Turkey - Third Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13976-TU IMPLEMENTATION COMPLETION REPORT TURKEY THIRD AGRICULTURAL CREDIT PROJECT (LOAN NO.3090-TU) FEBRUARY 16, 1995 Agriculture and Envirnment Operations Division Country Department I Europe and Central Asia Region 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. CURRENCY EOUIVALENTS Currency Unit = Turkish Lira (TL) Value of US$1.00 in T 1987 856 1988 1,421 1989 2,121 1990 2,608 1991 4,170 1992 6,888 1993 10,986 September, 1994 US$1.00 TL 33,800 TL 1,000 US$0.03 TL 1,000,000 = US$30 WEIGHTS AND MEASURES 1 kilogram (kg) 2.20 pounds 1 metric ton 1,000 kilograms, 0.98 long ton 1 hectare (ha) 2.47 acres 1 decare 0.1 ha 1 square kilometer (kmi = 0.386 square mile FISCAL YEAR OF BORROWER Government of Turkey - January 1 to December 31 ABBREVIATIONS AND ACRONYMS USED ERR - Economic Rate of Return FAO - Food and Agriculture Organization of the United Nations FRR - Financial Rate of Return FSAL - Financial Sector Adjustment Loan GOT - Government of Turkey ICR - Implementation Completion Report MARA - Ministry of Agriculture and Rural Affairs M&E - Monitoring and Evaluation MIS - Management Information System PPAR - Project Performance Audit Report SACP - Second Agricultural Credit Project SAR - Staff Appraisal Report TCZB - Agricultural Bank TKK - Agricultural Credit Cooperatives FOR OFFICIAL USE ONLY Implementation Completion Report Turkey Third Agricultural Credit Project Loan No. 3090-TU Table of Contents Page No. Preface 1 Evaluation Summary i-vi Part I: Project Implementation Assessment A. Statement/Evaluation of Objectives 1 B. Achievement of Objectives 3 C. Major Factors Affecting the Project 6 D. Project Sustainability 6 E. Bank Performance 7 F. Borrower Performance 9 G. Assessment of Outcome 9 H. Future Operation 10 I. Key Lessons Learned 10 J. Program Objective Categories 11 Part II: Tables Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation and Operation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 8C Calculation of Project Cost (Medium- and Long-term Lending, in Current Prices) Table 8D: Calculation of Project Cost (Medium- and Long-term Lending, in US Dollar Prices) Table 8E: Calculation of Project Cost (Short-term Lending, in Current Prices) Table PF: Calculation of Project Cost (Short-term Lending, in US Dollar Prices) 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. Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions Annexes Annex 1: Aide Memoire of Implementation Completion Mission Annex 2: Plan of Operation Annex 3: Summary of Borrower's Evaluation and Project Impact Annex 4: Comments by Borrower on Draft Implementation Completion Report Map IMPLEMENTATION COMPLETION REPORT TURKEY THIRD AGRICULTURAL CREDIT PROJECT (LOAN NO, 3090-TUI Preface This is the Implementation Completion Report (ICR) for the Third Agricultural Credit Project (the Project) in Turkey, for which loan 3090-TU in the amount of US$250 million equivalent was approved on June 15, 1989 and made effective on November 6, 1989. The loan was closed on December 31, 1993, compared with the original closing date of June 30, 1993. An amount of US$70.7 million, constituting the balance of the credit component at that time was cancelled in June 1992 on the basis of non-compliance with interest rate covenants. Final disbursement under the institutional development component took place on December 28, 1993. Cofinancing for the Project was provided by the Overseas Economic Development Fund of Japan in the amount of US$250 million. The ICR was prepared by the Agriculture and Environment Operations Division, Country Department I of the Europe and Central Asia Region. Preparation of this ICR was begun during the Bank's final supervision mission in February 1994 and continued during the completion mission in August 1994. It is based on material in the project file and data collected by that mission. The Borrower contributed to preparation of the ICR by providing views reflected in the mission's aide memoire (Annex 1), preparing its own evaluation of the Project's execution and initial preparation (a summary of this evaluation is contained in Annex 3) and by commenting on the draft ICR (Annex 4).  EVALUATION SUMMARY i. Introduction. The Third Agricultural Credit Project in Turkey (the Project) was appraised in November 1986, post-appraised in August 1988 and approved by the Bank's Board in June 1989. Project cost was US$1,226.5 million toward which the Bank provided a loan of US$250 million equivalent. The borrower was the Republic of Turkey. The implementing agency was the Agricultural Bank (TCZB). Cofinancing was provided by the Overseas Economic Development Fund of Japan in the amount of US$250 million. The loan was closed on December 31, 1993, compared with the original closing date of June 30, 1993. An amount of US$70.7 million was cancelled in June 1992. As of July 31, 1994, an amount of US$22.6 million of the Japanese cofmancing was undisbursed. ii. Project Qbjectives. The Project objectives were: (i) to further strengthen the institutional capabilities of TCZB and the credit operations of the Agricultural Credit Cooperatives (TKK); and (ii) to increase farm productivity and farmers' income through expanded access to agricultural credit and the financing of productive investments at the farm level. Related to the institutional development objective was the strengthening of TCZB's financial position. Related to the objective of expanding access to agricultural credit was the aim of having the project operate in about one third of the country's provinces to meet the full requirements of farmers and to reach creditworthy farmers previously without access to institutional credit. iii. At the time of appraisal in 1987 and subsequently, financial sector reform was an important part of the Bank's country assistance strategy. In support of this objective, the Second Financial Sector Adjustment Loan (FSAL II) included a floating tranche of US$100 million for the restructuring of state-owned banks. However, for TCZB the Bank accepted a more gradual approach to restructuring and thus institutional development covenants in the Project did not provide for full restructuring. Because the Government of Turkey (GOT) had made capital infusions into TCZB, it requested in 1991 utilization of US$97 million of the FSAL floating tranche for this purpose. However, the restructuring plan of TCZB did not satisfy the Bank because it was not based on a portfolio as required. A revised restructuring plan was prepared by TCZB but not discussed with the Bank. The floating tranche was cancelled at closing of the FSAL II on December 31, 1992. iv. In general, the Project objectives were clear and realistic. They were quite demanding on TCZB's technical capabilities but set out precise action plans and operational details for their attainment. They were also important for the sector strategy both in the agriculture and financial sectors. v. Achievement of Objectives. Sector policy objectives were only partially achieved, while financial, institutional development, and physical objectives were substantially achieved. An agriculture sector policy objective was to bring about sub-loan interest rates that were positive in real terms. Protracted negotiations brought about an agreement on iii interest rate covenants and some up-front action on increasing some rates. The Project formulated three interest rate covenants: (i) the weighted average sub-loan interest rate would have to be positive in real terms by March 1990, (ii) all sub-loan interest rates were to be positive by March 1991, and (iii) there should be a spread for TCZB on all its loans that would cover all lending-related costs by September 30, 1991. It also introduced a review mechanism to determine the adequacy of on-lending interest rates. vi. The main institutional objective that TCZB be strengthened financially by increasing its net worth was achieved. TCZB strengthened its equity base through equity infusions from GOT in the years 1989 and 1990 and thereafter through profits from lending to sales cooperatives. This helped to meet the first covenant above. Interest rate covenants (ii) and (iii) above were not met. Other institutional development objectives were substantially met. vii. Physical objectives as they relate to credit and to increasing farm productivity and farmers' incomes through expanded access to agricultural credit were exceeded. TCZB made more than 96,000 direct medium- and long-term investment loans, far more than the 40,000 investment loans envisaged at appraisal. It also made 1.5 million short-term loans. The TKK made an additional 114,000 medium- and long-term and 560,000 short-term loans in the Project area. In US dollar terms, the SAR projected Project costs of US$1,105 million for investment and US$118 million for incremental short-term lending. Actual Project costs were US$953 million, 86% of appraisal estimates. viii. The design of the Project was appropriate for achieving the physical and financial objectives. The design of the procedures for appraisal and supervision of sub-loans was excellent and contributed substantially to the institutional improvements of TCZB and the improvement of the quality of its portfolio. TCZB introduced the technical parameters agreed on for the Project also in non-Project provinces. ix. Economic Rates of Returns (ERRs) and financial rates of return (FRRs) were calculated for individual on-farm investments. The SAR stated that ERRs were expected to be in the range from 17 to 71%, while FRRs were expected to be between 13 and 52%. A Monitoring and Evaluation (M&E) exercise carried out by TCZB on a representative sample of 198 medium- and long-term loans was not completed as of late 1994. Preliminary results of the aggregated data on financial viability for investment lending indicate that of 14 types of investment under review, two had FRRs under the required level of 12%. The remainder achieved FRR rates ranging from 13% for a combine harvester to 60% for a 20-cow breeding unit. Economic analysis for the aggregate models from the M&E exercise was not completed by late 1994. x. Major Factors Affecting the Project. The implementation phase of the Project beginning in 1989 was affected by macro-economic policies aimed at returning to sustainable macro-economic balances and bringing inflation under control. Encouraging progress in the attempts to bring inflation under control thereafter was reversed when the Gulf crisis broke out. Policy changes, persistent inflation and exchange rate volatility contributed to the iv uncertainty facing sub-borrowers. Inflation stubbornly persisted at high levels around 60%. The exchange rate development was along similar lines with the TL depreciating from an average in 1989 of TL 2,121 to TL 10,986 in 1993. Other negative influences were the extensive drought in 1989, regional droughts in 1990, and civil unrest in the eastern and south-eastern provinces which disturbed agricultural activities. xi. Project Sustainability. Some aspects of the Project are sustainable while others are not. GOT and implementing agency commitment to carry out the Project in accordance with the agreements remained strong, with the exception of a reluctance to address vigorously agricultural support policy and interest rate issues. In terms of TCZB's financial viability the Project appears to be sustainable. Its ratio of net worth to average assets reached 14.8% by the end of 1993. TCZB has become a stronger bank in all respects. The Project is also sustainable from the on-farm development aspect. Farmers have greatly benefitted from the investments made under the Project as planned and have developed a sense of financial discipline often lacking in other developing countries. Strong loan supervision efforts by TCZB minimized the misallocation of funds usually expected in cases of interest rate distortions. The Project objective of creating a revolving fund to finance the same real value of loans after repayment by farmers until repayment by TCZB to GOT did not materialize. TL 100 disbursed by GOT to TCZB in 1989 had a real value of TL 58 when repaid at the end of 1993. xii. Bank Performance. The Bank's performance at preparation and appraisal was satisfactory. Bank missions which jointly appraised the Project with staff of the IBRD/FAO Cooperative Program made strong efforts to convey technical knowledge and generate commitment to the Project. The design of the Project was complex and TCZB potential to implement such a complex and demanding program was adequately assessed. Major Project risks were clearly assessed to be in high inflation and economic disequilibrium. Commitment to the package of reforms that GOT had agreed to undertake to reduce the budget deficit and bring inflation under control was diluted in the years during Project implementation as a result of the Gulf crisis. The recurring financial crisis at the beginning of 1994 led to a stronger and more efficient economic reform program that also attempted to address the costly agricultural subsidy system. Bank performance during implementation was satisfactory. Supervision missions were fielded at regular intervals twice per year, staff continuity was maintained and the relationship of the Bank staff with the Treasury and implementing agency staff was excellent. GOT and TCZB maintain that the Bank should have been more flexible on interest rates, rather than threatening suspension and thus forcing GOT to cancel undisbursed loan amounts when interest rate covenants were not met. In fact, the Bank made substantial efforts to maintain this dialogue in the presence of a deteriorating economic situation. Efforts by the Bank were not successful in convincing policy-making levels in GOT that strong macro-economic action was needed to support and complement the credit program. xiii. Borrower Performance. Performance in meeting the Project's major covenants was generally satisfactory, with the significant exception of the loan covenants on interest rates V which was inadequate. GOT's performance in implementing financial policies vis-a-vis TCZB was satisfactory. The required equity contributions were provided and the arrangements regarding payment of TCZB claims for duty losses from loans to sales cooperatives were implemented over time as required. The performance of TCZB in reaching its institutional objectives was satisfactory, and its major institutional development objectives were achieved. The performance of both TCZB and the Central Union of Agricultural Cooperation in reaching the physical objectives was satisfactory, as most targets were exceeded. Fellowships funded under the Project proved beneficial. The performance of Project consultants was satisfactory. Project M&E appears to be adequate, although the final results were not yet available late 1994. The major covenants related to institutional development and financial strength of TCZB were complied with, except for the interest rate covenants. xiv. Assessment of Outcome and Future Operation. All major institutional development objectives were achieved, while the objectives related to agricultural interest rates were only partially achieved. Cancellation of the $70.7 million due to non-compliance on interest rate covenants was a negative factor. The on-farm development impact relating to achievement of returns on investment is expected to be positive overall in accordance with preliminary M&E results. Taking all of these factors into account, the project is rated as satisfactory. A plan of operation for the Project's future operation has been agreed with GOT, MARA, the Union and TCZB, and is outlined in Annex 2. xv. Key Lessons Learned. TCZB's ultimate viability continues to depend on GOT's willingness and ability to implement economic reforms and compensate TCZB for loan losses resulting from agricultural support measures. This has involved a combination of guarantees and equity contributions to TCZB. xvi. Negative interest rates distort resource allocation. In a highly inflationary economy like Turkey farmers consider investments in agricultural machinery and livestock as the best means to safeguard the value of their money. If loans are made at negative real interest rates, farmers are inclined to make investments which they otherwise would not have made. If this is to be minimized, close supervision at the local level is required. xvii. World Bank resources can effectively support policy changes. Although the Bank's contribution to TCZB's short-term lending program was limited in terms of filling a resource gap, it was important as an incentive to revise TCZB's policies for short-term credit lending. xviii. Rural credit can be an effective means to support efficient agricultural production in a less-than-ideal institutional and financial environment. Available channels may be less than ideal. There was no other effective way to reach the farm sector than through the state- owned TCZB. xix. The partial appraisal of TCZB at the appraisal stage which limited itself to TCZB's agricultural operations in combination with appraisal of its overall financial position proved Vi to be sufficient. A full appraisal of all TCZB activities likely would have added little to project achievements. xx. Negative real interest rates contribute to erosion of the financial institutions' capital base. In the context of this Project, the GOT will not recover the real value of funds on-lent to TCZB. Sound overall financial policies would have added to the success of this project.  