FILE COPY. Public Disclosure Authorized. Document of The 'World Bank FOR OFFICIAL USE ONLY. Report No. 2447a-TU. Public Disclosure Authorized TURKEY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The 'World Bank FOR OFFICIAL USE ONLY TURKEY TURKIYE SINAI KALKINMA BANKASI STAFF APPRAISAL REPORT May 17, 1979 FILE COPY Report No. 2447a-TU Regional Projects Department Europe, Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 TURKEY TURKIYE SINAI KALKINMA BANKASI Currency Unit: Turkish Lira (TL) CURRENCY EQUIVALENTS 1976 TL = $ TL =$ TL 25.00= $ (since April) TL =$1.00 LIST OF ABBREVIATIONS DYB Develet Yatirim Bankasi (State Investment Bank) KfW Kreditanstalt fur Wiederaufbau EIB European Investment Bank LDR Less Developed Regions SEE State Economic Enterprises SMLI Small/Medium Scale Labor-Intensive Industries SYKB Sinai Yatirim ve Kredi Bankasi TSKB Turkiye Sinai Kalkinma Bankasi

3 FOR OFFICIAL USE ONLY T'URKEY TURKIYE SINAI' KALKINMA BANKASI STAFF APPRAISAL REPORT Table of Contents Page No. I. THE ENVIRONMENT... 1 A. Economic Performance and Prospects B. The Industrial Sector..., 2 Role in the Economy..., 2 Industrial Policy, Achievements and Problems... 3 Prospects... 4 Manufactured Exports... 5 II. THE FINANCIAL SETTING... 6 The Financial Sector... 6 Interest Rates and Foreign Exchange Risk III. TSKB - INSTITUTIONAL DEVELOPMENTS.10 Shareholders.10 Board.11 Organization.11 Management and Staff.12 Policies.12 Appraisal and Supervision Procedures.13 Procurement and Disbursement Procedures.14 IV. TSKB's OPERATIONS AND ITS IMPACT Summary of Operations Assistance to Less I)eveloped Regions (LDR) Assistance to New and Widely-Owned Enterprises ERR and Employment Small and Medium Scale Labor Intensive Projects (SMLI) Project Promotion Export Oriented Projects This report is based on the findings of an appraisal mission which visited Turkey in October, 1978, and was composed of Messrs. Franco Batzella, David Berk, Abdul Haji and Jean-Francois Landeau. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 Table of Contents (Continued) Page No. V. TSKB's FINANCIAL SITUATION AND PROSPECTS Financial Performance and Position Quality of Loans and Equity Investments Projections of Operations and Financial Situation. 22 Resource Position Foreign Exchange Resource Mobilization Domestic Resource Mobilization VI. THE PROJECT General Objectives A. Meeting TSKB's Financial Gap B. Promoting Export-Oriented Projects C. Maintenance of TSKB's Other Development Objectives VII. AGREEMENTS REACHED ANNEXES Annex 1 - List of Shareholders as of December 1978 Annex 2 - Board of Directors Annex 3 - Organization Chart Annex 4 - Summary of Operations ( ) Annex 5 - Gross Approvals of Loans by Size ( ) Annex 6 - Loan Commitments by Industry ( ) Annex 7 - Sectoral Distribution of Outstanding Loans and Equity Investments at December 31, 1977 Annex 8 - Geographical Distribution of TSKB's Loan and Equity Approvals ( ) Annex 9 - Distribution of Share Capital of Projects Financed by TSKB Annex 10 - Economic Rates of Return of Projects Annex 11 - Employment Generation of Projects Financed by TSKB ( ) Annex 12 - SMLI financed by TSKB (1977 and 1978) Annex 13 - Projects Identified and Promoted in 1977 and 1978 Annex 13a - Project Promotion Fund - Projected Income and Expenses Annex 14 - Export-Oriented Projects Approved in 1977 and 1978 Annex 15 - Income Statements Annex 16 - Balance Sheets as of December 31, Annex 17 - Debt/Equity Calculations Annex 18 - Summary of Arrears ( ) Annex 19 - Equity Participations as of September 30, 1978

5 Table of Contents (Continued) Annex 20 - Projected Operations Annex 21 - Projected Income Statements ( ) Annex 22 - Projected Balance Sheet ( ) Annex 23 - Projected Debt Equity Calculations ( ) Annex 24 - Resource Position as at December 31, 1978 Annex 25 - Projected Disbursement Schedule of Proposed Loan MAP OF TURKEY

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7 I. THE ENVIRONMENT A. Economic Performaince and Prospects 1/ 1.01 Turkey's real GDP grew at an average of over 7% per annum from 197Q through the recent world recession to Agriculture grew over 4% per annum, and industry at 10% per annum principally as a result of sustained high industrial investment, while public sector deficits fuelled the rapid growth of aggregate demand. Great strides were also made in meeting the basic needs of the fast-growing population, although unemployment rose gradually to over 13% of the labor force. However, this generally impressive progress was ended by a severe balance of payments crisis, lasting from 1977 to the present The current account, which had improved after 1970 stabilization measures and as a result of a world economic boom, deteriorated from a $0.5 billion surplus in 1973 to a $3.6 billion deficit in 1977, as a result of several factors. Imports caught up to normal levels after strict rationing in the 1960s, and reflected the growing requirements of industry, while the small volume of exports stagnated and workers' remittances declined due to the world recession and policy weaknesses. Since the deficits were financed largely by short-term borrowing, a situation arose by early 1977 where foreign lending dried up, foreign exchange transfers could not be made, and payments arrears accumulated. Meanwhile the strong growth of aggregate demand, combined recently with shortages of imported items, drove up the rate of inflation to around 50% per annum "Stabilization measures were taken in early 1978, combined with a drastic reduction in imports, some success with agricultural exports, the conclusion of an incomes policy, external debt rescheduling on a large scale, and a search for new external assistance. These measures led to slower growth of output and stagnant investment without checking the rate of inflation, but the trade deficit nearly halved and the overall balance of payments improved considerably. 1.A4 New stabilization measures taken in March/April 1979 aim at raising domestic savings, restraining the growth of domestic demand and lowering the rate of inflation; and also at redirecting resources and improving incentives to'boost exports substantially. They will need to-be supported by substantial external finance, particularly quickly-disbursing assistance on medium and long terms, if the level of imports is to increase 'And moderate growth of output be possible in / A detailed review of Turkey's economic situation and prospects is in Part I of the President's Report on this project.

8 The export drive, and the progressive resumption of normal international commercial relationships, should permit accelerating growth of output and investment thereafter, combined with a stable current account deficit. Even so, the balance of payments position is likely to remain tight over the remainder of the Fourth Plan period ( ), given the need for large borrowings to finance both the current account deficit and debt amortization. The Plan targets for the growth of real output (8% per annum), investment, savings, and external capital inflows appear ambitious, and the present project has been appraised on the basis of more conservative assumptions. B. The Industrial Sector 1.06 Role in the Economy. The growth of manufacturing industries in Turkey has been rapid and relatively steady through the first three five-year plan periods ( ). Value added in manufacturing rose from about 15% of GDP in the early 1960s to about 18% currently, with an annual average growth rate of about 10%. The manufacturing sector absorbed some 30% of total fixed investment up to 1975, but its share fell to 23% in 1978 largely as a result of its import-dependence and the growing scarcity of foreign exchange. With rising capital-output ratios, its share of total employment grew only slowly to reach 11% currently. During the past decade, the share of consumer goods in industrial output has declined to just under half, with that of intermediates steady and that of capital goods (but including consumer durables) rising from 12% to 16%. These changes reflect a gradual structural change, at a pace which has not satisfied the economic planners, as a result of an import-substitution strategy. However, the manufacturing sector remains heavily dependent on imports of both capital goods and some intermediate products such as steel, fertilizers and other chemicals The private sector has historically invested mainly in profitable consumer goods and durables, and only recently entered intermediate and capital goods production. It carried out 57% of industrial investment during the last decade and now accounts for about 50% of value added in manufacturing. However, as a result of the recent economic crisis, private manufacturing investment stagnated from 1974 to 1977 and fell 11% in real terms in The state has always been involved in basic industries where private capital has hesitated to enter because of long gestation periods, heavy capital requirements, or high risks. Thus State Economic Enterprises (SEEs) are major producers in steel, petroleum refining, fertilizers, petrochemicals, and pulp and paper. While the primary purpose of SEEs is production, they have also been charged with social goals, such as the development of backward regions, provision of employment and maintenance of price stability, which have contributed to their generally poor financial performance. Low salaries, political pressures and otherwise limited autonomy, and featherbedding have affected the quality of their management and operating efficiency. Despite liberal legislation, foreign owned enterprises contribute only 3% of total value added in manufacturing, as a result of a hitherto unwelcoming political and bureaucratic climate. Foreign direct investments have been consistently low, especially since 1975; they amounted

9 -:3- to only $40 million in IFC has sponsored a number of important projects bringing foreign capital and new technology to Turkey Industrial Policy, Achievements and Problems. Industrialization has been viewed as instrumental for tlne achievement of high rates of economic growth, structural changes and greater self-sufficiency. In the pursuit of these objectives, industrial development policy has stressed import substitution, the application of advanced technology and a shift of emphasis from consumer goods to intermediate and investment goods industries. The main instruments to support this policy have been large investment allocations with direct planning and control, in the public sector, and the stimulation of private investment by generous incentives and high protection against imports. The main investment incentives have been exemptions from income and other taxes, as well as from customs duty on imported equipment. The main form of protection has been to permit imports of a commodity only to the extent Turkish production cannot satisfy domestic demand, giving absolute protection against imports; there are also tariffs, higher on consumer goods than on intermediates, while capital goods (as mentioned) largely escape duties These past policies have produced many achievements. Private investment has been stimulated and public investment raised, with the result that the growth rates of industrial output and value added have been impressive. A good part of both private and public industry is efficient. There has been considerable import-substitution, in the sense that large quantities of basic commodities which otherwise would have been imported are produced in Turkey using newly introduced technologies and with the creation of substantial labor force skills. Dispersal of SEEs and incentives for private firms to invest in less-developed regions probably made a contribution to mitigating interregional disparities and slowing the pace of ruralurban migration, as have a widespread program of industrial estate and lending by TSKB. Industrial planning has on the whole focused investment where demand was gro*ing rapidly, and has attempted to exploit Turkey's natural resources. The planners have also emphasized the possibilities of learning, of external economies, of changing the present pattern of comparative advantage, and of rationalizing the structure of individual industries There are, however, a few problem areas. The immediate ones are low capacity utilization, and the low level and rate of growth of manufactured exports. SEEs are deliberately domestically-oriented. The private sector remains so because export incentives are not sufficient to outweight the advantages of effective industrial protection, which, in a climate of growing domestic demand, makes domestic sales more profitable than exports. As for longer-term problems, although some industries are competitive, the domestic resource cost of other manufacturing or processing operations is high by international standards. This is attributable to a combination of poor choices in investment allocations; small scale operations often because too many producers were encouraged in the past; poor project implementation; under-utilization of installed equipment for lack of inputs, foreign exchange, or incentive to increase shiftworking; compulsory use of lower quality domestic inputs; and absence of competition from imports. Other problem areas arise from Government policy and the design of incentives, which have

10 - 4 - over-encouraged capital-intensive activities and allowed a build up of the unemployment rate to over 13%. In recent years, the Government has also tried to start too many too large projects simultaneously, in light of both implementation capacity and resource availability, and often without benefit of careful economic analysis. Prospects 1.11 Turkey has a considerable natural resource base for further industrialization, a comparatively low-wage and skilled labor force, and quite a diversified, complex and interdependent industrial base, all of which are - presently underutilized, as well as a dynamic private sector responsive to market incentives. It also has an advantageous location near both Western and Eastern European and Middle Eastern markets. The immediate problems are to increase the currently low utilization of existing capacity, and to achieve a rapid and sustained growth of manufactured exports (see following section) Over the medium term, the Government intends to increase the contribution of the industrial sector to GDP. It should make exports an integral element of its strategy to the same degree as import-substitution was in the past. The latter should continue in intermediate goods, without which import demand would become unnecessarily high, and capital goods where this is demonstrably economically viable, subject to adequate priority for exportoriented investments. Careful public investment project selection, with the elimination or postponement of low priority investments, and efficient implementation will be crucial to this effort. In this way, Turkey can both surmount the existing problems and achieve its desired long-term structural changes and a greater degree of self-sufficiency in strategic sectors like fertilizers, chemicals, metals and metal products and machinery Over the long term, substantial improvements in structure, efficiency and international competitiveness will be needed in many existing industries, and particularly in the SEEs, to enable them to use resources effectively and compete successfully at home, as well as provide some of the thrust for development of exports. The present variability of effective protection should be gradually reduced to mitigate distortions in resource allocation. More generally, efficiency would be spurred by a general move from reliance on quantitative restrictions to use of tariffs, accompanied by a gradual lowering of the level of protection, in line with and as a stimulant to the build up of Turkey's competitive strength. Finally, a faster rate of job creation in manufacturing is needed, to prevent a further rise in the already high rate of unemployment. This could be achieved in part through shifts in project and technology choices, to better reflect the relative scarcities of capital and labor in Turkey, by changing the bias of present investment incentives so as to increase the relative cost of capital and intensify its utilization The Fourth Five-Year Plan ( ) was approved by Parliament in November It provides for manufacturing production to grow by over 11% per annum, contributing a large share of GDP growth of over 8% per annum. Industry's share of GDP is to rise by 2% to 32% by Consumer goods

11 5- are to grow by 8%, intermediates by 13%, and capital goods by 15% per annum; as a result, the share of investment goods (including consumer durables) is to reach 20% by Fast-growing sectors will include iron and steel, petrochemicals, fertilizers, non-ferrous metals, agricultural and other machinery, and transport vehicles. This growth is to be based on total investments in manufacturing of TL 432 billion, 27% of the total in the economy. This will be an increase of 62% in constant prices over the actual figure in the Third Plan period. Private investment would grow relatively slowly, from TL 151 billion in the Third Plan period to TL 199 billion in the Fourth, with a significant decline in its share from 57% to 46%. Public investment is to be TL 233 billion, a doubling in real terms over Third Plan levels. The investment allocation is clearly along traditional lines, with as much as 71% for large import-substituting projects mainly for the production of intermediate goods, reflecting both the large number of projects already underway and the general emphasis of the Fourth Plan; investment in capital goods manufacture will be 16% of the total, a prelude to subsequent increases. While it is desirable to complete some of the ongoing projects in these subsectors, the investment allocations for light and consumer goods industries with higher export potential (particularly food, textiles and clothing, and leather products) appear small in relation to the export targets set for them, and may need to be increased in the second phase of the Plan when more new investments can be undertaken. As for other objectives, more rapid job creation in manufacturing will be attempted, partly through the rapid expansion of relatively labor intensive subsectors. Redistribution of activity and income will be fostered through a continuation of the incentives for investing in the less developed regions of Turkey. As mentioned above, the Plan targets for manufacturing investment and output growth appear ambitious in the light of the availability of both domestic and external financial resources Manufactured Exports. The share of manufactures in Turkey's merchandise exports increased from about 23% in the early 1960s to around 35% at present. The largest expansion occurred during , when there was a more than fourfold increase as a result of the 1970 devaluation and a boom in Western Europe. The bulk of this gain, however, was achieved through a few industries: textiles, leather products and processed foods, which even today account for about 75% of all industrial exports. Nearly all exporting enterprises are in the private sector. Since 1973, domestic demand has continued to boom, the profitability of exporting has cleclined considerably due to rapid cost increases not offset by sufficient devaluation, and the world recession dampened demand abroad. As a result of these factors and the continuing import-substitution strateegy, favoring sales to the highly protected and lucrative domestic market, exports accounted for only 7% of the gross output of the manufacturing sector in Exporters benefit from four main types of incentives. Export rebates of up to 35% of export value are designed to compensate for indirect taxes paid in production, but may at times contain an element of subsidy. Investment incentives include tax exemptions which increase with the degree of export-orientation of a project. Credit for export-oriented investments is subsidized in varying degrees, depending on the volume of projected exports.

