private sector because of differences in product mix (SB produces low-priced, utility type goods) and the fact that a substantial part of SB capacity, particularly in finishing, needs to be modernized as originally envisaged to be carried out under the now postponed Phase II (para 4.02). 4. Institutional and Management Improvements 3.04 Significant improvements have been achieved in CTD operations by the consolidation of cotton textile activities under one division. The operational and technical assistance provided under the Project (paras 3.09-3.10) identified and introduced improvements in CTD's operational, accounting and financial systems both at the headquarters in Ankara and in selected plants which were chosen as pilots for introducing 30 improvements. The changes were later to have been extended to the other plants on the basis of the experience gained. However, due to turnover of personnel and difficulties in attracting suitably qualified new staff, the systems are not being fully utilized and their extension to others not undertaken. The Project Implementation Unit (PIU) set up to implement the Project has functioned efficiently and developed the capability to carry out similar work in future. Significant improvements were also made in the marketing arrangements with the reorganization of SB's erstwhile Sales and Purchase Division, resulting in the separation of the sales and purchasing functions and the consolidation under a newly constituted Sales and Retail Division (SRD) of SB's domestic, export and public sector (e.g., armed forces) sales. However, substantial scope remains to improve these further, as indicated in the cotton textile subsector strategy study (referred to in para. 1.08). Though some improvements were made in recruitment and incentive systems, including the approval of contractual positions, overall, SB has been finding it difficult to sustain the improvements initiated in various operational areas due to turnover of personnel, the consequent lack of continuity, and difficulties in replacement caused by the restrictive regulatory framework governing SEE staffing policies in general. In this regard, though provisions under the Decree No. 233 of June 1984 have resulted in some improvement by allowing an increase in the number of contractual positions required to attract and retain suitably qualified staff, they still do not adequately meet SB's needs. B. Project Scope 3.05 There were no significant changes in the physical scope of the project. About US$6.5 million of the Bank loan, originally included to finance foreign consultants' services and training, was reallocated to finance replacement and rehabilitation of additional obsolete equipment (mostly in yarn manufacturing) since a part of the technical assistance was implemented by the local consultants and the program of training of CTD personnel abroad was substantially curtailed because of lack of qualified, foreign-language speaking candidates (para 3.07). As the result of this reallocation, and the fact that contingency funds were not required to be utilized due to the savings in US$ terms caused by the appreciation of the US$ vis-a-vis main supplier countries' currencies, it was possible to replace 4 additional opening lines, 40 draw frames, 24 roving frames and rehabilitate additional 18 opening lines, 300 cards and 70 roving frames (Annex 2). Also, the faulty ring spinning equipment installed in 1974/75, which had never been commissioned and was to be replaced as part of the Project, was successfully rehabilitated and the resulting savings were used to procure: (i) open-end spinning equipment to produce 2,700 rpy of yarn from cotton waste; and (ii) additional sewing machinery to inL dse the Project-financed itcremental capacity for manufacturing of garments from 1.7 to 3.2 mp per annum. C. Project Management 3.06 For the purpose of project implementation, CTD formed a separate Project Implementation Unit (PIU) per the terms of the Project Agreement 31 (Section 3.02(a)). Initially, due to renumeration constraints, recruitment of qualified English-speaking staff for PIU was exceedingly difficult and the bulk of the technical work had to carried out by the foreign consultants. Only in the middle of 1982, SB was able to obtain the Government's agreement to employ staff on a contract basis which allowed PIU to increase the number of professional personnel to about 30, a bare minimum to manage major projects in 15 different locations (Annex 3). Originally, the machinery specifications and tender documents were developed by the Consultants but all subsequent tasks such as the bid evaluation, procurement, detailed engineering and erection were carried out efficiently by the PIU. The PIU was also responsible for the control of Project costs, completion schedules as well as preparation of quarterly progress reports, and discharged these functions to the satisfaction of CTD's and SB's managements, as well as the Bank staff supervising the Project. The staff assigned to the PIU gained valuable experience in international procurement of textile equipment and project management. Because of the higher salaries offered by private industry, turnover of PIU personnel was rather high which indirectly may also benefit the overall textile sector by the provision of skilled personnel for the private sector. D. Training 3.07 Another provision of the Project was a training program for technical instructors, supervisors and management staff. The part of this program conducted in Turkey covered about 50 students. However, the original target of providing to CTD personnel about 1,800 man-weeks' training abroad proved unrealistic primarily because of the foreign language constraints of the potential trainees and the generally continued reluctance of SB's higher and middle level management, to utilize foreign exchange for purposes other than hardware, which the Bank was not able to overcome. Altogether 122 supervisors and technicians were trained abroad in spinning, weaving, processing and garment manufacturing for a total of about 380 student-weeks (about 20% of the original target). In addition, mill improvement and industrial engineering seminars in the CTD mills were conducted by the staff of the textile faculties of Aegean University (Izmir) and Uludag University (Bursa) for a total of 320 student-weeks (Annex 4). The program of training CTD engineers at the International Institute of Cotton (UK) was scrapped because of the shortage o' qualified candidates with an adequate :ommand of English to benefit