IMPLEMENTATION COMPLETION REPORT Part I: Project Implementation Assessment Project Objectives A. Statement/Evaluation of Objectives 1.01 The Project objectives as summarized in the Loan Agreement were: (i) to further strengthen the institutional capabilities of TCZB and the credit operations of the Agricultural Credit Cooperatives (TKK)1; and (ii) to increase farm productivity and farmers' income through expanded access to agricultural credit and the financing of productive investments at the farm level. The Staff Appraisal Report (SAR) provides further details. Related to the institutional development objectives were the strengthening of TCZB's financial position through supporting arrangements that would increase its equity, settling its claims to Government, and improving its ratio of net worth to average total assets. It was intended that TCZB would be able to take the appropriate measures concerning provisioning and write-offs through further analysis of its portfolio of overdue agricultural loans and equity portfolio. Related to the objective of expanding access to agricultural credit was the aim of having the Project operate in 45 of the country's 67 provinces, thereby reaching creditworthy farmers previously without access to institutional credit. This was intended through a two- pronged approach: TCZB would make loans directly to individual farmer beneficiaries and to TKKs which in turn would make loans to their members, both for short-term loans for production inputs and medium- and long-term loans for small investments. Because the number of provinces in Turkey during project implementation increased from 67 to 76 through administrative reorganization, the number of project provinces also increased from 45 to 52. The institutional development objectives were designed on the basis of the lessons learned from the Second Agricultural Credit Project (SACP, Loan 2318-TU): TCZB's appraisal and lending processes were to be sufficiently flexible to accommodate rapid price changes in an inflationary economy. 1.02 As described in the SAR, the Project was to: (i) maintain the momentum in the institutional development of TCZB, including organizational and procedural measures and improvements in TCZB's financial position through analysis of its loan and equity portfolio; (ii) reach agreement with Government on equity contributions and a spread for TCZB that would cover all lending-related costs; and (iii) help fill TCZB's resource gap in a three-year time slice that was projected to cumulate to US$1.2 billion in the years 1989-91. 1.03 At the time of appraisal in 1987 and post-appraisal in 1988, financial sector reform was an important part of the Bank's country assistance strategy. This manifested itself in the Second Financial Sector Adjustment Loan (FSAL H1, Loan No. 2964-TU) for which the 1/ The primary TKK constitute the grass-root level of the cooperative system. They are controlled by 16 regional cooperatives and the Central Union of Agricultural Credit Cooperatives (the Union) in Ankara. TCZB determines in discussions with the Union the policy framework for the lending activities of the TKK and determines also the monetary limits for TKK members within the resources available from TCZ8 for lending purposes. 2 Letter of Development Policy was agreed in March 1988 and became effective in June 1988. It contained covenants regarding: (i) the strengthening of the banking system through the introduction of prudential regulations that required specified levels of equity and provisions for bad debts, establishment of a mechanism to restructure insolvent banks and action programs to restructure state-owned banks; and (ii) improvement in the interest rate structure, including an increase in preferential lending rates to positive levels in real terms. 1.04 The objectives defined in the area of institutional development of TCZB, though complex and encompassing in nature, did not include a full restructuring of TCZB as specified in an annex to the FSAL II agreements. TCZB carries out a number of tasks for GOT related to agricultural sector policy objectives, i.e., being the executing agency for the support price system operated through the agricultural sales cooperatives, and to carrying out banking functions for GOT, i.e., payment of pensions and salaries for civil servants, collection of fees on behalf of GOT, etc. The restructuring program mentioned in the SAR (para 3.17) started in 1988 as a step by step approach, rather than a radical program that would have clearly separated all commercial banking functions from those related to carrying out GOT programs. This approach was accepted at the time of appraisal. Covenants were limited to financial strengthening and the continuation of organizaticnal and human resource development. This decision was in line with the Bank's policy at the time which required only the appraisal of agriculture-related activities in banks functioning as outlets for agricultural credit. Full appraisal of such banks was later proposed in the 1988 task force report on financial intermediation that resulted in the 1992 Operational Directive OD 8.30. 1.05 There was an understanding between the Bank and GOT that the proceeds of the floating tranche from FSAL II should be used for the restructuring of smaller state-owned banks, not for the restructuring of TCZB. However, inasmuch as GOT had made capital infusions only into TCZB and had no other state-owned banks to claim funds from the floating tranche, it requested utilization of US$97 million of the floating tranche of US$100 million against the capital infusion in TCZB. TCZB had not based its restructuring plan required by the Central Bank on a full audit in accordance with internationally accepted auditing principles and internationally accepted accounting standards. The full portfolio audit was undertaken and the report provided to the Bank some time after the restructuring plan was submitted to the Bank as justification for this requested use of funds. The restructuring plan did not satisfy the Bank and a revision was requested based on findings of the loan portfolio audit. The revised restructuring plan was prepared by TCZB but not provided to the Bank. The floating tranche of the FSAL II was cancelled after its closing date of December 31, 1992. 1.06 In general, Project objectives were clear and realistic. While quite demanding of TCZB's technical capabilities, they set out precise action plans and operational details for attainment. They were also important for sectoral strategies in agriculture and finance. The importance for the agricultural sector grew from the fact that all medium-term lending by TCZB for financing of on-farm investment was to a large extent incremental -- TCZB had only very limited funds for investment lending -- and thus contributed to making the 3 agricultural sector more efficient and productive. They were important for the financial sector because any strengthening of the largest bank in the sector in its institutional development had a measurable direct impact on the performance of the entire sector. Implementation Experience and Results B. Achievement of Objectives 2.01 The attainment of objectives can be summarized as follows: (i) there were no macroeconomic objectives in the Project; (ii) sector policy objectives were partially achieved; (iii) financial and institutional development objectives were substantially achieved. An agriculture sector policy objective was to bring about positive sub-loan interest rates. The SACP had failed to reach this objective. It was incorporated in the Project as being of paramount importance and because, due to the decrease of inflation in 1986 to its lowest level in years, there was a realistic expectation that it would be achieved. At the time when the Project went to the Board in May 1989 -- the processing had been held up after appraisal in November of 1986 because TCZB and GOT had not taken any action on the interest rate issue -- inflation was on the rise again. It was decided to go forward after having reached an agreement on the interest rate issue satisfactory to both sides. This was reached in May 1989 in meetings between the Treasury, TCZB and the Bank's Resident Mission after negotiations in Washington in November 1988 had failed to reach such agreement. It contained up-front action on increasing the interest rate for farm mechanization sub-loans and limiting access to the lowest interest rate of 34% p.a. Additionally, the Project formulated three interest rate covenants: (i) the weighted average sub-loan interest rate would have to be positive in real terms by March 1990; (ii) all sub-loan interest rates were to be positive by March 1991; and (iii) by September 30, 1991 there should be a spread for TCZB on all loans that would cover all lending-related costs. A review mechanism was introduced to determine the adequacy of on-lending interest rates. 2.02 An overriding institutional objective of the Project was that TCZB be strengthened financially by increasing its net worth through equity infusions by GOT, and, over time, build up reserves from profits. This goal was reached although the Project sub-loans did not contribute to this achievement. TCZB strengthened its equity base through equity infusions from GOT in 1989 and 1990 and thereafter from increased profits through lending to sales cooperatives at interest rates always well above inflation rates. TCZB used the relatively high lending rate to sales cooperatives to offset losses from that part of the portfolio lent out at negative real interest rates. Since the lending rate to sales cooperatives was incorporated in the weighted average rate, the first covenant above (para. 2.01) was met. TCZB maintained that its financial viability was not jeopardized as long as this was the case. The other two interest rate covenants were not met, despite a definition of positivity based on the formula used under the FSAL agreements that included the WPI month- over-month index for the previous 12 months with a weight of 50% and GOT's inflation projection with a 50% weight. GOT and TCZB were unable to agree to covenant-required interest rate increases 4 necessary to offset rising inflation rates. The required annual report on the adequacy of interest rates was prepared twice during the second and the third years of Project implementation, with considerable delays. Because of the delays, it proved ineffective as a management tool and was allowed to lapse thereafter. 2.03 Objectives related to increased farm productivity and farmers' incomes through expanded access to agricultural credit and the financing of productive investments at the farm level were exceeded. TCZB made more than 96,000 direct medium- and long-term investment loans, far more than the 40,000 investment loans envisaged at appraisal. It also made 1.5 million short-term loans. The TKK made an additional 114,000 medium- and long-term and 560,000 short-term loans in the Project area (Annex 2: Plan for Project Operation after Closing Date on December 31, 1993). 2.04 More than 210,000 investment loans were made valued at TL 2,675 billion in current terms, equivalent to TL 1,538 billion in constant 1989 prices. The value of medium- and long-term lending represents about 55% of investment cost, the balance being investors' equity contribution. Taking this into account, total investment cost during the Project period was TL 4,875 billion in current terms. This compares to TL 3,023 billion in current terms projected in the SAR. For short-term lending, TL 362 billion in current terms, corresponding to TL 218 billion in constant terms, would be added. In US dollar terms, the SAR projected Project costs of US$1,105 million for investment (US$933 million for direct loans and US$172 million for loans to TKK members) and US$118 million for incremental short-term lending (US$62 million for direct loans and US$56 million for loans to TKK members). Actual Project costs were US$953 million, 86% of appraisal estimates (Tables 8 and 8A-D). The difference is the result of cancellation of US$70.7 million in 1992. The 96,000 direct investment sub-loans had average investment costs of US$7,814, financed by sub-loans of US$4,267 on average. Lending to the TKK was largely for small loans. The 114,000 medium- and long-term sub-loans had average investment cost of US$1,780 and an average loan size of US$938. The average size for short-term loans in the US dollar terms was US$2,893 for loans to individual farmers and US$2,400 for loans made by the TKK. For short-term loans, farmers had to make substantial equity contributions because TCZB, in the face of hyper-inflation, was unable to provide resources sufficient to cover the full input needs of farmers. No data are available to calculate this equity contribution. 