Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 5526-TU

STAFF APPRAISAL REPORT

TURKEY

SMALL AND ]MEDIUM SCALE INDUSTRY PROJECT

December 11, 1985

Regional Projects DepartmentEurope, Middle East and North Africa Region

|This document has a resricted distribution and may be used by recipients only in the plerformance of|tbeitr oficial duties. Its etents may not otherwise be disclosed without World BsDk sutborizatin.

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CURRENCY EQUIVALENTS

Currency Unit = Turkish Lira (TL)

Value of US$

1975!' TL 14.441976 TL 16.051977 TL 18.001978 TL 24.281979 TL 31.081980 January TL 70.001981 January TL 91.001982 January TL139.601983 January TL191.151984 January TL309.201985 January ' TL451.401985 September TL542.00

a/ Annual averages through 1979.

GLOSSARY OF ABBREVIATIONS

DESIYAB Devlet Sanayi ve Isci Yatirim BankasiDYB Devlet Yatirim BankasiEIB European Investment BankERR Economic Rate of ReturnFE Foreign ExchangeFERIS Foreign Exchange Risk Insurance SchemeFER Financial Rate of ReturnGDP Gross Domestic ProductGNP Gross National ProductGTZ Deutsche Gesellschaft fur Technische ZusammenarbeitHB Halk BankasiKfW Kreditanstalt fur WiederaufbaumsI Medium Scale IndustryNPC National Productivity CouncilSEE State Economic EnterpriseSAL Structural Adjustment LoanSEE State Economic EnterprisesSEGEM Industrial Training and Development CenterSIDO Small Iudustry Development OrganizationSKI Small and Medium Scale IndustrySOE Statement of ExpenditureSSI Small Scale IndustrySYKB Sinai Yatirim ve Kredi BankasiTA Technical AssistanceTCZB T.C. Ziraat Bankasi, or Agricultural Credit BankTSKB Turkiye Sinai Kalkinma BankasiTUBITAK Scientific Technical Research Council of TurkeyTURDOK Turkish Documentation Center

FISCAL YEAR

January I -- December 31

KaO OFFUOAL US ONLY

TURKEY

STAFF APPRAISAL REPORT

SMALL AND MEDIUM SCALE INDUSTRY (SRI) PROJECT

Table of Contents

Page No.

I. InTODucTION ......... .. ... 1

II. MANUFACTURING SECTOR .. ................ 2

A. Government Policies In the Industrial Sector .................... 2B. Trends in Labor Force and Employment ............................ 3C. Structural Characteristics and Performance ...................... 3

- Private Sector and the Role ofSmall and Medium Scale Industry (SRI) .................... 4

- Artisanal Enterprises .. *. . ..................**. .. 4- Sub-sectoral Structure ................................... 6Growth .................. ......... 6-Eport Performance ..................... .... 7

- Investment ... .... .. ...................... 7 . 7Prospects for the Manufacturing Sector .. .. ............ a

D. Issues and Policies Affecting SKI Development ... oo .............. 9

- Issues and Constraints .................... . ..... 9- Government Policies 'or SKI Development ................ 10

E. Bank's Lending and Strategy in the Industrial Sector . .......... 11

- Recent DevelopPents . .......... .. 11

- Future Strategy .... . ... .- o. .... .. .. 12

III. FINANCIAL SECTOR . .... .*. ............ 13

A. Financial System .. 13B. Credit by the Financial System... . 14C. Financing of the Industrial Sector Including SKI . .15D. Interest Rates and the Cost of Capital. 16

This report is based on the findings of an appraisal mission composed ofMessrs. Zafar Sbah Khan (mission leader), Shyamadas Banerji, Redha Behbehani,Geoffrey Gown, Jacob Levitsky and Ross Hammond (consultant) which visitedTurkey in November/December 1984.

This document has a nstrikd disibuton and may be usd by recipients only in the performance|of their officia dutieLIs contenu may nOOt otherwie be discko wiithout Wofdd Bank authodnton

(Table of Contents - continued)

E. Financial Sector Issues ......* * *........................ 18

- Structure, Costs and Foreign Exchange Risk ... '............. 18- Improving Efficiency of the Banking System ............... 20- Development of Capital Market ............................ 21- Local Currency Resources of Development Banks ............ 22

IV. THE PROJECT ......................... 22

A. Project Objectives and Description .............................. 22B. Financial Intermediaries ..... ...... ..... * ... .... . . ...... ; 23

- Sinai Yatirim ve Kredi Bankasi (SYXB) .................... 23- Halk Bankasi (HB) ......... 0................... 9.......... 25

C. Technical Assistance Program for SMI ......... .. ............ 0... 29

V. MAIN FEATURES OF TiLE LOAN .... * .................................. 32

A. The Borrower and Loan Conditions ..... ........................... 32B. Procurement and Disbursements ... ................................ 33C. Status of Project Preparation ....... 34D. Reporting .......................... *........ 34E. Project Benefits and Risks ................ 34

VI. AGREEMENTS AND RECOMMENDATIONS 36

ANNEXES

Annex 1: Relevant Industrial Studies and Reports

Annex 2: Sinai Yatirim ve Kredi Vankasi (SYKB)

Attachment 1: SYKB: Organizational ChartAttachment 2: SYKB: Approvals, Commitments, and DisbursementsAttachment 3: SYKB: Analysis of Loan Approvals by Sector, Geographical

Location, Size, Repayment Terms, and Types ofProjects

Attachment 4 SYKB: Summary Income StatementsAttachment 5 SYKB: Summary Balance SheetsAttachment 6 SYKB: Summary of ArrearsAttachment 7 SYKB: Projected Loan Approvals, Commitments, and

DisbursementsAttachment 8 SYKB: Projected Income StatementsAttachment 9 SYKB: Projected Balance Sheets

Annex 3: Halk Bankasi (HB)

Attachment 1 RB: Organizational CbartAttachment 2 HB: Draft Terms of Reference of the Study for Review of

the Institutional StructureAttachment 3 RB: Analysis of Industrial Credits ApprovedAttachment 4 HB: Income StatementsAttachment 5 HB: Condensed Balance SheetsAttachment 6 RB: Projected Income StatementsAttachment 7 HB: Projected Balance Sheets

Annex 4: Technical Assistance for SMI Development

Attachment I SIDO: Cost Estimates of Technical Assistance ProgramAttachment 2 SIDO: Recommended Additional StaffAttachment 3 SIDO: Terms of Reference of ConsultantsAttachment 4 SIDO: The Computerized Information System

Annex 5: Projected Disbursement Schedule

Annex 6: Selected Documents and Data Available in the Project File

TURKEYSMALL AND MEDIUM SCALE INDUSTRY (SMI) PROJECT

Loan and Project Summary

Borrower: Republic of Turkey.

Beneficiaries: Sanai Yatirim ve Kredi Bankaei (SYKB)Halk Bankasi (HB)

Amount: US$100 million.

Terms: 15 years, including 3 years of grace, at the standardvariable interest rate.

Relending terms: The Government will onlend US$98.4 million to the twofinancial intermediaries, viz. SYKB and HB, forrelending to eligible sub-borrowers in the industrialsector and US$0.35 million to HB as technicalassistance. In addition, the Government will transferUSi1.25 million equivalent to SIDO for technicalassistance to SMI enterprises. Sub-borrowers will beable to borrow either in local currency at theintereo. rate established under the Foreign ExchangeRisk Insurance Scheme (FERIS) or in foreign exchange.Under FERIS, the Government will lend Bank fundsdenominated in TL to SYKB and HB at a fixed rate equalto the onlending rate to sub-borrowers minusintermediation cost (4%). Alternatively, Bank fundswould be lent in foreign exchange to SYKB and HB at afixed interest equal to the then prevailing Bank rateplus 0.75% to compensate the Government for bearingthe interest risk arising from the variability of theBank's interest rate. The onlending rate tosub-borrowers will be fixed at 5% above the Bank rateprevailing at the time of subloan approval. Therepayment of the loans by SYKB and HB to theGovernment will conform substantially to the aggregateof the amortization schedules of individual subloans,except for the technical assistance amount of US$0.35million to be repaid by HB over 15 years including 3years of grace.

Project description: The project is designed to support a program for thedevelopment of labor-intensive SMI through lines ofcredit to SYKB (US$80 million) and HB (US$18.4million) and technical assistance for theinstitutional strengthening and efficiency improvementof HB (US$0.35 million) and technical assistance to

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SMI enterprises (US$1.25 million) through SIDO. Itwould (i) provide a part of the foreign exchangerequirements of SYKB and HB over 1986-88 for onlendingto SMI, with special emphasis on small scaleindustries (SSI); and (ii) finance a program oftechnical assistance to SMI.

Benefits and risks: The project would support the development of labor-intensive SMI projects in industries where Turkey hasa comparative advantage and thus contribute to bothjob creation and growth of manufactured exports. Theproject is estimated to create about 18,000 directjobs. The project would also provide technicalassistance to SMI resulting in their increasedproductivity and efficiency. In addition, the projectwould help strengthen the institutional structure forfinancial assistance to SMI. The project risks mainlyrelate to the overall investment situation in theprivate industrial sector and the timely utilizationof the proposed loan by the iutermediary banks.Substantial delays in loan utilization are, however,unlikely in view of the measures taken by theGovernment to stimulate the growth of private sector.

Free limit: US$1.25 million for SYKB and US$150,000 for HEB. Inaddition, HB will submit the first five sub-loans forthe Bank's approval irrespective of the sub-loanamount.

Final date for sub-project submission: June 30, 1988.

Procurement: SMIs to procure through international and localshopping procedures which require comparison of offersfrom at least three suppliers. However, small itemscosting less than US$10,000 and proprietary items maybe purchased by direct contracting.

Estimated (in USS millions)Bank loan FY87 FY88 FY89 FY90 FY91 FY92disbursements:

Annuai: 12.0 27.0 27.0 19.0 11.0 4.0Cumulative: 12.0 39.0 66.0 85.0 96.0 100.0

TURKEYSMALL AND MEDIUM SCALE INDUSTRY (SMI) PROJECT

INTRODUCTION

1.01 The proposed project addresses two critical issues now facing theTurkish economy-high urban unemployment and the problem of sustaining highgrowth rates of manufactured exports. Turkey's rapidly growing unemployment(up from 1.67 million in 1979 to about 3.06 million in 1984) has become amajor social issue. The limited possibilities for job creation in agricultureand the growth of non-productive marginal jobs in the services sector make theunemployment issue a particularly complex one to tackle. It is clear that theindustrial sector will need to play a much bigger role in productive jobcreation in future. An effective approach to urban job creation (asillustrated in the labor-intensive industry project--Loan 1952-TU) is tofoster development of labor intensive enterprises in industries where Turkeyhas comparative advantage. This approach has proved successful in terms ofgenerating productive employment at a low investment cost.

1.02 However, the development of small and medium scale industrialenterprises'' (SMI) as a group is being inhibited by a variety of internaland external constraints which need to be specifically addressed if this groupis to develop efficiently and make an effective contribution to export andemployment growth. Until recently, the Government's export promotion policydiscriminated against smaller exporters. Because of depressed domesticdemand, this policy adversely affected their growth. Lack of access toinstitutional finance, particularly for financing machinery, plant andadequate working capital has been another serious problem. The Halk Bank(HB), the only source of finance for artisanal enterprises, is constrained bylimited resources and inadequate management systems and procedures fordevelopment lending. Commercial banks generally are averse to financing SMIpartly as a result of perceived higher risk, the higher unit costs of smallerloans and a preference for assisting clients with whom they have alongstanding banking relationship in a period of credit scarcity. Yet anotherconstraint is SMI's limited access to technical assistance. Specializedadvice needed to resolve technical, management, marketing problems, etc. isout of reach for SMI, both because of lack of information on availability ofsuch services and the high costs involved. Government operated institutions,so far, have not been effective in assisting small firms due to lack ofqualified extension personnel, unclear objectives, and low credibility.

1.03 Since 1980, the Government has enacted a number of policy reforms toopen up the economy to market forces as well as bring about structuraladjustment. Some of these reforms have benefited SMI, e.g. adoption of acrawling peg exchange rate policy instead of specific export subsidies topromote exports. Reform of the financial sector and trade liberalization willundoubtedly help create a favorable environment for SMI development, butspecific intervention is still needed to remove particular bottlenecks inaccess to finance, technology, and skilled workers to promote sustaineddevelopment of SMI. The proposed project builds on the successful outcome of

1/ See para. 2.06 for the definition of SMI.

the Bank's first project aimed at assisting labor intensive SMI (Loan1952-TU). It gives special emphasis to the development of artisanal and SSIenterprises as well as to the institution building of HB so that HB becomescapable of efficiently providing investment finance and other financialservices to these firms. The project will also assist the Small IndustriesDevelopment Organization (SIDO) to initiate the establishment of a nationwidenetwork of branches to provide technical assistance to SMI as well as to starta program that would help SMI utilize the services of specialized consultantsfrom both the private and public sectors.

II. HAIUFACTURING SECTOR

A. Government Policies in the Industrial Sector

2.01 Industrialization in Turkey has been viewed as an instrument forachieving faster economic growth, greater self-sufficiency, and reducedinter-regional disparities. Until recently, the main thrust of industrialdevelopment strategy had been capital-intensive import substitution in basicindustries. The principal policy instruments used were large investmentallocations to State Ecouomic Enterprises (SEEs) accom'enied by centralizedplanning and control, and generous incentives combined v'th high levels ofprotection for private investments. The vigorous pursuit of these policiesunder the first three development plans (1963-1977) resulted in high growthrates, substantial structural change, and dispersal of industry to lessdeveloped regions. On the other hand, the same policies gave rise toindustrial inefficiency, extreme anti-trade bias and excessive capitalintensity in production. The emphasis on costly import-substitutio., as wellas several other factors, including shortcomings in the S. & D effort andinadequacies in labor training, contributed to the decline in the productivityof investment. The countrv's latent export capacity could nat offset thechanges in the international environment in the aftermath of the 1973-74 oilcrisis, leading to a major crisis in the balance of payments in 1977-79.

2.02 In January 1980, in response to the crisis, the Government adopted anew economic development strategy characterized by an outward orientation ofthe economy and an increased role to market forces with greater emphasis onthe private sector to stimulate growth, employment and exports. Major policyreforms have been enacted since then in the areas of exchange rate (largedevaluation followed by a crawling-peg policy); export incentives (subsidizedcredits, free access to imported inputs, indirect tax rebates); domesticresource mobilization (deregulation of interest rates, tax reforms, capitalmarket legislation); pricing policy (freeing most SEEs to set their ownprices); import liberalization (shifting a large number of items to moreliberalized treatment); public sector investment (rationalization and removalof a number of economically unviable projects from public sector investment);private direct foreign investment (centralization of responsibility andsimplification of rules and regulations), etc. A number of these reforms arefar reaching and it may be several years before their full impact is felt.

2.03 The policy reforms designed to stabilize the economy and bring aboutstructural changes produced a decline in inflation (from 100X in 1980 to below30X in 1982). The recent resurgence of inflation (estimated at more than 50%

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in 1984), is partly attributable to SEE price increases and to the impact ofthe export drive on domestic food prices. Government is attempting to bringthe situation under control in the context of a tighter program in place forthe second half of the IMF standby. The reforms.have also led to a dramaticexpansion in the value of merchandise exports (from US$2.9 billion in 1980 toan estimated US$7.2 billion for 1984) despite the recession which prevailedabroad during most of this period. Industrial value added also increased by28S during the same period. However, many private sector industrial firmsincluding many SMI are in serious financial difficulties because of theerosion of their equity base and very high real interest rates for workingcapital loans. Complex financial sector issues are at the root of theseproblems and are being addressed with Bank assistance (see paras. 3.12-3.20).

B. Trends in Labor Force and Employment

2.04 Turkey's total population, estimated at 47.4 million in 1984, hasbeen growing at an average annual rate of 2.42 in the past decade. Althoughthe total working age group increased at about the same annual rate, the laborforce grew at only about 1.6X per annum between 1968-77, reflecting declininglabor force participation. Total civilian employment increased even slower,at slightly above li, resulting in increasing unemployment which totalled 2.1million in 1977 or 12.82 of the labor force. Between 1977 and 1983, in spiteof the large increase in out-migration to Saudi Arabia, Libya and Iraq, theunemployment situation worsened primarIly because of the higher growth rate ofthe labor force (1.9%) compared to a marginal increase in the number of jobscreated (450,000). As a result, by 1983 total unemployment increased to 3.56million or about 192 of the labor force. Most of the unemployed (2.9 million)are located in urban areas and 97% are barely literate or with primary ormiddle school education. The industrial sector's track record in job creationhas been inadequate; between 1978 and 1982, industrial employment increasedfrom 1.826 million to 1.R93 million or only by 67,000 workers. Although firmdata are lacking, it is likely that most of the jobs created have beengenerated by organized sector manufacturing establishments engaged in exportproduction which have had high capacity utilization ratios (see para. 2.06).

C. Structural Characteristics and Performance

2.05 The manufacturing sector 4 ' is the leading sector of the Turkisheconomy and, in 1984, accounted for 252 of GDP (higher than agriculture whoseshare was about 18S of GDP), 23Z of fixed investment, 11X of employment and642 of total merchandise exports. State economic enterprises (SEEs) occupy aprominent role in manufacturing even though their importance has diminishedover the last few years because of deliberate government initiatives to limittheir growth. Manufacturing SEEs accounted for some 30S of manufacturingvalue added, 352 of manufacturing employment (268,000 workers) and about 602of manufacturing investment in 1984. About 20 SEEs operate some 440 plants inpractically all branches of manufacturing; the major concentrations are infood, tobacco, textiles, chemicals, paper and basic metals. Most SSEs arelarge capital-intensive operations and suffer from significant overstaffing.

1/ The industrial sector includes manufacturing, mining and energy;manufacturing accounts for about 801 of industrial value added.

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The private sector whose share of manufacturing employment and value added isapproximately twice that of the public sector, Is particularly strong intextiles and garments, food, beverages, engineering products, furniture,plastics, and ceramics.

(i) The Private Sector and the Role of Small and Medium Scale Industry (SMI)

2.06 In 1978, the organized private sector (comprising establishmentsemploying 10 or more workers) included some 8600 establishments employing520,200 workers. Small-scale establishments-' (employing 10-49 workers) andmedium-scale establishments (employing 50-199 workers) accounted for some 5867establishments and employed 235,000 workers. Thus small and medium scaleestablishments (SMI) accounted for 68Z of establishments and 451 of workers inthe organized private sector. SMI firms have the highest share of totalemployment r.nd value added in the manufacture of furniture and wood products;other impor..ant sub-sectors of SMI activity are engineering, chemicals,non-metallic products and paper products in that order. Although recent dataon SMI are not available, tha relative importance of SMI in these sub-sectorsdoes not appear to have changed appreciably over the past five years. In somesub-sectors-engineering, garments, and food industries--SMI have increasedtheir shares of empInymont pnd output because of higher capacity utilizationrates due to improved expor: performance (para. 2.07).

2.07 Between 1970-77, SMI as a-group showed strong growth relative tolarger firms and increased their share of total manufacturing employment(including SEEs) from 31S to 35S. Although comparable data by firm size arenot available for 1978-82, some 2,300 new firms were established in theorganized private manufacturing sector in this period and some 58,500 jobswere created.1l Analysis of the number of new firms and additionalemployment generated by sub-sector (see Table 2.1) indicate that most of thenew firms and new jobs created belong to the SKI category.

(ii) Artisanal Enterprises

2.08 In the non-organized sector, artisanal establishments (employing 1-9workers) comprised some 177,000 establishments employing 455,000 workers and

1/ There is no single official definition of SSI in Turkey. The StateInstitute of Statistics uses the number of workers employed to clatsifyfirms into the non-organized (employing less than 10 workers) or organized(employing 1O or more workers) categories. The Small Industry DeveldpmentOrganization defines SSI as firms employing up to 50 workers. The HalkBank (HB) defines SSI as firms with less than 25 workers and less than TL80 million assets (excluding land and building). Medium scale firms (MSI)are defined by BB as firms with assets (excluding land and buildings)between TL 80 million and TL 300 million (US$190,000-US$700,000). TheBank-financed project (Loan 1952-TU) defined SSI as firms with fixedassets (excluding land and building) valued at less than US$500,000 in1984 prices; the corresponding limit for SMI is US$2.5 million in 1984prices. These limits will be maintained in the proposed project.

2/ Only a part of the additional employment is due to the new firms.

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Table 2.1: MANUFACTURING SECTOR: SUB-SECTORAL BREAKDOWN OFGROWTH IN NEW FIRMS AND EMPLOYMENT BETWEEN 1978-82!'

No. of Employment No. of EmploymentNew Firms Growth New Firms Growth

Food and Tobacco 590 10,922 Chemicals & Plastics 187 3,921Textiles 217 495 Non-Metallic Prods. 16 2,445Garments 68 7,376 Non-ferrous metals 52 3,394Fur products 49 488 Fabricated Metal Prods. 225 5,199Footwear 49 1,447 Non-electrical Mach. 215 5,300Furniture 28 988 Electrical Machinery 196 7,882Paper Products 141 1,521 Transport Products 81 2,878Printing 23 504 Scientific Products 10 830

*, Private sector only; employment in manufacturing SEEs declined by 21,563in thi period.

Source: State Institute of Statistics, Turkey.

Table 2.2: RANK ORDER AND SRARES OF MANUFACTURING INDUSTRIESBY PRODUCTION VALUE

(Constant 1983 prices TL billions)

Annual Growth Annual GrowthRate (X) Rate ({)

Output S Share Rank (1978-83) (1984489)

I. Consumer GoodsL' 4193.8 46.9 - 5.1 6.4Food products 2706.9 30.3 1 5.6 6.2Textiles 600.5 6.7 3 3.2 6.0Garuents 254.3 2.8 9 6.1 11.1

II. Intermediate- 1 'Goods 3578.5 40.2 - 5.4 7.3Petroleum prodcts. 1100.2 12.3 2 3.8 7.5Iron & Steel 467.5 5.3 4 9.1 9.9Chemicals 334.5 3.7 5 7.1 7.6

III. Capital Goods 1 ' 1147.2 12.9 - 6.0 9.7Vehicles 285.4 3.2 7 4.0 11.5Metal Goods 274.4 3.0 8 6.8 7.0Non-Elec. Machry. 180.0 2.0 12 8.1 8.7

IV. TotalManufacturing 8928.3 100.0 - 5.3 7.5

1/ Only the three largest sub-sectors in terms of share of output are shown.

Source: Fifth Five-Year Plan in the Context of Structural Adjustment; AReview; World Bank Report No. 5418-TU.

accounted for about 201 of manufacturing value added. Major concentrations ofartisanal firms occur in garments and leather (281)" metals and engineering(262), wood products (18Z), food products (81) and chemicals (61). Theartisanal sector grew slowly in the decade 1970-8Q; the number ofestablishments increased by less than 21. The number of firms in metals,engineering, chemicals, plastics and wood products shoved substantialincreases, but these were offset by losses in the more traditional sectors oftextiles, garments, leather products and food industries. The major problemof the artisanal sector is one of overcrowding; this is particulary apparentin the sub-sectors of textiles, garments, leather products, wood products andin fabricated metal products. Many artisans are severely under-employed andcontinue in these non-produ' tive jobs because of the lack of alternativeemployment opportunities in organized manufacturing.

(iii) Sub-sectoral Structure

2.09 The manufacturing sector is fairly broad-based; only food processing,petroleum products, textiles, and iron and steel each account for more than 51of production value. Food processing is clearly Turkey's most importantmanufacturing sub-sector, accounting for 281 of manufacturing production in1984. Table 2.2 shows the shares in manufacturing output of consumer goods.intermediate goods and capital goods (44Z, 411 and 151 respectively), and theranking of the three most important sub-sectors in each category.

(iV) Growth:

2.10 Despite the recession which prevailed in Turkey and abroad during1980-83, manufacturing output grew at an average rate of 5.3 percent per annumduring The Fourth Plan period (1978-83) and in the last two years the growthrate reached about 9 percent. Some key performance indicators are shown inTable 2.3.

Table 2.3: MANUFACTURING SECTOR-SELECTED PERFORMANCE INDICATORS

1980 1981 1982 1983 1984 (est.)

Value of Manufacturing Ouput(TL billion 1983 Prices) n.a. n.a. 7,673 8,223 8,750

Manufacturing Growth Rate (Z) -5.4 8.1 5.6 9.5 8.5Private ManufacturingInvestment Growth Rate (X) -14.1 -1.9 0.6 1.6 n.a.

Capacity Utilization () 51.0 62.0 66.0 69.0 72.0Manufactured Goods Exports

(`US$ million) 1,047 2,290 3,430 3,658 5,100

Source: Fifth Five-Year Plan in the Context of Structural Adjustment; AReview; World Bank Report No. 5418-TU.

1/ Figures in parenthesis refer to percentage of total firm population.

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The fairly high output growth rate since 1981 was made possible mainly becausecapacity utilization rates (CURs) in most industries were low during 1980-83.Investment rates were thus able to remain low, particularly in the privatesector, even though the export drive required, and obtained, substantialincreases in output. Industries with high output growth rates'- includeagricultural machinery (14.8%) iron and steel (9.1%), petroleum products(8.71), non-electrical machinery (8.1%), metal goods (6.8%), clothing (6.1%),and rubber products (11.5X).