from the courses. Since one of the main constraints to advanced overseas training for the technical and managerial staff was the lack of foreign language capabilities, CTD instituted a program for teaching English at the Bursa Training Center (STTRC). The program includes two 6-month courses per year and at the time of the project completion about 100 students attended; as the teachers and audiovisual equipment are in place, SB intends to continue to use BTC facilities for this purpose in the future. E. Use and Performance of Engineering Contractors and Consultants 3.08 As the civil works were limited to rehabilitation and repairs of the existing buildings, there was no need for an outside contractor, and 32 all Project-related work was done by SB's own engineering department. The Project was supported, however, by substantial technical assistance (Annex 4). The assistance was grouped into (i) operational technical assistance (OTA); and (ii) financial technical assistance (FTA). The first stage of (OTA-1) covered the period prior to the implementation of the Project and included finalizing of the project preparation, procurement documentation, training programs, planning for CTD organization, reorientation of marketing, production planning, development of maintenance and operational manuals. The assistance was financed by the Bank's PPF (PU18-TU) and included 60 man-months before November 1980. OTA-2 continued during the period of Project implementation 1981-86 and included technical assistance for detailed machinery specification, plant engineering and supervision of erection, rehabilitation and commissioning of machinery, establishment of quality control systems as well as direction and supervision of CTD's training program. This stage included about 190 man-months, of which 60% was provided by the Consultants and the balance by &wo local consulting firms. 3.09 The first stage of the financial technical assistance (FTA-1) was financed by a grant from UNDP/UNIDO and initiated the work on development of management information systems, financial planning, budgeting and control. In the second stage, FTA-2, the Consultants developed procedures for the project cost control, standard costing and cash management system and computerizing the costing system in selected CTD plants for later extension to other plants based on the experience gained. FTA-1 covered 20 man-months and FTA-2 about 40 man-months. The assistance for FTA-1 was provided by a UK management tirm and for FTA-2 by the Consultants (25 man-months) and a local consulting company (15 man-months). In addition two local universities provided about 20 man-months of technical assistance for CTD training programs. 3.10 In total the operational and financial technical assistance amounted to 330 man-months including 80 man-months during preparation and 250 man-months during implementation of the Project. There was effective cooperation between the foreign consultants, local consultants and PIU staff, as illustrated by the fact that, by mid-1984, most of the routine functions related to the implementation of the Project and operations of the new management systems within CTD were taken over by the PIU staff and local consultants thereby allowing the foreign experts to concentrate on preparation of feasibility studies for Phase II of the RMP including the rehabilitation of the SB wool operations. However, as mentioned earlier (para 3.04), SB has been finding it difficult to sustain the improvements initiated with the assistance of the Consultants due mainly to personnel turnover and related problems. F. Implementation Schedule 3.11 The mechanical completion of the Project was 31 months behind schedule (Annex 1) including an initial delay of nine months in making the Project effective. The schedule of Project implementation was adversely affected by delays in (i) appointment of consultants; (ii) staffing of the Project Implementation Unit (PIU); (iii) lengthy approval procedures of 33 procurement decisions by SB Board and; (iv) later than planned installation of the garment manufacturing equipment. The delay in appointment of consultants was caused by the protracted contract negotiations between SB and the consultants. The delay in appropriate staffing of the PIU was caused principally by difficulties in obtaining the requisite clearances and other procedures for recruitment and employment of the contract personnel. The lengthy review procedures of the PIU contract award recommendations by SB's Board, especially when such contracts were awarded according to the Bank's guidelines to the lowest evaluated, but not lowest priced, bidder, also were a factor in the delayed implementation. Finally, phasing out of the operations and scrapping of the obsolete spinning equipment in Bakirkoy was postponed by SB because of social reasons (the impact on displaced labor) and delayed the progress of the necessary civil works and installation of the garment manufacturing plant. 3.12 The build-up of incremental commercial production of yarn and loom-state fabrics, which accounted for the bulk of the incremental production under the Project, in line with appraisal estimates, was achieved in 1984, and finished fabrics in 1985 about eight months behind schedule, so the final cause of delay in completion of the Project was the activities related to the phasing out of the textile operations and installation of the garment plant at Bakirkoy, which accounted for relatively a small part of the overall incremental production. G. Procurement and Performance of Suppliers 3.13 Procurement of plant and machinery was carried out in accordance with Bank guidelines. About 90% of the contracts (by value) were awarded through ICB procedures, 4% were proprietary items (mostly spare parts) and the balance was procured through limited international tendering. All specifications, tender documents and instructions to the bidders were prepared by the PIU with the assistance of the Consultants, reviewed by SB's Board and accepted by the Bank. The bids were evaluated in a two-step procedure, i.e., technical evaluation preceded the opening of the separate envelopes containing prices; bids technically rated below 65% of the highest score bidder were disqualified. Altogether, about 850 firms from 16 countries applied for prequalification and about 300 were prequalified in 59 categories and 83 equipment contracts were awarded to companies in 13 countries. The top two (Federal Republic of Germany and Switzerland) received about 70% of the orders (Annex 5), which is roughly in line with the shares of these two countries in the supply of textile machinery to the world markets (excluding the East European centrally planned economies, China and India). 