12 Recently, manufacturing exporters have also been granted preferential access to scarce foreign exchange, including the right to retain 50% of their export earnings, either for their own import requirements or for sale to other industrialists at a substantial premium through a parallel market. The Government is also implementing or contemplating various organizational measures to promote exports, including simplification of formalities, export marketing and quality control, which should be supplemented by private efforts. However, these measures need to be reinforced by restraint of domestic demand and exchange rate adjustments whenever appropriate. The Government has introduced a number of such measures in its March/April 1979 stabilization program, and has indicated to the IMF and the Bank its intention to maintain the competitiveness of the Turkish economy in light of the relative movements of prices domestically and internationally. The remaining bias against exports, as compared with import-substitution, will need to be rectified over a longer period, and entrepreneurs given confidence that the Government will ensure the profitability of exporting on a long-term basis The Fourth Plan projects growth of manufactured exports from some $700 million in 1978 to $3.3 billion in 1983 at a rate of some 36% per annum in volume terms. The largest contributions would come from textiles and clothing ($500 million) and food products ($358 million), with hides and leather and a variety of intermediate and even some capital goods exports growing rapidly. These subsector proposals will be explored further and tested in a study under the proposed project (para 6.07), to be conducted by TSKB under the direction of the State Planning Organization (SPO), to identify promising commodities and markets for early support. Comparisons with domestic resource costs of earning (or saving) foreign exchange through various activities may be useful, if dated and static, indicators. The recent experience and success of other developing countries also offers clues as to suitable lines, as of course does Turkey's natural resource endowment. The Plan targets for exports appear ambitious, and the actual rate of volume growth may turn out to be a little lower than that projected; however even this will be a creditable achievement and will require policies along the lines just discussed. II. FINANCIAL SETTING 2.01 The Financial Sector. Roughly 50% of total private fixed investment in industry is financed by intermediaries. TSKB provided 6% of the total investment requirements of private manufacturers during The other major sources of long term industrial credit are the well-established smaller Industrial Investment and Credit Bank (SYKB), which so far has financed predominantly domestic currency expenditures, the new and rapidly-growing State Industry and Labor Investment Bank (DESIYAB), designed to mobilize inter alia the savings of migrant workers for investment in widely-owned companies mainly in the less developed regions (LDRs) (potentially complementing TSKB's regional development efforts), and the Halk Bank, a Government owned financial institution financing small-scale industry, small tradesmen, and artisans.

13 Another 40% of private industrial investment is financed out of internally generated funds: about 8% from bond issues, and the remaining 4% through direct foreign financing. Since 1972, commercial banks have increased medium-term lending to the private sector, in response to new regulations and incentives whereby they were required to earmark 10% (and, since 1976, 20%) of their portfolio for loans of 2-5 year maturities; the volume of longer terms loans granted by commercial banks accounts for less than 1% of their total operations. Between 1975 and 1978, private short-term capital inflows of $2 billion through convertible lira accounts (CLAS) with Turkish commercial banks were converted into local currency and lent to local borrowers, mainly for investment purposes. However, with the ending of the exchange guarantee on these deposits by the Central Bank in 1978, the assumption and rescheduling of CLA debt by the Government now being finalized, and the need for strict control of new short-term debt, CLAs are unlikely to play any significant role in future The capital market is presently thin and stagnant, since with the high inflation prevailing in Turkey, the returns on financial investments do not match those on real estate ancl other investments. Share issues by private corporations to outsiders are very limited. The bond market is dominated by Government and State Investment Bank (DYB) issues, which enjoy a captive market. Government bonds yield 18% tax free as of May 1, 1979 and are redeemable at par on demand. During the Third Plan period, some 60% were placed with financial and other public institutions and almost 30% with individual savers. The issue of bonds by private corporations is a relatively recent development. TSKB has played an important role by guaranteeing and placing some of the principal early issues. Corporate bonds yield 21% subject to tax, a rate which is expected to be increased in summer 1979 to bring it into line with the recent increases in other interest rates (paras ). Those backed by banks have also in effect become redeemable on demand. Development banks such as TSKB have limited their own bond issues, since they suffer a negative spread on loans made out of the proceeds of bonds at the basic lending rate. Private bond issues reached TL 2.0 billion in still a relatively small amount, and declining in real terms. The Government's tax bill before Parliament threatens to reduce further the net return on private bonds. In contrast, during , private savings and time deposits have grown rapidly and reached TL 52 billion at the end of Most of these are for 2 years, at an interest rate of 22% as of May 1, 1979, but on deposits over 4 years the rate is negotiable. Finally, the Investment Finance Corporation was established in 1976 by a group of banks, in which TSKB played a key role, to participate in the equity of industrial firms located in the LDRs. For the time be!ing, the new company will be managed by TSKB. By the end of 1978, it had invested TL 353 million in a wide variety of subsectors, including TL 205 million as co-financing of projects financed by TSKB The role of foreign private investments in Turkey's industrial development has always been limited. The official policy is to accept them when they lead to transfer of new technology and provision of training, contribute to export earnings, and entail no monopoly or special privilege.

14 - 8 - In practice the policy has been restrictive due to political opposition and administrative delays. However, the Government has now prepared a new, more liberal code for foreign investment, especially in export-oriented ventures, to assist in mobilizing external capital during the Fourth Plan period Resource allocation in Turkey is affected more by controls over the volume of credit channelled through the specialized banking institutions than by interest rates, although both types of instruments are used. For commercial banks, the most important Government influence on resource allocation has been the selective credit policy for designated priority activities. Banks are induced to participate by the lower reserve requirements for these types of lending, the possibility of discounting a portion of these loans at the Central Bank, and since May 1, 1979 by the payment of new subsidies to the banks of between 1 and 4.5% per annum for such lending This policy is strengthened through the mechanism of interest subsidies paid to the borrowers, at the level of 6% per annum for projects in less-developed regions, and for projects exporting more than 50% of their output, or 9% per annum for projects with both features. Export-oriented projects, even if unable to guarantee the exportation of 50% of their output may qualify for an exemption from the transaction tax on interest paid (25%). Cooperative and cooperative members are eligible for a 5% interest subsidy. In practice, however, the effectiveness of this type of incentives is somewhat reduced, and the cost of capital raised, by delays in payment of the subsidies A number of weaknesses in the present mechanism, for resource mobilization by financial intermediaries and their allocation to medium-term industrial lending, have been identified by a Government study of the financial sector, carried out with Bank encouragement. The study is currently under review by both the Government and the Bank, with joint discussions anticipated thereafter. A discussion on interest rates for medium-term industrial lending has already taken place in the context of the proposed project. The Government's aims set out in the draft Fourth Plan already reflect some of the recommendations of the financial sector study, especially as regards the general objectives of improvement of the financial sector's efficiency and the allocation of credit to designated priority areas The study's main thrust is on how to improve the mobilization of private savings, and their rational allocation through financial intermediaries to priority uses, such as industrial development of backward regions, exports, and small scale industry. Its findings are inter alia that resource mobilization is presently hindered by the high returns to investment in non-financial assets such as real estate, while there is also evidence of the existence of a large informal financial sector attracting savings and catering to consumer and housing finance demand. Savers prefer bank deposits, very rarely for more than two years, to investment in nominally longer-maturity financial instruments such as corporate bonds, and these deposits can only to a limited extent be mobilized for medium-term lending. Finally, because lending rates are set below domestic capital market borrowing rates, the incentives to and efforts

15 - 9 - of financial intermediaries to mobilize resources from the domestic market have been hampered. Further, while commercial banks have been increasing their medium-term lending to the private sector, the regional distribution of credits still shows an overall net iflow from poor to rich regions of Turkey, with the proportion of lending done in more-developed regions higher than the proportion of deposits mobilized there. The Government is alsc concerned that commercial banks belonging to large industrial groups may be unduly favoring companies of these groups in their 'Lending, promoting a greater concentration of private industry and hampering the development of new firms The study recommends, among other things, the de!velopment especially by the banking system of new financial instruments--including possibly indexed ones--to attract savings; the elimination of all restrictions on yields and redeemability of bonds; the granting of permission to deve!lopment banks to accept deposits from social security funds, and for companies to invest their mandatory reserves in development banks' bonds; and an increase in medium term banks credit, especially for investment in the less developed regions. The study also recommends that bank credit should be directed to priority uses through an array of regulations affecting asset/liability ratios, and special allocation and reserve requirements; that the banks' use of compensatory balances should be subject to controls; and that their holding of shares in private companies should be permitted only for short periods as a way to mobilize the public's savings toward the capital market. Interest Rates and Foreign Exchange Risk 2.10 The study does not address systematically the question of the appropriate level of deposit rates and of the cost of credit, but does point toward the need for an overall increase of both such as has recently occurred (para 2.11), with tighter government controls on bank practices, and the modulation of rates as a function of the nature of the holders of deposits and of the recipient of credits. The cost of credit is recognized to be a less important factor in determining its allocation than are its availability and maturity; nevertheless, the continuation of interest rate subsidies is envisaged, though exclusively for the least developed regions; subsidies should however be paid to the banks rather than to credit recipients, because delays and uncertainties in obtaining the payment of such subsidies jeopardize their effectiveness. The effects of the transaction tax and of other additional charges on the real cost of credit is also not reviewed in depth by the study On May 1, 1979, the Government increased the legal ceiling interest rates on term loans to industry from 16% to 20% per annum. Borrowers are charged a 25% transaction tax on interest. There are also some small frontend fees. Commercial banks charge a commission of 2% per annum on collateral held, and used to increase the cost: of capital by informally "expecting" compensatory deposits of 10-15% of the loan, worth 2-3% per annum. The effective cost to borrowers (before taking account of the interest subsidies for priority activities mentioned above) is now around 26% for loans from TSKB and is estimated to be a little over 2% per annum higher now for loans from

16 commercial banks. The one exception to the interest rate ceilings, so far unused by TSKB, allows it a negotiated interest rate on an amount of loans equivalent to that of outstanding bond issues The actual cost of short-term local currency loans is negative in real terms in the short run, despite the May 1979 increases. Turkey's inflation rate, as measured by the wholesale price index, increased from 16% in 1976 to 24% in 1977 and 51% in It is currently projected to remain high at 40% in 1979 before declining to 30% in 1980 and 10% by 1982, given the Government's stabilization measures. However, the actual cost of medium and long term loans in real terms should be measured over the expected life of such loans. Given the expected decline of the rate of inflation, a typical 5-year medium term loan of commercial banks would have to carry nominal financial charges of about 22% p.a. for these to approximate zero in real terms. Similarly, a typical 7-year loan made by a development bank at end with a two-year grace period would have a zero cost in real terms over its entire life, if the borrower paid nominal financial charges of about 19% p.a. As a result, current interest rates imply a reasonable positive real cost of about 7 percentage points for Turkish borrowers of medium and long term TL loans, before interest subsidies The increase in interest rates that took place in May 1979 was deemed because of the uncertainties inherent in inflation rate projections, and the desirability of raising the real cost of term funds significantly, to better reflect the opportunity cost of capital in the country. The 4 percentage point increase in the base rate to 20%, which brings the after tax cost of medium- and long-term loans to at least 26% is expected to help curb inflation, engender a more appropriate allocation of scarce capital resources via the market mechanism and increase the role of interest rates in economic decision-making Borrowers of foreign exchange bear the exchange risk on both principal and interest. The Government has stated to both the IMF and the Bank its intention to maintain competitiveness through exchange rate adjustments as needed. These are expected to reflect, in the medium term, the difference between domestic and international inflation. The effective cost (gross of interest subsidies) of foreign currency loans of 26% with the full exchange risk is substantially positive in real terms. This is appropriate considering the current scarcity value of foreign capital to the Turkish economy, and entrepreneurs are willing to pay it. The rate is currently appropriate for on-lending of the proposed Bank loan by TSKB, but an understanding was reached that it will be reviewed, initially in the study of export potential (para. 1.17) and annually thereafter, for its possible impact on the international competitiveness of Turkish firms. III. TSKB - INSTITUTIONAL DEVELOPMENTS 3.01 Shareholders. There has been no significant change in shareholding of TSKB since Turkiye Is Bankasi, Turkey's largest private commercial

17 bank continues to be TSKB's principal shareholder, owning 22% of total share capital (see Annex 1). 47.7% is held by 12 private institutions, mostly Turkish Commercial Banks and 23% by private shareholders each owning less than 2% of the capital. IFC's share has remained unchanged since 1976 at 6% and three foreign banks account for the remaining 1.3% of TSKB's Capital as of December All the major shareholders (including I]FC) intend to participate in the capital increase which has been approved by the Shareholders Meeting in March, 1979 (para 5.05) Board. TSKB's Board consists of the Chairman and eight members elected by shareholders. Members are elected for a term of three years and are eligible for re-election. The General Manager of Turkiye Is Bankasi has been the Chairman of TSKB's Board since December A member of the Board of Osmanli Bankasi (second largest shareholder of TSKB) has been TSKB's Vice-Chairman since TSKB's General Manager was appointed as board member in March The remaining six members include representatives from three other shareholders, the Istanbul Chamber of Industry, and a former Minister (see Annex 2 for data on current board members) The Board determines the operating policies of TSKB and approves annual targets for allocation of funds. It also approves all projects. According to the statutes the Board is to meet at least once a month; in practice it usually meets every two weeks. The Board is active in its involvement in the current affairs of TSKB, which is reflected in the indepth evaluation of the projects presented to it for approval Organization. Prior to 1978, TSKB's four regionalized Operating Departments, the Engineering Department, and the branch offices all reported to one of the three Assistant General Managers. The second Assistant General Manager headed the Research and Planning Department, whereas the third Assistant General Manager was in charge of the departments handling foreign and local resource mobilization and accounting and computing activities In order to achieve a better distribution of TSKB's increasing operations and to give a greater emphasis to the regional character of its operation, in January 1978 TSKB implemented a reorganization under which the four Operating Departments were consolidated into three Area Departments, (Western, Central and Eastern Anatolia), each under the supervision of one Assistant General Manager (see organization chart Annex 3). The supervision of the functional departments, such as the Research, Project Engineering, Controller's, Treasurer's, Resource Development departments, as well as the support services, have also been reassigned among the three Assistant General Managers. With the reorganization, the Planning Department has been newly created: it prepares annual lending and investment programs based on demand projections for funds prepared by the Area Departments. [t also monitors the progress of the lending and investment programs and reviews the performance of Area departments against established targets The reorganization has proved generally satisfactory. The fact that all engineers and economists are concentrated in centralized departments,

18 however, creates, at times, problems of coordination. The next step in the growth of TSKB would seem to be the regionalization of part of the technical staff, retaining a nucleus of specialized engineers in a Central Department TSKB has small branch offices in Izmir, Adana, Elazig and Samsun. TSKB's plans to increase and strengthen its regional branches, envisaged at the time of appraisal of twelfth Bank loan have not yet been fully implemented. The branch offices remain sparsely staffed and do not contribute significantly to the appraisal or supervision of TSKB's projects (see also paras. 3.12, 3.13 and 5.10) Management and Staff. TSKB's General Manager and the three Assistant General Managers continue to manage TSKB competently; all four have long experience within TSKB and are well regarded by the business community and by the staff TSKB's current professional staff of 146 (an increase of 4 since the end of 1976), continues to be sound and competent. Except for the need to increase its staff at branches as mentioned above, the level of staff appears adequate to handle TSKB's current and projected operations Policies. In April 1978 TSKB's Board of Directors adopted a Policy Statement consolidating several previous resolutions and operating procedures. The principal elements of the Policy Statement are as follows: - Economic and Social Criteria. Projects supported by TSKB should take into consideration the economic and social development targets set out in the Turkish Development Plans and should benefit the Turkish economy as a whole. In particular, emphasis is put on the following: (a) enhancing the competitive position of Turkish industry in foreign markets by promoting export-oriented industries; (b) reducing dependency on foreign markets for intermediate and capital goods; (c) securing the participation of a wide section of the public in the capital of industrial enterprises; (d) creating employment for and raising the living standards of people in all the regions of the country. - Project Development and Allocation of Resources. TSKB is to provide extensive services, ranging from basic research and preparation of feasibility studies to promotion and implementation of projects. In this context, TSKB is to guide and assist entrepreneurs in project preparation and also play a key role as a financing leader and an intermediary for joint financing. To limit the risk, TSKB must observe the following constraints: - Not more than 15% of TSKB's equity and quasi-equity (subordinated loan from the Government of Turkey) may be committed to any single project or any single company;