2.05 The design of the Project was appropriate for achieving these economic and financial objectives. The design of procedures for appraisal and supervision of sub-loans was excellent and contributed substantially to institutional strengthening of TCZB and improvement of portfolio quality. Despite the limitation of the Project area to 45 (and later 52) provinces, TCZB introduced agreed technical parameters in all other provinces. In this sense, the Project had a geographical impact that went well beyond original objectives. 2.06 Financial objectives were to improve TCZB's financial position, both in terms of a net worth as percentage of average assets and provisions for bad debts that were in line with prudential regulations issued by the Central Bank. All financial objectives were achieved, 5 i.e., TCZB built up its equity to more than the required levels and complied with all prudential regulations, with certain exemptions from the provisioning decree. These exemptions were granted to TCZB on grounds that loans to defaulting farmers should go into legal follow-up only one year after the payment due date because debt service capability was often impeded by crop failures from drought, flooding and other vagaries of nature. 2.07 Other institutional development objectives were substantially met. The action plan was fully implemented with the exception of the studies regarding: (i) the analysis of the equity portfolio; and (ii) the analysis of TCZB's portfolio in arrears. The former analysis was not applicable after TCZB's Board decided in 1989 to sell off all participations through the Public Administration Fund. Exempted from the divestiture were participations in the insurance business which was considered an important link to the banking business. The analysis of arrears was not undertaken by a task force as requested, but through a portfolio analysis by TCZB's external auditors. However, TCZB's Management did not agree in all respects to the findings and recommendations of the auditors. It stated that there was no need for additional provisions because loans to sales cooperatives were fully covered by GOT guarantees for which the auditors claimed was not sufficient evidence on file. In retrospect, both parties were correct. GOT did indeed honor even those guarantees for which there was no written confirmation on file. However, the inadequate provisions for these overdues were not in conformity with internationally accepted accounting standards and the auditors therefore had no choice but to qualify their audit statements. The fellowship program designed by TCZB's Chief Technical Advisor was part of the action plan and was carried out in the second half of 1993. It consisted of six study tours by TCZB staff in various departments. All tours were considered by the participants as extremely useful. 2.08 No economic rate of return (ERR) was calculated for the total Project. However, ERRs and financial rates of return (FRRs) were calculated for individual on-farm investments. The SAR stated that ERRs were expected to be in the range of 17 to 71%, while FRRs were expected to be between 13 and 52%. An M&E exercise carried out by TCZB on a representative sample of 198 medium- and long-term loans was not completed by late 1994. Preliminary results of aggregated data on financial viability for investment lending (using two monitoring runs for 28 farmers and one for 170 farmers) indicate that of 14 types of investment under review, two came out with FRRs under the required level of 12%. These are egg production with an FRR of -4% and a 10-head dairy unit with 1%. The poultry investment was adversely affected by declining prices due to loss of export markets after the Gulf War. In the case of the dairy investment, the investment cost includes construction of stables for cattle, an investment that cannot be supported by a small herd of ten animals. The remainder achieved FRR rates ranging from 13% for a combine harvester to 60% for a 20-cow breeding unit. Four individual models prepared by TCZB's Project Evaluation Department for farm operations visited during the completion mission also show satisfactory FRRs: 35% and 29% for two 18-head livestock breeding farms, 48% for an investment in a deep-well with electric pump, and 52% for a plastic greenhouse for flower production on 0.55 ha. Economic models for three individual farms show ERRs of 35% for a cotton farm investing in a tractor, of 59% for a citrus farm producing lemon and 17% for a 6 citrus farm producing tangerines, both based on calculations for 0.1 ha units. Some 1,347 beneficiaries of TCZB short-term loans were included in the M&E exercise. The SAR estimated that the cost/benefit ratios for ten representative crops would range from 1.3 to 3.5. C. Major Factors Affecting the Project 3.01 The implementation phase of the Project was affected by macro-economic policies aimed at returning to sustainable macro-economic balances and bringing inflation under control. Frequent policy changes, continued inflation and exchange rate variability contributed to the uncertainty facing sub-borrowers. The SAR stated (para 3.08) that the inflation rate as measured by the WPI at the end of each year reached a low of 28% in 1986 and accelerated to 48.9% in 1987 and 69.6% in 1988. During implementation, there was encouraging progress through the first half of 1990. This was reversed when the Gulf crisis contributed to the deteriorating economic situation in the second half of 1990 and in 1991. Inflation persisted at high levels: 62.3% at the end of 1989, 48.6% for 1990, 59.2% for 1991, 61.4% for 1992, and 60.3% for 1993. The exchange rate development was along similar lines, the average for 1989 was TL 2,121 for one US dollar, in 1990 it stood at TL 2,608, in 1991 at TL 4,170, in 1992 at TL 6,888, and in 1993 at TL 10,986. 3.02 The Gulf War had serious negative consequences on Turkey's exports and strong influence on agricultural returns through restricted export markets and increases in domestic costs. The backflow of funds from farmers to TCZB was strongly impacted by inflation: TL 100 paid out in 1989 had a real value very substantially less at the end of 1993. 3.03 Other negative influences were the extensive drought in 1989 and regional droughts in 1990. Bad harvests reduced loan recovery rates and forced GOT to declare loan rescheduling in disaster areas. The eastern and south-eastern provinces were negatively affected in the last years of Project implementation through civil unrest which disturbed agricultural activities. 3.04 TCZB's intention to divest itself of its participations was hampered by lack of capacity in the Public Investment Administration (PIA) to deal with these cases. Although investments were initially offered to the PIA, TCZB then retained the assets which were transferred from "equity participations" in the balance sheet to "other assets". D. Project Sustainability 4.01 Some aspects of the Project are sustainable while others are not. GOT and implementing agency commitment to carry out the Project in accordance with the agreements remained throughout the implementation phase, with the exception of a reluctance to address vigorously the politically sensitive issues of agricultural support policy and interest rates. These commitments are likely to carry on through the operational phase. The commitment for policy change, as assessed eight months after the Closing Date or 24 months after the 7 date of cancellation of the remaining credit funds, is also there. But prospects for action remain uncertain. After the closing, TCZB's Board decided to introduce a system of less fragmented interest rates consisting of three rates: A rate for short-term loans of 60%; a rate for investment loans of 70%; and a rate for sales cooperatives for marketing purposes of 118%. As of September 1994, only the 118% rate has been made effective while the two other rates were planned for introduction later in the year. 4.02 All sub-loan amounts disbursed are being recovered in nominal terms. The recovery percentage in 1993 was 88%. It is expected by TCZB that at least 88% of the unrecovered amount will be recovered with the dues of 1994. Amounts unrecovered one year after due date are subject to legal action with the possibility of foreclosure against collateral. Recovery against overdues under legal follow-up for medium- and long-term loans was 26% in 1989 and increased steadily to 52% in 1993. TCZB does not entertain write-offs. 4.03 In terms of TCZB's financial viability the Project appears to be sustainable. Its ratio of net worth to average assets, covenanted to reach 6% at the end of 1991, reached 12.2% by the required date and 14.8% by the end of 1993. The ratio of net worth to risk-weighted assets reached 25% in 1993. TCZB has become a stronger bank in all respects. Its business carried out on behalf of GOT is subject to precise regulations and carries full GOT guarantees if it involves lending activities to sales cooperatives for the procurement of agricultural commodities at support prices or payment of direct subsidy to farmers. TCZB benefitted from the technical knowledge provided through appraisal, supervision and monitoring of its lending activities. Its various credit departments and its Project Evaluation Department are capable to deal with potential follow-on projects. 4.04 The Project is also sustainable from the on-farm development aspect. Farmers have greatly benefitted from investments made under the Project and have developed a sense of financial discipline often lacking in other developing countries. Strong loan supervision efforts by TCZB minimized the misallocation of funds usually expected in cases of interest rate distortions. The PPAR findings for the SACP that "there is little evidence of significant credit substitution of diversion on the farms" is also valid for this Project despite the significant increase in lending activities. 4.05 The Project objective of creating a revolving fund to finance the same real value of loans after repayment by farmers until repayment by TCZB to GOT did not materiali&e. The weighted average interest rate on Project loans was usually less than inflation rates (although positive in real terms on loans to sales cooperatives which were not financed by the Project). Thus, TL 100 disbursed by GOT to TCZB in 1989 would have a real value of TL 58 when repaid at the end of 1993. E. Bank Performance 5.01 Bank performance at preparation and appraisal was satisfactory. Bank missions staffed with Bank staff and staff from the IBRD/FAO Cooperative Program at that stage 8 worked effectively with TCZB and TKK. Close cooperation continued in the preparation of working papers for the Project, thus conveying technical knowledge and generating commitment to the Project. During preparation and appraisal the Bank fielded numerous missions with all necessary expertise, e.g., financial analyst, economist, institutional specialist, training specialist, agriculturist, frequently supplemented by visits by middle-level managers. The Project was more complex than that of the SACP, but TCZB potential to implement such a demanding program was correctly assessed. 5.02 Main Project risks were correctly assessed to be in high inflation and economic disequilibrium. Commitment to the package of reforms that GOT had agreed to undertake to reduce the budget deficit and bring inflation under control was diluted in the years during Project implementation as a result of the Gulf crisis. The recurring financial crisis at the beginning of 1994 led to a stronger and more efficient economic reform program that also attempted to address the costly agricultural subsidy system. Renewed inflation appears to have had relatively little effect on demand for credit, nor did it influence negatively the repayment discipline of farmers. It was correctly predicted that in the institutional development of TCZB would continue. The intensive discussions regarding institutional development of TCZB and the TKK during preparation and appraisal were continued throughout implementation and produced positive results. 5.03 Bank performance during implementation was satisfactory. Supervision missions were fielded at regular intervals twice per year, staff continuity was maintained and the relationship of the Bank staff with the Treasury and implementing agency staff was excellent. The supervision effort would have benefitted from having an agriculturist or agricultural economist more frequently available to strengthen the M&E exercise. This happened only once because of staff constraints. 5.04 GOT and TCZB maintain that the Bank should have been more flexible on interest rates, rather than threatening suspension (follow-up letter on Country Implementation and Strategy Review of April 20, 1992) and thus forcing GOT to cancel undisbursed loan amounts when interest rate covenants were not met. In fact, the Bank made substantial efforts to keep the dialogue going in the presence of a deteriorating economic situation. Treasury indicated that in 1991 and 1992, when the covenants were to be implemented, GOT was not ready to make fundamental changes in agricultural support policies and that dealing with interest rates alone would have been a partial, ineffective reform measure. Readiness to address the costly agricultural incentives policy in a comprehensive package of measures has evolved in the last three years when it became evident that the support policies were not sustainable and that interest rates were not an appropriate vehicle for income distribution. Efforts were not successful in convincing policy-making levels in GOT that strong macro- economic action was needed to support and complement the credit program. 9 F. Borrower Performance 6.01 The performance of GOT and the implementing agencies was highly satisfactory in some aspects, satisfactory in others and deficient in some. GOT's and TCZB's performance in meeting the loan covenants on interest rates was inadequate. GOT's performance in implementing financial policies vis-a-vis TCZB was satisfactory. Required equity contributions were provided and the arrangements regarding payment of TCZB claims for duty losses from loans to sales cooperatives were implemented over time as required. TCZB implemented its financial policies in a satisfactory manner, e.g., it strengthened its equity base and introduced external auditors in 1988 for a partial audit and thereafter for full financial audits. Performance of TCZB in reaching its institutional objectives was highly satisfactory. The Union performed satisfactorily, although only about half of the TKK's were eligible in the last few years to participate in the Project. The performance of both TCZB and the Union in reaching the lending objectives was highly satisfactory, as most targets were exceeded. The quality of Project management by TCZB in general was good. Efforts by the Foreign Operations Department and the General Credit Department were highly satisfactory. The performance of Project consultants was satisfactory: they helped to improve TCZB's internal auditing system, its computer-based personnel management system, and its MIS. Project M&E appears to be adequate, although final results were not yet available in late 1994. 