DaaMint of

The World Bank

FOR OMCIAL USE ONLY

Rqot No. 12573

PROJECT COMPLMEION REPORT

TURKEY

SKALL AND MEDIUM SCALr INDUSTRY PROJECT(LOAN 2647-TU)

DECEMBER 1, 1993

MICROGRAPHICS

Report No: 12573Type: PCR

Country Operations DivisionCountry Department IEurope and Central Asia Regional Office

This document has a rsticted distrbution and may be used by reipients only in the perfonance ofther officia dudes. Its contents may not othewnise be dilosed widhut Wodd BDak auriation.

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FZRlS- Foreign Exchange Risk Insurance SchemeFt - Financial Intermediaryas - Halk BankMIS - Management Information SystemPCI - Participating Credit InstitutionPCR - Project Completion ReportS100 - Small Industry Development Organization8MS - Small and Medium Scale Industrial EnterprisesSMIDO - Small and Medium Scale Industry Development organizationSYXB - Industrial Investment and Credit BankSSI - Small Scale Induotrial EnterprisesTA - Technical AssistanceWPI - Wholesale Price Index

FOR OFFICIAL USE ONLYTHE WORLD BWK

Wangton. D.C 504USA

Offic . Dttoo4naOm" of ao

December 1, 1993

SUBJECT: Prect Compledon Report on TurkeySmall and Medium Scale Indutr Prol (Loan 47-T[

Attached is the Project Completion Report On Turkey - Smal and Medi Scale Idusy Project(Loan 2647-TU) prepared by the Europe and Cental Asia Regional Office. Par I, c iutd by 91eBorrower, sggess that the level of credit subsid tion under the project was minimal.

The objes of the project were to () 2Mce lbor Inteive sm and medium scab nUSties(SMIs), epecialy veqr small ind es, where Turley has a comparative advantg, (i) srqteinstional capabilidies of pardtipating Developme Finance Insituions (DFIs), and (I) st a rtionaprogram of tcncal asisan to SMI The target for the number of sbpojec to be financed wasmetHoweve, the mor specific objective of directing some of the lead to very ma wtezle wau onlypardy achieved. The finnca Institution building of one DPI was met, wIh Ban finced techicalassistance. About balf of the TA progam to SMI was impleted, with the remainig ud Aidsreallcatod to a DPI for sub-project financing.

The project was implemented durmg a period of mac o instabWity. As a resut, teobjecive of acieving positive onlending int rates to beneficiaes was not met SMI itvestnn maynot be sustained and fiaci iemdWs may not be able to provide suitab fiancing If unstablmacroeconomic conditions peist

Overall, the project outome is rated as satsfctry, its sustalnability as unertain and itsIntitionl development impact as partial.

The PCR prvides a f&an and informative account of project oucomes and derives meanlessons of experience on project design.

No audit is phnned.

Attachment

I ri docum e teiclsd diurlbutlad amy b by ipany I tim p eofkofiat_ Ion_aamy ,a o*mwIm be diacd wiA WoeA ,w* _mhaika. I

FOR OMCLAL USE ONLY

QRJS CNPETON REIMR

SMALL AND MDIUX SCAME INDUSTRY PROJECT

LOA (2647-ZUI

Table of Contents

Page No.

RVALUTIONSaU i

PAMII PROJECT REVIEW FROM BINK'S&RSPECTIyJ . . . . . . . . . . . 1

A. Project Identity . . . . . . . . . . . . . . . . . . . . 1

S. Background . . . . . . . . . . . . . . . . . . . . . . . 1

C. Project Objectives and Description . .. . . . . . . . . 2Project Objectivoe . . . . . . . . . . . . . . . . . . 2

Project Description . . . . . . . . . . . . . . . . . . 2

D. Project Design and Organization . . . . . .. . . . . . . 3

3. Project Implementation . . . . . . . . . . . ... .. 4credit Component . . . . . . . . . . . . . . . 4Tchnical Assistance Component ............ 6

P. Project Results . . . 7. . . * . . . . .* . . . . . 7credit Component . . . . . . . . . . . .. . .* . . 7Technical Assistance Component . . . . . . . . . . . . 7

G. Project Sustainability . . . . . . . . . . . .. . . . . 8

H* Bank Performance . . . . * * * . . . . . . 8

I. Borrower Performance . . . ,. . . . . . . . . . . . . . 9

J. Lessons and Recommendations . . . . . . . . . . . . . .. 10

PART II PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . . . . 11

This documt tas a rstict distribution and may be used by mcipients ny in th pwefomeof their ffiecl dutis. Its contonts nmy not otherwis be disclosed without World Bak authoriaton.