3.14 As requested by CTD and SB and agreed by the Bank, additional orders were placed with the successful bidders in eight original machine categories when the extent of savings in foreign exchange funds became apparent (para 3.05). Most of the textile equipment and machinery installed and rehabilitated reached the expected level of performance by the time of Project completion. In the case of the garment plant, which will not be fully operational before the end of 1987, CTD is holding the 34 supplier's performance bond for US$1.0 million to secure the achievement of the production level agreed in the contract. H. Environmental Aspects 3.15 In all mills where new equipment was installed, as well as in those where major rehabilitation of existing machines was carried out, air conditioning and/or humidification systems were either replaced or overhauled. The rehabilitation of the carding machines included installation of floor waste exhaust systems to reduce the amount of cotton dust and improve working conditions. Also, the installation of shuttleless weaving looms in five locations reduced the noise pollution to an acceptable level. 3.16 A unit to reduce alkalinity and biological oxygen demand of the liquid effluent was installed at the processing plant in Eskisehir and the other eight processing plants will be equipped with similar effluent treatment units after the efficiency and cost-benefit ratios of the initial installation have been fully evaluated. I. Costs, Disbursement and Financing 3.17 Pioject Cost. The total financing required for the Project was US$163.4 million equivalent, i.e., US$12.9 million above the appraisal estimates (AnneK 6). The overrun was caused by increases of US$20.6 million in installed costs (comprised of a USS24.8 million overrun in local costs and US$4.2 million underrun in the foreign exchange component) and of US$12.6 million in the interest during construction, offset to some extent by a decrease of around US$20.3 million in the incremental working capital requirements. Most of the increase in the local component reflects a sharp rise in the cost of civil works which rose faster than the general inflation, as well as the increased amount of equipment and machinery replaced and rehabilitated during the project (Annex 2). Also, in order to conserve foreign exchange, most of the costs of freight, insurance, erection and about half of the costs of technical assistance and training were paid in local currency. This resulted in savings in foreign exchange costs. Other contributing factors in the foreign component underrun were the successful use of ICB procedures which resulte.d in vigorous competition (para 3.13) for the Project contracts and the strength of the US$ against the currencies of the main suppliers during the period. The overrun in financial charges in US$ terms during the construction period was due to the delays in Project implementation and occurred largely in the foreign (mainly IBRD) component since increases in interest charges on local currency loans were offset by the rapid devaluation of the Turkish lira during the period. Though working capital requirements increased substantially in TL terms in line with the increased sales due to the Project, the currency exchange rate changes led to a substantial decline in US$ terms as compared to appraisal estimates (SB's revenues from cotton textile operations remained aound the same level in US$ terms between 1980 and 1986). A comparison of actual costs with appraisal estimates is shown in Annex 6 and summarized below: 35 Sumerbank Cotton Textile RatiMnliVAtio Project - Summary of Project Costs (in US$ mLllion) Appraisae Estimates Actual Fc- Pbr- cal a Mta local e Total Vaximm Installed Cost 18.0 88.0 106.0 42.8 83.8 126.6 20.6 Pnancial Qrges during Gxstruction 3.5 14.2 17.7 2.6 27.7 30.3 12.6 Additional Wrkirg Capital a/ 23.0 3.8 26.8 3.5 3.0 6.5 -20.3 Total 44.5 106.0 150.5 48.9 114.5 163.4 12.9 a/ Incremental workdrg capital requiremants in US$ terms were lower than estimated at appraisal due to changes in exclarge rates vis-a-vis the US$ as a result of wbich SB's ctton textile sales revenues did not charge appreciably in U5$ terms between 1980 ani 1986. 3.18 Disbursement. The appraisal estimates of disbursements of the Bank loan proved to be too optimistic as the first equipment contracts were awarded only in the middle of 1982. In the first three years following loan approval only US$12.6 million were disbursed (mostly for spare parts and technical assistance) as against US$79.0 million estimated. Subsequent disbursements followed the pattern of appraisal estimates and by the end of 1985 about 99.3 of the loan was disbursed. The closing date of the loan was extended by one year until June 30, 1985, and, finally, until February 28, 1986. The last disbursement was made on February 12, 1986, and the undisbursed balance of the loan (about US$0.4 million), outstanding on the closing date, was cancelled. Disbursement turned out to be a rather high staff-time intensive procedure because of the large number of contracts (para 3.13) and a special account in the form of a revolving account would have been most helpful in simplying procedures and reducing processing time for procurement of minor items, such as spare parts and accessories, required for rehabilitation of the existing machinery and equipment. 3.19 Project Financing. The financing plan for the Project as envisaged at appraisal provided for the foreign exchange component to be financed by the loans from the Bank, supplier's credits and revenues from CTD's exports. Actually, the Bank loan was not fully utilized and the overrun in foreign expenditures to cover primarily the additional expenditures for the interest during construction were financed by CTD's export revenues which in the period 1980-85 cumulatively exceeded US$100 million. Local costs, including the overrun, were financed by equity contributions, internally generated funds, and initially by loans from the local banks as well which were later converted to equity (resulting in an increase in the e4uity financing). A comparison of the original and the actual financing plan is summarized below: 36 Sumerbank Cotton Textile Rationalization Project - Financing Plan (in US$ million) Appraisal Actual For- For- Local eign Total Local eign Total Equity: Addl. Equity Contribution a/ 18.0 - 18.0 