Document of The World Bank

Report No: ICR0000610

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-72130)

ON A

LOAN

IN THE AMOUNT OF US$ 303.10 MILLION

TO THE

TÜRKIYE SINAI KALKINMA BANKASI A.Ş.

FOR THE

SECOND EXPORT FINANCE INTERMEDIATION LOAN (EFIL II)

January 4, 2008

Private and Financial Sector Development Department ECCU6 Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective October 2007)

Currency Unit = TRY 1.00 = US$ 0.8515

US$ 1.00 = 1.174 TRY

FISCAL YEAR January - December

ABBREVIATIONS AND ACRONYMS

BRSA Banking Regulation and Supervision Agency CAS Country Assistance Strategy EFIL Export Finance Intermediation Loan EIA Environmental Impact Assessment EU European Union IBRD International Bank for Reconstruction and Development IEG Independent Evaluation Group ISRs Implementation Status Reports IT Information Technology LIBOR London Interbank Offered Rate M&E Monitoring and Evaluation PAD Project Appraisal Document PDO Project Development Objectives PFI Participating Financial Intermediaries PIU Project Implementation Unit SAL Structural Adjustment Loan SME Small and Medium Size Enterprises TL Turkish Lira TSKB Türkiye Sinai Kalkınma Bankası/Turkish Industrial

Development Bank

Vice President: Shigeo Katsu Country Director: Ulrich Zachau Sector Manager: Lalit Raina

Project Team Leader: Lalit Raina ICR Team Leader: Steen Byskov

TURKEY

Second Export Financial Intermediation Loan (EFIL II)

CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

B. Key Dates ..................................................................C. Ratings Summary ......................................................D. Sector and Theme Codes ..........................................E. Bank Staff..................................................................F. Results Framework Analysis .....................................G. Ratings of Project Performance in ISRs ...................H. Restructuring (if any)................................................I. Disbursement Profile .................................................1. Project Context, Development Objectives and Design............................................... 12. Key Factors Affecting Implementation and Outcomes .............................................. 33. Assessment of Outcomes ............................................................................................ 74. Assessment of Risk to Development Outcome......................................................... 115. Assessment of Bank and Borrower Performance ..................................................... 126. Lessons Learned ....................................................................................................... 147. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 15Annex 1. Project Costs and Financing.......................................................................... 16Annex 2. Outputs by Component ................................................................................. 17Annex 3. Economic and Financial Analysis................................................................. 22Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 23Annex 5. Beneficiary Survey Results ........................................................................... 25Annex 6. Stakeholder Workshop Report and Results................................................... 26Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR..................... 27Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders....................... 33Annex 9: Financial Performance of Borrower and PFIs............................................... 34Annex 10. Distribution of loans by region, sector, and loan size ................................. 37Annex 11. List of Supporting Documents .................................................................... 38

MAP

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A. Basic Information Country: Turkey Project Name:

Export Finance Intermediation Loan 2 (EFIL 2)

Project ID: P082801 L/C/TF Number(s): IBRD-72130 ICR Date: 02/08/2008 ICR Type: Core ICR

Lending Instrument: FIL Borrower: TURKIYE SINAI KALKINMA BANKASI (TKSB)

Original Total Commitment:

USD 303.1M Disbursed Amount: USD 303.0M

Environmental Category: F Implementing Agencies: TSKB Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 06/26/2003 Effectiveness: 03/19/2004 03/19/2004 Appraisal: 10/14/2003 Restructuring(s): Approval: 01/13/2004 Mid-term Review: 07/01/2006 Closing: 09/30/2009 09/30/2009 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Highly Satisfactory Risk to Development Outcome: Moderate Bank Performance: Highly Satisfactory Borrower Performance: Highly Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Highly Satisfactory

Quality of Supervision: Highly Satisfactory Implementing Agency/Agencies: Highly Satisfactory

Overall Bank Performance: Highly Satisfactory Overall Borrower

Performance: Highly Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments (if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Highly Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Banking 35 35 Micro- and SME finance 35 35 Other domestic and international trade 30 30

Theme Code (Primary/Secondary) Export development and competitiveness Primary Primary Other financial and private sector development Secondary Secondary Small and medium enterprise support Primary Primary E. Bank Staff

Positions At ICR At Approval Vice President: Shigeo Katsu Shigeo Katsu Country Director: Ulrich Zachau Andrew N. Vorkink Sector Manager: Lalit Raina Khaled F. Sherif Project Team Leader: Steen Byskov Lalit Raina ICR Team Leader: Steen Byskov ICR Primary Author: Steen Byskov F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) Project development objective (i) Provision of medium and long-term working capital and investment finance to private exporters, and contribute to further facilitating export growth in Turkey; and

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(ii) Improvement in the quality, and safety of, and access to, finance through development of financial intermediation in the Turkish private financial sector by banks and leasing companies. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Financial intermediary participation as measured by the number of PFIs participating in the project and the number of PFIs different from those participating in the first EFIL.

Value quantitative or Qualitative)

At least three banks and two leasing companies

Five banks and three leasing companies

11 PFIs (5 banks and 6 leasing companies) participated, of which all but 2 banks were new relative to EFIL I.

Date achieved 12/04/2003 12/31/2006 10/01/2007 Comments (incl. % achievement)

Achieved well beyond target (38 percent above target based on the number of PFIs).

Indicator 2 : Export multiplier: (incremental export/loans disbursed) - to be measured over a three year period

Value quantitative or Qualitative)

Not applicable Not available

The export multiplier for 2003 to 2006 is 7.1. Exports by participating firms grew by 117 percent from US$ 2.1 billion in 2003 to US$ 4.6 billion in 2006. For comparison, export growth for the country was 81 percent in the period.

Date achieved 12/04/2003 10/01/2007 10/01/2007 Comments (incl. %

Although a target was not set at approval, an export multiplier of 7.1 is a very good achievement over a three year period.

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achievement)

Indicator 3 : Sub-loan payment performance as measured by the amount of non-performing sub-loans and leases; and interest and (/or) principal defaults/total amount of sub-loans and leases disbursed

Value quantitative or Qualitative)

Not applicable Not available

Non-performing ratio: 1.4 percent. For comparison, non-performing loans amount to total loans in Turkey equals 3.7 percent.

Date achieved 12/04/2003 10/01/2007 10/01/2007 Comments (incl. % achievement)

Although a target was not set at approval, an NPL ratio well below the general NPL ratio in Turkey is very good.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Credit line utilization as measured by the amount of sub-loans disbursed to sub-borrowers

Value (quantitative or Qualitative)

US$ 0 Disbursement of US$210 million US$300 million

Date achieved 12/04/2003 06/30/2007 06/30/2007 Comments (incl. % achievement)

The credit line was fully disbursed two years ahead of projections, and thus disbursement was very successful.

G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 06/17/2004 Satisfactory Satisfactory 39.27 2 12/19/2004 Highly Satisfactory Highly Satisfactory 160.50 3 06/06/2005 Highly Satisfactory Highly Satisfactory 210.49 4 04/14/2006 Highly Satisfactory Highly Satisfactory 270.65 5 11/16/2006 Highly Satisfactory Highly Satisfactory 289.72 6 07/17/2007 Highly Satisfactory Highly Satisfactory 303.03

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H. Restructuring (if any) Not Applicable

I. Disbursement Profile

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1. PROJECT CONTEXT, DEVELOPMENT OBJECTIVES AND DESIGN

1.1 Context at Appraisal

Country and Sector Background. A financial sector still recovering from the financial crisis in 2001 and continuing macroeconomic volatility led to difficulties in accessing investment finance for exporting companies. With uncertainty surrounding domestic demand, exports were recognized as a driver of growth. Inflation remained high and domestic currency financing was not realistic for investment needs, so dollar and euro loans were the norm for investment finance. Firms and financial institutions were well aware of the risks of taking on foreign currency long term finance, but exporting firms were at least partially shielded from exchange rate risk and domestic demand conditions. Rationale for Bank Assistance. The Turkish authorities requested the Bank to provide an export credit line, which would be intermediated through the financial system and would help fill the gap in medium- and long-term finance to private exporters. Notably, the requested EFIL II project would largely maintain the design of its successful predecessor EFIL I project that had provided a timely and focused response to the unmet demand from banks and exporting companies for medium- and long-term funding, both during the pre- and post-crisis periods. The credit line would help the financial sector further develop its investment lending business by demonstrating that medium term lending can be a viable business proposition while building the necessarily skills at PFIs to appraise medium term loans. Importantly, the Government of Turkey had demonstrated its commitment to policies and strategies intended to revitalize Turkey’s real sector and export-oriented industries in particular, while the project was consistent with the FY04-06 CAS (R2003-0181) objectives. The CAS noted that the process of crises recovery depended on revitalizing the real sector suffering from a credit crunch. Its key priorities for the medium term included completing the banking and financial sector reforms and revitalizing the real sector by filling the gap in accessing credit facilities, supported by EFIL II.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)

The project specified the following PDOs: • Provision of medium and long-term working capital and investment finance to

private exporters, and contribution to further facilitating export growth in Turkey; • Improvement in the quality, safety of and access to finance through development

of financial intermediation in the Turkish private financial sector by banks and leasing companies.