Table of Contents (continued)

PART . x STIIQ ALS iF.MgION ... . . . . . . . . . .*.*. .*.*.*. 15

1. Related Bank Loans/Credits . . . . . ..... . ... 152. Projeft Timetable . . . . . . . , . . .* . . . 163. Loan Disbursements . . . . . . . .* * .,, *. .* 164. Project Zmpl_mentation ................ . 175. Project Costs and Financing . . . . . . . . . . . . . . . 186. Project Results . . . . . . . . . . . . . . . . . . . . . 19

7. Status of Covenants .a.t.s. . . . . . ................... 198. Use of Bank Resource ................... 20

ANNEXE8

Annex ls Sectoral Allocation . . . . . . . . . . . . . . . . 23

Annex 2: Averagse 7RI8 Interest Rates vs. Average WPI ... . 24Annex 3s Geographic Distribution of Subloans . . . . . . . . 25Annex 4: Subsectoral Distribution of Encouragement

Certificates in Manufacturing Sector . . . . . . . 26

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PROJECT COMPLETION REPORT

SMALL AND MEDIUM SCALE INDUSTRY PROJECTLOAN 2647-TU

PREFACE

This is the Project Completion Report (PCR) for the Small and Mediumscale Industry Project in Turkey, for which Loan 2647-TU in the amount of US$100million was approved on January 7, 1986. The loan was closed on December 31,1992, six months later than the date planned at appraisal. The loan has beendisbursed to the extent of US$98.51 million, and the residual amount of US$1.49million mostly comprises the unused amounts for technical assistance.

The PCR (preface, evaluation summary, and Parts I and III) wasjointly prepared by Country Operations Division and Resident Mission in Turkeyof Country Department I in the Europe and Central Asia Region and the Governmentof Turkey, SYXB and Halk Bank (Part II).

The preparation of this PCR was started in December 1992 and wasbased, inter alia, on the Executive Project Summary, the Staff Appraisal Report,Staff Appraisal Reports of associated projects, Loan and Subsidiary LoanAgreements and Supplementary Letters, Supervision Reports, Project CorrespondenceFiles, Internal Bank Memoranda, Subproject Files and interviews with the managersof Participating Credit Institutions (PCI) and Bank staff.

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PROJECT COMPLETION REPORT

SMALL AND MEDIUM SCALE INDUSTRY PROJECT(LOAN 2647-TUI

EVALUATION SUMMARY

(i) Obiectives and Design. The Bank provided this loan to theGovernment of Turkey for financing small- and medium-scale industrialenterprises (SKI), focussing particularly on smaller enterprises, to assist inreducing urban unemployment. Related to this objective, the project alsoaimed to help develop financial intermediaries that are proficient inproviding term finance to SMIs. The project included technical services forSNIs through the Small Industry Development Organization (SIDO), which wasthen the only government agency respon ible for providing promotional andextension services to SMIs. To attain these objectives, the Bank extended tothe Government the equivalent of US$100,000,000. Of this amount, $98.4million was to be used for financing eligible SMI sub-projects while theremaining $1.6 million was for technical assistance to financialintermediaries and SMIs.

(Ii) Imlementation Experience. Loan effectiveness was delayed mainlydue to protracted discussions between the Bank and the Government about theForeign Exchange Risk Insurance Scheme (FERIS), the credit program under whichon-lending under the project was to be undertaken. There were also delays inthe preparation of necessary legal documents by the Government. After loaneffectiveness, however, the level of commitments and disbursements quicklyreached a much higher level than appraisal estimates. However, rapidcommitment and disbursement could I ve been due to the favorable interest rateoffered under FERIS.