(v) Export Performance

2.11 During 1978-83, 291 of the total increase in manufacturing outputwent into exports i.e. a marginal export/output ratio of 291 compared to onlyabout 71 between 1973-77. The table 2.4 below analyzes the strong exportperformance of the manufacturing sector relative to other sectors as well asthe performance of different product groups. Five industries (ready madeclothing, foodstuffs, textiles, iron and steel and petroleum products)contributed to 751 of the increase in manufactured exports; five others(fertilizers, measuring instruments, furniture, shoes and agriculturalmachinery) were the fastest growing exporting industries;together, these tenindustries were responsible for about 80% of the increase in manufacturingexports. A noteworthy feature of this export performance is the appearance ofnew industries in the list of major exporters (iron and steel and petroleumproducts) and fastest growing exporters (fertilizers, instruments, -

agricultural machinery). The other noteworthy feature is the penetration ofnew markets in Middle Eastern countries (Iran, Iraq, Libya, Algeria)particularly for foodstuff, iron and steel products and non-electricalmachinery.

Table 2.4: EXPORT GROWTH RATES

Total Export Manufacturing SxportGrowth (1978-83) Growth (1978-83)Constant Prices, Constant Prices,

1 p.a. X p.a.

Agriculture 12.0 Consumer Goods 16.0Mining -4.3 Intermediate Goods 20.7Manufacturing 19.1 Capital Goods 60.9Total Total

Merchandise 16.3 Manufacturing 19.1

Source: Fifth Five-Year Plan in the Context of Structural Adjustment; AReview; World Bank Report No. 5418-TU.

(vi) Investment

2.12 Table 2.5 gives the trend in fixed investment in manufacturing.

1/ Figures in parenthesis give output growth rates between 1978-83.

Table 2.5: FIXED INVESTMENT IN MANUFACTURING(Constant 1983 prices, TL billions)

1977 1978 1979 198Q 1981 1982 1983

Total Manufacturing Investment 761.6 661.2 591.0 582.3 548.4 499.7 493.3Public Sector 309.8 253.3 312.8 343.3 314.1 264.1 255.4Private Sector 451.8 407.9 278.2 239.0 234.3 235.6 237.9Percentage Public 40.7 38.3 52.9 59.0 57.3 52.9 51.8Percentage Private 59.3 61.7 47.1 41.0 42.7 47.1 48.2

Source: Fifth Five-Year Plan in the Context of Structural Adjustment;A Review; World Bank Report No. 5418-TU.

The table indicates that real investment in 1983 was only 65Z of the 1977level; also the balance between the public and private sectors, which was infavo-z of the latter before 1979, shifted thereafter strongly in favor of thepublic sector. However, in the past couple of years, the Government has beentrying to restore the balance as part of the structural adjustment strategy bycutting back on public investment. Private investment activity has been verydepressed, because of low capacity utilization and high non-preferentialinterest rates. Borrowing in foreign currency for investment-purposes hasbeen particularly adversely affected because of the high devaluation of theTL. The Government introduced a Foreign Exchange Risk Insurance Scheme (para.3.10) (FERIS) in 1984 to cover borrowers of foreign currency against exchangerisks which significantly helped to stimulate iwnestment borrowing. It islikely that the Government wi'll continue with the scheme as long as inflationis volatile and the investment climate uncertain.

(vii) Prospects for the Manufacturing Sector

2.13 The Bank undertook a detailed review of the Government's FifthFive-Year Plan (1984-89), approved by the National Assembly in July 1984(Report No. 5418-TU). The Plan envisages that the industrial sector willcontinue its lead role in the economy with its share of value-added GDPincreasing from 32Z in 1984 to 341 in 1989 at an annual growth rate of 7.5X.Manufactured exports are projected to grow at an annual average rate of10.61. The Plan calls for a larger role for the private sector, principallyby restricting the growth of industrial SEEs. The private sector's share oftotal manufacturing investment (TL 3015 billion in 1983 prices) is projectedat 57X. Private manufacturing investment during the Plan period is projectedto be nearly 41% higher and public manufacturing investment 14Z lower thantheir corresponding amounts in the Fourth Plan period. However, given thehigh real interest rates on working capital and low CURs in non exportoriented industries, private investment may grow more slowly than projected inthe Plan.

2.14 Based on a review of CUR trends and production targets, the Bank'sreview of the Plan concluded that the bulk of Plan manufacturing investment(74X) should flow to the intermediate goods sector; only 18 and 8 percentrespectively should flow to the consumer and capital goods industries.

Otherwise, supply bottlenecks are most likely to constrain the intermediategoods sector, which could jeopardize export targets in the consumer andcapital goods industries. An analysis of major and leading (fastest growing)export sub-sectors indicates that based on CUR trends, existing capacity andoutput targets, large investments are needed only in two major exportindustries-garments, and iron and steel. If iron and steel is excluded, theremaining nine major and leading export sub-sectors which are expected toaccount for 70% of the increased exports, will require only about 16Z of thefixed investment in manufacturing projected in the Plan. Thus the exporttargets can be attained even under stabilization conditions. Attainment ofthe export targets will, however, require continuing real devaluation of theTL, which in turn will facilitate the scaling down of direct incentives to anaverage level of 6Z-81 and redirection of direct incentives to capital goodsindustries.

D. Issues and Policies Affecting SMI Development

(i) Issues and Constraints

2.15 SMI generally face a number of internal and external constraints.Internal problems adversely affecting productivity include outdated machinery,obsolete and deficient technical and production engineering methods, poorworking conditions, inadequate management, planning and control, and marketingknow-how.I 1 External problems tend to compound the internal ones. Oneproblem is the limited access to institutional finance (para. 3.04)exacerbated by current stabilization measures and related factors which havemaintained non-preferential working capital interest rates at record levels.

2.16 Another external constraint is the limited availability and high costof technical assistance. Many SEEs have special R & D divisions capable ofproviding extension. rexvroes (such as Sumerbank's unit in Bursa) with amandate to assist private sector including SKI, but in fact have givenservices only to their own operations. In the private sector mnny largeenterprises have mechanisms to provide technical assistance such asproduction/quality control departments or "in-house" divisions that provideconsulting services. They also benefit from service agreements with licensorsand suppliers of technology and plant machinery. Except for firms acting assub-contractors and suppliers to a few of the large machinery manufacturers,the availability of industrial extension services to SMI is extremelylimited. The available private consulting firms tend to be geared to therequirements of larger firms and appear extremely costly to SMI. A few publicinstitutions have been established over the years to provide advice andinformation in technical and management fields including the NationalProductivity Center (NPC), SEGEM (for training), TUBITAK/TURDOK (technicalresearch and information services) and specialized sub-sectoral institutes.The only institution established to assist SSI-the Small Industry DevelopmentOrganization (SIDO)-has had very limited impact.

1/ Constraints facing SMI in Turkey are discussed in detail in Turkey:Prospects for Small-Medium Scale Industry Development and EmploymentCreation, World Bank Report No. 2913-TU, 1980, Volume II, pp. 46-50.

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2.17 SMI face complex problems in exporting because of lack of marketresearch and data, inability to tap distribution channels, pricing and costingproblems and inability to adapt products to meet export market requirements.Export trading companies established in recent years have only partially metthis need in a few sub-sectors (e.g. garments) where strong sub-contractingrelations exist. In view of the lack of management, production and exportmarketing services for SMI, it is necessary to complement any program offinancial assistance with appropriate technical assistance in order to bringabout desired modernization and improvements in operating efficiency.

(ii) Government Policies for SMI Development

2.18 Prior to 1980, Government policies which favored large,capital-intensive, import-substitution projects did not promote thedevelopment of SMI. Following the adoption of an outward-oriented developmentstrategy, the Government has increasingly recognized the potential of SMI tocontribute to employment creation and export growth. The Fifth Five YearDevelopment Plan (1985-89) enunciates a strategy and accompanying policymeasures specifically to promote SSI. These include:

(a) strengthening the Small Industry Development Organization (SIDO) todevelop appropriate strategies, policies and technical extensionactivities to assist SMI development;

(b) enlarging the flow of investment and working capital loans;

Cc) expanding support for the building of industrial estates forartisanal firms and providing on-the-job and technical training inthe industrial estates.

2.19 In addition to these direct measures, recent policy reforms havereduced discrimination in regard to access of SMI to incentives. With regardto investment incentives, the new regime published in October 1984 has severalimprovements. First, for investment of less than TL 600 million (US$1.32million at end 1984 prices) application procedures have been simplified, withinvesting firms required to prepare simplified investment forms rather thansubmit detailed feasibility studies. Second, the newly introduced supportpremium rate (a one time subsidy on the total project investment) is the sameas for larger investments (7%) except for the projects in the less developedregions. Third, the required percentage of production to be exported has beenreduced from 25% to 5%-20%, the percentage depending upon location. Fourth,the new regime also for the first time provides incentives that directlyencourage use of labor: it grants tax exemptions for wages paid to firms insectors of special importance and in the least developed regions. Some of thequalifying sectors--electronics and communications, agriculture and livestock,production of medica'l equipment, aquatic products, and tourism--are typicallycharacterized by firms in which labor intensive SMI are important. Finally,for smaller (less than TL 600 million) investments, the required equitypercentage is lower (40Z) than the normal level (50%).

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2.20 The problem of the export rebate system (the most important of thedirect export incentives)"', which also discriminated against smallerindustry by granting high rebates for large volume exporters-' has largelybeen removed by the Government's policy set forth in the Fifth Five Year Planto reduce this incentive and rely increasingly on the indirect incentives of arealistic exchange rate. Rebate percentages were reduced to 80% of theprevious level beginning April 1984 and further to 55Z beginning September1984. With the institution of a system of value added taxation which theGovernment has implemented with effect from January 1985, the export rebatesystem will be reexamined and possibly further reduced in scope.

E. Bank's Lending and Strategy in the Industrial Sector

(i) Recent Developments

2.21 Between 1978 and 1984 the Bank undertook a number of major economicand sector studies in support of its Structural Adjustment Loans (SALs) aswell as its overall macro economic and sectoral dialogue with the country(Annex 1 lists the relevant reports). The thrust of the Economic and SectorWork (ESW) has been directed along several lines-analyses of issues ofcomparative advantage, tariff reform, and liberalization of imports in supportof the Government's policy of opening up the economy to market forces;analysis of the foreign exchange regime and export incentives to ensurecompetitiveness of exports; review of the financial sector to identify keyinstitutional and policy issues in order to assist the Government in policyreforms, (e.g. introduction of positive deposit rates, reduction of interestsubsidies on selective credits, development of a capital market, eliminationof transaction tax, etc.); review of public sector investment programs torationalize and improve the efficiency of public investments; review of thefunctioning of SEEs with the view to improving operating efficiency andresource allocation; and review of the prospects of SMI to ensure appropriatepolicies for their development. These studies have provided the technicalunderpinnings for the Bank's dialogue with the Government on the content andpace of the Structural Adjustment Lending effort. Given the continued needfor stabilization of inflation and recognizing the ongoing natue of thestructural adjustment process, particularly at the sectoral level, future ESW(see para. 2.23) will continue to focus on most of the above-mentioned issues.

2.22 Up to 1980, Bank industrial lending was directed at two broad areas:(i) towards State Economic Enterprises (SEEs) for improving the resourceallocation process and the technical and management efficiency of SEEs, both

1/ Other direct export incentives were preferential export credits and foreignexchange allocation with duty-free imports. Export rebates account forabout two-thirds of total subsidy value. Preferential export credits werediscontinued as of January 1, 1985. See Turkey: The Vth Five Year Plan inthe Context of Structural Adjustment: A Review, Report No. 5418-TU ofJanuary 22, 1985, para. 4.47.

2/ Since April 22, 1982 firms have received rebates which increase with thevolume of exports culminating in an additional 10 percentage points forannual export levels in excess of US$30 million.

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directly as well as through the State Investment Bank (DYB); Bank loans havealso attempted to strengthen DYB through improvement of systems and proceduresand training of staff; and (ii) towards the private sector through theTurkish Industrial Development Bank (TSKB) and The Industrial Investment andCredit Bank (SYKB) to develop viable import substitution and exportcompetitive industries as well as to encourage geographical andentrepreneurial diversification. The loans have also attempted to strengthenthe participating intermediaries and to develop a capital market. Banklending, however, had limited success in attaining many of these objectivese.g. development of a capital market because these projects had little impacton the larger sector policy issues. Following the economic crisis of the late1970's, and greater receptivity on the part of the Government to Bank policyadvice, the Bank made five SALs aimed at assisting the Government inimplementing a number of major policy reforms in the industrial and financialsectors. The last three SALs have included a strong focus on trade policyissues and have allowed the Bank to engage in a constructive dialogue with theGovernment on policy reforms which conventional Bank project lending could notcover.

(ii) Future Strategy

2.23 The key to future economic growth is continued successful adjustmentto a market economy in which industry, particularly manufacturing, will play acritical role in sustaining the export effort and creating jobs. The FifthFive Year Plan (1985-1989) makes clear that the Government is prepared topursue this strategy which will require that industrial and financial sectorpolicy reforms enunciated since 1980 be supplemented by further reformspertaining to SEE efficiency, deepening of capital markets, adoption ofrealistic interest rates, restructuring of financial institutions, furtherlowering of trade barriers, etc. to fully bring about the changeover to amarket-oriented economy. The Plan states that the private sector is in thebest position to address the two critical problems facing theeconomy-sustaining high export growth rates and creating jobs in urbanareas.

2.24 The Bank's medium term ESW and lending strategy is aimed at assistingthe Government in following through with its program of policy reform. Withregard to ESW, the Bank's objectives are twofold: (i) to monitor Turkey'sprogress towards the goals of stabilization, restructuring of the economy andrestoration of creditworthiness; and (ii) to provide the macro and broadsectoral basis for sector and project lending. Following the recent reviewsof the development strategy and of the Public Investment program of the FifthFive-Year Plan, four additional studies--on agroindustries, industrialtechnology, a review of the telecommunications and electronics industries, anda review of engineering industries-are proposed to examine the longer termtechnological and R & D needs of industry and to analyze their investment andtraining requirements to ensure that they attain international competitivenessand continue to contribute strongly to export growth. This will be followedby a study of the effect of liberalization on the performance of selectedsub-sectors to assist the Government in formulating a program of structuralrationalization of private industries.

2.25 Industrial lending strategies are aimed at assisting the Governmentto implement the program of financial sector reform, to improve the efficiency

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of public enterprises and to strengthen the role of the private sector. Thepublic sector, which comprises nearly 502 of manufacturing sector investments(para. 2.12), will remain an important area for Bank lending. However, inlight of the Government policy to reduce the role of SEEs in manufacturing,Bank lending to SEEs will emphasize rehabilitation, improvement in efficiencyand policy reforms (e.g. pricing and rationalization of investment programs)to be tackled both at the firm and sub-sector level.

2.26 The Bank is supporting the Government's long-term objective ofexpanding the role of the private sector, so that it produces and exports moreefficiently as well as generates employment at low cost through the proposedproject, which builds on the first labor intensive industry project (Loan1952-TU). In this respect, the Bank's strategy will focus on increasing thequality and quantity of technical assistance to the SMI sector by assistingSIDO to establish a nationwide network of extension service centers which willalso strengthen the industrial sector as a whole by building up suppliers andsub-contractors for larger industries. The proposed project will give specialemphasis to the development of artisanal firms by earmarking funds for thisgroup to be onlent by Halk Bankasi. Halk Bankasi itself will be strengthenedso that it will develop a capability to provide medium and long terminvestment loans to SMI in an efficient manner.

III. FINANCIAL SECTOR

A. Financial Systeml-'

3.01 The financial system of Turkey is relatively undeveloped and isdominated by the banking system. At the end of 1984, there were 19 domestic

Table 3.1: SIZE OF FINANCIAL SYSTEM IN TURKEY

Ratio of DirectAverage Direct Credit Nominal Ratio of Credits from

Year M2 from the Fi- GNP Average M2 the Financialnancial Systemr; to GNP System to GNP

( TL billion ) - - -- (in percent ) -

1975 129 208 535 24 391980 681 1,326 4,435 15 301981 1,201 2,059 6,556 18 311982 2,052 2,673 8,657 24 311983 2,921 3,435 11,549 25 301984 4,234 4,250 18,339 23 23

Source: World Bank Report No.4459-TU, Quarterly Bulletins of Central Bankof Turkey, and IMF data.

a/ Cumulative outstanding.

1/ World Bank's Report No. 4459-TU entitled Turkey-Special Economic Report-Policies for the Financial Sector, provides a comprehensive description ofthe financial sector of Turkey.

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commercial banks and 15 banks (including the Central Bank, Agricultural CreditBank (TCZB) and Halk Bank (HB)) established under special laws. There werealso two privately-owned development banks (TSKB and SYKB), and 13 foreignbanks. The total number of banks' branch offices was 6,221. The bankingsector is highly concentrated; TCZB and the three leading commercial banks (IsBank, Yapi-Kredi Bank, and Akbank) together accounting for more than 50Z ofthe total assets of the banking sector (TL 12,964 billion at the end of 1984).

3.02 The size of the financial system and trends in its growth aresummarized in Table 3.1. In nominal terms, the financial system in Turkey hasbeen increasing rapidly but this growth reflects the high rates of inflation.In real terms (1975 prices), M2 was equivalent to only TL 170 billion in 1984(average grovth of 3.2Z per annum) and total credit equivalent to only TL 171billion (-2.1S per annum). Also, the financial system has remained small insize in relation to GNP and has fluctuated widely in 1975-84. The increase ininflation rate from 10 in 1975 to 1071 in 1980 without a correspondingincrease in nominal interest rates made fir-ial assets unattractive leadingto a decrease in the size of the financial system compared to GNP between 1975and 1980. The subsequent decrease in irflation (3'1 in 1981 and 271 in 1982)and increase in nominal deposit rates (ranging from 251 for one-month depositsto 501 for 6-months and longer deposits from January 1. 1982) produced highreal interest rates in 1981-82.

3.03 The Government reduced the interest rates on demand deposits in 1983in the expectation of further declines in inflation and to alleviate thefinancial problems faced by businesses due to very high real interest rates.However, inflation accelerated considerably during the second-half of 1983(30.4% for the whole of 1983), resulting in negative real interest rates ondeposits (-51) by the end of 1983. The interest rates were, therefore,increased again in December 1983 (471 for 6-month and 451 for one-year timedeposits). The Government also decided to maintain positive interest rates ondemand deposits and to adjust these rates every quarter in line with changesin inflationary expectations and the situation in credit markets. The presentrates (August 1985) for 3-month, 6-month, and one-year deposits are 45Z, 502and 55Z respectively. The interest rate structure reflects the Government'sexpectation of an overall decline in inflation during 1985 which was already38.9Z for 12 months ending October 31, 1985 as compared to an average of 50.41for the whole of 1984. The increase in interest rates has brought an upturnin the relative size of the financial system as seen by a significant increasein real terms (32% in 1983 and 30% in 1984) in the stock of M2 and in theratio of M2 tJ GT (from 151 in 1980 to 231 in 1984). The ratio of directcredits from the financial system to GNP, however, did not show an increase in1980-83 and declined in 1984 mainly due to restrictions on Central Banklending and its debt consolidation (para. 3.04).

B. Credit by the Financial System

3.04 The total direct credit extended by the financial system in Turkeyhas increased significantly in nominal terms as shown in Table 3.2. In realterms, there was a decline of 251 in total credit between 1975 and 1980. Thisdecline was partly related to the increase in reserve requirements imposed in1977, but it also reflected difficulties in attrecting deposits. During thesame period, the Central Bank's share in total credit increased from 321 toabout 501 mainly due to its financing the increased funding needs of the

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Table 3.2: DIRECT CREDITS FROM THE FINANCIAL SYSTEM IN TURKEY&'(TL billion)

Central Deposits Investment &Year Total Credit Bank Money Bank Development

Credit Credit Bank Credit

1975 208(100Z) 66(32Z) 112(54Z) 30(14X)1980 1,326(100Z) 655(492) 542(412) 129(10Z)1981 2,059(100X) 925(45X) 942(46Z) 192( 91)1982 2,673(1002) 910(36X) 1,484(55Z) 279( 9%)1983 3,435(100X) 1,235(36X) 1,848(54Z) 352(101)1984 4,250(100Z) 880(21Z) 2,871(68Z) 499(11%)

Source: World Bank Report No.4459-TU and Quarterly Bulletin of Central Bankof Turkey.

a/ Central Bank's credits to DYB and credits extended to banks throughrediscounting are excluded from the credits of deposit and investmentand development banks.

public sector. Total credit started picking up in real terms from the secondhalf of 1980 but had not reached the 1975 level by the end of 1984. Thegrowth of credits since 1980 has been to a large extent determined by theceilings on the expansion of domestic financial assets of the Central Bank,which were established in the context of economic stabilization policyincreases agreed with the INF. One of the main functions of these creditceilings has been to ration the credit extended by the Central Bank to thepublic sector and the amount of preferential credit to the private sectorfinanced by the Central Bank. A substantial portion of the decline in CentralBank credit in 1984 was due to debt consolidation which resulted in theassumption of debts of certain SEEs and state-owned banks by the Treasury. Asa result, the share of deposit money banks in total credit financing in 1984increased to the highest level in the last 10 years. The share of HalkBankasi, one of the two intermediaries under the proposed Bank loan, was 71 inthe total credit of deposit money banks at the end of 1984. SYKB which is adevelopment bank and the other intermediary under the proposed loan hasaccounted for 61 of the total credit by investment and development banks atthe end of 1984 (para. 3.06).

C. Financing of the Industrial Sector Including SMI

3.05 Nearly 601 of total private fixed investment in the organizedindustrial sector is financed by financial institutions. Of this amount,about 801 is now extended through deposit money banks which are required tomaintain 201 of their deposits in medium and long-term credits, and thebalance from investment and development banks. A substantial portion ofdeposit money banks' short term loans to the industrial sector are rolled overand thus function as medium or long-term credits, but under present conditionsof financial stress faced by enterprises, most is used to finance arrears andworking capital rather than fixed assets. Nearly all of the investment not

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financed by intermediaries comes from investing firms' own funds. Bonds,which comprised about 8Z of manufacturing investment in the mid-70s, presentlyrepresent a negligible proportion of such investment because of the highinterest rates on deposits. Suppliers' credits also play a limited role infinancing because of the private sector's reluctance to bear the foreignexchange risk (see para. 3.10). Foreign investment is a growing source offunds, but has not reached more than 1-2% of the total.

3.06 Four banks are classified as investment and development banks. DYB(State Investment Bank), which concentrates its activity in financinginvestment of SEEs, accounts for about 60% of total assets of this group ofbanks and has been a channel for three Bank loans to the public sector. Theother three development banks-TSRB, SYKB (both private sector-owned), andDESIYAB (government-owned)-serve principally the private sector. Of these,TSKB, with about two-thirds of the total assets, is the largest. It isregarded primarily as a source of foreign exchange loans. SYKB formerlyprovided mainly medium-term local currency loans, but during the last threeyears it has been extending largely medium- and long-term loans in foreigncurrency. DESIYAB, the most recently established institution of this group(1976), channels resources of workers abroad into industrial and otherproductive investments in Turkey especially in the less developed regions.TSKB and SYKB have been recipients of several Bank loans. Total credits ofinvestment and development banks have decreased in real terms by 33X during1975-84 and their share in total direct credit by the financial system hasdeclined from 14X in 1975 to about 10% in 1980-84 (see table 3.2). Thereluctance of investors to borrow in foreign currencies (para. 3.10) and theirlack of access to local currency resources (para. 3.19) are the main reasonsfor this situation.

3.07 Halk Bankasi (RB) is the principal source of loans to smallbusinesses in the unorganized sector through a network of more than 600regional offices and branches. Its borrowers include small tradesmen andartisans often organized in cooperatives. Only about 25X of its funtds go tomanufacturing firms, mostly for working capital which is much less than thepotential need. It is proposed as an intermediary under this project in orderto assist the smaller firms (4.22-4.47). For SMI that are too large toqualify for HB financing (i.e. firms with fixed assets of TL 300 millionexcluding land and buildings) sources of funds are very limited. Commercialbanks are reluctant to lend to SMI because of higher administrative costs anda perceived higher risk. SYKB has been providing funds under the Bank's firstlabor intensive industry project for firms at the larger end of the SMIspectrum and is proposed as one of the intermediaries under the project toserve that group (paras. 4.01-4.21).

D. Interest Rates and the Cost of Capital

3.08 Prior to mid-1980, all interest rates were regulated by Government.Though differentiated by activity and maturity, lending rates wereconsistently negative in real terms, especially in priority activities andregions. Since deregulation on July 1, 1980, the banks collectively determinebase lending interest rates. For loans that qualify, their rates areinfluenced by the rediscounting policies that are set forth periodically by

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the Central Bank which vary with different activities and maturitieo. Thebase lending rates are revised periodically by the banks, taking into accountexpectations of inflation and market conditions. The costs to the borrowersalso include commission, taxes, and (for all but a few categories of highpriority loans, e.g. agriculture) contributions to a new Resource UtilizationSupport Fund, which replaced the Interest Rate Rebate Fund at the end of1984. The fund is being used to defray investment costs for eligible projectsreceiving certificates of encouragement with greatest support for lessdeveloped regions, and for exports based on net foreign exchange revenueearned.

