Turkey - Agricultural Sector Adjustment Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11381 PERFORMANCE AUDIT REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) NOVEMBER 20, 1992 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. EXCHANGE RATE (Turkish Liras per US dollar) 1985 1986 1987 1988 1989 1990 1991 522 675 857 1,422 2,122 2,609 4,172 ABBREVIATIONS APK MAFRA's Planning, Research and Coordination Bureau ASAL Agricultural Sector Adjustment Loan DSI State Hydraulics Works Agency (within the Ministry of Public Works) ED Executive Director EEC European Economic Community EPC Effective Protection Coefficient GDP Gross Domestic Product GDRS General Directorate of Rural Services, within MAFRA ICB International Competitive Bidding IM Initiating Memorandum IMF International Monetary Fund MAFRA Ministry of Agriculture, Forestry and Rural Affairs OECD Organization for Economic Cooperation and Development OED Operations Evaluation Department PIP Public Investment Program PAR Performance Audit Report SAL Structural Adjustment Loan SAR Staff Appraisal Report SASP Statement of Agricultural Sector Policy SECAL Sector Adjustment Loan SEE State Economic Enterprise SPO State Planning Organization, within the Prime Ministry TIGEM Agricultural Enterprises of Turkey, and SEE TOR Terms of Reference TZDK Agricultural Supply Organization of Turkey, a SEE GOVERNMENT OF TURKEY, FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation November 24, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Turkey Azricultural Sector Adjustment Loan (Loan 2585-TU) Attached, for information, is a copy of a report entitled "Performance Audit Report on Turkey - Agricultural Sector Adjustment Loan (Loan 2585-TU)" prepared by the Operations Evaluation Department. Attachment 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.  FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) TABLE OF CONTENTS Page No. PREFACE .. i BASIC DATA SHEET ...................................................i EVALUATION SUMMARY ............................................... v I. INTRODUCTION From Self-Sufficiency to Structural Adjustment .......................... 1 Adjustment and Agriculture ......................................... 2 II. PROJECT DESIGN AND CONTENT Evolution ...................................................... 3 General Design .............................................. 4 Reform of the Agricultural State Economic Enterprises ................ 4 Irrigation ................................................... 5 Agricultural Credit Interest Rates ................................. 5 Fertilizer Subsidy and Counterpart Funds ........................... 5 Monitoring of Implementation ................................... 6 Rationale for the Size of Loan ................................... 6 Negotiations ................................................ 7 Board Presentation ............................................ 7 Final Content...................................................8 Agricultural Inputs Pricing and Distribution..........................8 Irrigation and Drainage Investment Program..........................8 Technical Support Services......................................8 Sector Planning and Monitoring...................................8 Second Tranche Release........................................9 Objectives .................................................10 Procurement................................................ 10 III. PROJECT IMPLEMENTATION First Tranche.................................................. 10 Second Tranche................................................ 12 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. IV. FINDINGS, ISSUES AND LESSONS Findings ........................................................ 14 Im pact ..................................................... 14 R ating ..................................................... 15 Sustainability ............................................... 16 Issues ....................................................... 16 Price Distortions ............................................. 16 Public Investment Program ...................................... 18 Reform of the State Economic Enterprises .......................... 18 Tranche Release ............................................. 19 Institutional Development in Adjustment Operations .................. 19 Ownership .................................................. 20 Procurem ent ................................................. 21 Size of the Loan ............................................. 21 Lessons ...................................................... 21 Removing Price Distortions ..................................... 21 Rationale for the Size of Operations............................... 22 Ow nership .................................................. 22 -1- PERFORMANCE AUDIT REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) PREFACE This is a Performance Audit Report (PAR) on the Turkish Agricultural Sector Adjustment Loan (ASAL) in the amount of US$300 million equivalent with the objective of supporting policy reform in the agricultural sector and of reducing the imbalance in Turkey's external accounts. The loan was approved on June 18, 1985 and became effective on August 9, 1985. The second tranche of US$100 million equivalent was released on February 4, 1987, seven months later than anticipated. The loan closing date was extended from December 31, 1987 to June 30, 1989. Accounts were closed on May 15, 1990, and the undisbursed balance of US$49.8 million equivalent was cancelled. The PAR, prepared by the Operations Evaluation Department is based on the Project Completion Report (PCR)y prepared by the former Europe, Middle East and North Africa Regional Office, the Staff Appraisal Reporty, the President's Reporty, the loan documents, the transcript of the Executive Directors' Meeting at which the loan was considered, on a review of Bank files, sector and economic reports and on discussions with Bank staff. An OED Mission visited Turkey in June, 1992. It discussed the effectiveness of the loan with the Treasury in the Prime Ministry; the State Planning Organization; the Ministry of Agriculture's Planning Research and Coordination Bureau, General Directorate of Rural Services, Agricultural Supply Organization of Turkey, and General Directorate of Agricultural Enterprises; and the State Hydraulics Works Agency within the Ministry of Public Works. While in Turkey, the Mission also discussed the loan with donors, contractors, and academics either involved in its implementation or knowledgeable concerning it. The cooperation and valuable assistance of those interviewed is acknowledged in the preparation of this report. The Project Completion Report provides a thorough, highly perceptive, and well documented account of the experience with the loan. The PAR builds on this account, but goes beyond it in the diagnosis of what went wrong and in offering "lessons" for resolving several problems which the Turkey experience illustrates and which are still widespread. Copies of the draft PAR were sent to the relevant Government officials for comment, but none were received. Project Completion Report: Agricultural Sector Adjustment Loan (Ln. 2585-TU), Report No. 10025, October 25, 1991. Staff Appraisal Report: Agricultural Sector Adjustment Loan (Ln. 2585-TU), Report No. 5576-TU, May 22, 1985. President's Report: Agricultural Sector Adjustment Loan (Ln. 2585-TU), Report No. P-4097-TU, May 24,1985. 少 - iii - PERFORMANCE AUDIT REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TUR) BASIC DATA SHEET TOTALS Original Loan Amount: US$300.0 million equivalent Disbursed: US$250.2 million equivalent Cancelled: US$49.8. million equivalent CUMULATTVE LOAN DISBURSEMEM (US$millions equivalent) FY86 FY87 FY88 FY89 FY90 Planned 200.0 300.0 300.0 300.0 300.0 Actual 94.3 133.5 239.5 250.0 250.2 Actual as % of Planned 47 45 80 83 83 PROJECT DATES Original Plan Date Actual Date Initiating Memorandum October 2, 1984 Negotiations Completed May 11, 1985 Letter of Development Policy Received May 21, 1985 Board Approval June 18, 1985 Loan Agreement Signed June 27, 1985 Effectiveness September 25, 1985 August 9, 1985 Second Tranche ReLease June 30, 1986 February 4, 1987 Extension of Closing Date to June 30, 1988 December 31, 1987 Extension of Closing Date to June 30, 1989 July 21, 1988 Loan Closing December 31, 1987 June 30, 1989 Accounts Closed May 15, 1990 - Iv - DISBURSEMENTS BY COMPONENTS (US$millions) Original Plan Actual 1. Imported Seeds 20.0 13.9 2. Seed Multiplication and Processing Equipment 5.4 6.5 3. (a) Imported Fertilizer 152.4 123.3 (b) Imported Fertilizer Raw Materials --- 5.0 4. Irrigation Operation and Maintenance Equipment 111.0 94.3 5. (a) Computer Hardware, Software and Communication Equipment 2.7 0.6 (b) Artificial Insemination Equipment and Materials --- 0.4 6. Training 2.3 1.5 7. Consultants Services 6.2 5.1 Subtotal 300.0 250.6 Less Cross Currency Gains on Special Account --- 0.4 Total 300.0 250.2 STAFF INPUTS (staff weeks) FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 TOTAL Preparation 1.6 68.3 193.0 262.9 Appraisal 121.8 121.8 Negotiations 25.3 25.3 Supervision _ 0.3 35.2 110.3 72.1 45.9 8.1 271.9 TOTAL 1.6 68.3 340.4 35.2 110.3 72.1 45.9 8.1 681.9 MISSION DATA No. of Staff Staff Date of Performance Month/Year Weeks Persons Weeks Report Rating Identification 8/83 2 4 8 9/83 Preparation 5-7/84 8 12 40 8/6/84 Post-Preparation 9/84 4 20 60 10/84 Appraisal 11-12/84 3 11 18 5/22/85 Post-Appraisal 2/85 4 11 35 2/28/85- Supervision 1 11/85 3 2 6 11/22/85Y 2 Supervision 2 6-7/86 2 9 18 7/30/86 2 Supervision 3 9-10/86 4 7 28 11/12/86 2 Supervision 4 4/87 3 4 10 6/26/87 3 Supervision 5 1-2/88 1 2 2 3/16/88 3 Supervision 6 4-5/88 1 2 2 6/24/88 2 Supervision 7 6/89 1 2 2 8/18/89 4 Supervision 8 6/90 1 2 2 7/30/90 4 Y Date of Aide Memoire (BTO report not found). PERFORMANCE AUDIT REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) A program of reforms is underway in Turkey to re-attain historical growth rates in the agricultural sector, under conditions of markedly reduced subsidization and greater exposure to market forces. (From the ASAL Preparation Mission, July 1984) While there have been...achievements under this loan... overall accomplishments must be considered disappointing. Progress had been good through 1986 in reducing agricultural subsidies, but most subsidies are now at or above the level prevailing prior to ASAL. (From the covering memo of the supervision report, August 1989.) EVALUATION SUMMARY Introduction reforms included, but unachieved, in the SALs. The first involved moving from highly subsi- 1. In 1985, after five structural adjustment dized fertilizer distribution by a public loans (SALs), Turkey was an adjustment monopoly, the Agricultural Supply Organi- success story. A series of trade and fiscal zation of Turkey (TZDK), to an unsubsidized, reforms had helped move the Turkish competitive marketing system. The second, economy from its traditional import-substi- was the elimination of subsidized agricultural tution stance with strong autarkic elements credit. The loan also included several and heavy reliance on public production, to a elements requiring substantial institutional more market-oriented economy, better inte- development. There was to be a master plan grated into the worldwide division of labor. plus its implementation to improve resource During the SAL period, 1980-85, the economy allocation in the key irrigation subsector; key, grew rapidly, fuelled by export growth of more in that it accounted for two thirds of public than 11 percent per year. Hence, by 1984, the investment in agriculture and was capable of Bank had decided to change direction and high returns. But political influence had led to concentrate future adjustment lending in a portfolio with many low-return projects Turkey on key sectors. Agriculture was the whose implementation dragged out, on aver- first candidate, with nearly half the population, age, to fourteen years. In addition the failure a sizeable share of exports, and good potential to include adequate drainage in completed for growth, checked to a degree by public systems was greatly reducing their productivity. policies. To improve on this situation, however, re- quired time-consuming, and difficult changes in Project Design organization of two government services DSI, the very large and powerful state irrigation 2. The ASAL (Agricultural Sector development authority, and GDRS, the Adjustment Loan) took over two important General Directorate for Rural Services, which - vi - was responsible for on-farm irtigation Government's intention to carry out the improvements; e.g., small canals, subsurface reform program (paragraph 2.16, footnote 21). drains, field-leveling, and access roads. The It served as the rationale for the loan and its loan also included improvement of the conditionality. The size of the loan was management and