(iii) The Bank and the Government had agreed that the FSRIS interestrate would be adjusted every six months for new subloans in line with marketconditions. However, in the period between January 1986 and December 1989,adjustments were less frequent than agreed, and average interest rates wereusually negative when compared to the average Wholesale Price Index (WPI). Atthe beginning of 1990, the FERIS rate was indexed to the re-discount rate ofthe central bank to make it more responsive to market conditions. However,this rate was also negative in real terms. Thus, the lending rate under theproject continued to be a preferred rate throughout the life of the project.FERIS was io be reformed under a follow-up project (Second SMI Project) whenthe interest rate was made a variable rate tied automatically to the three-month Treasury bill rate. Finally, under the Private Investment CreditProject approved in May 1991, the Bank and the Government agreed to wind downthe FERIS program altogether.

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(iv) The appraisal targets in terms of the number of subprojects to befinanced were met, indicating the existence of stronger than expected demandfrom medium scale and small scale industrial enterprises for the loan, at theinterest rate offered. However, the objective of directing some of thelending to very small industrial enterprises was only partially realized.Halk Bank (HB) was required to direct 70% of its allocation to very suallenterprises. Only about half of this target was achieved.

(v) The allocation of funds for TA had to be revised duringimplementation mainly because of implementation problems and changedconditions. Originally, US$0.35 million was allocated for technicalassistance to HB. Subsequently, HS decided to use its own funds for the stafftraining and other institution building components envisioned under theproject. Upon the request of HE and the Government, US$0.30 million werereallocated to sub-project financing through HE. The major portion of the TAfunds (US$ 1.25 million) were originally allocated to SIDO. It was expectedthat SIDO would utilize about 60% of this allocation for consultants*services, and the remaining for equipment, reference materials and training.S1DO successfully implemented the recommendations of its consultants fordeveloping a Management Information system (MIS), and improved itsinfrastructure by installing a computer system and acquiring personalcomputers. However, the component providing for technical services to SMIsdid not proceed as well, as a result of changes in SIDO's organizationalframework and mandate. The residual amounts of SIDO's allocation (US$0.6million) were reallocated to the Industrial Investment and Credit Bank (SYKB)for sub-project financing.

(vi) Proiect Results and Sugtainabilitv. The project was successful insupporting the SMI sector and increasing SMI's access to financial assistance,and in encouraging the two financial intermediaries to expand their SMIportfolios. However, unless macroeconomic stability is attained, it isunlikely that SKI investments will be sustained. Likewise, it is unlikelythat financial intermediaries would continue to provide an uninterrupted flowof funds to SMI under unstable conditions.

(vii) Almost 20,000 direct jobs were created at an investment cost perjob of approximately US$17,000. The number of direct jobs created hasexceeded the appraisal estimates of 18,000 which indicates the success of theproject in achieving one of its primary objectives, that is, job creation. onthe other hand, the actual cost per job of US$17,000 was above the expectedlevel of US$10,000, indicating more capital-intensive subprojects werefinanced than expected at appraisal.

(viii) The changes in the organizational structure and management of SIDOand an expansion of its mandate within the Ministry of Industry led to majorbudgetary changes and altered SIDO institutional needs and priorities. Thusthe institution building objectives for SIDO under the project were notachieved. On the other hand, although the TA funds for HB were not utilized,this was principally because HS decided to use its own funds for TA. Theagenda for staff training and other institution building components for HBproceeded as expected.

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(ix) Lessons Learned and Recomm1endaLtons. While the credit componentof the project provided financial assistance to more SNI units than expectedat appraisal and helped build SMI lending capability in SYKB and HB, it hasnot helped develop alternative sources of funds for SKI lending because of thepreferential interest rate offered. By distorting the credit markets, FERISmay have prevented the development of an SMI lending program that issustainable for the long-term. The Bank should take issue with preferentialand subsidized credit programs and work toward their elimination or, at least,reduction to levels that minimize distortions in credit markets. (Furtherreform and subsequent winding-down of PERIS were achieved under subsequentoperations.) Provision of technical assistance for SMIs by a governmentagency, such as SIDO, will succeed only if there is close collaboration withthe private sector. Without private sector involvement, such programs quicklybecome bureaucratic and unresponsive to the needs of the sector they aresupposed to assist. Technical assistance for HS was more successful sinceobjectives were not only clear but shared by both the Bank and HB. This ledto a ,ecision by HB to use its own resources, indicating the value it attachedto the TA.