41.0 - 41.0 Internally Generated Funds 26.5 18.0 44.5 7.9 30.7 38.6 Debt: IBRD Loan - 83.0 83.0 - 82.6 82.6 Suppliers' Credit - 5.0 5.0 - 1.2 1.2 Local Banks b/ - - - - - - Total 44.5 106.0 150.5 48.9 114.5 163.4 a/ Including conversion of long-term debt into equity. / Subsumed under equity due to the conversions in 1984/85. IV. OPERATING PERFORMANCE A. Production 4.01 Over the period of Project implementation, CTD's production of yarn increased by about 40% and fabrics by 20% (Annex 8) which were substantially in excess of the targets at appraisal. Also, the pattern of output was upgraded as proportionately more yarn was converted to fabrics and production of higher value added finished fabrics (yarn dyed, piece dyed and printed) increased by over 40%. At the same time, capacity utilization in spinning increased from 59% to 93%, and in weaving from 79% to 96%. Rehabilitation and replacement of machinery and equipment also resulted in higher technical efficiency which increased by 3.2% in spinning and 6.2% in weaving (Annex 9). Also during Projezt implementation, CTD was able to reduce some of the overstaffing in the operating plants and headquarters through a policy of gradual attrition (e.g. the number of operators was reduced by about 4% and administration and management by 18% Annex 3). As the result of higher capacity utilization, higher machine efficiency and reduction in the number of operators, labor productivity is estimated to have increased on average by about 25%. While labor productivity is still well below European standards, it is more than offset by the unit costs of labor which are much lower because of the substantially lower Turkish wages as compared to industrialized European countries. Further, due to transfers of existing machinery (Annex 2) and rationalization measures, the number of types of yarn and fabrics was greatly reduced and production of the remaining items consolidated within fewer locations, resulting in longer runs and lowering of operating costs. Finally, the quality of CTD's products was substantially improved, which resulted in maintaining export performance through SB's overall export performance has not been as good as that of the private sector for the reasons explained in para 4.03 (Annex 10) 37 B. Market Development 4.02 At appraisal, domestic demand for cotton woven fabrics and yarn (including blends) was expected to grow between 1978-85 at average annual rates of 3.3% and 4.3% respectively leading to an increase of per capita consumption by about 8-10% as compared to 1978 levels. However, the domestic consumption of textiles, after increasing steadily from 229 thousand metric tons (TMT) in 1969 to a peak of 357 THT in 1980 subsequently declined to about 320-325 TMT as a result of the Government's economy stabilization and adjustment programs and a sharp increase in the cost of living outpacing adjustments in wages and salaries. There was a corresponding fall in terms of per capita consumption by about 15-20% as compared to 1980 levels. On the other hand, the value of textile exports grew steadily from US$80 million in 1973 to US$440 million in 1980 and even more rapidly since then, due to the Government's increased emphasis since early 1980 on export promotion through export incentives and an exchange rate policy resulting in continual devaluation of the Turkish Lira. The softness of the domestic market also contributed to export growth. However, since 1984, the Government, in keeping with the overall policies regarding export promotion, began progressive reduction in export tax rebates, preferential credit and other incentives. For textiles, export tax rebates and preferential credit have largely been eliminated since 1986. Consequently, exports which reached a peak of US$1.9 billion in 1984 later dropped slightly to US$1.8 billion in 1985. At the same time, imports of textile products into Turkey continue to face relatively high tariff rates and strict licensing requirements though the Government is undertaking a progressive liberalization of imports and amounted to only about 8% of the value of textile exports. Though this has resulted in savings of foreign exchange, the continuing protection from foreign competition has been conducive to the continuation of low labor and machine productivity (relative to EEC, USA, and Far East textile-exporting countries), poor technical performance, as well as outdated designs, fashions and a limited variety of textiles available in the highly protected domestic market. 4.03 The operating performance of SB's cotton textile operations has improved markedly as a result of the Project (para 4.01). SB's production of yarn and fabrics have exceeded appraisal targets. However, most of these have been consumed in the domestic market. With regard to exports, both the volume and value of CTD's exports increased significantly in the 1980-84 period, but thereafter, while volume continued to grow, it is not fully reflected in value terms (in US$) due to lower product prices in US$ terms. On the whole, SB's expcrt performance has not been as good as that of private industry which increased exports by 300% (in value terms) during the period (Annex 10). Generally, CTD remains a producer of low-priced, utility types of goods. Its ex-factory costs are higher as compared with the private sector but the low mark-up and credit extended by SB's own retail outlets makes the goods relatively attractive to the low to middle income segments of the rural and urban population. However, as Phase II of the RMP has not been implemented, CTD, at the completion of the Project, remains still not fully competitive with the private sector. In terms of modern technology, only 1% of CTD's spinning capacity is open-end, as 38 compared with 5% for the private sector, and 20% in Western Europe. Shuttleless looms account for less than 9% of ZD's weaving capacity as compared with 30% in the private sector, and 60% in Western Europe. About 60% of the fabrics produced by CTD are still less than 140 cm wide as compared with only 15% in the private sector and the polyester-cotton blends, which are more in demand by the consumer, account for less than 6% of CTD's production as compared with a 30% share of the domestic market. Also, while about 25% of the woven fabrics produced in Turkey are converted and sold as garments, the corresponding figure for CTD is about 4%. In the private sector, the value of output per employee is still about 50% higher while the average wages and salaries are about 30% lower in textile manufacturing, and 