Turkey - Agroindustry Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16683 IMPLEMENTATION COMPLETION REPORT TURKEY AGROINDUSTRY PROJECT LOAN 3077-TU May 30, 1997 Agriculture and Regional Development Division Central and Southern Europe Departments 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 EQUIVALENTS Currency Unit = Turkish Lira (TL) 1989 US$1 = TL 2,027.0 1990 US$1 = TL 2,930.1 1991 US$1 = TL 5,079.9 1992 US$1 = TL 8,564.4 1993 US$1 TL 14,472.5 1994 US$1 = TL 38,726.0 1995 US$1 TL 59,650.0 1996 US$1 = TL 94,756.0 April 1997 US$1 TL 126,950.0 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CU (R) Capacity Utilization (Rate) EU European Union ETC Export Trading Company FE Foreign Exchange FERIS Foreign Exchange Risk Insurance Scheme FSAL Financial Sector Adjustment Loan GDP Gross Domestic Product GNP Gross National Product GOT Government of Turkey HB Halk Bank IGEME Export Promotion Center ERR Economic Rate of Return FRR Financial Rate of Return PCI(s) Participating Credit Institution(s) SMI 11 Second Small- and Medium-Scale Industry Project SPO State Planning Office SYKB Sinai Yatirim ve Kredi Bankasi (Industrial Investment and Credit Bank) TCZB Turkiye Cumhuriyet Ziraat Bankasi (Agricultural Bank of the Republic of Turkey) TSKB Turkiye Sinai Kalkinma Bankasi (Development Bank of Turkey) TURKEY FISCAL YEAR January I to December 31 Vice President Johannes F. Linn Director Kenneth G. Lay Division Chief/Manager Michele de Nevers Staff Member Franco Lucca FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT TURKEY AGROINDUSTRY PROJECT (LOAN 3077-TU) CONTENTS P R E FA C E ...................................................................................................................................................... EV A LU ATIO N SUM M A RY ........................................................................................................................ PART 1: PROJECT IMPLEMENTATION ASSESSMENT A . STATEM ENT/EVALUATION OF O BJECTIVES................................................................................................. B . A CHIEV EM ENT OF O BJECTIVES................................................................................................................... 2 S ecto r P olicy O bjectives ............................................................................................................................. 2 F inancial and P hysical O bjectives ............................................................................................................. 2 C . M AJOR FACTORS A FFECTING THE PROJECT................................................................................................4 D. PROJECT SUSTAINABILITY ...................................7 E . B A N K P ERFO R M A N C E ................................................................................................................................. 8 F . B O RROW ER PERFO RM ANCE ........................................................................................................................ 8 G . A SSESSM EN T O F O U TCO M E ........................................................................................................................ 9 H . F U T U R E O PERA T IO N ................................................................................................................................... 9 I. K EY L ESSO N S L EA RN ED ............................................................................................................................. 9 J. PROGRA M O BJECTIVE C ATEGORIES........................................................................................................... 10 PART II: STATISTICAL ANNEXES Tables: I: Summary of Assessments 2: Related Bank Loans/Credits 3: Project Timetable 4: Loan Disbursements: Cumulative Estimated and Actual 5: Project Financing 6: Economic Costs and Benefits 7: Compliance with Operational Manual Statements 8: Bank Resources: Staff Inputs 9: Bank Resources: Missions 10: Status of Legal Covenants Appendices: 1. Mission's Aide-Memoire 2. Government's ICR 3. Plan for Project Operation 4. Loan Disbursements 5. Japanese Grant Fund Expenditures 6. Map IBRD No. 24903R 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. 4 IMPLEMENTATION COMPLETION REPORT TURKEY AGROINDUSTRY PROJECT (LOAN NO. 3077-TU) PREFACE This is the Implementation Completion Report (ICR) for the Agroindustry Project, Turkey, for which Loan 3077-TU in the amount of US$150 million equivalent was approved on May 30, 1989 and made effective on October 10, 1989. The Loan was closed on April 30, 1997, compared with the original closing date of December 31, 1995. Final disbursement under the institutional development component took place in April 1997. The loan was fully disbursed. Cofinancing for the Technical Assistance component of the Project was provided by a Japanese Grant Agreement in the amount of Yen 607.5 million. The ICR was prepared by Franco Lucca, Task Manager, Agriculture and Regional Development Operations Division in the Central and Southern Europe Departments of the Europe and Central Asia Region. It was reviewed by Michele de Nevers, Division Chief and George Zaidan, Project Adviser. The Borrower's contribution was prepared by the Undersecretariat of Treasury and is attached (Appendix B). Its contents have been considered in the preparation of this ICR. Written contributions were also provided by the Fisheries Department of the Ministry of Agriculture and Rural Affairs (MARA/GDAPD); the Export Promotion Center (IGEME); Turkiye Cumhuriyeti Ziraat Bankasi (TCZB), Turkiye Halk Bankasi (THB), Sinai Yatirim ve Kredi Bankasi (SYKB), and Turkiye Sinai Kalkinma Bankasi (TSKB). They are available in the regional files. Preparation of this ICR was begun during the Bank's final supervision mission in October 1996 and continued during the completion mission of March 1997. It is based on material in the project file and data collected during that mission. The Treasury and the implementing agencies contributed to preparation of the ICR by providing views reflected in the mission's aide-memoire and reflected in this ICR, by preparing their own evaluation of the Project's execution, and by commenting on the draft ICR. IMPLEMENTATION COMPLETION REPORT TURKEY AGROINDUSTRY PROJECT (LOAN NO. 3077-TU) EVALUATION SUMMARY i. Introduction: The US$ 150 million IBRD loan for the Agroindustry Project in Turkey was approved in May 1989 and made effective in October 1989. The borrower was the Republic of Turkey. Cofinancing for the Technical Assistance (TA) component of the Project was provided by a Japanese Grant Agreement of Yen 607.5 million. Executing agencies were four Participating Credit Institutions (PCIs) for the Loan; and the Ministry for Agriculture and Rural Affairs (MARA) and the Export Promotion Center (IGEME) for the TA component. The loan was closed on April 30, 1997 and the Japanese Grant Agreement on June 30, 1997, considerably after the initial planned completion date of December 31,1995. ii. Project Objectives. The Project objectives, which stemmed from the Agroindustry Sector Survey (Report No. 6890-TU) were: (i) to increase the output of agroindustry through the financing of investments to improve capacity utilization in existing facilities and to establish new facilities; (ii) to improve the capabilities of the Participating Credit Institutions (PCIs) to carry out financial restructuring, and appraisal of investments for agroindustrial Projects; and (iii) to strengthen agroindustry through the establishment of an institute for marketing training and for planning in the fisheries sub- sector. The project was supplementary to the financial sector restructuring efforts of FESAL II (2694-TU), and supported the Bank's strategy for (i) assisting the development of the agricultural sector and increasing its commercial orientation; (ii) increasing Turkey's exports; and (iii) strengthening financial intermediaries. iii. Project objectives relating to the sector were realistic with one exception. The specific objective of the PCIs concentrating on restructuring ailing enterprises was unrealistic - it was always more likely that they would want to use incremental long term credit to finance their stronger clients, as the latter was more profitable and less risky. iv. The institutional development objectives for the PCIs were relatively limited, focusing on improving their capabilities in the appraisal of agroindustrial sub-projects and the design of financial restructuring packages. The fisheries component was aimed at establishing planning capabilities in the Ministry of Agriculture directed toward defining sector strategies and investment projects; while the marketing training objective was to improve the marketing skills of agroindustrial enterprises in order that they would become more competitive. - 11 - v. Achievement of Objectives. The Sector policy objectives were substantially achieved. They were aimed at: (i) improving the capacity utilization of enterprises in the agroindustry sector through the financing of viable sub-projects; (ii) designing training prototypes for improving the agroindustrial competitiveness; and (iii) establishing a capability in MARA for sector planning in the fisheries sector. vi. Financial and physical objectives were related to financing viable and productive investments in the agroindustrial sector in order to help enterprises to increase their capacity utilization and output, improve their financial position and enhance their standing in the market. These objectives were fully achieved although it is noted that Loan funds were used for normal investment purposes in sound enterprises - modernization, expansion, rehabilitation and not for restructuring of enterprises in distress. Overall, the Loan of $150 million financed 95 sub-loans with an average size of $1.6. million, compared to 250 sub-loans at $0.6 million envisaged in the SAR. At appraisal, it had been envisaged that PCIs would contribute a further $57.5 million and beneficiaries, $200 million. In the event, the PCIs' contribution was zero, but the sub- borrowers provided $373 million, with the net result that total investment in sub-projects amounted to $524 million, some 28% higher than the $409 million envisaged at appraisal. Generally these investments were viable, yielding average FRRs of 28%. Incremental annual output resulting from investment under the Project is estimated at $600 million and capacity utilization on firms supported by the Project has increased by about 25%. vii. The objective of strengthening the PCIs' capacity to carry out financial restructuring and appraisal of investments for agroindustrial projects was achieved, although sub-loans did not deal significantly with the restructuring of ailing enterprises. TA funds which were provided to the banks were used in 1990 by Turkiye Cumhuriyet Ziraat Bankasi (TCZB) and Turkiye Halk Bankasi (THB) and again by THB in 1996. Of the $500,000 provided for PCI training, $293,200 were used with the remainder re- allocated to the credit component. The implicit objectives of improving the financial position of PCIs, were achieved in that debt to equity capital adequacy and collection ratio covenants were all complied with. However, THB developed financial problems stemming from its involvement with activities on behalf of Government and was being de facto excluded from making further loans under the Project. viii. The objective of implementing the Marketing Training Component was achieved. A study to design and test training prototypes best suited to improving the marketing skills of agroindustrial enterprises was made. It was found that one-on-one consultancy was the most appreciated training method. Accordingly, a portion of the funds remaining in the Japanese Grant was directed toward training professionals in consulting techniques and rendering consultancy services through local consultants to some 59 small and medium export enterprises. ix. The Fisheries Support Program provided inputs for establishing fisheries planning capacity. It carried out a series of studies on resources practices and markets and supported both (i) the drafting and ongoing negotiation of a Convention on the Living - iii - Resources of the Black Sea; and (ii) the establishment of a Sector Strategy Task Force to review the results of the studies and surveys and formulate recommendations for future sector policy. It had also been expected to prepare investment projects, if appropriate, for which support from international donors including the Bank was to be requested. Overall, the Fisheries support program achieved its basic objective of preparing studies and recommendations for sector policy but did not fully establish planning capacity in MARA or prepare any projects. x. No ERR was calculated for the total Project, the usual practice for a credit project. However, the appraisal reports prepared by the PCIs for individual sub-projects showed ex ante ERRs ranging from 15% to 60%. A post investment evaluation carried out by the PCIs on a sample of 11 sub-projects representing about 25% of Project investment revealed ERRs ranging from 20% to 60% with an average of 29%. Most investments involved additional employment, and extrapolation from the survey suggests that the project probably created about 3,000 jobs. xi. Major Factors Affecting the Project. The Project was identified and prepared in 1987, but because of an issue between the Bank and GOT on agricultural interest rate policy, processing