operation of TZDK, which rationalized in terms of its contribution to was going to experience very serious deficits covering part of the continuing foreign once its monopoly was broken and fertilizer exchange gap. distribution was liberalized. Further, the loan included a management improvement program 5. With hindsight, certain difficulties for TIGEM, a parastatal conglomerate of 38 surfaced during the negotiation stage that state farms, responsible for cultivation of over pointed to serious underlying problems which 370,000 hectares, inter alia to continually were to prove insoluble. Before negotiations, renew seeds for wheat and other self- the Government sent a telex to the President pollinating crops. Finally, the ASAL had a of the Bank in a last attempt to get an component to develop a capacity for program- operation similar to a SAL, rather than an ming within the Ministry of Agriculture, plus a operation with complex sector documentation, review of the way research and extension were and conditionality. The telex concluded with organized and operated. "the Bank's present approach could lead the Turkish Government to take a decision of not 3. Reform of the eight agricultural state accepting the ASAL at the end of negoti- economic enterprises (SEEs), including TZDK ations." In reply, the regional vice president and TIGEM, was considered during prepa- emphasized the Bank's flexibility and his ration, although it never became a central confidence that shared objectives could be issue. SEE privatization was also considered articulated to ensure mutual satisfaction. But at the meeting to review the yellow-cover loan there was no change in the negotiation documents. At negotiations, Government package. During negotiations the Government successfully opposed enterprise privatization in could not agree to a dated covenant for the the conditionality as premature, and likely to intermediate steps in phasing out the fertilizer engender overwhelming opposition within subsidy. The solution to this was a satis- Turkey. So, rather than privatization, the factory-progress condition for tranche release ASAL involved an attempt to improve the and a Bank side-letter defining criteria for operation of several SEEs but actually satisfactory progress. strengthened them by financing their imports of inputs, and equipment. Implementation 4. Much of the reform program was to be 6. The ASAL became effective in August completed during the first-tranche, for which 1985. From the beginning compliance proved US$200 million equivalent were programmed. difficult. Elimination of fertilizer subsidies and There was also a set of dated covenants and of subsidized interest rates for agro-credit was satisfactory-progress conditions for second a roller-coaster performance. As concerns tranche release (US$ 100 million equivalent). fertilizer, in 1986 Bank staff reported full Other than outlays for studies and technical government compliance. But only briefly. The assistance, procurement was to be for fertilizer, subsidy was increased in 1987; it decreased seeds, and irrigation equipment, all destined slowly in 1988; and was then increased again for the public sector, and all subject to precipitously in 1989. (The loan was not international competitive bidding (ICB). The closed until June 30, 1989). The interest rate policy letter reviewed recent reforms as they subsidy has a similar history. Today, both affected agriculture and indicated the subsidies are intact. The initial approach of -vi - the master-plan for irrigation development was 5 percentage points would have meant aggre- deemed unacceptable to the Bank and DSI gate savings of over $33 million per year. (See continued, by and large, its practice of paragraph 4.2.) If one compares this to the spreading its development operations over a total disbursement under the loan of $250 large number of slowly implementing projects. million equivalent, the "quasi rate of return" The studies and technical assistance to on the loan to this change would have improve performance of the fertilizer exceeded 13 percent. distribution monopoly (TZDK), of the irrigation development authority (DSI) cum 9. Rating. Execution of the remaining GDRS (the rural development authority), and measures was unsatisfactory (paragraph 4.3). of the newly formed seeds development Consequently, the project rating has to be organization (TIGEM) became exercises in unsatisfactory. This confirms the earlier futility. They were carried out late, and most unsatisfactory rating based on OED's initial of their recommendations were shelved. review of the PCR. Moreover, some of the recommendations were clearly unsatisfactory. For example, the 10. Sustainability. Liberalization of management improvement study for TIGEM fertilizer distribution is a clear success and will recommended re-establishing seed subsidies not be reversed. The need for adequate and restricting seed imports to avoid excessive drainage for irrigation systems is now widely numbers of new seed varieties. recognized in Turkey, and investments to improve drainage are underway. There is a Findings better appreciation among Turkish decision makers of the importance of good economic 7. Impact. One very important objective returns to irrigation investment. But the was achieved in 1986: the elimination of the Turkish Government, and perhaps a majority inefficient fertilizer distribution monopoly. By of the Turkish population, apparently continue 1990, 79 percent of fertilizer was distributed by to support subsidies for fertilizer and private firms. The competition which resulted agricultural credit. They continue to consume improved farmers' access to fertilizer, a large amount of fiscal resources. encouraged the introduction of new products and reduced overstocking. Given the division Issues within the Government between those op- posed and those supporting elimination of the 11. Removing Price Distortions. As subsidy, it is possible that the Bank's partici- concerns prices, the operation was biassed pation tipped the balance of forces in favor of against agriculture. The ASAL ignored the liberalization. Without the ASAL, this reform Government Grain Board which kept prices on may not have occurred. 13 agricultural commodities below border levels. Export taxes and restrictions on export 8. The economic impact of the reform is of food crops were also ignored. Yet agri- considerable. The Staff Appraisal Report culture was more heavily taxed than other (SAR) indicated the shortcomings of TZDK's sectors. The weighted-average effective distribution: excessive inventories, excessive protection coefficient (EPC) for major distribution costs, poor response to cost-saving agricultural products was 76 percent of the opportunities offered by high-analysis fertil- border priceY In manufacturing the weighted izers in transport, packaging, and warehousing. EPC was 119 percent. On a border price The SAR estimated cost reductions of up to base, agriculture was getting about 64 percent US$50 million annually as feasible. In 1983 a of the prices manufacturing got. Achievement reduction in the average distribution margin of of the price adjustment measures in the ASAL - viii - would have turned the terms of trade even 14. Institutional Development in further against agriculture. Adjustment Operations. The Bank under- estimated the problems involved in achieving 12. Reform of the State Economic the institutional developments under the Enterprises. The parastatal reform track ASAL Political problems arose because followed in the ASAL has turned out to be a TIGEM, GDRS, TDZK, and DSI were op- dead-end. The ASAL was designed to im- posed to most of the measures concerning prove performance of four parastatals in them, while the central authorities, as agriculture: TIGEM (seed production); DSI represented by State Planning Organization (irrigation development); GDRS (on-farm and Treasury, did not force their compliance. irrigation development); and TZDK (fertilizer As a result, the studies and other analytical distribution). Reflecting the Bank's approach work were carried out with substantial delay. to parastatal reform in the early 1980's, it Some were of poor quality. Recommendations attempted to set up management improvement were frequently ignored. Further, the insti- programs and provide additional training and tutional and technical problems in drainage equipment. The four organizations are still were not solved and contributed to the failure fully in the public domain and continue to to move forward on the irrigation reform. have serious financial and other problems. (See paragraph 4.13.) Additional measures under the ASAL could have involved contracting out to the private 15. Government Commitment. The sector for civil works, and for seed production, Government's commitment waned as imple- and encouraging private sector fertilizer and mentation proceeded. The national elections seed imports using ASAL finance. The at the end of 1987 greatly weakened the hand possibility of implementing these measures of those bent on reform. The agricultural would have been worth exploring during the authorities successfully resisted the proposed identification and preparation of the loan. reform measures. If Bank staff had been able Obviously, privatization would have been to focus on political developments in Turkey, preferred, but presumably was not feasible. a more feasible program might have been pos- sible. Or, cancellation might have come 13. Tranche ReleaseY Tranche release in earlier. February, 1987 was probably premature, for three reasons. There was little need for it. At 16. Rationale for the Size of Loan. The the end of June, 1987, US$116 million Bank's justification of the size of loan in the equivalent of the US$200 million equivalent in Initiating Memorandum, SAR and other rele- the first tranche were still undisbursed. vant material did not go beyond affirming in Second, the Government was stumbling badly one sentence why a loan of US$300 million in carrying out the measures to be completed equivalent was warranted. This PAR showed before tranche release. (See paragraph 3.4) this amount to be justified. But documen- The Core Program for irrigation drainage, tation was unsatisfactory. which was to be executed using equipment brought in under ASAL, had still not been set up. Third, elections were scheduled for Lessons November 1987, with rejection of much of the ASAL as a possible outcome, as in fact 17. Removing Price Distortions. To avoid occurred. A more patient development insti- mistakes leading to poor overall resource tution might have adopted a wait-and-see allocation, it is still worth repeating that attitude, and might have canceled the loan adjustment operations concentrating on agri- before releasing the second tranche. culture need to consider the entire price -lx - system. The temptation to see a sector central authorities. It probably would be wiser adjustment credit as a de facto solution to to be less active in writing these documents. fiscal problems should be avoided. Piecemeal They certainly should not be written early in reform can lead to greater distortion than no the preparation period. These changes would reform. promote the goal of a full exploration of all possible solutions to the issues being covered 18. Ownership. As discussed in OED's before alternatives are in effect excluded from Second SAL/SECAL Overview (see p.22) consideration because of the need to negotiate failure of the borrower to "own" the reforms a draft document. This is a grey area. It is explains many failures of adjustment not always clear whether a collaborative Bank- operations. As in the Turkey ASAL, early on, borrower effort is underway, as was apparently there is an assessment of whether political the case in Turkey, or whether the Bank is commitment suffices to warrant the adjustment imposing its own agenda. Greater reticence by operation. This is usually ad hoc, in part staff in developing policy letters and greater because of the Bank's historical stance that a emphasis on considerations of alternatives borrower's politics should not be considered in would lead to increased ownership, more assessing credit-worthiness. So the political sustainable adjustment programs, and fewer assessments are mostly informal and escape program failures. scrutiny during the review process. The lack of attention to these assessments also in effect 20. Rationale for the Size of Operations. sustains the common judgment among the In contrast to the Turkey ASAL, the determi- Bank's assessors that extended political analysis nation of the size of such operations should be can give no better results than the ad hoc addressed carefully. Apparently, it is common approach. The result has been to frequently to set the size of adjustment operations with overestimate the degree of ownership. little probing as to the rationale for the loan Greater care in political assessments is amount at the various reviews prior to counseled. negotiations. This may be believed unnecessary since the aggregate lending 19. One possible change involves the letter program has been fully discussed in another of sector development policy. A sign of context. It is desirable to include in the ownership is the degree to which the country Initiating Memorandum and the President's writes its own letter. Nevertheless, as is Memorandum an explicit justification of the common practice in adjustment lending, a size of the proposed operation, just as in Bank staff member wrote the policy letter for investment operations and for the same the Turkey ASAL in collaboration with the reasons. EPC is defined as the ratio of domestic value added to the equivalent international value added. Zero taxation implies an EPC of 100 percent. Protection increases it above 100 percent. Paragraph 2.18 states the tranche release conditions.  