6.02 The major covenants related to institutional development and financial strength of TCZB. Although compliance with the interest rate covenants was deficient, compliance with other covenants was satisfactory. G. Assessment of Outcome 7.01 The Project achieved most of its major objectives and realized satisfactory development results. It is rated as satisfactory, although the 1992 cancellation of $70.7 million due to non-compliance with interest rate covenants is a negative factor. All institutional development objectives were achieved; objectives related to agricultural interest rates were only partially achieved. TCZB emerged as a stronger financial institution in several areas. It commands a much better financial position in terms of net worth and quality of its loan portfolio. Organizationally, it improved significantly its lending procedures and emerged with a well qualified cadre of staff in its four agricultural credit departments. Improvement in the MIS came with the further computerization of branches. TCZB's personnel data system was upgraded to a more adequate computer-based status. However, a major innovation introduced in 1988 - the transfer of its staff from civil service to contract status -- was reversed in 1993 by the constitutional court. The TKK strengthened their position organizationally and financially and increased their share in the agricultural credit system of the country. Objectives related to sub-loans made were exceeded. The on- farm production and economic impact from investment is expected to be positive overall in accordance with preliminary M&E results. 10 H. Future Qpration 8.01 A plan of future operation for the Project has been agreed with GOT, MARA, the Union and TCZB. It contains the arrangements on how the backflows of funds to TCZB will be used in lending for similar purposes until all Bank funds have been repaid to GOT as specified in the legal agreements. Details are in Annex 2. 8.02 In terms of institutional development, one of TCZB's main objectives was to further strengthen its financial position. An operating objective is to reach positive interest rates and full coverage of all lending-related costs as soon as feasible. A program for new macro- economic stabilization was put in place by the GOT in April 1994 and TCZB's Board subsequently decided on a substantial increase in interest rates. The decision was approved by GOT. The rate increase has been implemented for loans to sales cooperatives and is to be put into effect later for all other loans. Lending to TKK will continue to be governed by the protocol between TCZB and the Union. It has been agreed that: (i) more flexibility in the eligibility criteria for TKK should be introduced by allowing deviations in areas which have been declared disaster areas by GOT; and (ii) credit limits available to members of TKK should reflect a more pronounced difference between eligible and ineligible TKK, within the resources available to TCZB. This would be done in the form of a supplement to the protocol. Technical consultations with MARA will continue to be governed by its protocol with TCZB. 8.03 Optimum timing for a future impact evaluation by OED would be one to two years after the M&E exercise for the Project investments has been completed. I. Key Lessons Learned 9.01 TCZB's ultimate viability continues to depend on GOT's willingness and ability to implement economic reforms and to compensate TCZB for loan losses resulting from agricultural support measures. This has involved a combination of guarantees and equity contributions to TCZB. 9.02 Negative interest rates distort resource allocation. In a highly inflationary economy like Turkey farmers consider investments in agricultural machinery and livestock as the best means to safeguard the value of their money. If loans are made at negative real interest rates, farmers are inclined to make investments which they otherwise would not have made, e.g., buy an uneconomically-large tractor for a small farm. If resource allocations are to be minimized, close supervision at the local level is required. 9.03 World Bank resources can effectively support policy changes. Although the Bank's contribution to TCZB's short-term lending program was limited in terms of filling a resource gap, it was important as an incentive to revise TCZB's policies for short-term credit lending. 11 9.04 Rural credit can be an effective means to support efficient agricultural production in a less-than-ideal institutional and financial environment. Available channels may be less than ideal. At the time of Project preparation there was no other way to reach the farm sector than working with the state-owned TCZB. Only TCZB had the reach into rural areas and no other bank had specialized knowledge of the agriculture sector. During Project implementation its staff did an excellent job in seeking out viable on-farm investments, appraising sub-loans, and supervising their utilization to ensure effective use. The Project contributed to private sector development because loans were made only to private sector farms. TCZB's status as a state-owned bank appears to have had little, if any, negative impact on this contribution. Quality of management of participating financial institutions, as opposed to ownership status, is an important consideration in the design of Bank-supported credit projects. 9.05 The partial appraisal of TCZB limited to TCZB's agricultural operations, in combination with appraisal of its financial position, proved to be adequate. A full appraisal of all TCZB activities probably would have added little to Project achievements. 9.06 Negative real interest rates contribute to erosion of the financial institutions' capital base. In the context of this Project, the GOT will not recover the real value of funds on-lent to TCZB. Sound overall financial policies would have added to the success of this project. J. Program Objective Categories 10.01 Although the Project had no program objectives, it made significant contributions to poverty alleviation, environmental objectives and private sector development. As all sub- loans had exclusively private sector beneficiaries, the Project contributed to private farm sector efficiency by financing profitable investments in mechanization, livestock and other agricultural development. It can be assumed that virtually all loans made by the TKK went to beneficiaries below the relative poverty level which, measured as 30% of GNP per capita (US$2,130 in 1993), is US$639 or US$3,834 for a family of six. The positive income effect on farmers borrowing directly from TCZB farms is likely to be confirmed by M&E work. Initial evidence is encouraging. The protocol between MARA and TCZB stipulated the tasks of the extension service, including guidance to farmers on the use of fertilizers and pesticides. This protocol was faithfully executed and supportive of environmental objectives.  13 Part II: Tables Table 1: Summary of Assessments A. Achievement of Objectives Objectives Substantial Partial Negligible Not Applicable Macro Policies X Sector Policies X Financial X Objectives Institutional X Development Physical Objectives X Poverty Reduction X' Gender Issues x Other Social X Objectives Environmental X Objectives Public Sector X1 Management Private Sector X1 Development Other (specify) X B. Project Sustainability Likely Unlikely Uncertain Ix None of the three program categories was specified in the objectives, yet the achievements were substantial. 14 C. Bank Performance [Performance Highly Satisfactory Satisfactory Deficient Identification X Preparation X Assistance Appraisal X Supervision X D. Borrower Performance Performance Highly Satisfactory Satisfactory Deficient Identification X Preparation X Assistance Appraisal X Supervision X E. Assessment of Outcome Assessment Highly Satisfactory Unsatisfactory Highly Satisfactory Unsatisfactory ______ x 7 X 15 Table 2: Related Bank Loans/Credits Loan/Credit Title Purpose Year of Status I Approval Preceding Operations 1. Second Agricultural Supported credit for on-farm 1984 Closed Credit Project, loan 2318- development to increase TU agricultural production, raise farmers' productivity and incomes, and various other free- standing agricultural projects, and an action plan for institutional development. 2. Agricultural Sector Deepen, broaden and refine 1985 Closed Adjustment Loan, 2585-TU agricultural adjustment program through agreed policy reforms 3. Agricultural Extension Development and dissemination 1984 Closed and Applied Research of improved agricultural Project, loan 2405-TU technology to foster increased productivity and agricultural incomes 4. IAEE Irrigation Project, Complete four irrigation 1984 Closed loan 2433-TU projects to increase agricultural production and incomes and expand rural employment opportunities 5. Drainage and On-farm Rehabilitation and improvement 1986 Closed Development Project, loan of drainage systems to increase 2663-TU agricultural production, productivity and incomes 6. Agroindustry Project, Expansion and modernization of 1989 Under loan 3077-TU agroindustry sector, improve implemen- capacity utilization, various tation fisheries surveys, pilot marketing training program 16 Loan/Credit Title Purpose Year of Status I_ Approval Following Operations 1. Agricultural Extension II Increased productivity and 1990 Under Project, loan 3177-TU income through improving the implemen- flow of information and the tation transmission of relevant F 9 technology 2. Agricultural Research Institutional strengthening of 1992 Under Project, loan 3472-TU research and strengthening high- implemen- priority research programs tation 3. Eastern Anatolia Addresses rural poverty and 1993 Under Watershed Project, loan natural resource degradation implemen- 3567-TU though a participatory approach tation to watershed rehabilitation Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/Latest Estimate Identification 06/85 Preparation 02/86 09/86 Appraisal 04/86 11/86 Post-appraisal - 08/88 Negotiations 02/87 11/88 Board Presentation 04/87 06/89 Signing 06/87 06/89 Effectiveness 10/87 11/89 Midterm review n.a. n.a. (if applicable) Project Completion 12/92 12/93 Loan Closing 06/93 12/93 17 Table 4: Loan Disbursements: Cumulative Estimated and Actual (US$ million) FY90 FY91 FY92 FY93 FY94 Appraisal Estimate 78.0 138.0 207.0 243.0 250.0 Formally Revised Estimate' -- -- 178.7 179.3 179.3 Actual 75.1 152.5 178.7 179.1 179.3 Actual as % of Estimate 96.3 110.5 100.0 99.9 100.0 Date of Final Disbursement 12/28/93 Cancellation in June 1992 of US$ 70.7 million. 18 Table 5: Key Indicators for Project Implementation and Operation' I. Key Indicators in SAR Estimated Actual 1. TCZB's ratio of net 6% for 1991 12.% for 1991 worth to average total 14.8% for 1993 assets 2. Recovery of total dues Normal credits to In Project area 87.7% for 1993 (past dues at beginning of individual farmers In non-Project area ranging from year plus current dues) 78.1% in 1986 65.4% to 99% for 1993 Supervised credit to individual farmers 68.4% in 1986 Credit to TKK members 75% to TKK members for 1993 3. Staff expenses to 4.4% 6.9% performing portfolio 4. Beneficiaries of 40,000 210,000 medium- and long-term loans 4. Beneficiaries of short- 170,000 2,052,000 term loans II. Modified Indicators 1. Fellowship participants: 4 managers for skill gap 6 managers for study of organization, analysis course; program and system of management development 6 instructors for training 5 instructors for training of trainers of trainers 10 system analysts 6 staff from Planning and Budgeting and Systems Analysis for courses in MIS; I/ OD 10.70, Project Monitoring and Evaluation and OD 13.05, Project Supervision, both requiring that quantitative indicators of project performance be included identified and evaluated were not yet published at the time of Board approval. This table therefore shows as performance indicators those that are specified in the SAR and in the covenants. 19 I. Key Indicators in SAR Estimated Actual not provided 12 staff from Credit and Systems Analysis for courses in credit and portfolio management not provided 6 inspectors from Internal Audit for courses in internal audit in place in other banks not provided 10 staff from branches and foreign Operations for courses in branch operations and design of training programs 10 top graduates for dropped from program advanced training III. Other Indicators 1. Recovery of past dues not available at appraisal 34.3% in 1989 under legal follow-up 29.1% in 1990 24.2% in 1991 58.2% in 1992 44.9% in 1993 20 Table 6: Key Indicators for Project Operation No key indicators for project operation were defined in the SAR. Key indicators for future operation are as follows: 1. TCZB to maintain ratio of net worth to average total assets of at least 6% 2. TCZB to continue lending to individual farmers for similar purposes 3. TCZB to continue lending to TKK in accordance with provisions of protocol with Union of Agricultural Credit Cooperatives 4. TCZB to maintain recovery ratio of total dues of at least 75% 21 Table 7: Studies Included in Project Study Purpose as Defined at Status at Impact of Study Appraisal Appraisal Analysis of Reach decisions about TCZB was TCZB's Board TCZB's divestiture and/or making burdened with decided in 1989 to portfolio of adequate provisions for large number of sell off all equity participations loss-making enterprises participations, participations except many of them insurance loss making companies, therefore study was not undertaken Analysis of The objective of the study Audit of TCZB's Study was TCZB's was to reach agreement financial undertaken by portfolio in on measures needed to statements was independent auditors arrears improve recovery and to undertaken by and make adequate provisions GOT auditors recommendations until 1989 were made 22 Table 8A: Project Costs Appraisal Estimate (US$M) Actual/Latest Estimate (US$M)l Item Local Foreign Total Local Foreign Total Costs Costs Costs Costs 1. Production 87.5 30.4 117.9 43.5 45.1 88.6 Loans _ 2. Investment 578.4 526.5 1,104.9 477.9 475.1 953.0 Loans __ 3. Institutional 0.6 3.1 3.7 0.6 3.1 3.7 Development Total 666.5 560.0 1,226.5 522.0 523.3 1,045.3 1/ Based on TCZB calculations and mission estimates. 2/ This figure contains only the short-terms loans with Bank financing. The total short-term lending in the Project area was US$1,386 million. 