To measure progress, the project designed the following performance indicators:

• Export multiplier: incremental average aggregate annual exports generated (measured over 3 years for all sub-borrowers)/total credit line disbursed;

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• Range of financial intermediaries participation: number of additional Participating Financial Intermediaries (PFIs) participating in EFIL II different from those in the first EFIL;

• Sub-loan performance indicators: amount of non-performing sub-loans and leases; interest and or principal defaults/total amount of sub-loans and leases disbursed.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

The PDOs did not change during the operation.

1.4 Main Beneficiaries

The main beneficiaries of EFIL II were Participating Financial Intermediaries (PFIs, banks or leasing companies) and Turkish private exporting enterprises (exporters). TSKB intermediated the credit line through PFIs to exporters. The exporters would benefit from the provision of medium- and long-term working capital and investment finance to make productive investments at a time of (i) increasing demand for longer term credit as the economy was showing strong signs of rebounding from a recent slump and export performance was on the rise; and (ii) inability by the financial sector to support these trends with very much needed longer term finance at a reasonable cost. The PFIs would benefit from access to medium- and long-term funding to help them expand their business in medium- and long-term lending and financial leasing1 (financial leasing is hereafter just referred to as leasing) while reducing maturity mismatches that lead to both interest rate risk and refinancing risk. In addition, the project’s requirements for compliance with banking and leasing regulations and financial covenants would help ensure that the PFIs remain financially sound. The ultimate objective was to strengthen and improve the ability of the Turkish financial sector to provide medium- and long-term financial resources to the enterprise sector.

1.5 Original Components (as approved)

The project had a single component, a credit line for exporters with the provision of medium- and long-term funds through two distinct channels, or sub-components: (i) commercial banks providing investment and working capital loans, and (ii) leasing companies providing lease finance for acquisition of productive assets (equipment and machinery).

1 A financial lease, as opposed to an operating lease, is an arrangement in which ownership is transferred to the lessee at the end of the lease period. Thus, a financial lease is more similar to a loan than an operating lease. Operating leases by the leasing firms are currently not permitted in Turkey.

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The credit line was provided by the Bank to TSKB, with a government guarantee to the Bank, while TSKB passed it on in the form of subsidiary finance to PFIs for further on-lending to eligible exporters. The structure of the credit line is summarized below in Figure 1.

Figure 1: Structure of the EFIL II Credit Line

At the level of PFIs, the project had originally allocated US$100 million to lease finance and US$200 million to bank sub-loans.

1.6 Revised Components

The component was not revised.

1.7 Other significant changes

No significant changes were made. Reallocations took place on two occasions between the leasing and the banking channel, which on a net basis increased leasing allocations by US$13 million and reduced the banking allocation with the same amount.

2. KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES

2.1 Project Preparation, Design and Quality at Entry

The project’s preparation, design, and quality at entry were based on the following: (i) Consistency with Bank and Government priorities. The project’s design to fill the gap for export enterprises in accessing credit facilities fitted closely the FY04-06 CAS for recovery from the crises by revitalizing the real sector. The project similarly supported the Government’s principle objective of real sector recovery and growth. (ii) Incorporation of lessons learned in the first EFIL project. Important lessons incorporated in EFIL II were (i) project design should be kept as flexible as possible, with minimum or no statutory requirements; (ii) use sensible financial indicators for the

IBRD

TSKB

Government of Turkey

TSKB pays a guarantee fee to the Government

Government guarantees TSKB’s repayment to IBRD

IBRD extends credit line to TSKB

PFI 1 PFI 2 PFI 3 PFI 11

TSKB extends subsidiary loans to PFIs

………

Exporter 1 Exporter 4 Exporter 5 Exporter n ……… Exporter 2 Exporter 3

PFIs extend sub-loans and leases to exporters

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selection of both the PFIs and exporters in line with established market practices; (iii) avoid restrictive procurement requirements unsuitable for private sector borrowers, proven to be a hindrance to expeditious project implementation; (iv) combine the Borrower and Implementing Agency functions in one and the same entity for higher quality and expeditious project implementation; and (v) pre-commit financial intermediaries to borrowing a certain part of a credit line as an incentive to be quick and effective in finding and financing eligible sub-projects, thus leading to quicker disbursement of the loan. (iii) Introduction of leasing in credit lines. The inclusion of leasing companies as financial intermediaries was an innovative aspect of the project, not previously used in World Bank credit line operations in the ECA Region. It helped: (i) reach smaller exporters, which do not necessarily have access to bank loans, but are accessible by leasing companies; (ii) assist the development of the leasing sector and thereby deepen the financial sector; (iii) provide a vehicle for the World Bank to engage with the leasing sector to identify development challenges. (v) Decentralized decision-making and sound incentive structure. With TSKB carrying the credit risk of and selecting PFIs, and PFIs carrying the credit risk of and selecting exporters in the project, the choices of the participants in the project was made by the entities best capable of identifying good financial intermediaries and firms. Qualitative criteria set out in the project and monitored during supervision helped control that the choices were made on a sound basis. (vi) Identification of risks and associated mitigation measures. Risks included (i) macroeconomic risk with a large government debt overhang and high current account deficit; (ii) risk of delays in three state owned bank privatizations; and (iii) political risk, and implementation risks. Mitigations included the Government’s demonstrated commitment to sustained economic and political stability and reforms; that the economy had become more adaptive to negative shocks following the floatation of the currency; and exporters’ track record of resilience to macroeconomic instability demonstrated on the occasion of the 2001 crisis. On the project level, the World Bank team had strong confidence in the financial, institutional, managerial and technical capacity of TSKB, which had experience in managing foreign credit lines, including those from the World Bank.

2.2 Implementation

The strong capacity of TSKB was the most important factor in the successful implementation of the credit line. TSKB implemented very streamlined Internet-based loan processing procedures. It proactively monitored the performance of PFIs and, in coordination with the PFIs and the Bank team, ensured that funds were allocated and re-allocated to well-performing PFIs with demand for the funds, so the credit line continued disbursement in a timely manner and with proper procedures in place for intermediating the funds to exporters. Reallocations among PFIs included a shift towards leasing companies reflecting rapidly increasing demand for medium term funds from the leasing

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industry. Another example of TSKB’s responsiveness to the market conditions is that TSKB renegotiating its lending rates to some of the already participating PFIs. The project’s implementation performance was successful in assessing credit risk with exporters, with only two out of the 249 participating firms classified as non-performing during the project’s life time. One of the companies recovered leaving non-performing loans standing at US$ 4.3 million or 1.4 percent of the total credit line as of October 2007. Foreign ownership in the financial sector increased during the life of the Project and supported the PDO, but at the same time it posed a threat to the project. Foreign ownership of financial intermediaries helped them gain access to funds at lower costs and thereby stimulated access to finance in Turkey. At the same time, however, it created a more competitive environment for disbursing funds under the Project. TSKB proved its responsiveness to the changing market conditions and renegotiated its lending rates with some of the PFIs.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

The project had a good monitoring and evaluation framework design, with the original set of PAD indicators tracking performance at all stages of the credit line implementation. This design was reinforced during the supervision mission by additional indicators for tracking developmental impact and financial prudence. The original indicators proposed in the PAD were on export performance, the scope of financial intermediary participation, and on sub-loan/lease performance, (see section 1.2). In addition, supervision missions monitored the following quantitative indicators (see also qualitative impacts discussed in Section 3.2 and Annex 2): (a) planned employment impact associated with the project, (b) financial performance of the Borrower and PFIs, and (c) loan distribution by PFI, firm size, sector, and geographical location. The indicators were effectively monitored. TSKB developed an IT system to interface with PFIs for sub-loan applications and monitoring. Financial performance of TSKB and the PFIs was monitored through independent auditors’ reports and separate letters confirming adherence to the eligibility requirements. TSKB performed occasional consistency check and cross referencing for the data.