PERFORMANCE AUDIT REPORT TURKEY AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2585-TU) I. INTRODUCTION 1.1 From Self-Sufficiency to Structural Adjustment. Through the 1960s and early 1970s, Turkey's economy grew rapidly. By the end of the 1970s, however, heavy borrowing to counter the first oil shock, recession in the developed countries, and the cumulative shortcomings of dirigist import-substitution policies, led to economic and political crisis: the massive burden of external debt brought alarming deterioration in the country's external accounts; the increasing government deficit, financed by creating money, had caused high inflation; there was a critical shortage of imports and a critical rise in the number unemployed. The economic crisis coincided with increasing political instability. A reform-minded military junta took power in September 1980, although civilian rule was restored in 1983 with the introduction of a new constitution and general elections. 1.2 The new government embarked on a structural adjustment program in 1980, emphatically turning away from the traditional import-substitution strategy with strong autarchic elements such as quantitative import restrictions, heavy reliance on public production, and administered pricing. The new strategy was market-oriented, and designed to integrate Turkey into the world economy as the most promising route to rapid economic growth. It aimed at restoring price stability, international creditworthiness, and at generating a capacity for producing and selling in world markets. To this end it foresaw a new division of labor between public and private sectors. The latter would be primarily responsible for production. The state would concentrate on maintenance of security, provision of infrastructure, and management of an increasingly complex market economy. The state would also provide an environment propitious for investment and industrialization. The International Monetary Fund (IMF) and the World Bank vigorously supported the strategy, the latter through five structural adjustment loans (SALs) implemented over 1980-85. During this period, overvaluation ceased, many prices were liberalized, quantitative restrictions reduced, and financial markets became more liberal. As a result, over the same six years, the share of foreign trade in gross domestic product (GDP) rose from 19 percent to about 37 percent." In summary, the strategy led to rapid growth throughout the 1980s, based on the spectacular growth in exports-- mostly manufacturing increases but also some in agro-industry-- more efficient production resulting from the increasing market orientation, and a resurgence of both domestic and foreign investment in Turkey. By the mid-1980's Turkey was a big adjustment success story. By the end of the 1980s, it had integrated most of its economy into the international division of labor. 1.3 But the economic revolution was and is incomplete. Turkey's double-digit inflation persists notwithstanding a substantial concentration on the problem during the SAL period. Inflation OED., Report No. 7205, "Evaluation of Structural Adjustment Lending in Turkey, Program Performance Audit Report of the Fourth and Fifth Structural Adjustment Loans and Overview of SALS I-V," April 13, 1988, p. viii. This report provides a good statement of the adjustment process and the important role of the Bank in supporting and guiding it. -2- was one reason why the fertilizer subsidy, equivalent to about 1 percent of GDP in 1984, was an important issue in SALs IV and V and the agricultural sector adjustment loan (ASAL). Its recent increase to over 60 percent in 1991 fuelled by the deepening of electoral politics since 1987, is reducing the volume and efficiency of investment in a way which seriously threatens the growth of the economy. This failure results in large degree from another fundamental failure, namely to convert the state economic enterprises (SEEs) into viable economic organizations. During the SAL period (1980-85) the Bank stressed reforms to increase their productivity but also supported their privatization. But rather than contract, by 1986 the SEEs accounted for 20 percent of GNP, up from 15 percent in 1980Y With their subsidiaries the losses of the SEEs currently equal about three quarters of the central government deficit. 1.4 Adjustment and Agriculture. As sketched out below, the reforms undertaken during the SAL period also affected agriculture in that there was considerable liberalization and change in its orientation. But just as in the economy at large, after 1985 there was still great need for structural adjustment in the sector. And just as in the economy at large, political developments after 1985 checked the adjustment process as promoted in the ASAL. 1.5 Prior to the 1980s, a dirigiste Turkey stressed food self-sufficiency through heavily subsidized inputs, and guaranteed high producer prices. The domestic market was highly protected. Agriculture grew at 2.5 percent annually annum over 1960-70 Y, at the same rate as population. Growth of agricultural production accelerated through the first half of the 1970s, averaging 4.7 percent per year for 1972-75. It dropped to less than 1.5 percent for the remainder of the decade. Several factors explain the deterioration: the decreasing growth of aggregate demand throughout the economy, stagnating agricultural exports resulting from an overvalued exchange rate, poor returns to public investment in agriculture, and the constraints put on agro-marketing by the administration. During the SAL period (1980-85), however, agriculture recovered to grow at more than 3 percent per year.' 1.6 Through the SAL, several large but inefficient agricultural projects were removed from the public investment program. Livestock exports were liberalized. The system of support prices, mostly for food crops, insulated from the world economy and held below border prices, was modified by one of floor prices and the number of affected commodities reduced from 25 to 13. SALs IV and V also included conditionality to reduce interest-rate subsidies for agricultural lending, and to "phase out fertilizer subsidies over the next three years" [1983-85]. These last SALs also "envisaged specific measures" to liberalize the seed industry, particularly as concerns joint ventures with foreign firms, and to develop a "medium-term planning capability and set priorities" for research and extension services. Seed liberalization excepted, SALs IV and V, did not get these changes.Y So similar and more detailed measures concerning agricultural credit, fertilizer, research and the extension service Mosley, Harrison and Toye, Aid and Power, The World Bank and Policy-Based Lending, Volume 2, Routledge, (London, New York, 1991) p. 29. World Development Report 1980, p. 113. Derived from Turkish Government statistics. Seed policy liberalization has led to a dynamic private industry that includes a number of joint-venture seed companies with foreign firms. -3- were carried into the agricultural sector adjustment loan (ASAL)Y The novelty in the ASAL was the heavy concentration on irrigation issues. 1.7 During the SAL period, the state export monopolies were largely dismantled, both in industry and agriculture. Moreover the series of devaluations ipso facto significantly improved the international terms of trade for agriculture. Nevertheless, agricultural export earnings in constant dollars declined from 1982-87, in large measure because of declining world prices, but also because of the effects of export taxes and non-tariff barriers and other policies reducing export incentives. In contrast there has been a five-fold increase in the export value of processed agricultural products between 1980 and 1989, although they still represent a small part of total exports. Increased output of low-cost agricultural raw materials also played an important part in the rapid growth of textile and leather exports. 1.8 For Turkey, the 1980s mark a period of revolutionary change in policies and institutions, and of remarkable transformation of the economy. Key statistics document this: in 1980, agriculture accounted for 65 percent of merchandise exports, and manufacturing for 27 percent. By 1989, the percentages were reversed, 26 percent for agriculture and 66 for manufacturing. Agriculture's share in GDP also decreased from 21 percent in 1980 to 15 percent in 1989, notwithstanding annual agricultural growth at a respectable 3 percent over 1980-89. During the same period the country swung over from being in the majority rural, 53 percent in 1980, to 40 percent by 1989Y 1.9 During the second half of the ASAL disbursement period, that is after 1986, Turkey's farm economy became increasingly politicized as the competing parties made strong efforts to win agricultural voters. By 1992, Turkey had clearly swung over from the substantial taxation of agriculture in the early 1980's to substantial subsidization: irrigation water, fertilizer, seeds and credit, are all available at subsidized prices; output prices for wheat and other crops are now above border prices. In irrigation, in response to political imperatives, the Government has persisted in its policy of starting a large number of projects, which are slowly implemented rather than concentrate resources to rapidly complete a smaller number of promising undertakings. As the ensuing discussion shows, politicization of agriculture also is the leitmotif which explains why the ASAL went wrong. The ASAL reforms which appeared politically feasible at the outset proved increasingly unattainable as disbursement proceeded. II. PROJECT DESIGN: EVOLUTION AND FINAL CONTENT Evolution 2.1 In line with general Bank policy by mid-June 1983, during the discussion of the Country Program Paper, it was decided that the fifth SAL --effective July, 1984-- would be the last. Future Program Completion Report of the Fourth and Fifth Structural Adjustment Loans (Loans 2321-TU and 2441-TU), paragraphs 130, 44, and 45. World Development Reports 1983, and 1991, Annex Table, "Structure of Merchandise Exports." Derived from government statistics. -4- adjustment lending would take the form of SECAL's. As stated in the initial project brief, given the "advanced state of knowledge of the agriculture sector [an agricultural sector study was completed in June, 1983] it appeared to be a good first candidate." Work on the loan started with exploratory discussion with the Turkish Government in August 1983. Between these discussions and the appraisal mission in December, 1984 a debate ensued within the Bank on the form, content, and financing of the operation. As stated in the PCR: In view of the outstanding success of the Turkey SAL program, this loan was looked upon by some as a model to establish the "New Product of the Bank." This led to theological debates on issues such as whether there would be a separate Staff Appraisal Report or merely an expanded President's Report (as in SALs), the relative emphasis on the policy letter vis-a-vis covenants, and the advantages of positive versus negative lists. It also led to efforts to make the loan all encompassing. 2.2 General Design. Notwithstanding these tendencies, the content given to the operation in the draft Initiating Memorandum of May 1984, largely persisted to negotiations. The loan did concentrate on fertilizer distribution, and subsidies, rationalization of investment in irrigation, a review of agricultural research, and improvement of sector planning capability. Only the proposed rural infrastructure component was later dropped. The items to be financed under the loan were designed to complement these various reform measures. (See the basic data sheet.) 2.3 The ferment as concerns content and approach --both a staff appraisal report and a President's Memorandum were produced-- is reflected in mission reports, and the Bank's intramural discussion. Preparation over three fiscal years required 263 staff-weeks; there were 20 participants in the post-preparation mission. Much of this work had little impact on the final operation, although much of it has proved useful in preparing recent investment operations in irrigation development, and agricultural research. 