was slow with appraisal in spring of 1988, negotiations in May 1989 and effectiveness in December 1989. Disbursements were initially satisfactory, reached $38.0 million by the end of FY92 but then slowed to reach only $52.0 million, or one third of the appraisal estimates by the end of FY95. After an amendment to the Loan agreement, in December 1994 which defined agro industry more flexibly, allowed free- standing working capital subloans, made foreign currency borrowing more market oriented, and provided for equipment leasing and pre-export finance the speed of disbursement picked up to a cumulative $135.3 million by the end of FY96 and full disbursement in FY97. Disbursements under the Japanese Grant started only in FY92 with the result that the two components financed by it benefited from the depreciation of the USdollar vis-a-vis the Yen. xii. Project implementation was influenced strongly by the macro-economic environment, particularly the relationship between inflation and interest rates. Inflation persisted at high levels throughout the project period, averaging over 70%, with the exchange rate devaluing to compensate. Initially, Project loans were at the government determined Foreign Exchange Risk Insurance Scheme (FERIS) rate, based on the three- month Treasury bill auction rate. These oscillated wildly and were high in real as well as nominal terms due to GOT's heavy deficit finance requirements. Another flaw of the FERIS mechanism was the inadmissibility of prepayments. In 1992, GOT announced an investment incentive program offering subsidized loans to alleviate the investment climate which had deteriorated considerably in the wake of the Gulf Crisis. In 1993 the Bank decided to stop approving sub-loans which were to be used in a blend with subsidized credit from GOT. This was decided for all credit lines operated in Turkey, i.e., SMI II, PICP, and Agroindustry with a view to inducing GOT to change the incentive program. GOT, however, did not react until 1995 when the costs of the program became clearly unaffordable and its scope was reduced considerably. - iv - xiii. The end-1994 restructuring (para xi) coincided with the beginning of a strong recovery in investment. By mid-1995, the economy was doing well and exporters in the agroindustry sector (which was now redefined to include textiles) were anxious to expand and take advantage of their increased access to the European market. The effect was a major increase in sub-loan demand, virtually all for foreign currency loans at market related rates. xiv. Project Sustainability. The credit component of the Project can be rated sustainable. During implementation the commitment of GOT to carry out the Project in accordance with the agreements was re-established when subsidized credit was limited to special schemes such as environmental projects. Recycled funds from net sub-borrowers repayments will be used for the same purposes as the initial loans for several years to come and now that subloans are denominated in foreign exchange, strong demand is likely to continue. Interest levels adequately protect against capital erosion and interest margins to the PCIs coupled with the excellent recovery rate of over 99% make project lending profitable to them, and therefore sustainable. The Project is also sustainable from the point of view of the sub-borrowers. They have greatly benefited from the investments made under the Project and have developed a good sense of financial discipline. Having modernized their plants and increased capacity utilization and production they are expected to continue to prosper. xv. The Marketing Training Activities will need further infusion of support funds to become sustainable. The pilot operations have demonstrated the value of training and consultancy and an awareness has been created that such services are not free. If funds can be lined up to continue the effort through the establishment of an institute for marketing and consultancy training for a nationwide coverage or regional coverage through the Chambers of Commerce or the Exporters' Unions and higher contributions can be raised from participating enterprises, the effort could become self-supporting in the long run. To make the Fisheries Component sustainable, new funds would have to be made available for the services of the Program Coordinator and the Sector Strategy Task Force since the budget of the Fisheries Department of MARA is not presently sufficient to pay for the necessary expertise. xvi. Bank Performance. The Bank's performance at preparation and appraisal was satisfactory. The Bank's missions had the necessary expertise to translate the findings of the Agroindustry Sector report of 1987 into a workable project. The design of the Project was kept simple and the selection of the PCIs was based on the knowledge that TCZB, THB, and SYKB had the largest portfolio in agroindustry. The definition of agroindustry was kept intentionally narrow at appraisal and negotiations but was widened during implementation to include also secondary processing of cotton in spinning and weaving. xvii. During implementation, supervision was regular, staff continuity was maintained and the relationships between supervision staff and implementing agency staff was excellent. The Treasury maintains that the Bank could have been more flexible in permitting the utilization of Loan funds in a blend with subsidized credit. Although supervision staff tried to achieve a compromise on this, Bank Management adhered to the -v- principle of not supporting subsidized credit. The Bank was flexible, however, in agreeing to the successful restructuring of the Loan at the end of 1994. xviii. Borrower Performance. The performance of GOT and the implementing agencies was highly satisfactory in some aspects, satisfactory in others and deficient in some. The performance of the PCIs in carrying out the credit operations and meeting the financial covenants agreed under the Project was highly satisfactory. Treasury also helped in its power to ensure a smooth operation of the credit line. However, its efforts to meet THB's claims for duty losses from various activities carried out for GOT were unsatisfactory. Frequent changes in personnel resulted in less than satisfactory support from MARA for the fisheries component. The performance of Project consultants in general was satisfactory. The major covenants related to the institutional development and financial strength of the PCIs, were met. Compliance with covenants is highly satisfactory. xix. Assessment of Outcome and Future Operation. The Project achieved nearly all of its objectives. Its outcome is satisfactory, despite the delays in implementation caused mid-way by economic factors. A plan of operation for the Project's future operation has been agreed with GOT, MARA, the PCIs and IGEME and is contained in Appendix C. xx. Key Lessons Learned. Several lessons can be learned from the project: (i) Firms whose earnings are effectively "dollarized" prefer and can manage foreign-currency debt. They prefer the stability of borrowing in US$ and DM to the highly fluctuating interest rates under the FERIS arrangement. (ii) in high inflation economies acceptable and even high economic and financial benefits can be obtained if lending activities are sheltered from the effects of inflation through appropriate interest rate mechanisms; (iii) free- standing permanent working capital loans can be as important tools to help restructure agroindustrial companies in distress as investment financing; (iv) lending mechanisms should be kept simple so that sub-borrowers understand their obligations; and (v) if problems arise between the Bank and the Borrower, solutions should be sought and agreed quickly after the emergence of the problems. As it was, two years of inactivity generated significant real and opportunity losses for the Borrower. xxi. Program Objective Categories. Although the Project had no program objectives, it made significant contributions to private sector development, through investment and training and to the environment by promoting environmentally acceptable practices in agroindustry and drafting an environmental law for aquaculture. u IMPLEMENTATION COMPLETION REPORT TURKEY AGROINDUSTRY PROJECT (LOAN 3077-TU) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. STATEMENT/EVALUATION OF OBJECTIVES 1. The Project objectives as stated in the Loan Agreement were: (i) to increase the output of agroindustry through the financing of investments to improve capacity utilization in existing facilities and to establish new facilities; (ii) to improve the capabilities of the Participating Credit Institutions (PCIs) to carry out financial restructuring of, and appraisal of investments for, agroindustrial Projects; and (iii) to strengthen agroindustry through the establishment of a capacity for marketing training and for planning in the fisheries sub-sector. 2. The Project was intended to support the Bank's strategy for (i) assisting the development of the agricultural sector and increasing its commercial orientation; (ii) supporting Turkey's efforts to increase exports; and (iii) strengthening financial intermediaries and increasing their areas of competition. It was considered to be supplementary to the efforts to restructure the financial sector in Turkey assisted by the Second Financial Sector Adjustment Loan (FSAL II, Loan No. 2964-TU) which became effective in June 1988. 3. The specific objectives stemmed from the Agroindustry Sector Survey (Report No. 6890-TU) of 1987 which reflected the fact that there was a serious bottleneck caused by lack of long-term credit in the system. This was seen as inhibiting the potential growth of the sector which was identified as having strong export opportunities. The driving force in agroindustry was and still is the private sector, which requires efficient banks to deliver the necessary credit. Export marketing was relatively undeveloped and this too was identified as a key constraint to expanding the sector. Fisheries had also been recognized as potentially very important in Turkey, but the planning capacity within MARA, necessary to set effective policy and support fisheries development was weak. 4. The Project objectives relating to sectoral investment were broad and realistic. However the objective of restructuring ailing enterprises was unrealistic because the PCIs, which are profit-seeking banks, have generally used long term credit to finance their stronger clients, thereby minimizing their risk. 5. The institutional development objectives for the PCIs implementing the Project covered improving their capabilities to appraise agroindustry sub-projects and to design financial restructuring packages for subborrowers. They were appropriate, and sufficient because the more general conditions for PCI strengthening had already been covered under other Bank operations, particularly FESAL II. 6. The objective of establishing a capacity for marketing training was relevant to the sector in that-there was a need to improve the marketing skills of agroindustrial -2- enterprises in order to make them become more competitive. In fisheries, the objective of establishing planning capabilities in MARA directed toward defining sector strategies and investment projects was appropriate and realistic. B. ACHIEVEMENT OF OBJECTIVES 7. The attainment of objectives can be summarized as follows: (a) sector policy objectives were substantially achieved; and (b) financial, institutional development, and physical objectives were achieved, although it is noted that Loan funds were used for normal investment purposes in sound enterprises - modernization, expansion, rehabilitation and not for restructuring of enterprises in distress. Sector Policy Objectives 8. Sector policy objectives were aimed at: (i) increasing the output, capacity utilization and commercial orientation of enterprises in the agroindustry sector through the financing of viable sub-projects; (ii) designing training prototypes for improving the competitiveness of the agroindustry sector; and (iii) establishing a capability in MARA for planning in the fisheries sector. 9. The credit disbursed to the sector resulted in both new enterprise establishment and increased output from existing firms. In aggregate, incremental annual output resulting from investment under the Project was estimated at sub-project appraisal to be. $600 million. This is the equivalent of about 0.5% of total output from the sector. Capacity utilization on pre- existing firms supported by the Project was estimated ex ante to increase by 30%. The actual achievement was 25%, as calculated from a random sample of subborrowers. 10. The Marketing Training Program and Supplementary Consultancy Services were effectively implemented and so should have a lasting impact on the agroindustry sector. Training prototypes have been designed and tested, local consultants have been trained and additionally consultancy services have been rendered to small and medium-sized agroindustrial enterprises in two pilot areas. 