60% lower in garment manufacturing, than in the public sector. In view of the substantial scope for further improvement in SB's operations and performance through the required further restructuring and modernization, an early decision by the Government as to SB's future status, i.e. whether to retain it in the public sector or to privatize it, in part or in whole, would enable SB to proceed with the required restructuring, either in the private sector or as an SEE, as the Government may decide. V. FINANCIAL AND ECONOMIC PERFORMANCE A. Financial Results 5.01 Sumerbank's financial performance since 1981, the first year of impact of the project, is summarized in Annex 11. SB's and CTD's profitability has increased both in terms of operating profit and profit before taxes. CTD's profitability has increased as a result of the higher production, upgrading of product mix and productivity resulting from the Project and the liberalization of cotton textile product prices, and it is now a major contributor to SB's revenues and profits accounting in 1985 for about 52% of sales revenues and 80% of profits before taxes. The financial restructuring of SB consisting of consolidation of selected short-term debt into medium- and long-term debt, conversion of some long-term debt into equity, and infusion of additional equity undertaken in 1984 as part of the general financial restructuring of public sector enterprises, together with the annual revaluation of assets, has resulted in improved financial performance for both SB and CTD, due to the consequent lowering of interest charges and improvements in current and debt-equity ratios which continued to renain within covenanted limits. Though CTD's operating profitability continued to increase in 1985, its profitability before taxes dropped as compared to 1984 primarily due to higher interest charges in 1985 than in 1984. B. Financial Rate of Return (FRR) 5.02 The pretax incremental FRR for the project is estimated at 21.8% compared with 25.1% at appraisal (relevant cost and benefit streams in Annex 12). The reduction in the FRR is due to a combination of the increase in capital costs, longer implementation period, together with a slower than projected increase in product prices due to the weaker domestic 39 markets resulting from the economic adjustment and stabilization programs in 1980-85. C. Economic Rate of Return (ERR) 5.03 The ERR is estimated at 16.5% compared to the appraisal estimate of 23.6%. Border prices have been used where appropriate for outputs and fob prices for exportable inputs (e.g., cotton); adjustments have also been made for applicable taxes and duties (relevant cost and benefit streams in Annex 13). The lower ERR as compared to appraisal is primarily due to cif product prices being lower than comparable domestic prices in Turkey by larger margins than projected at appraisal, together with the increase in capital costs and the longer implementation period. D. Other Economic Benefits 5.04 The rehabilitation and modernization of CTD operations under the Project have enabled SB to expand the volume of its exports which would have been jeopardized in the absence of the Project (para 4.02). Over its expected life, the Project is expected to result in net foreign exchange earnings of around US$100 million. VI. BANK ROLE AND LESSONS LEARNED A. Bank Role 6.01 The Bank helped identify the Rationalization and Modernization Program (RMP) for SB as a priority project, aimed at overcoming the declining capacity utilization, low efficiency and inadequate quality in SB's cotton textile operations. The Bank was instrumental in persuading SB to accept that the RMP should address not only the required physical rehabilitation aspects but also the necessary organizational and institutional improvements in CTD. Preparatory work in this regard, undertaken with the Bank's guidance, resulted in identification and examination of major issues underlying SEE reform in general (e.g. the legal framework, management autonomy, relationship with Government agencies, etc.) which were useful in later dialogue with the Government on the subject. With regard to the organization of SB's cotton textile operations, the Bank urged the Government to consider various options, including possible privatization or divestiture, culminating in the consolidation of all SB's cotton textile operations under a single division with consequent gains in efficiency. The Bank provided about 68% of the foreign exchange required for the Project and mounted 12 supervision missions to assist in the implementation of the Project and to monitor progress including compliance with the loan covenants. 40 B. Lessons Learned 6.02 An important lesson learned from the Project was that, at a time when other possible options for improving SB's performance e.g., through privatization or divestiture, were not politically feasible due to the prevailing socio-political climate, the Bank's decision to support the rehabilitation and modernization of a major ailing SEE was nevertheless justified since it enabled SB to improve its efficiency and turnaround its operations thereby improving its financial performance and reducing dependence on budgetary support from the Government. Other lessons learned from the Bank involvement in the Peoject are the following: (a) Events crucial to the progress of project implementation such as employment of consultants and local counterparts should have been made conditions of Board presentation, rather than of loan effectiveness, to avoid the long delays due to contract negotiations and SB's constraints regarding employment and compensation of staff; (b) The disbursement schedule proved optimistic and shoild have taken into account the initial hiatus due to delays in loan effectiveness, mobilization of resources and manpower required for implementation; (c) A special account should have been set up in the form of a revolving account to simplify and expedite disbursements for a large number of minor items like spare parts and accessories required for rehabilitation of the existing machinery and equipment; and (d) In regard to the overseas training program for SB technical and supervisory staff, the Bank should have: (i) anticipated and suggested appropriate provisions earlier than it did for overcoming the foreign language constraints of the potential trainees that hindered the program; and (ii) included stronger provisicis, e.g., specific covenants under the Project Agreement, to ensure SB management's commitment and support to the program. 