23 Table 8B: Project Financing Appraisal estimate (US$M) Actual/latest estimate (US$M)1 Source Local Foreign Total Local Foreign Total costs costs Costs costs IBRD/IDA 0.0 250.0 250.0 0.0 179.3 179.3 Cofinancing 0.0 250.0 250.0 0.0 227.4 227.4 institutions Other external 0.0 0.0 726.5 0.0 0.0 0.0 sources Domestic 666.5 60.0 0.0 522.0 116.6 638.6 contribution TOTAL 666.5 560.0 1226.5 522.0 523.3 1,045.3 1/ Based on TCZB calculations and Mission estimates. Table 8C Calculation of Project Cost (Medium- and Long-term Lending) In Current Prices 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 Total Total Total Loans Invest Loans Invest Loans Invest Loans investmt. Loans Investmt. Loans Farmer investmt. Farmer Type of Investment Disb. Cost Disb. Cost Disb. Cost Disb. Cost Disb. Cost Disb. Contrib. Cost Contrib. OTL BTL BTL BTL BTL BTL BTL BTL BTL BTL BTL BTL BTL In % Crop Production Indiv. Farmers 23.1 46.2 25.3 50.6 13.2 26.4 26.5 53.0 37.9 75.8 126.0 126.0 252.0 50.0 TKK Members 0.0 0.0 RA 06 0.9 M L 16.6 11.0 XUO 20.6 LOA iu 50.0 Total 23.1 46.2 25.7 61.4 14.1 28.2 34.8 69.6 48.9 97.8 146.6 146.6 293.2 50.0 Livestock Breeding indiv. Farmers 35.9 44.9 40.7 50.9 49.9 62.4 184.1 230.1 228.1 285.1 538.7 134.7 673.4 20.0 TKK Members L 3 3.0 8 .5 6j 4 42.5 51 95.9 240 1199 200 Total 38.5 48.1 43.7 54.6 63.1 78.9 218.7 273.4 270.6 338.3 634.6 158.7 793.3 20.0 Tractor indiv. Farmers 121.4 242.8 211.7 423.4 138.1 276.2 224.4 446.8 591.8 1,183.6 1,287.4 1,287.4 2,574.8 50.0 TKK Members 0A 0.0 0.0 1 0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 50.0 Total 121.4 242.8 211.7 423.4 138.0 276.0 224.3 448.6 591.8 1,183.6 1,287.2 1,2872 2,574.4 50.0 Agric. Equipment Indiv. Farmers 18.7 37.4 13.4 26.8 8.0 16.0 9.1 18.2 12.4 24.8 61.6 61.6 123.2 50.0 TKK Members 45.8 91.6 37,6 ZI 57.0 114.0 140.5 21.0L 217.4 434.8 498.3 498.3 996.6 50.0 Total 64.5 129.0 51.0 102.0 65.0 130.0 149.6 299.2 229.8 459.6 559.9 559.9 1,119.8 50.0 Water Management Indiv. Farmers 0.0 0.0 13.6 27.2 9.8 19.6 9.7 19.4 13.6 27.2 46.7 46.7 93.4 50.0 TKK Members 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 50.0 Total 0.0 0.0 13.6 27.2 9.8 19.6 9.7 19.4 13.6 27.2 46.7 46.7 93.4 50.0 Grand Total Indiv. Farmers 199.1 371.3 304.7 678.9 219.0 400.6 453.8 769.5 883.8 1,596.5 2,060.4 1,656.4 3,716.8 44.6 TKK Members 48.4 94.9 41.0 79.8 71.1 132.3 183.4 340.9 270.9 509.9 614.8 542.9 1,157.7 46.9 Total 247.5 466.1 345.7 658.6 290.0 532.7 637.1 1,110.2 1,154.7 2,106.5 2,675.2 2,199.3 4,874.5 45.1 1) Note: Actual farmer contribution Is in all cases higher than that requested by the guidelines because prices go up between application and actual disbursement and farmers have to make up for the balance from their own equity. 2) Assume that equity contribution Is the same as for indiv. farmers 21-Sep-94 Table 8D Calculation of Project Cost (Medium- and Long-term Lending) In US Dollar Prices 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 Total Total Total Loans Invest Loans Invest Loans InLoans oans investmt. Loans Investmt. Loans Farmer investmt. Farmer Dish. Cost Dish. Cost Disb.ish. Cost Disb. Cost Disb. Contrib. Cost Contrib. Type of Investment US$ M US$ M US$ M US$ M US$ M US$ M US$ M US$ M US$ M US$ M US$ M US$ M US$ M In % Crop Production Indiv. Farmers 10.9 21.8 9.7 19.4 3.2 6.3 3.8 7.7 3.4 6.9 31.1 31.1 62.1 TKK Members 0.0 0.0 0.2 0.3 g O. U 2 2.0 2.6 2.6 5.2 Total 10.9 21.8 9.9 19.7 3.4 6.8 5.1 10.1 4.5 8.9 33.6 33.6 67.3 Livestock Breeding Indiv. Farmers 16.9 21.2 15.6 19.5 12.0 15.0 26.7 33.4 20.8 26.0 92.0 23.0 115.0 TKK Members 12 1. L 4.fl -, 6.3 3.9 4.8 14.4 3.6 18.0 Total 18.2 22.7 16.8 20.9 16.1 18.9 31.8 39.7 24.6 30.8 106.4 26.6 133.0 Tractor indiv. Farmers 57.2 114.5 81.2 162.3 33.1 66.2 32.6 65.2 53.9 107.7 258.0 258.0 515.9 TKK Members 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total 57.2 114.5 81.2 162.3 33.1 66.2 32.6 65.1 53.9 107.7 257.p 257.9 515.9 Ln Agric. Equipment Indiv. Farmers 8.8 17.6 5.1 10.3 1.9 3.8 1.3 2.6 1.1 2.3 18.3 18.3 36.6 TKK Members 21.6 4! 14A 28 13.7 2,I MA 40. 198 39.6 89.9 89.9 179.7 Total 30.4 60.8 19.6 39.1 15.6 31.2 21.7 43.4 20.9 41.8 108.2 108.2 216.4 Water Management Indiv. Farmers 0.0 0.0 5.2 10.4 2.4 4.7 1.4 2.8 1.2 2.5 10.2 10.2 20.4 TKK Members 0.0 0.0 22 .00 A 0.0 0.0 0.0 0.0 A 0.0 Total 0.0 0.0 5.2 10.4 2.4 4.7 1.4 2.8 1.2 2.5 10.2 10.2 20.4 Grand Total indiv. Farmers 93.9 176.0 116.8 222.0 52.5 96.1 65.9 111.7 60.4 145.3 409.6 340.6 750.1 TKK Members 22.8 44.7 15.7 30.6 17.1 31.7 26.6 49.5 24.7 46.4 106.9 96.1 202.9 Total 116.7 219.8 132.6 252.5 69.5 127.7 92.5 161.2 105.1 191.7 516.4 436.6 953.0 21-Sep-94 Table 8E Calculation of Project Cost (Short-term Lending) In Current Prices 1989 1990 1991 1992 1993 Total Loans Loans Loans Loans Loans Loans Type of Loan Disb. Disb. Disb. Disb. Disb. Disb. BTL BTL BTL BTL BTL BTL Crop Production Indiv. Farmers 0 624.2 719.6 648.7 0.0 1,992.5 TKK Members 0 106.3 287.5 300.0 0.0 693.8 Total 0.0 730.5 1,007.1 948.7 0.0 2,686.3 Livestock Breeding indiv. Farmers 0.0 501.7 752.4 573.6 0.0 1,827.7 TKK Members 0.0 85.4 118.5 115.2 0.0 319.1 Total 0.0 587.1 870.9 688.8 0.0 2,146.8 Fertilizer indiv. Farmers 0.0 124.5 226.8 155.0 0.0 506.3 TKK Members 0.0 21.2 171.3 129.7 0.0 322.2 Total 0.0 145.7 398.1 284.7 0.0 828.5 Grand Total indiv. Farmers 0.0 1,250.4 1,698.8 1,377.3 0.0 4,326.5 TKK Members 0.0 212.9 577.3 544.9 0.0 1.335.1 Total 0.0 11463.3 2,276.1 1,922.2 0.0 1) Note: Actual fanner contribution should be zero, but Is in most cases required because crop budgets are not in line with Inflation and also prices increase between application and disbursements and farmers have to make up for the balance from their own funds. 2) Note: TCZB's short4erm lending in 1993 not shown because no Bank funds were available to TCZB in that year. Lending from backflow of funds could have been shown, however. 21 -Sep-94 Table 8F Calculation of Project Cost (Short-term Lending) In US Dollar Prices 1989 1990 1991 1992 1993 Total Loans Loans Loans Loans Loans Loans Disb. Disb. Disb. Disb. Disb. Disb. Type of Investment US$ M US$ M US$ M US$ M Crop Production Indiv. Farmers 0.0 239.3 172.6 94.2 0.0 506.1 TKK Members 0.0 40 6.9 43.6 0.0 153.3 Total 0.0 280.1 241.5 137.7 0.0 659.3 Livestock Breeding Indiv. Farmers 0.0 192.4 180.4 83.3 0.0 456.1 TKK Members 0.0 32.7 28.4 16.7 00 77.9 Total 0.0 225.1 208.8 100.0 0.0 534.0 Fertilizer Indiv. Farmers 0.0 47.7 54.4 22.5 0.0 124.6 TKK Members 0.0 81 41.1 18.8 0.0 68.0 Total 0.0 65.9 95.5 41.3 0.0 192.7 Grand Total indiv. Farmers 0.0 479.4 407.4 200.0 0.0 1,086.8 TKK Members 0.0 81.6 138.4 79.1 0.0 299.2 Total 0.0 661.1 545.8 279.1 0.0 1,386.0 21-Sep-94 28 Table 9: Economic Costs and Benefits No Economic Rate of Return (ERR) for the whole project was calculated at appraisal. However, ERRs and Financial Rates of Return (FRRs) were calculated for individual on-farm investments. The SAR stated that ERRs were expected to be in the range from 17% to 71%, while FRRs were expected to be between 13% and 52%. Preliminary results of the M&E exercise carried out on a sample of 198 medium- and long-term loans only two FRRs (egg production and a 10-head dairy unit) came out with unsatisfactory FRRs. The other investments achieved FRRs ranging from 13% to 60%. Regarding ERRs, preliminary results are available only for three models, they range from 17% to 59%. Results from the M&E report of TCZB are awaited. Täble 10: Stat df Idgal Ceve Loan Covenant Presemt Original Revied Agreement Typ. Statum Fuiflument Fulfnilet Dcacriptio of Covena t Commea Section Date Data 2.02A 3 C Amoumt of loan may bo witddrawn in accordancc with provisios of Schedulk 1 2.028 1 C Borrower ^aal opan and maimain a pecial accou m in the CemrWl Bank of Accout opend in December 1989 Turkay, witdrawal and paynt~ balo be made in accordanca with in Ca. In 1991 tran~ferred to provision of scha~ 4. TCZB in New York. Röconcliated and closed ond-1993. 2.03 10 C 6/30/93 12/31/93 Cing data saH b Juna 30, 1993 or mch date aa Bank shall utablish. Extended by 6 moua and cloed 12.31.93 3.01A 10 C Dorwer declares commnt, al causa TCZS to perform according to PA 3.011 3 C Efacedvanesa Dorrown r t make procds available under trm and cond~itin agreed Subidiary LA igned o 10/19190 Supon betwen Borrower and Sank in wb~idiary LA 3.01C 5 C åorrower shall ex*rcims ha rights to pro~act intarsta of Bortoer and Bank and acco plish purpoan of oan. 3.01D <and 2 C 12/31191 Borrower ska provid TCZB with aquity contribution to amble TCZa to ida lemer N. nmin redo to averaga al aes of 5% In 1989, 5.5% la 1990, and 1) _6% in 1991. 3.02 5 C Effectivenss Bonower skal causa MAFRA to oclhda prooc with TCZB and asign Protocol ignd 10/19189. aff raquired. Supplumemary lumr on anviroement ~hrnishd on 11/2/19. Cooperafion OK 3.03A l C Borrower skafl cauaa MAFA o audi at last one avery 3 Acal years AMd nom done by Caral Uåon the accou and fanial ~ ~atemens of TKK and individual couperatives auditors 3.03B 1 C borrw, skall causa MAFRA to ~rmis TCZB report of adk no laer Sa 3.03A. than 9 moths after and of åcal year audit was undertaken 3.04 (and 2 CD 6/30/90 6/30/91 Borowar skall cary out an aanal rmviaw of approprm~-- of Recuived ort review in Nov. 1990, side Iatte agricuff ral 1intesat ra on an agred basis. ascond in December 1991, no No. 1) futher reviews wera undertaken 3.04 (and 2 CP B9r~m« ala tak mna~ ecessary to bng (i) average iuret c side Iener by 3/31/90 and (f) al agric. rates by 3/31/911t positiva levela. No. 2(b)) Loan Cuvemnam Present Original Plevised Arement Typ* Status Fulfimet Fuifiimet Decr~pion of Covenat ComMDU Section Data Date 3.05 5 C Exc~p as agreed, procuremm of good , works and con-ma' u~rvices elhall be governd by provisione of Section 2.03. 4.01 Por aU penditure, with respect to which wdrawala from oan mcou~ the borro~ sha4: 4.OIA(i) 1 C baa~uin facord and accow~s reting xpnditures. 4.OIA(u) l C Enm a rmrecod of expenditurs are retaind at baat onm year ar Bank roc~e udtrpr for flacal year las wiohdramwaå fUm bua wco~ was 4.01A(iii) 1 C Enable Bank represenativsa to examin rmcods. 4.018 Borrower shall: 4.01B(i) 1 C Hava racorda and accomas auded by ind ende auditore. 4.01B1i) l CD Puah to Bank W later han 6 nt aec end of mach much yar report Audi reporte for 1991 recaived of and Jan. 93, therealer up to date. 4.01B(iii) 1 C Pmish to Bank dber information concering r~corda and accoums and andas requeed by Bank. Loan Covena Pmaen Origna Revined Araemet Typ* Status Pulfillnat Fulfillment Deocripion of Covenae Commeta Section Date Date Schedul. 4 to 5 C Paymfes out of SA hall be made only for eligble expenditures and in Loan accordance with achedul 4. Project 5 C TCZB dec"ars commitmen to Pr~jct Ageemet Section 2.01A 2.01B 5 C TCZB to cary out Project in accordance with Schedule 2.01C(i) 5 C TCZ8 to conclude agreemnt with MAFRA Signed 10119/19 2.01C(ii) 5 C TCZ8 to conclude agrement with TIKK 2.01D 5 C TCZB to adop credit guidelins 2.015 5 C TCZB ~t to abroga Policy Statbmett, Credit Ouideina, Project Credit Ouid~linaa, MAFRA Protocol and TKK Agremt 2.02A 5 C - TCZ to cary out t Action Plan and the trainine program referred to in Al and A 4 ofthe Pr ct 2.02B 5 CP TCZB to cary ot the studis referred to in A l of the Project 2.03A 5 C TCZD to cany ou procur~eme in accordance V.ith the schadule to the Proec Agreeen 2.03B 5 CD TCZB to ~rioy cona a 3.01A 1 C TCZB to e-iI adequat r~cords and accoum 3.01(i) l C TCZB to hav* its accouts and financial atamma auditöd Agr~mnn Typ. Saans Peln Paina~ Dm~cdpdo of Coven=s Cam~u 3e-sd. Deb Dem 3.0191) 1 C TCZ to &ni a r~poss a= har thaå im omdh a *s s~ of ___ __each ywa 3.02 1 C TCZa ticruce anm~ tD ~a hatar[a --d~n proceduua_ schd~ ID 5 C TCZ o ha Aconu r d to la A i ofPct A~ soctiom A a 5 C TCZD .~ co~ ppv~I of .ubo_ _ _ 1(b) 3 C TCZB duN provide mb~a to ian a sccor~n whb en, Para budgets ad i,a".maf principls ad procod.a of CokiM and P~oject Cidi modeis a~odied aud ~gulay- BI(b)l) 3 C k~-a .ppela den ba apprad to dutrim 6r ~ ud~ ad Se skab. COa~1d desple daem~i vi~bily. 8Tom basis of caop budget. MLT om bes of åhtag of båcimal Maff _____ ag model. 10% of gT and an MLT wig be reviwld. ål(b)(ii) 2 C maun dna 6ha be chrged et . rtes spciiad lm Crdi G~mdami~•. Bl(b)0i) 5 C S6pev~ moa 6.o~l mde hoeies coopaet wib..o- Tevice of MAPRA. MAPA wio alm nr e h sd t fi~ of pesd . Coreeiv ~ma we bs umquired If mcesmary. 33 III EiiII* Milli an11 -34 I1 .1 .115 I o - - - i l _ 35 Table 11: Compliance with Operational Manual Statements Statement Number and Title Describe and Comment on Lack of Compliancepli an e Basically, there was compliance with the applicable Bank Operational Manual Statements 36 Table 12: Bank Resources: Staff Inputs' Stage of Project Actual Weeks Through Appraisal 207.7 Appraisal--Board 92.4 Board--effectiveness not separately available Supervision 58.9 Completion 7.3 Total 366.3 1/ Data for planned weeks not available, therefore, comparison of planned weeks with actual weeks not possible. Also, US dollar figures not available. Table 13: Bank Resources: Missions Stage of Month/ Number Days Specialized Staff Skills Represented Performance Rating Types of Project Year of in Problems Persons Field Implem. Dev. Status Objectives Through Jun. 1985 5 6 Agric. Credit Specialist N.A. N.A. N.A. Appraisal Credit Institut. Specialist (CP) Agriculturist (CP) Fin. Analyst (CP) Coop. Credit Specialist (CP consultant) Oct. 1985 2 9 Credit Institut. Specialist (CP) N.A. N.A. N.A. Agriculturist (CP consultant) Nov. 5 8 Agr. Credit Specialist N.A. N.A. N.A. 1985 Credit Inst. Specialist (CP) Fin. Analyst (CP consultant) Agriculturist (CP consultant) Coop. Credit Specialist (CP consultant) Apr. 7 14 Agric. Credit Specialist N.A. N.A. N.A. 1986 Agriculturist Agric. Education Specialist Credit Institut. Specialist (CP) Fin. Analyst (CP consultant) Agriculturist (CP consultant) Coop. Credit Specialist (CP consultant) May 1 2 Manager N.A. N.A. N.A. 1986 Stage of Month/ Number Days Specialized Staff Skills Represented Performance Rating Types of Project Year of in Problems Persons Field Implem. Dev. Status Objectives Nov. 4 11 Agric. Credit Specialist N.A. N.A. N.A. 1986 Agric. Credit Specialist Credit Institut. Specialist (CP) Coop. Credit Specialist (CP consultant) Appraisal-- Jul. 1987 3 3 Manager N.A. N.A. N.A. Board Agric. Credit Specialist Agric. Economist May 1 13 Agric. Credit Specialist N.A. N.A. N.A. 1988 Aug. 1 16 Agric. Credit Specialist N.A. N.A. N.A. 0 1988 Board-- Jun. 1989 1 3 Agric. Credit Specialist 1 1 No effective- Oct/Nov problems ness 1989 1 11 Agric. Credit Specialist 1 1 Supervision Jul. 1990 1 13 Agric. Credit Specialist 2 2 Covent. Compl. Progress in TA Stage of Month/ Number Days Specialized Staff Skills Represented Performance Rating Types of Project Year of in Problems Persons Field Implem. Dev. Status Objectives Supervision Oct/Nov 3 12 Agric. Credit Specialist 2 2 Covent. 1990 Agriculturist Compl. Economist Progress in TA Supervision Apr/May 2 16 Agric. Credit Specialist 3 2 Covenant 1991 Financial Analyst Compl. Progress in TA & Studies. Supervision Jan, 1992 3 16 Agric. Credit Specialist 3 2 Covenant Financial Analyst Compl. Agric. Credit Specialist Progress in TA & Studies Supervision Oct/Nov 2 15 Agric. Credit Specialist 2 2 No major 1992 Financial Analyst problems. Supervision Aug. 2 13 Agric. Credit Specialist 2 2 No major 1993 Financial Analyst problems. Supervision Feb/Mar 2 18 Agric. Credit Specialist 2 2 No major 1994 Financial Analyst prob lems. Completion Aug. 1 16 Agric. Credit Specialist N.A. N.A. N.A. 1994 _ __1_1_1- 40 Annex 1 Page 1 AIDE MEMOIRE TURKEY THIRD AGRICULTURAL CREDIT PROJECT (Loan 3090-Tf) Implementation Completion Mission of August 1994 Introduction 1. A World Bank mission consisting of Mr. J. Duester carried out the Implementation Completion Mission of the Third Agricultural Credit Project (the Project) from August 12 - 26, 1994. The Mission held discussions with officials of the Undersecretariat of Treasury and Foreign Trade, the Ministry of Agriculture and Rural Affairs (MARA), the Management and officials of the Agricultural Bank of Turkey (TCZB), and the Management and officials of the Central Union of Agricultural Credit Cooperatives (the Union). 