Turkey - Rural Cooperatives Restructuring Project

Report No. PID11495 Project Name TURKEY-RURAL COOPERATIVES RESTRUCTURING... PROJECT - TR Region Europe and Central Asia Region Sector Agricultural extension and research (100%) Project ID P078269 Implementing Agency Address: 4. Cad. No.169, 06490 Bahcelievler, Ankara, Turkey Contact Person: Mr. Sadir Durmaz, Deputy General Director Tel: 90-312-223-8965 Environment Category F Date PID Prepared October 16, 2002 Auth Appr/Negs Date December 6, 2003 Bank Approval Date November 4, 2004 1. Country and Sector Background Sector Issues The ACC system is in many respects an impressive creation. With a nationwide coverage of 2,412 primary ACCs and a registered membership of more than 1.5 million, it reaches around one third of the farmers in the country. It has well established procedures for provision of production credit and farm inputs, and a cadre of trained staff to manage these activities. In 2000, the ACCs held a third of the Turkish fertilizer sales to farmers, distributing 1,5 million tons valued at around US$ 500 million. The ACCs also sold 10 million liters of chemicals and 50,000 tons of seeds, and purchased significant quantities of olives, grains and sunflower seeds as raw materials for its agro-processing industries.ACCs operate through a three-tier structure consisting of the Central Union (CU) of the ACCs, 16 regional unions (RUs) and the more than 2,000 primary societies with over 1.5 million registered members. A characteristic feature of the system is its high degree of centralization under the tutelage of the CU which, through the RUs, exercises de facto control of the activities of the grassroots cooperatives. With financing from the government-owned Ziraat Bank, the ACC system has during the last few decades been a key instrument for administration of input and credit subsidies to the small-scale farming sector. The ACC system remained stable as long as it was supported with concessionary financing from Ziraat and with agricultural subsidies. Credit recovery deficits, caused by repayment defaults by farmers or by government directives allowing write-off of interest and loans, were absorbed by Ziraat Bank through concessionary financing it received from government.There is no other agricultural service institution in Turkey with a coverage and infrastructure as widespread as that of the ACC system. In many areas of the country, the ACCs are the only available source of agricultural input services. With its widespread infrastructure, the ACC system has the potential to become an increasingly important provider of agricultural and other services, not only to farmers but to the rural community as a whole, provided that it is assisted to recover from the adverse affects of the national financial crisis and to address the weaknesses which originate from its long-standing government dependence and control.Status. A combination of factors have recently put the ACC system under financial strain and exposed its inherent weaknesses. These weaknesses originate from its long-standing status as a quasi-public institution obliged to implement programs and activities without due regard being given to the financial and operational stability of the system. Escalating interest rates caused by the recent financial crisis in the country resulted in increasing loan recovery problems, and the ACC system was faced with the prospect of loan repayment default on a massive scale. Subsequently, in early 2002 the Management Board of the CU decided to reschedule members' debts without further interest being charged during a rescheduling period of 30 months (to 2005 for some loans). A substantial part of the ACC resources will thus be tied up in loans bearing no interest. Considering the high rate of inflation (about 35% p.a. as of July 2002), this will cause a significant reduction of the real value of the capital available to the ACCs for future operations.Government Strategy The government of Turkey is in the process of implementing agricultural and financial sector reforms that have far-reaching consequences for the operations of the ACCs. Agricultural subsidies had, by the end of 2001, been withdrawn and are being replaced by a direct income support scheme. The financial sector reform that is underway, including the expected privatization of the Ziraat Bank, also radically changes the conditions under which the ACCs operate. These reform measures form part of the government strategy of reducing public expenditure and curtailing government involvement in activities which are better suited for execution by the private sector. The implication of this policy is that the ACC system cannot any longer count on government financing and protection -- either directly, or indirectly through Ziraat Bank -- and that it therefore has to take measures which ensure its viability, sustainability and competitiveness as a private sector system.Acknowledging the importance of the ACC system which serves nearly one third of the farmers in the country with farm inputs on a credit basis, the government recognizes the need to ensure the sustainability of the ACCs by facilitating their development into private sector institutions and by helping them to address their structural, financial and operational weaknesses. MARA, which is the line ministry responsible for monitoring of the agricultural credit cooperatives, announced publicly in July 2002 the private nature of the ACC system and its support for efforts aimed at restructuring the system so that it becomes fully independent and financially viable. In discussions, MARA also declared its support for a corresponding amendment to the ACC law with the objective of providing an appropriate legal framework for the ACCs to operate as private sector institutions. Equally important, during a recent mission, Treasury stressed the importance and urgency of a project for restructuring and further development of the ACC system. 