PROJECT COMPLETION REPORT

TURKEY

SMALL AND MEDIUM SCALE INDUSTRY PROJECTLOAN 2647-TU

Part Is PROJECT REVIXW FROM THE ANK'S P-RSPECTIVE

A. Project Identity

Project Name Small and Medium Scale Industry ProjectLoan No. 2647-TURVP Unit s EcA RegionCountry TurkeySector Finance and Industry

B. Baclkbrggng

1. Turkey did not make the necessary adjustments to the economicdisruptions that were caused by the general unfavorable conditions in theworld economy in the 1970s. As a result, Turkey developed a large externaldebt burden which led to balance of payment crisis, a sharp deterioration incredit worthiness, shortages of imports, disruptions in industrial productionand a rise in unemployment. Starting in 1980, the Government of Turkeyadopted a new economic development strategy, including a wide ranging programof structural reforms. In this context, one of the major objectives of thegovernment was to stimulate growth, employment and exports throughstrengthening the private sector. Numerous studies of Turkey's industrialsector had shown that factor productivity was significantly higher in privatethan in public industry, and that privately owned small and medium scaleenterprises (S1I) offered high returns per unit of capital invested, whilebeing more labor intensive.

2. As part of the new economic strategy, a large devaluation of theTurkish Lira and major policy reforms such as trade liberalization, and exportpromotion had been enacted. These reforms led to a large shift of productionfrom domestic to export markets. Over the medium term, total factorproductivity was increased. However, lack of access to institutional finance,particularly to financing machinery, plant, and adequate working capital wasstill a serious problem for SMIs. Also, SMIs faced bottlenecks in benefitingfrom then existing sources of technical assistance. This was particularly truefor those in the private sector who failed to resolve various technical,management, marketing problems both because of lack of information on theavailability of such services and the high costs involved.

3. Given the important role of SMIs in the manufacturing sector andtheir potential to contribute to employment creation and export growth, thegovernment's Fifth Five Year Development Plan enunciated a strategy andaccompanying policy measures specifically to promote SMI. These includedstrengthening the Small Industry Development Organization (SIDO) to developappropriate strategies, policies, and technical extension activities to assist

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in SKI development and enlarge the flow of investment and working capitalloans.

C. Proiect Oblectives and Descrintion

4. iroject Obiectives. In line with the government objectives topromote SMIs and thereby contribute both to job creation and growth inmanufactured exports, the Project aimed at building on the Bank's firstproject in this area, Labor Intensive Industry Project (Loan 1952-TU), andprovide further assistance for the development of the small and medium scalemanufacturing sector. In this context, the project was expected to placespecial emphasis on assistance to small scale industrial enterprises (88I)particularly those that are located in remote areas of the country. Also,parallel to this, the project intended to assist in developing financialintermediaries (PI) capable of providing term finance and financial servicesto SMIs in an efficient manner and thus improve SMI's access to term finance.Another objective was to help initiate a national program of technicalassistance to provide a range of technical and management services to SMIs ina cost effective manner.

5. Proiect Descrintion. The Bank extended to the government theequivalent of US$100,000,000 for the development of labor intensive SMIs withspecial emphasis on small scale enterprises. US$98.4 million of this amountwas to be used for financing eligible sub-projects and the remaining US$1.6million for technical assistance. Sinai Yatirim Kredi Bankasi (SYUB) andBalk Bank (HZ) were the two FIs which were found eligible to on-lend theproject funds. $80 million was allocated to SYKB and US$18.4 million to HB tobe utilized in financing sub-loans. The project was estimated to create18,000 direct jobs through approximately 700 sub-projects, of which 500 wereto be financed through HB. HB would finance only SSIs# and within the SSIcategory 70% of HBl's share for sub-loan financing would be channeled to verysmall enterprises'. On the other hand, SYXB was allowed to utilize up to 20%of the project funds for financing non-SMI projects which satisfied the costper job criteria3 and were considered export-oriented based on certificatesof Encouragement. SYXB was required to finance SMI4 projects with at least80% of its portion of the loan proceeds and: within this limit, minimum 30% ofthe loan would be on lent to SSIs. The onlending terms for tthe sub-loans werea maximum of 15 years including a grace period of 3 years. For sub-loans that

1 For an investment to be considered an SSI, the maximum investment limitfor new projects should be $500,000 and $650,000 for expansion projects.

2 Very small enterprise was defined as an enterprise whose total fixedassets excluding land and buildings was less than US $200,000.

3 All eligible subprojects would have a maximum average capital investment,excluding land and buildings, of $18,000 per job.