19 Not more than 5% of TSKB's equity and quasi-equity may be committed to equity investments in any single company; - Not more than 25% of: the subscribed capital of any single company may be purchased by TSKB, unless TSKB acts as an underwriter, in which case the limit is raised to 50%; and - Total equity investments may not exceed TSKB's paid-in share capital plus reserves; - In addition to these policies TSKB also normally requires investors to provide no less than 50% of the cost of a project in the form of equity funds. - Criteria for Regional Distribution of Resources. TSKB prepares an annual program of loan and investment targets for the various regions of Turkey. The program also sets out strategies and goals for lending and investment in both the regions and areas of investment such as small-medium sized labor intensive industries. TSKB will assign the highest priority to the least developed regions, taking into account the investment potential of each region. TSKB encourages the emergence of new entrepreneurs and widely held companies in each region. To achieve this objective, TSKB is to assume, if necessary, the leading role as project promoter and also to participate in the equity of these companies to inspire the confidence of the local investors and to complem,ent the scarce supply of risk capital in the underdeveloped regions Appraisal and Supervision Procedures. TSKB's appraisals of projects continued to be strengthened through a wide range of sector studies, often with outside consultants' assistance. Economic rates of return are calculated by TSKB for all projects costing more US$2 million. TSKB's Policy Statement specifies that generally projects must yield an ERR higher than 15% to be eligible for TSKB financing, unless substantiated reasons warrant an exception to this constraint. In no case can the EER be lower than 10%. This agreement has been confirmed during negotiations Although TSKB has developed sound supervision procedures, its experience with some of the projects in the less developed regions and projects promoted by widely-owned companies, especially those set up with the savings of large groups of migrant workers ("worker-companies") indicate that such projects need closer attention than that provided by TSKB's current procedures. Shift in TSKB's emphasis to least developed regions commenced in 1975/76 and the difficulties which these projects face have surfaced increasingly over the last two years. Projects often lack adequate managerial and technical staff due to difficulties to attract qualified personnel

20 to remote areas. Inadequate management during the project's implementation phase causes delays and cost overruns, which workers' companies cannot meet because they often lack the ability to mobilize sufficient supplementary resources. This compounds the problem and further increases delays and overruns, causing the company to fall in arrears. Poor management and marketing techniques in the start-up phase cause losses and more arrears (para. 5.10). TSKB recognizes that the early identification by TSKB of these problems, and its prompt assistance to borrowers in difficulties, would greatly alleviate their impact on project performance. To do so, TSKB has started, in 1978, to implement a program of closer monitoring and follow-up of projects especially during the implementation and start-up phases An understanding was reached during negotiations to the effect that TSKB will pursue its program to further strengthen its project followup procedures. This program includes periodic review at Area Department and General Management levels, also through especially created task forces, of problem projects and projects under implementation, with a view to taking prompt corrective actions (such as adjustment of grace periods, debt rescheduling/consolidation, share capital increases and provision of technical or managerial assistance). In addition, TSKB plans to restructure and strengthen its network of branch offices and to upgrade the latter's role in the appraisal and follow-up of project. As part of the understanding reached during negotiations, TSKB will submit to the Bank for discussion by September 30, 1979, a plan of actions--to be implemented by mid specifying the staffing and terms of reference of existing branch offices, as well as the need to open new ones Procurement and Disbursement Procedures. TSKB routinely ensures that competitive bidding procedures appropriate to each project are adopted by the project sponsors. Frequently TSKB provides valuable guidance on procurement matters to the less sophisticated project sponsors, and in many cases TSKB's staff directly participate in the negotiations between project sponsors and foreign suppliers. Disbursement procedures are satisfactory. IV. TSKB'S OPERATIONS AND ITS IMPACT Summary of Operations 4.01 TSKB's approvals, commitments and disbursements from 1974 to 1978 are shown in Annex 4. Total approvals and commitments increased from TL 1.0 billion and 0.6 billion respectively in 1974 to TL 2.7 billion and 2.0 billion by Foreign currency loans continue to be the principal part of TSKB's operations, accounting, on an average, for about 75% of its total approvals followed by local currency loans accounting for a further 13% and equity investments for 11%. Both approvals and commitments in 1978 did not exceed significantly the 1977 levels, which signifies a reduction in real terms over the previous year. Foreign loan approvals (net of withdrawals and reductions)

21 for 1978 amounted to US$83.7 million compared to US$95.5 million in 1977 i.e. a reduction of about 12% over the lprevious year The reduction in operations in 1978, and in the growth rate in is, in general, a reflection of a slowdown in business activity over this period. However, and perhaps more than the general business cycle in Turkey, TSKB's operations during have been more strongly influenced by two factors: (a) availability of resources: TSKB had to decrease its commitments of foreign currency loans in 1974 as the funds from the tenth Bank loan of 1972 had been exhausted. Only after receiving the eleventh loan in 1975, was TSKB able to increase its foreign currency loan commitments to pre-1974 level and above. A similar situation existed before the conclusion of the twelfth loan in Commitment of this loan was further held up since TSKB intended to use the loan funds in conjunction with the $40-50 million medium-term loan which TSKB hoped to place in the international market in 1977 under IFC's syndication. That loan, which did not materialize, was expected to have a maturity of only 5 years; blending its proceeds with Bank funds would have made the average maturity of the resulting subloans more suitable to the requirements of TSKB's subprojects. (b) TSKB's targets for regional allocation of funds and assistance to new, broadly-owned enterprises: while there was a very strong demand particularly in 1977 and 1978 for projects in the developed regions, TSKB was constrained to allocate funds to these regions in order to meet its targets for the less developed regions (see paras ). Of the 30 applications for new loans, worth, in aggregate, about $65 million, which were turned down by TSKB in Western Anatolia during the first 9 months of 1978, 15, for aboult $21 million, were rejected due to their location, and 7, for about $26 mil:lion, were rejected because the owners were well established, or because the corporate by-laws granted special privileges to a closed group of shareholders TSKB's increased assistance to projects in the less developed regions and those promoted by widely-owned new enterprises is reflected in the increase in the number of equity investment. Commitments for equity investments increased from 14 in 1974 to an average of 213 per year during The average size of equity investments, which had reached TL 12.2 million in 1976, declined thereafter to about TL 6-8 million. The absence of any marked increase in total volume of equity investments is attributed to the fact that an increasing proportion of the investments are now for projects in the less developed regions, which are smaller than those in the developed regions. TSKB has played an important role in providing and mobilizing equity funds for projects in these areas in recent years An analysis of TSKB's approvals by size of loans and its commitments by industrial subsectors is shown in Annexes 5 and 6 respectively. Average size of loans approved has increased from TL 15.4 million in 1975 to TL 27.1 million in 1978, largely due to domestic price inflation. Loans of up to TL 10 million which constituted 24.2% of total approvals decreased to about 11% of approvals in Loans cf more than TL 30.0 million have, on the other hand, increased and accounted for about 55% of approvals in 1977 and Textiles, food processing, machinery manufacture and forestry products

22 were the principal industrial sectors for TSKB's operations, accounting respectively for 15.5%, 12.4%, 10.7% and 9.8% of TSKB's commitments over The rest of TSKB's approvals were well distributed over other subsectors with none of them accounting for more than 10% of the approvals for the period. The largest subsectors in TSKB's total outstanding loans and equity investments as of December 31, 1977, were as follows: 19.9% in Textiles, 14.2% in Food and Beverages, 8.3% in chemicals, 7.1% each in Metal products and Forestry products (Annex 7). Assistance to Less Developed Regions (LDRs) 4.05 TSKB's commitment to assist the development of backward regions was formalized in connection with the eleventh Bank loan (1078-TU) when TSKB's board agreed that in 1975 and 1976 TSKB would allocate at least 50% of it resources to LDRs as then defined by SPO. TSKB lived up to this commitment and increased its operations in LDRs to 56% of its total approvals in 1975 and 1976 compared to 10% in Assistance to developing regions was further reinforced and refined under the twelfth Bank loan (1430-TU) under which TSKB was to allocate in 1977 and 1978, (i) no more than 25% of its resources to the eight most developed provinces of Turkey (ii) at least 40% to the least developed regions which were redefined in a stricter sense 1/, and (iii) the remainder of its resources to the residual semi-developed areas, as defined under the Bank loan. TSKB's performance to December 1978 against these criteria, analyzed in Annex 8, indicates that it has substantially met the targets set for 1977 and Of its total loan and equity approvals during 1977 and 1978, 39% were for investments in the least developed regions and a further 38% in the semi-developed regions. Investment approvals in the most developed provinces amounted to 22% of total approvals. Assistance to New and Widely-Owned Enterprises 4.06 Within its targets for regional allocation of funds, TSKB has, particularly since 1975, given higher priority to financing projects of new enterprises and those sponsored by widely-owned enterprises. Of the 183 projects approved in 1976 and 1977, 111 were first-time borrowers from TSKB. Total loans approved for such borrowers amounted to TL 2.5 billion, i.e. 60% of its total loans approved in 1976/77. Annex 9 shows the ownership distribution of projects financed by TSKB in In spite of TSKB's efforts, financing of enterprises broadly owned by the public and 1/ The 1974 SPO definition of LDRs, adopted for the purpose of Loan 1078, included all of Eastern Anatolia except two provinces, 13 of the 23 Central Anatolia provinces and 7 provinces in Western Anatolia. The definition of LDR was changed under Loan 1430, to include all of Eastern and Central Anatolia except for 3 provinces, the category of semideveloped regions was introduced, to encompass Western Anatolia's less developed provinces; 8 provinces were considered most developed, of which 5 in Western Anatolia and 3 in Central Anatolia. This amended repartition of Turkey's territory was subsequently adopted also by SPO.

23 small savers had stabilized at about: TL 1.0 billion per year until 1977, and declined slightly to TL 0.8 billion in 1978, despite the increase in the overall volume of TSKB's operations. This category includes projects promoted by Turkish immigrant workers and by groups of local entrepreneurs particularly in the less developed regions. ERR and Employment 4.07 Annex 10 summarizes the data on projects for which TSKB calculated ERR. Out of 63 projects in 1975 and 1976, 29 had ERR of 20% or more. In 1977/ out of 93 projects had ERRs of more than 20% and only 5 projects had ERRs of between 10 and 15% Employment generated by projects supported by TSKB over is analyzed in Annex 11. TSKB finamcing of projects over this period has induced a total investment of TL 24.0 billion (i.e., approximately 15% of total investment in the manufacturing sector) which created about 39,000 jobs, i.e., also about 15% of total additional employment in manufacturing over Average investment per job grew from US$27,600 in 1975, to $43,400 in 1976, then declined to $31,500 in 1978, with an overall average of $34,100. This compares reasonably well with the best available estimate of the national average of $33,500 for , for the entire manufacturing sector which includes also smaller projects than those financed by TSKB. Projects in Central and Eastern Anatolia (which include the least developed regions) appeared to be less capital-intensive than those in the relatively more developed regions of Western Anatolia. Small and Medium-Scale Labor-Intensive Projects (SMLI) 4.09 During 1973 to 1976 TSKB's local and foreign financing of SMLI projects (defined as those with fixed assets of less than TL 35 million and maximum investment per job of US$17,000) had averaged US$12 million for about 30 projects per year. Under the twelfth IBRD loan TSKB had agreed to continue its assistance to such projects, and set up targets of US$30 million (including US$15 million of Bank funds) and TL 500 million in local funds to be allocated to SMLI projects in 1977 and Against these targets, TSKB's approvals of SMLI projects in 1977 and 1978 amounted to US$36.0 million in foreign currency, including $12.8 mlillion of Bank funds, and TL million in local resources for a total of 85 projects. Geographical location, investment costs and job created by these projects are shown in Annex 12. Thirty-two of the projects financed were in the least developed areas and a further 20 in the semi-developed regions. New projects accounted for 70 of the 85 projects assisted, and 15 were for expansion of existing facilities. Fixed investment per project averaged TL 29.4 million of which about 47% was financed by TSKB. Average investment per job in these projects amounted to TL 281,400 (equivalent to US$11,000 at current exchange rate). Project Promotion 4.10 TSKB has continued its project promotion activities. Thus in 1977 and 1978 it identified 17 projects and took a lead role in promoting them

24 and finding suitable sponsors. Fifteen of the projects were in the least developed areas and 2 in the semi-developed regions as defined under the twelfth IBRD loan. Total investment in these projects amounted to TL 1.4 billion. TSKB provided US$18.3 million in foreign currency loan, TL million in TL loan and TL 52.1 million as equity participation in eight of these projects. These projects generated 2,552 jobs with an average investment per job of TL 536,000 (see Annex 13) To finance the local currency cost of TSKB's project promotion activities a Project Promotion Fund was set up at the time of the tenth IBRD loan (873-TU) under which one-quarter of TSKB's spread from the loan was allocated for the Fund. The Fund is also being replenished through 1% of the spread under the twelfth loan (1430-TU). Total allocation to the Fund from these two sources amounted to TL 53.1 million as of December 1978 against which TSKB had spent or committed TL 30.9 million, leaving a balance of TL 22.2 million. Projections of the Fund's income and expenses are shown in Annex 13(a). The Fund's income is expected to increase to about TL 30 million yearly in , then decline gradually. Expenses are projected to increase to 13.2 million in 1979 and by 20% yearly in terms of 1979 prices thereafter. This would leave a cumulative surplus of income over expenditures of between TL million until The Fund would start showing a deficit in On these grounds, no new sources of income for the Fund are deemed necessary for the time being In the framework of its project promotion activities, TSKB has also undertaken to carry out detailed studies to explore the problems and development potential of specific industrial subsectors. $500,000 out of the previous Bank loan to TSKB had been allocated to finance the foreign exchange cost of such studies, which are often carried out with the assistance of foreign experts. The studies prepared by TSKB so far under this program have greatly contributed to upgrade the quality of TSKB's promotion and appraisal work. Funds previously allocated for this purpose have been virtually fully budgeted. TSKB's research department has now begun work on six subsector studies, relating to shoe manufacturing, furniture making, copper and aluminum processing, electrical and electronic equipment, chemicals, and packaging materials. A seventh study is planned to analyze the cost/price structure of the Turkish manufacturing industry. All seven studies concern topics of high priority in the context of Turkey's industrial development strategy, and of TSKB's possible contribution to it. TSKB requested the Bank to help it finance the foreign exchange cost of completing these studies, which is estimated at $230,000, of which only $30,000 can be budgeted against the balance of earlier allocations of Bank funds to finance studies and project promotion. Agreement was reached during negotiations to allocate $200,000 out of the proceeds of the proposed loan, to replenish TSKB's research department budget for the purpose of financing the above studies. As in the past, TSKB will inform the Bank of the detailed use it intends to make of these funds. Export Oriented Projects 4.13 Although the promotion of export oriented industries, is highlighted as one of TSKB's objectives in the Policy Statement, no specific target were

25 set for this purpose in recent years, during which the emphasis of TSKB's lending was toward promoting new entrepreneurship, regional development and SMLI. The export orientation of TSKB's financed project was not specifically monitored; the only data available on this aspect of TSKB's operations relate to approvals of loans in foreign exchange in the period (Annex 14). They indicate that projects in which more than 10% of total production was to be exported (as projected in TSKB's appraisal reports) represented between 8 and 12% of total approvals of foreign exchange loans, without there being a clear pattern of regional distribution among such projects. These data, however, are not representative of the export potential of projects which can be financed by TSKB, because many potentially export-oriented projects have been turned down by TSKB due to their failing to meet TSKB's regional or ownership criteria. CHAPTER V TSKB'S FINANCIAL SITUATION AND PROSPECTS Financial Performance and Position 5.01 TSKB's audited income statements and balance sheets for and the unaudited statements for 1978 are shown in Annexes 15 and Profitability. TSKB's overall profitability (as measured by earnings before taxes), fluctuated betwe!en 25% and 30% of its average net worth between This is high in nominal terms, but barely adequate in real terms considering recent inflation rates. The effect of the increase in TSKB's lending rate from 12% to 14% in September 1974 was partly offset by a steady increase in TSKB's borrowing costs, which increased from 8.7% of its average long-term debt in 1975 to 9.5% by 1977, and to 11.9% in The significant increase in TSKB's earnings for 1978 reflect the April 1, 1978 Government-decreed increase in its lending rate, to 16% effective, which was also applicable, retroactively, to all TSKB's outstanding loans, regardless of their original contractual interest rate. 1/ TSKB's spread on the several of its borrowings, including the eleventh and twelfth IBRD loans (which account for TL 2,634 million, or 23% of TSKB's outstanding obligation as of December 1978) is fixed at 2.5%, the difference in excess of this percentage between the financial charges on these loans and the yield to TSKB being refundable by TSKB to the Government. 47.5% of TSKB's resources as of end-1978 were not affected by such arrangements. As a result, the overall spread between cost and yield of these resources widened by 2 percentage points with the 1978 increase in lending rates. This was only partly offset by TSKB's decision to increase, from 18% to 21%, also retroactively, the interest it pays on all outstanding TL bonds, which accounted for 6% of its overall resources as of December As a consequence and in spite of growing borrowing costs, 1/ TSKB's loan contracts contain a clause which links the interest rate payable to TSKB to the officia:l rate for long term loans set by the Government.