2.4 Safeguard and Fiduciary Compliance

Procurement, financial management practices, and the environmental review process for the operation were supported by the operational manual with guidance for TSKB and PFIs. The well-developed operational manual and a diligent PIU helped ensure effective implementation of safeguards and fiduciary compliance. With regard to fiduciary compliance, all financial management aspects related to implementation were satisfactory. TSKB had worked with the World Bank before and

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was very familiar with the Bank’s fiduciary requirements related to procurement, disbursements and applicable safeguards. The financial soundness of PFIs was supported by improved banking and leasing sector regulations, project requirements aligned with the regulatory environment, and an incentive structure that ensured that borrower were effectively pre-screened and monitored. Banking and leasing sector supervision has improved since the EFIL I implementation period, and EFIL II ensured the soundness of PFIs through (a) a prudential regulation compliance certificate; and (b) independently audited IFRS financial reports. For leasing companies separate eligibility requirements were applied and compliance was assessed based on quarterly project implementation reports, semi-annual external auditor compliance certificates, and annual external audit reports of the participating leasing companies. During project implementation, supervision of the leasing sector was strengthened as the supervisory responsibility was transferred from the Turkish Treasury to the independent regulator, BRSA. In addition, since TSKB carried the credit risk of PFIs, it had strong incentive to pre-screen and monitor PFIs to ensure that they are financially viable institutions. Environmental protection procedures were effectively implemented at TSKB and PFIs. Detailed procedures were designed in the operational manual. The majority of the approved sub-loans were classified as having negligible environmental impact and not needing an Environmental Impact Assessment (EIA), whereas two sub-borrowers were required to provide an EIA and be monitored. Some projects were rejected during loan the approval procedure based on environmental standards of loan applicants.

2.5 Post-completion Operation/Next Phase

EFIL II was designed to enable participants to continue the activities independent of the project on a commercial basis as the Turkish financial sector’s access to medium and long term funding increases, and this has been partially achieved. The financial sector’s access to medium term finance has improved, but deposits in Turkey remain short term, and syndicated loans are still mostly of 1-2 years maturity. TSKB has built lending relationships and experience with PFIs. PFIs have expanded their client base and honed their skills in making medium- and long-term credit. They have used the loan to demonstrate that medium term lending can be a profitable business proposition. Exporters have built a credit history with financial intermediaries and improved their financial records and documentation required for bank loans, thus improving their ability to gain access to credit. However, additional operations could help sustain the achievements of EFIL II and expand the scale and scope of the development impact. In particular the following needs remain relevant: (i) access to medium and long term funds; (ii) further development of medium term lending skills; (iii) expansion of the scope of financial institutions included; (iv) scaling up the project, which reaches only a small part of the exporting sector; (v) better reach smaller firms, which still suffers from poor access to credit; and (vi) better

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reach borrowers outside major urban areas, which are experiencing relatively worse access to credit as evidenced in the recently published Turkey ICA. EFIL II has already been followed up with a repeater operation, EFIL III, and a credit line for SMEs, the SME Access to Finance project. EFIL III includes new banks and leasing companies as PFIs (relative to those included in EFIL I and EFIL II) and thereby expands the scope of the financial intermediaries benefiting from the project. The SME Access to Finance credit line supports smaller firms and has an additional regional objective to serve an area in the central and eastern part of Turkey, where lending to SMEs is still weak. Additional needs remain (i) for medium and long-term finance to private exporters, (ii) to further build capacity in the financial sector, (iii) to scale up the impact of the project, and (iv) to better reach smaller firms and those with inadequate access to medium term funds. Exports/GDP in Turkey remains low compared to some other emerging markets, and with the proximity to EU and the customs union in place there is still ample scope for expansion of export industries if their investments can be funded. For the leasing companies the funding mismatch remains an even greater concern than in the banking sector. Additional credit line financing should be considered to build on the success of the past and ongoing projects.

3. ASSESSMENT OF OUTCOMES

3.1 Relevance of Objectives, Design and Implementation

The objective, design and implementation of the project remain highly relevant with regard to Turkey’s and the World Bank’s development objectives. The CAS for FY04-FY07 (a new CPS is underway, but not yet completed), aimed to improve the business climate and identified export growth and stability of financial markets as key outcomes. It identified increase in export capacity of enterprises financed through lines of credit as a Bank Group benchmark. The Turkish Government in its development plan for 2007-2013 includes competitiveness in export markets as a main objective and includes improvement to the financial system as a key underpinning goal to achieve this.

3.2 Achievement of Project Development Objectives

The PDOs were very well achieved and ahead of time. The first PDO indicator was overachieved, and the next two indicators showed better results than what should be expected in Turkey. Providing medium- and long-term working capital and investment finance to private exporters. The credit line provided US$ 300 million worth of medium term financing for exporters through 11 financial intermediaries. US$187 million was provided by 5 banks, and US$113 million was provided by 6 leasing firms. The project thus added US$300 million worth of financial intermediation. This is equal to around 0.3 percent of total domestic credit to the firm sector in Turkey, but it is a much larger part of investment

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finance in Turkey, which remains underdeveloped. The maturities of sub-loans and leases were quite long with more than half the loans having maturities of four years or more (Figure 2). The impact was well dispersed across 249 exporters in several industries and geographic areas (see Annex 10) with some concentration in the Marmara region and in the textile sector.

Figure 2: Maturity of Sub-loans and Leases

0

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<1Y 1Y-2Y 2Y-3Y 3Y-4Y 4Y-5Y 5Y-6Y 6Y-7Y 7Y-8YMaturity of loan

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The project reinforced the general trend of increased credit in Turkey. Bank loans grew by 223 percent and leasing volume grew by 143 percent between 2003 and 2006 in US$ terms. The growth continued in the first half of 2007 albeit at a slower pace. Further facilitating export growth in Turkey. The export multiplier (measuring incremental exports divided by loan amount) was 7.1 for the project meaning that for every dollar of loan taken by an exporter, it increased exports by 7.10 dollars. Exports by sub-borrowers in the project grew by 117 percent (or US$ 2.5 billion) between 2003 and 2006 and thereby reinforced the general trend of increasing exports. Turkish exports in general expanded by a cumulative growth of 81 percent in US$ terms between 2003 and 2006. The strong export performance has been in spite of a tendency of appreciation of the Turkish currency throughout the life of the project (Figure 3) and a strong growth in domestic demand, which increased by 31 percent between 2003 and 2006 and thereby creating an incentive for Turkish firms to become more inward-looking in their marketing.

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Figure 3: Turkish Currency has Appreciated in Real Terms

Real Effective Exchange Rate Index, CPI-based

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Source: Central Bank of Turkey.

Improving quality and safety of and access to finance through development of financial intermediation in the Turkish private financial sector by banks and leasing companies. Sub-loans and leases performed reasonably well with 1.4 percent being non-performing relative to a 3.7 percent NPL ratio in the banking sector as of October 2007. Two of the participating 249 exporters were classified as non-performing borrowers during the life of the project, and one of them later recovered to performing status. The borrower and participating financial institutions remained financially healthy during the operation with one exception. One PFI incurred losses and had to increase provisions for pension liabilities, which pushed the capitalization of the bank below the regulatory minimum. The bank was subsequently recapitalized by its owners and is now in compliance with banking regulations. The loans’ concentration in the manufacturing sector and in the Marmara region is explained by the overall exporters’ concentration in this sector and region. Within the manufacturing sector, a large share went to the textile sector (36.7 percent), which accounts for about 27 percent of Turkey’s manufacturing exports2. The concentration in this traditional Turkish export sector may reflect that these firms have better track records to prove their creditworthiness than emerging industries with better growth potential. It suggests that there is still room for developing good credit appraisal practices for medium term financing. Employment at participating exporters was planned to grow by 4,993 individuals as a result of the projects financed by EFIL II3. At the time of sub-loan/lease application the

2 Including wearing apparel.

3 The employment impact is specific to the project for which the loan proceeds are applied, but it reflects the planned impact at the exporter level rather than the actual impact. During the loan application process borrowers were asked how many employees they planned to add in connection with the investment for which they were borrowing, and that is the basis for the data.