41 ANNEX 1 PIJEC1 COMPIETION REPORT TIKEY - SMRBME COTMN 'Il MATIONALIZATION PRJECT (LIAN 1847-TU) Imlmentation Schedule Date 1961 1982 1983 1984 1985 1986 1987 Items 0 12 24 36 48 60 72 84 33 a/ Detailed angineering 6 Design 30 Technical Assistance 57 Civil Works 42 Procurement 27 Delivery of Equipment Machinery 33 Erection 39 Trial Runs 36 Entry into Conmercial Production - Appraisal estimates. - Actual. a/ Delay in months. Industry Department November 1986 42 Table 1 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Replacement and Modernization of Machinery Before After the the Including Status Project Project Trans- M&R Year 1980 Scrapped Added 1986 fers W7 Spinning Blow Rooms b/ 81 35 23 69 2 35 Cards 1,345 699 - 646 247 419 Silver Lap 11 4 3 10 1 - Ribbon Lap 4 4 5 5 - - Draw Frames 425 204 70 291 54 - Cumbers 66 32 14 48 6 - Speed Frames 282 119 24 187 7 117 Spindles c/ 560 86 1 488d/ 50 142 Twisting c/ 35 27d/ - 8 13 13 Two for One 38 5 48 81 - - Wiaders 180 49 52 183 76 - Weaving Pirn Winding 2,486 900 750 2336 150 - Sectional Warpers 13 8 4 9 3 - Direct Warpers 34 14 12 32 4 - Sizing Units 31 11 11 31 3 - Looms 8,350 2,311 1,639e/ 7,678 145 - Shearing and Cropping 24 9 6 21 - - Garments Sewing Machines 687 - 724 1,411 - - a/ Modernized and rehabilitated. b/ In terms of scutchers. c/ Thousands. Sd/ Including 13 converted from ring twisting to ring spinning. e/ Including 684 imported and 955 made in Turkey. Industry Department November 1986 43 Table 2 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Machinery and Equipment Age Structure Age/Year 1980 1986 % % Spinning 5 years 22.7 47.9 10 years 20.4 19.1 20 years 22.1 28.3 25 years 17.7 1.5 30 years 8.8 0.6 Over 30 years 8.3 2.6 Total 100.0 100.0 Weaving 5 years 14.1 21.9 10 years 9.0 11.6 20 years 20.3 14.1 25 years 9.4 10.8 30 years 16.5 9.7 Over 30 years 30.7 31.9 Total 100.0 100.0 Processing 5 years 5.9 14.0 10 years 14.9 6.2 20 years 18.7 21.0 25 years 21.5 10.3 30 years 3.5 16.5 Over 30 years 35.4 32.0 Total 100.0 100.0 Industry Department November 1986 44 ANNEX 3 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Cotton Textile Division - Number of Employees Year 1980 1981 1982 1983 1984 1985 1980/85 Operators 24,465 23,705 23,045 24,266 24,148 23,527 -3.9 Administration and Management 1,597 1,533 1,439 1,390 1,348 1,317 -17.6 Total 26,062 25,238 24,484 25,658 25,498 24,844 -4.7 Including HQ in Ankara 961 967 928 879 801 790 -17.8 Project Implementation Unit - Number of Employees Year 1980 1981 1982 1983 1984 1985 1986 Management 1 2 6 8 5 5 4 Technical 11 11 25 28 22 20 19 Office 2 2 2 2 2 3 2 Total 14 15 33 38 29 28 25 Industry Department November 1986 45 ANNEX 4 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Technical Assistance and Training Consultants a/ 1981 1982 1983 1984 1985 1986 Total Training b/ Foreign Gherzi OTA 125 113 120 95 41 28 522 FTA 35 66 101 Suppliers 380 Local Tumas 17 92 52 52 212 Tubitak 8 18 19 8 8 61 TDS 30 60 90 Aegean University 25 30 15 70 ) Uludag University 10 24 4 18 ) 320 BTC (Language) 1,800 Total 1,014 2,500 a/ Man-weeks. b/ Student-weeks. Industry Department November 1986 46 ANNEX 5 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Procurement by Country of Origin Country US$ Equivalent Z of the Bank Loan (in thousand) West Germany 33,083 39.9 Switzerland 26,159 31.5 Belgium 8,072 9.7 Japan 6,339 7.6 Italy 5,284 6.4 United Kingdom 1,630 2.0 USA 568 0.7 Holland 562 0.7 France 398 0.5 Sweden 332 0.4 Denmark 78 0.1 Spain 21 - Austria 2 - 82,549 95.5 Cancelled 0.451 05 Total 83,000 100.0 Procurement Procedures International Competitive Bidding 73,708 88.8 Limited International Tendering 3,624 4.4 Proprietary Goods 5,217 6.3 Cancelled 0,451 0.5 Total 83,000 100.0 Industry Department November 1986 PROJECT COMPLETION REPORT TUREY - SIERBANK COTTON TETILE RATIONAL17ATION PROJECT (LOAN 1847-TU) Project Capital Costs - Planned and Actual Original Estimates (1980) Actual Coat (1986) US Illion TL Million (US$1 * TL 70) TL Million US$ Million C/ For- For- For- For- Local eg Total local eign Total local sign Total Local elu Tota IMacbiaery 6 Equipment a/ Sptn Ag 40 1,281 1,330 0.7 18.3 19.0 313.3 12,766.6 13,079.0- 1.1 33.1 34.2 Weaving 196 917 1,113 2.8 13.1 15.9 1,544.1 11,763.8 13,307.9 5.2 30.5 35.7 Processing - 329 329 - 4.7 4.7 499.6 2,969.9 3,469.5 1.7 7.7 9.4 Garments ? 196 203 0.1 2.8 2.9 237.8 1,041.4 1,279.2 0.8 2.7 3.5 Spares & Components b/ 756 756 - 10.8 10.8 - 2 175.4 2 175.4 - 7.1 7.1 Subtotal 252 3,T79 3,731 T.T T9.7 31 2 ,59.89 377.1 33.11.9 VTI _.L WT: W Freight 6 Insurance d/ 7 280 287 0.1 4.0 4.1 2,390.1 - 2,390.1 6.4 - 6.4 Civil torks EogineerTug & Service Equipment 560 105 665 8.0 1.5 9.5 6,541.7 322.6 6,864.3 19.2 0.3 19.5 J. Brection e/ 7 105 112 0.1 1.5 1.6 1,246.6 - 1,246.6 3.2 - 3.2 Consultany & Training 119 476 595 1.7 6.8 8.5 540.2 691.6 1,231.8 2.2 2.4 4.6 Ceneral A Preoperating (Exp.) - 957.7 0.5 958.2 3.0 - 3.0 awe Cost 945 rt445 5390o 13.5 63.5 77.0- T4,.271. 31173.8n- 46,002.V T TT M 126 Physical Contingency 70 259 329 1.0 3.7 4.7 - - - - - - Price Contingency 245 1,456 1,701 3.5 20.8 24.3 - - - - - - Installed Cost 1,260 6,160 7,420 18.0 88.0 106.0 14,271.1 31,731.8 46,002.9 42.8 83.8t/ 126.6c/ Financial Charges Dring Construction 245 994 1,239 3.5 14.2 17.7 1,193.5 11,672.5 12,866.0 2.6 27.7 30.3c/ Incremental Working Capital 364 126 490 5.2 1.8 7.0 ) Additional Working Capital for Existing ) Operations 1,246 140 1,386 17.8 2.0 19.8 ) 5,125.0 4,390.0 9,515.0 3.5 3.0 6.5 Total Financing Required 3,115 7,420 10,535 44.5 106.0 150.5 20,589.6 47,794.3 68,363.9 48.9 114.5 163.4 a/ Including the cost of erection. Ef Spare parts components for existing mschinery. c/ Using exchange rates at the time of conversion. /1 Insurance and freight from European ports ..ua local transport cost and custome duties. 