2.4 The interaction within and with government was an important aspect of loan design. Early on, in 1983-84, the agricultural projects division attempted to design the project with the agricultural ministries and their parastatals. As it became clear that much of the program involved changes detrimental to organizational interests, be it elimination of subsidy or reducing and recasting budgets, powerful agricultural organizations swung over to opposition. Treasury in the Prime Ministry and the State Planning Office continued to be strongly supportive but communicated their concern that they needed active Bank assistance in carrying through the proposed reform program. Indeed, in Turkey today, most of the conditionality to improve agricultural institutions is perceived as the World Bank's program laid on a reluctant borrower. Consequently, rather than a consensual program involving the line ministries, the Bank took the lead in program design. It initially wrote and negotiated the basic loan document, the Statement of Agricultural Sector Policy (SASP), after discussion during several preparation missions, and absorbed the brunt of resistance from the agricultural community in negotiating the SASP. In other words, the Bank was encouraged to try and push through implementation of a program which the central ministries apparently were uncertain that they could deliver themselves. PCR, pp. 20 and 26. -5- 2.5 Reform of the Agricultural State Economic Enterprises. SEE reform was considered in many ways during preparation although it never became a central issue. For example, leasing and other approaches to privatization of the eight agricultural state economic enterprises were included in the early draft Statement of Agricultural Sector Policy (SASP) used in November, 1984 to guide the appraisal mission.- SEE privatization was also considered at the meeting to review the yellow- cover loan documents (April 1, 1985) including the draft Staff Appraisal Report which proposed that there be a substantial effort to privatize the agro-SEEs as part of the ASAL. The discussion at the review meeting concluded by opting for exploring the scope of privatization for the agricultural SEEs in the context of the proposed operation. At negotiations, however, the Government did "not wish to announce in advance which SEE's would be candidates for privatization...the proposal for a SEE privatization study under the ASAL" was dropped." The final, post-negotiation version of the SASP stipulated that public-enterprise reforms to be addressed in the ASAL be limited primarily to improving the efficiency of the public fertilizer distribution company (TZDK), the seed conglomerate (TIGEM), and the public irrigation development authority (DSI). Rather than divestiture, the ASAL was to finance substantial import of material and equipment to strengthen these three parastatals. 2.6 Irrigation. Instead of a full review of the agricultural public investment program (PIP), the Bank decided to concentrate 6n irrigation. Earlier sector work and loan preparation had indicated a very promising sub-sector that accounted for about two-thirds of public investment in agriculture, but which was also characterized by poor resource allocation: the Government had been increasing both the number of irrigation projects underway and also increasing the time needed for completion (about 14 years on average in 1985) and therefore, increasing the resources being tied up in non-productive undertakings. Moreover, in many cases the projects could not be justified economically, even if they had been rapidly implemented. And even after the basic works had been completed, the lack of complementary on-farm development, such as completion of the smallest irrigation canals and drainage works, was seriously reducing the returns to irrigation investment. The payoff from putting in drainage in reducing water-logging and salinization of existing works was expected to be very high. The measures to provide these improvements became known as the "Core Program," and its design was included under the ASAL, as well as the development of a "Master Plan" for the realization of new and ongoing irrigation schemes. 2.7 Agricultural Credit Interest Rates. The interest rate issue also loomed large at the yellow-cover review meeting, as it would throughout the life of the operation. At the meeting it was noted that "No progress had been made on the interest rate issue in connection with the SAL V tranche review." Although the loan agreement talked only of satisfactory progress as a tranche release condition,2 underlying this was a side letter of the Bank's agricultural credit loan then under implementation that spelled out the conditions of such progress. 2.8 Fertilizer Subsidy and Counterpart Funds. The fertilizer subsidy came in for intensive scrutiny. In January 1985, at the decision meeting to clear the departure of the appraisal mission, it was noted that elimination of the fertilizer subsidy would probably double the retail price, and it was suggested that counterpart generated by the ASAL be reserved to finance the resulting increased need for credit of farmers wishing to buy fertilizer. But this proposal was considered unmonitorable. Internal Bank Memo, Nov 29, 1984, TOR for Appraisal Mission. Internal Bank Memo, May 16, 1985, paragraph 10. Memo to files, April 3, 1985. -6- Instead, the decision meeting concluded that "a general requirement that counterpart funds should be earmarked for productive purposes in the agricultural sector would be appropriate, using language similar to that of the SAL's."!- This was the only reference to counterpart funds which the audit found in the files. As is usual in adjustment operations, no attention was directed toward the impact of spending or sterilizing the local currency generated under the ASAL, nor did supervision missions review this aspect of procurement. 2.9 Monitoring of Implementation. The SAR foresaw monitoring progress under the loan through an implementation schedule using bar-charts and impact monitoring according to a set of performance indicators. These included measures of crop production, input use, agro-exports, credit, and summary performance ratios, matched by a set of corresponding time-bound projections of what would be expected under the adjustment program. The Ministry of Agriculture's APK (Planning, Research and Coordination Bureau) was to be responsible for keeping the indicators up-to-date and for completing a progress report prior to tranche release and the PCR. The ASAL also provided support to APK in technical assistance and training. At the suggestion of Bank management the set of indicators was dropped from APK's work-plan before negotiations.-' Nevertheless they were carried as an annex to the first full supervision mission in June, 1986, to be brought up to date by MAFRA (Ministry of Agriculture, Forestry and Rural Affafts). The Audit found no further references to these indicators in the project files, although keeping the indicators up-to-date on variables expected to be affected by the project--interest rates, fertilizers subsidies, fertilizer distribution margins, etc.--is clearly a good idea. To the present the Bank does not usually build into agricultural adjustment operations a requirement for systematic monitoring of relevant performance indicators. To do so would facilitate supervision and the associated implementation dialogue. 2.10 Rationale for the Size of Loan. The size of the loan was decided with little controversy. The Loan Committee "noted that a justification for the size of the proposed loan linked more explicitly to performance criteria within the sector would be desirable."L" But reward-for- performance dropped out of consideration. The rationale was the need to cover an external payments gap. Government rescheduled its debt in 1980, while interest payments were capitalized through 1983. Repayment started in 1984 and accelerated in the "hump years" of 1985 and 1986. According to the Initiating Memorandum (October 2, 1984) the annual external resource gap was US$2 billion; while net imports of agro-inputs were US$790 million. The ASAL, it continues "would finance a portion of the agricultural import bill...a loan of US$300 million would appear appropriate to ensure adequate levels of agricultural imports while providing an incentive to pursue the program of reforms."- Three hundred million was also the usual size of SALs in Turkey: SALS II, III and IV were US$300, JS$304.5, and US$300.8 million equivalent respectively. In September, 1984, the Government had requested US$450 million equivalent for the ASAL. By appraisal in November, it had settled for the usual amount. Government officials also stress that a large loan reaffirmed the Bank's endorsement of the adjustment program, thus reassuring investors, local and foreign. The loan also presumably strengthened the position of the reform-minded faction in the Government to help carry the day in the inevitable political conflict involved in the realization of the adjustment program. 3/ Decision memorandum, January 31, 1985. 41 Internal memo, July 30, 1985, concerning meeting on Turkey ASAL of April 30, 1985. 1 Minutes of the Loan Committee Meeting, Nov. 7, '84, paragraph 6. 616 Initiating Memorandum, paragraph 15. -7- 2.11 Negotiations. The program was negotiated May 7-11, 1985, in Ankara rather than Washington, since it involved about three dozen government participants. In agriculture, apart from the Ministry per se, seven different organizations were involved. The Turkish authorities sent a telex to the President of the Bank on May 7 stating that "all Bank representatives have indicated to the Turkish Government that the sector loans will be a kind of continuation of the SALs, quick disbursable loans with a statement of sectoral policies and a simple loan documentation similar to the ones in SALs." But the Bank was now insisting on a very restrictive positive procurement list, while a complicated SASP, loan agreement and supplemental letters had to be negotiated. The telex concluded that "the Bank's present approach could lead the Turkish Government to take a decision of not accepting the ASAL at the end of negotiations." In reply, the regional vice president emphasized the flexibility in the Bank's approach, concluding with "I am confident that our shared objectives can be articulated to our respective satisfaction." 2.12 Removal of the fertilizer subsidy blocked the negotiations. The Bank insisted on a dated covenant stipulating intermediate steps in phasing out the subsidy. The Government would only agree to phase it out by the end of 1988, with a satisfactory-progress condition for tranche release. The solution was a side letter to be written by the Bank defining satisfactory progress needed for tranche release. The Government also committed itself to announce an increase in the retail fertilizer price as a condition of Board presentation. The loan package went to the Board in June, 1985, before the price increase, on condition that it be withdrawn if the increase was not announced as agreed. The Bank settled for a telephone call from the Government promising the increase in July or August. (The increase took place in July.) These early difficulties were symptomatic. Throughout the implementation period dealing with the fertilizer subsidy was a major challenge for both Bank staff and management. 2.13 The biggest change at negotiations involved the rural infrastructure component (proposed ASAL funding of US$100 million equivalent) to develop rural roads, water-supply and electrification. The Government decided to drop the component!' after it received substantial assistance for rural infrastructure from Japanese aid. As concerns rural roads (US$75 million equivalent), it elected to finance these through supplier credits and to avoid Bank conditionality. 2.14 Board Presentation. Board presentation, on June 18, 1985, came near the conclusion of Turkey's very successful period of adjustment: five SALS had led to liberalization, an unprecedented burgeoning of exports, and a prosperous growth rate, just under 5 percent, for 1980- 84. There was no doubt about the Government's commitment to adjustment. Its credibility with the Board was high. The staff presentation concentrated on agriculture, above all agriculture's flourishing new open-field and greenhouse exports of flowers, vegetables and other crops. The statistics were spectacular: between 1980 and 1984 exports had increased from US$2.9 billion to US$7.1 billion. Simultaneously, agro-industry exports had increased from US$200 million to US$800 million. The sense of the meeting was that more adjustment was needed, and quickly. One Executive Director (ED) was concerned that the two year disbursement period implied an implementation time which was "too leisurely," given the likelihood of a "big payoff." There was but a single dissonant note: an ED was concerned that in eliminating the fertilizer subsidy, cost-push inflation, higher living costs, 1/ Internal Bank memo, May 16, 1985. 