3.09 For investment loans eligible for Central Bank rediscounting, thefinal cost is a blend between the cost of funds eligible for rediscounting(for which the rediscount proportion ranges from 50% to as high as 90% for theless developed regions) and the cost of funds from the banks' own sources.However, the Central Bank's rediscounting facility is not available throughouta given year, depending on progress made in meetis.g the monetary and creditceilings; this results in postponement of investments or, on occasions,borrowings from banks at their regular rates. During 1984, the effectiveinterest rate on the rediscounted portions of medium and long-term TLinvestment loans for industrial credits to the private sector, after takinginto account various taxes, and charges varied between 26% for loans to theleast developed regions to 38% for other investment loans. The effective costof the rediscounted portions during 1984 was negative, since inflationaveraged 50.4%. Medium and long-term loans that do not qualify forrediscounting and the non-rediscounted portion of loans made from banks' ownsources are much costlier, ranging from an effective cost of 60X to 80%.Under SAL IV, the Government declared its intention to set interest rates anpreferential credits at least equal to the rate of inflation and minimize thedifference between preferential and non-preferential credits. In pursuit ofthis policy, the Central Bank rediscount rates on investment credits wereraised from 19.5-30% to 33% commencing January 1985 and, thus, differencesbetween preferential and non-preferential categories were also reduced. Theeffective blended interest rate of medium and long-term TL investment loansfor industrial credits from the deposit money banks is now estimated at 50-55%p.a. but the cost of similar funds from the investment banks is 38-41% becausea relatively higher proportion of these loans can be rediscounted. Theavailability of local currency term loans from the investment banks is,however, very limited (para. 3.20). Given the expectation of significantlylower inflation rates in the future, the blended interest rates are generallyexpected to be positive in real terms in 1985 and over the life of loans. ForSSI that qualify to borrow from Halk Bankasi, a range of rates exist dependingupon the source and purpose. For tradesman and artisans who are members ofcooperatives and require loans for working capital, the effective cost throughthe Central Bank rediscount facility is 30-32%, whereas the cost of investmentloans for SSI is 43-52%.

3.10 On foreign currency loans until mid-1984, the interest rate was setby the intermediary's cost (or the weighted average cost) of foreign currencyborrowings plus a spread, which for TSKB and SYKB was set at about 5Z. Theeffective interest rate on foreign currency loans was about 14% with theborrower assuming the full foreign exchange risk. Demand for foreign funds on

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this basis has been very limited, however. Firms with loans denominated inforeign currencies have found that the amount of TL required to repay them hasincreased faster than the increase in earnings, due both to depressed domesticmarkets and the fact that the TL has had a significant and continuing level ofreal devaluation. This problem was particularly acute for new firms underconstruction which had not started operations and suffered heavy losses duo tothe foreign exchange risk. Although there are presently no strong reasons tofear significant losses arising from the foreign exchange risk given thepresent exchange rate policies, firms are unwilling to borrow in foreigncurrencies under the current relatively d pressed conditions. Furthermore,with the foreign exchange constraint greatly eased in the last couple of yearswith the surge of exports, some firms were able to satisfy their requirementsby obtaining TL loans (which could in some cases be at lower effectiveinterest rate) and then either purchasing the requisite foreign exchange, orutilizing the foreign exchange from exports. To encourage greater use offoreign borrowings, the Government, in July 1984, instituted a foreignexchange risk insurance scheme (FERIS) applicable to IBRD loans to TSKB andSYKB in the private manufacturing sector. In this scheme, loans weredenominated in TL at a fixed interest rate (26Z) over an 8-year term with aspacial fund bearing the foreign exchange risk. This scheme succeeded instimulating investment demand for Bank loans, in part because the effectivecosts to borrowers, estimated at 31-332-', was low compared to theprevailing inflation rate. The question of how to harmonize the costs ofdomestic and foreign exchange loans and develop an acceptable long-term schemethat will stimulate investment without subsidizing it is a major issue of thefinancial sector (see paras. 3.12-3.14 below).

E. Financial Sector Issues

3.11 The financial sector issues in Turkey have been a subject ofintensive dialogue between the Bank and the Government for a number of yearsand most recently when the Bank report on the policies for the financialsector in Turkey (Report No. 4459-TU of September 1983) was prepared anddiscussed with the Turkish authorities. The major issues identified in thatreport are beginning to be effectively addressed by the Government includingsome in the context of recent SALs. These issues fall into the following fourcategories: (i) structure, costs and foreign exchange risk; (ii) bankingsector efficiency; (iii) development of capital markets; and (iv) localcurrency resources of development banks.

(i) Structure, Costs and Foreign Exchange Risk

3.12 There are several problems which are evident from the discussionabove (paras. 3.08-3.10) regarding the structure and cost of capital. Theseproblems are embodied partly in the system of selective credits which resultsin fragmentation of the financial market and in wide differences between thecost of different types of credits. Other problems stem from significantincreases in inflation without corresponding adjustments in lending rates

1/ The nominal interest rate was fixed at 262. The rate of 31-33X takes intoaccount the effect of certain additional fees and charges imposed by theintermediaries (TSKB and SYKB).

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which caused some preferential interest rates to be highly negative in realterms over most of 1983 and 1984 while non-preferential rates were generallyhighly positive in real terms following their liberalization. This situationleads to constraints in the optimum mobilization of domestic savings, anddistortions in allocation of resources; it can also lead to inflationarypressures to the extent that preferential credits are not financed throughcross-subsidization. The Government's recent 4ctions have broughtimprovements in the interest rate structure but further actions need to betaken to introduce and maintain real positive interest rates on all loans, andto minimize the gap between the cost of preferential and non-preferentialcredits.

3.13 While borrowers of local currency loans were subject to either highlypositive or negative real rates, borrowers of loans in foreign currencies withexchange risks suffered large losses in recent years due to the majordevaluation of TL. As a result, they became reluctant to borrow foreigncurrency loans, particularly those with medium and long-term maturities. Inresponse, the Government introduced a Foreign Exchange Risk Insurance Scheme(FERIS) in 1984 (para. 3.10) and has decided to continue the scheme for thetime being with a fixed interest rate of 35X and an effective cost of 38-42Xapplicable to loans approved during 1985. In addition, it is the Government'sintention to operate the scheme on the basis of the following principles:

i) FERIS will be managed in order to be self-financing. To achievethis, the lending rate to borrowers would be positive in real termsover the life of the subloans. The rate would be reviewed every sixmonths and adjusted as necessary. In the case of prepayment of aloan under FERIS, the borrower will be required to compensate thescheme for any losses incurred on that loan between the date ofdisbursement of the loan proceeds and the prepayment date.

(ii) The effective cost of funds to borrowers under the Central BankRediscount Rates will be comparable to the cost of funds to borrowersunder FERIS.

(iii) FERIS will not discriminate between financial institutions coveredunder the scheme. Onlending terms and conditions will be appliedequitably to such loans and the financial institutions will beallowed an appropriate spread.

(iv) In order to be eligible for financing under FERIS, projects will berequired to have a Certificate of Encouragement which in turnrequires normally a minimum debt/equity limit of 50:50. FERIS will,therefore, be an instrument for mobilizing private savings.

(v) Financial intermediaries will continue to offer finance in foreigncurrency with the exchange risk to be passed on to sub-borrowers.

3.14 Accordingly, it has been agreed during negotiations that the proceedsof the proposed Bank loan may be onlent to sub-borrowers either under FERIS orin foreign exchange. Under FERIS, the Government will lend Bank funds

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denominated in TL to SYKB and Halk Bankasi at a rate equal to the onlendingrate to sub-borrowers minus a spread of 4X. Alternatively, Bank funds wouldbe lent in foreiga exchange to SYKB and Halk Bankasi at a fixed interest equalto the then prevailing Bank rate plus 0.75% to compensate the Government forbearing the risk arising from the variability of the Bank interest rate. Theonlending rate to sub-borrowers will be fixed at 5% above the Bank rateprevailing at the time of subloan approval. The Government intends todiscontinue FERIS in its present form as soon as the private investmentclimate has recovered and inflation has abated. The Bank plans to discuss thefuture of FERIS, together with other specialized credit schemes, with theGovernment in the context of the proposed Financial Sector Adjustment Loan.

(ii) Improving Efficiency of the Banking System

3.15 The bankiLg system, which dominates the financial sector of Turkey,has been characterized by lack of competition, excessive number of branchoffice, widespread interlocking ownership between banks and enterprises, lackof accounting standards, and lack of effective supervision by the Central Bankwith unsatisfactory procedures for the monitoring of loan portfolios. Thoughthe costs of intermediation have been dropping (from 11X of total assets in1980 to 7Z in 1983) they are significaoti.y higher than in in4ustrializedcountries which range from 3% to 4-1/12. These costs have been inflated byliquidity and reserve requirements of the Central Bank and a tax on inter-banktransactions which contributed to the absence of an inter-bank money market.Improied efficiency of the banking system would improve the.cnst and terms offunds available to SMI. The Banking Law of June 28, 1983 laid the cornerstonefor strengthening the banking system. Covering many of the recommendations ofthe Bank's report on the Financial Sector'-', it reduces under-capitalizationof banks by setting a maximnu total debt/equity ratio of 20:1, places limitson tne real assets and investments of banks, links the establishment ofbranches to the level of a bank's equity, and reduces the interlockingownership between banks and corporations. It also introduces a depositinsurance scheme and strengthens the role of the Central Bank in thesupervision of the sector.

3.16 There are two major issues which need to be addressed further. Oneis the intermediation cost which despite recent measures (such as reduction ofa withholding tax) is still excessive. This will require a number ofapproaches including tax incentives to reduce operating expenditures, betterenforcement of Central Bank liquidity requirements to encourage use of theinterbank market and further steps to limit banks' equity holding in companiesin order to induce arm's-length relationship with customers, and theintroduction of modern technology to improve accounting and auditingpractices. The other issue is the supervision capability of the Central Bankwhich despite the Decree Law on Banking, remains weak. Further progressrequires clearer demarcation of responsibility between the Central Bank anddifferent departments in the Ministry of Finance for supervision of banks,improving the monitoring of exposure of banks to major borrowers, and raisingthe standards of project appraisal by banks for discounting of loans by the

V/ Bank report 4459-TU, of September 21, 1983.

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Central Bank. .ne Bank has begun to address these issues for the overallbanking sector in the context of the discussions of the financial sectorreport and to be pursued through the proposed financial sector loan.

3.17 Halk Bankasi which would be an intermediary for the proposed Bankloan is a specialized commercial bank. It does not have some of thecharacteristics of other commercial banks (e.g. interlocking of ownership withits assisted enterprises, under-capitalization, etc.), and its intermediationcosts have been relatively low at 6-7Z. However, these costs are still highwhen compared to international levels. This points out to the need forgreater efficiency in operations particularly with respect to deployment ofstaff, size and location of branches, internal operational controls,computerization of operations, etc. In order to address the above issue, theproposed project includes technical assistance to identify and introducemeasures to improve operational efficiency (para. 4.16).

(iii) Development of Capital Market

3.18 The development of a larger and more diversified capital market isneeded in Turkey to increase competition with banks, provide savers with awider choice of financial instruments, enable companies to restore theirequity to sound levels, and facilitate broader corporate ownership.Accomplishing this task will require strengthening the institutionalframework, particularly the capability of the Capital Markets Board toregulate, supervise and develop the market in coordination with the work ofother agencies. Legislation concerning the accounting and auditing professionis also needed to upgrade disclosure standards and introduce the requirementof externAl audit of the accounts of firms whose securities are to be offeredto the public. Other areas where progress is needed include: strengtheningsecurities market intermediaries, promoting institutional investors;development of the primary market for securities; reducing the restrictionsgoverning corporate debt issues, stimulating the equity market; andimplementing plans to establish a new stock exchange in order to develop thesecondary market for securities.

3.19 The Bank Group is assisting the Government to bring about thesedevelopments in sevex.-l ways. IFC is providing technical assistance to theCapital Markets Board. Programs have been agreed to and are being implementedto adopt a system of standardized accounts for companies making public issuesof securities, and to enact a law regulating the activities of externalauditors and providing for the opening of the Stock Exchange. Finally, theGovernment-Bank dialogue on these matters, initiated in the context of theIFC's TA program and to be pursued through a possible financial sector loan(para. 3.16), should assist in improving the institutional, supervisory anddevelopmental framework of the capital markets in parallel with measuresalready planned to strengthen primary markets for securities and activateequity markets through the opening of a new stock exchange. These measureswill have an impact on medium and large-sized enterprises both directly byfacilitating access to sources of equity, and indirectly by increasingcompetition with the banking system and thereby increasing the availability ofand reducing costs of short and medium-term financing.

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(iv) Local Currency Resources of Development Banks

3.20 In addition to the problems related to the use of foreign exchangefunds discussed above (para. 3.10), the four major development banks in Turkey(TSKB and SYKB in the private sector and DYB and DESIYAB in the public sector)face a common problem: lack of access to local currency resources. The twoprivate sector development banks (TSKB and SYKB) are also inhibited fromcompeting with commercial banks because their shares are mostly owned by theleading commercial banks and both are dominated by a single shareholder, IsBank. The continuing dialogue between the Government and the Bank on theseissues in this context of a possible financial sector loan is intended toaddress these medium-term issues by seeking an increase in private sectordevelopment banks' share of medium and long-term loans in the Central Bankdiscowit facility and stricter requirements of project evaluation bycommercial banks to participate in the facility. As regards the proposedproject, HB is a deposit money bank and does not face constraints similar todevelopment banks in mobilizing local currency resources. SYKB has projectedan increase in its local currency loans of only 332 p.a. in nominal termsduring 1985-38 and does not foresee any difficulty in meeting the fundrequirements from its traditional sources, viz. Central Bank rediscountingfacility, capital increases and internal generation of funds.

IV. THE PROJECT

A. Project Objectives and Description

4.01 The proposed project will assist in the development of efficientlabor-intensive industries, mainly in the SMI category, here- Turkey hascomparative advantage and thus contribute both to job creation and growth ofmanufactured exports. The project will place special emphasis on assistanceto small scale industrial enterprises, particularly those located in remotearea of the country, through Halk Bankasi (HB) which has a widespread branchnetwork. The project will also concurrently assist in developing financialintermediaries capable of providing term finance and financial services to SMIin an efficient manner and thus improve SMI's access to term finance.Finally, the project will help start a national program of technicalassistance for SMI involving both private and public sector institutions toprovide a range of technical and management services to SMI in a costeffective manner. In order to achieve the above objectives, the projectincludes (i) credit lines of US$80 million and US$18.4 million for SinaiYatirim ve Kredi Bankasi (SYKB) and Halk Bankasi (HB) respectively; and (ii)technical assistance of US$1.25 million for SMI to be implemented by the SmallIndustry Development Organization (SIDO), and US$350,000 for the institutionalstrengthening and efficiency improvements of RB. On the basis of pastoperations and project pipeline of SYKB and RB, and overall financial needs ofthe SMI sector, it is anticipated that most of the subprojects to be financedunder the loan would be for the manufacture of food products, ready-madegarments, furniture, leather products, and metal works and engineering. Theproject objectives support those in the Five Year Plan (para. 2.18), and areconsistent with the Bank's strategy and lending objectives in Turkey (paras.2.23-2.25).

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B. Financial Intermediaries

(i) Sinai Yatirim ve Kredi Bankasi (SYKB)'-'

4.02 The Institution: SYKB was established in 1963 by five majorcommercial banks in Turkey, to meet the investment financing needs of theprivate industrial sector. Its paid-in capital is TL 2,000 million of which60% is owned by Is Bank-the largest bank in Turkey--and the remainder isequally divided among the four other banks. It has very competent managementand staff. The total professional staff of SYKB was 49 in December 1984; thisincluded 9 engineers and 24 economists/financial analysts and their totalnumber has increased by 50% during the last four years. The staff isexperienced and has been provided with adequate training in project appraisaland supervision. SYKB plans to increase its staff gradually and the totalmember of engineers and economists would reach to 54 by 1988; this would beadequate to meet projected operational requirements. SYKB's internal stafftraining arrangements are satisfactory and it does not need special project-related training.

4.03 SYKB's operational and financial policies are laid down in its policystatement of January 1979 which is designed to ensure sound lending operationsand a strong finnncial position. SYKB's appraisal procedures are satisfactoryas indicated by the review of subprojects financed by SYKB under the Bank'sloans for the textile industry (Loan 1755-TU) and labor intensive industry(Loan 1952-TU) projects. As regards project supervision, there is scope forits further strengthening by closely following the details of supervisionsystem agreed with the Bank under the labor-intensive industry project. Inparticular, SYKB staff has to increase the frequency of visits to all projectsunder implementation (at least once every six months) and to monitornon-financial aspects of projects (including physical implementation andtechnical and marketing aspects) on a regular basis. SYKB managementcoanfirmed that its staff has been instructed to carry out above improvements

4.04 Operations and Financial Positaon: Total loan approvals of SYKB haveincreased from TL 2,765 million for 29 projects in 1980 to TL 16,782.9 millionfor 83 projects in 1984. The increase in real terms during the period was 14%p.a. and the number of projects almost trippled which is quite impressive.Local currency loan approvals were 33% of total loans during the 1980-1984period. The foreign currency loans increased from US$17.4 million (13 innumber) in 1980 to US$22.0 million (46 in number) in 1982 but declined toUS$18.1 million (41 in number) in 1983, due to reluctance of sub-borrowers toaccept foreign exchange risk (para. 3.13). Foreign currency loan approvals,however, increased to US$37.7 million (66 in number) in 1984 with theintroduction of the Foreign Exchange Risk Insurance Scheme (FERIS) (para.3.13). SYKB has continued financing priority projects which have obtainedCertificates of Encouragement from the Government. The projects assisted bySYKB have high labor-intensity, particularly in more recent years. It isestimated that about 26,000 direct jobs would be created by projects which

1/ For details, see Annex 2.

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received loans from SYKB for fixed investment during 1980-1984 period, with anestimated average cost per job (excluding land and buildings) of US$19,726 in1980, US$20,720 in 1981, US$7.975 in 1982, US$11,111 in 1983, and US$8,247 in1984.

4.05 SYKB's net income as percentage of equity has increased from 22% to32% in 1980-84. Its administrative expenses in relation to total assets haveremained at around 2% which is satisfactory. SYKB's average interest spreadfor the last few years has been about 10% p.a. which is high mainly due tocharging interest from the date of loan commitments and interest free loans(TL 725.4 million as of September 30, 1984) from shareholding banks. (Thespread would, however, reduce to 6.5X by 1988 mainly due to the conversion ofshareholding banks' loans into equity and increase in the share of loans inthe total resources of SYKB). The returns to shareholders in nominal terms ontheir capital and loans to SYKB (received in the form of annual dividends)have gone up from a low of 1 in 1980 to 32% in 1984 which are still low,compared to interest rates on term deposits or other financial instruments inTurkey. The long-term debt/equity ratio has gone up from 4.2:1 at the end of1980 to 8.6:1 at the end of 1984 which is within the maximum limit of 9:1agreed with the Bank under the labor intensive industry project. At the endof 1984, the current ratio was 1.9:1 and showed a satisfactory liquidityposition. SYKB's arrears and loans affected by arrears of more than threemonths were 2.5% and 14.71 respectively of the total loan portfolio onDecember 31, 1984 and were reasonable.

4.06 According to SYKB's financial projections, its return on equity wouldincrease to 45Z in 1988 and its liquidity and long-term financial positionwould continue to be satisfactory. In view of its sound financial position,it is proposed to increase the debt/equity limit of SYKB from 9:1 to 10:1under the proposed project.

4.07 SYKB's audit has been performed satisfactorily by independentauditors who have given unqualified audit reports.

4.08 Bank-financed Operations: SYUB has so far received two loans ofUS$15 million (Loan 1755-TU) and US$40 million (Loan 1952-TU) from the Bank insupport of the development of textile industry and labor-intensive industry,respectively. Due to reluctance of firms to incur foreign exchange risk, thelast date for loan commitments was extended for both Loens. With the help ofthe 1984 FERIS, the two loans were almost fully committed (textiles 1001 andlabor-intensive 99%) by December 31, 1984. SYKB has approved 112 subprojects(net of cancellations) with a total amount of US$39.5 million up to December31, 1984 under the Bank loan for labor-intensive industries. About 38% of theloan amount has been approved for SSI subprojects against the original targetof 33%. Subprojects assisted under the loan would create about 8,600 jobs atan average cost of US$8,700 each (excluding land and buildings). The ERR andFRR were calculated for subprojects with fixed investment of above US$750,000each and these ranged between 16Z to 45% and 19.6% to 54% respectively.SYKB's performance in utilizing the loan as reflected by good quality ofsubproject appraisal, financing of a large number of SSI subprojects and lowcost per job, has been very satisfactory.

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4.09 Proposed Bank Loan: Total foreign currency loan commitments of SYKBduring the 1986-1988 period are estimated at US$171 million. The proposedBank loan of US$80 million and an expected loan of US$35 million form EIBwould meet the bulk of the resource requirements. The unidentified resourcegap may be met from existing or new sources (e.g. KfW).

4.10 The proposed Bank loan of US$80 million would be used by SYKB tofinance mainly labor-intensive small and medium scale industry projects. Thedefinition of SSI, SMI and the cost of per job criteria for assistance will bethe same in real terms as under the last labor-intensive industry project.The definition of SSI subprojects would include new projects with maximuminvestment limit, excluding land and building, of US$500,0001' and expansionprojects with a limit of US$650,000." For medium-scale industry projects(MSI) the respective maximum investment limits would be US$2.5 million andUS$3.5 million1' for new and expansion projects. At least 80X of the loanwould be reserved for financing SMI projects and, within this limit, at least30% of the loan would be onlent to SSI. All eligible subprojects will have amaximum capital investment (excluding land and buildings) of US$18,0001' perjob. Non-SMI projects which satisfy the cost per job criteria and areconsidered export-oriented based on Certificates of Encouragement would beeligible for financing from the balance of the loan proceeds (up to a maximumof 20% of the loan to SYKB). This would allow SYKB leeway in financing asmall number of subprojects which, besides being labor-intensive, were alsoexport-oriented. The Bank's experience has shown that such subprojects couldbe somewhat bigger than typical SMI subprojects because of the need to captureeconomies of scale. As a consequence of SYKB's policy guidelines, regardingthe size of subloans, the maximum subproject and subloan sizes for theselarger subprojects are expected to be in the range of US$4-5 million andUS$2-2.25 million respectively, i.e. not significantly larger than thesubprojects that would belong to SMI category under the loan.

4.11 As agreed under the labor-intensive industry project, SYKB willcalculate economic and financial rates of return for all subprojects receivingterm financing and having total investment in fixed assets exceedingUS$750,000 equivalent. The eligible subprojects will also have a minimumeconomic rate of return of 1Z% and a minimum financial rate of return whichwill be not less than the Central Bank's rediscount rate for the industrialinvestment loans at the time of subloan approval.

(ii) Halk Bankasi (HB)!-'

4.12 Role of HB in the Proposed Project: The Bank has endeavored underits industrial credits to Turkey to diversify its assistance on a geographicalbasis and to enhance the support to SSI. The achievement of these objectiveshas been constrained by the inadequate branch network of DFCs in Turkey andthe lack of interest of commercial banks in assistance to SSI.

1/ All in end-1984 prices.

2/ For details, see Annex 3.

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4.13 The Balk Bankasi (HB) is a specialized bank in Turkey which catersmainly to the credit needs of small traders, artisans, and SSI and mobilizessmall savings. It has been established on the pattern of "popular banks" inmany European and Asian countries and is a member of the International PopularCredit Confederation.L' HB has a large branch network (para. 4.14)whichprovides easy access to small enterprises all over the country. It hasrecently received technical assistance from the Federal Republic of Germany(to be continued up to 1987) which includes advisory services to assist thehead office and selected branches of RB in the policies, procedures andcriteria of assisting SSI, particularly small metal and wood-working andprocessing industries.' In view of the above and considering that theGovernment and the chief executive of EB are keen to enhance its developmentalrole, the Bank can provide technical and financial assistance to HB and, thus,help in the development of SSI on an extensive basis. At this stage, it isproposed that the Bank support the institutional strengthening of HB andprovide technical assistance (para. 4.17) for this purpose. In addition, arelatively small amount of the loan (US$18.40 million) is proposed to beprovided for onlending to SSI through HB (para. 4.21) as a pilot project. Thetechnical and financial assistance programs are designed to lay the basio forfurther Bank assistance to HB and the SSI sector.

4.14 The Institution: HB was established in 1938 as a State Enterprise(SEE) to provide specialized banking services for the promotion of smallbusinesses. The Ministry of Finance is the main shareholder of HB as it holds95% of HB's paid-in capital of TL 11.5 billion (US$26.4 million as of December1984). HB operates from its head office in Ankara and regional offices inIstanbul and Izmir as well as its 598 branches and 9 foreign currency bureausthroughout Turkey. Its management and senior staff have generally longbanking experience. During the last five years (1979-84). the number of RBstaff increased by 27Z to 11,726 of which 4,260 (36X) are in managerial andexecutive positions.

4.15 HB's lending operations are governed by four different creditdepartments, each having its own specialization including one for theindustrial sector. RB has an established system of delegation of loanapproval authority from the Board to branch managers. The branches areauthorized to approve loans up to their permitted limit. The limit variesamong different branches depending upon their size and it can go up to TL 25million. Most of the day-to-day banking operations are therefore carried outat the branch level.

4.16 HB has followed conservative commercial banking practices. Althoughits decisions on investment loans are made after a review of technical,financial and market aspects of the project, the financial structure of the

1/ An international organization playing an active role in bringing together"popular banks" and institutions engaged in the development of smallbusinesses for the purpose of sharing their knowledge and experience.

2/ Bank's proposals for the institutional strengthening of HB take intoaccount the detailed discussions that Bank staff had with the lead advisorprovided under the TA from the Federal Republic of Germany.

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borrowers and the collateral of the loan are given high importance. There isa need for more project-oriented lending by HEB by increasing the emphasis onproject viability rather than the loan collateral and directing/coordinatingtechnical assistance to SSI. This objective is proposed to be achieved byincreasing the number of professional staff for industrial projects, appoint-ment of a training officer for preparation and implementation of trainingprograms in project appraisal and supervision, adoption of an appropriatepolicy statement, and active coordination with the Small Industry DevelopmentOrganization (SIDO). HB has already appointed additional professional staff(8 financial analysts/economists) for the immediate needs of the IndustrialCredit Department and completed the training of a core staff with other DFCsin Turkey. It has also adopted a policy statement acceptable to the Bank.During negotiations, assurances were received from HB on the appointment of atraining officer before sending the first withdrawal application under asub-loan. The proposed loan includes technical assistance of US$50,000 forthe training of HB's staff in foreign institutions. As HB would need toincrease the number of engineers from 66 to 100 and the number ofeconomists/financial analysts from 32 to 70 by 1987 to meet the targets of itsprojected industrial investment operations, assurances were also received fromRB on an appropriate annual recruitment plan to meet the above target.