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exporters indicated what the planned employment impact of the project association with the loan would be. Job creation was not an objective for the project when designed, but it is an important objective for the World Bank and for Turkey, and it is therefore an important added benefit of the project. Furthermore, as Annex 2 further develops, the project had significant impact towards achieving the PDO through indirect channels, namely (i) a demonstration and spillover effect, with TSKB and the PFIs demonstrating that medium term lending can be a viable business proposition; (ii) capacity building for TSKB (for example a new IT system to process loan applications by PFIs through the Internet), PFIs (improving their skills in making medium and long term credit through better credit appraisal and higher documentation requirements) and exporters (improving formal documentation for gaining access and getting credit), (iii) improved environmental practices of exporters and the capacity of PFIs to assess environmental risks of borrowing companies.

3.3 Efficiency

The project was efficient in terms of generating exports. For every dollar of loan extended, the exporters increased exporters by 7.1 dollar; and for every US$ 60,000 borrowed the exporters planned to add one employee (see also Annex 2 and section 3.2). It is likely that the project had a causal effect on the outcomes although it cannot be firmly proved. The alternative that the project merely crowded out private sector financing does not seem plausible. First, there is very little financing of firms by leasing firms and banks that have the long maturities offered in EFIL II, suggesting that there is not a significant private market to crowd out. Second, a regression analysis showed that firms that receive larger loans experienced greater export growth. Third, for instance export growth and NPLs were benchmarked against and outperformed the rest of the economy. The only way to firmly establish causality would be to benchmark against a control group created by randomly rejecting loan applications from firms that had already been approved by the PFI and TSKB – an experiment which is impossible in practice.

3.4 Justification of Overall Outcome Rating

Rating: HS – Highly Satisfactory The development objectives of the operation were and remain highly relevant for Turkey’s and the World Bank’s development agenda. The project overachieved on its indicators, it did so efficiently and faster than planned, and it had additional positive effects such as employment generation, improved environmental practices, capacity building at financial intermediaries, and a demonstration effect to develop medium term financing.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

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The project’s impact on poverty is indirect as it helps firms grow and create employment. At the macroeconomic level, the project supported expanding export activity, which contributes to economic growth and social development. The employment impact of creating about 4,993 jobs likewise has a positive social impact. (b) Institutional Change/Strengthening The project helped strengthen leasing and bank project finance credit appraisal procedures among the PFIs. Some PFIs, though not all, indicated that the credit appraisal and documentation requirements under the project helped them upgrade their lending practices and in some cases prepare for merger with international banks that required some of the same processes. One leasing company was a new entrant when it started participation in the EFIL II project and used the requirements as a starting point for developing their credit appraisal processes. TSKB built an Internet-based IT system to process sub-loan applications from PFIs, which is being used in other projects. It allowed for an expeditious interaction with PFIs for the approval of sub-loans and leases, and the structured IT system reduced the scope for errors. PFIs found the interaction with TSKB very efficient, and the system contributed to that. The IT system is also being used in the EFIL III project and is an asset that will remain with TSKB. The project improved the environmental practices of exporters and the capacity of TSKB and PFIs to assess environmental risks of borrowing companies. The project’s environmental requirements dictated that either an Environmental Impact Assessment (EIA) had to be submitted or an “EIA not required” certificate had to be provided. In order to implement the requirement, the PFIs built capacity to assess environmental risks and the effectiveness of mitigation at borrowing firms. TSKB and PFIs have used the loan to demonstrate that medium term lending can be a viable business proposition. This has been a crucial higher-level objective for the project, aiming to ultimately encourage medium- and long-term credit by creating the market and demonstrating its business rationale. This will further strengthen exporters’ access to investment finance in the future (c) Other Unintended Outcomes and Impacts (positive or negative) None.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

No survey was done or workshop was held.

4. ASSESSMENT OF RISK TO DEVELOPMENT OUTCOME

Rating: Moderate Risks to the project outcomes encompass general country risks, risks to financial intermediation, export performance, and project specific risks. General risks include

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political risk, natural disasters (the Istanbul region, which is the hearth of commercial activity in Turkey, is earthquake prone), the war in neighboring Iraq, international financial market turbulence, and macroeconomic mismanagement all of which have happened in the past. Specific export sectors could be affected by changes in the international competitive environment. For instance the textile sector could see declining prices as China and India continue to grow their capacity. The project aims to improve the domestic financial sector’s resilience to shocks, but otherwise these factors are beyond the control of the project. Project specific risks include the future performance of TSKB, the PFIs, and the sub-borrowers. TSKB’s financial performance has been monitored during supervision missions and the bank remains sound. Its liabilities have long maturities making the bank fairly resilient to financial turbulence (Annex 9 provides additional information on the financial performance of TSKB and the PFIs). PFIs, likewise, have been monitored during supervision for their financial health and with one exception (see section 3.2) found to be performing well. Non-performance on the loan obligations by exporters may well happen as it has twice in the project. The aggregate export performance of the sub-borrowers, however, will not be materially impacted by a few non-performing firms because the project is disbursed across 249 different firms, and as a group they are unlikely to pose a risk for the projects outcomes.

5. ASSESSMENT OF BANK AND BORROWER PERFORMANCE

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry Rating: S - Satisfactory The project’s identification and design were compatible with the CAS, the project built on the lessons learned the first EFIL, and it was consistent with the Government’s development strategy for the sector as also noted in section 2.1. Importantly, the project had the benefit of learning from a predecessor operation, the first EFIL, and it was able to refine the project to ensure a successful implementation. A particular strength was the development of a detailed operational manual, which helped ensure that the project was implemented effectively and that the PIU was following bank procedures.

Box 1: IEG Lessons from World Bank Lines of Credit In 2006, IEG produced an evaluation of lines of credit and found the following characteristics to be associated with better outcomes: i) stable macroeconomic conditions; ii) stronger financial sectors, including

satisfactory competition policies and good legal and regulatory regimes governing financial institutions, and mostly market determined interest rates, few distortionary credit and tax policies, and limited state ownership of financial institutions;

iii) use of clear eligibility criteria in the selection of participating financial institutions; and

iv) use of only private sector financial intermediaries.

In addition, smaller size of lines of credit is associated with lower cancellation rates. Source: Independent Evaluation Group (2006), “World Bank Lending for Lines of Credit: An IEG Evaluation”, The World Bank, Washington, DC.

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The project design was well aligned with the later published IEG (2006) recommendations for lines of credit (Box 1): (i) the macroeconomic environment was stabilizing with inflation reaching single digit levels in 2004, although clear vulnerabilities remained; (ii) banking sector reforms (supported by World Bank SALs) were substantially progressing in improving the regulation of the banking sector; (iii) clear eligibility criteria for PFIs were identified in the PAD; and (iv) only private intermediaries were used (the Government was guarantor for TSKB’s financial obligation to the World Bank, but not directly involved in implementation). Notably, the loan was disbursed quickly although the loan size was relatively large. (b) Quality of Supervision Rating: HS – Highly satisfactory Effective supervision by the World Bank team helped ensure a successful project by responding to Borrower needs and by being proactive in addressing implementation hurdles on the horizon, which the team collaborated with TSKB to overcome. TSKB in its feedback highlights the importance of effective collaboration with the World Bank team. Moreover, development results were effectively monitored and the supervision expanded the scope of measurement to include for instance employment, which is a key development priority, and geographical and sectoral dispersion of the loans. Importantly, the quality of supervision has resulted in the institutionalization of best practices for TSKB and participating PFIs. TSKB’s lending practices improved in sophistication and efficiency, including an IT system to expedite sub-loan processing, while PFIs benefited from building institutional capacity in assessing credit risk for medium term financing and managing environmental risks.

(c) Justification of Rating for Overall Bank Performance

Rating: HS – Highly Satisfactory Based on the above, the overall Bank performance in ensuring quality at entry and quality of supervision is Highly Satisfactory toward achieving the development outcomes.