4 For investments to be considered SMI, maximum investment limit should beUS $2.5 million for new investments and $3.5 million for expansion projects.

were overed under the Foreign Exchange Risk Insurance Scheme (UERIS),subs rrowers paid the fixed FERIS interest rate and the maximum terms wereeight years with three years grace period. SYKB and HB received the fundsfrom the GOT with a rate which vas decided to be FERIS minus an intermediationfee of 4%. The government was to beaz the foreign exchange and lntereet rateriske.

6. For technical assistance (TA) to HB $0.35 Million was allocated toinstitutLonal strengthening of BB. In addition to thie, $1.25 Million was setaeide to develop inetitutlonal capabillty to provlde extenslon services toSMIs and to facLiltate subcontracting on a national basis. For this purpose,8100 was expected to bulld up a decentralized network of branch offLcesstaffed with multldlsclpllnary extension teams. Each branch office wouldpromote TA by visiting and undertaking diagnostlc surveys of SMI firms tc.assess their problems and needs and refer firms needing speclalized assistanceto appropriate experts or LretLtutions capable of provlding such services.Upon completion of the TA program, 810D was expected to provlde assistance andguidance to about 350 SMI enterprLses, train about 200 entrepreneurs, anddevelop about 900 company proflles annually.

D. Proiect Design and OraanLxztion

7. The SMI project was designed with a larger scope ln terms offinancial and technical assistance than Loan 1952-TU. The latter wasprovided to SYKB for supportlng the development of labor intensive SMIs,whereas the coverage of SMI project was enlarged by adding a TA component andexpanding the credit delivery wlth increasing the funds and by including HB asan additional PI. The SNI project also aimed to support the governmentefforts to develop SMI as stated ln their fifth five year plan.

S. Although, under its previous industrial credits to Turkey, theBank had endeavored to diversify lts assistance on a geographlcal basis and tointensify support to sSIs, these objectlves were met wlth limited success.The major reason for this was the limited access of DFIs to the less developedregions of Turkey. In order to be more effectlve in the promotion andextensLon of the loan, the SKI project lntroduced a commerclal bank (HB),whlch had a vast branch network spread all over the country and which wasspecialized ln loans to small enterprlses. Towards this end, the Bank alsorequired RB to focus on the smaller end of SSI.

9. Interest rates and foreign exchange rlsk was one of the majorissues ln project preparation. In contrast to the then existing fixedlnterest rates under the forelgn exchange risk lneurance scheme (UERIS), theBank supported the LntroductLon of floating lnterest rates which would beadjusted on a six monthly basli in relation to an inflation based referencerate. The aim was to ellminate subsidies and move to positive interest rates.Also, the Bank lnsisted that the FERIS should be transitional ln nature andshould be self-financlng. The Bank and the government agreed that the FERISwould be admLnLstered by the Central Bank of Turkey, the FERIS interest ratewould be adjusted every six months and the prevaillng lnterest rate at thedate of the TL contract would be applled until the end of the maturity of the

sub-loans. It was also agreed that the future of the FERIS should bediscussed appropriately under the Financial Sector Adjustment Loan, which wasthen under preparation.

10. The financial assistance part of the project was to be carried outby SYKB and Ha. Both Flo would only lend to investment projects defined asthe project whose investment cost per job created would not exceed US$18,000.SYRK was required to calcula*. economic and financial rates of return only forinvestment projects whioh were estimated to cost more than $750,000 each. Inthis category, SYRB would finance investment projects which had economicinternal rate of return not less than 12% and financial rate of return notless than the prevailing rediscount rate charged by the Central Bank of Turkeyfor medium and long term loans for industrial investments, both in nominalterms. A 5Qs50 debt/equity ratio requirement was established by FERISadministration for sub-loans to be covered under this scheme. Establishmentof financial performance measures like minimum current ratio, debt equityratio and debt service coverage ratio as eligibility criteria for theinvestment firm were recommended at the appraisal stage. However, they werenot included in the later stages of the loan processing.

11. The maximum debt/equity ratio for SYXB was set as 10:1. Forfurther strengthening the institutional capacity of HB, agreement was reachedfor HB to carry out a program of restructuring in terms of their overallorganization as well as their information systems to improve their efficiency.Also, HS agreed to appoint and train additional staff, especially in projectidentification, appraisal, and supervision.