4.1/ While the above measures would help to bring an immediate improvementin the capability of HB to identify, appraise, and supervise industrialprojects, an in-depth review of its overall institutional structure wouldenable adjustments which may be called for (i) to respond effectively to thenew and growing role of HB, particularly with respect to greater development-orientation in its operations; and (ii) to improve cost and operationalefficiency. A technical assistance of US$300,000 is, therefore, proposed forHB to undertake a study which would review mainly (a) organizationalstructure, policies, and procedures; (b) accounting, internal auditing andmanagement information system; and (c) the developmental role of HB. Thestudy would also make recommendations for further institutional strengtheningof HB and means to improve efficiency. The findings and recommendations ofthe study will form the basis for preparation of an action program andtimetable for its implementation by HB, in consultation with the Bank. Theterms of reference of the study (Annex 3, Attachment 2) were agreed duringnegotiations.

4.18 Operations and Financial Position: During the 1981-1984 period, HB'stotal loans increased by 1.5% p.a. in real terms and amounted to TL 207billion (US$ 475 million) at the end of 1984. The Industrial CreditDepartment which has the overall responsibility for loans to SMI for workingcapital and investment purposes accounted for 25% of total portfolio of HB asof December 31, 1984. The industrial credit portfolio (including both shortand long-term loans) increased by 1% p.a. in real terms during 1981-84 andamounted to TL 48 billion (US$110 million) at the end of 1984. The creditavailable for investment to the small businesses and industry-i' out of this

1I/ This breakdown is based on BB's own internal definitions of SSI and M1SI.SSI includes very small euterprises, i.e. those with less than 25employees and less than TL 80 million (US$ 190,000) capital investment(excluding land and buildings). MSI enterprises are those having capital(excluding land and buildings) between TL 80 million to TO 300 million(US$190,000 to US$700,000).

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department was TL 21 billion (US$48 million) at the end of 1984; an increaseof 4Z p.a. in real terms during 1981-1984. The working capital loans wereabout 70Z of total loans made in 1984; the balance of 30X being for fixedinvestment.

4.19 Although HB is not a profit-motivated institution, its net profit aspercentage of equity was 19Z in 1982, 12% in 1983, and 25Z in 1984. The majoradjustments in deposit and lending rates in the last few years have beenresponsible for the deviation in the net profit of HB. HB's average interestspread was 7% in 1982, 6Z in 1983 and 9X in 1984 which is high frominternational st-ndard. HB's administrative expenses as a share of totalassets between 1981-1984 have also been high at 3-4% mainly due to the largenumber of branches and the small size of sub-loans of HB. At the end of 1984,the total debtl/-equity ratio of HB stood at 12:1 which is low for acommercial bank and well within the maximum limit of 20:1 required by theCentral Bank for all commercial banks.2 / HB follows sound liquiditypolicies and complies with the liquidity reserve requirement of the CentralBank. Total arrears for all credits of HB at the end of 1984 were TL 8.1billion (USt 18.6 million) or 3.9Z of the loan portfolio, which is on the lowside. HB's financial projections show that its return on equity will be about18X in the next four years and that it will maintain a satisfactory liquidityand long-term financial position.

4.20 HB's financial statements are audited by BLxsbakanlik Yuksek DemetremeKurulu (Supreme Board of Auditors) in the Prime Minister's Office. The auditis carried out in accordance with the Government's requirements for the stateenterprises and is considered acceptable by the Bank. HB's accounts have beenfound satisfactory by the auditors.

4.21 Proposed Bank Loan: The proposed Bank loan of US$18.40 million wouldbe used by HB to finance labor-intensive subprojects in the SSI category onlyas defined in para. 4.10. Furthermore, within SSI category, RB willconcentrate its financing on very small enterprises, which is the main area ofis operations. It will thus use at least 70% of its share in the Bank loan(US$13 million) for assistance to subprojects with total fixed assets,excluding land and buildings, not exceeding US$200,000 in 1984 prices.3/The proposed loan would meet about 37% of investment fund needs of HB (i.e.Investment Credit Department) on commitment basis for financing theprocurement of machinery and equipment by small industrial enterprises during1986-88, the balance coming mainly from paid-in capital, term-deposits, and aloan of DM 10 million from KfW.

1/ Includes short-term and long-term deposits and borrowings.

2/ In view of this general limit and considering that HB is an almost fullyGovernment-owned commercial bank, a separate long-term debt/equity limitis not considered necessary for HB.

3/ This limit is almost equivalent to the present SSI limit of TL 80 millionused internally in HB.

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C. Technical Assistance Program for SMIl/

4.22 Turkey's industrial sector is at a fairly advanced stage ofdevelopment compared to most developing countries. The technical assistanceneeds of SHI are relatively sophisticated and include access to improvedproduct designs, production technology, management methods and marketingskills, particularly for competing in export markets. There is a need todevelop inter-firm linkages between SMI and larger firms to allow SMI accessto national and international markets. Until now, SMIs have had very limitedaccess to existing institutional sources of technical assistance because theseinstitutions were not geared towards serving the needs of smaller firms. In1970, with the support of UNDP/UNIDO, the Government established the SmallIndustry Development Organization (SIDO) with a pilot project in Gaziantep inEastern Turkey to assist small enterprises of that district. The Gaziantepfacilities comprise a demonstration center for metal working industries. Thepilot project has not been successful primarily because of the incompatabilityof its relatively complex machinery and technology with the needs of most ofthe small enterprises in the area for relatively simple knowhow and the lackof an effective extension service for SMI.

4.23 In June 1983, the Government decided to substantially strengthenSIDO. SIDO became a semi-autonomous body of the Ministry of Industry andTrade (MOIT) with the mandate of providing technical assistance to SMI on anation-wide basis. At the same time, UNDP approved a three-year project at anestimated cost of $9l2,000 to assist SIDO establish a demonstration center cumcommon facilities for small foundries in Ankara, which is under implementation.

4.24 In the light of its experience with the (Mziantep pilot project,SIDO's management has adopted a new strategy to assist SMI. The new strategycalls for SIDO to build up a decentralized network of branch offices staffedwith multidisciplinary extension teams. Each branch office would promotetechnical assistance by visiting and undertaking diagnostic surveys of SMIfirms to assess their individual problems and needs and refer firms needingspecialized assistance to appropriate experts or institutions capable ofproviding such services. The firms will receive in-plant services tailored totheir specific needs with minimum disruption of work. Also, SIDO will becomea catalyst in mobilizing existing sources of technical, marketing, trainingand management expertise to assist SMI rather than attempting exclusively onits own to service all the diverse technical assistance needs of SMI.

4.25 SIDO currently employs a total staff of 72 (16 professionals) ofwhich 66 are at Gaziantep and the remaining 6 are at Ankara headquarters.SIDO's present management has considerable experience in small industrydevelopment and appears competent. SIDO's operations are reviewed by agoverning body chaired by the Deputy Under-Secretary of MOIT and includes arepresentative of Halk Bankasi (HB). However, SIDO's organization andstaffing need substantial strengthening to implement effectively its newdevelopment strategy.

1/ For details see Annex 4.

- e0 -

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4.26 The proposed project component will assist in the implementation ofthe new development strategy of SIDO (para. 4.24) with a modest beginning. Itwill provide assistance to SIDO over a three-year period to (i) develop adecentralized organization structure and strengthening management and staffcapabilities; (ii) develop an effective extension service through six branchoffices; (iii) develop a computerized information system (a) to monitor andmanage the decentralized technical extension program; and (b) to meet theinformation needs of SMI and promote inter-firm production and marketinglinkages; and (iv) develop an efficient system including a financial mechanismto promote other specialized institutions and private consultants in assistingSMI. The impact of SIDO's new development strategy as well as the range andcost-effectiveness of its overall activities, including the role of twodemonstration centres at Gaziantep and Ankara, will be reviewed by theGovernment with SIDO in mid-1987 and in end-1988 (which would be the middleand end respectively of the implementation of the TA component of the project)and the findings and conclusions will be discussed with the Bank with theobjective of adjusting/redirecting the strategy and future activities of SIDO,if necessary.

4.27 The major elements of this project component (see Chart 1 for summarydescription) include advisory assistance, overseas training for SIDOmanagement and staff, equipment and reference information, materials andfunding for consulting assistance for SMI firms to resolve complex andspecialized problems. The foreign exchange cost of the project component isestimated at $1.25 million. The local currency needs of SIDO to implement theproject component, and to meet its operating costs are estimated at TL 330million in constant 1985 prices.

4.28 The proposed work program will be a substantial addition to SIDO'sexisting activities involving significant increases in its branches and staff,introduction of a new computerized information system, provision of extensionservices, promotion of sub-contracting, etc. To ensure that the technicalassistance component of the project is adequately implemented and that theexpansion of SIDO activities is carried out on schedule, a supplementaryproject monitoring procedure will be instituted in addition to normal projectsupervision as follows: (i) copies of final reports by foreign advisors toSIDO will be sent to the World Bank for review and conmment; briefing anddebriefing sessions will be held with the advisors as appropriate; (ii) SIDOwill prepare a semi-annual progress report for the World Bank; (iii) SIDO willprepare a more complete annual report detailing activities, expenditures andresults as related to the annual goals under the program; and (iv) SIDO willmaintain separate accounts for the expenditures under the proposed technicalassistance component. These accounts will be audited and submitted togetherwith the annual accounts of SIDO for the Bank's review.

4.29 Assurances were received from the Government during negotiations thatit will provide to SIDO all the funds necessary to implement the above programand will commit SIDO to implement the new development strategy, build up itsorganization structure including branch offices, hire and train additionalstaff, introduce new information system and procedures, implement thetechnical assistance component of the project according to an agreed timetableand submit periodic reports on the implementation of the project.

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V. MAIN FEATURES OF THE LOAN

A. The Borrower and Loan Conditions

5.01 Lending and Relending Arrangements: The Government will be theborrower of the proposed loan of US$100 million. The Government will onlendthe respective loan amounts to SYKB and HB, including the technical assistancecomponent of US$350,000 to HB, and transfer the technical assistance funds ofUS$1.25 million to SIDO. The Government will repay the loan to the Bank overa fixed period of 15 years including a grace period of 3 years. SYKB and HBwill make subloans normally of 8-10 years but in no case more than the loanmaturity period. They will repay the loans to the Government commensuratewith the aggregate amortization schedule of individual subloans. HB willrepay the technical assistance component of US$350,000 over 15 years. TheGovernment will be responsible on behalf of SIDO, for the repayment oftechnical assistance component of US$1.25 million. The execution ofsubsidiary loan agreements, acceptable to the Bank, between the Government andSYKB and HB, will be a condition of loan effectiveness.

5.02 Interest Rates and Foreign Exchante Risk: As elaborated inparas.3.13 and 3.14, the proceeds of the Bank loan will be onlent tosub-borrowers either under FERIS or in foreign exchange. Under FERIS, theGovernment will lend Bank funds to SYKB and HB at a fixed rate equal to theonlending rate to sub-borrowers minus the intermediation cost of 42.Alternatively, Bank funds would be lent in foreign exchange.to SYXB and EB ata fixed interest rate equal to the then prevailing Bank rate plus 0.75S tocompensate the Government for bearing the risk arising from the variability ofthe Bank's interest rate. The onlending rate to sub-borrowers will be fixedat 5S above the Bank rate prevailing at the time of sub-loan approval. Theonlending rates to sub-borrowers would be positive in real terms over the lifeof sub-loans based on projected inflation (para. 3.09).. These arrangementswould ensure that onlending rates are: (i) free of any subsidy from theGovernment, (ii) comparable to interest rates on other similar funds inTurkey, and (iii) provide a reasonable spread to SYKB and HB.

5.03 Free Limit: In view of the generally satisfactory quality of projectappraisal under the textile and labor-intensive industry projects, SYKB's freelimit for subloans is proposed to be US$1.25 million; all subprojects abovethis limit will require prior approval of the Bank based on a full review oftheir viability to be submitted by SYKB in the form of an appraisal report.On the basis of experience under the labor-intensive industry project and theproject pipeline of SYKB, it is estimated that the total number of subprojectsto be financed by SYKB would be about 200 of which about 101 by number and 351by amount would be above the free limit. While all SSI subprojects would bebelow the free limit, about 502 of the subprojects in MSI category wolild beabove the limit and would require the Bank's prior approval.

5.04 The free limit for HB's portion of the loan is proposed to be kept ata low level of US$150,000 because it would be financing small subloans andthis would be the first Bank loan to HB. Also, EB will submit for the Bank'sapproval the appraisal of the first five subprojects irrespective of the sub-loan amount. This would give an opportunity to the Bank to review the quality

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of project appraisal of HB and to provide necessary advice and guidance to itsstaff at an initial stage. In addition, HB will make available to the Bank'ssupervision missions 10X of the subprojects with loan amounts of US$100,000-US 150,000, to be identified by the Bank's staff, for an ex-post review. Itis estimated that HB will use the loan proceeds to finance about 500 sub-projects of which 10X by number and 30X by amount would be above the freelimit.

5.05 Closing Date: On the basis of resource requirements of, and theexpected pace of utilization of loan proceeds by SYKB and HB, the last datefor submission of subloan applications to the Bank will be June 30, 1988; thelast date for submission of applications will not apply to the technicalassistance component. The closing date of the loan will be June 30, 1992.

B. Procurement and Disbursements

5.06 The subloan proceeds of US$98.4 million (US$80 million for SYKB andUS$18.4 million for HB) will be used to finance the full costs of acquiringimported machinery and equipment (including the foreign costs of know-howacquisition, commissioning and training costs incurred with the initialinvestment) and the initial stock of imported raw materials and spare parts.In addition, Bank funds will be used to finance 70X of the cost of importedmachinery and equipment procured off-the-shelf in the domestic market, and tofinance 50Z1' of the cost of domestically produced machinery and equipment,net of taxes, reflecting the imputed import content of such items. Thetechnical assistance component of US$1.6 million (US$1.25 million for SIDO andUS$350,000 for HB) will be used to finance the full cost of importedequipment, engaging the services of advisors and consultants and foreigntraining of SIDO and HB staff.

5.07 The procurement procedures will be consistent with those providedunder the labor-intensive industry project. SYKB and HB will require theirsub-borrowers normally to obtain at least three bids from suppliers eligibleunder Bank guidelines. However, small items costing less the' US$10,000 andproprietary items will be purchased by direct contracting. Goods and serviceswill be procured by SIDO through international shopping or ICB in accordancewith Bank guidelines.

5.08 The estimated disbursement schedule of the loan is g ren in Annex 5.This is based on actual disbursement profiles of the IDF sub-sector in theEMENA Region for 1974-83. Disbursement of funds will normall- be done againststandard documentation. A Special Account (Revolving Fund) will beestablished in the name of the borrower (i.e. the Government) and it will have

1/ The last labor-intensive indu;stry project had provided for the financingof 40X of the cost but it is now proposed to be increased to 50Z becausethe devaluation of TL has been higher than domestic inflation in the lastfour years, thus increasing the imputed import content by at least 10percentage points.

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sub-accounts for SYKB, HB and SIDO for disbursement purposes. An amount ofUS$6 million will be initially deposited by the Bank in the Special Account.The Account will be maintained in US dollars.

5.09 As a large number of subloans of HB will be very small in size withonly one contract of up to US$20,000, Statement of Expenditures (SOE) will beused for reimbursements of contracts of up to US$20,000. SYKB and HB willsubmit a monthly SOE giving information on amounts of individual subloans,amount of payments, purpose of loans, name and address of machinery suppliers,and the country of origin of the machinery. All supporting documents fordisbursements covered under SOE will be made available on request, to theBank's supervision missions. Also, an independent auditor will verify all SOEand the Special Account within five and six months respectively for SYKB andHB after the end of each of their financial year and his report will besubmitted to the Bank.

C. Status of Project Preparation

5.10 Both SYKB and HB have a well-developed project pipeline and sub-loancommitments are expected to commence immediately upon loan effectiveness. HBhas employed and trained additional professional staff for the immediate needsof its Industrial Credit Department. The terms of reference of the study forthe institutional strengthening of HB have been agreed and the selection ofconsultants is expected to be completed by June 30, 1986. SIDO has alreadygot core staff in position and does not foresee any difficulty in therecruitment of additional staff to implement the technical assistance programfor SMI. The terms of reference for the advisors to be employed by SIDO underthe project have been agreed and their selection would be made in accordancewith the timetable agreed during negotiations.

D. Reporting

5.11 SYKB will submit to the Bank periodic reports, as under thelabor-intensive industry project. These reports will include summary ofoperations, progress on utilization of loan and annual accounts and auditreports. Similar reports will also be submitted by HB. SIDO will submitquarterly reports on the progress in implementation of various components ofTA program for SMI. SYKB, BB, and SIDO will also submit a project completionreport.

E. Project Benefits and Risks

5.12 The project will support the development of labor-intensive SKI inwhich Turkey has comparative advantages. This would, in turn, createproductive jobs at relatively low cost and contribute to exports ofmanufactured goods. Although the maximum limit for the cost per job(excluding land and buildings) is US$18,000, it is estimated, based on theexperience under the labor-intensive industry project, that the average costwould be about US$16,000 as compared to the average of US$120,000 in themanufacturing sector as a whole. Thus, about 18,000 direct jobs will be

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provided by subprojects to be financed under the project. The project wouldalso use, for the first time, HB as a financial intermediary which has branchoffices all over the country. As a result, investment funds would becomeaccessible to SSI and artisans located outside the main urban centres. Thiswould contribute to a balanced industrial development at the regional level.The project would also assist HB in developing the project appraisal andsupervision capability and to promote its developmental role as well as itsoverall institutional strengthening and efficiency improvement throughtechnical assistance. The role of HB in the project is of a pilot nature but,based on a satisfactory experience, HB can play a much bigger role in theBank's future assistance to SSI. Technical assistance for SMI would initiatethe development of institutional capability in Turkey to provide extensionservices to SMI and to facilitate sub-contracting on a national basis. Thiswould result in improved productivity and efficiency of SMI and thedevelopment of a much-desired complementary relationship between SSI andlarger industries. Upon the completion of the TA program, SIDO would be ableto provide assistance and guidance to about 350 SMI enterprises, train about200 entrepreneurs and to develop about 900 company profiles per year.

5.13 The project risks relate to mainly two areas: meeting of investmenttargets by the intermediary banks and implementation of technical assistanceby SIDO. The private sector investment situation has been uncertain in Turkeyin the recent past mainly due to very high real interest rates on workingcapital loans, adverse effects of large devaluation of Turkish Lira on thedebt-servicing burden of enterprises which had carried exchange risk on theirforeign currency borrowings, and slow recovery of domestic markets in manyindustries. The Government's policies for the promotion of private sectorinvestment, the emphasis on development of industries with comparativeadvantages in export markets, and the FERIS scheme have helped to revive theprivate sector investment. A reversal in this situation may slow down theinvestments by SYKB and HB and the utilization of the proposed loan. However,the present Government is fully committed to the promotion of the privatesector. Also, the proposed loan is expected to meet only a part of demand forfunds on SYKB and HB (paras. 4.19 and 4.46). It is therefore unlikely thatSYKB and HB will experience significant delays in the utilization of theproposed loan. As regards SIDO, it has been operating in only two areas ofTurkey with a relatively s:iall staff who have generally limited practicalexperience. Also, the equipment and information resources at SIDO areinadequate. These factors introduce an element of risk in the proposedtechnical assistance component of the loan which would require substantialincrease in staff and tax the management resources of SIDO. However, as thedesignated Government unit to provide technical assistance to SMI, SIDO is thelogical choice for strengthening. The activities outlined under the technicalassistance component are designed to improve the administration capabilitiesand services of SIDO for SMI, and to further enlarge the scope of SIDO'sefforts through the backup resources of other organizations. In addition, theBank staff would need to cli ely monitor the implementation of technicalassistance and SIDO's activi:ies. The risks are therefore reasonable andshould be accepted considering the potential benefits of the project.

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VI. AGREEMENTS AND RECOMMENDATIONS

6.01 The Bank has reached agreement with the Government, SYKB, and HB onmaking a loan of US$100 million. The Government will (i) onlend US$80 millionto SYKB and US$18.4 million to HB for onlending to eligible enterprises in theindustrial sector in Turkey (para. 4.01), (ii) onlend US$0.35 million to HEBfor the preparation of a study for its institutional strengthening andimprovements in efficiency and staff training (para. 4.17), and (iii) allocateUS$1.25 million to SIDO to implement the program of technical assistance toSKI enterprises (paras. 4.22-4.29).

6.02 Agreement was reached with the Government on the following mainpoints:

(i) The Government will implement the TA program for SMI through SIDO(paras. 4.22 to 4.29).

(ii) The Government will make the necessary funds available to SIDO forimplementing and operating the TA program for SMI (para. 4.29).

(iii) The impact of SIDO's new development strategy as well as the rangeand cost-effectiveness of its overall activities, including the roleof two demonstration centres at Gaziantep and Ankara, will bereviewed by the Government with SIDO in mid-1987 and end-1988 and thefindings and conclusions will be discussed with the Bank with theobjective of adjusting/redirecting the strategy and activities ofSIDO, if necessary (para. 4.26).

(iv) The repayment term of the loan will be 15 years including a graceperiod of 3 years (para. 5.01).

(v) The proceeds of the Bank loan will be onlent to sub-borrowers eitherunder FERIS or in foreign exchange. Under FERIS, the Government willlend Bank funds to SYKB and HB at a fixed rate equal to the onlendingrate to sub-borrowers minus the inter- mediation cost of 4%.Alternatively, Bank funds would be lent in foreign exchange to SYKBand HB at a fixed interest rate equal to the then prevailing Bankrate plus 0.75Z to compensate the Government for bearing the riskarising from the variability of the Bank's interest rate. Theonlending rate to sub-borrowers will be fixed at 5% above the Bankrate prevailing at the time of sub-loan approval (para 3.14).

(vi) The Government will sign, before loan effectiveness, subsidiary loanagreements with SYKB and HB, acceptable to the Bank (para. 5.01).

6.03 Assurances have also been received from the Government to ensure thatSIDO implements the technical assistance program which would include theappointment of advisors and additional staff in SIDO, staff training,procurement of equipment and reference material, establishment of branches,strengthening of extension activities, development of information system,provision of technical advisory services, and submission of periodical reportsto the Bank; as elaborated in paras. 4.22-4.29 and Annex 4.

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6.04 Agreement was also reached with SYKB and HB on the following points:

(i) The following definitions will be used for SSI and SMI enterprises(para. 4.10):

(a) SSI - Fixed assets, excluding land and buildings, up toUS$500,000 for new projects and US$650,000 for expansionprojects.

(b) SMI - Fixed assets, excluding land and buildings, up to US$2.5million for new projects and US$3.5 million for expansionprojects.

All values are in 1984 prices and would be adjusted according to theinternational inflation index.

(ii) All enterprises eligible for financing under the proposed Bank loanwould be labor-intensive with an average capital investment(excluding land and buildings) not exceeding US$18,000 per job in1984 prices (para. 4.10).

-iii) SYKB and HB will onlend the loan proceeds to eligible enterprises forterms not exceeding 15 years including a grace period of up to 3years (para. 5.01).

(iv) The loan repayment by SYKB and HB will be according to the aggregateamortization schedules of individual sub-loans, except for thetechnical assistance of US$350,000 for HB will be repaid in 15 yearsincluding a grace period of 3 years (para. 5.01).

(v) SYKB will use at least 80% of its share of loan proceeds to financeSMI and within the above limit it will use at least 30X of loanproceeds for onlending to SSI (para. 4.10). HB will use its share ofloan proceeds for onlending exclusively for the financing of SSI andat least 70% of the above amount will be channelled to very smallSI, i.e. enterprises with fixed assets, excluding land andbuildings, not exceeding US$200,000 (para. 4.21).

(vi) The free limit will be US$1.25 million for SYKB (para. 5.03) andUS$150,000 for HB. The first five sub-projects of HB will be treatedas above the free limit irrespective of their size (para. 5.04).

(vii) The last date for submission of sub-loans will be June 30, 1988, andthe closing date will be June 30, 1992 (para. 5.05).

(viii) ERR and FRR will be calculated by SYKB for all sub-projects withtotal investment cost of above US$750,000. The minimum ERR will be12% and minimum FRR will be not less than the Central Bank'srediscount rate for the industrial investment loans at the time ofsubloan approval (para. 4.11).

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(ix) The debt/equity limit of SYKB will not exceed 10:1 during the life ofthe loan (para. 4.06).

(x) HB will carry out the program of its institutional strengthening andefficiency improvements through appointment of additional staff,training of staff and an in-depth review of its institutionalstructure (para. 4.16-4.17).

(xi) HB will submit its annual audited financial statements to the Bankwithin six months of the end of each year.

(xii) SYKB will submit its annual audited financiai statements to the Bankwithin five months of the end of each year.

6.05 The proposed project is ruitable for a Bank loan of US$100 million onthe terms and conditions outlined above.

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Annex 1page 1 of 2

TURKEY

SMI PROJECT

Relevant Industrial Studies and Reports

1. Turkey: Country Economic Memorandum (in 2 volumes), IBRD, June 1983(Report No. 4287-TU).

2. Turkey: Special Economic Report for the Financial Sector, IBRD,September 1983 (Report No. 4459-TU).

3. President's Report for SAL V, IBRD, May 24, 1984 (Report No. P-3783-TU).

4. Turkey: Public Sector Investment Review (in 3 volumes); IBRD,December 1981 (Report No. 3472-TU).

5. Turkey: Industrialization and Trade Strategy (in 3 volumes); IBRD,February 1982 (Report No. 3641-TU). Also available in publishedcussntry study.