2. Objectives The development objective of the proposed project is to grow the economy and improve livelihoods in rural areas of Turkey by supporting the transformation of the agricultural credit cooperative (ACC) system into an efficient, self-sustaining and member-controlled system capable of providing agricultural and related services that contribute to increased income from farming and other economic activities in rural areas. Consolidation and further development of the ACC system, with its nation-wide coverage of some 2,400 primary cooperatives, is essential in order to ensure continued availability of inputs to farmers, to improve - 2 - output marketing and primary processing, and to ensure availability of other services needed for improvement of livelihoods in rural areas of Turkey. Specifically, the Rural Cooperatives Restructuring Project (RCRP) would: (i) support implementation of improvements to the ACC system that will result from an amendment of the legal and statutory framework of the ACCs intended to integrate them firmly into the private sector; (ii) facilitate the restructuring of the Central and Regional Unions of the ACCs to improve their cost-efficiency and capability to serve the primary ACCs; (iii) promote consolidation and diversification of the primary ACCs into larger and more viable units; including a pilot program for the introduction of credit union activities and (iv) contribute to the establishment of a cooperative development fund supporting financial consolidation and investments in new activities and facilities, and facilitating financial rehabilitation of the ACCs. As part of the restructuring of the ACC system, the project would provide funding for severance payments necessary to address the inherited overstaffing problem. 3. Rationale for Bank's Involvement In addition to project finance, the Bank's involvement will add value in two ways. First, the ACCs and the GoT expect to gain substantially from the Bank's advice and TA. This project may also be of interest to grant agencies and may attract some co-financing. The involvement of the Bank is required in order to mount a project comprehensive enough to address all key issues facing the ACC sector, while potentially providing a framework for donor-supported TA. 4. Description Actions during preparationThe pre-implementation activities, which would be a condition for financing of RCRP by the Bank, and which would be executed in parallel with the preparation of the proposed project, would consist of three elements:(a) Action by the Central Union to initiate the restructuring process (b) A public declaration by the Minister of Agriculture and Rural Affairs announcing the Ministry's commitment to promote privatization of the ACC system. (c) Amendment of the ACC law and the articles of association of the Central Union, the Regional Unions and the primary cooperatives. Project componentsThe Rural Cooperatives Restructuring Project (RCRP) would consist of four components and would have an implementation phase of five years. Component 1: Restructuring of the Central Union and the Regional UnionsComponent 2: Primary ACC Development and ConsolidationComponent 3: The Cooperative Development FundComponent 4: Project Management and SupportComponent 1: Restructuring of the Central Union and the Regional Unions. The recent deterioration of the financial position of the agricultural credit cooperatives and the reduction of their business volume call for urgent measures to restructure their operations with the view to reducing costs, increasing efficiency of operations, and generating capital for development of core activities. Under the proposed project, the unions would be assisted by restructuring, financial and institutional development specialists who, together with the leadership and staff of the unions, would undertake an in-depth review of the unions and prepare restructuring plans. These plans would address the restructuring and cost-reduction needs already referred to above, i.e. reduction of staff and overhead costs, reorganization of functions and activities, and financial strengthening of the core activities of the unions through disposal of idle assets. Furthermore, the plans would identify the need for possible new business and support activities in - 3 - order to facilitate development of the capability of the primary ACCs to provide services to their members. Implementation of the restructuring plans would be supported by the project through a variety of measures. They would include business development assistance, design and implementation of financial and operational management systems, and training programs for management, staff and board members. The restructuring component would include funding of the substantial severance payments that would be necessary for implementation of the staff reduction program. Component 2: Primary ACC Development and Consolidation. Support to the primary societies would be a crucially important component of the RCRP. The objective of this component would be to ensure availability of input supply and other services through an efficiently operating and financially sound network of ACCs, which are managed in accordance with priorities determined by an informed membership that actively participates in the affairs of the cooperatives as users of their services and as owners of the cooperative societies. The main issues to be addressed would fall into three broad categories: (i) structural and financial strengthening in order to ensure profitability, solvency and, generally, financial viability and sustainability of the ACCs; (ii) business development, i.e., improvement of the existing activities of the ACCs and diversification of the core business based on needs of the members as well as the viability of the various activities; and (iii) training, education and information targeted to the three primary stakeholder groups in the ACCs, i.e., members, elected representatives and