26 earnings before taxes for 1978 increased to TL million compared to TL 178 million for TSKB increased its dividends on its ordinary shares to 18% since 1976, which is in line with prevailing practices in Turkey, though the larger commercial banks pay around 20% on their shares. In view of the higher profits TSKB intends to increase its dividend rate for 1978 to 25% in addition to distributing stock dividends at the rate of 1:2 with the forthcoming capital increase (para 5.05). TSKB's pay-out ratio is currently 50% Financial Position. TSKB's total assets increased by 31% and 26.5% in 1976 and 1977 respectively reaching TL 8.4 billion by the end of The substantial further increase of 58% to TL 13.3 billion by the end of 1978 reflects, in part, the 25% devaluation of Turkish Lira in March The increase in TSKB's total long-term debt followed a similar pattern increasing from TL 4.3 billion in 1975 to TL 7.2 billion by 1977 followed by a significant increase to TL 11.6 billion in 1978 incorporating the effect of the restatement of TSKB foreign debt following the devaluation. The loans from the Bank Group increasing from TL 2.2 billion (US$145.2 million) in 1975 to TL 6.6 billion (US$260.3 million) in December 1978, constituted between 51% and 57% of its outstanding long-term debt over this period. The increase in TSKB's equity between 1975 and 1977 was in line with the growth of its operations and its debt/equity ratio remained within the limits agreed with the Bank and IFC until the end of Debt/Equity Ratio. TSKB's debt/equity limitation, as defined under the existing twelfth loan (1430-TU) is specified at 8.5:1. Because of the devaluation in March and the consequent sudden increase in its foreign debt in terms of Turkish Lira, TSKB's ratio under the definition had reached 9.4 by December By the Board Resolution of September 1, 1978, TSKB is to increase its capital by TL 1.1 bilion, of which TL 862 million will be paid in as additional share-capital and TL 213 million as conversion of existing reserves into share capital. The shareholders approved the increase at the Annual Meeting in March The additional fresh capital of TL 862 million will be paid-in four equal tranches, two of which in 1979 and one each in 1980 and IFC is also considering an exercise of its rights (such rights cannot be sold in Turkey) and subsequently selling off part of its holdings. TSKB and the Government are discussing the terms of the Government Decree which is required when a Turkish company with non-turkish shareholders increases its capital. TSKB's shareholders proposed a month pay-in period for the new equity given the large size of the increase, but the Government wishes at least all foreign investors to pay the full amount within 3 to 6 months of subscription. A solution to this issue is expected to be attained shortly Although TSKB exceeded the existing limitation this should be corrected shortly, when the capital increase is subscribed, and the first quarter of the increase is paid in Under the existing IBRD definition of debt/equity, that portion of the subordinated loan from the Government which matures after the last repayment date under the Bank loans is treated as TSKB's quasi-equity and excluded

27 from its debt (See Annex 17). The determination of the equity portion of the Government loan under this definition is often difficult since the date of the last repayment due to the Bank changes which each amendment of the amortization schedules of Bank loans, which are, in turn affected by TSKB's disbursement of each sub-loan. 1/ TSKB's debt/equity ratio is also limited under the existing IFC Loan Agreements. The definitions of deb, and equity under IFC Agreement also treates a portion of subordinated debt as TSKB's equity and includes in its debt, all outstanding loan commitments to its clients. As of December 31, 1978, the ratio so calculated was 10.7:1, thus slightly exceeding the allowable limit, which is set at 10.5: In order to simplify the definition and the moni'toring of the debt/ equity ratio loan agreements, TSKB asked IBRD's concurrence (i) to define TSKB's debt as comprising all of its outstanding long-term debt (whether subordinated or not); (ii) to define TSKB's equity to consist of only shareholders equity funds (i.e. share-capital, paid-in surpluses, legal and other reserves) but excluding the Government's subordinated loans, and (iii) to increase the limitation under the revised definition to 10:1. Agreement to this effect was reached during negotiations. Because of the shift from equity to debt of the Government subordinated loan (which ranks pari-passu with equity), the proposed higher limitation is not expected to allow TSKB to incur, on balance, a substantially higher long-term indebtedness than that permitted under the current limitations of 8.5:1. The slight relaxation of the limit (equivalent to about 0.5 times the equity) which' TSKB requested in view of the likely effects of possi'ble devaluations on its foreign exchange debts, is justified in light of TSKB's comfortable interest coverage ratio, which is projected to remain at about 1.4:1 through 1982 (Annex 21). The total debt service coverage ratio (taking into account loan collections and principal repayments, after tax adjustments), is projected to remain at about 1.2:1 over the same period (Annex 21). Quality of Loan and Equity Investments 5.09 Loan Arrears. Annex 18 shows an analysis of TSKB arrears since The arrear situation has worsened particularly since Arrears of more than 3 months have increased from 2.1% of loan portfolio in 1976 (affecting 12.9% of loans outstanding) to 5.1% (affecting 31.6% of outstanding loans) by December While arrears of principal (in excess of 3 months) doubled from 0.8% to 1.6% of loans outstanding those of interest increased more rapidly from 1.3% in 1976 to 3.5% by December 1978, indicating preponderence of projects under construction in TSKB's current arrears. About 50% of the arrears of over 3 months were attributable to loans outstanding in the least-developed regions, (which constitute about 25% of TSKB's current loan portfolio). Arrears by broadly-owned or "workers" companies accounted for 1/ For the purposes of determining the ratio, TL 242 million of the loan is assumed as equity portion; this is the amount maturing after the last repayment date of the twelfth Bank loan under the current estimate of the amortization schedule.

28 of the 40 borrowers with arrears in excess of TL 1.0 million in June Lack of adequate management and inability to mobilize resources to finance cost overruns due to inflation and devaluation are the major causes of the financial difficulties of these projects. A detail analysis of major cases of arrears however indicate that most of these projects are conceptually sound and that once the managerial and financial problems of these projects are resolved, the projects can operate profitably. TSKB's loans are adequately secured. Provisions against losses on loans were increased from TL million (1.4% of outstanding loans) at end-1977, to TL million (1.9% of outstanding loans) at end They are amply sufficient to cover possible losses Given TSKB's policy to encourage projects in the less developed regions and those sponsored by new, broadly-owned enterprises, TSKB should continue to monitor closely not only its projects with outstanding arrears but also those in the implementation and start-up phases. The tighter follow-up procedures introduced by TSKB in late 1978 (para 3.13) respond to this requirement, and have begun to bear fruit, with portfolio affected by arrears having declined to 21% of total outstanding loans as of end-march, Payments received since then, and new reschedulings already approved by the Board of TSKB would reduce this percentage to 14% as of May, The planned strengthening of TSKB's branch network is also expected to contribute to the improvement of the arrears situation. An understanding was reached, during negotiations that TSKB will report quarterly to the Bank on all its loans in arrears by over 3 months and over TL 1.0 million, until the portion of portfolio affected by arrears is reduced to less than 10% of total. This objective is expected to be attained in the course of Equity Investments. In spite of TSKB's emphasis on operations in less developed regions and assistance to new enterprises, quality of its equity portfolio has continued a steady improvement. Its total investments of TL million in 75 companies as of September 30, 1978, was made up as follows: TL million (42.8%) in 36 projects under construction, TL million (38.1%) in 25 companies operating profitably, TL million (18.5% in companies operating at loss and TL 3.2 million (0.5%) in two companies in liquidation (see Annex 19). Dividend income of TL 45.3 million in 1977 represented a return of 18.3% on TSKB's average investment in companies in operation and 11% on its total average investments. This is acceptable considering that a large portion of its investments which is held in projects in implementation, and particularly in projects which required injections of fresh equity funds to make up for cost overruns. Potential losses are adequately covered by provisions of TL 45.8 million, i.e. 7.0% of total equity investments at December Projections of Operations and Financial Situation 5.12 Operations. TSKB's expected level of approvals, commitments and disbursements for the years are shown in Annex 20. Based on expectations of foreign resources (paras 5.17) TSKB expects to approve foreign loans of US$322.0 million (TL 8.2 billion) over 1979 and 1980 and a

29 further US$425.0 million (TL 10.8 billion) in 1981 and Local currency loan approvals should amount to TL 600 million in 1979 and increase thereafter at about 20% each year reaching TL 1.0 billion by Though they represent a considerable increase in activities over the past two years, these projections are considered reailistic in spite of the sluggish investment climate now prevailing in Turkey, for the following reasons: the main constraints to TSKB's past operations have been its shortage of resources and its strict adherence to very selective project eligibility criteria. The resource picture has now improved somewhat (paras ) and TSKB is now prepared to promote export-oriented projects which would otherwise have been turned down due to their location in the most developed regions and their failure to meet TSKB's ownership criteria. Furthermore, given the current difficulties of Turkey's internationval financial situation, TSKB has now a virtual monopoly of foreign exchange resources for private industrial investment. This explains the huge pent-up demand for TSKB's investment credit. As at end-april 1979, the foreign exchange requirements of projects already approved by TSKB and awaiting allocation of resources amounted to $132 million; in addition, the foreign exchange requirements of projects under study by TSKB at the same date amounted to $139 million. These data lend credibility to the above projections, which imply that, at least over the next two years, TSKB will be financing a larger share of a reduced total investment demand in Turkey. These levels of approvals should result in commitments of foreign loans of $289 million in 1979/80 and $354 million in 1981/ Projected Income Statements and Balance Sheets for the years 1979 to 1982 are shown in Annexes 21 and Profitability. TSKB's profitability in the immediate future will be favorably affected by the increase in the base interest rate from 16% to 20% effective May 1, 1979, coupled with a new provision granting interest subsidies to banks financing priority projects (paras 2.05 and 2.06). The impact on profits of the recent interest rate increases is expected to decline gradually and earnings before tax as percentage of average net worth should decrease from 46.8% in 1978 to 44% in 1979 and to about 34% by 1981/ This translates to net profit (after tax) of about 24% of average net worth and between 34 and 39% of year-end share capital, which is considered satisfactory. TSKB intends to distribute dividends at the rate of 21% per value of shares between 1979 and To do so, the pay-out ratio will need to be increased slightly but is expected to remain within acceptable levels of less than 60% of profits until Administrative expenses are likely to remain below the present level of 1.8% of average total assets Balance Sheet. On the basis of current level of operation for , TSKB's total assets are expected to more than double from TL 12.7 billion in September 1978 to TL 27.5' billion by The mobilization of expected resources would also double its long-term debt reaching TL 21.4 billion by With the expected increase in share capital and retained earnings TSKB's equity should increase from TL 1.1 billion in September 1978 to TL 2.6 billion by With the expected increase in share-capital, the debt/equity ratio should remain within the proposed limit of 10:1 (para 5.08).

30 Resource Position 5.16 TSKB's resource position as of December 31, 1978 is summarized in Annex 24. It shows that IBRD loans account for 52% of outstanding foreign exchange borrowings of TSKB and 42% of total borrowed and owned resources. If undisbursed funds are added, World Bank loans accounted for 46% of foreign exchange and 39% of total resources. Official loans from international financial institutions (including IFC's syndications) accounted for another 34% of total resources, including undisbursed commitments. Other foreign exchange resources, including the recently obtained suppliers' credits from France, Norway and Finland accounted for 13% of TSKB's total resources. Domestic currency resources, accounting for the remaining 14% of total resources, included: equity funds of TL 0.9 billion (6%); bond issues outstanding for TL million; the 1966 long-term subordinated Government loan, two lira loans from AID and EIB respectively, and Central Bank credit amounting to TL 239 million. Foreign Exchange Resource Mobilization 5.17 The last IBRD loan to TSKB, made in 1977, was made with the expectation that, during its commitment period, TSKB would be able to diversify its sources of foreign exchange financing. Specifically, it was then anticipated that TSKB would mobilize $90 million in fresh resources from the international capital market, including Middle East sources, over and above those resources which were in sight at end The latter included a proposed IFC-syndicated medium-term loan of $50 million; new loans from KfW for $25 million; a French export line of credit of $10 million; and a $18 million loan of EIB The worsening of Turkey's balance of payment and overall international financial position in 1977 and 1978 constrained TSKB's efforts in this respect. While the anticipated lines of credit from France and Germany were signed on schedule, the IFC syndication and the expected EIB loan did not materialize for reasons beyond TSKB's control. Resource mobilization efforts in the Middle East were unsuccessful despite repeated visits in Kuwait and Saudi Arabia by TSKB's management. TSKB was more successful in securing suppliers credits following the conclusion of rescheduling agreements for guaranteed debts between Turkey and a number of OECD countries. A second French export credit line of FF 150 million (US$34 million) was obtained in late A loan agreement for NKr 100 million ($19 million) was signed in June, 1978 with Eksportifinans (Norway) and another of $10 million with Finland's Export Credit Ltd. was signed in November In early 1979 the US Eximbank concluded a first operation with TSKB, comprising $1 million as a guarantee arrangement and $1 million as a credit line. Other export credits agreements are expected to be concluded shortly with Belgium's Societe Generale de Banque ($6-7 million), the Union de Banque Suisses ($10-12 million) and possibly other European institutions. In addition, TSKB continues to pursue, with IFC's support, the possibility of privately placing a medium term Eurodollar loan of the order of $40 million with a number of international banks as soon as Turkey's international position permits. Furthermore, TSKB plans in the near future to begin tapping the resources of Arab financial

31 institutions and consortium banks. The Islamic Development Bank is negotiating with TSKB and the Government the! technical arrangements for a $5 to 6.5 million line of equity, which TSKB would administer on behalf of IDB by investing in TSKB-financed projects. EIB is negotiating with TSKB a loan of 45 million Units of Account, probably to be subdivided into three one-year tranches to cover the period until end-1981; and KfW is expected to make two loans of about $10 million each before the end of Finally, TSKB renewed its contacts in several Middle Eastern capital markets in April, and an understanding was reached on its specific plans to follow up these efforts during the rest of 1979 and TSKB int:ends to: approach the Government immediately and formally with a view to its making requests for loans to TSKB from Middle Eastern bilateral aid institutions; once Turkish private sector borrowing from the international capital markets becomes possible again, approach the Arab consortium banks based in Europe for new financing; and approach the Kuwaiti financial institutions with a view to their underwriting bonds issues for TSKB in the Middle East in the first half of TSKB's estimated resource position for the period is summarized below: $ Million Resource available at 1/1/ New resources expected to be mobilized by end Export credits 18 - IFC syndication 40 - EIB loan (in three yearly tranches) 58 - KfW (two loans, in late 1979 and late 1980) 20 - Arab sources 18 - Proposed 13th Bank loan to TSKB 60 - Proposed Private Textiles loan of the Bank (for 3 year commitment, beginning late 1979) Projected commitments Resources available at 1/1/ of which: Balance of EIB loan 30 Balance of Textiles loan 25 Balance of KfW loan 10 This projection of TSKB's resource position through end-1980 allows for a reasonable balance of available resources to meet TSKB's projected commitments for the period , which are expected to amount to $354 million.