6. Turkey: Development Prospects for Small - Medium Scale Industry andPotential for Urban Employment Generation (in 3 volumes), IBRD,September 1980 (Report No. 2913-TU).

7. OED Special Study - Sector Operations Report: The Industries and DFCsProgram in Turkey, 1980 (Report No. 3077-TU).

8. Bertil Walstedt, State Manufacturing Enterprise in a Mixed Economy:The Turkish Case; John Hopkins University Press, 1980.

9. J. Lewis and S. Urata, Turkey: Recent Economic Performance and MediumTerm Prospects. 1978-1990; World Bank Staff Working Paper No. 602;1983.

10. K. Dervis and S. Robinson, Foreign Exchange Gap, Growth and IndustrialStrategy in Turkey: 1973-1983; World Bank Staff Working Paper No.306; 1978.

11. Turkey: Policies and Prospects for Growth, published World BankCountry Study; March 1980.

12. B. Balassa, Outward Orientation and Exchange Rate Policy in DevelopingCountries: The Turkish Experience, August 1982.

13. A. Krueger and B. Tuncer, Microeconomnic Aspects of Productivity Growthunder Import Substitution: Turkey, NBER Working Paper No. 532, August1980.

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Annex 1page 2 of 2

14. A. Krueger and B. Tuncer, Estimating Total Factor Productivity Growthin a Developing Country, March 1980.

15. F. Yagci, Macro-Micro Link in Policy Modelling: Suggestions for theTurkish Economy, World Bank Development Research Department, April 1983.

Source: Bank StaffEMENA/IDFMarch 1985

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TURKEY Annex 2

SMI PROJECT

Sinai Yatirim ve Kredi Bankasi (SYKB)

(i) Institutional Aspects

1. Establishment and Ownership: SYKB was established in 1963 by fivemajor commercial banks in Turkey; namely Is Bankasi, Akbank, Garanti Bankasi,Osmanli Bankasi and Vakiflar Bankasi, to meet the investment financing needsof the private industrial sector. The paid-in capital of SYKB is TL 2,000million of which 60X is owned by Is Bank -the largest bank in Turkey- andthe remainder is equally divided among the four other banks.

2. Board: SYKB's Board consists of six members. Mr. Cahit Kocaomer,who represents Is Bank, has been the Chairman since February 19i6. The other5 members are the representatives of the four remaining shareholder banks aneSYKB's General Manager, Mr. Orhan Altan.

3. Organization: Project identification, appraisal and supervision areundertaken by the Financial Analysis, Technical, and Economic Study andResearch Departments. Resource mobilization and loan administration includinglegal and insurance aspects are handled by the Loans Department and accountingmatters are carried out by the Accounting Department. There have not been anychanges in the overall organization of SYKB since its appraisal in 1980 by theBank for the labor-intensive industry project (SAR 3189-TU) and itsorganizational structure (Attachment 1) is satisfactory.

4. Magement and Staff: The general manager, Mr. Altan, appointed onJanuary 1, 1979, is a competent chief executive and has gradually transformedSYKB into a dynamic and development-oriented financial institution. TheAssistant General Manager, Mr. Omer Kizilkaya, provides support and continuityin management. The total professional staff of SYKB was 49 in December 1984,including 9 engineers and 24 economists/financial analysts. The staff isexperienced and turnover has been very low. SYKB has been increasing itsprofessional staff according to its operational needs. The staff has beenprovided with adequate training in project appraisal and supervision. SYKBplans to increase its staff gradually and the total member of engineers andeconomists would reach to 54 by 1988. This would be adequate to meetprojected operational requirements and no difficulty is foreseen in theemployment and training of additional staff.

5. Policies: SYKB adopted a policy statement in January 1979 which ensuressound lending operations. The statement provides, inter alia, for conductingsectoral and sub-sectoral studies to identify priority development areas andviable projects with high economic priority. It further stipulates that SYKBwill finance projects whose majority control is vested with the private sectorand provide up to 602 of the fixed investment cost of the project; its totalexposure in an enterprise will not normally exceed 20% of its own equity;equity investment will not exceed 25% of the enterprise's capital and 10% ofits own equity; and it will not carry foreign exchange risk. SYMB followsconservative though reasonable collateral policies.

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6. Procedures: SYKB's appraisal procedures are satisfactory asindicated by the review of subprojects financed under the Bank's loans for thetextile industry (Loan 1755-TU) and labor intensive industry (Loan 1952-TU)projects. Appraisal includes assessment of the management capability andcredit-worthiness of the applicant and economic, technical, marketing andfinancial viability of the proposed project. As regards supervision, SYK5B'sstaff makes periodical visits to projects and monitors the cost and financingof projects under implementation and the financial performance of projects inoperation. There is, however, scope for further strengthening of the projectsupervision by increasing the frequency of visits to projects underimplementation (at least once every six months) and monitoring non-financialaspects of projects (including physical implementation and technical andmarketing aspects) as provided in the supervision system agreed under thelabor-intensive industry project. SYKB agreed with the appraisal mission tocarry out above improvements and this was reconfirmed during loan negotiations.

7. SYKB's procurement procedures are designed to ensure economy andefficiency. Normally at least three bids from suppliers in differentcountries are required for purchase of imported goods. For local procurement,adequate domestic shopping is required. These procurement procedures areconsistent with those adopted by other Bank assisted DFCs providing loans toSMI and are considered satisfactory. Disbursement procedures are alsosatisfactory.

Dii) Operations

8. Overall Operations; Approvals, commitments and disbursements ofloans and equity investments for 1980-1984 are given in Attachment 2. Totalloan approvals of SYKB have increased from TL 2,765 million for 29 projects in1980 to TL 16,782.9 million for 83 projects in 1984, i.e. 57% p.a. in nominalterms. The increase in real terms during the period was 14X p.a. and thenumber of projects almost trippled which is quite impressive. Local currencyloan approvals were 33% of total loans during the 1980-1984 period, and theirrelative share has decreased from 38% in 1980 to 13% in 1984 mainly because ofthe availability of new foreign currency resources to SYKB. The foreigncurrency loans increased from US$17.4 million (13 in number) in 1980 toUS$22.0 million (46 in number) in 1982 but declined to US$18.1 million (41 innumber) in 1983 due to reluctance of sub-borrowers to accept foreign exchangerisk (para 3.10). Commitments were also low in 1983 (56X of approvals) forthe same reason. Foreign currency loan approvals, however, increased toUS$37.7 million (66 in number) in 1984 with the introduction of the ForeignExchange Risk Insurance Scheme (FERIS) (para 3.10 in text).

9. Structure of Operations: Analysis of SYKB's loan approvals duringthe 1980-1984 period by sector, geographical location, size, repayment termsand type of projects is giveit in Attachment 3. During this period, the mainbeneficiaries of SYKB's loans have been textile (36%), food (14%), chemical(12%), and clothing (10%) industries. Fixed investment loans were 40% and 60%for expansion and new projects respectively, and 48% of the loans approvedwere for sub-projects of above US$1 million each in 1984. SYKB's owncontribution to the total fixed investment in its assisted projects was 46% in1980, 41% in 1981, 75% in 1982, 35% in 1983 and 59% in 1984; the balance of

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funds coming from equity sources and other borrowings. With the availabilityof foreign currency funds under the Bank's textile project (Loan 1755-TU) andlabor-intensive industry project (Loan 1952-TU), SYKB's own contribution inproject financing increased in 1982. It decdlned in 1983 due to borrowers'reluctance to accept foreign exchange risk but again picked up in 1984 withthe introduction of the FERIS.

10. Development Impact of SYKB's Operations: SYKB's promotionalactivities include the identification and development of and assistance to SMIprojects of high economic priority. In order to achieve the above objective,SYKB has completed studies of various industrial sub-sectors, includingtextile goods, exports, forest products processing industry, meat processingindustry, and marble extracting and processing industry. The above studieshave led to the identification and financing of a large number ofsub-projects, some of which are export-oriented. Currently, SYKB isundertaking studies of electro-mechanical industry and treatment of leatherproducts. SYKB has continued financing priority projects which have obtainedCertificates of Encouragement from the Government. SYKB's loan approvals forprojects located in the semi-developed and less-developed regions of Turkeyhave increased from TL 1.9 billion in 1980 to TL 6.6 billion 1984, but havedeclined in real terms reflecting general reluctance of investors to developprojects in these areas as Government priorities have favored exports forwhich these areas are less suitable. The projects assisted by SYXB have highlabor-intensity, particularly in more recent years. It is estimated thatabout 26,000 direct jobs would be created by projects which received loansfrom SYKB for fixed investment during 1980 - 1984 period, with an estimatedaverage cost per job (excluding land and buildings) of US$19,726 in 1980,US$20,720 in 1981, US$7,975 in 1982, US$11,111 in 1983 and US$8,247 in 1984.

11. Bank-financed Operations: SYJB has so far received two loans ofUS$15 million (Loan 1755-TU) and US$40 million (Loan 1952-TU) from the Bank insupport of the development of textile industry and labor-intensive industry,respectively. Due to reluctance of firms to incur foreign exchange risk, thelast date for loan coamitments under the textile projects was extended twice.With the help of the 1984 FERIS, it was almost entirely comitted by December1984. The last date for commitments under the loan for labor-intensiveindustry project was also extended by one year to December 31, 1984 for thesame reason. This loan has also been couitted rapidly after the introductionof FERIS. At least one-third of the loan for labor-intensive industry wasearmarked to finance SSI sub-projects defined as enterprises with assets,excluding land and buildings, not exceeding US$350,000 in case of newsub-projects, and US$500,000 in case of expansion of sub-projects 1/.

12. SYKB has approved 112 sub-projects (net of cancellations) with atotal amount of US$39.5 million (99Z) up to December 31, 1984 under the Bankloan for labor-intensive industries. About 38Z of the loan amount has beenapproved for SSI sub-projects. Sub-loan disbursements as of the same datehave amounted to US$17.5 million 2/ which corresponds to 144 of the total loanamount. Sub-projects assisted under the loan would create about 8,600 jobs at

1/ December 31, 1980 prices.

2/ US$9.4 million for SSI and US$8.1 million for non-SSI.

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an average cost of US$8,700 each (excluding land and buildings) 1W. The majorindustrial sub-sectors which have been beneficiaries of Bank-funded loans aretextile, chemical, machinery, food, metal products, and marble industries.The majority of projects have been located in Istanbul (41X), Bursa (92),Izmir (6S), and Tekirdag (52). The ERR and FRR were calculated forsubprojects with fixed investment of above US$750,000 each and these rangedbetween 16S to 452 and 19.6S to 54X respectively. SYKB's performance inutilizing the loan as reflected by good quality of subproject appraisal,financing of a large number of SSI subprojects and low cost per job has beenvery satisfactory.

(iii) Financial Situation

13. Profitability: SYKB's income statements for 1980-1984 are given inAttachment 4. Net income increased from TL 112 million in 1980 (222 ofequity) to TL 832 million in 1984 (32S of equity). SYKB's administrativeexpenses in relation to total assets have stayed at around 21 between1980-1984 which are satisfactory. SYKB's average interest spread for the lastfew years has been about 101 p.a. The high interest spread is mainly due tocharging of interest from the date of loan commitments and special treatmentof interest on loans from shareholding banks. Until 1976, these loans carriedan interest rate of 111 per annum but, in 1977, the shareholding banks madethem interest free and elected to take the return in the form of higherdividends on their equity investment. The interest spread is, however,projected to decline in future years and would be 6.51 by 1988. SYRB's payoutratio (relationship of dividend payments to net profit after tax) hasgradually increased and was 77:23 in 1984 as compared to the limit of 82:18permitted by SYKB's Articles of Association. The actual returns toshareholders in nominal terms on their capital and loans to SYKB have gone upfrom a low of 11X in 1980 to 32Z in 1984 which are still fairly low, comparedto interest rates on term deposits or other financial instruments in Turkey.

14. Financial Position: SYRB's Comparative Balance Sheets for the yearsending December 31, 1980 - 1984 are given in Attachment 5. Total assetsincreased, in current prices, from TL 4,169 million at the end of 1980 to TL34,867 million at the end of 1984. In nominal terms they increased by over7002. The paid-in capital has increased from TL 400 million at the end of1980 to TL 2 billion at the end of 1984 with the biggest increases occurringin 1983 and 1984 by TL 400 million and TL 1200 million respectively. Thelong-term debt/equity ratio has gone up from 4.2:1 at the end of 1980 to 8.E:1at the end of 1984 which is within the maximum limit of 9:1 agreed with theBank under the labor intensive industry project. At the end of 1984, thecurrent ratio was 1.9:1 and showed a satisfactory liquidity position.

15. Resource Mobilization: The long-term resource position of SYKB as ofDecember 31, 1984 was as follows:

1/ It was agreed under the loan (No. 1952-TU) to limit the maximum investmentcost (excluding land and buildings) per job created to US$15,000 inDecember 1980 prices.

- 45 -

Table 1: SYKB: LONG-TERM RESOURCE POSITION AS OF DECEMBER 31, 1984

Local Currency Foreign Currency(TL millions) ($ '000)

Sources:Paid-in Capital 2,000.0 -Reserves 6 Surpluses 338.0 -Provision 844.0 -Revaluation Gains 311.0 -Retained Earnings 832.0 -Loans from: Central Bank Credit 3,707.0 -

EIB - 11.4Eximbank - 0.1IBRD Textiles - 14.9IBRD Labor Intensuive - 40.0

Total Sources 8,032.0 66.5

Apulications 6.662.2 36.0Surplus/ (Deficit) on Disb. basis 1,369.8 30.5Amount Comitted but not yet disbursed 69.6 29.7Surplus/ (Deficit) on Comuitmnent basis 1,300.2 0.8Amount Approved but not yet Comitted 2,204.5 0.3Surplus/ (Deficit) on Approval basis (904.3) 0.5

As can be seen from the above table, SYBD's major sources of local currencyfunds are loans from the Central Bank uwder its discount facility followed bypaid-in capital, and provisions and reserves. Although SYKB's local currencyloan approvals exceeded its resources as of December 31, 1984, the shortfallcould be covered through the fuller utilization of discounting facility of theCentral Bank and loan recoveries. The major utilised foreign currenciesresources are from the World Bank (Textile US$15 million, Labor IntenswiveUS$40 million) and from EIB (US$11.4 million). S7KB's foreign currencyresources exceeded the loan approvals by only a small amount of US$0.5 millionas of December 31, 1984.

16. Quality of Portfolio: SYXK's arrears situation is given inAttachment 6. Although SYKB'8 arrears have increased over the years, they arestill on the low side. Arrears and loans affected by arrears of more thanthree months were 2.51 and 14.71 respectively of the total loan portfolio onDecember 31, 1984. The loan portfolio is well spread among differentindustrial sub-sectors and a large portion (70X) is secured by bankguarantees. The quality of the loan portfolio is, therefore, good. SYRB hasagreed under the textile project to retain at least 5% of its net annualincome as a provision for bad and doubtful loans and investments up to amaximum of 2S of its loan and equity portfolio. It has been complying withthis loan condition and its provisions amounted to TL 844 million at the endof 1984.

17. Audit: SYKB's audit has been performed satisfactorily by Muhas, alocal audit firm in cooperation with Price Waterhouse, an international auditfirm, and it has given an unqualified audit report.

- 46 -

(iv) Future Operations and Prospects

18. Operational Forecast; SYKB's operational projections for the 1985 -1988 period are given in Attachment 7. The loan approvals are projected toincrease at an annual average rate of about 41% in current prices or 8% inreal terms. SYKB's loans will form about 3% of the estimated total privatesector investment in the industrial sector in 1985-88 and it is considered areasonable target in view of the lending operations of SYKB in recent years.The project pipeline of SYKB as of December 31, 1984, consisted of loanapplications for US$35.37 million equivalent in foreign currency and TL 1.85billion in local currency. The projects included in the pipeline are mainlyin textile (35Z), food (17%), chemical (11X), clothing (10%), andmachinery(8Z) subsectors. Foreign currency loan approvals are projected atUS$25.3 million (60 in number) in 1985 (US$37.6 million in 1984) and areestimated to increase to US$70.5 million (110 in number) in 1988. Theprojected foreign currency loan approvals also include sub-projects in the SKIsector to be financed during 1986-1988 under the proposed Bank loan (US$80million). SYKB's local currency loan approvals are expected to increase fromTL 5.9 billion (18 in number) in 1985 to TL 14 billion (42 in number) in 1988,an increase of 33% p.a. in current prices or 3% in real terms. The equityinvestments of SYKB are expected to remain low (TL 500 million in 1985) andwould increase at an average rate of 17X p.a. in current prices during1985-1988.

19. Total foreign currency loan commitments of SYKB during the 1986-1988period are estimated at US$171 million. The proposed Bank loan of US$80million and an expected loan of USt35 million equivalent from EIB would reducethe foreign currency resource gap to about US$56 million. SYKB does not yethave firm plans to fill this gap but expects that existing and new sources(e.g. KfW) will provide additional funds. SYKB plar.s to meet its localcurrency requirements largely through increases in paid-in capital, borrowingsfrom the Central Bank and internal generation of funds.

20. Projected Profitability and Financial Position: SYKB's projectedincome statements and balance sheets for the 1984-1988 period are given inAnnexes 8 and 9. Net income is projected to increase from TL 1,103 million in1985 to TL 6,463 million in 1988 in current prices. The return on equity isexpected to increase from 32% in 1984 to 45% in 1988. The liquidity positionwill also be satisfactory as indicated by the current ratio of 1.12:1 to1.23:1. SYKB's financial structure will continue to be sound with debt/equityratio being below the 9:1 limit at least until 1987. At that stage a furtherincrease in equity would be required and has been planned for (para 21).

21. Debt -Equity Limit: Under the Bank Loan (1952-TU), SYKB wasauthorized a debt/equity limit of 9:1. The projections indicate that SYKB'sdebt/equity ratio will remain below this limit up to 1987 and thereafter willincrease to about 10:1, despite increase in equity. (SYKB's shareholoers areplanning to increase their paid-in capital from TL 2 billion to TL 6 billionin 1987 and to TL 10 billion by the end of 1988). It is recommended thatSYKB's maximum debt/equity limit be increased to 10:1 considering itsefficient management, highly prucent financial policies and practices,satisfactory project appraisal, and sound portfolio (para 15).

TURnY

SKI PROJECT

SYKS - ORGANIZAMIONAL CHART

I BORD OF DlRECrORSI

=ASSISTANT CGRE L MANAGER

F iscal AJdviserI

Stam Duty ConsultantiLoans Co_ittee I

Seeiretey' * Of ficesI

Financial~~~ ~ ~ ~ ~ Anlyi Tehnca lc studyor | on ta oto

I -~~~~~~~~~~~ Fn nac ml Analys * |Techrnca Ecnoi Std l [lD~ r Accuntu. CostPronnl Dent] a

Doc_oftnoion

Source: SYIII Il

ENKA/IDF

Harch 1985

- 48 -

attachment 2

snB - A4eaas. Comtet soD(TL

1W 1981 1982 1983 1904ND. AND.t No1 hmudt NO. No. Auiut No. A

ime. NoMdr CkAw± I.MsDoweam SourcS eBod 4 2W5 6 451.5 - - - - -

T=fesbmlt towasDomestic Soumc Bae 12 954.2 19 1,80.6 35 1,508.9 25 3,875.9 17 2,100Exterm Summe Bd 13 1 564.3 24 L987.6 46 3,581.2 41 4.087.2 66 146L2.9

Sub-total 25 2 5185 43 3,789.2 S 5,090.1 6 837l9631 2.

Total Iu 29 2,765.0 49 4,240.7 81 5 0901 66 7.963-1 83 1

Equity Iiel its 3 25.8 6 62.3 4 59.5 3 15.7 3 70.9

W_- Wets COtsl oIiDimegitir. Scp=e Baed 3 147.2 3 276.5 1 587 -

Iiws~a IYs5ac- Source Baed 10 429.7 10 865.6 32 1,634.9 14 2,010.7 8 530,8

zternd1 Soure Basd 7 415.3 11 3,409.9 -36 20173-9 37 2,294.4 73 LS,IOSad,-totl 1-7 845.0 21 2,275.5 68 3,8068 51 4,305.1 8 15,92 8

Ttal la"s 20 992.2 24 2,552.0 69 3,867.5 51 4,30581 81 6

51pizy iveats 4 26.8 4 40.8 6 810 3 15.7 2 34.9

inai arcigCaial Lou.Dmmatic Samre Based 6 183.7 5 276.5 2 5L7 - - - -

lnet loansDomestic Swine Based 10 490.0 15 818.6 40 !,a3&2 15 1,48L8 8 1,Ol.6Externa1 SonrcD Based 9 561.3 13 1,439.1 25 2,032.2 33 1,S19.9 47 14,64.60

Sub-total 19 1,051.3 28 2,257.7 65 3,520.4 48 3,487 55 15,6566

ToAl Tu 25 1,235.0 33 2.5342 67 3,579.1 48 3.406.7 55 &6

}rIity lb s 6 21.9 9 49.1 7 68.9 6 38L 2 34.9

Smie: sZR

?mxh 1985

-49 - MANEX2

uE attachment 3

Yo _~~~~~WAP of f_ _ cr ,qa

1 A f. . 6 _MIt ft A lb. S _ I c

ra PM& 1 MA2.1 7 425.3 16 813.7 7 475.3 19 2,422.2kantioU - - - - - - 1 M0 -rTwilm CinL N .=vg

dysh & fimdd"d 6 65L3 8 1,31.6 5 77L28 4 8A.3 16 6,0460C - zbe - - 4 153.1 6 316.8 U 1,2.2 10 ,6320I_obw 4 Id - I A50. 1 l.9 1 I. I 3 - _ _ui4, pale.pqiw - - 1 273.3 - - 2 770.0 - -

|r | p ------ 2 85.2 1 73.4* p m &te - - - - - - I iI5.2 I &6L1

om1a 2 193.0 5 381.8 6 28L0 4 555.1 4 1,951Ap1 ftic bz- - 2 322.4 - - - - 4 735.5

utuw,.a1 el3 qcu t 1 30.0 2 60.0 6 6L5 1 - - - -b,iny, chi= a &. 2 223.6 - - - - - - - -

0& & _lm -- - - 1 U2.8 2 83.7 2 1228

I LI 1 2LS 1 27.0 1 35.9 1 89.0hI - - - - 3 219.7 2 23l.2 1 6.2

Ts, shtI & EWr zta 1 JD5.2 1 180.0 - - 2 662.8 - -1 _a1pu& 6 477.2 5 427.2 4 19L57 6 35.4 2 16.5

h1ainq& dP 2 9M5 3 5A 9 9 426.8 5 72L9 S 5L.0U1ctdm1 Md"Y qplim

*uw _i 4 32.5 2 297.0 9 745.7 3 75.1 4 659.8AgimkInl -q' & 1q18. - - 1 2.2 - 7.8 - - - -lbuhc * in& r Of Vud_ii I 10 - - I 133.6 1 36.4 1 E9L4;1_cmllin,Ah c!hU 1 166.3 S 297.6 13 707.5 12 757A 0 101O3.8

29 2,765.0 49 4. 51 5,090.1 66 7.93W.1 83

: _W w ipi 10 827.6 37 2,561.5 42 2,87L4 45 4,80.0 49 10,096.2i_d1mlw a,& 18 1,907. U 1.496.3 33 1,701L6 2; 3>099.1 3A 6,686.7Jam Dwidow Eqim 1 3D.0 1 380.0 6 03.l1 1 380 - -

,m 29 2,765.0 49 4 _1 5aft. 66 7.963.1 83 16 7UL9

C. Sixs

Wf,m-1.000,130 - - - - - - - 0.8 - -

1,00om,01- 5,000,0o0 2 3.2 3 3.0 7 44.7 - 3.7 - 2D.75,000,0L - 20,000,0O0 I 26.1 6 92.8 3 211.6 3 M.I 2 1L.520.00,001- 50,0,1o 5 18. 16 527 31 1,166.5 23 7994 13 547.050,9L0001-100,0000 9 705.8 7 43.8 19 1,410.5 20 1,4792 2 1,727.0MO,0A,O1 - O,50003 o 8 4100.9 5 619.4 6 73.0 9 1,328.9 13 1,651.2150.1.WL0 - 200,00,000 3 533.3 7 1,306.9 - - 3 527.3 12 2,13.320.00M.001- 250,0O0000 1 20S.3 3 719.5 2 462.8 1 225.0 3 70L0250,00,01 - 300,000,000 - - 2 535.7 1 269.7 - - 3 L133.6300,000,001-350,000.00 - - - - - - 1 386.4 - -330,O0,ODL1-400,00,0 - - - - 2 754.3 3 1,.0 ; 735.7

0e 4000,O0 - - - - - - 3 1,961.3 U 8,035.9

Tocal 29 2,765.0 49 4..08 81 5,091 66 7, l381 83 29

D. _AOr TJas I 1 ywr - - - - - - - - - -

I- 5 3. 7 1.275.3 23 2,253.1 33 l,505L9 23 3,839 17 2.M06- 10 ym 10 1,5.1l 22 1.956.3 32 1,257.3 33 3,06A.4 60 13,036.8eec 1 Dm 2 334.6 2 31b 14 1,623.7 8 1,0I2.8 6 1,576.1

T1a 29 276.0 49 4 S 81 5a9&1 66 7,963.1 83 16,782.9

L T-Fiid lo Inm

IMIFrojet 12 1,357.8 19 2,390.9 46 2,8661 28 3,33.5 48 10,6b_iA 13 I160.7 24 1,59814 35 2,46.0 38 4,069.6 35 6.627.3