staff.Component 3: The Cooperative Development Fund. The purpose of the Cooperative Development Fund (CDF) would be: (i) to provide working capital for the ACCs' core business which is the procurement and sale, partly on a deferred payment basis, of farm inputs; and (ii) to provide funding for development. The disbursement of this component would be against inputs bought by the ACCs.Component 4: Project Management and Support: This component would provide resources for the Project Management Unit (PMU) operations, to include professional and technical staff for project management, advisory services, procurement, financial management, reporting, and monitoring and evaluation.Tentative estimate of project costsThe total project budget is tentatively estimated to be US$ 300M. The main items included in the budget are: 1. CU/RUs Restructuring (including severance payments) 2. Primary ACC Development 3. Cooperative Development Fund 4. Product Management 5. Financing Total ( US$m) BORROWER $100.00 IBRD $200.00 IDA Total Project Cost $300.00 6. Implementation Implementation arrangements will be identified during preparation. 7. Sustainability The project is designed to build a sustainable agricultural service cooperative structure at the primary, regional and national level. The primary ACCs would be assisted to transform into sustainable rural service - 4 - units with increased self-financing and with activities that are financially and operational viable. Restructuring and rationalization of the Regional Unions would ensure their development into profitable enterprises. Project assistance to the RUs would improve their capability to extend support services to their affiliated primary cooperatives. The project activities in the Central Union would, similarly, contribute to a financial strengthening of the CU; to further development of its business activities in order to ensure efficiency, competitiveness and viability; and to the development of the CU into an effective, national service provider for the entire ACC system.As the CU and the RUs participate in project implementation, the project would build capacity in the unions for continued institutional development and for support activities targeted to primary cooperatives. Thus, at the end of the project period, the unions would have the capability to continue the activities developed by the project.Financial sustainability is a core issue reflected in the design of practically all project components. The consolidation of the primary cooperatives, as well as the efforts to increase their degree of self-financing, would contribute to the creation of strong primary ACCs. Cost-reduction measures in the unions, and disposal of idle and non-productive assets would improve their profitability and their capacity to finance investments as well as operations from internal sources. 8. Lessons learned from past operations in the country/sector The proposed project builds on the increasing realization worldwide that appropriately managed cooperatives offer efficient delivery of valuable services to their members, and that sustainable development of cooperatives cannot be achieved through government intervention and subsidies. The role of government should focus on providing a conducive environment in terms of policy and legislation, as is the case for other private sector enterprises. However, such a conducive environment is a necessary but not a sufficient condition for cooperative development in Turkey. Cooperatives need support and guidance to evolve into functioning private sector enterprises.The Third Agricultural Credit Project demonstrated the importance of the ACC system for rural areas. However, as pointed out in the implementation completion report, the state-controlled ACCs provided a less-than-ideal institutional environment for provision of inputs to farmers. The proposed project builds on these lessons by seeking to ensure the sustainability and development of the ACC system and, at the same time, transforming the agricultural cooperatives into private sector institutions managed and controlled by their members. 9. Environment Aspects (including any public consultation) Issues No major environmental issues. The project largely finances technical assistance for ACC restructuring, including severance payments. Through the Cooperative Development Fund, the project would finance working capital for eligible cooperatives. The negative environment impact of possibly increased usage of agricultural chemicals and fertilizer would be avoided by providing information on appropriate use of these inputs, introduction of integrated pest management, and non-point source pollution reduction methods. Over the past ten years, the use of fertilizer and agricultural chemicals has remained fairly steady, although it declined significantly in 2001.The proposed ACC project provides an opportunity for the introduction of environmentally friendly agricultural practices through dissemination of information and training from the MARA extension services to ACC members. The - 5 - introduction of environmentally friendly practices would also have the effect of reducing nutrient flows into the groundwater and rivers, ultimately reaching the Black Sea, Aegean and Mediterranean. A Global Environmental Facility project aimed at reducing agricultural non-point source pollution in the Black Sea region of Turkey is also being prepared, and would complement the proposed ACC project.Key stakeholders include farmers, primary ACCs, ACC system staff, MARA and environmental and agricultural interest groups/NGOs. Data on agricultural chemicals use and watershed management will be reviewed during preparation, and new information collected and analyzed (if needed). 10. Contact Point: Task Manager Lorenz X. Pohlmeier The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202-473-7053 Fax: 202-614-0697/8 11. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending October 25, 2002. -6-