5.2 Borrower Performance

(a) Government Performance Rating: HS – Highly Satisfactory The Government’s performance was Highly Satisfactory. Not only did the Government take the credit risk of TSKB by providing a guarantee, but throughout the life of the project the Government has been very supportive of the World Bank credit line project with TSKB. Prudent macroeconomic policies and strengthening of the supervisory framework also contributed to the success of the project. The regulatory framework was substantially strengthened in part as supported by a new banking law and in part with the transfer of supervisory responsibility of the leasing industry from the Turkish Treasury to the BRSA. Although Government’s direct role in a credit line project with the private sector is relatively small, it has been a critical and very positive role. (b) Implementing Agency or Agencies Performance

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Rating: HS – Highly satisfactory The performance of the Borrower and implementing agency, TSKB, was Highly Satisfactory. TSKB pro-actively supported PFIs implementation, effectively performed its responsibilities, developed an IT system to help interaction with PFIs and project monitoring, and reacted swiftly to changing market conditions by reallocating funds between PFIs and renegotiation costs to PFIs with foreign participation. PFIs voiced only praise for TSKB during the ICR mission except for the unanimous (and expected) complaints about pricing. In addition, monitoring data was promptly produced and utilized in decision-making. (c) Justification of Rating for Overall Borrower Performance Rating: HS – Highly Satisfactory Based on the above, the overall Borrower performance is rated Highly Satisfactory.

6. LESSONS LEARNED

In addition to lessons learned from EFIL I as described in Section 2.1, EFIL II offers the following lessons: Simplicity and alignment with existing business practices at PFIs speed up the implementation of the project. Eligibility constraints and reporting requirements that go beyond what PFIs normally require increases transaction cost of the project, slows implementation, and may have a tendency to shift funds to firms with relatively better access to finance. The application process for individual loans and leases reportedly required about twice the amount of manpower compared to normal lending practices. A solution may be to rely on existing credit appraisal practices at PFIs to a greater extent. Onerous environmental, procurement, and other project requirements tend to lead to funds being allocated to larger businesses rather than reaching those that need them most. The fixed costs incurred by these requirements make it relatively more attractive for PFIs to lend the loan funds to larger customers with greater loan sizes. PFIs indicated that project requirements made it uneconomical to cater to the smallest borrowers. For leasing companies, loan sizes under the project were roughly twice what they were for the leasing companies’ entire portfolio indicating that bigger firms are targeted in the project. Reevaluating our safeguard requirements in the context of credit lines and carefully designing our information requirements to minimize compliance costs while serving the safeguard objectives will help ensure successful implementation and better achievement of the development objectives. Responsiveness to changing market conditions reduces implementation delays. During the project, loan funds for two banks in the project became uncompetitive and would not have continued to disburse. Prompt reallocation to other PFIs ensured that the overall project was not delayed as a result.

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7. COMMENTS ON ISSUES RAISED BY BORROWER/IMPLEMENTING AGENCIES/PARTNERS

(a) Borrower/implementing agencies The borrower, TSKB’s, ICR is included in Annex 7. (b) Cofinanciers Not applicable. (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) The following is a summary of the main points put forward by participating PFIs in written feedback and during interviews in the ICR mission. • The project has been successful in achieving its objectives by helping (i) PFIs grow

their business; (ii) PFIs extend maturities of liabilities; (iii) increase awareness and expertise on environmental issues.

• The credit line cost to PFIs become expensive towards the end of the implementation period. Most, although not all, PFIs indicated that the price of the credit line had become high relative to other funding sources and in particular as price competition in the financial sector had become stronger.

• It would be desirable to simplify credit appraisal requirements and to simplify the application process. PFIs indicated that the time spent on applications under this loan was roughly twice the time for loans funded by own sources.

• Obtaining environmental documentation from small firms was difficult. The smaller the firm, the more likely it is to find it difficult or not worthwhile obtaining environmental documentation required under the project.

• It would be desirable for PFIs to have a fixed (as opposed to variable) interest rate. In particular leasing companies found that a fixed interest rate in the loan would help them manage interest rate risks. Leasing contracts are at fixed interest rate, and some leasing companies used interest rate swaps to hedge the interest rate risks resulting from the variable rate lending from TSKB.

• Including the tourism industry as an export industry would help implementation. Firms in the tourism industry were not eligible as exporters although tourism services to non-residents are exports (by economic statistics definitions). There is strong demand for investment lending in the tourism industry, and several PFIs indicated that inclusion of tourism would have helped implementation of the project.

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ANNEX 1. PROJECT COSTS AND FINANCING

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate (USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

Total Baseline Cost 0.00 0.00

Physical Contingencies 0.00 0.00 0.00

Price Contingencies 0.00 0.00 0.00Total Project Costs 303.1 303.01 100%Credit Line 300.0Unallocated .069Project Preparation Fund 0.00 0.00 .00Front-end fee IBRD 3.031 3.031 100%Total Financing Required 303.1 303.01 100%

(b) Financing

Source of Funds Type of Cofinancing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 0.00 0.00 .00 International Bank for Reconstruction and Development 303.10 303.01 100%

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ANNEX 2. OUTPUTS BY COMPONENT

This Annex summarizes the outputs that have been realized under the project. It assesses quantitative output targets against those set out in the PAD, in addition to the qualitative impact as assessed during supervision and by the ICR team. The project had a single component, and the quantitative outputs are described below and in Table 1 according to the development objective they supported: (i) Provide medium- and long-term working capital and investment finance to private exporters. Credit line utilization, as measured by the amount of sub-loans disbursed to exporters, was highly successful with the credit line to private exporters in Turkey fully disbursed (US$ 300 million) by June 2007, two years ahead of projections. Financial intermediary participation, as measured by the number of PFIs participating in the project and the number of PFIs different from those participating in EFIL I, was high with 11 PFIs4 (5 banks and 6 leasing companies), of which all but 2 banks were new relative to EFIL I. Thus, the project was successful in three dimensions: (i) attracting broad participation from institutions different from those in EFIL I; (ii) including leasing companies in addition to banks; (iii) including second-tier financial institutions, i.e. those that have otherwise more difficult access to funding. (ii) Contribute to further facilitating export growth in Turkey. Export growth impact, as measured by the export multiplier (incremental export/loans disbursed) for participating firms over a three year period, 2003 to 2006, was 7.15. In other words, for every dollar borrowed under EFIL II, exports by participating firms grew by 7.1 dollars. Although establishing causality is difficult, exports per se for the participating firms grew by 117 percent from US$2.1 billion in 2003 to US$4.6 billion in 2006, when, for comparison, export growth for the country as a whole was 81 percent over the same period. A regression analysis showed that firms that receive larger loans experienced greater export growth, and that the effect was stronger for investment loans than for working capital loans. (iii) Improve quality and safety of and access to finance through development of financial intermediation in the Turkish private financial sector by banks and leasing companies. Sub-loan payment performance, as measured by (i) the amount of non-performing sub-loans and leases and interest and (/or) (ii) principal defaults/total amount of sub-loans and leases disbursed

4 Two of the participating banks merged during the operation, and they are counted as separate banks in this report, because they originally participated as separate banks. In TSKB’s ICR in Annex 7, the two merged banks are counted as one. This explains why TSKB reports 10 PFIs in Annex 7, and this Annex reports 11 PFIs.

5 The base year in the export multiplier is the calendar year before the first loan was given except if it was given in the last quarter of the year. If the loan was given in the last quarter of the year, the base year is the calendar year in which the loan was given. The incremental growth is calculated according to 2006 data regardless of the base year.

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has been very satisfactory. Only two borrowers were classified as non-performers6 with a total of US$ 5.6 million worth of outstanding balance equaling 1.9 percent of the total disbursed amount. One loan subsequently regained status as performing reducing the non-performing rate to 1.4 percent. For comparison, non-performing loans to total loans in Turkey equals 3.7 percent. The financial performance of TSKB and PFIs was closely monitored during supervision through reviews of audited financial statement. With one exception, all intermediaries remained sound and well performing throughout the implementation period (Summary financial indicators are provided in Annex 9). One PFI’s capital fell below the regulatory minimum in 2006, but the bank was recapitalized without intervention or Government support, but rather through capital injection and a merger with another bank in 2006. The loan was broadly distributed across 249 firms with the largest individual loan amounting to 3 percent of the total project amount. The loans were geographically concentrated in the Marmara region (73 percent), which includes Istanbul (see Annex 10). The regions hosts a large share of Turkey’s exporting industries and the main offices of many firms operating throughout Turkey. In addition, the financial sector is strongly concentrated in Istanbul, and therefore it is not surprising to see loan concentration in that area. Loans were somewhat concentrated in the textile sector (36.7 percent) and in the basic metals and fabricated metals sectors (21.8 percent). 50 percent of the loan volume was for loans of more than $2.5 million. The level of big loans reflects that many big firms are also those that export. (iv) Contribute to employment (added during supervision). Employment has become the most important development objective in Turkey, and supervision missions therefore collected data on the planned employment impact of the projects, although this is not an objective of the project. At the time of application, the exporter reported the number of employment they planned to add as a result of the financing they received or project they undertook financed by the project. 4,993 individuals would be added to the 56,461 already employed by the exporters according to the firms’ plans. In addition, EFIL II was designed to enable participants to continue activities independent of the project on a commercial basis, thus adding a qualitative impact dimension, assessed during supervision and by the ICR team: (i) Demonstration and spillover effect. TSKB and PFIs have used the loan to demonstrate that medium term lending can be a viable business proposition. This has been a crucial higher objective for the project, aiming to ultimately encourage medium and long-term credit by creating the market and demonstrating its business rationale. The spillover effect is a longer-term goal, going beyond the scope of this ICR. (ii) Capacity building. The project has had a considerable impact among (i) TSKB, which has built lending relationships and experience with PFIs, and a new IT system to process loan applications by PFIs through the Internet; (ii) PFIs, which have expanded their client base and honed their skills in making medium- and long-term credit; (iii) exporters, which have built a credit history with financial intermediaries and improved formal documentation for gaining access to credit. Indeed, a large number of the PFIs