11. The activities in the Fisheries Component resulted in a series of surveys which had some impact on policy making in the sector. However, the final outcome of this component was short of the desired goal of preparing a comprehensive fisheries project oriented towards improvement of the environment and institution building in MARA and other elements of the sector. Financial and Physical Objectives 12. The main financial objective of the Project which aimed at financing viable and productive investments in the agroindustry-industry sector was fully met, although it took substantially longer than planned. The amount of Loan funds used for this purpose exceeded the amount envisaged at appraisal, because most of the non-credit elements of -3- the Project were switched from World Bank Loan to Japanese Grant financing, thereby freeing up a further $6.7 million to be used as credit. Overall, the four PCIs used the Loan of $150 million to make 95 sub-loans with an average size of $1.6. million as compared to 250 sub-loans at an average size of $0.6 million envisaged in the SAR. At appraisal, it had been envisaged that PCIs would contribute to the total amount loaned to beneficiaries to the extent of $57.5 million. In the event, their contribution was zero. Conversely, however, the sub-borrowers own contribution was substantially higher than originally expected. It amounted to $373 million rather than $200 million which had been estimated at appraisal. Overall, total investment in sub-projects amounted to $524 million, some 28% higher than the $409 million envisaged at appraisal. Generally these investments were viable, yielding average FRRs of 28%. 13. The objective of strengthening the PCIs capacity to carry out financial restructuring and appraisal of investments for agroindustrial projects was achieved, although for sound commercial reasons, investment under the Loan did not deal significantly with the restructuring of ailing enterprises. TA funds which were provided to the banks were used in 1990 by TCZB and THB for consultants ($109,000), to train the respective bank staff in the appraisal and supervision of agroindustry sub-projects, and in 1996, by THB for training abroad of managers and professionals in appraisal techniques ($184,200). Thus, of the $500,000 provided for PCI training under the Loan, $293,200 were used. The remaining $206,800 was re-allocated to the credit component. All training programs were reported to have been successful. The success of this Project element is evident from the professional quality of the appraisal reports for sub-projects submitted by the PCIs to the Bank for approval. Furthermore, there have been several examples of successful financial restructuring, in particular increasing capital through public offerings, of projects initially supported under the Loan by the PCIs. 14. The Project also had implicit financial objectives related to improving the financial position of PCIs, both in terms of reaching adequate net worth as percentage of average risk assets and to building up provisions for bad debts that were in line with the prudential regulations issued by the Central Bank. These financial objectives were fully reached, i.e., debt to equity and capital adequacy as well as collection ratio covenants were complied with. However, during Project implementation THB developed financial problems stemming from its involvement with activities on behalf of Government. These difficulties were brought out in the audit reports by the external auditors and dealt with by the Bank in the framework of the SMI II Project. Since 1995 THB has been de facto excluded from making further loans under the Project. 15. The objective of implementing the Marketing Training Component was achieved through initial studies carried out by a joint venture of two management consulting companies with a sub-contract to the Middle East Technical University in Ankara. The aim of the study was to design and test training prototypes best suited to improving the marketing skills of Turkish agroindustrial enterprises and to enhance their competitiveness. Among the training prototypes tested, one-on-one consultancy was the most appreciated. Accordingly, a portion of the funds remaining in the Japanese Grant after the completion of the Pilot Marketing Training Study was directed toward helping to -4- establish a consultancy profession in two regions of Turkey and rendering consultancy services through local consultants to small and medium enterprises. Some 46 local professionals from private business and local universities were trained in delivering consultancy services with the help of a foreign consulting firm. These then provided professional consulting services to 59 exporting companies operating in the agroindustry sector. These services were well received and generally resulted in an improvement in the competitive position of the beneficiary firms. The total contribution of the Japanese Grant Fund to the Marketing Training Component was $2.7 of which $1.4 million went to the implementation of the Pilot Marketing Training contract, $0.8 million to the two Supplementary Consultancy Programs, and $0.5 million to program management. 16. The Fisheries Support Program provided inputs for establishing fisheries planning capacity. Within this, the following studies were carried out: (i) Survey of the Mediterranean, Aegean and Marmara Sea Demersal Fish Resources; (ii) Study on Aquaculture Site Identification; (iii) Inland Fisheries Survey; (iv) Study on Fish Marketing; and (iv) Lagoon Rehabilitation Study. Additionally, the program supported the drafting and negotiation of a Convention on the Living Resources of the Black Sea, the services of various Program Coordinators and the establishment of a Sector Strategy Task Force which is to review the results of the studies and surveys and formulate recommendations for future sector policy. It had been expected to prepare investment projects, if appropriate, for which support from international donors including the Bank was to be requested. Due to frequent changes in Government and in MARA personnel and ensuing changes in sector policy, the Task Force was only established in October 1996 and recommendations regarding sector policy and investment projects are expected only during 1997. Overall, therefore the Fisheries support program achieved its basic objective of preparing studies and recommendations for sector policy but was somewhat deficient in achieving the goal of establishing a planning capacity in MARA, because of the long delays that occurred. Funds which had been earmarked for the Fisheries Component but not fully used were reallocated to the Marketing Training Component. 17. No ERR was calculated for the total Project, the usual practice for a credit project. However, ERRs were calculated for individual investment sub-projects. The SAR stated that ERRs for sub-projects had to be at least 15%. The appraisal reports prepared by the PCIs for individual sub-projects showed ERRs ranging from 15% to 60%. A post- evaluation exercise carried out by the PCIs on a sample of 11 sub-projects representing about 25% of Project investment reveals that actual ERRs range from 20% to 60% with an average of 29%. These reports indicate that the Loan helped to finance about $500 million in incremental investment and to create 3,000 full-time jobs. C. MAJOR FACTORs AFFECTING THE PROJECT 18. The Project was identified and prepared in 1987 in the wake of the Agroindustry Sector Survey (6890-TU) which had brought out sectoral potential for strong growth in exports and had highlighted the problems of low capacity utilization. Project appraisal took place in spring of 1988, but further processing was held up until 1989 because of the lack of agreement between GOT and the Bank on interest rate policy in the agriculture -5- sector. This issue had surfaced after the appraisal, in 1986, of the Third Agricultural Credit Project (Loan 3090-TU). Only after agreement had been reached on how real interest rates in the agricultural sector for lending in local currency were to be set, did the two projects go forward to negotiations in May 1989. The Project was approved by the Board in the same month and became effective in December 1989 after a Subsidiary Loan Agreement with three PCIs had been concluded by the Treasury. Commitments started speedily thereafter and disbursements reached $38.0 million by the end of FY92. However, due to the reasons given below (paras. 20-23), the speed of disbursements slowed down considerably, and by the end of FY 1995, cumulative disbursements were only $52.0 million, or one third of disbursement estimates. In December 1994 the Loan agreement was amended to make it more flexible in terms of definition of agroindustry and permitting free-standing working capital subloans. As a result the speed of disbursement soon picked up so that $135.3 million had been disbursed by the end of FY96 and full disbursement was achieved in FY97. To accommodate the slow disbursement between 1992 and 1994, the closing date had to be extended twice, by one year and by four months, respectively. 19. Because of the late availability of funds from the Japanese Grant, disbursements under the Pilot Marketing Training and Fisheries Components started only in FY92, initially at a very slow pace because it took considerable time to conclude the contracts with the various consultants for the marketing training program and the fisheries surveys. This had the effect that the two components benefited from the depreciation of the USdollar vis-a-vis the Yen (para. 22). The closing date for the Japanese Grant was extended in line with that of the Loan, except that the last extension was granted until June 30, 1997 in order to be able to complete the Second Supplementary Consultancy Program and some ongoing activities under the Fisheries Component, i.e., work on the Black Sea Convention, an extension of the Lagoon Rehabilitation Study and support to the work of the Strategy Task Force. 20. Project implementation was influenced strongly by the macro-economic environment, particularly the relation between inflation and interest rates. The inflation rate which was 70% in 1988 persisted at high levels through the 1990s, averaging over 70% and reaching a level of 80% at the end of 1996. The exchange rate increased along similar lines. From TL 1,875 for one US dollar in January 1989, to TL 17,204 in January 1994, climbed in four months to TL 33,408 and reached TL 126,600 at the end of March 1997. 21. Initially, Project loans were at the FERIS interest rate which was based on the three- month Treasury bill rate. It oscillated wildly due to the high inflation rates and the need for GOT to finance its deficit by offering attractive real rates to the general public and the banking sector for its bills and notes. Auction rates and thus FERIS rates were considerably higher than inflation rates. An additional factor contributed to the oscillations of the FERIS rate. A three-month Treasury bill rate was not available in all three-month periods because GOT held auctions only for notes of longer maturity. In these instances the six-month Treasury bill rate was used, and because six month interest rates are generally higher than three month rates, this placed an additional burden on customers. Another flaw of the FERIS mechanism was the inadmissibility of prepayments. The PCIs requested in both cases that the FERIS Administration find acceptable solutions to the issues but no decisions were taken. -6- 22. In the wake of the Gulf crisis, the economic situation in Turkey deteriorated to an extent that reduced considerably all investment activity. To overcome this situation, GOT announced an investment incentive program in the spring of 1992 which caused further delays in investments because the potential investors took a "wait-and-see" attitude as they wanted to avail themselves of subsidized loans rather than of costly FERIS loans. In the second half of 1993 the investment climate started to improve again partially as a result of the issuance of a high number of investment encouragement certificates and an ensuing increase in requests for subsidized loans submitted to the banks. There still would have been scope for disbursing FERIS sub-loans blended with subsidized credit from GOT incentive schemes since payments under these schemes were small and came usually after a long waiting period. However, because of these incentive certificates, in 1993 the Bank decided to stop approving sub-loans which were to be used in a blend with subsidized credit from GOT. This was decided for all Bank financed credit lines operated in Turkey, i.e., SMI II, PICP, and Agroindustry with a view to inducing GOT to change the incentive program. GOT, however, did not react until 1995 when the program became unaffordable and no further approvals for subsidized credit were granted. 23. With the very high nominal and real rates, using debt financing for investment projects was unattractive, even though under FERIS half of the interest could be capitalized during the grace period. The mix of effects of the Gulf war, the ensuing inflation which brought the FERIS rate to unprecedented levels peaking in July 1994 at 158% and the ineligibility of projects benefiting from the incentive program of GOT slowed down disbursements under the Project considerably. From the end of 1991 to the end of 1994 only $10 million were disbursed. 