1§ The official minutes of the negotiations note the date and place of negotiation. They consist entirely of correction of wording concerning Bank review of procurement contracts. -8- and "repercussions on the wage-problem" would follow. Management replied that high-cost fertilizer was a problem in many countries; fertilizer should be freely importable at international prices, insuring a low in-country price.322 Final Content 2.15 To describe the reforms to which the government legally committed itself under the ASAL requires piecing together conditions and commitments found in several documents. As described in the President's Report (para 81) the policy adjustments foreseen in the ASAL were: Agricultural Inputs Pricing and Distribution (a) Fertilizer. Implement an action program to phase out the remaining retail subsidy, establishing a competitive wholesale distribution network, expand the retail distributive system through increased use of private retailers, and liberalize the distribution of credit to finance purchase of fertilizer. (b) Seeds. Implement actions to revise and implement the relevant seed laws and decrees with a view to improving seed selection, handling and pricing, and to encourage commercial seeds production. Irrigation and Drainage Investment Program Apply standard investment criteria to all new and ongoing irrigation subsector projects, improved programming and coordination, and implementation of an agreed Core Program to concentrate investment on the completion of high-return drainage works, on-farm development, and improved operation of completed schemes. Technical Support Services Decentralize and consolidate the budgeting and operation of research and extension; appoint national research and extension coordinators Sector Planning and Monitoring Strengthen the Ministry of Agriculture's Research, Planning and Coordination Department (APK) to improve sectoral policy formation, performance monitoring, and expenditures. Although the Board Meeting was harmonious, one ED's Office had discussed its misgivings with the project loan officer on June 14, wishing to know why parastatals were still playing such an important role in agriculture, despite the Governments stated policy of reducing their influence; and why TZDK was to be made more efficient, rather than letting it wither away following the liberalization of fertilizer distribution. -9- Essefitially the same ground was covered in the SASP, the primary rationale for the loan and its conditionality.2 2.16 All of the reforms included in the President's Reportly were covered as "particular covenants" in the loan agreement or second tranche release conditions. In the particular covenants the Government agreed inter alia to: - carry out the core program in irrigation and drainage, involving selection of works according to agreed on criteria between Government and the Bank; - prepare a management improvement action program by June 30, 1986 satisfactory to the Bank for TIGEM (the seeds-promotion and development parastatal) and TZDK (the parastatal fertilizer distribution monopoly); - by May, 1986, do a full-scale review of research concentrating on irrigation, mixed cropping and livestock farm-systems; - establish a management information system and computerized data banks at the ministry of agriculture. 2.17 Second tranche release. (US$100 million equivalent) required prior completion of six conditions also stipulated in the loan agreement: - satisfactory progress in retail fertilizer policy as outlined in the Program and the supplementary letter on fertilizer; - liberalized fertilizer distribution opened to fertilizer manufacturers, private wholesalers and retailers; - satisfactory progress in realizing the construction targets established in the Core Program on Irrigation and Drainage; - satisfactory progress in achieving positive real interest rates in the agricultural sector; - implementation of the management improvement program for TZDK; Turkey's Deputy Prime Minister forwarded the SASP to the Bank on May 21, 1985, two weeks after negotiations. In the SASP, Section 3.01, the "Government intends to extend and deepen the reforms in the agricultural sector with emphasis on (i) reducing producer subsidization while maintaining adequate incentives; (ii) further improvement in input distribution, marketing, and credit channels (concentrating on fertilizer but also including improved seeds); (iii) improved allocation of public investment in agriculture, particularly in irrigation (66% of government agricultural investment); (iv) strengthening MAFRA's research, extension, protection and disease control services; (v) increased infrastructure investment, with a higher priority in the 28 less developed provinces; and (vi) strengthening management, planning, policy analysis, and public expenditure programming in the sector." V Project design in the SAR differs in several minor particulars from what materialized in the loan. For example the SAR foresaw that MAFRA's APK would be responsible for "the conjoint programming, recording, and monitoring of all MAFRA's expenditures in the sector." (SAR para 7.13) This was not included in the project as negotiated. - 10 - - and finally the omnibus condition, satisfactory progress by the borrower in carrying out the Program. 2.18 Objectives. In its only reference to objectives, the loan agreement (paragraph 1) states that the objectives of the loan were to assist the Government "in the support of the Program" delineated in the SASP by "financing urgently needed imports and services required during [its] execution." Obviously, the objectives also included realization of the reform measures in the Program. The President's Report (paragraph 89) prioritized among these measures in stating that Turkey's agricultural performance is "sensitive to the pace of three major variables": trade policy to support the growth of agricultural exports; irrigation development; and applied agricultural research and extension. Explicit concern with "continuing trend improvement in macro-performance" which had been roundly discussed during the preparation phase was replaced by full concentration on agricultural issues. The fact that the loan was also designed to reduce the external payments gap is not mentioned in the loan agreement. 2.19 Procurement. The Turkish ASAL was based on a restrictive positive list, that held procurement entirely to the public sector while requiring international competitive bidding (ICB) for virtually the entire loan. During preparation, the Government had expected a negative list as in the SALs which preceded it. Bank management, however, decided on a positive list limited to certain agricultural inputs and equipment. Specifically, the loan proceeds were to finance fertilizer, irrigation and seed processing equipment, seeds; training and technical assistance for TZDK, TIGEM and ADK; equipment and software to start developing a management information system for the Ministry of Agriculture; and several studies, including the analysis to develop a master plan for a core program in irrigation development. The loan covered the ex-factory costs of equipment contracts won by local firms and 90 percent of costs of local consultant contracts. III. PROJECT IMPLEMENTATION 3.1 The chronicle which follows shows that project implementation was characterized by persistent overoptimism of the Bank and decreasing ownership of the Borrower. On four occasions over four years, the Government officially declared its intention to eliminate subsidies on agricultural credit and fertilizer. It never succeeded. The story and outcome is similar for irrigation and most other adjustment measures. First Tranche (August 9, 1985 - February 3, 1987) 3.2 The loan became effective on August 9, 1985. Based on discussions at the annual meetings, in October, 1985 a form 590 was prepared which noted that the main problems were slippage. Recruitment of all ASAL consultants was 6 to 9 months beyond schedule, and "tendering for DSI drainage equipment has slipped by 9 months." Further "the inability (or unwillingness) of the MAFRA to staff up the sector planning and monitoring activities for the ASAL and establish work programs are becoming major problems."' In contrast, due to the reduction in inflation, real positive interest rates were expected to be achieved by the end of 1986 while the fertilizer subsidy L2 Form 590, 10/24/85. - 11 - was being rapidly reduced and had been eliminated on urea and diammonium phosphate. The draft decree to open fertilizer distribution was under debate in the Council of Ministers. 3.3 The first supervision mission, November, 1985, piggy-backed on the supervision of two investment projects. It concentrated on moving forward the studies and technical assistance programs. The Bank had wanted to mount a full ASAL supervision mission in February, 1986, but Government advised delay until mid-1986 to avoid complicating its internal policy discussion on fertilizer distribution. That discussion concluded with a decree of liberalization enacted in June, 1986. During fiscal year (FY) 1986 the first difficulties with ICB procurement also surfaced as the Bank delayed procurement of fertilizer, seeds, and equipment because of inconsistencies with Bank procurement rules. The files contain an abundant correspondence of objections, complaints, and clarifications concerning Bank ICB regulations. The slippage on contracting the technical assistants and selecting firms to carry out the studies increased. 3.4 The second supervision mission, in June, 1986, ten months after the date of effectiveness, documented liberalization of fertilizer distribution, the reduction of the fertilizer subsidy, and the elimination of negative interest rates as nominal rates rose above the declining inflation rate. Implementation of the other measures was problematic: - rather than re-allocation of irrigation investment to complete high pay-off projects, many new projects had been added to the 1986 budget, bringing the portfolio to 112 projects. The consultants to establish the master plan in irrigation had not been recruited. - the Core Program of GDRS (the Ministry of Agriculture's rural development organization responsible for developing farm-level irrigation) primarily to address on- farm poor drainage and soil salinization was delayed due to failure to recruit consultants. - neither MAFRA's fertilizer monitoring unit, nor the planning and monitoring unit were staffed. - the consultants to set up the management improvement studies for TIGEM and TZDK had not been hired. - terms of reference for the review of the management and organization of agricultural research were still being written. - the national extension-service coordinator had not been appointed. - rather than 10 percent only 7 percent of the public investment budget for 1987 was to be directed to agriculture. 3.5 Notwithstanding these difficulties, the mission gave the project a 2 rating, an outcome no doubt due to the fact that the impressive progress on interest rates, and fertilizer was of the highest priority: finally, two key policy goals, whose achievement had been frustrated in several SALs, were being realized. Moreover, the delays with consultants and studies could be eliminated. Indeed, the mission indicated in detail the steps and materials needed for second tranche release, including - 12 - an annotated outline of the required progress report. The mission to concentrate on tranche-release per se was scheduled for September, 1986. 3.6 The tranche-release mission ended on October 24, 1986. It found that, in addition to compliance on fertilizer and interest rates, "progress is being made in developing the management improvement study for TZDK and for the Core Program of drainage...... but all items dependent upon hiring consultants are about a year behind schedule."' Nevertheless the invitations to bid for the consultants to set up the Core Program in irrigation were expected to be issued shortly. DSI, however, had not yet started to procure the equipment destined to support the Core Program, although bids had been tendered, and it was expected that all contracts would have been awarded before mid January, 1987. "Thus the prerequisites for initiating the Core Program are likely to be achieved within the next few months." In its aide memoire, the mission noted that DSI took 14 years to carry out projects which would normally be completed in 5 years. But "the mission was pleased to note that no new irrigation projects were accepted in the 1987 budget and that only token allocations were given to 33 out of the 36 new projects accepted in 1986." Second Tranche (February 4, 1987 - June 30, 1989) 3.7 Following the tranche-release mission, and measures taken thereafter, the second tranche (US$100 million equivalent) was released on February 4, 1987. Senior Management of the Bank presented the case for release to the Board, concluding that: The fertilizer reform program far exceeds what we had expected at this stage and has had significant impact in reducing costs to farmers and the burden of subsidies to the Government. Positive real agricultural interest rates have been achieved. The overall agricultural reform program remains on track. While progress in implementing the Core Program for Irrigation and Drainage and in initiating technical assistance components of the program is behind schedule, recent developments are sufficient to give confidence that these loan objectives will be met. 3.8 On February 7, 1987, the dated covenants in the legal documents were amended to permit delays of up to 18 months in compliance. 