6 Non-performing loans are classified according to BRSA regulations in the sub-standard, doubtful, and loss categories.

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indicated that the credit appraisal and documentation requirements under the project helped them upgrade their lending practices and in some cases prepared them for mergers with international banks that required similar lending processes. (iii) Improved environmental practices. The project has improved the environmental practices of exporters and the capacity of PFIs to assess environmental risks of borrowing companies. The project’s requirements for environmental protection procedures went beyond what the PFIs had in place and mostly required the exporters to obtain “EIA not required” certificates from the local authorities.

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Table 1: Quantitative impact assessment

Indicator and target Results as measured Output: Provide medium and long term working capital and investment finance to private exporters Credit line utilization as measured by the amount of sub-loans disbursed to sub-borrowers.

The credit line was fully disbursed (US$ 300 million) by June 2007, two years ahead of projections.

Financial intermediary participation as measured by the number of PFIs participating in the project and the number of PFIs different from those participating in the first EFIL.

11 PFIs (5 banks and 6 leasing companies) participated, of which all but 2 banks were new relative to EFIL I.

Output: Contribute to further facilitating export growth in Turkey Measured by the export multiplier: (incremental export/loans disbursed) - to be measured over a three year period The PAD and ISRs did not specify a target.

Exports by participating firms grew by 117 percent from US$ 2.1 billion in 2003 to US$ 4.6 billion in 2006. For comparison, export growth for the country was 81 percent in the same period. The export multiplier for 2003 to 2006 is 7.1.

Output: Improve quality and safety of and access to finance through development of financial intermediation in the Turkish private financial sector by banks and leasing companies Sub-loan payment performance as measured by the amount of non-performing sub-loans and leases; and interest and (/or) principal defaults/total amount of sub-loans and leases disbursed

Two borrowers defaulted with a total of US$ 5.6 million worth of outstanding balance equaling 1.9 percent of the total disbursed amount. One borrower later regained status as performing thus reducing the non-performing ratio to 1.4 percent as of October 2007. For comparison, non-performing loans amount to total loans in Turkey equals 3.7 percent.

Financial performance of the Borrower and PFIs With the exception of one PFI, which later recovered, all financial intermediaries in the project remained sound throughout the project’s implementation period. Financial indicators are included in Annex 9.

Loan distribution Loans are widely distributed among 249 entities with a maximum sub-borrower loan size of 3 percent of the total project amount. There is significant concentration in the Marmara region (which includes Istanbul), in part because exporting industries are concentrated there, and possibly also because the PFIs are headquarter in this region. The textile industry, which

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accounts for about 27 percent of Turkey’s exports, accounts for 37 percent of the loans. Details are included in Annex 10.

Output: Employment (added during supervision) Employment growth of participating sub-borrowers The project did not specify a target for employment growth.

The planned employment growth as a result of the project was 4,993.

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ANNEX 3. ECONOMIC AND FINANCIAL ANALYSIS

At the level of exporters, which are the ultimate beneficiaries, economic and financial analysis has not been conducted, but outcomes (export performance and planned employment impact) have been measured (see Annex 2). There are 249 sub-borrowers in the project, and it would not be practical to go beyond those measures for economic and financial analysis considering that intermediaries already find it to be a significant cost of the project to collect just the outcome measures.

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ANNEX 4. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESSES

(a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending

Lalit Raina Lead Financial Sector Specialist ECSPF Team leader (preparation & supervision)

Marius Vismantas Financial Sector Specialist ECSPF Team member Marie-Renee Bakker Lead Financial Sector Specialist ECSPF Team member Young Ok Hong Program Assistant ECSPF Team assistant Ahmet Gurhan Ozdora Sr. Operations Officer ECSSD Team member Dilek Barlas Senior Counsel LEGEC Legal Rohit Mehta Senior Finance Officer LOAG1 Disbursement Salih Kemal Kalyoncu Procurement Specialist ECSPS Procurement

Ayse Seda Aroymak Sr. Financial Management Spec. ECSPS Financial Management

Supervision/ICR

Lalit Raina Sector Manager ECSPF Team leader (preparation & supervision)

Steen Byskov Financial Sector Specialist ECSPF Team leader (ICR) Nasreen Chudry Bhuller Program Assistant ECSPF Team assistant Ilias Skamnelos Financial Sector Specialist ECSPF Team member Marius Vismantas Financial Sector Specialist ECSPF Team member Irina L. Kichigina Sr. Counsel LEGEM Legal Ahmet Gurhan Ozdora Sr. Operations Officer ECSSD Team member

Ayse Seda Aroymak Sr. Financial Management Specialist ECSPS Financial

management

Zeynep Lalik Mete E T Consultant ECSPS Financial management

Furuzan Bilir Operations Officer ECSPS Disbursement Salih Kemal Kalyoncu Procurement Specialist ECSPS Procurement

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(b) Staff Time and Cost

Staff Time and Cost (Bank Budget Only)

Stage of Project Cycle No. of staff weeks

USD Thousands (including travel and

consultant costs)

Lending

FY03 1.10 6.99 FY04 54.63 309.43 FY05 1.05 1.35 FY06 .03 0.04 FY07 -- 0.00 FY08 -- 0.00

Total: 56.81 317.81 Supervision/ICR

FY03 -- 0.00 FY04 2.45 22.00 FY05 26.88 135.42 FY06 23.31 123.97 FY07 15.06 73.70 FY08 9.22 -0.09

Total: 76.92 355.00

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ANNEX 5. BENEFICIARY SURVEY RESULTS

No survey was conducted.

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ANNEX 6. STAKEHOLDER WORKSHOP REPORT AND RESULTS

No workshop was held.

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ANNEX 7. SUMMARY OF BORROWER'S ICR AND/OR COMMENTS ON DRAFT ICR

Below is the original ICR of TSKB. 1. Assessment of the operation’s objective, design, implementation and operational experience 1.1 Operation’s objective Primary objective of EFIL II was to provide medium and long-term investment finance as well as working capital to private exporting enterprises (Beneficiary Enterprises). The secondary objective of the loan was the further improvement in the ability of the Turkish financial sector to provide financial resources to the enterprise sector, through further development of intermediation by private financial institutions, including banks and leasing companies. The operation’s main objective above all was to intensify the export volumes of Turkish companies through very well structured financial intermediation scheme. Evaluation of the results shows that the objectives of the operation were achieved. 1.2 Operation’s design Lending was done through six leasing companies and four private banks (PFIs) throughout the loan utilization period. Leasing companies have not been financial intermediaries in World Bank projects in Turkey before. The inclusion of leasing companies as financial intermediaries is an innovative aspect of the project, not previously used in World Bank credit line operations in the Europe and Central Asia (ECA). The banks and the leasing companies that took part in the lending operations were selected according to the eligibility criteria agreed between the Bank and TSKB. TSKB took the risk of the PFIs selected for participation. The PFIs made the sub-loans to private exporting enterprises for the financing of raw materials, spare parts, plant and equipment, and works, both for working capital as well as investment purposes. The PFIs took the credit risks of the borrowing enterprises. As of the closure of the facility, the status of funds allocated and utilized by each PFI was: PFI Amount (USD million) Garanti Finansal Kiralama A.Ş. 37.00 TEB Finansal Kiralama A.Ş. 20.00 Fortis Finansal Kiralama A.Ş. 19.30 Fon Finansal Kiralama A.Ş. 17.50 Yapı Kredi Finansal Kiralama A.Ş. 13.34 Halk Finansal Kiralama A.Ş. 5.99 Turk Ekonomi Bankasi A.Ş. 42.00

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Yapı ve Kredi Bankası A.Ş. 73.30 Oyakbank A.Ş. 44 Fortisbank (Disbank) at the time of the loan agreement A.Ş.