24. In 1994, GOT and the Bank' agreed on restructuring the Loan to take account of the changed circumstances and to accelerate Loan disbursement. The amended Loan Agreement, signed on December 29, 1994 contained the following changes: (i) the definition of agroindustry was expanded to include additional operations in the textile sector; (ii) the interest rate base for foreign exchange loans as single-currency loans in US dollars or Deutsch Marks was made more market-oriented and no longer tied to the World Bank pool rate; (iii) free-standing permanent working capital loans were allowed; and (iv) loans for equipment leasing and pre-export financing were also permitted. These changes, together with an improvement in the investment climate in 1995, contributed to the full commitment of the Project's funds by the end of 1996. At some point during the implementation there were doubts about the commitment of GOT to carry out the Project. However in 1994 when subsidized credit was limited to special schemes such as environmental projects, and additionally GOT and the Bank agreed on a restructuring of the Loan, the Project got back on track and it was successfully implemented. 25. The Japanese Grant was Yen 607.5 million when the grant was made to cover the TA part of the Project. The Government of Turkey was the administrator. In 1993, on request of the Bank the Turkish Government agreed to take out Yen 25 million (equivalent to about. $200,000) from the total and to include this amount in a separate Grant Agreement for which Similar agreements were negotiated for all Bank-supported credit lines in Turkey. -7- the Bank became the administrator. This amount was used to pay for specialized consultants in the field of marketing, agroindustry and fisheries. During implementation, the US$ depreciated against the Yen from an exchange rate of Yen 188 per US$ when the Grant was agreed to about Yen 90 in 1995 and about Yen 120 in March 1997. The net result of this was that in dollar terms, the total Grant disbursed for the Pilot Marketing Training and Fisheries Components of the Project (Yen 582.5 billion) grew from $3.10 million to $5.42 million. D. PROJECT SUSTAINABILITY 26. The credit component of the Project financed sustainable investment which generated high profitability with FRRs averaging 28% and highly satisfactory recovery rates. Recycled funds available from excess of repayments from sub-borrowers over repayments by PCIs to the Treasury, will be used for the same purposes as the initial loans. Now that subloans are denominated in foreign exchange, the present strong demand for these funds is likely to continue. 27. In terms of the financial viability of the PCIs themselves and the profitability of the subloans, the Project would also be sustainable. The interest spread of 3% to the PCIs under FERIS and the flexible interest margin for foreign exchange loans,typically at about the same level, are adequate.The recovery rate of over 99% is excellent. The PCIs met all financial covenants in all years but one of the implementation period and the two PCIs using the recycled funds are in a strong financial position. After the financial crisis of 1994, TSKB for a short while did not meet the debt to equity covenant. However, this was swiftly corrected through an increase in capital. All PCIs had a stronger capital adequacy picture in 1996 than in the first year of Project implementation in 1989. Since TCZB and THB made sub-loans only under FERIS, there is no recycling of Loan funds by these two PCIs. 28. The capabilities of the PCIs in the appraisal, supervision and monitoring of lending activities are adequate and the various credit and project evaluation departments deal efficiently with sub-projects using recycled funds and funds from potential follow-on projects. The interest rate mechanisms developed for the Project ensured that there was no erosion through inflation of funds repaid from sub-borrowers. Sub-loans under FERIS carried a sufficiently high interest rate to cover inflation losses and foreign exchange sub-loans have to be repaid in foreign currency thus keeping the original value intact. The Proiect is also sustainable from the point of view of the sub-borrowers. They have greatly benefited from the investments made under the Project and have developed a good sense of financial discipline. They have modernized their plants and increased capacity utilization and production. They are expected to continue profitable activities and development. 29. The Marketing Training Activities will need further infusion of support funds to become sustainable. In the pilot operations a good start has been made to demonstrate to small and medium enterprises in the agroindustry sector the value of training and consultancy and an awareness has been created that such services are not free. The effort could be continued through the establishment of an institute with nationwide coverage as recommended by the consultants, with the long term aim of making it self-supporting through increased contributions from companies. -8- 30. To make the Fisheries Component sustainable, MARA would have to train its scientific staff to achieve a better counterpart participation in the planning and design activities. Also, the Task Force would finally have to resume work on a regular basis to translate the findings and recommendations of the various studies into realistic policy. However, new funds would have to be made available for the services of the Program Coordinator and the Sector Strategy Task Force since the present budget of the Fisheries Department of MARA is not sufficient to support the necessary expertise. E. BANK PERFORMANCE 31. The Bank's performance at preparation and appraisal was satisfactory. The Bank's missions, staffed with professionals having appropriate technical expertise, adequately transformed the findings and recommendations of the Agroindustry Sector Survey into a preparation report. The design of the Project was kept simple and the selection of the PCIs was based on eligibility and experience, as TCZB, THB, and SYKB had the largest portfolio in agroindustry. An issue developed with the definition of agroindustry whose scope at appraisal and negotiations was kept intentionally narrow to achieve the desired targeting. It included processing, packaging, transportation, handling, storage and distribution of food, beverages, animal feed, tobacco, and sawmills, leather tanneries or processing of raw cotton and agricultural inputs. During implementation the definition of agroindustry was extended to include also secondary processing of cotton in spinning and weaving. This helped to accelerate Loan disbursements. 32. Bank performance during the implementation phase 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 Treasury maintains that the Bank could have been more flexible in permitting the utilization of Loan funds in a blend with subsidized credit; particularly because in the Minutes of Negotiation the Bank had insisted in recording that "GOT intends to take all such measures as may be required to make access to the benefits under the investment incentives regime available for Investment Projects." Supervision missions made great efforts to achieve a compromise on this but Bank Management believed that it was more important to adhere to the principle of not supporting subsidized credit. The Bank was flexible, however, in agreeing to the successful restructuring of the Loan at the end of 1994 (para 24). F. BORROWER PERFORMANCE 33. The performance of GOT and the implementing agencies was highly satisfactory in some aspects, satisfactory in others and deficient in some. As discussed earlier, the performance of the PCIs in carrying out the credit operations and meeting the financial covenants agreed under the Project was very satisfactory. Also the Treasury helped to ensure a smooth operation of the credit line. The efforts of GOT to meet THB's claims for duty losses from various activities carried out for Government were unsatisfactory. The quality of Project management by the PCIs in general was quite good. In particular, performance by the various credit departments were found highly satisfactory. -9- 34. The performance of Project consultants in general was satisfactory. The consultants who imparted training to the staff of TCZB and THB and the consultants who trained local consultants under the Supplementary Consultancy Program performed particularly well. The joint venture of management consultants that carried out the Pilot Marketing Training started off well but got caught in delays through personnel management issues. The consultants involved in the studies under the Fisheries Component delivered excellent work. 35. The major covenants related to the institutional development and financial strength of the PCIs. Since all of them were met, compliance with covenants must be rated highly satisfactory. G. ASSESSMENT OF OUTCOME 36. The Project achieved nearly all of its objectives but took longer than planned to be executed. The delay was caused by a very difficult economic environment and problems between the Bank and the Borrower concerning subsidized credit. As of November 1994, the Project would have been rated unsatisfactory, but since then, performance has been highly satisfactory. This leads to an overall rating of satisfactory. H. FUTURE OPERATION 37. A plan for the future operation of the Project has been agreed with GOT, MARA, the PCIs and IGEME. It contains the following arrangements: (i) regarding credit it sets out how the reflow of funds to the PCIs will be used in lending for similar purposes until all funds have been repaid to GOT as specified in the legal agreements; (ii) regarding fisheries activities it contains the intentions of MARA on how to use the findings and recommendations of the studies financed under the Japanese Grant and to keep the Bank informed about planned investments in the fisheries sector ; and (iii) regarding marketing training it contains the agreement that IGEME, jointly with the Chambers of Commerce and the Exporters' Union of Izmir will continue the efforts started under the Project and make an attempt to institutionalize the training and consulting services as proposed in the Pilot Marketing Training Program study. I. KEY LESSONS LEARNED 38. Several lessons can be learned from the Project and its results: (i) Firms whose earnings are effectively "dollarized" prefer and can manage foreign-currency debt. At the beginning of the Project it was thought that investors would be averse to borrowing in foreign exchange. However, with rising inflation and the increasing need of GOT to borrow funds, FERIS interest rates started to fluctuate wildly and investors preferred the relative interest rate stability of borrowing in US$ and DM, despite the fact that repayment obligations for principal increased along with the rate of exchange; (ii) in high inflation economies sound economic and financial benefits can be obtained if lending activities are sheltered from the effects of inflation through appropriate interest rate mechanisms. Government risk insurance schemes do not seem to be the right mechanism to enable lending in local currency; (iii) - 10- lending mechanisms should be kept simple so that sub-borrowers understand their obligations - borrowers much preferred interest rates linked to LIBOR, with which they were familiar to rates linked to the Bank's pool rate, which they did not fully understand; (iv) if problems arise between the Bank and the Borrower, negotiated solutions should be sought right after the emergence of the problems. 39. The Bank's agreement to make free-standing permanent working capital loans was very important in that it made contributions to the financial soundness of enterprises hard- pressed to control the cost of their expenses under inflationary conditions. The availability of free-standing working capital loans at the outset of implementation could have been an important tool to reach one of the Project objectives: helping to restructure agroindustrial companies in distress. J. PROGRAM OBJECTIVE CATEGORIES 40. Although the Project had no program objectives, it made significant contributions to private sector development and safeguarding the environment objectives. As all sub-loans had exclusively private sector beneficiaries, the Project contributed to private enterprise sector efficiency by financing modernization and replacement investments and thus increasing capacity utilization. Private sector performance was also enhanced by the successful implementation of the marketing training program and the related supplementary consultancy programs. On the environment, the Project contributed in two areas: (i) All sub-projects financed under the Project followed environmental guidelines and thus contributed to introducing environmentally acceptable practices into agroindustry; and (ii) the studies in the fisheries sector that were related to aquaculture and inland fisheries led to the drafting of environmental legislation for aquaculture which is currently being discussed between s all related ministries, i.e., MARA, the Ministry for the Environment and the Ministry of Tourism. It is anticipated that this will become law within the next two years. IMPLEMENTATION COMPLETION REPORT TURKEY AGROINDUSTRY PROJECT (LOAN 3077-TU) PART II: STATISTICAL ANNEXES Tables: 1: Summary of Assessments 2: Related Bank Loans/Credits 3: Project Timetable 4: Loan Disbursements: Cumulative Estimated and Actual 5: Project Financing 6: Economic Costs and Benefits 7: Compliance with Operational Manual Statements 8: Bank Resources: Staff Inputs 9: Bank Resources: Missions 10: Status of Legal Covenants Table 1: Summary of Assessments A. Achievement of Objectives Substantial Pa Neligible Not applicable Macro Policies O O O 0 Sector Policies O0 [ Financial Objectives 0 0 O O Institutional Development 0 0 [ O Physical Objectives 0 E O O Poverty Reduction O l E 0 Gender Issues O O O 0 Other Social Objectives O OEl 0 Environmental Objectives O 0 0 0 Public Sector Management 0 0 O 0 Private Sector Development 0 E E O Foreign exchange earnings 0 E E O (Continued) B. Project Sustainability J.k.ly Unlikely Uncertain Highly C. Bank Performance satisfacto Satisfactory Deficient Identification Preparation Assistance Appraisal Ol Supervision Li O Highly D. Borrower Performance satisfactory Satisfactory Deficient Preparation Ol Implementation Covenant Compliance [I O Highly Highy E. Assessment of Outcome satisfatoy Satisfactory Unsatisfacty unsatisfactory Ol 0 0 0 Table 2: Related Bank Loans/Credits Loan/Credit Title Purpose Year of Approval Status Preceding operations Livestock Development Support genetic improvement 1985 ICR issued Project of livestock Following operations Guarantee for Bank support and guarantee to 1997 Under Development Banks assist the Development preparation (SYKB-TSKB) Banks SYKB and TSKB issue bonds for equivalent of $200 million. Funds to be used to finance agroindustry, and small and medium industrial enterprises. Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/ Latest Estimate Identification (Executive Project Summary) 01/88 02/88 Preparation 06/88 06/88 Appraisal 12/88 01/89 Negotiations 04/89 05/89 Board Presentation 05/89 05/89 Signing 06/89 06/89 Effectiveness 12/89 12/89 Project Completion 03/96 05/97 Loan Closing 12/95 04/97 Table 4: Loan Disbursements: Cumulative Estimated and Actual (US$ thousands) FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 Appraisal estimate 10,000 13,000 52,000 87,000 127,000 150,000 - Actual 2,803 15,398 38,045 45,600 51,068 52,209 135,325 150,000 Actual as % 28 118 72 52 40 35 - - of estimate Date of final disbursement: April 28, 1997. Table 5: Project Financing Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Item Local Foreign Total Local Foreign Total costs costs costs costs 1. IBRD - 150.0 150.0 - 150.0 150.0 2. Financial intermediaries 57.5 - 57.5 - - - 3. GOT 1.2 - 1.2 1.2 - 1.2 3. Sub-borrowers 200.0 - 200.0 373.0 - 373.0 Total 258.7 150.0 408.7 374.2 150.0 524.2 Table 6: Economic Costs and Benefits Economic Rates of Return (ERRs). Specific estimates of the project's ERR were not made at appraisal; PCIs were required to demonstrate the economic viability of individual projects which had to show ERRs in excess of 15% (except for projects specifically aimed at environmental amelioration). An analysis of the ex ante rates of return on investment projects for SYKB and TKSB, which accounts for 81% of Investments indicated a weighted average ERR from 53 projects of 29%. Ex post evaluation on eight of these (which had ex ante ERRs of 33%) resulted in an average ERR of 30%. Ex Ante ERRs and FRRs for Investment Projects In SYKB and TSKB (represents 72% of Loan & 81% of Project Investment) No Investment Av. ERR At Range Av. FRR At Range (US$'000) Appraisal Appraisal SYKB 40 191,598 36% 18%-117% 45% 22%-99% TSKB 13 232,684 23% 14%-57% 23% 15%-62% Overall 53 424,282 29% 33% Ex Post ERRs and FRRs for Sample Investment Projects in SYKB and TSKB (represents 21% of Loans for Investment) No Investment Av. ERR At Av. ERR Av. FRR At Av. FRR (US$'000) Appraisal Ex Post Appraisal Ex Post SYKB 6 57,484 33% 31% 44% 31% TSKB 2 12,406 29% 27% 34% 25% Overall 8 69,890 33% 30% 42% 30% Employment Impact. At appraisal, the project was expected to invest in relatively labor intensive projects with an incremental cost per job usually not exceeding US$25,000. Estimates of additional jobs made at the time of PCI appraisal was for a total of 3,678 jobs from the Investment Projects at a cost per job of $134,000. Estimates of Full Time Job Creation (at Sub Project Appraisal) No. Disbursement Investment Jobs Cost/Job (US$'000) (US$'000) (US$'000) SYKB 40 56,158 187,416 2,159 87 TSKB 13 52,111 232,684 944 246 TCZB 6 6,285 13,832 355 39 THB 20 9,858 59,707 220 271 TOTAL 79 124,412 493,639 3,678 134 Ex post analysis indicated slightly more employment creation than had been expected at sub project appraisal. On the eight projects reviewed, 492 full time jobs were created at a cost per full time job of $142,000, compared with sub project appraisal expectations of 391 jobs at US$176,000 per job. Table 7: Compliance with Operational Manual Statements Basically, there was compliance with the applicable Bank Operational Manual Statements. Table 8: Bank Resources: Staff Inputs Planned Revised Actual Stage of project cycle Weeks US$ Weeks US$ Weeks US$ Through Appraisal 60.0 180,000 57.0 171,000 Appraisal-Board 36.6 102,450 34.9 97,720 Board-Effectiveness 35.5 99,000 33.8 94,640 Supervision 200.0 600,000 234.6 703,800 Total 332.1 981,450 360.3 1,067,160 Table 9: Bank Resources: Missions Performance Rating" yeso Stage of project cycle Month/ No. of Days in Specialization' Implem. Developm. 3robTeso Year Persons Field status objectives Through appraisal 12/88 3 30 E, F, N Appraisal-Board 06/89 1 E Supervision 1 06/89 3 15 E, F, N 1 2 Supervision II 06/90 4 50 E, F, N, F 1 2 M Supervision 1II 12/90 1 5 E 1 2 M Supervision IV 05/91 4 23 E, F, Fi, N 1 1 Supervision V 04/92 4 30 AC, E, Fi, N 2 1 M Supervision VI 09/92 2 6 Fi 2 1 M Supervision VII 01/93 3 27 AC, Fi, F 2 1 Supervision VIII 06/93 3 20 AC, F, Fi 2 3 M Supervision IX 02/94 4 30 AC, F, F, Fi 2 3 M Supervision X 08/94 3 20 AC, F, Fi 1 3 M Supervision XI 04/95 4 22 AC, F, Fi 1 3 Supervision XII 09/95 4 20 AC, F, F, Fi 1 1 M Supervision XIII 09/95 4 26 AC, F, F, Fi 1 1 M Supervision XIV 10/96 3 26 AC, F, Fi 1 1 Completion 02/97 2 14 AC, F 1 1 I - Key to Specialized staff skills: 2 - Key to Performance Ratings: 3 - Key to Types of Problems: AC = Agricultural Credit Spec. I = Minor problems F = Financial E = Economist 2 = Moderate problems T = Technical F = Financial Analyst 3 = Major problems M = Managerial. Fi =Fishery Specialist N = Marketing Specialist Legal Covenant Report: Latest status of Covenant Compliance OD 13.05 - ANNEX D5 ECA - Europe & Central Asia Regional 0 Page: ECI - ECA u Country Department I Run Date: 03/31/97 at 10.23.08 ECIAR - Agriculture & Regional Devip Opr Form 590 Date: 11/18/1996 Project ID: TR-PE-9056 - AGROINDUSTRY Original Revised Covenant Fulfill Fulfill Class (s) Status Date Date Description of Covenant Comments Agreement: AGROIN Loan Number: IBRD -30770 Text Reference: 2.03 10 SOON 12/31/1995 04/30/1997 Closing date shall be 12/31/95. Postponed by 18 months to April 30, 1997. Text Reference: Schedule 4 A.3. 03 C From the loan amount allocated for subloans, Fixed allocations have been abandoned. DeS facto Borrower shall allocate $11.4 M to TCZB, $42.8 M allocations through use of pool will be: syxB to SYKB, and $28.6 m to TNB. $72.0 M, TSKB 61.6 M, TCZB $6.3 M, THB $9.9 M, Training $0.3M. Text Reference: 3.01(b) 01 C Each PCI shall have (i) its records/accounts/ Audit reports for 1995 received with clean audit financial statementsaudited by independent opinions. auditors, (ii) furnish Bank(A) certified copies ofits ausited financial statements and (b) audit report by auditors no later than 9 moo, for TCZB and 6 mos. for each PCIs and (iii) furnish Bank other related information. Text Reference: Japanese Grant 2.03 02,05,03,11 NYD 06/30/1997 Closing date shall be 6.30.94 or later date that New extension by six months to 6/30/97. Administration declares. C - Complied with CD - Compliance after Delay NC - Not Complied with SOON - Compliance Expected in Reasonably Short Time CP - Complied with Partially NYD - Not Yet Due Ot Appendix 1 AIDE MEMOIRE Page 1 TURKEY AGROINDUSTRY PROJECT (Loan 3077-TU) Implementation Completion Mission of March 1997 A. INTRODUCTION 1. A World Bank Mission consisting of Messrs. F. Lucca, G. Ozdora (IBRD), P. Harrison and J. DiIster (consultants) visited Turkey from February 23 to March 7, 1997 to carry out the Implementation Completion Mission for the Agroindustry Project (the Project). The Mission held discussions with officials of: the Undersecretariat of Treasury; the Fisheries Department of the Ministry of Agriculture and Rural Affairs (MARA/GDAPD); the Export Promotion Center (IGEME) in charge of the Pilot Marketing Training Program and of the Supplementary Consultancy Program (SCP); the Chamber of Commerce and Exporters' Union of Izmir; the management and staff of Turkiye Cumhuriyeti Ziraat Bankasi (TCZB), Turkiye Halk Bankasi (THB), Sinai Yatirim ve Kredi Bankasi (SYKB), and Turkiye Sinai Kalkinma Bankasi (TSKB) to discuss the Project achievements and the operational plan. Additionally, in order to verify the initial Project results and the impact of the consultancy services financed under the Japanese Grant Agreement, the Mission visited some beneficiaries of PCI loans and of consultancy services rendered under the Second Supplementary Consultancy Program (SCP II). 2. 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 management and staff of the PCIs, and the many Project beneficiaries visited. In carrying out its activities the Mission was fully supported by the Bank's Resident Mission in Ankara. 3. The Project will close on April 30, 1997. The objective of the Mission was to: (i) discuss with GOT and the implementing agencies the contributions to the Implementation Completion Report (ICR) prepared by them; and (ii) collect data for the preparation of the Bank's ICR. 4. 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. 5. 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 1. The Mission's findings regarding the views of the Bank are subject to confirmation by the Bank's Management. Appendix 1 Page 2 6. A wrap-up meeting chaired by the Head of the World Bank Department in the Treasury, Mr. A. Erden, was held on March 7, 1997 with representatives of MARA, the PCIs, and IGEME in attendance. Project Implementation 7. Project Closing and Disbursements. The Loan will be closing after two extensions on April 30, 1997, 16 months after the planned closing date. The remaining funds in the Loan account of $1.05 million will be disbursed by the PCIs by April 30, 1997. Annex 2 shows the disbursement situation as of February 14, 1997 and the final allocation of funds to the various Participating Credit Institutions (PCIs). As of this date, 99.3% of all Project funds had been disbursed. At closing, SYKB will have onlent 48% of the Project funds, TSKB 41%, THB 7% and TCZB 4%. 8. Cofinancing. The Project was cofinanced by a grant from the Japanese Government to support the technical assistance components of the Project, i.e., studies in the fisheries sector and the Pilot Marketing Training Component that was extended into the Supplementary Consultancy Programs I and II. The latter is still ongoing and to allow for its completion, the Japanese Grant Agreement has been extended to June 30, 1997. The disbursement position of the Japanese Grant Agreement as of February 28 and the likely position at the close of disbursements is shown in Annex 3. 9. Formulating and Attaining of Project Objectives. It is the view of the Borrower as represented by the Undersecretariat of Treasury and the implementing agencies that the Project had clear objectives which were as follows: (i) to increase the output of agroindustry through the financing of investments to revitalize existing capacity and to establish new facilities; (ii) to improve the capabilities of the Participating Credit Institutions (PCIs) to carry out financial restructuring of ailing enterprises and appraisal of investments for, agroindustrial projects; and (iii) to strengthen agroindustry through the establishment of a capacity for marketing training and for planning in the fisheries sub-sector. These objectives are considered realistic and attainable with one minor exception: The implied expectation that PCIs would play a leading role in restructuring ailing enterprises within the frame work of the Project was unrealistic. While they were willing at the time of appraisal to enter into financial restructuring of companies they in fact were not inclined to incur higher than normal financial risks. The Mission concurs that the implicit objective of restructuring enterprises in distress was over-ambitious given the fact that the PCIs had to focus on maintaining sound portfolios. It was noted that the explicit objective of improving the capacity of PCIs in restructuring agro-businesses was achieved. PCIs, however, provided assistance to enterprises in the context of their normal activities by floating equities and substituting short-term expensive exposures with long-term working capital finance. 10. In the view of the Mission, the design of the Project was appropriate for achieving its physical and financial objectives. However, the PCIs and in particular TSKB hold that the definition of agroindustry was too narrow in the beginning and contributed to the slow pace in disbursements. The PCIs also indicate that the FERIS mechanism proved in retrospect to have Appendix 1 Page 3 been a bad choice because persistent high inflation and budget deficits which had to be financed through heavy borrowing led to three-month Treasury bills, which were the basis for the calculation of the FERIS rate, resulting in excessively high real interest rates. The PCIs pointed out that they did not use the option to make subloans in foreign currency initially because rates were too high in comparison to LIBOR rates and the Bank's currency pool system was too complicated to be understood by investors. Also, there was no prepayment option for the sub- borrowers which made lending under FERIS unattractive. 