Turkey - Second Small and Medium Scale Industry Project

U, in 0 -t 04 U 4 I. is Lu 54 *1 0 0 '-4 0 04 II 4 p4 I hi ii  V N N  8 4 II ii - - 0 0' 'a, I I! U N 4 8 UIi ii 1; 5@  CURRENCY EQUIVALENTS US$1 Turkish Lira (TL) 2,027 (March 1989) TL 1 = US$0.00049 TL 1,000,000 = US$490 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS USED FERIS - Foreign Exchange Risk Insurance Scheme GOT - Government of Turkey IS - International shopping LCB - Local competitive bidding PCI - Participating Credit Institution SMI - Small and medium scale industry TL - Turkish Lira  FOR OFFICMAL USE ONLY TURKEY SECOND SMALL AND MEDIUM SCALE INDUSTRY PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Turkey Beneficiaries: Participating Credit Institutions (PCI) which include: Emlak Bank, Halk Bank, the Industrial Investment and Credit Bank, and Vakiflar Bank. The proposed project would also -rovide funds for technical assistance to the Turkish Standards Institute, selected export trading companies, the State Institute of Statistics, and the Small Industry Development Organization. Amount: US$204.5 million equivalent Terms: Seventeen years, including a five-year grace period, at the Bank's standard variable interest rate. Relending Terms: The final lending rate to subborrowers would be the prevailing variable Foreign Exchange Risk Insurance Scheme (PERIS) rate which would be adjusted quarterly in reference to the average 3-month Treasury Bill rate in the preceding three months. The Government through FERIS would bear the exchange and interest rate risks since the ultimate subborrowers are small and medium scale enterprises, which have relatively little capacity to judge and hedge against these risks. The Government would relend the proceeds of the Bank Loan to the PCIs at terms that would provide to them a spread of 32. The PCIs would repay their loans on a schedule based on the composite of the maturities of their subloans. Financing Plan: Government of Turkey US$ 0.5 million PCIs US$100.5 million Private Sector US$200.5 million IBRD US$204.5 million TOTAL US$506.0 million Economic Rate of Return: Not applicable Staff Appraisal Report: Report No. 7546-TU Map: IBRD 21322 This document has a muicted distribution and may be used by recipients only in the performance of their of Ecid duties Its coobents tnay not otherwise be discksed withOU Wodd Bank autfiot2atfion.  ]FOR OMCAL USE ONLY TURKEY SECOND SMALL AND MEDIUM SCALE INDUSTRY PROJECT LOAN AND PRO:ECT SUMMARY Borrower: Republic of Turkey Beneficiaries: Participating Credit Institutions (PCI) which include: Emlak Bank, Halk Bank, the Industrial Investment and Credit Bank, and Vakiflar Bank. The proposed project would also provide funds for technical assistance to the Turkish Standards Institute, selected export trading companies, the State Institute of Statistics, and the Small Industry Development Organization. Amount: JS$204.5 million equivalent Terms: Seventeen years, including a five-year grace period, at the Bank's standard variable interest rate. Relending Terms: The final lending rate to subborrowers would be the prevailing variable Foreign Exchange Risk Insurance Scheme (FERIS) rate which would be adjusted quarterly in reference to the average 3-month Treasury Bill rate in the preceding three months. The Government through FERIS would bear the exchange and interest rate risks since the ultimate subborrowers are small and medium scale enterprises, which have relatively little capacity to judge and hedge against these risks. The Government would relend the proceeds of the Bank Loan to the PCIs at terms that would provide to them a spread of 3X. The PCIs would repay their loans on a schedule based on the composite of the maturities of their subloans. Financing Plan: Government of Turkey US$ 0.5 million PCIs US$100.5 million Private Sector US$200.5 million IBRD US$204.5 million TOTAL US$506.0 million Economic Rate of Return: Not applicable Staff Appraisal Report: Report No. 7546-TU Map: IBRD 21322 This docutnent has8 a >dse distibution and may be used by gecipients o nlyi the. peronmance of their offcial duteW& hs conOtnlts may not otherwise be disclosed withOlt Wotid Bank aufthintion.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR THE SECOND SMALL AND MEDIUM SCALE INDUSTRY PROJECT 1. The following report ori a proposed loan to Turkey for US$204.5 million equivalent is submitted for approval. The proposed loan would have a repayment period of seventeen years, including a five-year grace period, and interest at the Bank's variable rate, and would help finance the Second Small and Medium Scale Industry Project. 