27.55

Total 299.98 At the inception of EFIL II, four leasing companies (Garanti Finansal Kiralama A.Ş., Yapı ve Kredi Finansal Kiralama A.Ş., TEB Finansal Kiralama A.Ş., Fortis Finansal Kiralama A.Ş. (formerly Dış Ticaret Finansal Kiralama) and four private banks (Oyakbank A.Ş., TEB A.Ş., Fortisbank A.Ş. (formerly Disbank), Koçbank A.Ş. (later on Yapı ve Kredi Bankası A.Ş.) and Yapı ve Kredi Bankası A.Ş. signed Subsidiary Loan Agreements (SLAs) with TSKB. The original breakdown of the facility among the PFIs was USD 200 million for sub-loans and USD 100 million for lease financing. FFK Fon Finansal Kiralama A.Ş. and Halk Finansal Kiralama A.Ş. entered the facility as PFIs afterwards. 1.3 Operation’s implementation The implementation of the facility was swiftly carried-out by TSKB. The PFIs were chosen according to the agreed criteria and the loan was committed to PFIs within a few months after the signing of the loan agreement. Backed by the lessons learned from the previous credit line operations (EFIL I) the process was improved during the implementation period by TSKB. In order to expedite a faster implementation of the project, a user friendly computerized system was developed by the IT department of TSKB. With the aid of this time saving system, paperwork lessened considerably. All the stages of sub-loan processing including the submission and approval of the original sub-loan applications as well as disbursement requests and disbursements of PFIs were done electronically. The computerized system worked very satisfactorily and reduced the overall sub-loan processing cycle time. TSKB demonstrated the functioning of the system to the PFIs before the implementation of the project. The system was very much appreciated by the PFIs. All the PFIs were given training about the system, the environmental requirements of the loan, project appraisal and disbursement process. TSKB used its IT system at every stage of the operations and all authorizations and transactions were performed through the system. In addition to the computerized record, TSKB also maintained backup paper files for those sub-loans where procurement and disbursements had taken place. During the implementation period, TSKB PIU provided consultancy services to the PFIs both on-line and via phone and orchestrated the loan scheme successfully. 1.4 Operational experience

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During the preparation phase, a separate Project Implementation Unit (PIU) was established by TSKB in parallel with the Bank’s requirements under the supervision of an Executive Vice President to oversee the implementation of the project. PIU staff worked closely with the Bank staff. As the primary project counterpart for the Bank the team was entrusted the overall administration of all aspects of the credit line and required reporting (FMRs) to the Bank. The interaction between TSKB and PFIs, and TSKB and the Bank was excellent during the project. The disbursement to the PFIs was completed by June 6, 2007 well before the closing date of the project (September 30, 2009). The trainings given to the PFIs regarding environmental issues, procurement and project appraisal improved the PFIs institutional capacity. Finally, TSKB’s wholesale lending function, well established today, became more sophisticated and more effective to the benefit of the overall Turkish private sector. 2. Assessment of the outcome of the operation against the agreed objectives The Primary objective of EFIL II was to provide medium and long-term investment finance as well as working capital to private exporting enterprises (Beneficiary Enterprises). A total of 249 companies utilized funds amounting USD 299.98 in the EFIL II facility. Therefore the primary objective has been well achieved. The secondary objective of the loan was the further improvement in the ability of the Turkish financial sector to provide financial resources to the enterprise sector, through further development of intermediation by private financial institutions, including banks and leasing companies. The number of PFIs participating in EFIL II was higher than that of EFIL I. In EFIL I there were six participating PFIs (all banks) where as in EFIL II there were ten PFIs (four banks and six leasing companies). Additionally, the leasing companies, which have access to smaller companies, were included for the first time in EFIL’s history as well as the World Bank’s previous implementations in the Europe and Central Asia (ECA) region. This objective has also been fully achieved Additionally the facility has led to an important diversification towards the smaller companies across the country. Smaller exporting companies typically not serviced by the banking system were financed with the proceeds of the loan through the intermediation of the leasing companies. The smallest amount of leasing finance extended to a single company was around USD 55,000. Koçbank A.Ş. (Later on Yapı ve Kredi Bankası A.Ş.), Fortisbank A.Ş. (Dışbank formerly) and Yapı ve Kredi Bankası A.Ş. participated as PFIs both in EFIL I and EFIL II. The remaining PFIs, which participated in EFIL II were all newcomers. During the lifetime of EFIL II reallocations among the PFIs were realized. The final breakdown between sub-loans and lease finance was USD 186.9 million and USD 113.1 million. The small-unallocated amount USD 69,000 and unutilized amount USD 21,687.85 was cancelled as of June 14, 2007 and August 10, 2007 respectively. Of the

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total loan amount, USD 210 million (70 percent) was utilized for investment loans and USD 89.9 million (30 percent) was utilized for working capital loans. Average loan sizes for the leasing and loan components of the facility were USD 631,982.70 and USD 2.4 million respectively. For the overall credit line the average loan amount was USD 1.2 million. Overall sub-loan performance was very satisfactory. Only two loans of negligible amounts were classified as non-performing loans by two PFIs. The operation’s main objective above all was to intensify the export volumes of Turkish companies through very well structured financial intermediation scheme. This objective has also been achieved. The exports of EFIL II sub-borrowers were 3.6 billion USD in 2004 and 4.6 billion USD in 2006. The export multiplier has been calculated as 3.5. The export volume and the export multiplier are expected to go up in the coming years as 13% of the facility was disbursed in the second half of the year 2006 and since 70% of the loans were for investment purposes. 3. Evaluation of the borrower’s own performance during the preparation and implementation of the operation, with the special emphasis on lessons learned that may be helpful in the future Since TSKB already had an experience in working with the Bank spanning over five decades, there weren’t any problems regarding the adaptation to EFIL II operation. Nevertheless it is important to state that for the first time, in a Bank loan – in EFIL II project, TSKB acted as an APEX Bank and had the Borrower and the Implementing Agency functions. As TSKB was one of the sub borrowers in EFIL I intermediated by Eximbank, the experience gained helped TSKB to empathize the requirements and needs of the sub borrowers. The lessons learned suggest that lines need to be designed as flexible as possible. The documentation and paperwork involved and reporting requirements should be kept to a minimum. Tourism, which is one of the main foreign exchange generating sectors, should be included among eligible sectors. The inclusion of tourism sector would have sped up the disbursement of the facility. With regards to procurement the deployment of local commercial practices expedites the disbursement process. Setting higher thresholds for national and international competitive bidding will help the pace of disbursements. 4. Evaluation of the performance of the Bank, any co financers, or of other partners during the preparation and implementation of the operation, including the effectiveness of their relationships, with special emphasis on lessons learned The Bank’s performance during the preparation and implementation stages was very satisfactory. During the preparation and implementation of the project both parties (Bank staff in Washington and IBRD Ankara Office and TSKB PIU) had a very cordial