7/ grscton costs for transferred existing maehinery and equipment. T/ Includes IIS$1.2 million supplier's credit. Industry Department Marcb 1987 ANNEX 6 48 Table 2 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Factors Responsible for the Variations in the Project Cost (in US$ million) Local Foreign Total Machinery & Equipment a/ Spinning 0.4 14.8 15.2 Weaving 2.4 17.4 19.8 Processing 1.7 3.0 4.7 Garments 0.7 (0.1) 0.6 Spares & Components b/ - (3.7) (3.7) Subtotal 5.0 31.4 36.6 Freight & Insurance 6.3 (4.0) 2.3 Civil Works, Engineering & Service Equipment 11.2 (1.2) 10.0 Erection d/ 3.1 (1.5) 1.6 Consultancy & Training 0.5 (4.4) (3.9) General & Preoperating 3.0 - 3.0 Base Cost 29.3 20.3 49.6 Physical Contingency (1.0) (3.7) (4.7) Price Contingency (3.5) (20.8) (24.3) Installed Cost 24.8 (4.2) 20.6c/ Financial Charges during Construction (0.9) 13.5 12.6c/ Additional Working Capital (19.5) (0.8) (20.7)q/ Total Financing Required 4.4 8.5 12.9 a/ Including the cost of erection. b/ For existing equipment and machinery. c/ Using exchange rates at the time of conversion. d/ For transferring existing machinery between the plants. e/ Due to the substantial changes in exchange rates between the Turkish Lira and the US$ during the period as a result of which, though CTD's sales revenues increased substantially in TL terms, they did not change appreciably in US$ terms between 1980 and 1986. Industry Department November 1986 49 ANNEX 6 Table 3 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Utilization of Bank Funds Category As Appraised Revised a/ Actual 1. Equipment & Spare Parts 68,000,000 80,433,906 80,198,700 2. Consultants' Services 6 Training 7,800,000 1,500,000 1,284,818 3. Refunding of Project Preparation Advance 1,000,000 1,066,094 1,066,094 4. Unallocated 6,200,000 - 450,388b/ Total 83,000,000 83,000,000 83,000,000 a/ June 18, 1985. b/ Cancelled. Industry Department November 1986 50 ANNEX 7 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Disbursement of Bank Loan (Comparison of Actual vs Appraisal Estimates) Calendar Appraisal X Disbursed Actual vs Estimate Qtr. Estimate Actual Appraisal Actual Estimate 12/80 4 1.00 1.20 03/81 1 5.00 1.00 6.02 1.20 20.00 06/81 2 13.00 1.16 15.66 1.40 8.92 09/81 3 23.00 1.19 27.71 1.43 5.17 12/81 4 37.00 1.31 44.58 1.58 3.54 03/82 1 49.00 2 80 59.04 3.37 5.71 06/82 2 60.00 3.29 72.29 3.96 5.48 09/82 3 68.00 3.80 81.93 4.58 5.59 12/82 4 75.00 3.94 90.36 4.75 5.25 03/83 1 77.00 7.80 92.77 9.40 10.13 06/83 2 79.00 12.61 95.18 15.19 15.96 09/83 3 81.00 22.00 97.59 26.51 27.16 12/83 4 83.00 25.85 100.00 31.14 31.14 03/84 1 83.00 29.46 100.00 35.49 35.49 06/84 2 83.00 34.32 100.00 41.35 41.35 09/84 3 83.00 43.20 100.00 52.05 52.05 12/84 4 83.00 46.40 100.00 55.90 55.90 03/85 1 83.00 52.51 100.00 63.27 63.27 06/85 2 83.00 61.12 100.00 73.64 73.64 09/85 3 83.00 72.78 100.00 87.69 87.69 12/85 4 83.00 79.87 100.00 96.23 96.23 03/86 1 83.00 82.55 100.00 99.46 99.46 06/86 2 83.00 82.55 100 99.46 99.46 Loan fully disbursed - balance US$450,388.02 cancelled. Indusry Department May 1987 51 ^bl 8 wmr onznŒ -aa TEY- SiwKc wrii 1ErrII R4T1IALIZATIGW PH1Er (LMN 1847-Miii Pro&~ Statltics Year 1987- 1979 1980 1981 1982 1963 19_4 1985 1986 97 fl arn a/ Wt~at b/ 40.5 39.8 38.9 38.0 37.1 36.3 35.5 34.7 34.7 With c/ 40.5 39.8 40.8 41.9 44.1 51.0 51.9 53.8 53.8 Prodtion d/ 40.5 41.4 42.4 47.1 51.2 53.9 50.7 58.0 60.2 Incremetal el - - 0.5 3.9 7.0 14.7 16.4 19.1 19.1 Incrementald/ - 1.6 3.5 9.1 14.1 17.6 15.2 23.3 25.5 1o~n-State Fabrics/ Withot b/ 206.6 210.5 218.7 220.4 217.7 215.1 210.4 207.6 207.6 with c/ 206.6 210.5 213.5 216.6 232.9 247.5 249.3 249.5 249.5 Prodtica d/ 206.6 178.9 222.4 218.5 230.4 252.7 226.0 255.0 265.0 Incremental el - - (5.2) (3.6) 15.2 32.4 38.9 41.9 41.9 Incrementalid - (31.6) 3.7 (1.9) 12.7 27.6 15.6 47.4 57.4 FLnihe Fabrcs~ Wtlhou bl 151.8 150.8 156.8 161.5 162.6 161.2 159.3 158.2 158.2 With c/ ~ 151.8 150.8 164.6 178.3 204.9 207.2 207.2 207.2 207.2 Produrtion d/ 151.8 154.3 173.2 184.2 184.1 193.5 208.4 212.2 212.2 Incremental el - - 7.8 16.8 42.3 46.0 47.9 49.0 49.0 Incremental~i - 3.5 16.4 22.7 21.5 32.3 49.1 54.0 54.0 Wb~~ Gants bl Withut bl 1.7 1.7 2.2 3.3 41. 4.5 4.5 4.5 4.5 Wth c/ 1.7 1.7 2.6 4.3 5.6 6.1 6.36.3 6.3 Prod tion d/ 1.7 1.2 2.0 1.8 2.2 4.2 3.2 5.41 7.2j/ Incremntal el - - 0.4 1.0 1.5 1.6 1.8 1.7 1.7 Increnental d/ - (0.5) (0.2) (1.5) (1.9) (0.3) (1.3) 0.9 2.7 Knitg ~Tabrics a/ - 0.3 0.4 0.9 1.1 1.5 1.7 2.4f/ 2.4 Germntshl - 1.3 0.8 2.8 3.7 3.5 5.0 5.5 5.5 a hu~sa metric tons per year (tpy). b/ Without the project as appraised. cl With the project as appraied. d/ Actual. e as apprased. f/ Esti-ted. /Mila aquare meters (PEa); phasing out fabric producin at Bekirkoy in 1986. bl HW11n pio e (Mp). / TIeudig 4.6 'p in the existing plant at bergam, Iniar d Hwisa and 0.8 wp in the new plant at Bakirkoy. / Inclurn 2.0 up at Bakrkoy and 0.6 up at the new plat at Slgurlu In 1987 and 1.2 ap in the 1988-97 period. Industry Department bvenber 1986 52 w90 031zr» ~RE TIGn - SUNME mrim T!lUE pAIJ2ATIM PNlECT (IDAN 1847-TU) Inc ntal Prock&+1~ Due to the Project 190 1981 1982 1983 1984 1985 1986 1987/97 Yan al 1.6 3.5 9.1 14.1 17.6 15.2 23.3 25.5 S rf~ a - - (0.1) (0.2) - 0.2 0.2 0.2 Grey Fabri b/ (35.1) (12.7) (20.8) (8.8) (4.7) (33.7) (6.6) (3.4)c/ Finished Fabric b/ 3.5 16.4 22.7 21.5 32.3 49.1 54.0 54.0 Garmets d/ (0.5) (0.2) (1.5) (1.9) (0.3) (1.3) 0.9 3.3 Knitwear / - - 0.5 0.6 1.1 1.3 2.0 2.0 ~ate a - - (0.9) (0.4) (0.5) (1.3) (1.3) (0.3) al 2numI metric toms. MUio fsquare meters. Used for production of the finished fabrics. Indtr 19a Ntabe 1986 A waL6 53 Table 3 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Causes of Production Losses a/ Power Shortage of Shortage of RMD Labor Failure Raw Materials Spare Parts Activities Skills 1980 6.3 1.2 23.0 1981 4.9 1.3 19.0 1982 3.4 1.5 17.0 - - 1983 0.9 1.0 4.0 5.0 - 1984 0.6 5.0 3.0 15.0 - 1985 0.3 1.0 1.4 20.0 - a/ As Z of actual production. Industry Department November 1986 54 waa a.mm me 'UMM - SW A ~1 1SK= RATIMJLTIMN W 1~0 1847-'M) Detailed ~ta tica - Sp~inni 1980 1981 1982 1983 1984 1985 1986 1987 / Nbr of Mndm IraUad a/ 560.2 560.0 560.0 560.3 484.7 485.1 487.5 487.5 ~taber of iM1Ae Irking 538.2 537.6 537.6 538.2 480.0 480.0 480.0 487.5 ma.perating-h~urs/year - - - - - 6,750 - - Eff. Operatig-hours/year 4,160 4,045 4,275 4,385 5,350 5,375 6,40 6,750 % Spi~la Utliatii 59.2 57.5 60.8 62.4 78.5 78.8 93.4 100 Yarn Production/ar b/ 41.4 42.4 47.1 51.2 53.9 50.7 62.0 68.0 AV. omt c/ 18.9 18.4 18.0 17.3 17.6 18.5 20.1 20.1 Production per SpMAnle-h~u d/ 18.5 19.5 20.5 21.7 21.0 19.7 20.2 20.7 Comverted to Na 20 17.0 17.2 17.5 17.5 17.3 17.5 20.2 20.7 % Uml~ icaE Effici~ncy 85.8 86.7 88.4 88.4 87.5 88.4 88.6 90.6 % Oierall Ghpsty Utilizarion 50.8 49.9 53.7 55.1 68.7 69.6 82.7 90.6 Labmr Produtivity el 4.4 4.7 5.5 6.0 6.5 6.0 7.9 9.0 Onverted to N 20 4.0 4.2 4.7 4.8 5.4 5.3 8.0 9.1 b/ n ~mnt =tric t=n. c/ Ne - 1ah ot. Gra~ per spiM1--hour. Yg per operator-bour. f Etimed. etnary 1987 Feb~ar 1987 55 T~ 2 FFw 02n OM IMN 1847-UI) n aea Statlot:e - Weaving f19W0 1981 192 1983 1984 1985 1986 19871./ Nehr of I1m Instaud al 8,350 8,396 8,396 8,396 8,213 7,980 7,678/ 7,678 lMber of iom Q~rkir9 a 7,900 7,900 7,900 7,940 8,200 6,950 7,426 7,174 ~ax. cperating- ~urs/er - - - - - 6,750 - - Eff. Operatir-burs/Year 5,670 6,550 