12. $1.25 million was earmarked for the technical assistance componentof the loan to be utilized by SIDO mainly for organizational development andstaff training. SIDO was expected to develop a decentralized program ofextension services and an efficient system to utilize other resourceorganizations and consultants to be effective in the improvement of theoperations of SRI.

Z. Prolect Implementation

13. Credit Component. Loan negotiations and effectiveness were not onschedule mainly due to protracted discussions between t.: Bank and theGovernment about FERIS, the interest rate which would be applicable to theloan, and also due to some delays in the preparation of necessary legaldocuments by the Government. After loan effectiveness, within one year, thelevel of commitments and disbursements reached a much higher level than theappraisal estimates. By the end of 198. disbursements amounted to US$35.99million, 300% more than the levels anticipated at appraisal. About 87.5% ofthe loan amount was disbursed by the end of the following year. As ofDecember 31, 1992 US$98.97 million was fully disbursed, six months later thanthe original closing date.

14. one of the critical issues raised in the preparation of the loanwas the introduction of an interest rate structure and a foreign exchange riskcoverage which would help to maintain an active demand for foreign currency

loans, but would eliminate subsidies. For this purpose, the Bank advocatedthe idea of setting floating interest rates in relation to an inflation basedreference rate that is to be adjusted every six months. The Government'sstated intention was to set FERIS interest rates which would be positive overthe life of the sub-loans, and also would be in line with interest rates forsimilar maturities under the Central Bank's rediscount facility for industriallending. After intensive discussions, the Bank and the Government reached anagreement on the application of FERIS. According to this, the FERIS interestrate would be adjusted every six months to new commitments. In spite of this,in the period between May 1984 and the last quarter of 1989 the FERIS wasadjusted for differing periods (3 months to eleven months) and most of thetime, the average interest rates were negative when compared to average WPI(Annex 2). This situation could be one of the determining reasons of thesubstantially higher than expected level of actual disbursements especiallybetween 1987 and 1990. Only after the introduction of a floating rate forFERIS which is adjusted every month according to the auction determinedinterest rate of three month T-bills, did the FERIS interest rate becomepositive in real terms, especially in 1991 and 1992. However, FERISadministration decided to grant the right of making a choice between fixed andfloating UERIS rate to the investors for subprojects which would be financedby then existing credit lines, including SMI I. For this purpose, in February13, 1990, the reference fixed rate of FERIS was announced as the interest rateapplied to the advance transactions by the Central Bank. This rate, which isa version of Central Bank discount facility, has been 54.5% since then.

I5. It was estimated that a total of 700 sub-projects, 500 by HB and200 by SYXB, would be financed from the Bank funds, for a total of US$98.4million. More than 47% of this total amount would be directed to 8SI, of which27.60% would be on lent to very small enterprises through HB. In other words,13.09% of the total amount allocated for sub-project financing was earmarkedfor very small enterprises.

16. Towards the end of 1987, the commitments of HS were below theexpected levels and there was agreement between the Bank and HB thatcommitments would have to be speeded up to meet the submission deadline ofJune 30, 1988. One of the reasons stated by HB for low commitments were thelack of demand from very small scale industries to which seventy percent ofthe loan had been allocated. As a result of this development, HB committed theremaining funds to SS1, without being very particular about the distinctionbetween 8SI and very small enterprises.

17. As of end 1992, a total of 387 firms have been financed by thefinancial intermediaries. SYKB provided funds to 185 firms and HB to 202firms. Almost 44% of the total amount disbursed for financing these sub-projects was utilized by SSI and only 5.95% of the total disbursements wasdirected to very small enterprises. HB's non-compliance with the requirementof directing 70% of its allocation to very small enterprises, was one of themain reasons of the variance in disbursement percentages for very smallenterprises, as well as the variance between the projected and actual numberof sub-projects financed. 94% of the funds under the loan were disbursed forfinancing small and medium scale enterprises, which is a better performance

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than anticipated in the appraisal stage where this percentage was estimated tobe around 87%. These results also indicate the existence of better thanexpected demand from medium scale and small scale industrial enterprises.

18. The project funds were mainly directed to the financing ofenterprises in the textiles subsector (42.6%). This subsector was followed bychemical industry (11.4%), metals (9.9%), electronics (5.8%), and foodindustry (5.7%). However, since the loan funds were not evenly distributedamong the two Fla, the above listing is mainly affected by, and reflects theexposure of SYKB (45.9%).