11. Achievement of Objectives. Main sector policy objectives aimed at: (i) increasing the capacity utilization of enterprises and agroindustrial output through the financing of viable sub- projects; and (ii) improving the competitiveness of the agroindustry sector, were achieved. The institutional objectives of the PCIs in terms of improving their appraisal capabilities and enhancing their financial position as expressed in the financial covenants referring to capital adequacy, debt to equity and recovery ratios were fully achieved or exceeded. 12. The three TA components achieved substantially their objectives. The TA for banks was used by TCZB and THB for successful training programs. The objectives of the fisheries component were properly designed and oriented in that they were aimed at improving environmental, marketing and institutional aspects of fishery production. Of specific importance were surveys on environmental and legislative aspects of aquaculture; a survey on the domestic and export marketing problems; a survey of management and rehabilitation strategies for coastal lagoons. An important aim of the component was to establish a Task Force to determine sector policies and investment resulting from the studies and to prepare a comprehensive fisheries project to be possibly financed by the Bank. The impact of the Component was positive in terms of recommendations but marginal in terms of applications in the sector. This was mainly due to the need of training of MARA's personnel to be in a position to absorb effectively and implement the recommendations produced by the surveys. It was also due to the difficulties inherent in the formation of the Task Force, somehow due to the reluctance of other agencies and ministries to participate in it. Overall, the Component has pointed out the direction for an action plan and policy measures to be taken in the sector. Follow-up by the GOT along the indicated directives is desirable and hopefully will be undertaken. 13. The Marketing Training Component consisted of a Pilot Marketing Training Study and the two Supplementary Consultancy Programs. The Study designed and tested training prototypes suited to improving the marketing skills of Turkish agroindustrial enterprises and to enhance their competitiveness. Among the training prototypes tested, one-on-one consultancy was found to be the most attractive. Accordingly, a portion of the funds remaining in the Japanese Grant was directed toward helping to establish a consultancy profession in two regions of Turkey and rendering consultancy services through local consultants to small and medium enterprises. The two consultancy programs using one-on-one consultancy were highly successful. IGEME points out that its participation in the management of the Pilot Marketing Training Component was a real challenge for them. While the initial program carried out with the objective to develop and test training modules and make recommendations for an Appendix 1 Page 4 institutionalization of the effort did not meet all expectations, the two added supplementary consultancy programs proved highly beneficial for all participants in the enterprise and consultancy sector. 14. Monitoring & Evaluation. The PCIs carried out regular monitoring of their subloans as their normal supervision activity. Additionally, an evaluation exercise on a representative sample of eight medium- and long-term subloans was undertaken. This covered some 25% of total Project investment by two of the PCIs and confirmed that the projects financed were economically very sound. The average ERR, weighted by investment, was 29%, with individual project returns being between 21% and 60%. FRRs were slightly lower on average, being 28% in real terms and varying from 20% to 60%. PCIs benefited by making adequate spreads on the Loan and have been successful in loan collections under the Project. Although investment was generally for sector modernization, it still resulted in some additional job creation. On the basis of the PCIs' survey, one job was created for every $53,000 of the Loan - pro rata basis, this suggests about 3,000 total jobs have resulted from the Project. 15. Major Factors Affecting the Project. In 1992, GOT announced an investment incentive program offering subsidized loans to improve the investment climate that had deteriorated considerably in the wake of the Gulf crisis. Consequently, the Bank decided to stop approving sub-loans which were to be used in a blend with subsidized credit from GOT despite no provision for such an action having been made in the Loan Agreement. GOT contends that the Bank decision not to allow blend financing under the Agroindustry Project was against the spirit of the agreements reached during Project negotiations where the Bank encouraged GOT "to make access to the benefits under the investment incentives regime available for Investment Projects appraised by PCIs and found eligible for subloans..." 16. Disbursements under the Project were at a very low level from the end of 1991 as result of the Gulf war and the ensuing persistent inflation which brought the FERIS rate to a peak of 158.4% in July 1994. The situation was aggravated by the financial crisis of January 1994 which was triggered by short foreign exchange positions of the banking system and led to a devaluation of the TL against the US dollar of 131% in the four months January to April 1994. To help remedy the situation, an agreement was reached between all parties at the end of 1994 that the Project should be restructured in a way that: (i) expanded the definition of agroindustry to add additional operations in the textile sector, (ii) made the interest rate base for foreign exchange loans as single-currency loans in US dollar or Deutsche Mark more market-oriented; and (iii) permitted the PCIs to make free-standing permanent working capital loans and loans for leasing of investment items and pre-export finance. These changes, together with an improvement in the investment climate in 1995, contributed to a full commitment of all Loan funds by the end of 1996. The Treasury emphasizes that the Bank showed a high sense of innovation and degree of flexibility in the negotiations that preceded the restructuring and led to the amendment of the loan documents in December 1994. Appendix 1 Page 5 17. The Treasury and the PCIs also indicate that the cooperation with supervision missions fielded in regular intervals twice per year during the implementation phase was satisfactory and led to an effective relationship with Bank staff. The Mission points out that this was greatly facilitated by always including a Project Officer from the Bank's Resident Mission in the supervision effort. 18. The Mission assesses the performance of the PCIs as good although THB was de facto excluded from the Project because it could not meet all of the Bank's eligibility criteria set for the Project. 19. Project Sustainability. The Mission rates the credit component of the Project as sustainable. PCIs met all financial covenants in all years but one of the implementation period and recovery rates are excellent. Sub-borrowers greatly benefited from the investments made under the Project and have developed a good sense of financial discipline. The interest rate mechanisms developed for the Project ensured that there was no erosion of banks' capital through inflation. Furthermore, many sub-borrowers have continued to expand further following successful performance under the Project. Project Operation 20. Annex I to this Aide Memoire contains the Operational Plan that has been agreed between GOT, the PCIs, MARA, and IGEME. In accordance with this plan, the PCIs will continue to supervise the Project portfolio to ensure an efficient use of the funds made available under subloans and will use the reflow of funds from subloans for similar purposes. Contribution of the Borrower to the ICR 21. The Mission discussed with the Treasury and the PCIs the draft reports that have been prepared as their contribution to the ICR. The reports represent a valuable contribution in terms of shedding light on the implementation of the Project. The reports will be added as annexes to the Bank's ICR. The Bank's ICR will be sent for comments to GOT. The comments received will also be annexed to the Bank's report before it is submitted to the Bank's Board. Key Lesson Learned 22. Among the lessons learned the following appears to be the most important: A credit project, if designed properly, can achieve its objectives in terms of economic and financial benefits even in an inflationary environment. Ankara, March 6, 1997 Appendix 2 Page 1 REPUBLIC OF TURKEY PRIME MINISTRY THE UNDERSECRETARIAT OF TREASURY General Directorate of Foreign Economic Relations Ref: B.02.1.HM.O.DEI.O1.02-152 - 126 2 C: 8 6 Ankara...) 2 MAY V7 Ms. Michele de Nevers Chief Agricultural and Regional Development Division Europe and Southern Europe Departments The World Bank Dear Ms. de Nevers: Re: ICR of the Aqroindustry Project Loan no. 3077-TU Please find attached the comments by the Undersecretariat of Treasury as the borrower of the above-mentioned loan on behalf of the Government of Turkey on the Implementation Completion Report for the Project financed by the said loan that we received from the Bank in 1989. We would like to thank you and your colleagues for the close cooperation and collaboration achieved during the implementation of this successful and highly beneficial Project. Looking forward to continuation of this good working relationship with the Bank in the future, too, EC2AWLog#: 0 f Date Rec'd: Sincerely yours, CountrylLn/Cr #: ****DISTRIBUTION Division Chief: Task Manager: V', Other(s): ACTION TAKEN Date: Type: By: B. *en AKMAN Encl. Ac-ng Deputy Director General cc. Mr. Frederick Temple, Chief, RMT Appendix 2 Page 2 COMMENTS OF THE GOVERNMENT OF TURKEY AGROINDUSTRY PROJECT (LOAN NO. 3077-TI) IMPLEMENTATION COMPLETION REPORT (ICR) This report presents the overall view of the Government of Turkey (GOT) as represented by the Undersecretariat of Treasury on the outcome of the above Project. Detailed comments on the Project results have been included in the contributions of the participating agencies to the ICR. We basically concur with the findings and opinions of these institutions. The agencies that are involved in this Project are the Ministry of Agriculture and Rural Affairs (MARA), the Export Marketing Promotion Center (IGEME) as the agencies that used the associated Japanese Grant to undertake valuable work regarding different aspects of agroindustrial businesses and TSKB, SYKB, THB, and TCZB as the participating credit institutions (PCIs) to lend the funds provided on to the private sector enterprises that used mainly agricultural inputs for manufacturing. The main targets of the Project have been to strengthen the agricultural input based, small-sized industry by increasing their chances to access commercial credits by providing funds through banks directed to that purpose only and at the same time by supporting their efforts to pursue sound and profitable projects through assistance provided by the PCIs' project evaluation departments and the World Bank experts. Among the purposes was also encouraging the involved PCIs to work with the agroindustry sector by assisting the institutional development of the banks involved and strengthening the credit allocation system. This was to be achieved by making investment credit available through the banking system. Although the targets did not change, the types of areas eligible for credit, like manufacturing, working capital etc. and accordingly the disbursement rates changed greatly over the life of the Project and to achieve this, the LA has undergone five amendments in six years with some of them not related with financial matters and the third and fourth being quite comprehensive in scope. The implementation period has also been extended twice with the agreement of the Bank for 16 months in total. When we look at the background that led GOT to collaborate with the Bank on this Project, we see that in 1980s, GOT policies aiming to improve the performance of the economy and the measures adopted in this respect had the purpose of strengthening the credit institutions and increasing credit supply to the agricultural and industrial sectors of the economy. The Agroindustry Project (Loan 3077-TU) is one of the projects GOT and the World Bank collaborated with a view to help realize those objectives in that area. Appendix 2 Page 3 The Agroindustry Loan in the amount of US$150 million equivalent was approved in May 1989 and made effective in October 1989. GOT signed Subsidiary Loan Agreements with three banks, initially, TCZB, SYKB, and THB and authorized them to evaluate projects and disburse funds at the terms and conditions set out in the SLAs. The banks were to make the repayments to GOT at the terms that GOT had to repay the World Bank. Also, Project Agreements were signed between the PCIs and the World Bank which helped the PCIs as a reference document while evaluating the projects for sub-loans. In line with the development targets of GOT, the private sector enterprises eligible to use credit under the project were to aim to improve their productivity and capacity utilization or to establish new facilities in that sector. Another important part of the Project was realized through provision of technical assistance (TA) for (i) marketing training and (ii) planning in the fisheries sub-sector. Initially, $6.7 million were earmarked for this purpose in the Loan, however, since the Japanese Government made available a grant for TA, this amount was transferred to the credit category toward the end of the Project. Thus, all