32 This is to a large extent predicated upon the success of the proposed private placement to be sponsored by IFC, and on the outcome of TSKB's resource mobilization efforts in the Middle East. The bulk of the resource balance at January 1, 1981 is due to those portions of the EIB, KfW, and textiles lines of credit which, although likely to be granted by TSKB in , are intended to be used only in The proposed $60 million loan of the Bank is expected to be fully committed by end TSKB will need to use the proceeds of the proposed loan not only to fill a resource gap in the next 18 months, but also to blend them with shorter term funds expected to be obtained from the European and Arab market, and especially with tied medium-term suppliers credit. The latter generally require a 10-15% downpayment which must be made available from other sources of foreign exchange before they can be drawn down. In addition, from the maturity point-of-view, the blending of medium-term funds with untied, longer term resources, such as the proceeds of Bank loans, will be indispensible to render these resources suitable to finance development projects to which TSKB gives priority. Domestic Resource Mobilization 5.20 TSKB has always had difficulties in mobilizing sufficient domestic resources on acceptable terms. In the tight Turkish capital market, local currency requirements of industrial investments are largely met with equity funds and commercial bank short and medium term credit. TSKB requires, as a matter of policy, that investor's equity cover at least 45%, but more generally 55%, of total project costs, and TSKB's financial support to any given project rarely exceeds 1/3 of total cost. This proportion corresponds to the average foreign exchange expenditure requirement determined, on an overall basis, by all industrial projects in Turkey. Nevertheless TSKB needs local currency resources mainly for two reasons: (i) to supplement commercial bank credit, especially for the new projects sponsored by newly established companies which, due to the inadequacy of their credit record, may have difficulties in obtaining credit; and (ii) to use for equity participations which are frequently essential to promote innovative projects, especially those in the less developed regions and those sponsored by newly established, widely-owned, and frequently under capitalized companies. To meet these requirements, TSKB needs to disburse between 1/4 and 1/5 of its total outlays in domestic currency TSKB is not authorized to hold deposits, and only in late 1978, following the Bank's prodding, did it become possible for TSKB to resort, on a significant scale, to discounting with the central bank notes which are the counterpart of between 50 and 70% of eligible outstanding maturities of 5 years or less. TSKB plans to use this facility (which allows a spread of about 2 percentage points for TSKB) to the maximum extent possible in the future; however, given the limitation on the proportion of outstanding loans against which notes can be discounted, and on their maximum maturity, this source of funds, which accounted for about 10% of TSKB's local currency resources as at December 1978, is projected to reach about TL 490 million as of end-1980 and about TL 1.0 billion at end 1982, i.e., between 15% and

33 % of total outstanding local currency resources. TSKB's main sources of fresh local currency resources over the next several years are expected to be capital increases (para. 5.05) bond issues and, as a newly introduced alternative to the latter, borrowings from commercial banks. Bonds and commercial bank loans are projected to account for 24-27% of TSKB's total local currency resources until 1982, with new borrowings cf this type of funds being projected to amount to TL 550 million in (para 5.24) and to TL 760 million in the subsequent two years TSKB until May 1, 1979 suffered from 6 percentage points negative spread on its bond issues. Since February 1978 it has to pay a 21% coupon (increased retroactively from the previous rate of 18%) on all outstanding bonds, including those sold up to 7 year earlier at lower rates; TSKB onlends the proceeds of bond-loans at its normal interest rate 1/ in spite of having been recently authorized to levy a higher, negotiable interest rate on loans made out of the proceeds of bonds. TSKB has not, so far, availed itself of this privilege, and has preferred to absorb this loss on its onlending of bond loans, largely in order to contain the otherwise steep average cost of financing for its borrowers, particularly those sponsoring new projects in the less developed regions. TSKB's borrowers pay now interest: and taxes in excess of 26% (compared to 21% before the May, 1979 increase) on TSKB's hard currency loans, on which they bear the full Eoreign exchange risk. In spite of the negative spread borne by TSKB, the net yield of TSKB's bonds to their holders (less than 16% p.a. after the transaction tax) has become increasingly uncompetitive compared to blocked time deposits with commercial banks, and with bonds offered by other issuers, including the Government. Government bonds, which yield 18% (up from 14% since May, 1979) interest net of taxes, are redeemable at par on demand; similarly most othner privately issued bonds, which carry a coupon equal to that offered by TSKB, include various forms of early redemption features, while TSKB's 7 year bonds are redeemed by lots over a four year period following three years of grace. Partly as a result of these market developments, and partly because of the negative effects of rumors on the provisions of a new tax bill which would further hit dividend and interest income, TSKB has faced considerable difficulties in placing two bond issues in 1977 and 1978, of TL 150 million and TL 110 million, respectively. It could not fully comply with the understanding it had reached with the Bank during the TSKB XII negotiations, according to which it wals to sell at least TL 325 million worth of bonds in those two years. The vast majority of TSKB 1/ Until May 1, 1979 the normal interest rate was 16% p.a., out of which 1% was paid by TSKB to the Government as a contribution to the interest subsidy fund. As a result, the yield to TSKB of its loans was 15%. The interest rate was increased to 20% on May 1, 1979; the fee due to the Government was increased to 2%, but interest subsidies of up to 3% were introduced in favor of banks lending to priority projects, so that the current net yield of TSKB's loans is around 20% p.a.

34 bond holders are institutional investors, such as foundations, insurance companies and pension funds, as private savers prefer holding their financial assets in high-yielding bank deposits, and banks, in turn, are not interested in buying long term bonds, the return on which, after the transaction tax, is considerably lower than that on medium term loans While the May, 1979 general increase of the interest rate structure has all but eliminated the negative spread on TSKB's outstanding bonds and has brought to a positive level the average overall spread on TSKB's local currency operations, the increased competitiveness of higher yielding bank deposits and government bonds has rendered new bond issues impossible at the current rate of 21% p.a.; the bond rate is expected to be aligned shortly to that of term deposits, thus reopening the market to bond issues. This, however, would reinstate the problem of TSKB's negative spread on its TL operations in general, and particularly on the onlending of the proceeds of bond loans, a problem which was singled out by the 1977 OED project performance audit of the 9th and 10th Bank loans to TSKB 1/ as one which constrains TSKB's ability to adequately mobilize local currency resources and jeopardizes its long-term viability. The negative spread which is expected to arise from the forthcoming increase in bond rates will be probably narrower than before, thanks to the interest rebates to which TSKB is now eligible for certain of its loans (paras 2.05 and 2.06). Nevertheless, TSKB has begun, in 1979, to resort to 5-year term borrowings from its shareholding commercial banks, which it can obtain at a somewhat lower cost than the expected bond rate, in order to supplement the proceeds of bond issues. TSKB obtained TL 275 millions in 5-year loans in this manner in early It intends to continue tapping this source of TL funds in the near future. Finally, TSKB expects to increase the degree to which it helps borrowers secure cofinancing arrangements from commercial banks for some of its projects In light of the above considerations, and taking into account the projected amount of Central Bank discounts to TSKB, it appears unlikely that scarcity of local currency funds among TSKB's resources would cause any substantive distortion in the foreseeable future in the mix of local and foreign currency financing available for TSKB-sponsored projects provided that TSKB's local currency resource mobilization plans materialize. An understanding was reached during negotiations, that TSKB would mobilize in 1979 and 1980, at least TL 550 million either through bond issues or through commercial bank loans of at least 5-year maturity To overcome the problem of the negative interest spread on TSKB's local currency operations which will inevitably present itself again as soon as a new rate is set by the Government on bond issues, an agreement was reached during negotiations to the effect that TSKB would annually review with the Bank its interest rates on local currency loans, and adjust them to the Bank's satisfaction, so as to ensure that the spread between the average yield of its local currency loans made in a given year, and the average cost of its local currency resources borrowed in the same year, be at least marginally positive. TSKB can obtain this objective in two ways: (i) it can increase 1/ Report No of February 11, 1977.

35 its base interest rates on part of its loans, to the extent that the loans made at a rate higher than the official one do not exceed the amount of bonds outstanding; and (ii) it can charge a commission of up to 2% on the promissory notes of its borrowers which it will hold as collateral, similarly to what is already practiced by commercial banks. Both these devices to increase TSKB's earnings on TL operations can be applied selectively, essentially to borrowers who obtain financing for the expansion of existing enterprises, and can therefore count on a steady cash-flow to face higher financial charges. VI. THE PROJECT General 6.01 The proposed project consists of (a) a line of credit to TSKB, of $59.3 million to help finance imported equipment needed for the implementation of eligible industrial subprojects; and (b) a component of $700,000 to finance technical assistance to TSKB mainly in the area of export promotion (paras and ). The! maturity of subloans will be commensurate to the economic life of the equipment financed, and to the subborrower's debt-servicing capacity. The final amortization schedule of the loan would be determined after the loan has been fully disbursed, so as to reflect the aggregate amortization schedules of individual subloans. It should not exceed 15 years. The portion of the loan to finance technical assistance will be repaid in 7 years, including 3 years of grace. TSKB will charge on subloans the interest rate set by the Turkish monetary authorities for long-term foreign exchange loans (currently 20% p.a. plus tax). The foreign exchange risk will be borne entirely by the subborrowers. As in the case of the two previous Bank loans to TSKB, TSKB will retain as income 2.5% of the interest payment on subloans; the difference in excess of 2.5% between the interest charged by TSKB and the interest due to the Bank will be paid by TSKB to the Government, as a guarantee fee. The "free limit" below which no prior Bank approval will be required for individual subprojects would be set at $4 million. This is higher than the $3 million "free limit" agreed under the previous Bank loan to TSKB; TSKB, however, would also submit to the Bank, for follow-up purposes, a random sample! of its export oriented subprojects (para. 6.05) consisting of one out of five of such subprojects. The final date for project submission will be December 31, 1980, and the closing date will be December 31, Objectives 6.02 The objectives of the proposed project are essentially three: (i) to help TSKB bridge its financing gap until end-1980, in a period when the critical international financial situation of Turkey constrains TSKB's capacity to mobilize alternative sources of long-term foreign exchange financing and risks jeopardizing its ability to continue carrying out its programs of industrial development financing in Turkey's private sector; (ii) to make it possible for TSKB to contribute to the development of Turkish industry's

36 export capacity, by giving priority to the financing of export oriented projects with demonstrated export potential; and (iii) to help TSKB continue to work toward the achievement of those priority objectives which it set for itself, in agreement with the Government and the Bank, since 1974, namely the development of the most backward regions of Turkey, the promotion of newly established, broadly owned industrial enterprises, and the fostering of small and medium scale labor intensive projects. A. Meeting TSKB's Financial Gap 6.03 As explained in para. 5.18, TSKB's failure to live up to the expectation that it would no longer have to rely on the Bank's support to meet its financial requirements were due to reasons beyond its control. The institution is, in itself, a creditworthy borrower. The results of its most recent resource mobilization efforts in the face of extremely adverse circumstances have been impressive; there is little doubt that, had the country's balance of payments crisis not erupted in 1977, the resource mobilization goals envisaged when the last Bank loan was negotiated probably would have been met. After the ongoing financial difficulties are settled through the conclusion of rescheduling agreements with the major holders of Turkey's outstanding debt, TSKB should be able to secure a larger proportion of its foreign exchange financing requirements from market sources. The size of the proposed Bank loan, of $60 million, is geared to fill TSKB's financial gap until the end of During this period TSKB will continue to have every incentive to identify and firm up alternative sources of financing, to ensure that its future financial requirements will continue to be met beyond Even thereafter, however, TSKB will continue to need long-term resources of the type provided by the Bank and other international aid agencies (such as EIB, KfW, etc.) in order to blend them with the shorter-term funds, it will borrow in the international market, so as to meet the financial requirements of the development projects to which TSKB gives priority. B. Promoting Export-Oriented Projects 6.04 The expansion of the export capacity of Turkey's manufacturing industry is necessary for Turkey to re-establish an equilibrium in its balance of payments. TSKB is virtually the sole source of long-term foreign exchange financing in Turkey for private enterprises which are not sufficiently large and well established to obtain direct foreign credit; it is therefore in a unique position to help the private sector contribute to this goal, by providing the foreign exchange resources needed to purchase imported equipment for export-oriented investments. However, in view of TSKB current resource constraints, it would not be able to do so in a significant manner without curtailing its financing activities toward its other, equally important, development objectives (Section C of this Chapter). The proposed project aims at providing TSKB with necessary funds to finance, on a priority basis

37 projects whose expected output has a high export potential. In view of TSKB's practice to blend funds of various sources depending on the specific financing requirements (in terms of maturity, and of ties to imports from specified countries of origin) the project funds will not be specifically reserved for export-oriented projects. However, TSKB has agreed, during negotiations, to earmark for export-oriented projects, an amount of $115 million out of its overall foreign exchange resources for the period / This figure is based on an analysis of lskb's pipeline of projects under study, and TSKB believes that it can achieve it Definition of Export-Oriented Projects. During negotiations, it was agreed that (a) projects consisting of the expansion of modernization of an existing enterprise will be considered export-oriented if at least 40% of the project's incremental output will be exported by the time the project is projected to reach full capacity; and (b) new projects will be considered export-oriented if at least 30% of their output will be exported by the time they reach full capacity. Minimum export performance targets will be specified in the loan contracts between TSKB and the sponsors of export-oriented projects. An understanding was reached during negotiations that at least 70% of TSKB's financing of export-oriented projects in 1979 and 1980 will go to project meeting a minimum export target of 40% of incremental output. The export potential of export-oriented projects will have to be thoroughly discussed in TSKB's appraisal reports, which should demonstrate that the expected production will be price--and quality--competitive in foreign markets and that local demand for it is satisfied, or will be when the project comes on stream. The following understandings were also reached during negotiations: (i) The bona-fide export-orientation of TSKB's projects will be demonstrated, as relevant to each project, on the basis of: past export performance; the existence of effective marketing channels abroad, or the steps that the project sponsor can demonstrate he has taken in order to secure an export market; purchase orders obtained from foreign importers of the goods to be produced; and a market study, to be prepared by the sponsor with TSKB's assistance (possibly against: a fee), the depth of which will be coimmensurate with the size of the project. (ii) TSKB shall satisfy itself that the sponsors of export-oriented projects have obtained, or have taken the necessary steps to 1/ TSKB's efforts in promoting export-oriented projects in the manufacturing sector will be in parallel with those TSKB will devote to developing the textiles sector, with the proceeds of the proposed Private Textile Project of the Bank. Many of the textile subprojects under that loan are likely to be also export-oriented. However, they will not be counted toward TSKB's meeting the above-mentioned cormmitment to export-oriented projects.