2. Field trips were made to the Izmir and Manisa provinces where TCZB branch offices, MARA extension offices, the District Office of the Union of Agricultural Credit Cooperatives were visited to discuss the project achievements and the operational plan. Additionally, the Mission reviewed a sample of TCZB loan beneficiaries participating in the monitoring and evaluation (M & E) exercise in order to verify the initial results of this exercise that have been incorporated in TCZB's first M & E report. 3. The Mission wishes to express its sincere appreciation for the cooperation and the courtesies extended to it and all previous missions during the project implementation phase by officials of the Government of Turkey (GOT), the managements and staff of TCZB, the Union and the many farmer beneficiaries visited. Without this cooperation, it would not have been possible to achieve the level of success in project implementation that has actually been achieved. 4. The Project closed on December 31, 1993, and it was thus the objective of the mission to: a. collect data for the preparation of the Bank's Implementation Completion Report (ICR), and b. advise GOT and the implementing agencies on preparing their own contribution to the ICR. 41 Annex 1 Page 2 5. The ICR marks the transition of the project from implementation to its future operation. It is intended to assess: a. the degree of achievement of Project objectives; b. prospects for the Project's sustainability; c. Bank and Borrower performance; d. Project outcome; and e. the plan for the Project's future operation. 6. This Aide Memoire records the views of the Borrower, the implementing agencies and the Bank on Project implementation and operation including the operational plan which is attached as annex. The Mission's findings regarding the views of the Bank are subject to confirmation by the Bank's Management. 7. A wrap-up meeting chaired by the Head of the World Bank Projects Department in the Treasury is scheduled to be held on August 26 with representatives of MARA, TCZB, the Union, and the World Bank Resident Mission in attendance. Project Implementation 8. Project Closing. The Project closed after one extension on December 31, 1993, six months after the planned closing date. The remaining funds on the loan account of $206,841.30 were disbursed to the Trust Fund Account of FAO under categories 2, consultants' services, and 3, fellowships, of the Project in December 1993, bringing the loan account balance to zero. The final disbursement figure was $179.3 million out of the total initial amount of $250 million. $70.7 million of the loan was cancelled in June 1992. Details of the Project disbursements and physical achievements are in the annex: Plan for Project Operation after Closing on December 31, 1993. 9. Cofinancing. The Project was cofinanced by the Overseas Economic Cooperation Fund of Japan (OECF) with $250 million. The funds of OECF were used in a joint financing operation of all medium- and long-term loans made under the Project. The Closing Date for the OECF loan is December 31, 1994. As of July 31, 1994 an amount of $22.6 million was still undisbursed. TCZB Management has requested that the OECF either extend the Closing Date by one year to allow sufficient time to disburse the remaining funds or increase the OECF disbursement percentage to 90% to cover the Bank's 45 % that are no longer forthcoming after the cancellation of the remaining credit funds. 42 Annex 1 Page 3 10. Formulating and Attaining of Credit-Related Objectives. It is the view of the Borrower as represented by the Undersecretariat of Treasury and Foreign Trade and MARA and of the implementing agencies that the Project had clear and attainable objectives in the area that relates to credit and that the Project objectives were met as they relate to increasing farm productivity and farmers' incomes through expanded access to agricultural credit and the financing of productive investments at the farm level. The Mission concurs with this view. As detailed in the annex, TCZB made more than 96,000 direct medium- and long-term investment loans, far more than the 40,000 investment loans envisaged at appraisal. The big difference is mainly due to the fact that OECF came in with additional long-term funds which were disbursed on a joint financing basis so that TCZB could reduce its own contribution and thus finance a larger number of investments. Without the Project, investment loans in that order of magnitude would not have been made due to the lack of long- term funds in TCZB. TCZB concentrated the scarce funds available to it in the non-Project provinces which, at the end of 1993, had medium- and long- term loans outstanding of 15.3% of the country total. The corresponding figure for short-term loans was 20.1% 11. In addition to the direct lending by TCZB, about 114,000 small medium- and long term loans were made by the TKK to their members. These were for agricultural equipment, e.g., tractor-drawn implements or trailers (87.7% of number of loans), livestock breeding, e.g., up to three heads of dairy cattle (10.9%) and crop production (1.4%). 12. The $23.1 million of Bank funds used for incremental short-term lending were part of TCZB's and the TKKs' impressive lending effort in this category. TCZB made close to 1.5 million short-term loans under the Project, the TKK another 556,000. TCZB argued that the formulation of the definition for "incremental" was flawed because it lead to very uneven disbursements. The Mission expressed the view that it was necessary to define "incremental lending" in real terms to avoid financing inflationary increases and that for this purpose the best possible definition was agreed at negotiations and incorporated in the legal agreements (para 2.c. of Schedule 1 to the Loan Agreement). The uneven disbursement was the consequence of a drop and subsequent steep rise in short-term lending by TCZB due to drought in 1989 and 1990 which could not have been foreseen. The Mission emphasized that the short-term component, which in retrospect may seem without great importance because the actual number of loans financed with Bank funds within the overall total of short-term loans was insignificant, did have an important role: It provided the vehicle for the introduction of crop budgets which proved out to be a very important instrument to calculate actual credit requirements at the farm level. Both GOT and TCZB indicated that the short-term component had indeed great significance and should be included in any further project. 13. Monitoring & Evaluation. TCZB carried out an M & E exercise on a representative sample of 198 medium- and long-term loans and 1,347 short-term loans. The participants among the loan beneficiaries, both for medium- and long-term and for short-term loans, were selected randomly under consideration of the number of loans made for each type of investment or crop purpose in the various agro-climatic zones. Preliminary results for the investment 43 Annex 1 Page 4 lending (using two monitoring runs for 28 farmers and one for 170 farmers) indicate that of 14 types of investment under review, only two came out with financial rates of return (FRR) under the required level of 12%. These are egg production with a negative FRR of 4% and a 10-head dairy unit with 1 %. In the case of the poultry investment, this is the result of declining prices due to loss of export markets after the Gulf War. In the case of the dairy investment, the investment cost include construction of stables for cattle, an investment that cannot be supported by a herd of ten heads. The remainder of the investment models achieved FRR rates ranging from 13% for a combine harvester to 60% for a 20-cow cattle breeding unit. Economic rates of return (ERRs) are still under preparation. The Mission reviewed a selected sample of farmer beneficiaries participating in the M & E in the Manisa and Izmir provinces and found that the results of the exercise appear trustworthy. For six farms visited with various types of investments, individual farm models were prepared which should have acceptable FRRs. 14. One additional achievement deserves to be listed. While in an environment of high inflation investors are normally reluctant to make new investments, e.g., in the agroindustrial sector, farmers who have taken a loan for the procurement of machinery and equipment or for the import of dairy cattle, consider this as the best type of assurance against devaluation of their money because the market value, rather than decreasing through depreciation, increased during all years of Project implementation, the rate of inflation being much higher than the depreciation rate. 15. Formulating and Attaining of Institutional Objectives. Institutional Development objectives were aimed to further strengthen the institutional capabilities of TCZB and the credit operations of the TKK. In particular, they were to maintain the momentum in a process that had started under the Second Agricultural Credit Project (Loan 1218-TU). They included organizational and procedural measures, e.g., improvements in TCZB's MIS, cost accounting, program budgeting, and improvements in TCZB's financial position through agreement with GOT on equity contributions and a spread for TCZB that would cover all lending-related costs as well as analysis of its loan and equity portfolio. 16. Conclusions by the Borrower and TCZB on Project performance in the institutional development aspects are that the Project has reached most of the objectives set out in the SAR also in this respect. It strengthened TCZB's financial position through increasing TCZB's net worth, it improved its recovery position and thus reduced its portfolio under administrative and legal follow-up, it assisted in settling TCZB's claims to Government and in finding new arrangements for Government programs carried out by TCZB, and had some success in furthering TCZB's institutional reform, although some of the momentum in the reform effort was lost when it took an inordinate amount of time to recruit consultants to carry out the new assignments. 17. It was the overriding institutional objective of the Project that TCZB be strengthened financially with the goal to increase its equity base through equity infusions by GOT, and, over time, allow TCZB to build up reserves from profits. This goal was reached although the Project 44 Annex 1 Page 5 subloans did not contribute to this achievement. TCZB strengthened its equity base through equity infusions from GOT in the years 1989 and 1990 and thereafter from building up profits from lending to sales cooperatives at interest rates which were always well above inflation rates. TCZB used the lending rate to the sales cooperatives to offset the losses from that part of the portfolio that was lent out at negative interest rates. The Project did not reach the goals that (i) all interest rates would have to be positive in real terms by March 31, 1991, and (ii) there should be a spread for TCZB on all its loans that would cover all lending-related costs by September 30, 1991. 18. It is this latter failure that lead to the consequences described in more detail in the annex (paras 10 - 12) that make the Project partially unsustainable and for which GOT will have to bear the losses that are the result of the fast depreciation of the Turkish Lira. GOT and TCZB maintain that it was not possible to meet the covenant related to positive interest rates because of the dilemma of having to compensate farmers for losses incurred due to rising inflation through various kinds of subsidy payments. It did not appear possible to raise interest rates at a time when farmers were already hard hit by the consequences of inflation. Treasury indicated that in 1991 and 1992 when the covenants were to be implemented, GOT was not ready to make fundamental changes in its agricultural support policy and that dealing with interest rates alone would not have been sufficient. The readiness to address agricultural policy in a package of measures built up only gradually in the last three years when it bacame evident that the support policies were not sustainable and that interest rates were not an appropriate vehicle for income distribution. Both Treasury and TCZB are of the view that the Bank should have been more flexible to keep the dialogue on interest rates open rather than forcing GOT to cancel with the threat of suspension. Certain measures were under discussion at the time to avoid cancellation, e.g., eliminating the lowest interest rate of 34% that due to the limits imposed on this rate was becoming anyway less meaningful with progressing inflation, and to ask the Bank to re-negotiate the pertinent covenants and allowing more time for their attainment. The Mission emphasized that no such proposal has been made to the Bank despite its efforts to come to a negotiated agreement. Not meeting the covenant that all rates should be positive lead naturally to non- compliance with the next one on all rates providing sufficient margins to TCZB. 19. Technical Assistance and Fellowships. Part of the institutional development progress of TCZB was facilitated with the help of a Technical Assistance (TA) program. The TA program was designed to pick up where the program under the Second Agricultural Credit Program had left and to provide financing for 26 man-months of consultancy to assist TCZB in (i) the various actions related to reorganization; (ii) introduction of an MIS; (iii) improvement of M & E, program budgeting and cost accounting systems. TCZB wanted, with the approval of the Bank, to recruit the services of the Chief Technical Adviser who had executed the TA program under the SACP and insisted partially for this reason, on making an agreement with FAO for the TA. It took until June 1991 for this agreement to be concluded and until June 1992 to become operational. By this time the services of the desired consultant were no longer available. Various changes were made to the program with the approval of the Bank, the most prominent among them being the dropping the consultancy in the M & E field and replacing it by a three- 45 Annex 1 Page 6 months consultancy directed toward improving the internal auditing system which was also a high priority under the Project, and the elimination of consultancy for the analysis of arrears and the equity portfolio. The loan portfolio audit was carried out by TCZB's external auditors. The study on the equity portfolio bacame redundant when TCZB mad it its declared policy that all participations with the exception of those in banking and insurance business should be sold. TCZB emphasizes that once the TA program was started, it achieved all its objectives and was well appreciated. The fellowship program was held up until the consultants took up their assignments. The program was then carried out in 1993. The Closing Date was extended for six months to be able to complete the TA and fellowship programs. 