but $0.3 million of the Loan of $150 million was used for financing subloans to agroindustrial enterprises, mainly for expansion and modernization investments. Project disbursements had a slow start-up. Following a review of the allocations to the three PCIs, ar the end of 1992, it was concluded that initial allocations to TCZB and THB were already set too high. This situation, coupled by a request from TSKB which had to participate in the Project as an additional PCI, led to reallocation of funds among the four PCIs. Following the restructuring in 1995 the allocations were also reviewed again and revised as necessary. A a result, the balance of Project funds including those originally earmarked for TA, was transfered to a pool to be disbursed on a first come-first served basis by the PCIs. Thus, the final adjustments resulted in the allocation of funds as follows: $72.1 million for SYKB, $61.4 million for TSKB, $9.9 million for THB, and $6.3 million for TCZB. The remaining $0.3 million was spent by THB and TCZB for training of their staff to increase capacity in project evaluation and lending to agroindustry sector. Regarding the efforts made to restructure the Project throughout 1994 and ending with an amendment to the LA in late 1994, one of the underlying reasons was the Foreign Exchange Risk Insurance Scheme (FERIS) which covered the foreign exchange risk for subloans made in local currency. It was observed, as time passed that there were either conflicts or differences in the degree of flexibility between the provisions of the LA and the provisions laid out in the regulations of FERIS Scheme that were published in 1980s. The strict procedures of this mechanism, coupled with prohibitively high interest rates based on three-month Treasury bills in the wake of the Gulf crisis turned out to be unattractive Appendix 2 Page 4 for investors starting from 1992. Consequently lending through the PCIs came to a virtual standstill. To remedy the situation, GOT in 1992 announced an investment incentive program offering a range of financial benefits to investors which included small amounts of subsidized credit. The funds provided under this program had been very limited and some investors who intended to increase the amount of funds they could use to invest by blending funds from the two sources could not achieve that, either. Under the then-prevailing circumstances, it was seen that the private sector avoided for some more time investing in especially agroindustry sector, which is by nature, highly dependent on the quantity and quality of agricultural production. Also, it became strikingly apparent that the Loan did not allow disbursements on anything other than brand new or modernization investments whereas the investors needed funding for working capital and leasing or trade in order to run their establishments. As a reaction, upon consensus with the World Bank and the PCIs, GOT decided to restructure the Project with the objective to accelerate Loan disbursement. In the amendment of December 29, 1994 to the Loan Agreement: (i) the definition of agroindustry was expanded to include additional operations in the textile sector; (ii) the interest rate base for foreign exchange loans as single-currency loans in US Dollar or Deutsche Mark was made more market-oriented; (iii) free-standing working capital loans were allowed; and (iv) loans for equipment leasing and pre-export financing were also permitted. These changes, together with an improvement in the investment climate in 1995, contributed to a full commitment of the funds by the end of 1996. We would like to emphasize that the Bank was also highly willing and helpful to us in our intensive discussions with the PCIs while searching for approaches to be adopted and changes to be made to the LA prior to the restructuring. In this context, a new tool also became functional by means loans offered to investors in currencies other than TL, mainly in USD and DEM, which was not available under the FERIS Scheme although it had been included as an option in the LA.. The exchange risk was now born by the investors. Also, early repayments by the investors to the PCIs was allowed upon request and under certain conditions which was not allowed under the FERIS Scheme, either. Although this process took some time to be finalized, causing the disbursement rates remain at quite low levels for about two years, the Project was finally structured in a way that put the funds in great demand from the PCIs and the private sector investors which helped the Loan, the undisbursed balance of which still amounting 95 million USD in mid-1995, to be used up in almost 20 months. In this, the experience gained by the PCIs also played an important role. The PCIs were effective in achieving their objectives. They improved their appraisal capabilities and complied with legal covenants requiring sound financial structure and reporting. Appendix 2 Page 5 During the implementation period, a total number of 95 subloans were financed with the proceeds of the Loan. The economic impact of the credit component of the Project has been very positive. It provided much-needed long-term funds to sub-sectors in need of investment capital, benefiting both the sub-borrowers and the financial structure of PCIs handling the Project. A post-Project reappraisal of some 25% of total Project investment by two of the PCIs confirms that the projects financed were economically very sound. The average ERR, weighted by investment, was 29%, with individual project returns being between 21% and 60%. FRRs were slightly lower on average, being 28% in real terms and varying from 20% to 60%. PCIs benefited by making adequate spreads on the Loan and have been successful in loan collections under the Project. Although investment was generally for sector modernization, it still resulted in some additional job creation. On the basis of the PCIs' survey, one job was created for every $53,000 of the Loan - pro rata basis, this suggests about 3,000 total jobs have resulted from the Project. Although being implemented in difficult economic situations, the Project clearly supported investment in niches of high export and development potential and through sound financial institutions. This indicates that despite World Bank excessive concern for macro- economic equilibrium, lending to efficient export-oriented enterprises is financially viable and it helps the process of economic restructuring. The TA components also achieved their objectives. The TA Loan funds for banks were used in 1990 and 1996 by TCZB and THB to carry out successful training programs related to sub-project preparation and appraisal. The Fisheries Survey financed by the Japanese Grant achieved its objective of preparing studies which provided recommendations for sector policy. It included five studies (survey of demersal fish resources, reconnaissance of marine fish culture, survey of inland fisheries including potential sites for aquaculture, fish marketing for domestic consumption and export, and lagoon rehabilitation) some of which were carried ot in cooperation with JICA and others with competent companies in this sector selected through ICBs. The Grant also financed the services of program coordinators and establishment of a sector strategy task force on fisheries. Also, in relation to the outcomes of the studies and as a result of the experience acquired during those studies MARA assisted in drafting and negotiating a Black Sea Fisheries Convention which is a very important development considering the increasing marine pollution in the region and a high number of countries with coasts on the Black Sea. Although, because of MARA's repeated reorganizations and changes in management, the impact was less than expected, it can be said that, through these activities it helped to establish a planning capacity in MARA. The initial intention of the TA program on the fisheries survey had Appendix 2 Page 6 been to form the basis for a fisheries Project, and MARA has recently established an Advisory Council and a comprehensive fisheries sector strategy is under preparation for the time being. The Marketing Training Component was administered by IGEME which chaired a Steering Committee with representation from the private sector and universities. It consisted of the Pilot Marketing Training Study carried out by a joint venture of two management consulting companies with a sub-contract to the Middle East Technical University in Ankara. The study provided designs and tested training prototypes suited to improving the marketing skills of Turkish agroindustrial enterprises in order to enhance their competitiveness especially in the international markets. This experience, however, was not totally positive, because the consultant firm, due to changes in personnel assigned to the Project and delays in presenting the final report, was less effective than expected. Providing management support to small and medium agro-enterprises besides their access to credit facilities is considered necessary and important. However, this exercise had aimed at the beginning to come up with a decision as to whether such programs should be pursued by a certain agency in a permanent manner or the private sector should manage to get training once the correct sources of information are made available to them. This conclusion has not been arrived yet, and as GOT, we would have liked to see that the TA had also been a tool in consolidating efforts to this end in this sector in an institutionalized manner. The supervision missions of the World Bank were fielded at regular intervals twice per year and their staff reached a good working relationship with the implementing agencies that was conducive to the attainment of the Project objectives. In this regard we would like to express our appreciation to the staff of the World Bank including the Resident Mission for the effective support and cooperation during the implementation of this Project, and for their close collaboration and creative thinking to bring about a maximization of Project benefits and impact. Overall, we would consider the performance of the Project as highly satisfactory despite the delays in implementation caused mid-way by external economic factors coupled by the inherent deficiencies in the lending mechanisms and the narrow coverage of the Project as adopted at the beginning, which became more apparent under the changing economic conditions. The following important lessons have been learned: (i) Entrepreneurs prefer to borrow in foreign exchange at relatively stable interest rates in a highly inflationary economy; (ii) a credit project, if designed properly, can achieve its objectives in terms of economic and financial benefits even in an inflationary environment; (iii) FERIS was not the right mechanism to use for the Project purposes. Now that all parties have gained enough experience on design and implementation of such a project, it would be necessary and easy to implement a project that will meet the need for Appendix 2 Page 7 a source of funds at commercial rates but under a project approach in an area where credits are usually scarce. A repeater credit line is in demand by the current and new PCIs and sub- borrowers and GOT might consider to meet the requirements if demands persist. Appendix 3 Page 1 TURKEY AGROINDUSTRY PROJECT (Loan 3077-TU) Plan for Project Operation after June 30, 1997 Project Objectives 1. The Project objectives as stated in the loan agreement were: (i) to increase the output of agroindustry through the financing of investments to improve capacity utilization in existing facilities and to establish new facilities; (ii) to improve the capabilities of the Participating Credit Institutions (PCIs) to carry out financial restructuring of, and appraisal of investments for, agroindustrial projects; and (iii) to strengthen agroindustry through the establishment of a capacity for marketing training and for planning in the fisheries sub-sector. The SAR (paras 2.19 and 5.01) provides further details. It states as primary objective "to promote the financial conditions in individual enterprises which will revitalize existing capacity" and "...to increase output, employment and foreign exchange earnings through the expansion and modernization of the agroindustry sub-sector". 2. The project was explained in the SAR as being needed to support the Bank's strategy for (i) assisting the development of the agricultural sector and increasing its commercial orientation; (ii) supporting Turkey's efforts to increase exports; and (iii) strengthening financial intermediaries and increasing their areas of competition. It was considered to be supplementary to the efforts to restructure the financial sector in Turkey assisted by the Second Financial Sector Adjustment Loan (FSAL II, Loan No. 2964-TU) for which the Letter of Development Policy was agreed in March 1988 and which became effective in June 1988. The FSAL II 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. 3. The institutional development objectives for the PCIs referred to improving their capabilities to appraise agroindustry sub-projects and the design of financial restructuring packages. Covenants in the Project related to financial strengthening and the continuation of organizational and human resource development. 