5tg QWPiaC LOm 4 256. 6 451.5 - - - - - -

TIa 29 2,765.0 49 4 8 81 509MI 66 7,9CL1 83 16,78.9

195S

- 50 -

TURKEY ANNEX 2Attachment 4

SMI PROJECT

SYKB - Sumnary Income Statements(Th Million)

1980 1981 1982 1983 1984

Income

Interest & fees on loans 654.4 970.7 1,781.4 2,797.8 4,968.8Income from other invests. 16.9 16.8 42.4 122.9 57.2Other income 13.9 22.9 46.6 42.5 75.0

Total Income 685.2 1,010.4 1,870.4 2,963.2 5,101.0

Expenses

Interest & fees on brwgs. 319.2 494.4 1,007.6 1,672.2 2,613.4Personnel costs 84.9 125.4 155.0 243.4 335.0Taxes and fees 23.3 31.1 11.4 13.4 7.9Other costs 7.7 12.2 17.2 36.1 143.2Provision for bad & doubtfulloans & equity part. 30.4 19.4 31.4 175.6 671.5

Total Expenses 465.5 682.5 1,222.6 2,140.7 3,771.0

Income before tax 219.7 327.9 647.8 822.5 1,330.0Tax on income 107.8 156.0 251.4 310.8 498.0

Net Income 111.9 171.9 396.4 511.7 832.0

Source: SYKB

EMENA/IDFNovember 1985

- 51 -

TURI= £11.3 2

8VI pawwr¢

xrn - l - iBEm_ab _

Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31980 1951 1982 1963 1984

Assets----Zi and due froo Sank 43.3 76.3 156.3 509.4 235.9

Sundry Sceivable. 276.1 436.1 660.5 1,205.1 3,450.4Otbhr Assett 37.7 46.1 116.0 139.3 -

s3591 !5Is 1,653.6 3,606.3

Loans and InvestmentsLoans 3,731.3 6,015.3 5,702.5 12,890.5 31,149.6Squity Imvnn t ot 89.3 138.4 207.4 245.5 450.0Covernenmt 4 other Bonds 0.5 0.3 300.0 240.0 234.0

3,621.1 6,154.0 1.1513 13,376 3M,83T.MLess provision for losses 56.7 76.2 107.6 263.2 843.9Additional Provisions - - - - -Net total loans A lnvt. 3.764.4 6.077.8 9.102.3 13.092.8 30.989.7

Fixed A set (Net) 46.2 47.9 190.1 189.2 1P1.1

Total Assets 4.169.7 6.684.2 10.245.2 lS.1i35.8 34.867.1

Liabilities and EquityTama Due 112.8 169.4 254.9 354.5 522.8Other Payables 101.9 155.9 261.2 369.4 1,427.0Short-term bank borrovings - - 200.0 51.7 -

2 T.77- r325.3 716.1 775.6 ii. iM

Nediuw- and l2an-term debt:

Local CurmeShareholder Banks 412.1 412.1 412.1 725.4 _Gowt. subordinated Loan 99.5 95.4 91.3 87.2 -Central lank 881.0 1,476.4 2,570.2 3,091.5 3,707.0lIED - - 175.2 1,111.9 3,932.4

Foreign CuMrreucAID - 449.5 445.1 367.7 295.4 139.3SIB 1,467.7 2,987.9 3,754.1 4,734.2 4,987.1Exiubank 43.7 49.5 48.6 42.. 17.5lsnD - 13.5 994.1 2,546.6 16,634.8L/C's Pending - - - - -

!3,3S3.i T 5,9.9 8,413T.T Tr1315 2Tf T

Staff retiremnt fund 28.7 51.1 59.8 69.0 18.2

8h r boldbrs' ZquitYShare cpittaV 400.0 400.0 400.0 800.0 2,000.0Legal Reserves 64.1 85.6 134.0 211.1 338.0Special Reserves I/ 5.5 9.2 20.3 40.6 -Revaluation surplus - - 141.6 141.6 310.9Retained earning 103.6 163.1 360.1 461.1 832.0

Total Equity S73.2 TS7K 1,06.0 1,6S4.4 3,460.9

Total Liabilities & Equity 4.169.7 6.684.2 10.245.2 15.135.8 34.867.0

11 For textile loan losse.

Sonrce: gm15

Noveaber 1985

- 52 -

TURKEY ANNEX 2Attacbhn"

S£KB - MM&ary of ArrearsCTL'000)

Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 313L90 1-9B 192 1AI

Arrears

Principal: Up to 3 mnths 12,572 5.135 54,543 115.746 201.125"ore than 3 months 9.833 10.013 32.686 103.576 298.570

Interest: Up to 3 mnths 12,878 62.029 61,872 426.693 837,519More than 3 months 19,310 34,171 152.011 164.405 450.324

Total: Up to 3 months 25,750 74,164 116,415 542.439 1,028.644More than 3 months 29,143 44.184 184.697 267.981 758,894

Total Arrears HIA9M la- i4 l.1-112 R10 420 1m7Z7 52ft

Loans affected by arrears ofmore than 3 months 48,152 246.648 232.9U6 1.433.902 4.457.032

Total net loan portfolio 3.674.000 5.939.100 8.594.900 12.607.300 30.300.000

Loans In Repaypwnt stage n.a. n.a. 3.15S.800 5,162.900 7.605.000

Arrears of mare than 3 mathsas % of net loan portfolio

Principal 0.3 0.2 0.4 0.8 1.0Interest 0.5 1.0 1.8 1.3 1.S

Total La L.2 LA &1 2

Portfolio affected by arrearsof more than 3 mnths as %of total net loan portfolio 1.3 4.2 2.7 11.4 14.7

SM: SY1SU

ENENA/ODFMarch 1965

- 53 -

ANNEX 2Attachment 7

TURKEY

SMI PROJECT

SYKB - Projected Loan ApprovalsComuitments and Disbursewents

1985 1986 1987 1988

A. Foreign Currency (t million)

Approvals 25.3 48.8 67.2 70.5

Commitments 17.0 40.0 61.0 70.0

Disbursements 0.5 13.8 53.1 81.1

B. Local urency (TL million)

Approvals 5,900 59700 11,000 13,500

Commitments 5,530 4,366 9,533 12,451

Disbursements 5,082 4,424 9,487 12,355

Source: SYKB

EMENA/IDFMarch 1985

- 54 -

TURKEY ANNEX 2SMI PROJECT Attachment 8

SYKB - Projected Income Statements(TL Million)

1985 1986 1987 1988Revenues:

Interest & Commissions 8,992.0 12,451.0 22,419.0 39,634.0Commitment Fees 40.0 124.0 217.0 296.0Interest on default 1,020.0 994.0 1,338.0 1,872.0Dividends from participation 90.0 100.0 120.0 140.0Miscellaneous 100.0 120.0 140.0 160.0

Total 10,242.0 13,789.0 24,234.0 42,102.0

Expenses:

Interest and Commission 6,407.0 8,573.8 15,548.0 27,040.0Commitement Fees - IBRD 120.0 342.0 344.0 266.0Front-end fee 99.0 - - -

Personnel expenses 483.0 717.0 1,025.0 1,410.0Stamp duty on subsidiaryloan agreements 193.0 121.0 462.0 380.0

Other ExpensesTechnical Assistance 82.0 82.0 84.0 83.0Depreciation 8.0 8.0 8.0 8.0Contingency 93.0 121.0 311.0 541.0Miscellaneous 75.0 91.0 111.0 136.0

258.0 302.0 514.0 768.0

ProvisionsLoans 1,000.0 600.0 982.0 1,785.0Personnel indemnity 10.0 15.0 21.0 29.0

1,010.0 615.0 1,003.0 1,814.0

Profit before Taxes 1,672.0 3,119.0 5,338.0 10,424.0Taxes (635.0) (1,185.0) (2,028.0) (3,961.0)Net Income (NI) 1,037.0 1,934.0 3,310.0 6,463.0

Appropriations of NI:

Dividends 829.0 1,547.0 2,648.0 5,170.0Legal Reserves 208.0 387.0 662.0 1,293.0

Source: SYKB

EMENA/IDFMarch 1985

- 55 -

hUJX 2

-~ ~~ AUfI |11

12/31/85 12/31/36 12/31/L7 12/31/88

Cash Does from Banks 499.0 890.0 1,492.0 1,919.0state Boa" 14.0 114.0 - -

*sceiwabless 2,966.0 3,965.0 7,039.0 12,387.0

A. Xistiag l amsVrking Capital 61.0 9.0 - -inreaott Capital 3,122.0 1,733.0 659.0 101.05n loreg Currcey Loas 6,029.0 6,112.0 5,309.0 5,230.0ISRD 22,341.0 23,182.0 23,289.0 22,376.0

Totel Loas 31 553.A 31,036.0 29,757.0 27,707.0

*. Psoepective In oemtmlIS. D fina) - 5,891.0 22,630.0 43,074.0ifs (4th Pinancial Protocol) - 2,426.0 24,451.0 58,345.0

Otbar Sources 3,464.0 7,935.0 15,529.0 53,471.0STam (solely) 1 900.0 3.100.0 6 830.0 14.620.0sub-total 564.0 19,352.0 72,44.0 169,T.Th0

Principal in arrears 435.0 529.0 711.0 915.0Total Loans 37,352.0 50,917.0 i02,0.0 198,132rProvisions C-) Cl 808.0) (2.408.0) (3.390.0) CS.175.0)not Loans after provisions i5,44.0 48,509.0 99,518.0 19Z,W57.0Participations 500.0 600.0 700.0 300.0Fied Assts

Building, Fixtures & Vebicl.s 315.0 315.0 315.0 315.0Accualated Depreciation (57.0) (65.0) (73.0) (81.0)

Total of Miaed Assets (not) 253.0 250.0 242.0 234.0

Total Assets 39961.0 54328.0 108.991.0 208.297.0

Liabilities

Short-term Debt- Accrued but not due expone 1,464.0 1,947.0 3,466.0 6,112.0- Taxs on profit 635.0 1,1B5.0 2,028.0 3,961.0- Niscellaneous 106.0 123.0 145.0 170.0

Total Short-term Debt 2,205.0 3.255.0 5,639.0 10.243.0

Term Loans- Central lank 5,302.0 6,614.0 7,743.0 8,672.0- SIB 5,523.0 8,032.0 29,754.0 63.069.0- IERD 22,216.0 28,962.0 45,868.0 65,339.0- Other sources 358.0 1,599.0 9.609.0 42,521.0

Total Torm Loa 33,399.0 45,207.0 92,914.0 179,801.0

Owners' Equity- Paid-in-Capital 2,786.0 3,191.0 6,000.0 .10,000.0- Legal servec S34.0 741.0 1,128.0 1,790.0

- Profit after taxes 1,037.0 1.934.0 3,310.0 6,463.0

Total Equity 4,357.0 5,866.0 10,438.0 18,253.0

Total Liabilities * Equity 39.961.0 54,328.0 106,991.0 208,297.0

Source: STUB

ZSAm/MFMarch 1985

- 56 -

Annex 3TURKEY

SMI PROJECTHalk Bankasi (HB)

ti) Institutional Aspects

1. Establishment and Ownership: HB was established in i938 (Law 2284)as a State Economic Enterprise (SEE) and is the only bank in Turkey whichcaters to the needs of SSI and artisans in a comprehensive manner. It is alsoauthorized to finance cooperatives and industrial estates. HB's basic purposeis to contribute to the mobilization of savings and to provide working capitaland investment loans to traders, artisans and small and medium-scaleindustries. It operates an the pattern of "popular banks" in many Europeanand Asian countries and is the member of the International Popular CreditConfederation. The operations of HB are guided by its articles ofincorporation and statutes and it conducts its activities within the frameworkof the government's general economic plans, policies and objectives. HB hasfull government support in furthering its basic purpose of establishment. TheMinistry of Finance is the main shareholder of HB as it holds 95% of HB'spaid-in capital of TL 11.5 billion (US$ 26.4 million as of December 1984 1/),the remaining capital (5%) being held by private and state banks,cooperatives, municipalities, private companies and individuals.

2. Organization: HB operates from its head office in Ankara andregional offices in Istanbul and Izmir as well as its 598 branches and 9foreign currency bureaus throughout Turkey. During the last five years, thenumber of HB staff increased by 272 to 11,726 of which 4,260 (36a) areclassified as managers and executives 2/. Currently, there are 26 departmentsat the head office which report to six deputy general managers who are membersof the management comnittee under the general manager's supervision. Asummary of the organization chart of HB is given as Attachment 1.

3. HB's loans are governed by four different credit departments, eachhaving its own specialization (para 17). BB has an established system ofdelegation of loan approval authority from the Board to branch managers. Thebranches are authorized to approve loans up to their permitted limit. Thelimit varies among different branches but it does not exceed TL 25 million.The branches perform day-to-day commercial banking functions including loanapprovals (within their limit), disbursement and co!lection of loans andmaintenance of customer deposits and accounts. Loans exceeding the authoritydelegated to branch managers are approved at the head office.

4. Board, Management, and Staff: HB's Board consists of six directorsincluding the Chairman and three outside members appointed by the Treasury and

1/ 1984 December US$ 1 = TL 436.0 1984 Average US$ 1 = TL 3881983 December US$ 1 = TL 294 1983 Average US$ 1 = TL 240

2/ Includes Managers, Assistant Managers, Accountants, Supervisors,Engineers. Economists. and Financial Analysts.

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the Ministry of Commerce and Industry. The Chairman, Mr. Ahmet Ertugrul, isalso the chief executive officer (General Manager) of HB. He i8 an economistwith substantial experience in the Treasury. He took over his presentposition in HB in September 1984. He is giving special attention to enhancethe developmental role of HB. The other two directors on the Board are deputygeneral managers of HB.

5. The Board normally meets once per week and more often if necessary.According to recently increased limits, it approves all loans for amountsexceeding TL 200 million (US$ 460,000). The Credit Committee, consisting ofthe general manager and two assistant general managers, approves loans whichare between TL 25 million (US$ 57,000) and TL 200 million. The Manager of therespective credit department at the head office approves loans exceeding thebranch's limit but below TL 25 million.

6. HB's senior and middle management has changed little except for thenew general manager and one deputy general manager. Almost the entiremanagement team has been drawn from among the HB staff, and, thus, has longbanking experience.

7. As of September 30, 1985, HB's professional staff included 66engineers, and 32 economists/financial analysts who work largely on industrialprojects. This staff is placed mainly at the Head Office and largerbranches. The technical staff visits smaller branches to appraise andsupervise smaller projects as and when needed. The professional staff in theIndustrial Credit Department at the Head Office was not adequate at the timeof appraisal and, as agreed with the appraisal mission, RB has increased theirnumber and arranged for their training (para. 14). HB will also need toincrease the number of engineers to 100 and the number of economists/financialanalysts to 70 by 1987 to meet the targets of its projected investmentoperations. During negotiations, assurances were received from HB on anappropriate annual staffing plan for 1986-87. The overall staff turnover inHB is low (about 5S for the professional staff) but there is a greatertendency among the technical staff to move to the private sector because ofthe much higher salaries. As this is a problem common to all stateenterprises, the Government is reviewing their overaLl salary structure toremedy the situation. HB management is also fully conscious of the problemand, as an interim measure, has decided to offer additional fringe benefits tothe technical staff.

8. Staff Training: HB has a seperate department for staff training butits activites are largely confined to commercial banking. The staff engagedin lending to industry for investment purposes has to develop expertise indevelopment banking and this would require training in project identification,appraisal and supervision. Arrangements for staff training in this area aredescribed in para 14. The proposed project includes technical assistance ofUS$50,000 for staff training.

9. Policies and Procedures: HB operates on the basis of numerousGovernment policy instructions and internal administrative circulars. Thedecisions on investment loans are made after a review of the technical.financial and market aspects of the project but the financial structure of theborrower and the collateral for the loans are given high importance. There isno formal supervision of projects but branch offices maintain closerelationship with clients and closely monitor their liquidity and financialposition. There is a need for more development-orientation in the operations

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of HB by incre-.ing the emphasis on project viability rather than the loancollateral Paad directing/coordinating technical assistance to SSI. This wouldrequire an increase in the number and improvement in the capability of thetechnical staff of HB (paras 7 and 14).

10. The Federal Republic of Germany has approved a technical assistanceprogram for small metal and wood-working and processing industries in threeselected regions of the country. The 3-year program is being implemented,beginning August 1984, by GTZ in collaboration with HB. Under the program, aGerman advisor has been provided to assist the head office and branches of HBin the policies, procedures and criteria of assisting SSI, particularly theabove mentioned sub-sectors. In addition, four engineers/technicians havebeen provided at the selected regional offices of HB.

11. Procurement and Disbursement: RB's procurement procedures forpurchase of goods under its loans are based on adequate shopping (i.e.canvassing with several suppliers/sellers). The borrower consults with thetechnical staff of RB on types of equipment and prices and contracts/purchasesare made only after the full satisfaction of HB staff. Under the proposedBenk loan, it will, however, be mandatory to obtain normally three bids fromdifferent suppliers for goods estimated to cost US$10,000 or more. As regardsdisbursement procedures, working capital loans are disbursed immediately uponthe loan approval. Investment loans are disbursed against actual invoices.These procedures are satisfactory.

12. Institutional Strengthening: HB's institutional strengthening has to

take a two-pronged approach. In the immediate future, there is a need forimprovement in HB's project identification, appraisal and supervision and,over the medium term, improvement is needed in the overall institutionalstrucuture of HB and its general efficiency. Various measures for theinstitutional strengthening of HB on the basis of above approach are discussedin paras. 13-16 below.

13. HB did not have a formal policy statement which would clearly defineits policies and criteria for assistance to the industrial sector. Duringloan negotiations, a draft policy statement was discussed and agreed betweenthe Bank and HB representatives and was later adopted by HB's Board. Itprovides for greater emphasis on the promotional activities of HB includingtechnical assistance to its borrowers, and specifies economic and financialcriteria of assistance.

14. HB should also increase the number of financial analysts/economistsin the Industrial Credit Department and should take measures to improve theirprofessional capability for project appraisal and supervision. In order tomeet the immediate requirements, the management of RB confirmed that it wouldincrease the number of above-mentioned staff by 8 to 12 and arrange foron-the-job training of 10 engineers and economists/financial analysts in DFCsin Turkey. In addition, HB's management agreed to appoint a training officerwho would prepare a medium-term training program, within six months of hisappointment, for the development of staff expertise in the identification,appraisal, and supervision of investment projects. The appointment ofadditional staff and their training has now been completed. Duringnegotiations, assurances were received from HB on the appointment of thetraining officer before submitting the first application for withdrawal undera sub-loan.

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15. In order to intensify its assistance to SSI enterprises, HB will alsoseek active coordination of the Small Industrial Development Organization(SIDO). SIDO will assist HB subprojects, upon request, ln solving thetechnical, management, and marketing problems on a cost-sharing basis (Annex4, para 36).

16. While the above measures would help to bring an imediate improvementin the capability of HB to identify, appraise, and supervise SMI sub-projects,it would be desirable to consider an indepth review of the overallinstitutional structure of HB to bring long-term improvements. Theinstitutional structure of HB has remained almost unchanged despite a rapidgrowth in operations and size of organization. The operations of HB areexpected to grow at an accelerated rate in the future as the fifth Five YearPlan (1985-89) puts special emphasis on the development of SSI and theenlarged role of RB for this purpose. An in-depth review of the institutionalstructure of HB would lead to appropriate adjustments which may be called for(i) to respond effectively to the new and growing role of HB, partic'Aiarlywith respect to a greater development-orientation in its operations; and (ii)to improve cost and operational efficiency. This can be accomplished througha study which should review mainly (a) organizational structure, policies, andprocedures, (b) accounting, internal auditing and management informationsystem, and (c) the developmental role of RB. The study should makerecommendations for further institutional strengthening of EB and means toimprove efficiency. The findings and recommendations of the study will bereviewed by the management of HB, and based thereon, HB will prepare, inconsultation with the Bank, an action program and its timetable forimplementation by the management of HB. The implementation of the programcould be further supported in a second Bank loan to HB. The study isestimated to cost about US$300,000 and is covered in the technical assistancefor HB in the proposed project. The consultants will be selected inaccordance with the Bank's guidelines. The terms of reference of the study(Attachment 2) were agreed during negotiations.

(ii) Operations

17. Overall Operations: HB's operations have grown very rapidly in thelast decade. During the 1981-1984 period alone, its total loans increased by165% to about TL 207 billion (US$ 475 million). The increase in real termswas 1.5%. HB's loans are made through four different credit departments.These are Commercial Credit, Industrial Credit, Cooperative Credit and FundsCredit Departments. The Commercial Credit Department's lending focuses ontrade financing, and loans to consumer and professionals. The Funds CreditDepartment is responsible mainly for channelling bilateral aid or expatriatefunds (e.g. Turkish workers abroad) mainly to industrial estates and otherspecialized purposes. The Cooperative Credit Department lends to cooperativesand members of cooperatives who are involved in very small SSI, and artisanaland handicraft operations. The Industrial Credit Department lends to SMI forworking capital and investment purposes. As of December 31, 1984, the creditportfolio of the different departments was distributed as follows: commercial(21%), cooperatives (23%), funds (31%) and industrial (25%).

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I ,.

18. Industrial Sector Landing: The major portion of financing of SKIprojects by jthe Industrial Credit Department has been for working capital.The total loans for the SSI 1/ amounted to TL 97 billion (US*250 million) in1984 of which the working ci^ital loans were TL 91 billion (US$235 million)and the equipment loans were TL 6 billion (US$ 15.5 million). SSI investmntloans have increased at an average rate of 441 p.a. during 1981-1984 period.The total loans for non-SSI (largely HSI) 1/ were TL 135 billion in 1984 (US$348 million) and the share of equipment and vorking capital loans was 501each. The total investment financing of U8*180 million equivalent constitutesonly a small part of HB's overall activities.

19. The growth between 1981-1984 in industrial crodit portfolio(including both short and lonrterm loans) was by 141X to TI. 48.0 billion(US*110 million) at the end of 1984. The credit available for investment tothe small businesses and industry out of this departmet was TL 21 billion(US48 million) at the end of 1984; an increase of about 1901 during the1981-1984 period or an increase of 41 in real term. Analysis of XB'sindustrial credit portfolio during the 1981-1984 period by sector,geographical location, size, and repayment term is given in Attachment 3.During this period, the main sub-sectoral beneficiaries of iB's loans havebeen machinery and electricals (21.6Z), chemicals and plastics (16.11), food(14.41), forest products (11.31), steel and metal works (8.7M), textile andleather products (8.5Z). About 241 of the portfolio was for loans of lessthan TL 1 million in size; 201 being between TL 1 to 10 million and 561 aboveTL 10 million range.

(iii) Financial Situation

20. Profitability: EB's income statements for 1981-1984 are given inAttachment 4. Although BB is not a profit-motivated institution, its netprofit was TL 5.2 billion (49Z of equity), TL 2.9 billion (191 of equity) andTh 2.2 billion (12X of equity) and TL 10.3 (251 of equity) at the end of 1981,1982, 1983 and 1984 respectively. The decline in profit from 1981 to 1983 isprimarily due to the increase in interest on deposits in 1982 without acorresponding increase in interest income. The interest rates on EB's loanportfolio have, however, been adjusted in 1983 and the net income in 1984 hasincreased to TL 10.3 billion. HB's average interest spread was 7Z in 1982, 61in 1983 and 9Z in 1984 which is high by international standards. HB'sadministrative expenses as a share of total assets between 1981-1984 have alsobeen high at 3-42 mainly due to the large number of branches and the smallsize of sub-loans of HB.

I/ This breakdown is based on HB's own internal definitions of SSI and HSI.SSI includes very small enterprises, i.e. those with less than 25employees and less than TI 80 million (US$ 190,000) capital investment(excluding land and building). HSI enterprises are those having capital(excluding land and buildings) between TI 80 million to TL 300 million(US$190,000 to US$700,000).

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21. Financial Positlon: RD's balance sheets for 1981-1984 are providedin Attachment 5. Its total assets increased substantially in current pricesfrom TL 127.0 billion at the end of 1981 to TL 463.0 billion at the end of1984. Although the average annual increase during the period was 54%., theincrease in real terms was 13S p.a. The paid-in capital of HB has increasedfrom TL 4.9 billion to TL 11.5 billion during the 1981-1984 period. At theend of 1984, the total debt I/ -equity ratio stood at 12:1 which is low for acommercial bank, and an indication of a sound and conservative lendingpolicy. The total debt/equity r&tio is also well within the maximum limit of20:1 required by the Central Bank for all commercial banks. HD follows soundliquidity policies and complies with the liquidity reserve requirement of theCentral Bank. Its liquid assets (cash or cash convertibles) have been morethan 501 of the deposits and a special provision equivalent to about 20% ofdemand and time deposits has been maintained to preserve liquidity. HB hasmaintained various provisions and reserves to safeguard against possiblelosses and to meet legal requirements, and these totalled to TL 13.1 billionat the end of 1984.

22. Resource Mobilization: As of December 31, 1984, HB had the followingsources of funds:

Table 4.2: HB: SOURCES OF FUNDS - DECEMBER 31, 1984

(TL Billion)

December 31,Sources 1984

Amount X

Shareholders' Equity 41.5 9.0Deposits 257.0 55.5Central Bank Discounting Facility 25.6 5.5overnmnt Fund 56.4 12.2Other Sources 82.5 17.8

TOTAL 463.0 100.0

Through its extensive network of branches, HB is in a position to raise itsresources by accepting deposits from large state enterprises as well asprivate individuals. This accounted for 55.52 of its resources as of December31, 1984. The Central Bank rediscount facility and the Government Fundaccounted for about 17.7X of its resources as of December 31, 1984. Theremaining sources of funds are shareholders' equity (91) and other specialized'and bilateral sources (181) which are provided to HB either cost-free, or atlow rates of interest. HB expects to meet its future fund requirements mainlyby increase in deposits and other traditional sources; the proposed Bank loanof US$18.75 million for BB to be a small part of its total resources (para25). Another possible source of funds is KfW.