38 obtain, all government incentives available for projects with minimum export targets consistent with those specified in the loan contract with TSKB. (iii) TSKB shall closely monitor the export performance of projects financed on grounds of their export-orientation; and shall submit semi-annual reports to the Bank, indicating the degree to which export targets are being met, and the measures taken by TSKB to assist the borrowers. (iv) TSKB shall also calculate the domestic value added of goods to be exported from each export-oriented project in relation to the total value of the project's exports, and the project's foreign exchange investment costs, with a view to assessing the effectiveness of the contribution of such projects to Turkey's balance of payments Training Requirements of the Appraisal Staff and Studies to Identify Promising Industrial Exports. TSKB's management recognizes that its staff's expertise in appraising the export prospects of projects, and in offering assistance to investors in this respect, is too limited. It plans to correct this weakness by launching a comprehensive training program on the export aspects of projects for the technical and economic staff. This program will comprise the following components: (i) hiring of an internationally recognized expert in the promotion of exports, who would work with TSKB's staff for a period of 2 years, mainly for the purpose of providing on-the-job training; (ii) organizing seminars and training courses in Istanbul, by inviting foreign experts to lecture; (iii) sending selected members of the staff on trips abroad, to prepare market studies for export-oriented projects, assist clients in securing outlets in export markets, and participate in negotiations of export contracts by TSKB's clients with their foreign customers. In doing so TSKB's staff should cooperate with foreign and international export promotion organizations, so as to gain exposure to their activities and methodology; and (iv) hiring ad-hoc consultants to help TSKB's staff in the preparation of export market studies and in devising ways to improve the export potential of projects. The organization of this training program may be done under the aegis of the Geneva-based International Trade Center (ITC), or by other organizations with experience in export promotion. The estimated foreign exchange cost of this training program which would be financed under the proposed loan, amounts to $200,000.

39 In the framework of TSKB's increasingly active involvement in export promotion, TSKB has agreed with SPO to undertake the main responsibility of carrying out an in-depth study of the Turkish industry's export potential. The results of the study could form the basis for the preparation of a new Bank project to finance exporting industries in the near future. The main purpose of the study would be to identify, among a restricted list of subsectors with good export potential,l/ those with the highest chances of success in developing export outlets in the EEC and the Middle East. TSKB plans to examine the demand side through an elaborate program to develop a matrix of specific commodities and markets which have good potential. For the supply side, teams of TSKB economists, financial analysts and engineers will visit plants producing items now exported, exportable, or new to examine export potential from the viewpoint of capacity, quality and price competitiveness. TSKB will also look at the official and other effective incentives for export used by other countries. The study will, among other things, review the appropriateness of the effective net cost of long-term loans in foreign exchange to finance export-oriented projects in Turkey, with a view to determine whether, and to what extent, this affects the competiveness of Turkish exports in the international market The study will be carried out by TSKB with the assistance of consultants. The services of ITC's export marketing experts may be enlisted by TSKB, which has already established contacts with ITC toward firming up a technical assistance agreement. TSKB may also, in parallel, draw on other public and private agencies for technical assistance. Financing of the study would be on a cost-sharing basis between UNDP (which would finance ITC's' assistance) and TSKB. The estimated foreign exchange portion of TSKB's share of the cost of the study, to be finianced under the proposed loan, is $300, Both the cost of the program to train TSKB's staff in appraising export projects (para 6.06), and TSKB's portion of the foreign exchange cost of the export study, would be financed under the proposed loan. An amount of up to $500,000 of the loan proceeds would be available to TSKB for these purposes. Their disbursement against expenditures incurred to finance the training program and the study should be conditional upon the Bank's prior approval of (a) technical assistance agreements between TSKB and one or more organizations (such as ITC) experienced in export promotion (b) the curriculum vitae and terms of reference of individual consultants to be hired and (c) detailed outline and terms of reference for the study on export potentials. It was agreed during negotiations that these funds, as well as the amount of $200,000 to be allocated out of the proceeds of the loan for financing the foreign exchange cost of the seven sector studies discussed in para 4.12, should be repaid by TSKB in 4 years, after a 3 year grace period. Should l/ Sectors being considered for the study are: food processing (certain items), textiles and clothing, glass, ceramics, mineral products, consumer durable, castings, chemicals based on domestic raw materials, and machinery parts (ancillary industries).

40 actual expenditures incurred by TSKB toward these pruposes prove less than the anticipated $700,000, or should it be possible for TSKB to secure cheaper, alternative sources of financing for the proposed training program and studies, TSKB will be authorized to reallocate these funds to the financing of subprojects Expected Performance. TSKB modest results in fostering exportoriented projects in 1977 and 1978 (Annex 14) are largely due to TSKB's existing project selection criteria as regards regional distribution of projects and the requirements that companies financed by TSKB must be broadlyowned, without preferential privilege for a restricted class of shareholders, and preferably newly established. Many projects with good export potential are expansions of well established firms, often owned by few individuals, and mostly located in the most developed Western regions; thus they fail to meet TSKB's eligibility criteria. Out of 30 projects turned down for the above reasons in the Western Anatolia regions alone during the first three quarters of 1978, seven applications, for a total of about $22 million in foreign exchange, had good export potential. Recognizing that the development of Turkey's exports deserves high priority, TSKB now agrees to waive for exportoriented project, the requirement that TSKB-financed projects should be widely owned, should not be sponsored by well-established firms, and should fit within the regional distribution of TSKB's overall financing. TSKB is also prepared to make the commitment to actively promote, on a priority basis, projects with good export potential. As of April 30, 1979 TSKB had in its project pipeline, 19 loan applications to finance export-oriented projects, 15 of which, requiring $50 million in foreign exchange financing, for expansion projects, and the other 4 for new projects requiring $20 million in foreign exchange. Under these conditions the target of $115 million in foreign exchange to be allocated to export-oriented projects in 1979 and 1980 is realistic Based on a review of the pipeline of projects currently under appraisal by TSKB, it is expected that between 75% and 85% of export-oriented projects will be located in the most developed regions. Their sectoral distribution is likely to show a predominance of textiles projects (mostly to be financed under the Private Textiles proposed loan), food processing projects, glass production projects, mining products processing projects, and metal processing and electro-mechanical industry projects. C. Maintenance of TSKB's Other Development Objectives 6.12 TSKB is rightly concerned that the new emphasis on export-oriented projects should not be to the detriment of its other development objectives. One of the aims of the proposed project is precisely to permit TSKB to undertake the additional goal of promoting exports while at the same time maintaining the momentum of its drive toward promoting the less developed regions and small and medium scale labor intensive projects (SMLI).

41 TSKB's targets under the previous Bank loan consisted of allocating at least 40% of TSKB's overal financing to projects in the least developed regions, no more than 25% to projects in the most developed regions, and the difference in the semi-developed regions. These proportions will be altered somewhat in favor of the most developed regions under the proposed loan, in order to make it possible for TSKB to give impulse to export-oriented projects. TSKB, however, would continue to set for itself realistic targets as regards the allocation of part of its resources to the financing of SMLI and of projects in the least and semi-developed regions To avoid the excessive cumlbersomness in monitoring the allocation of resources which would derive fromt the different targets partly expressed in percentage and partly in absolute terms, it was agreed during negotiations that TSKB would monitor its resource allocation based exclusively on targets set in absolute amounts of foreign exchange financing. The agreed target for the least developed regions for the two-year period is $90 million, which represents a significant increase in real terms over TSKB's performance in the preceding two years ($70 million). In the same period, TSKB will reserve at least $50 milion of its foreign exchange resources for projects in the semi-developed regions. The target for SMLI will be $35 million in foreign exchange and TL 500 million in local currency, which compares well with the targets agreed for ($30 million and TL 500 million) and with TSKB's actual performance ($36 million and TL 405 million). These targets have been established on the basis of TSKB's assessment of the sector's absorptive capacity for investment in these types of projects As indicated under para 5.12, for , TSKB projects its total approvals of loans in foreign exchange to amount to $322 million, of which between $30 and $40 million will be for textiles projects to be financed under the proposed Private Textile loan of the Bank. The following table shows the distribution of TSKB's approvals by regions and types of projects, which is expected to result from the implementation of the above targets. In constructing this table, account has been taken of the following considerations: (a) TSKB's equity investments and local currency loans have been historically more concentrated in the less developed regions, where new projects and newly established enterprises prevail, than elsewhere (in 1978, the less developed regions accounted for only 35% of foreign exchange loans, but for 40% of TSKB's overall financing); and (b) a large proportion of export-oriented projects are likely to be expansions of well established enterprises, thus needing little local currency financing. The distribution of foreign exchange and local currency financing for SMLI in the different regions has been assumed to remain similar to the pattern.

42 TSKB - Distribution of Project Approvals Percent of Total Foreign Local Non-Textile Exchange Currency Total Approvals (US$ millions) % Total approvals, of which: projects likely to be financed under textile sector loan Total non-textiles approvals Most developed regions, % of which: export-oriented (95) (10) (105) SMLI (15) (5) ( 20) - Semi-developed regions % of which: export-oriented (10) (3) (13) SMLI (lo) (5) (15) - Less developed regions % of which: export-oriented (10) (5) (15) SMLI (10) (10) (20) Total export-oriented % Total SMLI % 6.16 Definition of SMLI. It was agreed during negotiations to restate the definition of SMLI enterprises and projects in terms of constant Turkish liras of mid-1979, updating it to take into account the international and domestic price escalation of capital goods. As a result, SMLI projects will be defined as those sponsored by enterprises with fixed assets (before the project) of less than TL 110 million excluding land and implying an investment in fixed assets of less than TL 110 million at an investment cost per job created of less than TL 815,000. 1/ These parameters will be updated quarterly 1/ This definition under TSKB XII was expressed in terms of 1975 dollars. The fixed asset limit was $2.3 million and the cost per job limit was $17,000. These values remain virtually unchanged, in real terms, under the new definition agreed during negotiations.

43 on the basis of the general wholesale price index published by the Turkish Government, which reflects fairly the price escalation of capital goods in Turkey Definition of Most Developed Regions, Semi-Developed Regions, and Less Developed Regions. The following two mutually offsetting changes in the regional definitions have been agreed upon during negotiations: (i) the province of Ankara, excluding the Municipality of Ankara, should move from "most developed" to "least developed"; (ii) the Municipality of Iskenderun, but not the rest of the province of Hatay, should move from "least developed" to "most developed". As a result, the most developed regions (MDR) would include the provinces of Istanbul, Kocaeli, Sakarya, Bursa, Izmir, Icel, Adana and the municipalities of Ankara and Iskenderun; the semi-developed regions would include the remainder of Western Anatolia; and the least developed regions would include the remainder of Central and Eastern Anatolia. These changes in the regional definitions in line with those adopted in 1978 by the State Planning Organization, to reflect more accurately the geographic distribution of industrial activities in Turkey. VII. AGREEMENTS REACHED 7.01 During negotiations, the following agreements were reached with TSKB: (a) Redefinition of the debt/'equity ratio, and setting of its limit at 10:1 (para 5.08)1. (b) TSKB's financial charges on local currency loans to be reviewed annually and adjusted so as to ensure a positive spread on TSKB's local currency operations (para 5.25). (c) The free limit to be increased to $4 million (para 6.01). (d) An amount of $700,000 to be allocated out of the proceeds of the loan for the financing of (i) specific sector studies; (ii) a training program for TSKB's staff on the appraisal of the export aspects of projects and (iii) an in-depth study of the export potential of Turkish industry (paras 4.12 and 6.09). (e) TSKB to allocate, out of its total foreign exchange lending in 1979 and 1980, at least:

44 (i) $115 million to export oriented projects (para 6.04) defined as per para 6.05; (ii) $90 million to projects in the least developed regions (para 6.14) defined as per para 6.17; (iii) $50 million to the semi-developed regions (para 6.14) defined as per para 6.17; (iv) $35 million to small and medium scale industries (SMLI) (para 6.14) defined as per para (f) TSKB to further allocate TL 500 million of its local currency financing in to SMLI (para 6.14); (g) TSKB to continue to calculate the ERR for projects exceeding an investment cost of $2 million (para 3.11) Furthermore, the following understandings were reached with TSKB during negotiations: (a) TSKB to strengthen its supevision and follow-up procedures, including the preparation of a plan to restructure its branch network (para 5.10). (b) TSKB to report quarterly to the Bank on arrears, until less than 10% of loans outstanding are affected by arrears (para 5.10). (c) TSKB to follow a certain methodology to demonstrate the export orientation of projects; to report semi-annually to the Bank on the degree to which export targets are met (para 6.05); and to submit to the Bank detailed appraisal reports of one out of five of its exportoriented projects, to be selected by the Bank (para 6.01). (d) TSKB to mobilize bonds or medium-term loans from commercial banks in an amount of at least TL 550 million in (para 5.24). (e) TSKB to follow-up on the mobilization of long-term foreign exchange financing from Arab sources (para 5.18). (f) At least 70% of TSKB's export-oriented projects in to export more than 40% of their output at full capacity (para 6.05).

45 Annex 1-38 lots - TURKtYE SINAI KAIKINMA BANKASI A.V. List of Shareholders as of December 1978 Amount Subsoribed Peroentage Name and Nationality L (000) of Total 5 urkish Vtirkiye t BankasB A. g T!rkiye ig Bankas3 A. g. Pension Amd Osmanl3 lankasi A. S Milli Reasurans T. A. g Anadolu Anonim Tiurk Sigorta gti Istanbul Ticaret Odasi Tirkiye Garanti Bankaai Istanbul Ticaret Borsasi Tiirk Ticaret Bankasi A Yapi ve Kredi Bankasi A Istanbul Sanayi Odasi Akbank T.A.g Dogan Sigorta A. g Shareholders with less than 2% Total Turkish Shareholders &.7 Foreign Banco di Roma (Italy) Fidelity International Bank (USA) LVUnion des Assurances de Paris (Franoe) 315.a 0.1 Total Foreign Shareholders 5o564.4 International Organizations International Finance Corporation Total Shareholders

46 'Annex 2 TURKIYE SINAI KALKlNMA BANKASI A.S. BOARD OF DIRECTORS Name Age Director Since Business Experience Chairman: Cahit Kacaomer 55 December 1976 General Manager of Turkiye Is Bankasi A.S. Vice Chairman: Resad Akean 66 March 1958 Member of the Board and former General Manager of Osmanli Bankasi A.S.; fonrer Assistant Generil Manager of the Central Bank of Turkey. Others: Nurullah Gezgin 51 March 1978 Chairman of the Board of the Istanbul Chamber of Industry. Memduh Gupgupoglu 57 March 1978 Deputy Chairman of Yapi ve. Kredi Bankasi A.S. I Former Governor of the Central Bank of Republic of Turkey. Burhan Karagoz 49 March 1978 Assistant General Manager of Turkiye Is Bankasi A.S. Ilyas Seckin 60 March 1978 Former Public Accountant in the Ministry of Finance, Lawyer, Former Minister of Public Works and Minister of Interior. Emir Sencer 69 February 1966 Member of the Board of Akbank T.A.S.; Chairman of the Council of the Istanbul Chamber of Commerce; former Assistant General Manager of the Central Bank of Turkey. Tur8ut Sizmazoglu 54 March 1978 General Manager of Turk Ticaret Bankasi A.S. Former Auditor of TSKB. Ozhan Eroguz 49 March 1978 General Manager of TSKB. Forner Public Accountant in the Ministry of Finance and former Assistant General Manager of TSKB.