2. Background. Small and medium scale industry (SMI) units are defined as industrial enterprises with fixed assets (excluding land and buildings) not exceeding US$4 million or those employing less than 100 workers. As defined, the SMI sector constitutes about 89% of all private manufacturing enterprises, accounts for about 372 of total private manufacturing employment, contributes about 272 of private manufacturing value-added and is an important supplier of Turkey's manufactured exports. The Government of Turkey has attached priority to this sector in view of the need to increase employment, reduce regional income disparities, and expand exports. 3. Project Obiectives. The Bank, through two projects, has helped the Government meet the needs of the SMI sector by encouraging two financial institutions to expand their SMI lending activities and guiding a public agency in providing promotional and extension services to the SMI sector. The proposed project would further these initiatives by: (i) promoting and supporting efficient SKI investments and operations; (ii) improving credit access for SMI by increasing significantly the number of financial institutions that can serve as efficient intermediaries for SMI finance and by providing credit at efficient market prices; (iii) improving SMI product quality and expanding their markets by providing technical and marketing assistance; and (iv) enhancing policy making for the SMI sector through more reliable statistics. 4. Project Description. To meet the above objectives, the proposed project would have the following components: (i) credit lines to the participating credit institutions for onlending as subloans for fixed investment and permanent working capital for SMI subprojects that are financially and economically viable; (ii) technical assistance to the PCIs to help them become more efficient channels for SMI finance; (iii) technical and marketing support services for SMIs by providing quality improvement services and expanding export marketing linkages between SMIs and export trading companies; and (iv) assistance to improve understanding of this sector through improved statistics. A breakdown of project costs and the financing plan is shown in Schedule A. Amounts and methods of procurement and disbursements, and the disbursement schedule are shown in Schedule B. A time table of key project processing events and the status of Bank Group operations in Turkey are given in Schedule C and D, respectively. A map is attached. The Staff Appraisal Report No. 7546-TU dated May 4, 1989 is being distributed separately. 03 91 p  -2 - 5. Rationale for Bank Involvement. While earlier projects assisted by the Bank have helped increase SMI's access to financial, technical and marketing assistance, the institutional mechanisms that can deliver these services effectively have to be expanded and improved to enable SMI to reach its potential. Financial institutions are not yet fully equipped to handle SMI lending and are still averse to financing SMI units due to perceptions of higher risks associated with lending to this sector and higher administrative costs associated with smaller loans. Hence, equity financing and informal credit sources at very high costs continue to be the major source of financing for SMI. The Bank's continued assistance is needed to assure adequate long-term funds for existing and other financial institutions *o expand their SMI portfolio, and also as a means of providing technical assistance to make them more effective and efficient at SMI financing. In the area of technology and market development, the Bank has a '-Untinuing role in assisting both public and private sector institutions in providing technical and marketing services more effectively. 6. Agreed Actions. The Government of Turkey has agreed on the following: a) that the Government would bear the exchange and interest rate risks of the subloans because the ultimate subborrowers are small and medium enterprises with relatively little capacity to judge and hedge against these risks; and b) that the fixed rate FERIS be abolished and that FERIS be placed completely on a variable rate basis to make the interest rate be reflective of market conditions. 