4. It was a sector policy objective specified in FSAL II to bring about positive interest rates. For the Agroindustry Project, the issue of achieving positive real rates was resolved by using the Foreign Exchange Risk Insurance Scheme (FERIS) mechanism. Under FERIS, the Government converted the proceeds of foreign loans into TL-denominated loans with a variable rate set at the average of the three-month Treasury bill rate over the preceding three months. Additionally, the option of lending in foreign exchange through the Bank's pool rate was offered. Since there was no use of the foreign exchange option under the pool rate, GOT agreed in 1994 to convert the pool of currencies to single-currency sub-loans to the PCIs. Appendix 3 Page 2 5. The fisheries and agroindustry sector objectives of the Project as expressed in the LA were as follows: In fisheries, the objective was aimed at establishing planning capabilities in the Ministry of Agriculture and Rural Development (MARA) directed toward defining sector strategies and investment projects. In marketing training the objective was to improve the marketing skills of agroindustrial enterprises in order to become more competitive. 6. 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 the PCIs have the opportunity under foreign exchange lending (not under FERIS) 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 until all funds have been repaid to GOT as stated in the Loan Agreement. Equally important, the institutional development of the PCIs will continue along the lines that were started in this and other projects supported by the World Bank. Regarding fisheries activities it is the intention of MARA to use the findings and recommendations of the studies financed under the Project by a Japanese Grant. Regarding marketing training it is the intention of IGEME, possibly in cooperation with the Chamber of Commerce and the Exporters' Union of Izmir to continue the efforts started under the Project and make an attempt to institutionalize the training and consulting services as proposed in the Pilot Marketing Training Program study. Project Achievements during Implementation of Credit Program 7. The Project will close after two extensions on April 30, 1997, 16 months after the planned closing date. After necessary account adjustments and the reimbursement of funds in the Special Account (SA) by the PCIs, MARA, and IGEME to the Bank the final disbursement figures in the individual categories of the Loan and the Japanese Grant are set out in Annexes 2 and 3. 8. The financial and physical objectives related to financing viable and productive investments in the agroindustry sector to help enterprises to increase their capacity utilization and output, improve their financial position and enhance their standing in the market were fully met. Overall, the four PCIs used the Loan of $150 million to make 95 sub-loans at an average size of $1.58 million. Of these, 55 sub-loans for $47.0 million were made under FERIS where the foreign exchange risk was with the Government, the balance of 40 sub-loans for $102.7 million as foreign exchange loans for which the foreign exchange risk was with the ultimate beneficiaries. 9. The three TA components estimated to cost $8.65 million consisted of training for PCIs, fisheries surveys and a pilot marketing training program. Loan financing was substituted by financing from a Japanese Grant. All three components achieved substantially their objectives. The TA for banks was used by TCZB and THB for training of bank staff in the appraisal and supervision of agroindustry sub-projects. The actual cost was $0.325 million. The Fisheries Component supported various surveys for marine and inland fisheries, the drafting and negotiation of a Convention on the Living Resources of the Black Sea, the services of various Program Coordinators and the establishment of a Sector Strategy Task Force that is to review the Appendix 3 Page 3 results of the studies and surveys and formulate recommendations for future sector policy. It was also expected to identify investment projects for which support from international donors including the Bank was to be requested. The actual cost of the entire program was $2.7 million. 10. The Marketing Training Component administered by IGEME consisted of the Pilot Marketing Training Study aimed at designing and testing training prototypes that are best suited to improve the marketing skills of Turkish agroindustrial enterprises and to enhance their competitiveness. These objectives were achieved. Among the training prototypes tested, one- on-one consultancy was found to be the vehicle most appreciated by enterprises in this regard. Accordingly, a portion of the funds remaining in the Japanese Grant after the completion of the Pilot Marketing Training Study was directed toward helping to establish a consultancy profession in two regions of Turkey and rendering consultancy services through local consultants to small and medium enterprises. Two Supplementary Consultancy Programs were designed and implemented by IGEME funded by the Japanese Grant Fund with increasing contributions of the enterprises that received consulting services. Selected local consultants from private business and from local universities were trained with the help of a foreign consultant. Both programs were highly successful, about 46 local consultants were trained and had the opportunity to work in the consultancy profession and 59 companies operating in the agroindustry sector received consultancy services and improved their competitive position in the market. The total contribution of the Japanese Grant Fund to the Marketing Training Component was 2.7 million of which $1.4 million went to the implementation of the Pilot Marketing Training contract, $0.8 million to the two Supplementary Consultancy Programs, and $0.5 million to program management. Future Project Operations 11. The Loan was made to the Government of Turkey (GOT) for 17 years including five years of grace period. Onlending maturities to the PCIs depend on the type of investment financed. Under FERIS sub-loans are made for periods up to ten years including three years of grace and repayment by the PCIs to GOT is at identical terms, i.e., no possibility of revolving the funds exist. For sub-loans made in foreign exchange, maturities to sub-borrowers are up to ten years including three years of grace for investment projects, up to eight years with no grace period for permanent working capital. The PCIs have thus the opportunity to revolve the part of the foreign exchange repayments from client that exceeds their repayment obligations to GOT. 12. The legal agreements stipulate that the backflows of funds will be used for simil4r purposes. The PCIs confirm that they intend to follow this agreement and make loans to individual sub-borrowers for similar purposes until all funds have been repaid to GOT. It is likely that the bulk of funds to be reinvested will be used to finance permanent working capital and investment loans. In this sense this Plan of Operation foresees that the Loan will continue to benefit the agroindustrial subsector. PCIs intend to supervise the portfolio of sub-loans outstanding in accordance with the agreed procedures until all funds have been repaid. Appendix 3 Page 4 13. Regarding the institutional development it will remain one of the PCIs' main objectives to further strengthen their financial position and to maintain compliance with the financial covenants set out in the legal agreements. 14. Regarding fisheries activities it is the intention of MARA to use the findings and recommendations of the studies financed under the Japanese Grant for sector policy and strategy recommendations to be worked out by the Sector Strategy Task Force and to keep the Bank informed about planned investments in the fisheries sector that could be supported. 15. Regarding marketing training it is the intention of IGEME to continue the efforts started under the Marketing Training Component of the Project and make an attempt to institutionalize the training and consulting services as proposed in the Pilot Marketing Training Program study. It is also the intention to cooperate with the Chambers of Commerce and the Exporters' Union of Izmir in this respect. Ankara, March 6, 1997 Agroindustry Project Loan 3077-TU Loan Disbursements Actual as of Expected New Total Allocation PCI Feb. 14, 1997 Apr. 30, 1997 Allocation In Percent Apr. 30, 1997 of Total $'000 $ '000 $ '000 SYKB $71,277,552.00 $857,677.30 $72,135,229.30 48% TSKB $61,237,000.00 $192,000.00 $61,429,000.00 41% THB $9,857,769.28 $0.00 $9,857,769.28 7% TCZB $6,284,846.22 $0.00 $6,284,846.22 4% TA $293,155.20 $0.00 $293,155.20 0% Subtotal $148,950,322.70 $1,049,677.30 $150,000,000.00 100% SYKB needs $814,020 to honor its commitments of which $46,483 are in the SA TSKB needs $192,000 to honor its commitments. All disbursements are expected to be completed by March 31, 1997 There is a difference of $ 3/12/97 Agroindustry Prolect Japanese Grant Fund Actued end Expected Ependure A B C E F G HI z Name of Budget inct. Amount RemOang Of Which Amount New Total 3 Subproject or Activity Additons as of Spent as of Amount Committed Needed Budget 4 I0. I.95 2.28.97 &s of 2.28.97 to June 1997 Reqdred 5 US$ US$ US$ US$ US$ Vs$ 6 1. Fisheries 7 Survey of aquaculture sites 288,177 288,177 0 0 0 288,177 8 Aquaculture legislation 59,785 69,785 0 0 0 59,785 9 Inland water survey 501,373 601,373 0 0 0 501,373 10 Marketing study 544,000 533,943 10.057 0 0 533,943 11 Black Sea convention 140,193 100,193 40,000 0 30,000 130,193 12 Program Coordinator 359.981 304,982 54,999 5,500 5,500 310,482 13 Lagoon survey 563.158 562,774 10,384 10,384 10,384 553,158 _______ 14 Extension of Lagoon Project 113,622 0 0 0 113,622 113,622 15 Translation and printing of studies 93,956 93,956 0 0 20,000 113,956 16 Strategy task force expenditure 15,000 1,271 13.729 0 13,729 15.000 17 Equipment and stationay 0 10,090 0 1,825 1,825 11,915 18 Contingency 0 0 0 0 5,000 5,000 19 Subtotal I 2,679,245 2,446,544 129,169 17,709 200,060 2,646,604 20 II. Pilot Marketing Study 21 Mercer Management Contract 1,484,000 1,452,610 31,390 0 0 1,452,610 22 Project Mgt. and Support 474,044 463,708 26,400 26,400 26,400 500,444 23 Suppl. Consultancy Program Phase ( 446,928 436,519 10,409 0 0 436.519 24 Suppl. Consultancy Program Phase I1 350.000 0 350,000 128,194 315,000 315.000 25 Contingency 50,000 0 60,000 0 4.013 0 1 26 Subtotalnt 2,804,972 2,352,837 468,200 154.594 345,413 2.704.572- 27 Grand Total 6,484,217 4,799,381 597,369 172.303 545,473 5,351,178 28 29 Jap. Grant Fund Total Yen 582,500,000 524.812,107 57.687,893 30 in US$ Equivalent (as of 3.5.97) 472,852 172,303 545,473 31 IGEME disbursement February 2,250 32 470,602 33 Amount in SA MARA 35,490 34 Amount In SA IGEME 39,382 35 Estimated Remaining Balance 545,473 300,549 0 36 37 Notes: 38 Fisheries Component: 39 one more meeting for Black Sea Convention to be financed. 40 The amount for Program Coonator h as been dsed because he resinned 12.31.96. Amount 1ndicated I. for Assistant 41- Contingency may be used for equipment or miscellaneous other items. _ 42 To take account of the items disbursed by the World Bank in February, the following items in the budget have been reduced: 43 For MARA:. Stack Sea Convention, printkn%of reports, and cont%nMencies. ForI(GEME:. Prowgrmfor SCP13t1and contingencies.M 44 '45 H 46 Th reakn aMOWn In Yen at March 3, 1997 has been divided by the current exchange rate of yen 122 to $1. 47 The anounts sitting In the two SAs have been added. 3/11/97 JAPG-M97 16RD 24903R � BULGARIA 30• 3s SNOP "°° � GEORGIA Q апии а ���.� Н1АСК SEA �--�, � � �,����- � ю�рк Ок��и г i wze / ARMENIA enm.W - рzоисишиг . кwпмюиои г'� 1 �ON �- � �1 р'� Ozeeo � О �- Г • w�„ ьр - � } � A�..-� 5tvли /�' ° +, � • v' " (1 i ипл�ьапи �-_ ,, ч пУ . � г,�rtеwи . \ _.--г GREECE,p,., �кiмд,w iпливи� i,кпы,Г _• - _ - ` � _�� `'�.�1 �r�'-"'� � � � ыхвикг ' -"'° коиЕш " �мw�п) • �' , г имSвА `� -, . Сд1%S15нм+Е ° р'"'п1 О вош . Vиюw р �� � � � д О�со�к -� Seool `� . ' О qоаим . . "° roк�r . - , •г- � Q ,ир� о , _ Е�,�,� г_,r юw аго , . �� _ � р� ° . , .. .-, - '� '�-_...��..-"' t � е°^ l 4 � аа° . BUPS� •B1LECIK .�..''" , ,i� --•� �-Г'�~ 51VA5 а ЕцlNGЛ1 • Гi ` !� у '"� ~ rwr,m � • q'''"'к'°аЕ ' S�лпь �� ANKARA юкiкк,ие � � чоzсvт i _ "� � � �\�f `�� ��r �I$LAMIC q �ьшкеs�ы ` � � �ESкiseиiк � � �^ � ._--�-' / °zo1а REP. OF - г Т / о кйсwчг гоюл� � 4. - � nисеи • а � �вiигбi 1 i 1 1RAN _ _ С р миs г АЧ wuv �� - -,_ �. . -.К1р5ЕюХ • � , . � j __ , �.� r �..?1 `�/'f CU � � �ттo- l ' . . , : •.. - � • ELцIG � � `1 . ВfП15 ОАР/АСНЕН- J f-u' �' УЕ RE7A'УЕН �-иеrsенiв� 0 �� rыгы } �^ (� р м,и�ч� � . -� q� - +: _,_,_�.' . мwц+ G-� • и� �ч° д� .� . . -� ,'' -� ' , оiчигвиав : �т� ps�iкr � , ' (1 • • исwиr�' ., .. '` , � .О ^w''--� �.✓ --- Онгкмs�гi ,\jV(1 .-�,� ..--' рsiкиж (� юnмми /�СΡ.11,� таьы� _ о�па. )\ • и�¢се , клнмвили О ч � /ЙEVLмrv --� / Ииi11� l� • КОИУА .у �ЧЧ� - . MARD1N�,n �г Ерпдп SfA �1�''�jг� лтм • оеипи . Оiципл � Е^рь слрwла и�л� " ~ SYRIAN 1RAQ `�' BURDUR GAZ F. . SVJUURFA � �� � '. �' � Q к,wмии . r мамк�и µ Е...�а� ARAB REP. а � Q ° � миси � � - - � � � � -' • олкгрк�и �.вwнлы т� � � литиrw icEl • �оми И л 1м.т ' CJ ,,,, "п TURKEY �. 0 ТАУ ° �5, лр 0 �� ю� � SELECTED TOWNS AND VILLAGES эs^ а � о PROVINCE CAPITALS д MEDITERRANEAN SEA ю� ® MAJO ROADS 1TAL Q - PROVINCE BOUNDARIES п,,,,���°„�, маеs о so ioo iso - 1NTERNATIONAL BOUNDARIES д �т °"".,°`�п°"°"'�а`" р� CYPRUS �° �'а д° пы и'ау °п'^'а°" oI Province патег оге the soma os rownce са гГа1г. rм wo,y g�пк G�ro. �nr ифмю qLOMETERS 0 50 100 150 700 150 м Ии MpW aaw оГ апу lвnrbrк w Э5° ЭО° ьwмом.�г а � ы � ЗО° MARCH 1994 IMAGING Report No.: 16683 Type: ICR