47 TURKIYE SINAI KALKINMA BANKASI A.S. ORGANIZATION CHART GENERAL MANAGER Ozhan EROGUZ ASISTANT GENERAL MANAGER SSISTANT GENERAL MANAGER ASSISTANT GENERAL MANAGER Metin TOKPINAR Aparslan ALAGOZ Ibrahim ONGUT P:38 NP:33 P:29 NP:46 P:64 NP:7 SECRETARY'S LOAN AND INVESTMENT DEPART- LOAN AND INVESTMENT DEPART- LOAN AND INVESTMENT DEPART- DEPARTMENT: MENT (Western Anatolia): MENT (Central Anatolia): MENT (Easter n Anatolia): Dani UNSAL, Sec. Gen'l Namik AYARCI Asst. Sec. Zekai UNLU Manager Turgut ALBAYRAK Manager Atif CAMLIBEL Manager Gen'l Tamer ERGIN Asst. Mgr. Memduh COSKUNER Asst. Mgr. Metin CAGLER Asst. Mgr. Lahut TI REGUL Asst. Sec. Ulkil KISMIR Asst. Mgr. Aydin KESLER Asst. Mgr. Ergun SONMEZ Asst. Mgr. Gen'l Ali TULGAN Asst. Mgr. Hayati OZKAN Asst. Mgr. Erol UYEPAZARCI Asst. Mgr. P- 81 NP" 4 P: 10 NP: 5 P: 8 NP: 3 COMPTROLLER'S DEPARTMENT: RESEARCH DEPARTMENT: ADVISER TO THE GENERAL RESOURCE DEVELOPMENT MANAGEMENT: DEPARTMENT Haser A Tolgay CAVUSOGLU Manager I Ru~~~~~~~~~~~~~~~~~~Hsen AKUNGA ComUIterolle Okem CINAR Asst. Mgr. Esref OZDAG Ahmet DEMIREL Manager Auditor Korkmaz I LKORUR Asst. Mgr. P: 1 NP: 1 P: 1 NP: 1 P: NP: 16 Ermukan SENGEZER Asst. Mgr. I P: 9 NP: 16~~~~~~~~~~~~~~~~~: 3NP General Management 4 TREASURER'S EPARTMENTPLANNING DEPARTMENT: PROJECTS AND ENGINEERING Professional 142 YiImzTS raue LNIGDPRMN:DEPARTMENT: Non-Professional 104 Gunhan OZCICEK Asst. Trea. Ertugrul IBRAHIMOGLU Mehmet GURPINAR Manager General Services 60 Ozbek SENOL Asst. T rea. Manager MheGUSMANA AR Manger t 310 Hikmet VERIM Asst. Trea. P: 4 NP: 9 P 31M N 1 P: 16 NP: October 19, 1978 LEGAL DEPARTMENT: COORDINATOR - PROJECT FLOW: Sermet GUR Manager Belkis BURAK P: 2 NP: 2 P: 7 NP: 15 World Bank

48 TURKIYE SINAI KALKINMA BANKASI A.S. Annex 4 Summary of Operations (TL Millions) APPROVALS (Net of Cancellations) Loans: Foreign Currency , , , Local Currency , , ,233.9 Equity Investments Guarantee of Bond Issues COMMITMENTS 1, , , , Loans: Foreign Currency , , Local Currency , , , ,780.3 Equity Investments Guarantee of Bond Issues DISBURSEMENTS , , , ,993.8 Loans: Foreign Currency , ,591.9 Local Currency , , , ,870.5 Equity Investments , , Number of Loans Approved Number of Equity Investments Committed Number of Bond Issues Guaranteed _

49 Annex 5 T S K B GROSS APPROVALS OF LOANS BY SIZE (TL Millions) No. of No. of No. of No. of Loans Amount Z Loans Amount % Loans Amount Z Loans Amount X Size Distribution Under TL 500, _ ,001-1,000, _ ,000,001-2,000, ,000,001-3,000, ,000,001-5,000, ,000,001-10,000, ,000,001 = 20,000, ,000,001-30,000, Over 30,000, , , , , , , , Average Size

50 T S K B Annex 6 LOAN COMMITMENTS -1/BY INDUSTRY (TL Million) x Age (TL Million) % Age (TL Million) % Age (TL Million) % Age Food Beverages Textiles Forestry Products Pulp and Paper Skins, Hides and Footwear Rubber Manufacturers Plastics Chemicals Fertilizers Ceramics Class Cement Non-Metallic 0.3 Mineral manufacturer Iron and Steel Metal other than iron Metal Products Machinery Agriculture Machinery Electrical _ Machinery Electronics Motor Vehicles _ Industrial Services _ Other Industries Mining and Processing ,16i.3 IUU.U 1,i24.u luu.u 1,71u.5 lou.0 1, / Excluding cancellation and changes due to exchange rate fluctuation.

51 TURKIYE SINAI KALKINMA BANKASI A.S. Annex 7 Sectoral Distribution of Outstanding Loans and Equity Investments at December 31, 1977 Loans Equity Investments Total No. Amount No. Amount No. Amount %ag (TL Million) (TL Million) (TL Million) Food Beverages Textiles 75 1, , Forestry products Pulp and paper Printing Skins, hides and footwear Rubber manufacturers Plastics Chemicals Fertilizers Petroleum products Ceramics Glass Cement Non-metallic minerals Iron and steel Metals other than iron Metal products Machinery Agricultural machinery Electrical machinery Electronics Motor vehicles Industrial Services Other industries Mining and processing Financial and other services , ,

52 TURKIYE SINAI KALKINMA BANKASI A.S. GEOGRAPHICAL DISTRIBUTION OF TSKB'S LOAN AND EQUITY APPROVALS (TL Millions) No. Amount 7tage No. Amount 7 Lage No. Amount %age No. Amount 'Yage Eight Most Developed Provinces: 1/ Loans Equity Investments Semi-Developed Regions: 1/ S Loans Equtiy Investments Least-Developed Regions; 1/ , Loans e8s ,085.9 t Equity Investments , , Unclassified (Equity) / TOTAL Loans 104 1, , , ,602.7 Equity , ,&* / The regional classification is the one adopted by TSKB in 1977; Eight most developed provinces: the four provinces of Istanbul, Sakarya, Kocaeli, and Bursa in North-West Anatolia, Izmir in South-West Anatolia and Ankara, Adana, and Icel in Central Anatolia. Semi-developed regions.: Residual provinces of North-West and South-West Anatolia. Less-developed regions: Residual provinces of Central Anatolia and all of Eastern Anatolia. 2/ Break-down of TSKB's approvals of equity-investments in 1975 by above regional classification is not oa,iiable.

53 TURKIYE SINAI KALKINMA BANKASI A.S. DISTRIBUTION OF SHARE CAPITAL OF PROJECTS FINANCED BY TSKB TOTAL (TL Millions) % (TL Millions) % (TL Millions) % (TL Millions) % (TL Millions) % Shares held by: Banks ,136 9 State Enterprises Well-established firms and families , , , , General Public and Small Savers 1, , , , TOTAL Capital 2, , , , ,

54 Annex 10 T S K B ECONOMIC RATES OF RETURN OF PROJECTS Totals Projects will: ERR of 10-15% ) % ) % Over 30%

55 T S K B EMPLOYMENT GENERATION OF PROJECTS ElhANCEI BY TSKB No No. of No. of No. of No. of Total Investment Jobs Investrent Per Job 1/ Total Inve-stmet Jonb Invest-ent Per Job 1/ Total 1nvestosest Jonb Investment Per Job j/ Total Invetmcent Job I (TL Millions) (TL 00(i) (Us$000) (TL Millions) (T ) (Us$000) (US$00) (TIMiIons)000) (TL Mlli00) (TL 000) (Us$TL (USSGOO) Northwest & Southwest Anatoli 2/ 2,668 5, ,598 3, ,169 6, ,854 4, Central & Eastern Anatolia 3/ 1,49 5, , All Turkey 4,417 11, ,026 7, / converted at average enchange rates of: $1 = TL $1 - TL $1.TL S1 = TL / Covers five of the eight -iost developed provinces and a11 of the nssi-developed regions as defined under TORN XII. 3/ All of the least developed areas and including three of the n.ost developed provinces.

56 Annex 12 T0jy suat KALZUU IUKMI A. Page 1 of 2 Small and MNdiM eials Labt_ Iaftiv. PFro$s (Mr) Finied by TMi (1977) TSKB Finaanoin Averse Inv. Project Name/Activity Fixed Investment Porei6n IJO.L No. of Job Now or a Zie per Job (TL Millione) ($ OOOis TL KillNicm) (IL OD'O) 1977 SiKbt Xo t DeveloDpd Regions xrbae (Veneer Sheets) _ 20 1 GUYenp (leather) Y ~anin lak. (Maohine manufaoturing) TaYean (Coil spring) N TarLm Alet (Agri. impl.) N.ecar Mak. (Xaobine Manufaotlring) N Beltan (Oil Seals) glmas Mak. (NMohine Manufacturing) X Narita (Fruit Prooessing) istas (Marble Processing) N Topeya (Bricks) N Pinar Ddkiin (Iron Cashing) N KIahan Tugla (Brioks) N Bek-pek (Marble Processing) N Kardee gelik (Steel casting) N Treysan (Trailers) N Tarmaksaan (Agri. Imp.) N!maye sanayi (aiamel processing) N Bh lvar Giim (Clothing) N CS - aek. (Elect. App.) N Sub-Total See 1-Devel oced Regions Tekin Mak. (Maohine XMnufacturing) N Anamak (tachine lanufacturing) N Natosan (minerals) Alfa Moda (Clothing) N Tekirda6 Agag (Chair processing) B Pulouoglu (Underwear) E Karspinar (Bricks) I Ilbir Elek. (ELeo. Generator) N Suyakql (Marble Prooeseing) N Bart COyi (Clothing) N- Ay-Man (Shoo Xanufacturing) Sub-total Less Developed Agema (Machine manufacturing) :39 N Seyrani Un. (Flour Mill) N Reklam Is (Packing Mat.) N Tarsae (Agr. Impl.) N Supar (lehgine Valves) N Tugsan (Bricks) N Kavak Tasmloglu (Bricks) N Onel Fermuar (Zipper) N Barit Madan (Mineral Processing) N Qa4il Mak. (Machine Manufacturing) N El! Gtiney Oto (Rubber Auto Comp.) N Karinca (Bricks and Tiles) N Irean (Meet. Products) N genesizler (Brioks) Kar$elikta (Steel Casting) N Vasan (Bread) Rize EXaye (Enamel Processing) N Tuean (Aggregate Preparation) N Rize 'Jn (Flour Mill) N Batman (Agrio. Impl.) Ji! N Sub Total 494' Total for J Inoludes equity participation

57 Annex 12 TOtRKI SINIAI KAKINKA BANSI A1.. Page 2 of 2 Small and Medium Scale Labor Inteiivii Projeoate (SKLI) finmoed by TM (1978) TSKB Finuioing Fixed Investment oreim Looal No. of Jobs Now or exomios per lob Projeot Name/Activity (TL Nillion) ($ 000 s)(?l Million) (n OO.e) 1978 light most developed rejciona Saray8rme (Knittedaear) N Protekean (Shipbuilding) N Osdemir Qelik (Steel casting) N Ma.ean (Shook absorber) x Kalipan (Dye casting) N Asmas (Machine manufaoturing) GUney gelik (Automobile parts) N Makine ve Tedek PFr. ()achine manufaoturing) N lek Elektrik (Eleotrioal applianoes) _ 88 3 Me-S- (Pr_-Fab.Bousing) N 5ukurova DikSlim (Iron and Steel) N getin Mobilya (Foreatry produots) N Binde bir tekmtil (Machinery) _7- s Soi-Develoed Redons Es-lb Makine (Xaohine manufaoturing) N KCytaq (agri. Impl) N Standart Profil(Automative Weather Soale) Ehtil EBd. (Iron Casting) _ 53 F Dogany Mar. (Maohine Manufacturing) N Bintay (Cement tiles (roof)) ooo 88 N Kadem Kirtaaiye (Stationery) N Mostaq (Furniture Manufacturing) _ 163 N Metalurji lhdastrisi (Metal produots) N Sub-total s Less Developed Oniks Ittl. (Marble Processing) N Genma (Compremsors) N Fatoglu (Flour Mill) N Van Qivi (Naila) N,ermik Un (Flour Mill) N Agq (Forestry Products) N Petrol Un (Flour Mill) N Sakir gizmeci (Nail) N Seyfettin Karakog (Door knobs, Hinges) N Zintaq (Metal producta) N Meroan Marmer (Mining) N Celik Hasir (Metal products) blo N Sub-Total Total for Grand total

58 TURKTYE SINAI KALKINMA BANKASI A.S. Projects Identified and Promoted in 1977 and TSKB Financing Total Foreign Equity No. of CoSt Region 1/ Investment Exchange TL Loan Participation Jobs Created Per Job (TL Million) ($ Million) (TL Million) (TL Million) (TL oes) 1977 Aykim (Aluminum Profiles) II Isbir (Electric Generators II Agema (Machinery) III Tarmas (Agri. Equipment) III _ 88 Termesan (Aluminum Profiles) III Rize Emaye (Enamel Ware) III _ 159 Eryun (Woolen Cloth) III Batman Tarim Araclari (Agri. Equipment) III _ Total Yontas (Particle Board) III Caliskur (Maize Flour) III Baliksan (Fish Cannery) III Agas (Saw Mill) III Rigsan (Transformer) III Van civi (Nails) III Sakir Cizmeci (Nails) III ,0 39 Seyfettin Karakoc (Door Handles) III Yifas III , Total (1977/78) 1, , / Regions: I: Most Developed Provinces IT: Semi-developed Regions a III: Least-developed Regions

59 TURKIYE SINAI KALKINMA BANKASI Project Promotion Fund - Projected Income and Expenses (TL 000's) INCOME 25% of Spread on IBRD Loan 873-TU 12,495 14,216 11,157 7,982 4,972 2,584 1,073-1/ 1 6 th of interest on subloans from IBRD Loan 1430-TU 9,460 15,682 18,551 18,465 17,477 15,972 14,184 12,113 21,955 29,898 29,708 26,447 22,449 18j556 15;257 12,113 EXPENSES ,800 19,000 22,800 27,400 32,900 39,500 47,400 Excess of Income (Expenses) 8,755 14,098 10,708 3,647 (4,951) (14,344) (24,243) (35,287) Available January 1, ,210 Cumulative Excess 30,965 45,063 55,771 59,418 54,467 40,123 15,880 (19,407)

60 ANNEX 14 TSKB Export-Oriented Projects Approved in 1977 and 1978 % of TSKB's Total Foreign Exchange Total Foreign Foreign Exchange Lending Exchange Lending Lending ($ 000) ( $ 000) in that Region A. Eight most developed Provinces Istas (Izmir) 677 Beser Balata (Izmir) 1,650 Bulvar Giyim (Ankara) 147 Saray Orme (Bursa) 874 Proteksan (Istanbul) 360 Bindebir (Adana) 374 Total 2,474 1,608 21, B. Semi-Developed Regions Turksan (Tekirdag) 980 Bati Giyim (Manisa) 835 Alfa Moda (Tekirdag) 311 Tekirdag Agac (Tekirdag) 610 Serel (Manisa) 3,600 Soktas (Aydin) 1,350 Total 2,736 4,950 48, C. Least Developed Regions Termesan (Samsun) 1,240 Onel Fermuar (Corum) 750 Cisan (Kastamonu) 1,100 Soksa (Sinop) 161 Arica (Gaziantep) 824 Onkis Isletm. (Ordu) 370 Baliksan (Sinop) 1,350 Sagra Gida (Ordu) 375 Yifas (Malatya) 1,553 Total 3,251 4, , Grand Total 8,461 11, ,000 90, EMENA/IDF March 1979