20. With respect to the institutional development of the TKK, the objectives were aimed at making the TKK stronger and more resistant to withstand the vagaries of nature. This was to be brought about by the introduction of eligibility criteria for the TKK which were intended to create incentives for them to improve their financial soundness. The criteria included those directed at their financial position, i.e., increasing the TKKs' net worth and improving their recovery percentages and those directed at improving their organizational standing, i.e., requesting compliance with annual meeting and audit covenants. It was the original idea during Project design to include a separate institutional development component for the TKK and to have the credit funds flow directly to the TKK. This intention was abandoned even before appraisal on request of the Treasury and TCZB. The argument of TCZB was that the TKK were too weak structurally and organizationally to manage such components and that therefore all project funds including those for the TKK could only be channeled through TCZB. TCZB's Management convinced the Treasury of this position and thereafter also the Bank, all Project funds were channelled through TCZB and the separate development component for the TKK was dropped. TCZB maintains today that this was the right position to take and the Union agrees. They argue that the implementation of the TKK component through TCZB that was laid down in a protocol between TCZB and the Union went quite well and that the criteria for the eligibility for the participation in the Project have been judiciously applied although the Union maintains that more flexibility in the application of the criteria would have benefitted the members. The Mission agrees that the criteria for the participation of the TKK were indeed quite rigid, in particular in cases of natural disasters like the droughts that occurred in 1989 and 1990 with the effect of driving the recovery rates down. It may be advisable for the operational phase to allow for certain modifications in such cases. It may also have been a flaw in Project design that the Project did not define the differences in access to credit made available by TCZB between eligible and non-eligible TKK. It was also intended that the TKK should start mobilizing their own deposits, the "forgotten half" of financial intermediation, as also provided for in the cooperative law. In retrospect, it appears a blessing that such efforts have not been made because throughout the implementation of the Project deposit rates followed market rates and were thus much higher than agricultural lending rates. The difference would have been hard to digest for the TKK. 21. Technical Cooperation with MARA. It was also the aim of the Project to improve the technical capabilities of TCZB in the appraisal and approval of loans. For this purpose it 46 Annex 1 Page 7 required the preparation of investment models for medium- and long-term lending and of crop budgets for short-term lending by TCZB to help determine actual credit requirements in line with projections of costs and benefits of the envisaged loans. The Project enlisted the assistance of MARA in all technical aspects and laid down the details for this assistance and for the cooperation of TCZB's branch technical staff with the extension service of MARA in a protocol the signing of which was a condition of effectiveness of the loan. Both MARA and TCZB feel that the stipulations of the protocol were well designed and adhered to during implementation which laid the basis for an excellent cooperation. TCZB paid one third of the fee raised on all loans for technical evaluation to MARA. 22. The Mission is of the view that TCZB in general did very good work in all technical matters, i.e., in preparing and updating farm budgets and investment models and training its staff in their application. TCZB is today a much more project-oriented bank with excellent technical knowledge. Due to the requirements laid down in the Project, technical staff was recruited that helped greatly in improving the quality of lending and had thus a direct impact on recoveries. Although due to the stringent authorization requirements for all recruitment TCZB never got the authority to employ enough agricultural engineers to fully meet the criterion of having one engineer for 300 medium- and long-term loans, the deficiency was made up partly by agricultural technicians and the work got done. This pertains also to the M & E exercise, although it incurred initial delays because the responsible Project Evaluation Department was heavily engaged in carrying out special tasks for MARA in evaluating subsidized agricultural programs particularly in the field of promoting livestock production. 23. Project Area and Scope. The Project area was defined to be 45 out 67 provinces in Turkey. Due to administrative necessities, some new provinces were created out of existing ones and at the Project Closing date the Project area comprised 52 out of 76 provinces. The idea behind excluding about one third of the area of Turkey from the Project, mainly the Black Sea Region, was the fear that TCZB would not be in a position to apply the strict standards of loan appraisal and supervision required under the Project in the whole country. The Project was envisaged as one in a series of projects and the next step would have been probably to cover the entire country in a fourth project. It was therefore decided at appraisal to select those provinces which had been part of the SACP and add those provinces which formed part of the two agricultural extension projects (Loans 2405 and 3177-TU) to ensure the availability of qualified extension staff to beneficiaries of Project loans. 24. TCZB indicates that the split up of the country into Project area and non-Project area seemed arbitrary. It had the effect that TCZB had to use its own funds in those areas. However, since the long-term funds of TCZB were very limited, the coverage with investment loans in the non-Project area had a slightly lower density than that of the Project area. The Mission shares the view that covering the whole country probably would have exceeded the technical capability of the participants. However, in retrospect cutting out of a substantial part of the country from participation did not have any great impact: TCZB introduced all measures taken under the Project in the Project provinces also in the non-Project provinces. The outcome 47 Annex 1 Page 8 was therefore identical to one that would have been brought about if the Project would have covered the whole country. 25. The scope of the Project in terms of IBRD loan size was a function of the Project cost estimate undertaken at appraisal and the Bank funds available in FY89. The Treasury requested in 1989 to increase the loan amount from the envisaged $270 million to $300 million. However, due to limits on the lending program for Turkey in this year, the amount had to be reduced to $250 million. This was supplemented, however, by a cofinancing loan from OECF for another $250 million, so that of total Project cost estimated at appraisal at $1,226 million 41% was financed which represented 89% of the estimated foreign exchange component. These percentage figures were reduced to 35% and 77%, respectively, after the cancellation of $70.7 million. 26. Recoveries. From the point of view of recoveries, the Project would be sustainable. The recovery percentage in 1993 of amounts due, i.e., of amounts due at the beginning of the year and amounts falling due during the year, stood at 88%. It is expected by TCZB that at least 88% of the unrecovered amount will be recovered with the dues of 1994. The Mission received also figures which improve the situation further and render a complet picture: Recoveries against overdus under legal follow-up appear to bring in a substantial portion of the funds that appear under this heading. For medium- and long-term loans the recovery rate for amounts under legal follow-up was 26% in 1989 and increased steadily to 52% in 1993. 27. Covenants. The major covenants related to the institutional development and financial strength of TCZB. The covenants relating to interest rates have already been dealt with in paras 17 and 18 above. All other financial covenants relating to equity of TCZB, to arrangements regarding the claims of TCZB to GOT, and audit obligations were met, except the obligation of TCZB to prepare annually a report on the adequacy of agricultural interest rates to provide the basis for meeting the third interest rate covenant. This report was prepared twice but allowed to lapse when it became evident that the interest rate covenants would not be met. The Mission recognizes that the Treasury and TCZB made great efforts to meet all covenants when they became due but, as explained in para 18 above, the macro-environment was not conducive to a change in the agricultural support policies. Project Operation 28. The annex to this Aide Memoire contains the Operational Plan that has been agreed between GOT, TCZB, MARA, the Union and the Bank. In accordance with this plan, the backflow of funds from both medium- and long-term loans and from short-term loans will be used for similar purposes. 48 Annex 1 Page 9 Contribution of the Borrower to the ICR 29. The Mission discussed with TCZB the draft report that has been prepared as its contribution to the ICR. The report attempts a complete overview of the implementation and includes the contributions of the Union and MARA. It contains in its annex a very comprehensive data collection on TCZB activities and Project achievements. Certain modifications and additions will be made to the report. It will be submitted to the Treasury for review by October 15, 1994 for submission to the Bank. The summary of this report will be added as annex to the Bank's ICR. The Bank's ICR will be sent for comments to GOT, TCZB, MARA and the Union. The comments received will also be annexed to the Bank's report before it is submitted to the Bank's Board. Ankara, August 31, 1994 49 Annex 2 Page 1 TURKEY THIRD AGRICULTURAL CREDIT PROJECT (Loan 3090-TTU) Plan for Project Operation after Closing on December 31. 1993 Project Objectives 1. The Project objectives as summarized in the loan agreement were: (i) to further strengthen the institutional capabilities of TCZB and the credit operations of the TKK; and (ii) to increase farm productivity and farmers' income through expanded access to agricultural credit and the financing of productive investments at the farm level. Related to the institutional development objective were the strengthening of TCZB's financial position through supporting arrangements that would increase its equity, settling the claims of TCZB to Government, and improving its ratio of net worth to total assets. Related to the objective of expanding access to agricultural credit was the aim of having the project operate in 45 of the country's 67 provinces to meet the full requirements of farmers and to reach creditworthy farmers previously without access to institutional credit. Since the number of provinces in Turkey during project implementation increased from 67 to 76 through the division of several large provinces, the number of project provinces also increased from 45 to 52. 2. The Project was explained in the SAR as being needed to: (i) maintain the momentum in the institutional development of TCZB including organizational and procedural measures and improvements in TCZB's financial position through analysis of its loan and equity portfolio, and to reach agreement with Government on equity contributions and a spread for TCZB that would cover all lending-related costs; and (ii) help fill TCZB's resource gap in a three-year time slice that was projected to be US$1.2 billion in the years 1989-91. 3. These objectives remain valid for the operational phase, i.e., the phase after the implementation of the project and the full disbursement of the project funds. Since TCZB has the opportunity to roll over the funds obtained for a certain number of years, the backflow of funds will be used to continue lending activities for similar purposes as stated in the loan agreement. Equally important, the institutional development of TCZB and the TKK will continue along the lines that were started in the first credit line from the World Bank and continued in the second and third one. Project Achievements during Implementation of Credit Program 4. The Project closed after one extension on December 31, 1993, six months after the planned closing date. The final disbursement figures in the individual categories, after necessary account adjustments which included the reimbursement of funds in the Special Account (SA) by TCZB to the Bank and the adjustment of overdrawn balances between the categories, are set out in Appendix 1. 50 Annex 2 Page 2 5. Physical Achievements: Since inception in 1989, and including the retro-active financing since July 1988, until December 1993, more than 96,000 medium- and long-term investment sub-loans were made by TCZB to individual farmers, amounting to TL 2,060 billion. Another 114,000 sub-loans amounting to TL 615 billion were made by TKK to their members. Details on medium- and long-term lending by type of investment and the related percentages are in Appendix 2. 6. Additionally, TCZB made close to 1.5 million short-term production loans amounting to TL 4,327 billion directly to famers. Another 550,000 short-term sub-loans amounting to 1,335 billion were made by the TKK to their members. Details on short-term loans by type of lending are in Appendix 3. 7. Since disbursements for short-term lending were made only on an incremental basis, direct participation of IBRD finance was only in 19,394 loans with a value of TL 361.7 billion. Future Lending Operations 8. The loan was made to the Government of Turkey (GOT) for 17 years including five years of grace period. Onlending to TCZB is for the identical term, i.e., 17 years including five years of grace period. TCZB will start repayment to GOT in March 1995 and complete repayment in March 2006. 9. The maturities by type of investment for which medium- and long-term loans have been made are on average five years for tractor, livestock breeding, agricultural equipment, crop production and water management loans and eight years for livestock loans. This is in some cases shorter than required in the credit guidelines because the actual maturity is determined after having prepared cashflow projections. The weighted average maturity is thus 5.5 years. Assuming 100% repayment from farmers, TCZB would have the opportunity to revolve the funds used for medium-and long-term loans (the TL equivalent at the time of disbursement of $155.7 million) about three times after deduction of principal to be repaid to GOT. Since the actual recovery rate in any one year varied between 80 and 88%, and under the assumption that the unpaid 15% are paid in the following year, 15% of the payment due could be used only one year later. The backflows would, however, have a greatly reduced purchasing power due to the influence of inflation that was 62.3% at the end of 1989, 48.6% for 1990, 59.2% for 1991, 61.4% for 1992, and 60.3% for 1993. Since TCZB has to pay all interest earned except a 4% margin to GOT, TL 100 paid out in 1989 would have a value of TL 16 at the end of 1993. 10. The maturities for short-term credit are between six and 18 months, the average is one year. The TL equivalent after deduction of principal to be repaid to GOT of US$23.1 used for short-term loans will therefore be revolved 17 times. The loss of purchasing power is the same as indicated above. 