1/ Includes short-term and long-term deposits and borrowings.

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23. Quality of Portfolio: HB follows conservative loan collateral policy.Its loans are fully secured by mortgages and/or personal or bank guarantees.The arrears are low considering the nature of HB operations and only a smallpercentage of loans have been rescheduled, and only for short periods. Totalarrears for all credits at the end of 1984 were TL 8.1 billion (US$ 18.6 mil-lion) or about 3.9Z of the loan portfolio of TL 207 billion (USS 475 million).Total rescheduled loans in 1984 were TL 400 million (US$1 million). HB'sbranch offices play an effective role in loan collection and help prevent anincrease in arrears. The legal department of HB takes legal action in theevent of a missed interest or principal payment within three months of thedefault to recover the amount outstanding. The total "in court" amount forindustrial credits was TL 2.9 billion (US$ 6.7 m_llion) as of December 31,1984, and was approximately 6% of total industrial credits. An amount of TL200 million (US$ 500,000) or 0.41 of the industrial credit portfolio wasrescheduled in 1984. The arrears in the industrial sector are a little higherthan the overall average of EB and are reflective of the problems faced by theindustry in Turkey in the recent past (para 2.15 in the text). It is howeveranticipated that the overall recovery of the industrial sector and theinstitutional strengthening of HB (paras 12 to 16) would contribute to animprovement in debt servicing by industrial enterprises.

24. Audit: HB's financial statements are audited by Basbakanlik YuksekDemetreme Kurulu (High Board of Auditors in the Prime Minister's Office ). Inaddition to the High Board of Auditors, the Bankalar Yeminli Murakiplau(Bankers' Sworn Supervisor in the Treasury) are authorized to inspect theaccounts of HB and to check the compliance with the banking laws in the eventof any discrepancy or fault-finding by the High Board of Auditors or any otherconcerned agency. The audit is carried out in accordance with theGovernment's requirements for the state enterprises and HB's accounts havebeen found satisfactory by the auditors. HB will submit its annual auditedaccounts to the Bank on a regular basis as a condition of the proposed loan.

(iv) Future Operations and Prospects

25. Operational Forecast: HB's loan portfolio is estimated to increaseby 110% (to TL 670 billion) in current prices during the 1985-1988 period.Short-term working capital loans are expected to increase faster than mediumand long-term investment loans because of working capital shortages faced bybusiness and industry in general. It is estimated that short-term loans wouldbe about 65Z of the portfolio by 1988. The relative share of HB's variouscredit departments in loan portfolio would remain almost unchanged and wouldbe 261 for cooperative credits, 23% for industrial credits, 22% for commuercialcredits and 29% for funds credits. The industrial credit portfolio isexpected to increase from TL 74.5 billion at the end of 1985 to TL 150 billionat the end of 1988; an increase of 262 p.a. The investment loans in theindustrial sector are estimated at about 251 of the total. During 1986-88,the expected period of commitments of the proposed Bank loan, totalcommitments of investment loans for the industry would be about TL 69 billion(US$ 80 million equivalent) of which about TL 46 billion (US$54 millionequivalent) would be for the procurement of machinery and equipment.

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26. Proiected Profitability and Financial Position: Projected incomestatements and balance sheets of RB for 1985 to 1988 are provided inAttachments 6 and 7. HB is expected to maintain adequate profits with netprofit before taxes estimated at TL 8.5 billion in 1985 and increasing to TL15.5 billion in 1988, an increase of 22S p.a. in nominal terms. The return onequity would be about 18S during the period. Appropriations for taxes andduties will be equal to 27%, the remaining 732 will be mainly allocated toreserves. HB's total debt/equity ratio will increase from 12.0 at the end of1984 to 14.1 at the end of 1988 and would be within the limit of 20.0 imposedby the Central Bank for all commercial banks. HB's liquidity position wouldalso continue to be satisfactory.