61 Annex 15 TSKB Income Statments (L Million) audited (unaudited) Income Interest on liquid funds Interest on loan portfolio ,611.7 Commissions and other income Dividend income ,790.3 Gross capital gains Other extraordinary income Expenses ,818.3 Personnel expenses Directors and staff bonus Administration expenses Depreciation Provision for retirement 4.7 in.n Taxes, dues and fees Interest charges ,120.6 Provisions for losses Project promotion expenses Total expenses ,492.3 Profit before taxation Tax on profit Appropriation Net Profit Dividends Legal reserves Other reserves Ratios Total income as percentage of average total assets Administrative expenses as percentage of Average Total Assets Interest charges as percentage of Average Long-term debt Interest income as percentage of Average Loan Portfolio Dividend income as percentage of Average Equity Portfolio Earnings before tax as percentage of Average Net Worth Net Profit as Percentage of Average Net Worth G.7 wet Profit as Percentage of Share Capital Dividend as Z of Net Income Dividend as Z of Per Value Interest coverage

62 TSK" Annex 16 Balance Sheets as of December 31, (TL Willions) Dec. 31, Dec. 31, Dec. 31, Dec. 31, Audited (unauditee) ASSETS Cash A0.3 Accrued income Receivables and prepayments _ Investments: ,154.9 Loans 1/ 4, , , ,478.6 less provisions for losses (22.4) (70.0) (102.4) (217.4) Equity participations less provision for losses (28.2) (30.8) (30.8) (45.8) 11, , , ,450.7 Government bonds Other bonds , , , ,961.9 Fixed assets (net) Prepaid taxation Total Assets 5, , , ,307.1 LIABILITIES AND EQUITY Current liabilities Taxes due Dividends Long-term debt: Government subordinated loan 2/ Other Government loan Bond issues IBRD 1, , , IDA IFC , KFW, AID, EIB, PRB 1, , , , , , ,625.7 Staff Retirement Fund 'Shireholders' equity: Share Capital Paid-in surplus Reserves and returned earnings Total Liabilities and Equity 5, , , z / Includes unutilized letters of credit of: Contingencies Loan commitments Equity Guarantees / Of this TL million is due after 1992

63 Annex 17 TSKB Debt/Equit Ratio Calculations Debt 1. Long term debt, per balance sheet 4, , , ,625.7 Less: Unutilised L/Cs Plus: Guarantees Z Long-term debt outstanding, per proposed definition 4, , , ,909.0 Less: quasi-equity 1/ Long-term debt outstanding per definition under TSKB XII 4, , , ,667.0 Plus: Unutilized L/Cs Loan commitments Long-term debt outstanding, per IFC's definition 4, , , ,136.4 Equity 5. Shareholder's equity Plus: quasi-equity 1/ Equity as defined under TSKB XII and IFC's loan agreement , ,138.7 Ratios - Per old IBRD definition (3:6) Per Proposed definition (2:5) Per IFC's definition (4:6) / Quasi-equity is that portion of the Government subordinated debt which matures after the last installment due by TSKB on World Bank loans.

64 -57 Annex 18 TSKB Summary of Arrears (TL Million) Dec Dec Dec Dec Dec Arrears Principal: Up to 3 months More than 3 months Interest : Up to 3 months More than 3 months Total : Up to 3 months More than 3 months Loans affected by arrears of more than 3 months , ,625.1 Total loan portfolio 3, , , , ,478.6 Arrears of more than 3 months as percentage of portfolio: - Principal 1.7% 1.1% 0.8% 0.6% 1.6% - Interest 0.8% 1.0% 1.3% 2.3% 3.5% - Total 2.4% 2.1% 2.1% 3.0% 5.1% Total Arrears as percentage of portfolio: - Principal 2.1% 1.4% 1.1% 1.1% 2.0% - Interest 1.5% 1.7% 1.9% 3.2% 4.4% - Total 3.6% 3.1% 3.0% 4.3% 6.4% Portfolio affected by arrears of more than 3 months 4.9% 8.5% 12.9% 20.6% 31.6%

65 TURKIYE SINAI KAIKINhA BANKASI A,S. Annex 19 Equity Participations as of Sept (TL '000) Current Company's Share Market or Dlvideod 1977 Profit Total Loans A. Csompa.tes Operating profitably Industry Holding Estimated Yield (7.) as 7 of Outstanding (at cost) Value on Coat Net Worth to TSKB 1957 Rabak Electrolytic Copper 8,039 19, , Korumn Tarim Pharmaceutical prodlucts 19,907 45, , Yatirimlar Holding Investment Trust 1,125 1, Gorbon-Isil Ceramics 980 1, , Plantifay Plosticisero 2,739 8, , Celik Halat Wire Rope 9,873 49, , Aksa Akrilik Acyrilic fiber 19,095 40, , Nasas Metal ore smelting 19,500 44, , Kartonsan Carton board 6,220 37, , Altas Tools 7,500 10, , Tamnsn Tomrrk Hardboord 12,000 12, , Kilsan Bricks and tiles 5,200 5, , ok-an Construction naterial, 5,000 5, , Eltas Elazig Pulp and Paper 1,800 1, , PEC Profilo Electrical machinery 26,706 26, , Pulcuoglu Pamuk Textiles 5,000 5, , Odemis Tekstil Cotton Textiles 7,500 7, , T Demir Dok-m Cast iron 20,345 54, , Cam Elyaf Glass fiber 10,000 10, , Parnan Machire parts 25,065 25, , Tozmetal Binter metal 4,200 4, , Oduline Yapi Pulp and paper 5,000 12, , Kars Yem Food 3,000 3, , Fursan Chemicals 7,500 7, , Samsou Mnkice Machine 2,000 2, ,000 B. Companios Under Construction 235, , Asil Celik Ouality steel 66,250 66, S1c-Ova Food 5,250 5, , sintas Food 2,400 2, ,r Ditas Metal products 6,250 6, Carsancak Gida Food 1,375 1, Cukurova Kimya Chemicals 10,000 IO,OOO - 124, Karadeniz Su Urrnlori Fish products 7,834 7, , Petas Plantik Packing materials 6,250 6,250-23, Trabron Glyim Sanayit Ready-made clothing 3,975 3, _0, Eman Endustri Mineral Industrial minerals 3,500 3, , Kenita K. Elektrik Electrica equipmenl: 3,000 3, S1, Mus Meyan Koku Food 2,400 2, , Agema Machinery 4,141 4, Tupko Tuhen 6,000 6, , Isbir Elektrik Generator 2,000 2, Plasteks Textiles 4,000 4,000 - _ 125, Maksan Electrical machinery 3,150 3,150 _ 8, Anton Metal peoduct. 4,000 4,000-30, Vanet Food 1,250 1, Peteter Chemicals 5,000 5, Segman Metal products 11,750 11, Rigsan F-rtilizers 2,000 2, Polifan Plastic film 1,500 1, Karset Food 1,250 1, Karadenin Cimonto Cement piles 1,400 1, , Kuoey Hobilyn Furniture , Nardin Asbest Cement pipes 5,000 5, , Dogusan Cement pipes 4,800 4,800 - _ 61, Human Furniture , Poris Nuts and bolt , Tense Bakir Aluoin-m sections 1,575 1, Karsu Textile. 9,000 9, , Yibitas Cement 25,000 25, , Dokuson Teutil-a 12,500 12, , Bloikuan Food 1,500 1, Yatirim ve Finasaman Investment Company 37,500 37, C. Companies Operating at a Lonn 264, , Kar-denie Bkir Copper complen 23,000 6, Keban Holding Leather 13,250 13, , Pinr KConserve Food 4,950 4, Guney Biracilik Beverage 25,000 25, , Kayini Kurutma Food 10,000 10,000 - _ 19, Anadolu Snbun Yag Chemicals 12,500 12, , Truvn Deri Giyim Skins hides and footwe-r 5,680 5,680 - _ 32, Kutahya Porselen Ceramics 8,625 8, , Tamsan Tarim Agricultural machines 2,400 2, , Trafosan Electrical machines 5,000 5, , Caynan Packing materials 4, ,600 D. Companies in Liquidation 114,405 98, Kursun Sanayi Lead smelting 2, _ Eaton Yale Transmission parts 740 1,400-3_240 1,600

66 Annex 20 TURKIYE SINAI KALKINMA BANKASI A.S. Projected Operations (TL Million) APPROVALS Loans: Foreign Currency 4, , , ,129.0 Local Currency ,040.0 Total 4, , , ,169.0 Equity Investment COMMITMENTS Total Approvals 4, , , ,619.0 Loans: Foreign Currency 3, , , ,081.7 Local Currency Total 4, , , ,959.6 Equity Investment DISBURSEMENTS Total 4, , , ,341.1 Loans: Foreign Currency 3, , , ,752.0 Local Currency Total 3, , , ,537.2 Equity Investments Total Disbursements 3, , , ,885.1

67 Annex 21 TURKIYE SINAI RALK]INMA BANKASI A.S. Projected Income Statements (TL Million) Income Interest on loan portfolio 2, , , ,908.4 Commissions and other charges Dividend income and other income from equity investments Capital gains from equity investments Interest on liquid assets and bonds Other income Expenses Total Income 2, , , ,333.2 Personnel expenses Director and Staff bonus General administration expenses Depreciation Provision for retirement and dismissal Project promotion expenses _ Operational Expenses Expenditure tax fees Interest expenses 1, , , ,914.9 Provision for losses Total expenses 2, , , ,501.8 Income before tax Taxes _ Net Income Appropriations Dividends Legal reserves Other reserves Ratios Total income as %age of average total assets Administrative expenses as %age of average total assets Interest charges as %age of average long-term debt Lterest income as %age of average loans outstanding Dividend income as %age of average equity investments Earnings before tax as %age of average net worth Net Profit as %age of average net worth Net Profit as %age of year-end share capital Dividend as %age of net income Dividend as %age of per value Interest coverage Total Debt service coverage

68 - 61 Annex 22 TSKIF Projected Balance Sheet (TL Million) ASSETS Cash , , Accrued income, receivables and prepayments 1, Investments: 1, , , ,045.4 Local currency loans 1, , , ,369.9 Foreign currency loans 1/ 12, , , , , , , ,779.2 Equity investments , , ,623.3 Provision for losses , , , ,914.3 Government bond , , , ,200.2 Other Assets: Fixed assets (net) Prepaid taxes Total Assets 17, , , ,534.7 LIABILITIES AND EQUITY Current liabilities , ,213.2 Taxes and dividends Long-term debt: 1, , , ,878.1 Foreign currency debt 12, , , ,32-.- Goverrment subordinated loan Central Bank discounts Bonds or coumercial banks loans , ,257.4 Other TL term debt Total long-term debt 14, , , ,948.8 Staff Retirement Fund Equity Share capital 1, , , ,500.0 Legal reserves Other reserves Total equity 1, , , ,588.3 Total Liabilities and Equity 17, , , ,534.7 DEBT/EQUITY RATIO Contingencies Loan commitments in foreign exchange , ,233.9 Loan commitments in local currency Equity commitments Guarantee of bonds / Includes unutilized letters of credit 1, , , ,584.9

69 Annex 23 TURKIYE SINAI KALKINMA BANKASI A.S. Projected Cash Flow (TM. Million) SOURCES Local Currency Loan Collections Foreign Currency Loan Collections Increase in Local Currency Debt Increase in Foreign Currency Debt Increase in Foreign Currency Debt (txchange Rate Fluctuation) Equity Sales Increase in Provision for Losses Decrease in Fixed Assets (Inc. Depreciation) Decrease in Government Bonds Required by Law Earning before Tax (Inc. Bonus) Increase in Accounts Payable Increase in Provision Retirement and Dismissal Capital Paid in during the Year APPLICATIONS Increase in Receivables Local Currency Debt Repayments Foreign Currency Debt Repayments Increase in Foreign Currency Loans Increase in Foreign Currency Loan (Exchange Rate Fluctuation) Equity Disbursements Increase in Government Bonds required by Law Taxes Paid during the Year Dividends during the Year Increase in Local Currency Loans BALANCE AVAILABLE Cash, Near Cash Beginning of Period Net Change (-82.6) Cash, Near Cash End of Period

70 Annex 24 TURKEY - TSKB RESOURCE POSITION AS AT DECEMBER 31, 1978 Original Undisbursed Source of Year when Loan Cost to Last Outstanding Counitments Available for Loan Loan Signed Amounts TSKB Maturity Amount I/ & Approvals Commitments TL Million % Years ( TL Million A. FOREIGN BORROWINGS IBRD, loans VIII, IX, X ( ) 2, /2-7-1/4 15 2, IBRD, loans XI, XII ( ) 3, /5 2/ 15 2, IDA, fourth credit (1966) / IFC (three loans) ( ) 1, / , AID (2nd loan) (1968) / EIB (three loans) ( ) 2, /2 3/ 15 1, KfW (eleven loans) ( ) 3, /2 3/ 15 1, Paribas (two loans) ( ) 1, /4 5 + grace Eksportfinans (Norway) (1978) grace Finnish Credit (1978) 255.b 7-1/ Subtotal 9, , ,769.1 a B. DOMESTIC BORROWINGS Bonds Cseven issues) ( ) 750, Gov't Subordinated loan (1966) /2-10-1/ Central Bank discounts (1978) AID (two Lira loans) ( ) /2 3/ EIB (one Lira loan) (1971) / Subtotal 1,348.4) ) (594.5) C. EQUITY (paid-in capital, reserves and provisions) 896.7) _ TOTAL 11, , , / Excluding undisbursed portion of approved letters of credit. 2/ Spread in excess of 2.5% payable by TSKB to the Government. 3/ Rate set by Government, which retains difference between this rate and that actually payable to lenders. _/ Plus withholding tax of 29.87% of interest. EMENA IDF March 1979

71 Annex 25 TURKIYE SINAI KALKINMA BANKASI Projected Disbursement Schedule of Proposed Loan 1/ Quarterly Disbursements Cumulative (US$ millions) FY 80 2nd quarter rd quarter th quarter FY 81 1st quarter nd quarter rd quarter th quarter FY 82 1st quarter nd quarter rd quarter th quarter FY 83 1st quarter 1.C nd quarter / This table has been prepared on the assumption that. commitments will be distributed over 6 quarters, from the beginning of FY 80 to mid FY 81, with quarterly commitments peaking in the last quarter of FY 80; and that sub-loans would be disbursed over the seven quarters following their commitment, with 60 per cent of each sub-loan's disbursement being concentrated in the 3rd to 5th quarter following commitment. EMENA/IDF May 1979

72

73 ANKAR B U L GAR I A,*_>1 t_,8, 8 / a c k Se a U. S. S. R. F >0 \oirklareli i. W~ TEKI)~DAK NGLD K ASA 0 5/ P" 0-1t t XNGUI>O 0 L UZON < o X,-4 _ S r IE Z- ~~ CANAKKALE A-apaZoP~ \BOLU r Ao E egre / KARS 0 ~ AC(N0 ~ ~ ~~~~~~1 ta,--\1 2 ANKARA \< d \\tv ERZURtM._) B~C3 EALIKESI R-~ } 0 r ;irrerzincan /, ( OA\ RRA SAK A KAYSERI 7,KISEHI I V A S 0 0S A/S O <\\E #YD(N ( S_\\ 0 R _ G ) Q HAKARI IN MAN I b C,,,,A E '~ L, < mus'{5k4n463, RT E I R 0~~~~~~~~~~~~YRS1 SK DIITATV ITIT OU-, r r H OF5EHKAFA M DO ANj PROV NVCS ANOMUNICIPALITIES LA YS E R I I -EOYING I LEAST! EVELOPED _350 A,led;f ter r an e on S e. 2- S YR IA [I T SK B REGIONALRBRANCH OFFICFS 3S5- -KCNYA PKR U S = RESIONAL BOR NOARI E O UNDARIES ~.-., PROVINCIAL V _ ~ ~ ~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~LATIVLPDEIN 0 P R N OVI M N CER TI O R_ A L C A P I T AL I ES K I L O M E T E R S - O I SO 200. mm m0 smiesrn lmmm INERAIOA BOUDAIE MA L E KS 5 3 S 4)O A R _E