51 Annex 2 Page 3 11. From the perspective of GOT, the picture in terms of purchasing power on account of inflation is slightly more favorable. GOT receives from TCZB all interest received from farmers after a reduction of 4% for operational cost. TCZB's calculations show that the weighted average interest rate for Project funds was 42.9% in 1990 and in 1991, and 42% in 1992 and 1993. If these rates are combined with the inflation factor, TL 100 paid out to TCZB in 1989 would have a value of TL 58 at the end of 1993. 12. The legal agreements stipulate that the backflows of funds will be used for similar purposes. TCZB's Management confirms that it intends to follow this agreement and make loans to individual farmers and to TKK for similar purposes until all funds have been repaid to GOT. 13. Regarding the institutional development it will remain one of TCZB's main objectives to further strengthen its financial position. It will remain the intention to reach positive interest rates and full coverage of all lending-related costs as soon as feasible. The performance against the key indicators on the ratio of TCZB's net worth to average assets and on recovery of loans from borrowers that had been attained at the end of 1993 will be maintained or improved. 14. The lending to TKK will continue to be governed by the protocol between TCZB and the Union. In this context it has been agreed that (i) some more flexibility in the eligibility criteria for TKK should be introduced by allowing certain deviations in cases of natural emergencies in areas which have been declared desaster areas by GOT, and (ii) the credit limit made available to members of TKK should reflect a more pronounced difference than before between eligible and ineligible TKK within the resources available to TCZB. This would be done in the form of a supplement to the protocol. 15. The technical consultations with MARA will continue to be governed by the protocol between TCZB and MARA. Ankara, August 31, 1994 52 Annex 2 Page 4 Appendix 1 to Plan of Operation Disbursements under the Third Agricultural Credit Project Final Disbursement in AgCredit I Category Amount Dec. 93 Adjustment Final Amount 1 A ST Loans $23,100,000 $0 $23,100,000 1 B MLT Loans $155,671,292 ($84,202) $155,587,090 2 TA $300,000 $0 $300,000 3 Fellows. $310,695 ($10,695) $300,000 $179,381,987 ($94,897) $179,287,090 ($94,897) Total $179,287,090 Cancellation $70,618,013 $70,712,910 Total Loan $250,000,000 $250,000,000 53 Annex 2 Page 5 Appendix 2, Page 1 to Plan of Operation Medium- and Long-term Lending by TYpe of Investment and Recipient in Numbers of Loans and TL Billion Breakdown of MLT Loans by Type of Investment and Recipient Type of Loans to Loans to Loans to Loans to Total Total Investment Ind. Ind. TKK TKK Loans Loans TL Farmers Farmers Number TL bill. Number bill. Number TL bill. Tractors 32684 1287 0 0 32684 1287 Livestock 32799 539 12442 96 45241 635 Breeding Agricult. 13379 62 99799 498 113178 560 Equipment Crop Pro- 14352 126 1573 21 15925 147 duction On-Farm 3024 46 0 0 3024 46 Water Managemt. Total 96238 2060 113814 615 210052 2675 54 Annex 2 Page 6 Appendix 2, Page 2 to Plan of Operation Medium- and Long-term Lending by Type of Investment and Recipient in Percent Breakdown of MLT Loans by Type of Investment and Recipient Type of Loans to Loans to Loans to Loans to Total Total Investmt Ind. Ind. TKK TKK Loans Loans Farmers Farmers Number TL bill. Number TL Number TL bill. Percent Perc. Perc. bill. Percent Percent Perc. Tractors 34.0 62.5 0 0 15.6 48.1 Livestock 34.1 26.2 10.9 15.7 21.5 23.7 Breeding Agricult. 13.9 3.0 87.7 81.0 53.9 20.9 Equipment Crop Pro- 14.9 6.1 1.4 3.3 7.6 5.5 duction On-Farm 3.1 2.2 0 0 1.4 1.8 Water Managemt. Total 100.0 100.0 100.0 100.0 100.0 100.0 55 Annex 2 Page 7 Appendix 3 to Plan of Operation Short-term Lending by Type of Lending and Recipient in Numbers of Loans and TL Billion and in Percent Short-term Loans by Type of Utilization and Recipient Type of Loans to Loans to Loans to Loans Total Total Investmt Ind. Ind. TKK to TKK Loans Loans Farmers Farmers Number TL bill. Number TL Number TL bill. bi1l. Crop Pro- 698868 1992 287201 694 986069 2686 duction Livestock 626682 1828 138356 319 765038 2147 Fattening Fertilizer 169965 506 130765 322 300730 828 Total 1495515 4327 556322 1335 2051837 5662 Short-term Loans by Type of Utilization and Recipient Type of Loans to Loans to Loans to Loans Total Total Investmt Ind. Ind. TKK to TKK Loans Loans Farmers Farmers Number TL bill. Number TL Number TL bill. Percent Perc. Perc. bill. Percent Percent Perc. Crop Pro- 46.7 46.1 51.6 52.0 48.0 47.5 duction Livestock 41.9 42.2 24.9 23.9 37.3 37.9 Fattening Fertilizer 11.4 11.7 23.5 24.1 14.7 14.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 56 Annex 3 Page 1 Summary of Borrower's Evaluation and Project Impact The Third Agricultural Credit Proiect The measures taken by the Government for financial and economic aspects in 1980 and implementation policies aiming at strengthening the credit institutions and increasing the credit supply especially to small and medium scale farms made it necessary to supply new financial resources for all sectors. For this reason, the Third Agricultural Credit Project came into the agenda following the First and Second Agricultural Credit Projects (TU-1248 and TU-2318) which had been implemented by TCZB. The aim of this Project was to reach the development targets of the Government and progressing the agricultural sector supporting policy of the Bank' by providing the Institutional development of TCZB and TKK; strengthening the credit allocation system; increasing the credit demand and supply; and improving the agricultural productivity. 45 Provinces were included in the Project at the preparation stage. After some of the subprovinces became provinces, the number increased to 52. The Project provinces were determined by adding some of the provinces of the two agricultural extension projects (TU-2405 and TU-3177), in order to provide technical staff support, to the Second Agricultural Credit Project provinces. Treasury requested the loan amount to be increased form USD 270 million to USD 300 million in 1989, but this amount was decreased to USD 250 million due to the limits in the credit program of the IBRD set forth in that year for Turkey. The loan amount has reached to approximately USD 500 million with the funds provided from Overseas Economic Cooperation Fund of Japan (OECF) amounting to JPY 35.2 billion (approximately USD 250 million) for the co-finance of the Project. Therefore, 41% of the project cost, which was estimated to be USD 1,226 million in appraisal of the Project, could be financed. Loan Agreement between IBRD and the Government and Project Agreement between IBRD and TCZB were signed on June 28, 1989. The Subsidiary Loan Agreement was signed on October 10, 1989 between the Government and TCZB. According to this agreement concluded in conformity with the Loan and Project Agreements, principal installment payments would be made semi-annually between the dates March 15, 1995 and September 15, 2006, current interest rates would be applied to the credits to be opened to the farmers and four points would be deducted from these rates as the Bank's share and the remaining amount would be paid to the Government. 1/ The Bank referred to in this paper is TCZB. 1)7 Annex 3 Page 2 Cooperation protocol made with the Ministry of Agriculture and Rural Affairs related with the Implementation of the Project were signed on November 19, 1989 and June 20, 1990 and became effective as of July 1, 1988. The Bank made use of the studies of the Ministry of Agriculture and Rural Affairs related with technical parameters and cost prices in the preparation of crop budgets and investment models. Although it was foreseen during the appraisal of the Project that the TKK would disburse the Project funds to its members directly, it was decided with the objection of TCZB, acceptance of TKK and approval of the Treasury that the funds would be disbursed through TCZB, since TKK was not ready to run such a system both institutionally and structurally. A credit disbursement and cooperation protocol was signed between TCZB and TKK Central Union on December 25, 1986. From the proceeds of the IBRD loan, USD 23.1 million was for short term credits, USD 226.3 million for medium and long term credits and USD 0.6 million for consultancies and fellowships. The Loan became effective in November 1989. First withdrawal from the Loan was realized in January 1990. The targeted inflation rates realized at higher levels impeding to fulfill the positive interest rate covenant of the Project, USD 155.6 million of USD 226.3 million of the fund allocated for medium and long term lendings was totally utilized as of August 31, 1992, and the remaining USD 70.7 million, was cancelled. 78.7% of the credits were extended to the Bank's clients and 21.3% were extended to the cooperative members as of August 31, 1992. Credit disbursements were continued only from the OECF source after this date. USD 250 million credit opened by IBRD was aimed to be utilized in 4 years. On-lending Schedule (Million USD) 1990 1991 1992 1993 Estimation 78 138 207 243 Realization 97.1 154.0 179.1 179.3 Within the actual disbursement period of the Project, 2,051,837 short term credits were opened amounting to TL 5,661.7 billion. 23.6% for this amount was extended by TKK and 76.4% by the Bank. TL 88.7 billion equivalent of USD 23.1 million allocated from the IBRD source for short term lendings, was extended to the farmers with 19,394 lendings. 49.3% and 9.8% of this amount was disbursed for crop production, livestock production and fertilizer, respectively. 210,052 medium and long term credits were opened amounting to TL 2,675.2 billion. 22% of this amount was extended by TKK and 78% by the Bank. Of the total medium and long 58 Annex 3 Page 3 term credits, 5.5% was opened for crop investment, 23.&% for livestock investment, 48.1% for tractor, 20.(% for agricultural equipment and 1.7% for land-water. TCZB made monitoring and evaluation studies for both short and medium-long term credits during the Project implementation. It was observed that the equities of the monitored farmers, who were extended short term credits, have increased by 33.1 %, 18.7% and 74.5% in 1991, 1992, and 1993, respectively, against the figures of the previous year. Monitoring studies on the farmers who were extended medium- and long-term credits showed that only two investment models out of 14 had lower financial rate of return than the foreseen 12%. Chief Technical Advisor (CTA), who was selected from the candidates proposed by FAO, which undertook the Training and Consultancy Services of the Third Agricultural Credit Project, started his studies in July 1992. Two other consultants, one of whom was expert on "Human Resources Development, Registration and Information System" worked at Personnel Department, which the other being an expert on "Internal Auditing" worked at the Inspection Board. In addition to his studies on Management Information Systems (MIS), the CTA also supervised the other consultants and took part in the organization of the study tours realized under the Project. All the consultancy services under the Project were completed before the closing date of the Project after one extension on December 31, 1993, six months after the planned closing date. The consultants submitted their reports to the Bank Management. Moreover, the study tours organized under the project on Management Information System, Training of Trainers, Internal Auditing, Agricultural Credits, Human Resources Development and Training of Branch Managers were successfully completed and were useful to the Bank. According to the Supplemental Letter No. 1 to the Loan Agreement, the Government would make contributions so as to raise the ratio of the net worth of TCZB to its average total assets to 5%, 5.5% and 6 as of the end of 1989, 1990, and 1991, respectively. Realization about this ratio by the years is given below. (Billion TL) 1989 1990 1991 1992 1993 Net Worth (A) 1,113 2,317 5,222 11,142 20,599 Ave. Total 17,484 27,147 42,562 76,440 138,899 Assets (B) A/B 6.4% 8.5% 12.2% 14.6% 14.8% Recovery ratio in the Project implementation provinces were realized as 72%, 77.2%, 83.3% and 87.6% in 1990, 1991, 1992, and 1993, respectively. Recovery ratios in the other provinces realized were closer to these figures. The recoveries of the loans under legal follow- 59 Annex 3 Page 4 up have continuously increased and the recovery ratio for these credits reached 52% in 1993, which was 26% in 1989. The Third Agricultural Credit Project provided significant support to TCZB to meet its financial requirements. Although the Project implementation period has ended, during the operation period, the funds received from collections will continue to be extended to the farmers as credits on the Project subjects until the repayment is completed. The same applies for the OECCF loan. All the parties in the Project are of the opinon that the Project had clear and attainable objectives, and the Project objectives about increasing farm productivity and farmers' income through the extended agricultural credit facilities and financing the productive investments at the farm level were reached. The Project also made important contributions to the institutional developments of TCZB and TKK. TCZB disbursed 96,000 direct medium and long term credits which were much more than the foreseen amount, 40,000, and this great difference was the outcome of the utilization of the fund provided from OECF as co-finance of the Project. The Project was very beneficial by enabling TCZB to disburse medium- and long-term investment credits to this extent. TCZB would like to thank IEBRD, FAO, Undersecretariat of the Treasury and Foreign Trade, Ministry of Agricultural and Rural Affairs and Central Union of the Agricultural Credit Cooperatives for their contributions in the realization of this Project. 60 Annex & Page 1 THE REPUBLIC OF TURKEY PRIME MINISTRY THE UNDERSECRETARIAT OF TREASURY Ref:DEI-IV-2/78 / CO Mr. James T. GOERING Division Chief, EC1 Agriculture & Environment Operations The World Bank Re: Your facsimile transmission dated January 9, 1995 Dear Mr. GOERING: We would like to inform you that, on the Borrower's side, we do not have any additional comments on the Draft Project Completion Report prepared by the World Bank for the Third Agricultural Credit Project. As it has been expressed during the last mission's visit, we believe that the loan and the project activities have addressed a wide base of farmers in a timely manner and has had considerable success in this sector. We would also like to take this opportunity to thank you and the project staff for the hard work undertaken and close cooperation achieved during the project period and would like to send you and your colleagues our best wishes for the new year. Sincerely yours, cc. Mr. Fred TEMPLE Chief, World Bank Resident Mission in Ankara, Turkey V. Er e EK a&d of pepartmont MAP SECTION  IBRD 26189 36 15 GEORGIA z BULGARIA s<oN GEOGIA MEDR°NEBLACK SEA ARMEN P-R2E NC ARMNDARIE .GREECE-l MÅ ý-ý 5K1- ANKAR -- KL - . zATILA I sO°TORER OF9. - & sOý SE - o MNc~Q ANARAB REP THIRDE. AGIULUA CRDI PROJECT - SEETDTWSANDj VLAGE MEDITERRANEAN~~ SEo-ROIC CPTL AE®A NATONA CAPTAL KNT,OCOBE E,199R E