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relationship and issues relating to the implementation of the project were swiftly resolved. 5. Description of the proposed arrangements or future operation of the project Achievements of the predecessor EFIL II project lead to the EFIL III project, which is still successfully implemented by TSKB. The utilization of EFIL III has already amounted to USD 144.9 million and EUR 48.6 million as of September 17, 2007. There are newcomers to the Loan such as İş Leasing, Finans Leasing, Alternatifbank, Alternatif Finansal Kiralama, Denizbank and Finansbank. The successful completion of the EFIL loans may lead to newly structured financial intermediation loans. 6. Information on the economic, financial, social, institutional, and environmental conditions in which the operation was implemented. The environment that EFIL II facility was realized was as follows: The Turkish banking sector suffered from a series of macroeconomic and structural problems in the years surrounding the 2001 Crisis. After all, the “twin crises” of 2001 were also a banking crisis. Consequently, the ratio of total assets/GDP dropped from 77% in December 2002 to 70% in December 2003. In principle this negative development should have imperiled the sustainability of GDP growth performance and constituted an obstacle economic recovery had to surmount, but nothing of that sort has happened. As explained below, loan growth and GDP growth have been kind of decoupled in the aftermath of the 2001 crisis, suggesting that the corporate sector, especially SMEs, have found other financing opportunities. Unrecorded economy is sizeable, which further limited banks’ penetration and loan growth perspectives, especially as far as corporate loans go. Furthermore, despite the liberalization-oriented policy of the last 25 years, the government was (is) still a major player in the banking sector. Theoretically, large public banks may play a role in regulating the market through cost-of-service -or, as more commonly known, rate-of-return- regulation by acting as von Stackelberg leaders in a leader-follower game, but historic experience did not hint to anything of that sort. The picture depicted above has begun to change when non-retail loans, including corporate, started to respond in Q1 2004. The balance sheet of the system had already begun to change in the second half of 2003 when retail loans were triggered by the ongoing recovery, and especially, by lower interest rates. Inflation reversed course when the trend was clearly broken in April 2003, and from then on both inflation and the nominal and real rates of interest spiraled down visibly. A balance sheet that was entirely dominated by the securities portfolio gave way to loan growth, and loans quickly rose to unprecedented levels. The restructuring and transformation of the banking sector persisted into 2005 as banks tried to adapt themselves to lower interest rates and continue to rebalance their balance sheets in favor of loans and other new fee-generating instruments, especially mortgage, asset management and suchlike. The strategy was clearly to bet on TRY stability, emphasize the loan book at the expense of the securities portfolio, turn to TRY loans and boost the interest income and fee & commission income through more emphasis on retail loans. The loans to assets ratio continued to trend up in

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2003-2004-2005, but still wandered (wanders) below the EU average, which showcases the potential for further profitability improvement. Furthermore, expanded product lines and cross-selling opportunities associated with growing non-interest income may offer traditional diversification benefits for a bank’s revenue portfolio. If non-interest income and net interest income are negatively or only weakly correlated, for example, non-interest income may diversify bank revenue and improve the risk/return trade-off. Profitability increased sharply in 2003 and banks continued to be profitable in 2004 also, but this was basically due to mark-to-market and trading gains -especially in 2003- although fee & commission income gained some momentum also. By the end of 2004,the tendency to build retail corporate marketing units, specifically targeting SMEs, had already undergone some way. But competition should be fierce in this area and spreads rather low. SME finance, which we expected to come to the forefront by 2005 -and it did to some extent, is promising, and given existing European trends that are replicated in the accession countries, but it takes good risk management, a sizeable retail presence and franchise. Although free equity has been on the rise, not all banks are unconstrained in that respect and that also adds an upper bound to whatever profits may be expected to accrue there. Balance sheets are indisputably cleaner now, as compared to a few years ago. Banks have had more free equity in 2005 as compared to 2003-2004. Almost all major banks improved their free capital positioning in 2004.

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ANNEX 8. COMMENTS OF COFINANCIERS AND OTHER PARTNERS/STAKEHOLDERS

PFIs provided written comments and feedback during the ICR mission. A summary is provided in Section 7.c, but, due to confidentiality issues, the original comments are not available.

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ANNEX 9: FINANCIAL PERFORMANCE OF BORROWER AND PFIS

TSKB Financial Performance 2004 2005 2006 2007H1 Percent Capital adequacy ratio 42.8 36.8 32.9 25.0 Equity/assets 16.7 16.7 14.5 14.0 Return on equity 13.3 21.4 18.7 17.9 Return on assets 2.2 3.5 2.9 2.6 Gross NPLs/loans 4.2 2.4 1.3 1.2 Millions US$ Total assets 1,707 2,470 2,881 3,609 Loans 1,038 1,329 1,757 2,018 Equity 285 412 418 504

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Financial performance of banks acting as PFIs

Percent Return on

assets Return on

equity Equity/assets TEB

2003 2.0 17.6 11.4 2004 1.1 9.4 11.1 2005 1.7 18.1 8.7 2006 1.5 20.6 6.7

2007 (as of June) 1.5 23.4 6.6 YKB

2003 0.9 5.5 16.8 2004 -0.2 -1.4 18.8 2005 -6.4 -49.6 6.7 2006 1.4 20.8 6.8

2007 (as of June) 1.7 22.4 8.0 Oyakbank

2003 1.5 12.6 11.8 2004 2.2 18.5 11.6 2005 4.2 35.7 12.1 2006 1.0 10.6 8.3

2007 (as of June) 1.0 11.5 9.5 Koçbank

2003 1.2 17.7 7.1 2004 1.2 16.4 7.0 2005 1.9 13.8 18.4 2006 n.a. n.a. n.a.

2007 (as of June) n.a. n.a. n.a. Fortisbank

2003 3.8 23.8 16.8 2004 1.7 11.5 13.8 2005 1.3 9.1 15.4 2006 1.0 6.9 12.9

2007 (as of June) 2.5 16.0 18.6

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Financial performance of leasing companies acting as PFIs

Percent Return

on assetsReturn on

equity Net lease

receivables/assets Equity/ assets

Garanti Leasing 2003 3 12 80 29 2004 - - 91 20 2005 3 27 83 12 2006 3 34 97 11

2007 (as of June) 4 31 97 11 TEB Leasing

2003 4 25 71 15 2004 3 20 78 15 2005 4 24 77 15 2006 3 21 87 11

2007 (as of June) 2 21 82 11 Fortis Leasing

2003 - - 90 8 2004 2 23 92 9 2005 4 37 96 10 2006 3 34 88 6

Fon Finansal Kiralama

2003 15 86 74 21 2004 12 53 93 23 2005 7 37 72 18 2006 5 30 75 13

2007 (as of June) 3 21 67 16 YK Leasing

2003 14 40 82 34 2004 10 28 85 39 2005 8 24 90 28 2006 8 26 94 28

2007 (as of June) 6 26 92 22 Halk Leasing

2003 2 18 87 11 2004 3 29 89 10 2005 3 26 92 10 2006 4 37 89 10

2007 (as of June) 4 39 90 11

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ANNEX 10. DISTRIBUTION OF LOANS BY REGION, SECTOR, AND LOAN SIZE

Region Amount

('000 US$) Share

(percent) Number of loans

Marmara 220,863 73.6 183Aegean 24,392 8.1 23Mediterranean 7,967 2.7 11Central Anatolia 18,048 6.0 12Black Sea Region 11,545 3.8 6Southeast Anatolia 17,164 5.7 14Total 299,979 100.0 249

Sector Amount

('000 US$) Share

(percent) Number of loans

Textiles and textile products 110,065 36.7 94 Basic metals and fabricated metal products 65,377 21.8 57 Rubber and plastic products 32,220 10.7 27 Pulp, paper and paper products, publishing and printing 26,755 8.9 8 Electrical and optical equipment 16,134 5.4 9 Food products 12,328 4.1 11 Other non-metallic mineral products 7,885 2.6 7 Wood and wood products 5,428 1.8 2 Production and distribution of petroleum products 4,150 1.4 1 Machinery and equipment 4,007 1.3 10 Logistics 3,579 1.2 2 Baby healthcare products 2,888 1.0 1 Leather and leather products 1,575 0.5 4 Chemicals, chemical products 4,319 1.4 3 Agriculture and food packaging 1,626 0.5 5 Furniture 1,182 0.4 6 Mining and construction materials 462 0.2 2Total 299,979 100.0 249

Loan Size Amount

('000 US$) Share

(percent) Number of loans

< $250,000 9,845 3.3 69 $250,000 - $1,000,000 55,533 18.5 97 $1,000,000 - $2,500,000 79,202 26.4 48 > $2,500,000 155,398 51.8 35Total 299,979 100.0 249

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ANNEX 11. LIST OF SUPPORTING DOCUMENTS

Export Finance Intermediation Loan (EFIL) Project Appraisal Document, Report No: 19271-TR, June 1999. Export Finance Intermediation Loan (EFIL) Implementation Completion Report, Report No: 27566, December 2003. Second Export Finance Intermediation Loan (EFIL II) Project Appraisal Document, Report No: 26937-TR, December 2003. Independent Evaluation Group (2006), “World Bank Lending for Lines of Credit: An IEG Evaluation”, The World Bank, Washington, D.C. The World Bank (2007), “Turkey: Investment Climate Assessment” , The World Bank, Washington, D.C. Project Aide Memoires, various. Operational Manual for EFIL II. Financial reports for TSKB and PFIs.

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