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ANNEX 3Attachment 1

TURKEYSMI PROJECT

HALK BANKASI

Organhatlonai Chart

[ otbsdcIb.tma

[ Gen"ROO

I~~~~~~~~~Grw.. rr In Co

A~ ~d AjCo j j oVL Ar| n

0 ^ ~~~~~~~~~~~~~~it - lge

| d|]Mtd | 2| mm' d AOI ww. i arMgow

~~~~~~3min A dw1 r lr Q

Source: Halk BankasiEMENA/IDF November 1985 - 3

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ANNEX 3Attachment 2Page 1 of 2

TURKEY

SMI PROJECT

Draft Terms of Reference forReview of the Institutional Structure of Halk Bankasi (HB)

1. Obiectives

Halk Bankasi (HB) has had a very rapid growth in the last decade.During the 1979-1983 period alone, its total credits and investment loansincreased by more than 400% to TL 160 billion, its regional and branch officesincreased by 16% to 610, and its staff increased by 272 to 11,700. Theoperations of HB are expected to grow at an accelerated rate in the future asthe Fifth Five-Year Development Plan (1985-89) puts special emphasis on thedevelopment of SSI and the enlarged role of HB for this purpose. The pastperformance of HB, as measured by its financial position and quality ofportfolio, has been satisfactory despite little changes in its basicinstitutional structure, including policies, procedures, systems andmanagement controls. However, it would now be appropriate to have an in-depthreview of the institutional structure of RB and to consider appropriateadjustments which may be called for to effectively respond to futurechallenges, particularly the need for a greater development orientation in theoperations of HB. In addition, the review should consider way and means toimprove cost and operational efficiency which is highly desirable forcommercial banks in Turkey. The above objectives are to be achieved through astudy to review the following main areas.

2. Main Components of the Study

(a) Organizational Structure, Policies and Procedures

The organizational structure, policies and procedures of HB should bereviewed to determine whether they provide for the most effective andefficient realization of HB's main objectives including mobilization ofsavings; provision of various types of credits; promoting the development ofSMI; and the appraisal and supervision of projects. The study should takeinto account the grouping of main functions and the division of responsibilityat and the relationship between the head office, regional offices andbranches; and the delegation of authority at various management levels. Itshould also examine HB's present policies and procedures including circularsand instructions for processing, approving and supervising various types ofcredits. The study, in consultation with 1B's management and keeping in viewfuture trends in HB's operations, should (i) make specific recommendations forfurther strengthening of the organizational structure of HB with theobjectives of increased efficiency and cost-savings; (ii) propose any changenecessary in the present policies of BB, particularly in respect to resourcemobilization, lending and investments, financial structure, interest spread,provisions and reserves, and personnel and training; (iii) prepare anoperational manual defining a comprehensive and standard set of procedures forthe appraisal and supervision of investment projects to be financed underdifferent types of credits; and (iv) determine the adequacy of staffing at

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ANNEX 3Attachment 2Page 2 of 2

present and projections for 1987-90 at HB's head office, regional offices andbranches on the basis of the review of the organizational structure, policiesand procedures and highlight areas where manpower may be redeployed forgreater efficiency.

(b) Accounting, Auditing and Management Information System

The study should review (i) the application of the new accountingsystem and procedures (to be effective from January 1, 1986) in HB and theirfunctioning; (ii) the internal audit system and standards to ensure theaccuracy of financial transactions and compliance with policies, proceduresand guidelines at various levels in the organization; and (iii) the managementinformation system to enhance its effectiveness as a tool of management. Thestudy should also make necessary recommendations including improvements in theeffective functioning of the new accounting system and procedures,computerization of accounts, internal auditing, and the management informationsystem.

{c) Developmental Role

The study should review the development role of HB, particularly forthe promotion of SMI. In order to achieve the developmental objectives aslaid down in the articles of incorporation of HB, the study should recommendnew activities and appropriate institutional strengthening at the head office,regional offices and branches of HB.

3. Cost, Financing and Timing of the Study

It is estimated that the study would cost about $300,000 includingcontingencies. The study should commence by June 30, 1986 and should becompleted in about 9 months.

4. Follow-up on Findings and Recommendations

The findings and recommendations of the study will be reviewed by themanagement of HB and based thereon, HZ will prepare within three months afterthe completion of study an action program and its timetable forimplementation. A copy of the study will also be provided to the Bank uponcompletion and the Bank will provide comments thereon to assist HB in thepreparation of the above program. The study may recommend certain actionplans, particularly in the areas of internal auditing, computerization, andmanagement information system, which may need the serviceb of experts toprepare comprehensive details and assist in their implementation. Any fundsrequired for the engagement of such experts will be provided by HB out of itsown budget.

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T, 3 3

IKE PRET

nl SASCAlf.- Amael.- of lo dustrial Cdits

(IL million)

|2/31/1981 1j3l/S,92 12/31/1983 U/31/84lb. A.suaS Es. E ouct o. ^ o EM. _mt

A. SiAc eiwt __ - -

S. Niaiumaan bmta 171 202 100 100 s0 204 91 264

II. Neuufsctu,lma

food 2,259 2,517 3,036 3,924 2,920 4,636 2,22S 7,791T ttile 2,831 1.719 2,941 2,077 2,042 L,943 1,456 3,623Leather A

Loather product 753 311 939 444 724 496 696 600Forest products 9,670 3,194 9,873 4,060 6.029 3.938 5,603 3,608Cbedeal/Plastic/Rubber 6u5 1,751 1,006;w 3,531 944 7,226 859 6,789

Paper A paperproducts 270 276- 240 315 335 1,672 306 3,273

Class and glassproducts 1,170 1.390 1,401 1,549 1,343 1,754 712 2,559

Steel - Motal works 3,410 2,294 3.086 3,340 2.409 2,462 2,037 3,630Non-ferroum basic

induetwy 655 469 739 1,065 579 1,326 352 2,221*aricated metal

products 1,924 993 2,356 1,387 2,327 1,672 1,581 1,535Nachinevy and Zlec-

trical machinery 7,315 4,600 7,989 6,730 7,049 7,910 5,453 9,271

III. Service Industry

Tourism - - 405 194 434 153 390 338Other. 1,367 151 1 087 147 841 129 442 124

Total 32,710 19.867 1-:3iS 28S2 29,8S65 3S,72 22.- 47,826

S. Ceogr!e4ical Location

Kiddle North 4,668 2,782 5,515 4,567 4,787 7,271 3.570 14,866Aegean 7,412 5,919 7,609 7,352 6,950 10,327 4,702 13,321Harmors 4,891 4.953 5.442 7,762 4.797 8,999 3,307 10,773Kediterrcnean 3,419 1,878 3,964 2,784 3,441 2,537 2,358 2,663worth East 1,130 319 1,331 399 894 375 575 310South Nast 973 310 986 364 690 354 762 289Black Sea 3.689 1.171 3,977 2,116 3,212 2,231 2,416 1,974Middle East 3,082 881 2,878 1,317 2,111 1,402 2,367 1,331Middle South 3446 1 654 3.550 2,202 2 974 2 229 2 178 2,299

Total 32!7Tf 1 9,I7 !3:E5T i:52T 2rM 5A 347[S 223 47.8i2

C. By Size of Loan.

Loas than 1,000 25.814 6,888 31.290 10,765 24,858 8.336 16.681 6,2351,000 - 10,000 ) 5,206 L1,55410,000 - 100,000) 6.896 12,979 3,962 18.098 4.998 27,389 296 7,712Over 100,000 ) 52 22 325

Total 3 219,867 3;5T 2 2886 198 3,725 22,35478

D. RepayMent Terms (Yere)Less thsn 5 29,051 12,328 30.735 14,702 25,324 19,387 18,859 35,6566 - 10 3,659 7.539 4,517 14.161 4,532 16,338 3.376 12,170

Over 10 - - - - - - -Total 32,710 IW1o S3!5 !TA[ 1I7B5 3372S ZZ,35 4712

Source: Valk Banksui

EMKA/ IDFNovember 1985

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TURKIY ANNEX 3Attachmt 4

5HI PROJECT

HALK BANKASI - Incom. Statem_nts(TL Million)

1981 1982 1983 1984

Interest IncomeBanks 126 1,759 2,376 2,439Portfolio of Bills 1,288 1,553 2,940 8,847Cowoercial Credit 3,780 6,143 9,110 )Cooperative Credits 5,734 6,778 9,646 ) 52,388Industrial Credits 5,409 9,639 10,784 )fund Credits 229 285 323 )Cash for Legal Provisions 1 357 2 492 7 921

Total 17,923 7T-I,

Cou.ission IncomeCredit Operations 387 609 1,091 ) 2,366Guarantees 262 332 429 )Banking Services 383 620 668 756Foreign Exchange 1.169 1.463 2,048 4.054

Total 2,201 3,024 4,236 7,176

Total Interest &Comission Income 20,124 31,673 44.187 78.771

Interest ExpensesSaving Deposits 786 974 4,263 34,444Term Deposits 6,314 17,599 24,343 13,878Central Bank Rediscounts 2,007 2,906 3,429 5,443Sundry Funds 225 142 133 733Coop Blocked Deposit 95 225 458 1.531

Total 9,427 21,846 32,626 56,029

Met Interest &Coum. Incomes 10,697 9 827 11.561 22,742

Other Income 440 940 1,076 1,573

Income beforeNon Finan. Expenses 11,137 10,767 12,637 24,315

Non Financial ExpensesPersonnel Expenses 3,156 4,404 5,809 8,064Duties and Taxes 639 1,235 1,824 843Depreciation & Provision 99 152 221 322Other Expenses 2,067 2,098 2 593 4.750

Total 5,961 7,889 10,447 13,979

get Income 5.176 2,878 2.190 10,336

Source: Halk Bankasi

EMENA/IDFNovember 1985

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HALE DA II - Cdend mUe ie

(as of Decmbr 31.)i9ei 1962 19J3 1954

Cash 4,982 7,749 11,109 17,396

State Boeds 1/ 280 794 1,086 1,084Liquiity reserves oV 10 140 20 399 29 363 46,21

Previsions 10:425 llv1If 30,449 74;T§

Central lask 9,914 7,111 9,116 20,735Banks 6,778 18,435 24,673 49,2L2Ueourities - boant 5,406 8,469 13,593 27,L18

Commeroal Credits 1,959 22,329 34,523 43,708

Industrial Cedits 19,867 28,862 35,725 47,827Cooperative Credits 21,484 25,928 40,892 50,795Funds Credits 21 576 33 630 47 991 65 009

Profelssonal Credlts 37iW27 163,627

Vot lined Assets 2.108 3,302 8,902 14,035Otbhr Assets 9.553 16.431 26.723 79.160

Total Assets 126A987 196.441 283,696 463.028

LiabilLtiesSaving. Depoits 9,637 11,310 23,915 96,622Trm Deposit 26,157 53,101 66,215 20,321special Deposit 23 710 47 368 59 882 139. 56

Deposits 39e350 111,779 150,01 2 256,539Cooperative

Blocked Capital 2,523 3,318 4,789 5,617Central BankRediucount Funds 15,575 14,701 22,010 25,618

Debt 21,132 32,145 45,311 56,896Payment Orders 271 244 283 513Sundry Creditors 3,193 6,061 14,650 20,692Other Liabilities 8 839 14 241 22 571 55 639

Total Liabilities 111i037 U2.489 259,626 421,S13

EqtuityPaid in capital 4,880 5,000 10,000 11,500leserves:

Legal Reserves *1 280 796 1,086 1,896Contingency Resrees 1,009 3,138 4,650 4,740Revaluation Reserves - - 3,423 6,492

Provwi*iois 6 11 18 28Profit 5.176 2,879 2,190 10,336Prve,. for Special Account 3/ 46599 2.128 2.703 6,523

Total Equity Zi41,51S

Total Liabilities 4 Equities 126.987 196.441 283,696 463,028

1I State Sands purchased in accordance vith ArticLe 36 of the Bank's Law for possiblefuture losses and legal reserves.

2/ Liquidity Resrves required by the Central Dank as additional provisions for deposits.yI Required reserves for foreign exchange and foreign trade losses.

Source: Balka Bankai

ENZN/IDFNovmber 1985

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TURKEY ANNEX 3Attachment 6

SMI PROJECT

NALK BANRASI - Proiected Income Statements(TL Million)

1965 1986 1987 1988Interest IncomeBanks 2,000 2,200 2,500 3,000Portfolio of Bills 12,500 14,000 16,000 19,000Co mercial Credit 27,800 40,000 52,000 67,350Cooperative Credits 20,880 30,000 39,000 50,000Industrial Credits 27,870 39,000 50,000 65,000Fund Credits 600 900 1,000 1,200Cash for Legal Provisions 14.500 24 200 30 000 39 000

Total 106,15 244200

Commission IncomeCredit Operations 2,250 3,000 4,000 5,500Guarantees 1,000 1,400 1,900 29500Banking Services 1,100 1,500 2,000 2,500Foreign Exchange 4,500 6,000 7,250 8,750

Total 8,850 11,900 15,150 19,250

Total Interest &Comission Income 115,000 162,200 205,650 263,450

Interest ExpensesSaving Deposits 16,200 22,240 27,500 34,400Term Deposits 62,800 88,960 110,000 137,600Central Bank Rediscounts 7,100 11,000 15,000 20,000Sundry Funds 201 302 403 504Cop Blocked Deposit 8o00 1,400 01800

Total 89,101 123,602 154,303 194,304

Net Interest &Comm. Incomes 27,899 38.598 51,347 69.146

Other Income 2,000 2,500 3,000 3,500

Income beforeNon Finan. Expenses 29,899 41,098 54,347 72,646

Non Financial ExpensesPersonnel Expenses 11,250 15,500 21,000 27,500Duties and Taxes 1,900 2,800 3,800 5,000Depreciation & Provision 450 600 750 1,000Other Expenses 7.799 12,198 16,797 23,646

Total 21,399 31,098 42,347 57,146

Net Income 8,500 10,000 12,000 15,500

Source: Halk Bankasi

EMENA/IDFNovember 1985

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TURKEY ANNEX 3Attachment 7

SMI PROJECT

HALK BANKIASI - Proiected Balance Sheot(TL Billion)

(as of December 31)1985 1986 1987 1988

Assets:

Cash 21.0 28.7 38.6 45.9Liquidity Reserves 66.U 85.0 110.0 140.0Central Bank 12.0 15.0 19.0 24.0Banks 24.0 25.0 27.0 29.0Securities and Bonds 40.0 45.0 52.0 60.0Commercial Credits 75.0 100.0 124.0 150.0Industrial Credits 74.5 100.0 124.0 150.0Cooperative Credits 80.0 109.0 134.0 170.0Fund Credits 90.0 125.0 160.0 200.0Net Fixed Assets 20.4 25.4 31.0 36.0Other Assets 57.6 71.6 82.0 91.0

Total Assets 560.5 729.7 901.6 1,095.9

Liabilities:

Deposits 300.0 394.0 502.0 618.0Coop. Blocked Cap. 8.5 11.4 13.9 17.5Central Bank Rediscount Funds 42.0 53.0 65.0 82.0Payment Orders 1.0 1.3 1.5 1.8Sundry Creditors 25.0 31.0 35.0 40.0Other Liabilities 126.9 174.3 210.4 251.1

Total Liabilities 503.4 665.0 827.8 1,010.4

Equity:

Share Capital Paid in 30.0 30.0 30.0 30.0Reserves 18.6 24.7 31.8 40.0Profit 8.5 10.0 12.0 15.5

Total Equity 57.1 64.7 73.8 85.5

Total Liabilities + Equity 560.5 729.7 901.6 1,095.9

Source: Halk Bankasi

EMENA/IDFNovember 1985

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Annex 4

V. TECHNICAL ASSISTANCE FOR SMI DEVELOPMENT

A. Background

1. Small and medium scale industrial enterprises (SMI) in Turkey sufferin varying degrees from the same difficulties that characterize suchenterprises in almost all developing countries, namely poor management,obsolete and inadequate equipment, limited access to finance and to new andimproved technologies and marketing problems (paras 2.15-2.16 in the text).The dynamism of Turkish entrepreneurs has helped to mitigate these problems toa considerable extent but there remains substantial scope for furtherimprovements. The development of economically efficient SMIs can help tocheck the rapidly growing urban unemployment in Turkey. Thus, technologiesintroduced must reflect the most appropriate factor relationship betweencapital and labor.

2. The technical assistance required by. SMI should be geared to thecurrent needs of small enterprises in Turkey aibd this, above all else, is forimproved technology, greater orientation towards exporting, enhanced abilityto produce products that are competitive in price, quality, and delivery, andimprovement in management training and skills of SMI managers. A greaterdegree of linkages with larger industries and trading corporations throughsubcontracting and exporting contracts Is critically needed to allow access tonational and international markets. Moreover, technical assistance can helpensure that the financial credits made available through banks can beeffectively used by SMIs.

3. Until now SMIs have had very limited access to technical assistanceservices. Over the years a number of institutions have been established toprovide advice and information in technical and management fields, such as theNational Productivity Center (NPC); Industrial Training and Development Center(SEGCE), which has evolved programs of specialized training; Scientific andTechnical Research Council of Turkey (TUBITAK) Turkish Documentation Center(TURDOK), with excellent technical research facilities and an activeinformation service; and other more specialized subsectoral institutes such asthat for the leather industry at Pendik. Although these institutions havebeen effective in assisting large industry, few of their activities have beendirected towards the small scale sector.

4. Existing Technical Assistance Programs for SMI. With the support ofUNDP/UNIDO, the Small Industry Development Organization (SIDO) established ademonstration center (pilot project) in 1970 in Gaziantep in Eastern Turkey tohelp small industries of that district. 1/ The Center which comprises commonfacilities for the metal working industries has had very limited impact.

L/ Originally, the project started as an industrial estate with some commonfacilities. Subsequently, the project was expanded into a demonstrationcenter.

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Because of its location in a provincial town, the Center has been unable toattract adequately qualified engineering staff. The emphasis has been ondemonstrating the use of relatively complex machinery and technology involvingmetal working operations. Small workshops have been unable to assimilate theadvanced technology or apply it to their production operations. The Centerhas not paid sufficient attention to developing effective extension serviceswhich would have assessed the actual technological needs of SSI and helped tomeot these needs. The assistance given to SSI has been limited to generalinformation and some tool and die-making help. Some large firms in theGaziantep area also have been assisted. A UNIDO expert reported in mid-1984that the common facilities at Gaziantep (machine shops, metallurgical labs,heat treatment shops, etc..) were being used at below 30X capacity. Recently,SIDO has made some headway in recruiting qualified engineers by offeringadditional incentives. Also, it is recruiting extension personnel toestablish closer liuks with the SSI community. This effort should helpimprove the effectiveness of the Center.

5. In 1975, UNDP/UNIDO proposed to the Government to expand SIDO into anational institution to help small enterprises. It recommended theestablishment of centers similar to that in Gaziantep throughout the countrywith the idea that each would serve a specific industrial sub-sector. Ankarawas selected as the site for the second center specializing in the foundryindustries. After some delays, in June 1983, the Government approved the UNDPproject for the Ankara foundry center and also decided that SIDO would operateas a semi-autonomous body of the Ministry of Industry and Trade (MOIT) withthe objective of providing technical assistance'and other extension servicesto small and medium scale industries at the national level. Thus a newdirection was given to SIDO.

6. The immediate objectives of the SIDO/UNIDO project are to convertGaziantep to a regional center with a special capability to assist small scalemetal industries, to set up the Ankara center for foundry industries and tohelp SIDO develop an extension service. The UNDP input towards the projectfor a three-year period starting October 1, 1983 is estimated at US$912,150 ofwhich about US$400,000 is earmarked for foundry equipment and the remainderfor technical advisory assistance. The Government input for the project isestimated. at TL1,420 million (US$6.5 million). As of December 31, 1984, UNIDOhad provided a SSI expert to advise and assist in the overall planning andexecution of the project and to formulate a strategy for strengthening SIDO.The remaining advisory inputs comprise technical experts for the foundrycenter and some short term consultants (about 55 man-months).

7. SIDO currently has a total staff of 72 of which 6 are employed atSIDO headquarters and the remaining 66 at Gaziantep. Besides the General andDeputy General Director, SIDO headquarters employs three engineers who aresupervising the implementation of the Ankara foundry center. These engineersare expected to move to the Ankara center after it is established. TheGaziantep center has 11 professionals of whom four are business economists.Because of the difficulty of finding qualified extension sta'f, SIDOmanagement is building up staff slowly even though adequate budget isavailable. Twelve professionals are proposed to be recruited by December1986. SIDO's operating budget was TL140 million in 1984 and is estimated atTL240 million in 1985 which is adequate. The SIDO management team appears

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competent and qualified. Both managers have had considerable experience insmall industry development. SIDO's operations are reviewed by a governingbody chaired by the Deputy Under-Secretary of the Ministry of Industry andTechnology which includes a representative of the Halk Bank.

8. SIDO's New Strategy for Technical Assistance. SIDO's management, inthe light of its experience with Gaziantep, have embarked on a new strategyfor assisting SMI. They have recognized that for SIDO to be effective itshould develop as an extension institution to promote the use of technicalassistance; to stimulate the availability of service programs, training,consultancies, and financial assistance geared to the needs of SHI; and to actas a referral agency to other specialized institutions or individuals whowould be able to provide more complete and specialized services. Thus, SIDOwill need to marshall other technical assistance resources available in Turkeyin this effort, as mentioned above, as well as give a new orientation to itsown activities. This will entail: (a) a greater emphasis by staff ondiagnosis of SMI problems and their referral either to specializedinstitutions or to short term consultants able to provide solutions;(b) assisting SMI to become more involved in promoting exports, includingfeostering closer linkages with export trading corporations as well asorienting their product development towards external markets; (c) designingand presenting training programs for SSI entrepreneurs on its own and with theassistance of other institutions; (d) expanding management assistance effortsto improve management of SMIs; (e) giving a stronger focus on providing accessof SMIs to new technologies; and (f) becoming more involved in preparingprojects for sub-borrowers of Halk Bankasi.

B. Proposed Technical Assistance for SIDO

9. The proposed project will assist SIDO in the implementation of itsdevelopment strategy (para 8) with a modest beginning. It will provideassistance to SIDO over a three-year period to (i) strengthen its overallorganization, management and staff capability; (ii) develop a decentralizedprogram of extension services; (iii) develop a capability in the field oftechnical information and to achieve a faster response to requests for help;(iv) develop an efficient system to utilize other resource organizations andconsultants in its efforts to improve the operations of SKI. The importantelements of this technical assistance program include consultant services,training, equipment and reference materiala, and other institutional supportfor SIDO. The impact of SIDO's new development strategy as well as the rangeand cost-effectiveness of its overall activities, including the role of twodemonstration centers at Gaziantep and Ankara, will be reviewed by theGovernment with SIDO in mid-1987 and end-1988 (which would be the middle andend respectively of the implementation of the T.A. component of the project)and its findings and conclusions will be discussed with the Bank with theobjective of adjusting/redirecting the strategy and activities of SIDO, ifnecessary, in the light of experience gained during the period. The foreignexchange cost of the program (see summary table below) to be financed underthe proposed Bank loan is estimated at US$1.25 million and the local currencyrequirements of SIDO to support the proposed program of technical assistanceare estimated at TL 330 million during 1986-88 in 1985 prices (details inAttachment 1).

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Table 1: SIDO: FOREIGN AND LOCAL COSTS OF T.A. PROGRAM

Items 1986 1987 1988 Total

Forsign Cost. (Us$000)

1. Organization Development andInformation System for SIDO HQ 109 45 45 199

2. Extension Activities 56 45 45 146

3. Information SystemsDevelopment (Branches) 200 8O 80 360

4. Technical Advisory Services 80 140 1SO 400

13Z Physical & Price Contingency 58 40 47 145

Sub Total 503 350 397 1,250Local Costa(Constant TL million) 44 110 176 330

gi) Organizational Development of SIDO

10. The proposed project will help strengthen SIDO's organizationstructure and management capability to carry out the envisioned program ofdevelopmental assistance to the SMI sector. SIDO will establish six branchoffices in addition to the Ankara and Gaziantep centers to develop a nationalprogram of extension services. It will also need to strengthen itsheadquarters staffing by hiring at least 5 professionals by June 30, 1986 tomanage this program and to operate a computerized information system linkingheadquarters and branches (see Attachment 2 for details). The overall programwill require SIDO to recruit some 40 professionals during 1986-88, in additionto its current recruitment plan to hire 12 professionals by end 1986, mainlyfor the Ankara center. Given the paucity of experienced staff, the programincludes a substantial training component for SIDO personnel (para 17).

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11. The Establishment of six New Branch Offices. Between 1986-88 SIDOwill establish six new branches apart from the Centers at Gaziantep andAnkara. These will be developed approximately at a rate of two per year. Thenew branches are likely to be located in Istanbul, Izmir, Bursa, Adaiia, Konya,and Eskisehir which are important centers of SMI. Each branch will need aminimum staffing of 5 professionals within the first two years ofestablishment apart from those who will be employed directly in the regionalcenters at Gaziantep, and Ankara. To ensure the efficient operation at bothheadquarters and branch offices, it will be necessary to recruit adequatesupport personnel - at least four support personnel including secretaries anddrivers at each branch office. rhe final actual staffing at each branch willdepend on the development of business.

12. Organization and Procedural Changes. With the help of the Planningand Training Advisor (para 15) SIDO management will introduce appropriateorganizational and procedural changes to allow maximum autonomy to thebranches and centers.

13. Staff Training. With the addition of new operational systems and newactivities, SIDO will need to mount internal staff training programs (paras17-18) to ensure that new staff would carry out their task: in a satisfactorymanner.

14. The technical assistance component will assist SIDO's organizationalstrengthening by financing the following expert assistance.

15. Planning and Training Advisor. SIDO will recruit by July 1, 1986 anadvisor to assist in planning the new crganization of SIDO, designing anddeveloping training programs for SIDO : aff, and developing criteria forassisting SMIs (para 15). The advisor will also participate directly in thetraining of staff for the various programs. Estimated cost: US$54,000.Detailed terms of reference for the advisor are given in Attachment 2.

16. Equipment and Reference Material. SIDO headquarters will expand itsbasic information resources by acquiring appropriate handbooks, referencepublications, and periodicals, including small collections of similarmaterials for each branch office. Estima'.d cost: US$30,000.

17. Overseas Training. (i) Study tours for SIDO management personnelwill be provided to visit effective industrial extension organizations mainlyin developed countries to observe administrative policies, procedures andprograms. This will assist in creating and maintaining an administrativeawareness of international industrial extension practices. Three persons foran average of one month each will participate to be utilized during 1986-87.(ii) Training tours for SIDO professional staff will be provided atappropriate organizations, which will include working assignments and shorttours of relevant industrial subsectors as well as training on managementinformation sytems for extension activities. Approximately 15 person-monthsof training will be made available in all to be utilized during 1986-88.Total estimated cost: US$70,000.

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18. Local Training on Computer Information Systems. SIDO will takeappropriate measures to meet the training needs of its headquarters and branchstaff in this area.

(ii) Strengthening of Extension Activities

19. SIDO's existing embryonic extension services will be strengthened toinclude increased emphasis on a number of activities as mentioned below. SIDOwill also hire a Branch Office Manager to coordinate and supervise theextension activities of the branch offices.

20. Problem Diagnosis and Referral. The industrial extensionprofessionals will continue to handle and resolve problems which fall withintheir capabilities. However, many problems will require the expertise ofoutside consultants. In such cases, it will be the responsibility of SIDOpersonnel to diagnose the SMI problems and to refer the SMIs to qualifiedshort-term consultants. These consultants will negotiate contracts with theSMIs using funds provided for their services on a cost-sharing basis (para35). It is estimated that, at full operations, SIDO staff at branches will beable to visit about 900 SMI enterprises and provide further technicalassistance to about 350 such firms per year.

21. Export Promotion. Assisting SMIs to export requires meetinginternational standards of quality and packaging, competitive pricing and anawareness of export rules and regulations. A program of information, trainingand assistance for SMIs to encourage and stimulate their export potentialswill be developed and implemented by SIDO. A number of foreign short-termadvisors will assist in helping to identify new markets for SMI products andproviding guidance and feedback on product acceptability and conformance withdelivery requirements. Assistance from export trading companies will besought to meet these objectives. About 40 SMI enterprises will be assistedper year for export promotion.

22. Entrepreneur Training. SIDO will develop training programs for SMIentrepreneurs to cover specific subject areas to be identified through surveysand analysis. Other institutions e.g. SEGEM, NPC, will assist in coursepresentations. A typical program will be a one- to three-day seminar orworkshop, aimed at improving the problem-solving capabilities of theparticipants and improving their managerial and technical competence. SIDOwill hire a Training Manager at headquarters to plan, coordinate and assist inits training activities. About 200 entreprreneurs per year would participatein training programs.

23. To strengthen SIDO's extension activities, the following elementswill be financed under the technical assistance program.

24. Advisory Assistance. (i) An Entrepreneur Training Advisor to berecruited by July 1, 1986 to develop training programs for SMI owners andmanagers, and (ii) short-term technical advisors to assist in the developmentof SMI exports. These advisors will le recruited during 1986-88 in line withthe estimates in Attachment 1. Estimated cost: US$136,000. Detailed termsof reference are given in Attachment 3.

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25. Other Institutional Support. Links between SIDO and export tradingcompanies will be developed; these firms will assist SIDO in undertakingmarket research, publication of catalog, and brochures, and other relatedactivities to help SMI's export activities. Estimated cost: US$10,000.

(iii) Development of Information System

26. SIDO's problem-solving capability will be strengthened, its technicalresources improved, its response time shortened, and its ability to monitorthe effectiveness of its technical extension activities improved with thedevelopment of an information system made up of the following elements:

27. Computerized Data Bases. A computerized information system will bedeveloped, involving data bases with primary and secondary data from surveysand other soutrces and linked through a micro-computer network to all SIDOunits. This will expedite the collection, storage and retrieval ofinformation, the transmission of data, messages and reports, and providebetter managemert control of the extension and technical advisory services.

28. Inter-firm Linkages. This will utilize stored company profiles andother data bases. The system will expedite the development and strengtheningof inter-company linkages to promote sub-contracting, procurement, exportcontactu and other needed services.

29. Technical Information Dissemination. The computerized informationsystem will permit the dissemination of technical information and data to SMIsthrough the SIDO industrial extension branch offices and centers.

30. The computer system will also be used for planning, monitoring andsupervising the extension service activities and for promoting inter-firmLinkages, particularly sub-contracting and export marketing links with tradingcompanies. The information system will allow SIDO branches to develop a databank on the SMI population in their service areas, monitor the extensionservices requested and follow up on the impact of the services provided.Resources devoted to these activities can be altered depending on the effect-iveness of the programs. The computerized information system will permit SIDOto maintain an up to date inventory of equipment and facilities of SMI inter-ested in exporting or sub-contracting and enable SIDO to facilitate suchlinks. SIDO will hire three information specialists at headquarters to managethis program.

31. The project will help in the development of the information system asfollows:

32. Consultant Services. A Data Systems Analyst to be recruited bySeptember 1, 1986: (i) to design the computerized information system whichwill link all SIDO offices, (ii) to train SIDO staff in computer system use,data gathering, storage and retrieval; (iii) to assist in developing neededdata bases; and (iv) to promote use of computer systems for SMIs whereappropriate. Estimated cost: US$60,000. Detailed terms of reference for theData Systems Analyst are given irn Attachment 3.

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33. Equipment and Reference Materials. A basic equipment package will befinanced for each branch office (6 total) and the two existing centers. Theequipment package will consist of the following items: one 256K expandablemicrocomputer, with letter quality printer, other peripheral equipment andsoftware programs, connected by modem to the headquarter's computer; oneelectric typewriter; one photocopier; one audio-visual package consisting of35 mm camera, projectors, portable screens, VCR, TV monitor, and storagecabinet; two office vehicles; and computer and office supplies. 1/. Estimatedcost: US$300,000.

34. Headquarters Computer and Office Equipment. This package willinclude a multi-processing computer with peripheral equipment, two electrictypewriters, one word processor, one photo copier, an audio-visual equipmentpackage for training and one vehicle 1/. Estimated cost: US$ 45,000.

(iv) Technical Advisory Services

35. The use of resources and capabilities of other organizations can helpSIDO provide a broader range of expertise and specialized assistance to SMI.SIDW will, therefore, develop and maintain a roster of approved technicalconsultants (private consultants as well as consultants from otherorganizations in Turkey) able to provide assistance to SMI in various fields.Following diagnostic surveys by SIDO staff of problems.and of the need forassistance, firms will be recommended to make use of experts from otherorganizations or individual specialized consultants. Assistance to SMIs forfinancing such services will be provided on a cost-sharing basis with therecipient enterprise paying up to one-third of the costs in the beginning andthe balance being provided by SIDO. The -onsultants on the roster vill bedrawn from the public and private sector, from research centers, universities,consulting organizations and other sources of expertise. Detailed criteriaand procedures for evaluating and approving individual assistance will bedeveloped by SIDO in the light of the recommendations of the Planning andTraining Adviser.

36. Advisory services will be available primarily for three main types ofactivities: (i) SMI Management. Improvements in organization, procedures,planning, controls, systems; (ii) Marketing. Market research, distributionfor domestic and export sales, packaging, product development aaddiversification, subcontracting links; (iii) Technology and Productivity.Product design, production and process improvement, plant layout, materialhandling, introduction of new technologies, quality control, etc. Theadvisory services will not be available for financing routine businessactivities such as auditing, legal services, architectural services forexpansion, etc.. All participating consultants and organizations will agreeto a SIDO prescribed daily fee, an upper limit on the number of days to bemade available to any single enterprise in any one year, and the length andscope of any single assignment. It is estimated that about 250 enterpriseswill benefit from technical advisory services to be supported by US$400,000allocated in the technical assistance program for SMI. This area of activitywill be of a pilot nature and SIDO will review its effectiveness, cost-sharingbasis for services, and criteria and procedures for evaluating and approvingof assistance to SMI during project implementation, and will make adjustments

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an necessary. SIDO will continue to arrange the technical advisory servicesfor SMI on an appropriate cost-sharing basis subject to satisfactory resultsof these services. Satisfactory assurances were received from the Governmentto this effect during negotiations.

37. Procurement: Goods and services will be procured by SIDO accordingto the Bank's guidelines. Bid packages valued at beLow US$250,000 will beprocured through international shopping based on price quotations from atleast three suppliers. Items costing US$250,000 or more will be procuredaccording to the Bank's ICB procedures. Consultants' selection will followBank guidelines in this regard.

C. Monitoring of SIDO Technical Assistance Program

38. The proposed technical assistance program would be a substantialaddition to SIDO's activities involving significant increases in its branchesand staff, introduction of a new computerized information system, provision ofextension services, promotion of sub-contracting, etc. The successfulimplementation and operation of the program would, therefore, be a majorchallenge to the SIDO management. However, no serious problems are foreseenin this respect in view of the competence and considerable experience of theSIDO management and the use of advisors. Nevertheless, to ensure that thetechnical assistance component is adequately implemented and chat theexpansion of SIDO activities is carried out on schedule, a project monitoringprocedure is recommended in addition to the usual project supervisionprocedures: (i) Copies of final reports by foreign advisors to SIDO will besent to the World Bank for review and comment. Briefing and debriefingsessions will be held with the advisors as appropriate.(ii) SIDO will prepare a semi-annual progress report for the World Bank.(iii) SIDO will prepare a more complete annual report detailing activities,expenditures and results as related to the annual goals under the program.(iv) SIDO will maintain separate accounts for the expenditures under proposedtechnical assistance component. These accounts will be audited and submittedtogether with the annual accounts of SIDO for the Bank's review.

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ANNEX 4Attachment 1

TURKEYSMI PRCJECT

SIDO: Cost Estimates of Technical Assistance Program

Items Expenditures by Year1986 1987 1988 Total

A. TO BE FINANCED UNDER THE BANK LOAN (us$000)

Orsga1ization Development (SIDO)!lTannxng and Training Advisor 54 54Overseas Staff Training 10 30 30 70Headquarters Information Collection 10 10 10 30Headquarters Computer Acquisition 20 20Headquarters Vehicle & Office Equipment 15 5 5 25

109 45 45 149Extension ActivitiesEntrepreneur Training Advisor 36 36Short-Term Export Advisors 20 40 40 100Export Trading Companies 5 5 10

56 45 45 146Information System

Data Systems Analyst 60 60Branch Office Equipment Package (6) 80 80 80 240Centers Equipment Package (2) 60 60

200 80 80 360Technical Advisory Services

Management Improvement 25 34 51 110Marketing Development 30 49 66 145Productivity Improvement, etc. 25 57 63 145

80 140 180 400Subtotal 445 310 350 1,105

Contingency '13%) 58 40 47 14'

Total 503 350 397 1,250=m= .M m...

B. TO BE FINANCED FROM DOMESTIC SOURCES (Constant 1985 TL Million)

Headquarters 0 20 40 60Branches 40 80 120 240

Subtotal 40 100 160 300

Contingency (10%) 4 10 16 30

Total 44 110 176 330

Source: Bank StaffEMENA/IDF November 1985

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Annex 4Attachment 2Page I of 2

TURKEYSKI Pro ect

SIDO: Recommended Additional Staff

SIDO activities under the Technical Assistance Component of theWorld Bank loan will require the addition of the following professional andsupport staff over the three-year period. The headquarters staff will berecruited by March 31, 1986 and branches will be staffed as needed.

A. Headquarters

(1) An Information Systems Manager to coordinate the use of theinformation system and to serve as a communication point for otherinformational resources (TURDOK, etc.).

(2) An Information Systems Specialist to store, retrieve and transmitdata and to forward inquiries and responses to appropriate parties.

(3) A Librarian to build the information collection, conduct libraryresearch, receive and respond to inquiries, and maintain linkageswith other library and reference centers.

(4) A Branch Office Manager to handle administrative matters,correspondence, inquiries and responses, and to coordinate andsupervise the branch office expansion activities.

(5) A TraininR Manazer to design and present training programs for SIDI.personnel and to coordinate training programs to be presented bySIDO or other organizations such as SEGEM and NPC.

(6) A Manager to review projects to be assisted through technicaladvisory services.

(7) Appropriate support personnel (secretariess etc.).

B. Branch Offices

Initial staffing of a typical SIDO branch office should consist of 5professionals and 2 support personnel. As demand or services grow and thespecific needs of the branch office area industries are identified, the staffcan be added to with appropriate generalists or specialists. Previous workexperience in industry is very desirable for all branch office professionals.

Suggested Initial Branch Office Personnel

'%) An experienced engineer Economist/Financial Analyst to serve asManager.

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Annex 4Attachment 2Page 2 of 2

(2) A business administration graduate specializing in management ormarketing.

(3) Two specialist(s) in r:he major industrial subsectors of the area.

(4) An information syste-da specialist to operate the branch computerinformation system.

(5) A secretary/receptir2nist.

(6) A driver.

Source: Bank StaffIMENA/IDF, December 1985

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Annex 4Attachment 3Page 1 of 4

TUlRKEY

SKI Project

SIDO: Terms of Reference of Consultants

1. Planning and Training Advisor

Expertise and Background

The advisor should have appropriate qualification in the fieldsof business administration, management or industrial or system engineering,preferably with a graduate degree. The advisor's work background shouldinclude at least 15 years of consulting or relevant experience concernedwith organization, planning, policies, procedures and controls.Experience in identifying, developing and presenting training programswould also be needed.

Terms of Reference

The advisor will be required to undertake the following taskswithin the period of the assignment:

(a) Review, analyze, and advise on SIDO's organization planning,policies, procedures, controls, and relationships with otherorganizations capable of assisting the small industry sector.

(b) Suggest possible changes and improvements to SIDO management toimprove coordination, communication, and control oforganizational activities.

(c) Recommend operational improvements to SIDO management and assistimplementation of approved actions.

(d) Identify, design, develop and present training programs for SIDOstaff professionals and support staff relating to systems andprocedures, and rules and regulations to insure that full under-standing of SIDO's objectives is widely disseminated, and toprovide job motivation to the staff. This activity shouldinclude orientation programs for new employees and courses onorganizational subjects such as goals and objectives, policies,uniform record keeping, standard reporting procedures, opera-tional activities, procedures for contacting and maintainingrelationships with SM19, etc.

(e) Prepare, for the individual staff training courses, a coursesummary, lecture outlines and notes, course handout materialsand appropriate audio-visuals for course use.

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Annax 4Attachment 3Page 2 of i'

(f) Perform such other related duties as SIDO management mayrequest, within the time constraints of the assignment.

2. Entrepreneur Training Advisor

Expertise and Background

The advisor must have qualifications in the fields of businessadministration, economics, or a related field preferably with a graduatedegree. The advisor's work background should include at least 10 yearsexperience in industry consulting, and/or education and training.

Terms of Reference

The advisor will be required to undertake the following taskswithin the period of the assignment:

(a) Review and analyze available information on the problems andneeds of small and medium-scale industries in Turkey.

Cb) Consult with other Turkish organizations involved in industrialtraining, such as SEGEM and the National Productivity Center, toascertain and verify SMI problems and needs.

{c) Design course outlines on subject areas relating to SMI problemsand needs.

(d) Survey a sample of SMIs to ascertain potential interest in theproposed courses.

(e) Develop, for courses in which a need has been identified, acourse syllabus, lecture outlines and notes, course hand-outmaterials, and appropriate audio-visuals.

(f) Test the courses with selected SIDO professionals and train themin the course content to permit them to present the courses toSMI entrepreneurs -nd personnel in various areas of Turkey.

(g) Work with other training organizations to include the courses intheir curricula as demand warrants.

(h) Prepare a final report for SIDO management, detailing activitiesduring the assignment and recommending a future course of actionfor training SKI entrepreneurs.

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Annex 4Attachment 3Page 3 of 4

3. Data Systems Analyst

Expertise and Background

The advisor must have qualifications in the fields ofInformation Science, Computer Science or Library Science, preferably withone or more graduate degrees. The advisor's work experience shouldinclude 10 years of responsible positions in consulting industry,universities or government in the field of computerized informationsystems, the design of data bases, and training experience in computersystem usage.

Terms of Reference

The advisor will be required to undertake the following taskswithin the period of the assignment:

(a) Design and develop specifications for a microcomputerinformation system and communication linkage system between SIDOheadquarters and all SIDO units. The linkage system will be ina "hub and spoke" configuration with headquarters serving as the"hub" with a multi-processing computer, suitable peripherals andsoftware.

(b) Design and develop needed data base forriats for computerizedstorage and retrieval of: company profiles; demographic,industrial and economic data; lists of companies interested insubcontracting and exporting; technological information andreference data; aud such other data bases as will facilitate theprovision of extension services to SMIs.

(c) Prepare a computer system operating manual (to be printed inboth T-urkish and English) for SIDO staff use.

(d) Prepare training programs for SIDO staff in the use of thecomputer system use and develop standard instruction sheets forthe various data bases.

(e) Supervise the procurement and installation of the computersystem.

(f) Outline required software programs to be developed by Turkishconsultants under contract.

(g) Prepare necessary forms to be utilized in data gathering andtrain SIDO staff in their use.

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Annex 4Attachmnt 3Page 4 of 4

(h) Provide problem-solving assistance to uere of the computerizedinformation system.

(i) Assist in promoting the ucs of microcomputerc in the SNI sectorwhere appropriate.

(j) Prepare a final report to SIDO managemtnt recommending coursesof action for strengthening the service capabilities of theinformation system.

Source: Bank StaffEHENA/ IDPDecember 1985

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Annex 4Attachment 4Page 1 of 2

TURKEYSMI Project

SIDO: The Computerized Information Syscem

1. The computerized information system must be regarded as an essentialfeature of tha technical aasistance component for SIDO. It will have two mainfunctions: (1) the gathering, storage and retrieval of data essential toSIDO's operations; and (2) the improvement of communications and controls.The establishment of six branch offires, in addition to existing andcontemplated centers, will make SIDO a largely decentralized organization. itwould not be practical or cost effective to suggest that each and every unitof SIDO establish its own information center. The information system shouldbe in one location with easy access to that system by all SIDO units.

2. The logical location for the information system is at SIDO head-quarters in Ankara. It will be composed of computer data bases and acollection of resource and reference materials. Each unit of SIDO will have asmall collection of basic handbooks and other printed materials useful inproviding industrial extension services. Each unit will also have amicrocomputer which is linked to the headquarters computer by telephoniccommunication.

3. Such computer networks exist in Turkey at present and they providepractical solutions to transmittal of various kinds of information andmessages many hundreds of miles and to remote locations. This has been madepossible in the last decade by the marked improvement of thetelecommunications system of Turkey.

4. As SIDO staff gain experience in the operation of the computerizedinformation system, additional uses of the information system will begradually introduced. A listing of uses includes:

(1) Development and utiliza.ion of data bases:

(a) Company profiles, in sufficient detail (skills, equipment,capability, etc.) to permit matching of needs and oppor-tunities with other organizations.

(b) List of qu2 ified consultants, de -;ling areas of expertise,'s* wie in onulting assignments.

(c) Lic of c-466ies with sub-contracting needs to permitm t q - th companies capable of producing undersuL Z -A -ct.

(d) List v. companies with export interest and/or potential.

(e) List -E export trading companies and areas of interest andpriM1a-y markets.

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Annex 4Attachment 4Page 2 of i

(2) Transmishion of data to SIDO units and responses to SMI inform&-tion raquests.

(3) Transmission of rerorts, messages and internal information toSIDO units concerned.

(4) Records of management and technical assistance rendered to SHIl.

(5) Transmission of SMI training program information, courseoutlines, etc., to facilitate promotion of training courses.

(6) Utilization of the computers for training of SMI entrepreneurs,including the use of business games.

(7) Administrative record keoping such as budgeting and accounting,personnel, purchasing, etc.

(8) Production of timely management control reports.

(9) Data on SMI sub-borrowers of SYKB and Halk Bankasi.

Source: Bank StaffEMENIV IDFDecember 1985

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Annex 5

TURKE

SNI PROJECT

Projected Disbursement Schedule(in US$ millions)

Year Period Amount Cumulative

1986 July-December 6.0 6.0

1987 January-June 6.0 12.0July-December 12.0 24.0

1988 January-June 15.0 39.0July-December 14.0 53.0

1989 January-June 13.0 66.0July-December 11.0 77.0

1990 January-June 8.0 85.0July-December 6.0 91.0

1991 January-June 5.0 96.0July-December 3.0 99.0

1992 January-June 1.0 100.00

Source: Bank Staff!MWIiTIDFDecember 1985

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Annex 6TURKEY

SMI PROJECT

Selected Documents and Data Available in the Proiect File

A-1 Turkey: Prospects for Small-Medium Scale Industry Development andEmployment Creation, World Bank Report No. 2913-TU, September 1980.

A-2 Turkey: Special Economic Report-Policies for the Financial Sector,World Bank Report No. 4459-TU, September 1983.

B-1 Consultants' Report on Technical Assistance for SMI.

C-1 Detailed Operational and Financial Projections of SYKB and BB.

D-1 Miscellaneous Working Papers for the SMI Project.

Source: Bank StaffEMENA/IDFMarch 1985