3.9 Procurement continued to drag, due to problems in bid evaluation, preparation of bidding documents and technical specifications. The bidding process for the irrigation equipment to be brought in under the loan (actual disbursement of US$94 million equivalent) continued after tranche release. Similar procurement problems then proved very time-consuming particularly as concerns the bid-evaluations of DSI so that the equipment did not start arriving until the end of 1988. At the end of June, 1987 cumulative disbursements were US$83.5 million equivalent, excluding the US$50 million equivalent in the revolving fund.L1 By this time, in an attempt to attract private operators, the loan had been amended by expanding the positive list to include procurement of raw materials used in fertilizer manufacture. By June, 1988, the loan agreement had been again amended Supervision Report, Nov. 12, 1986. The Core Program would, mr alia include a revision of cost estimates, review of designs, and recalculation of economic benefits. 241 Letter from EMENA, Country Programs II, to Turkish Government, June 26, 1987, paragraph 6. - 13 - to permit private importers to import fertilizers and fertilizer feed-stocks up to a value of US$5 million equivalent on the basis of three price quotations. Even this "international shopping" requirement proved too onerous for a private sector which had ready access to other sources of foreign exchange. Little private procurement occurred under the loan. After four years of disbursement, the Turkish lira was a convertible currency. The remaining US$50 million equivalent of the ASAL were canceled when the accounts were closed in May, 1990. 3.10 In early April, 1987, two months after tranche-release, the Agriculture Division had started to engage a consultant for work on preparation of ASAL II. The supervision mission of April 11-27, 1987, showed this to be ill-timed. The subsidy roller-coaster had reversed direction. The Mission found that effective October 1, 1986 the interest rate for fertilizer credit had been reduced by 12 percentage points, and was once again below the rate of inflation. It discovered that there was a subsidy for animal feed of 20 percent, equivalent to US$117 million per year. The government was subsidizing 50 percent of the costs of production of hybrid soya, maize and sunflower seeds. New subsidies had been introduced for milk, pesticides, and veterinary medicines. The mission estimated gross subsidies to the agricultural sector at 4 percent of agricultural GDP in 1986, and estimated them at 8 percent for 1987.11. The fertilizer subsidy had been increased to about 34 percent of retail value in January, 1987, against a target subsidy of 15 percent to be achieved by June, 1987. The GDRS's drainage and on-farm programs were not going well. The Mission noted that "Drainage and on-farm work appears to be relegated to a subordinate role, in favor of other types of rural infrastructure." 3.11 These changes may have been due to the combined effect of a bad crop year in 1987, and to preparations for the return of open competitive political parties in the elections of November 1987. In earlier elections the military had restricted the parties allowed to participate. At the Bank's annual meeting in 1987 the Turkish authorities stated that following elections the subsidies would be decreased. Consequently the Bank agreed to extend the Closing Date from the end of 1987 to June 30, 1988, "to allow time, following the elections and expected new cabinet appointments to reach revised agreements on those portions of the ASAL policy reform program which could no longer be achieved by the originally scheduled dates."-' 3.12 The supervision mission of April/May 1988 found that "post election performance, under the major areas of concern, fertilizer subsidies and agricultural interest rates, has been positive." The fertilizer price subsidy had "declined from 34 percent in 1987 to 24 percent in early 1988." Interest rates on loans to farmers "increased by 7 to 11 points and now range from 29-45 percent (cf. 22-35 percent in 1987)." Although inflation in 1987 exceeded 70 percent, it was expected to come down in 1988. (It actually remained close to 70 percent.) Progress had also been made on institutional issues. Consultants to make the various plans and other analyses were at work. Given these improvements, and the fact of substantial unfinished procurement, the mission recommended extending the Closing Date to June 30 1989, "provided that an acceptable new agreement can be reached on revised schedules for meeting interest and fertilizer subsidy reduction targets..." The ZY Supervision Mission Report, June 26, 1987, Annex 3, paragraph 29. Notwithstanding the high gross subsidies, net subsidies, calculated on a border-price basis, were negative during this period, given the taxes and restrictions on exports and output prices held below border values. See World Bank Report Mo. 7764-TU, "Turkey, Review of Agricultural Pricing and Trade Policies," March 30, 1990. PCR, paragraph 4.08. - 14 - mission suggested that positive interest rates could be attained by June 30, 1989 and unsubsidized fertilizer prices by December 31, 1989. Irrigation conditionality apparently drops out of the discussion at this point, probably because the Bank-funded Drainage and On-Farm Development Project (US$255 million equivalent, effective June 15, 1987) complemented the ASAL and helped accelerate implementation in that it was to set up and carry out the Core Program and develop the master plan for irrigation investments. 3.13 The supervision mission's recommendations carried the day. On July 14, 1988 the Bank received a letter from Turkey's Minister of State for Economic Affairs stating the Government's intention to adjust interest rates to positive real levels by mid-1989. This outcome appeared feasible to the Bank, since the Second Financial Sector Adjustment loan had a general positive-interest-rate condition for second tranche release. The Government stated its intention to hold the nominal fertilizer price constant while inflation and devaluation drove down the gap between it and the unsubsidized price. After consultation with Senior Management, the Closing Date was extended to June 30, 1989. In August 1988, the Government announced an increase in fertilizer subsidy levels. A further increase in April, 1989, raised the average net subsidy to 44 percent of the retail price, one percentage below the pre-ASAL level in May 1985. The entire interest rate structure became negative in 1989. Notwithstanding an undisbursed balance of US$49.8 million equivalent, the Closing Date was not extended a third time. IV. FINDINGS, ISSUES AND LESSONS Findings 4.1 Impact. The realization of the reform measures embodied in the SASP and the loan documents constituted the objectives of the loan. (Financing part of the external gap served these objectives. See paragraph 2.11.). In this definition, one important objective was achieved: the elimination of the inefficient fertilizer distribution monopoly in 1986. By 1990, 79 percent of fertilizer was distributed by private firms.U The competition which resulted improved farmers' access to fertilizer through private retailers, encouraged the introduction of new products and reduced overstocking. Moreover, given the division of power within the Government between those opposed and those for elimination of the subsidy, it is likely that the Bank's participation tipped the balance of forces in favor of liberalization. Without the ASAL, this reform may not have occurred. 4.2 Its economic impact is considerable. The SAR pointed out the shortcomings of the monopoly fertilizer distributor: excessive inventories and storage, excessive costs in allocating fertilizer to the consuming regions, poor response to cost-saving opportunities offered by high-analysis fertilizers in transport, packaging, handling and warehousing. The SAR also noted that "The preliminary results of a linear programming model...show that savings of up to US$50 million annually could be made through improvements on these various aspects."' Add to this that a competitive system, building on national consumption exceeding four million tons per year, is likely to be more responsive to farmers in providing products adapted to their needs and in developing new markets 2/ PCR, paragraph 5.02. M8/ SAR, paragraph 6.12 - 15 - in remote areas. Total fertilizer sold by TZDK in 1983 was 4.4 million tons. At an average dollar equivalent price in excess of US$150 per ton' the total market exceeded US$660 million. If liberalization reduced the average distribution margin by five percentage points, this would have meant aggregate savings of over US$33 million per year. Total disbursement under the loan was US$250 million. If the disbursement had been a total loss in terms of achieving other objectives, which of course it was not, the "quasi rate of return" to this policy change would have still exceeded 13 percent.2-' 4.3 Rating. Execution of the remaining measures was unsatisfactory. At project closing: - the fertilizer subsidy was still high; - interest rates on agricultural credit were still negative; - the irrigation master plan had been received, but could not be used for investment allocation because the DSI told the consultants that projects in implementation would be continued and need not be analyzed; most of the implementation of the Core Program for on-farm irrigation development was still in the future; - MAFRA's APK (the planning and coordinating department) was not evaluating or programming MAFRA's expenditures; - the completed management improvement study for TZDK was of very limited value because the consultants had been instructed by TZDK to take the existing organizational structure as given (Today TZDK's losses are high and its situation desperate. By 1991 it retained but 15 percent of the national fertilizer market, but its physical plant and work force have been held at the pre-liberalization level); - finally, neither the seeds law nor the seed-industry development plan foreseen in the SASP (paragraph 5.02) had been established. Since most objectives were not attained, the rating has to be that of an unsatisfactory project. This confirms the earlier unsatisfactory rating based on review of the PCR.2- 4.4 Sustainability. The liberalization of fertilizer distribution and pricing is having a strong positive impact. The importance of adequate drainage to maintain productivity of irrigation has been recognized and a good start has been made in dealing with this issue. There is a better appreciation among Turkish decision makers of the importance of good economic returns to irrigation investment. But most of the Turkish Government, and possibly a majority of the Turkish population, support The average CIF price for imports in 1985 of 950 000 tons (CAN, DAP, AS, and Urea) was $155, before factoring in distribution costs. Fertilizer prices in 1985 were lower than in 1983. The Audit was unable to get information on the actual decrease in the distribution margin. According to the Bank's standard definition, satisfactory performance requires that the project achieved most of its (original or revised) objectives and had satisfactory results with no major shortcomings. - 16 - subsidies for fertilizer and agricultural credit. They continue to consume a large amount of fiscal resources. Issues 4.5 The material below concentrates initially on three "classic" issues in agricultural adjustment operations. It is followed by a consideration of additional issues suggested by the preceding review. The Bank is now dealing successfully with many of these. Others still pose problems. In concluding the audit these are pulled out and used to suggest lessons that may be applicable to ongoing adjustment lending. 