6,550 6,710 6,600 6,700 6,700 6,700 % ino= Uti1iz~o 79.5 91.3 91.3 94.0 97.6 86.4 %.0 100 Productmi bl 176.7 220.5 214.5 225.1 243.6 212.7 250.5 250.5 Production c/ 178.9 222.4 218.5 230.4 252.7 226.0 273.3 273.3 Av. Pick/an 18.8 18.2 18.6 18.5 18.4 18.8 18.8 19.4 Av. Grey Width d/ 101.2 100.9 101.9 102.4 103.7 106.3 109.1 109.7 Prod./Incorbur el 3,94 4,26 4,15 4,23 4,50 4.6 5.0 5.2 Prod.LIoxr~our f/ 7,415 7,755 7,710 7,815 8,280 8,585 9,765 10,150 Aere Speed g 180 180 180 180 188 1% 205 208 % 'bdi~n1 Effic~ency 68.7 71.8 71.4 72.4 73.4 73.0 79.4 81.4 % OeraU Qhrsety lkiUatlM 54.6 65.6 65.2 68.0 71.6 63.1 79.4 81.4 Prod. per Operator-hour _h 20.8 25.7 26.4 27.3 28.8 27.6 37.4 40.7 al ~ber. bl milloi limar meters. c/ Mil im re meters. il 1n centi~ters. T.im meters. f/PIcks. / RenistIms per ma. b/ Kimters of weft lnserted. Closirg Båkirky In June 1986. / Fationed. Industry Deparent February 1987 56 1u~T - s-1~ WYm nm= nuaans r IUM 1847-U) n.e.1±r '~1 . S at U~ - Pro~ 1980 1981 1982 1983 1984. 1985 1966 1987l1 'al al 162.1 182.8 190.4 191.2 193.4 210.4 210.2 193.8 'Itli/154.3 173.2 184.2 184.1 193.5 208.4 212.2 2)1.8 reie 13.1 14.7 15.7 15.6 16.4 17.7 17.7 18.5 wlhm t 17.1 19.2 20.4 20.4 21.5 23.1 22.7 23.0 Yam Dyed 15.9 17.8 19.0 19.0 19.9 21.5 22.7 23.0 Plece Dffed 37.0 41.8 44.2 44.2 46.4 50.0 50.5 .48.5 Printed 71.0 79.7 84.7 84.7 89.0 95.9 101.0 97.0 N of Operat r h~urs/year c/ 39.4 41.4 42.5 42.9 43.2 43.2 42.1 40.7 Proda~ per deratordiour / 39.1 41.9 43.3 43.2 45.1 48.2 50.4 49.6 Proå~ctio per eerator-hour el 41.1 44.2 44.8 45.0 45.1 48.7 49.9 47.6 Int. Cap.: Bleaching al 239.2 239.2 239.2 239.2 - - - 226.6 Yarn Dyeing c 2,356.8 3,656.8 3,656.8 3,656.8 - - - 4,952.5 Plems D aeigl 147.6 147.6 134.1 Printilg l 161.6 - 161.6 161.6 161.6 161.6 161.6 161.6 % Coity Udlizaim: R1arhi g 54 62 65 69 - - - 72 Yam Di~g - - 85 88 - - - 95 PieceIDeis - 45 46 - - - 72 PrntiMg 46 - 57 57 55 60 63 63 Finished W%dth f/ 95.2 94.7 %.7 %.3 100.0 99.0 101.0 104.1 al t11 linser 9eters per year. f fN1on qare =ters per year. Metric tom per year. Square mters per operator/~ur. el 1,n1 r neters per operator/hour. ~lair B ry pimt in Ju 1986. ÉPatizntet. I~utry Depat~ ury 1987 A^ 9 57 T TE - -Emffi~ Wm1MIIE A w (IMN 1847-M0 Dnat~ ~ie Stati~n - gIttIm an Gem 19e0 1981 1982 '1983 1984 1985 1986 1987 Nb of mach~ 7 7 15 24 22 33 43 43 Proåa~tkm a/ 257 170 566 742 698 999 1,060 1,150 / Noberof a rs 21 35 37 35 34 41 41 Prohxim per (pentor b/ 12.8 8.1 16.2 20.1 19.9 29.4 25.9 28.0 ist. Ca.tty a/ 2,160 2,160 2,160 2,160 2,160 2,160 2,160 2,160 % rCqpn ty fiuitli 11.9 7.9 26.2 34.4 32.3 46.2 49.0 53.2 N~ber of Sedg Hadin~ 463 465 893 990 981 981 1,063 1,063 Pro,~t c/ 2,523 2,790 4,636 5,903 7,677 8,249 10,736 17,665 ~å.er of (perators 596 616 883 1,377 1,409 1,370 1,958 1,958 Peou~nn per perator-a~yd/ 14.11 15.10 17.50 14.29 18.16 20.07 18.28 30.07 Int. o.a-ctty 15.82 15.82 18.62 18.62 18.62 18.62 21.25 22.45 % Ca~ty Uilmt.im 15.9 17.6 24.8 31.7 41.2 44.3 50.5 78.7 al ~as per year. b/ 1bns per oprator/yeIr. ff i1lan i per yew. d/ P.es. e/Estb~em. fl At aver it of 103 g per peMm. In ty Dertmn Febeury 1987 38 1Uf!f -S ærSiNO EM= ATI(1ZATI PnW 1IAN 1847-TU) 1lhsy's 'ti aprts 1979 1980 1981 1962 1963 1984 1965 1966 1987 <,ttem ~l.e. DLvision Yam al 3.1 1.3 3.9 4.5 2.6 2.0 3.2 3.6 Fa~rcs: (Gmy B1l~ bl 0.1 - 8.5 10.9 4.0 2.5 2.6 2.8 Finishe b/ 1.6 0.5 11.2 13.3 4.5 7.4 7.6 7.3 OeM=nte cl 1.5 1.1 1.7 2.5 2.0 5.0 4.4 4.9 Value d 18.5 9.1 24.5 29.5 27.3 20.1 20.7 N Valu d/ 390.9 439.8 802.8 1,056.3 1,229.1 1,875.4 1,789.5 al Bomm~ twa. bl fiæ lnæar i mters. cmiæ piaa US$ =if1iæ. Feb~try 1987 F~ur 1967 59 ANEX 11 PRI= 02FIE1MN JfiWE 1M - SWEMANK CI7IW lEXE RATIONAMATIOIN HWEC sB and CI - ammary of Fin.il anfoEmoC (TL =ILI lion) SB Comlatad cm a/ 1981 1982 1983 1984 1985 1981 1982 1983 1984 1985 nome Statements Net Sales Ievm 79,293 115,859 144,797 208,247 248,366 36,578 54,855 81,843 100,%1 130,343 (bst of Goods Sold 73,718 109,961 134,649 186,718 225,360 33,897 51,219 75,566 89,974 114,790 Operatirg Profit 5,575 5,898 10,148 21,529 23,006 2,681 3,636 6,277 10,987 15,553 Profit/(s) Before Tax 467 (2,305) (120) 9,323 7,096 (516) (536) (135) 8,020 5,704 Balance Sheets Ourren Asaets 49,297 63,6% 135,265 131,678 164,875 18,920 22,316 31,776 42,238 68,800 Net Fixd & Other Assets 22,961 32,679 46,683 85,261 132,163 5,034 6,829 21,266 32,975 60,503 Ibtal Assets 72,258 %,375 181,948 307,198 297,038 23,954 29,054 53,042 75,214 121,292 Current Liabilities 38,380 55,895 123,275 61,621 75,000 19,411 20,958 30,311 35,529 20,650 lag-term Liabilities 12,040 18,259 23,243 40,786 85,739 2,243 3,906 9,614 16,521 40,897 Equity 21,838 22,221 35,630 114,532 136,299 2,300 4,181 13,117 23,163 59,745 (Of which: Fevaluation Surplus) (-) (-) (11,215) (31,818) (47,834) (-) (-) (6,774) (10,560) (15,6%) atios Operating Profit/ Net Sales (%) 7.0 5.1 7.0 10.0 9.2 7.3 6.6 7.7 10.9 11.9 Profit Before Tm/ Net Sales (%) 0.6 (2.0) (0.1) 4.5 2.9 (1.4) (1.0) (0.2) 7.9 4.4 Qrrent Assets/ Orrent Liabilities 1.3 1.2 1.1 2.1 2.2 1.0 1.1 1.05 1.2 3.3 LT Debc:Equity Ivallstion Surplus 36:64 45:55 39:61 26:74 39:61 49:51 48:52 42:58 42:58 41:59 - Elui Surplus 36:64 45:55 49:51 33:67 49:51 49:51 48:52 60:40 57:43 48:52 a/ Includiig absidiaries In %Wich &marbemk has mjority percipetim (Aitalya, BergAm and Mmnisa), except for 1984 and 1985. In&try wmt Bebruy 1987 60 ANNEX 12 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Incremental Financial Rate of Return - Cost and Benefit Streams (in constant 1980 US$ million) Working Incremental Incremental Fixed Assets Capital Operating Costs Revenues 1980 2.4 1981 4.0 1982 4.8 0.7 23.4 24.3 1983 30.5 0.3 35.5 45.3 1984 27.9 3.7 53.7 71.9 1985 37.0 0.5 48.7 66.1 1986 4.8 45.9 64.0 1987 46.5 71.0 1988-94 46.5 71.0 1995 -5.2 46.5 71.0 Industry Department February 1987 61 ANNEX 13 PROJECT COMPLETION REPORT TURKEY - SUMERBANK COTTON TEXTILE RATIONALIZATION PROJECT (LOAN 1847-TU) Incremental Economic Rate of leturn - Cost and Benefit Streams a/ (in constant 1980 US$ million) Working Incremental Incremental Fixed Assets Capital Operating Costs Revenues 1980 2.3 1981 3.8 1982 4.6 0.7 23.8 19.4 1983 29.3 0.3 36.3 34.4 1984 26.8 3.7 55.0 64.7 1985 35.5 0.5 49.0 62.8 1986 4.6 45.8 64.0 1987 44.6 70.0 1988-94 44.6 70.0 1995 -5.2 44.6 70.0 a/ Based on the incremental financial cost and benefit streams in Annex 13 adjusted as follows: border prices have been used for tradeable outputs and fob prices for tradeable inputs (e.g., cotton); taxes and duties have been excluded from the cost streams. Industry Department February 1987