7. Justification. The proposed project would support the expansion and modernization of the SMI sector which makes significant contributions to employment, exports and output growth. The Bank loan would fill a significant portion of the resource gap for SMI financing and would help the participating credit institutions become more efficient channels for SMI lending. It is anticipated that about 900 subprojects would be financed, resulting in fixed investments of about US$400 million. On the basis of experiences with earlier projects supported by the Bank, it is estimated that about 26,000 new full time jobs may be created. The subprojects financed are expected to be fairly labor intensive with a cost per job usually not exceeding US$15,000, to employ less skilled workers or new entrants into the labor force, to produce for exports both directly and indirectly, and to process local raw materials with close linkages with the agricultural sector. 8. Risks. No unusual risks are foreseen in the implementation of the proposed project. There is a risk that participating banks may not pay sufficient attention to SMI lending considering the small size of this operation in relation to the total business of these banks. Major criteria in the selection of the PCIs included their interest in, and firm plans for, 0391R  -3- developing an important SMI portfolio and consistency of SMI lending with their corporate strategies. Separate monitoring and reporting will be required to ensure attention to this operation by the top managements of these banks. There is a risk that, due to weaknesses in staffing and procedures, the public sector institutions will be unable to play the roles assigned to them for the technical assistance components of the project. Training and consultancy assistance under the project would be provided to strengthen these institutions wbile the private sector is expected to play an important role in monitoring and ensuring effective project implementation. 9. Recommendations. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. May 4, 1989 0 39 X t  Schedule A TURKEY SECOND SMALL AND MEDIUM SCALE INDUSTRY PROJECT Estimated Costs a/ Local Foreign Total (USt million)- - Subloan Component 300.0 200.0 500.0 Technical Assistance Components 1.5 4.5 _6.0 Total 301.5 204.5 506.0 a/ Inclusive of taxes and contingencies. Financing Plan Local Foreian Total -( sUS million) Bank 0.0 204.5 204.5 Private Sector 200.5 0.0 200.5 PCI 100.5 0.0 100.5 GOT 0.5 0.0 0.5 Total 301.5 204.5 506.0 0391I  Schodule B Pagp 1 of 2 TURKEY SECOND S4ALL AND MEDIUM SCALE INDUSTRY PRT PROCUREMENT METHOD AND DISBURSEMS Project Element Procurement Method Total IS a/ LCB Other N.A. - - - ~~~(US$ Millio'n)--- Subloans 75.0 b/ 25.5 400.0 b/ 500.0 Equipment, vehicles, and materials 0.5 0.5 1.0 Consultants 2.0 c/ 2.0 Training 1.5 1.5 Administrative Costs 1.5 1.5 Total 75.5 25.5 402.0 3.0 506.0 a/ International shopping, based on, at least, three responsive quotations. bf For goods procured locally or goods procured outside the country with single items costing less than US$100,000 and combined items costing less than US$500,000, existing procedures of the PCIs would be used; otherwise international shopping would be required. c/ According to the Bank Guidelines for use of consultants. 0391R  Schedule B Page 2 of 2 Disbursements Category Amount UJs$ Sub loans Equipment, Materials 200.0 100I of CIF cost of directly & Supplies imported items; 701 of imported but locally purchased items; 50% of ex-factory cost of locally manufactured items; and 301 of the cost for civil works in tourism subprojects. Technical Assistance Equipment, Vehicles 1.0 100% of CIF cost of directly & Materials imported items; 100l of ex-factory cost of locally manufactured items; 701 of cost of imported but locally purchased items. Consultants 2.0 1001 Training 1.5 1001 of foreign expenditures Estimated IBRD Disbursements: IBRD Fiscal Year 90 91 92 93 94 95 (US$ millioio) Annual 20.0 33.0 58.0 48.0 26.0 19.5 Cumulative 20.0 53.0 111.0 159.0 185.0 204.5 039 i R  Schedule C TURKEY SECOND SMALL AND MEDIUM SCALE INDUSTRY PROJECT Timetable of Key Pro1ect Processins Events (a) Time taken to prepare: 9 months (b) Prepared by: Government with Bank assistance (c) First IBRD mission: February 1988 (d) Appraisal mission departure: November 1988 (e) Negotiations: March 27 - 29, 1989 (f) Planned Date of Effectiveness: August 1, 1989 (g) List of relevant PCRs and PPARs: Labor Intensive Industries Project (Loan 1952-TU, PCR Date: December 7, 1988) 03S aR  Schedule D Page 1 of 2 STATUS F BANK GROUP OPIRATINI INi rtr A, SDIATtHNT F BANK LOANS AND IDA CREAgTS U (As of September 30 1968) Loan Fiscal Aa,unt