4.6 The Bank's approach to adjustment in agriculture is derived from its general adjustment model. In agriculture, it has evolved to a consensual approach, within the Bank, which involves at a minimum three core elements on which reform is needed for virtually all countries in adjustment: the pricing and marketing framework, which nearly always has important distortions which prevent agricultural production from attaining comparative advantage; the public investment program in agriculture which often uses resources inefficiently; and the public enterprises in agriculture which are usually grossly ineffective, and also far from covering their costs of operation. The Turkish loan, which was developed while this core approach was still evolving, addressed aspects of all three of these core elements in ways which would be different today. The first concerns the piecemeal approach to price liberalization, that is a focus on input subsidies, and very little attention to output price distortion. Based on the unprecedented pace of adjustment in the previous three years, it was expected that the pace of adjustment would accelerate in 1984-85 as popular support grew. This was expected to reinforce the Government's resolve to complete the liberalization of food marketing, and export crops so that the remaining price distortions in agriculture were going to continue to wither and were eventually to disappear completely. Second, in a way the approach to the agricultural PIP was more sophisticated than current practice, in that it realized that PIP reform involved profound institutional upheaval and required, therefore, an approach which stressed institutional development. Third, the Bank's line on public enterprise reform was still in flux in 1985; e.g., although aware of the problems of public enterprises working in agriculture, the Bank had not yet been driven to conclude that usually the only solution was to move them out of the public sector. Reform without divestiture was seen by the Bank as a real possibility, rather than the current dedication to enterprise privatization. 4.7 Price Distortions. It is constructive to consider the question of prices and comparative advantage. The ASAL took a clear position on the distortions on the input side, the agricultural credit and fertilizer subsidies, but was opaque on output pricing. Detailed model-based sector work carried out in 1988 and 1989, however, indicated serious distortions on output pricing. The effective protection coefficient (EPC) in 1987 for major agricultural products, on a value-of-output weighted average basis was 76 percent of the border price. In manufacturing, the weighted EPC was 119 percent.A On a border price base, agriculture was getting only about 64 percent of the prices manufacturing got. During the period of ASAL implementation the Government maintained taxes on the traditional exports, such as hazelnuts, tea, and tobacco, while maintaining export constraints EMENA1AG, Report No. 7764-TU, green-cover, Turkey, Review of Agricultural Pricing and Trade Policies, March 30, 1990, vol.1, p. 13, Figure 3. EPCs vary over time because of volatile world-prices and other factors. Since the EPC's for Turkey were estimated when world prices were very low, it is unlikely that they overestimate the degree of distortion against agriculture. - 17 - designed to keep local prices of agricultural production low, and permitting exports on an ad-hoc basis when there was a clear surplus. There was, however, substantial protection for import substitution crops. The sector study concludes that total liberalization---elimination of all subsidies, taxes and other trade constraints-- after all adjustments, would have seen a net increase of output of about US$560 million equivalent in 1987 or about 7 percent of GDP.V This would have taken the form basically of switching from lower to higher value production, resulting in increased agricultural income, and significantly increased agricultural exports. The fiscal accounts would also have registered a net gain from total liberalization, although far less than eliminating the fertilizer subsidy alone. The sector study concludes that "Turkish price and trade policies were adapted to hold domestic agricultural prices in most years below world market prices as part of an effort to support industrial growth. But now agriculture was taxed in aggregate rather than subsidized as in the 1970's....the policy makers remained convinced that successful rapid industrial development continued to require low cost food and raw materials." 4.8 Through the loan, the Bank addressed only the input and subsidy side. Since many prices were substantially below border levels, in many cases fertilizer use was brought closer to the economic optimal level because the subsidy on fertilizer offset the tax on output. For example, about a third of total fertilizer was applied to wheat for which the EPC in 1987 was calculated at 0.85. It should be noted here that in 1984, in those areas with access to fertilizer, the average application levels were close to 90 percent of the profit maximizing level, given the prevailing fertilizer/crop price ratios to farmers.ly So another tack was feasible and probably desirable since operational staff at the time of appraisal were generally aware of the overall price distortions against agriculture, although the detailed analysis of agricultural price distortions had not yet been carried out.A They could have designed a reform package based on a more balanced approach. Thinking along these general lines was already somewhat the case in that agricultural export taxes were allocated to the price stabilization fund used to finance the fertilizer subsidies. Tying the elimination of fertilizer subsidy to permission to let crop prices rise to their border-levels would have made not only good economic sense, but also might have worked politically to reduce the opposition of the agricultural community to the proposed reforms. In terms of promoting fruitful dialogue and long-term reform, it would have been worth the effort to consider this general approach during preparation and appraisal.?' 4.9 Public Investment Program. Bank-led reviews of public investment programs can be very effective use of staff-resources since the total resources involved in the PIPs are usually a multiple of Bank-lending, while their quality is frequently low'. Hence they provide a rare opportunity to bring about fundamental improvements in the allocation of agricultural resources. As discussed above, the Turkish ASAL did not include a full PIP review, but concentrated on irrigation, which in 1985 accounted for 65 percent of total public investment in agriculture. Unlike many L paragraph 4.21. LQ SAR, Annex 4, paragraph 1.03. The SAR, paragraph 3.07, notes that "Fartgate prices which used to be significantly protected are now lower than their border prices equivalents." Complicating the issue is the fact that Turkey's accession to the European Economic Community (EEC) would require competing in the Community's highly subsidized agricultural markets. This legitimization" of subsidies and Turkey's concern with the long-run ability of its agricultural economy to compete with the EEC may explain some of the resistence to eliminating the fertilizer subsidy. See AFTAG, "A Strategy to Develop Agriculture in Sub-Saharan Africa", draft, March 16, 1992, p.28 - 18 - adjustment operations which seek to eliminate only the most obvious misallocations from the PIPs, the ASAL took an institutional approach: rather than hunt for the biggest white elephants, it would a) support development of the Core Program to focus irrigation subsector investment on the completion of drainage works, on-farm development, and improved operation and maintenance for completed schemes; and b) develop a master plan for irrigation investment which would drop the weakest projects, and concentrate on those promising the highest returns. To increase the probability of success the ASAL allocated over a third of its finance to irrigation equipment to support realization of the Core Program. Moreover, a Drainage and On-farm Development loan for US$255 million equivalent, which was signed in March, 1986, complemented this component of the ASAL. In addition to rehabilitation of drainage systems it aims to assist in improving design and implementation capacity of GDRS and DSI. An alternative to the ASAL approach could have made satisfactory revision of the agricultural public investment program a condition of tranche release, and put the irrigation component of the ASAL into the Drainage and On-farm Development Operation. The irrigation component of the ASAL had a strong institutional-development dimension which might have been best pursued in an investment operation, rather than forcing it into what was meant to be a quick disbursing adjustment operation. Nevertheless, although a conventional PIP review might have been preferable, its execution probably might also have been very difficult in Turkey. For example, several very large irrigation projects have very strong political backing and it would have been difficult to subject them to a searching analysis of their economic rationales. 4.10 Reform of the State Economic Enterprises. Notwithstanding the Government's official position that SEES should be reformed and privatized where appropriate, the ASAL was unable to follow this tack because of government resistance. Rather, where it addresses the question of public organizations it seeks to improve them while still accepting their modus operandi. In this respect the ASAL resembles classic pre-structural-adjustment investment projects which did not call into question the public production model, and attempted to deal with its shortcomings by improvement rather than radical change. Thus where the ASAL considers public organizations it proposes to improve them, not to liquidite nor to radically reform them. The ASAL did this by funding and technical assistance for institutional development. So, the DSI, the irrigation development authority, receives US$94 million in new equipment and substantial consultant support to develop and execute by force-account the Core Program; GDRS, the rural development authority, receives consultant support to help carry out the same Core Program at the farmer level; TIGEM, the public farming conglomerate holding over 370, 000 hectares, receives substantial equipment (US$6.5 million) and technical assistance to carry out its mission of direct seed production for wheat and other open-pollinated varieties. Finally, all fertilizer imported under the project is to be by TZDK, which in turn receives substantial technical assistance to develop a management improvement plan. In Bank-perspective, a modern approach could have involved redefinition of operations by contracting out to the private sector for civil works (DSI), and for seed production to renovate self-pollinating varieties, (TIGEM); and by encouraging private sector fertilizer imports, if not the privatization of TZDK 4.11 During preparation, more attention to using economic resources efficiently by exploring ways to redefine the division of labor between the agricultural parastatals and other operators might have paid off in a more satisfactory ASAL.2' Nevertheless, the bias in the ASAL toward supporting The World Bank's agriculture projects are evolving away from public production models, but with difficulty. "Old style" projects dominate the pipe-line, which are prepared for and implemented by public sector entities. See AGRAP, "Annual Sector Review, Agriculture and Rural Development", FY 91, December 21, 1991. - 19 - public modes of production may also be a negotiation outcome. Recall that at negotiations, at Government request, the Bank dropped the proposal for a SEE privatization study (paragraph 2.6). 4.12 Tranche Release. The Bank was eager to continue its support to the adjustment effort, hitherto so successful, and to offset its flagging momentum. And tranche release and the associated set of actions, or promises of actions provided new impetus to the adjustment program. Nevertheless, looking back, it is easy to give three reasons why release was too early. First, it was not required by a shortage of funds: at the end of FY 87, nearly five months after second tranche release (February 4, 1987), US$116 million equivalent were still undisbursed from the first tranche of US$200 million equivalent.A So tranche release was probably not needed to assure availability of funding to finance equipment needed for carrying out the Core Program. (See below.) Second, nearly across the board, the Government was stumbling badly in meeting the completion dates on the steps for tranche release. (See paragraphs 3.6-3.8.) As concerns the critical conditionality of the Core Program, the consultants had yet to be selected. Since the equipment for DSI (US$111 million programmed, US$94 million actually imported) was destined to support execution of the Core Program it would have been less risky to hold off on its procurement until formulation of the Core Program had advanced enough to permit the equipment to be used productively. In actual fact, the Core Program, i.e. the detailed work program, was not set up during ASAL implementation but carried over into the Drainage and On-Farm Development Project. Third, elections were scheduled for November 1987. A more patient institution would have adopted a wait-and-see attitude. Indeed, the new government proved less supportive of structural adjustment than its predecessor. This "brief" forces the conclusion that tranche release was premature. Its delay and an associated delay in procurement for the Core Program, until the latter was set up satisfactorily, would have increased the chance of its execution, or resulted in earlier more beneficial cancellation of the loan. 4.13 Institutional Development in Adjustment Operations. The Bank underestimated the political, technical, and institutional problems involved in forcing far-reaching institutional development into the ASAL. The political problems arose because TIGEM, GDRS, TZDK, and DSI were opposed to most of the measures concerning them, while the central authorities, as represented by the State Planning Office (SPO) and Treasury, did not force the issue on them. Moreover, following the elections in 1987 which led to more politicized agricultural service institutions, forcing compliance from the center probably was out of the question. Impairment of the execution of the study for the irrigation master plan was one result.- As concerns TZDK, in carrying out its management improvement program it instructed the consultant not to consider changing the number, size, or location of branches, notwithstanding the fact that it was losing its markets. In the case of TIGEM the management improvement program was shelved.!' 4.14 As concerns the Core Program, technical and institutional problems arose. To wit: Turkey's limited experience in providing on-farm pipe drains, for which the technical requirements are not trivial; the lack of equipment in the country for such purposes; the inexperience of GDRS Letter from Country Programs II, EMENA to Turkish Government, June 26, 1987, paragraph 6. L0 The irrigation master-plan was, however, satisfactorily completed in 1992, as part of the Drainage and On-farm Development Project. Lit A manager in one of TIGEM's production departments on the job since 1982 stated that he had never heard of the program. Another manager claimed that the only objective of developing the improvement program was to get World Bank clearance for the equipment to be imported under the loan. - 20 - in dealing with contractors. Farmer cooperation was also needed. The issue of compensation for those farmers whose crops are destroyed by the excavation and associated works-- installation of sub- surface drain pipes about every hundred meters typically requires a destructive eight-meter wide swath for excavation - was unaddressed. The compensation issue and that of cost-recovery for the work in general are still being resolved. Moreover, GDRS was formed out of several recalcitrant organizations amalgamated in 1984. As a result it had limited operational capacity in 1985. Its coordination with DSI--one of the most prestigious and powerful organizations in Turkey-- has also proven extremely difficult, although it is unavoidable since drainage on-farm, the responsibility of GDRS, needs to connect to the drainage canals put in by DSI. In an investment project, this set of problems would have been dealt with in preparation and resolved before negotiations. Given the complexity of the issues, a delay for preparation over two years would have been warranted. In fact, the Bank has been slowly covering the same ground in the Drainage and On-Farm Development Project which became effective in mid 1987. 4.15 Ownership. Government commitment or "ownership" of the operation is a necessary condition for successful adjustment. The Bank was prudent in assuming in 1985, after the remarkably successful earlier reforms, that ownership of the ASAL was sufficient to assure future success as well. Events proved that it was wrong. By July, 1986, after the impressive liberalization of fertilizer distribution, the accumulation of delays in carrying out the agreed measures indicated that commitment was flagging. Groups were resisting the proposed reforms successfully. The elections in November 1987, changed the constellation of political forces which further reduced support for the ASAL. By 1988, the preferred action may have been closing the credit, and not going for an extension. Conceivably complete reformulation of the adjustment package might also have made sense. Or going back to the beginning, an adjustment program might have been developed by 1985 which would have defused some of the resistance from the agricultural community, for example by reducing both implicit and explicit taxes on agriculture as the quid pro quo of subsidy-reduction. This could also have been coupled with increased budgeting for local irrigation development which is highly valued by farmers, or possibly infrastructure undertakings; e.g., improved rural schools, access roads, potable water, and rural electricity. 4.16 Turkey's ASAL experience is a case of a promising but risky adjustment operation brought low because of the political environment. The project files indicate that there was assessment of the degree of ownership as part of the preparation process. It was well known that the highest levels in the government were firmly behind the reform process, although it was also clear that powerful figures were opposed. But the assessment was, as is the usual case, informal and improvised. If the Bank had been a different institution such that staff could have been more forward looking as to political currents and developments in Turkey, and if the assessment of political risk could have been more searching and systematic, a better program might have been developed. This might have been an ASAL with different content, or possibly a decision to delay undertaking the ASAL, and to set up an adjustment operation for another sector. 4.17 As a middle-income country with a high level of educational achievement, Turkey clearly has substantial capacity for developing and carrying out economic policy reforms. Nevertheless, the Turkish policy letter, the SASP, was initially written by a Bank staff member in collaboration with the Turkish central authorities most supportive of the reforms proposed within the SASP. As noted above, there was a serious difference of views within the Government, and the public agricultural organizations responsible for implementing the ASAL were by no means "on board." Had Turkey written the ASAP with substantial input from the agricultural authorities, and - 21 - perhaps the agricultural community at large it would have delayed the loan in order to get a product which the Bank could accept. It might even have meant that no ASAL was possible. But it might also have led to a successfully implemented set of reforms. Arguably, additional time spent in developing support for this operation would have produced a more satisfactory outcome. 4.18 Procurement. The very limited positive list was clearly a mistake, which probably would not occur today. A more broadly based list open to private operators from the beginning would have been preferable. If a large share of the proceeds of the loan needed to be used for public-sector procurement, this could have been done by including a statement in the legal documents that a portion of the loan would be made available for this purpose. 4.19 The Size of Loan. The audit is left with an appreciation of the difficulty of dealing with the question of loan size in the Turkey adjustment operation. The issue here is that the Bank's justification of the size of loan in the Initiating Memorandum, SAR and other relevant material did not go beyond affirming in one sentence why a loan of precisely US$300 million equivalent was warranted. As it turned out, review by the audit showed that the size was warranted (paragraph 2.11). Only the documentation was unsatisfactory. Lessons 4.20 Several lessons extracted from the discussion of issues are given below. 4.21 Removing Price Distortions. To avoid mistakes leading to poor overall resource allocation, it is still worth repeating that adjustment operations concentrating on agriculture need to consider the entire price system. The temptation to see a sector adjustment credit as a de facto solution to fiscal problems should be avoided. The net effect of the price conditionality in the ASAL was to further turn the terms of trade against agriculture, leading to further undervaluation of its output relative to that of industry. Moreover, a comprehensive approach in Turkey might well have had a better chance of succeeding within the Government, than the piece-meal approach followed. A similar situation may exist in other countries.' 4.22 A detail worthy of emulation arose during implementation of the ASAL. In the letter requesting the extension of the Closing Date, the Government committed itself to the wither-on-the- vine approach to reducing the fertilizer subsidy: henceforth the fertilizer subsidy was to remain unchanged at its nominal level, while inflation rapidly reduced it to an insignificant level. If countries have a significant inflation rate this approach is likely to have a greater probability of success than setting a target date for zero subsidy, as was originally the case in Turkey, since the latter involves a politically more difficult course involving active reduction in the nominal value of the subsidy. 4.23 Rationale for the Size of Operations. The appropriate size of adjustment operations is not self-evident. Yet, apparently, the size of adjustment operations may be set with little probing of the rationale for the loan amount at the various reviews prior to negotiations. The Audit concludes that it is desirable to include in the Initiating Memorandum and the President's Memorandum an explicit and detailed justification of loan/credit size. If the amount to be lent has 9 The same point is covered in OED's World Bank Structural and Sectoral Adjustment Operations: The Second OED Overview, Report No. 10870, June 30, 1992, p. 30. - 22 - been analyzed in another context, e.g. determination of the country's lending program, the relevant substantive analysis and conclusions should also be documented in the review documents. The amount to be lent should be justified just as in investment operations, and for the same reasons. 4.24 Ownership. OED analysis shows that the failure of the borrower to "own" the reform program explains many of the failures of adjustment operations. The Turkey experience is typical. During the period of loan design there is usually an informal assessment of whether there is sufficient political commitment to warrant the adjustment operation. This is nearly always ad hoc in part because of the Bank's historical stance that a borrower's politics need not be considered in assessing credit-worthiness. So the political assessments are neither scrutinized by the Bank's scrutinizers, nor are lessons from experience accumulated and diffused to the task managers and others taking decisions on the ownership issue. The lack of systematic attention to the assessment process also does nothing to call in question the common judgment among the Bank's assessors that serious political analysis would only marginally improve the current ad hoc approach. The record shows that the result has been to frequently overestimate the degree of ownership. Greater care in assessments of ownership is counseled. OED's efforts to develop a more formal approach for these assessments should be supported.!' 4.25 One possible change involves the letter of sector development policy or the equivalent. An objective sign of ownership is the degree to which the country writes its own policy letter. Bank staff probably should desist from writing these documents early in the preparation period to assure that all possible alternatives are explored for the issues being covered before alternatives are in effect excluded from consideration because of the need to negotiate a draft document. This is a grey area. In many cases it is not clear where a truly collaborative Bank-borrower effort is underway, and where the Bank is imposing its own agenda. Nevertheless, it is probable that the Bank errs on the side of being too activist. In general greater reticence by Bank staff in developing policy letters would lead to increased ownership and more sustainable adjustment programs because of a fuller considerations of alternatives. 3 Ibid. Chapter X and Annex X. ! OED's Second SALISECAL Overview is designed, ielia to help provide guidance for the the Bank's policy-based lending in the face of the borrower's political constraints. As part of this undertaking, it is seeking to define the "conceptually elusive" but crucial concept of ownership in a way which will permit it to be analyzed objectively. This in turn would permit objective evaluation of the relationship between the degree of ownership and the effectiveness of adjustment programs. See the Second SAL/SECAL Overview, paragraph 10.3.