19. Technical Assistance Component. The allocation of funds, whichwas done at the appraisal stage, had to be revised during implementationmainly due to the problems which are related to the technical assistancecomponent of the loan. US$0.35 million was allocated to HS for TA. USS0.05million of this amount was allocated for training purposes and USS0.30 wasallocated for payments to consultants for their services for organizationaldevelopment of HB. However, during the execution of the project nosignificant progress was apparent in HB's preparation of its technicalassistance program and in the utilization of TA funds. Following themanagement changes, BB indicated that it would be prepared to use its ownresources for the implementation of an institution building technicalassistance program. Upon the request of HS and the Government, US$0.30million and the unutilized portion of the amount allocated for training wererealloceted in order to make these funds available for sub-project financingthrough HB.

20. The major portion of the TA funds (US$1.25 million) were allocatedto SIDO. It was assumed that, SIDO would utilize about US$0.75 million forconsultants' services, US$0.42 million for equipment and reference materials,and 0.08 million for training. SIDO successfully implemented therecommendations of its consultants for developing an efficient MIS system,improved its infrastructure by installing a computer system and by theacquisition of PCs. However, especially the technical assistance component ofthe project did not proceed as well, due to changes within SID0 resulting frommanagement turnover and a redefinition of its role within the Turkish Economyin a broader context as SMTIDC. The intention was for SMIDO to have abroader policy coordination and advisory role, while at the same timemaintaining its role as provider of general extension and consultancyservices. SMID0's organizational framework and budget had been changed suchthat the remaining funds allocated were no longer required. At the same time,SYRB's original allocation under the loan had been fully committed andextremely tight credit market conditions continued to exist. Therefore,SMIDO's allocation for consultants' services was decreased to US$0.19 millionand its allocation for training was decreased to US$0.038 million, and theresidual amounts were reallocated to SYKB for sub-project financing.

5 SNIDO: Small and Medium Scale Industry Development Organization. SIDOwas merged into S0IDO.

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F. ProIect Regults

21. Aredit Comqonent. S8I I was partly successful in achieving itslending objectives. The project was successful in supporting the Governmentto assist the SMI sector and also helped to increase SMI's access to financialand technical assistance, and to encourage the two financial intermediaries toexpand their SMI portfolios. The credit component was fully disbursed to sub-projects of 387 enterprises of which 384 are in the SNI category. These sub-projects have created 20,000 jobs as compared to l80O00 estimate at appraisal.The actual number of direct jobs has been above the appraisal estimates whichindicates the success of the project in achieving one of Its primaryobjectives, that is, job creation. on the other hand, although the cost perjob was expected to be US$10,000, the actual cost was US$17,000. Thesefigures were US$9,000 and US$22,850 for HB and SYKB respectively. SYKSexplained this high cost per job as the result of lower capacity utilizationin some sub-sectors. According to SYXB, an increase in the capacityutilization ratios of the companies would also increase the employmentfigures, and thus decrease the average cost per job. In addition to highconcentration of SYKB's lending to certain subsectors, the exposure of SYKB tomedium scale or larger industrial enterprises which tend to be more capitalintensive than 88I, could be another factor to explain the difference betweencost per job figures of the two FIIs.

22. Another objective of the project was to particularly assist 88I,especially those located in the remote areas of the country and it wasestimated that around 47% of the funds that were made available for the creditcomponent would be on-lent to 88Is by the FIs. However, due to factors suchas lack of efficient promotion, lack of investment demand from distant orlesser developed areas most (89.43%) of the sub-projects were located in thethree most developed regions of the country: Marmara (65.41%), Eagean(20.29%), and Mediterranean (3.73%). The objective of financing particularlysmall scale enterprises was barely achieved as 44% of available funds went tothis segment of the sector. The project was not fully successful either inmeeting the objective of utilizing 70% of H8's allocation to finance verysmall enterprises. Although it was estimated that around 13% of the fundsavailable for the credit component would be disbursed for this category, only6% was.

23. Technical Assistance Cormonent. For the execution of thetechnical assistance component of the project, US$1.25 million was allocatedto SIDO and U8SO.35 million to HB. However, nearly US$0.6 million of SIDO'sallocation and US$0.3 million of HB's allocation was not utilized, andtherefore, was reallocated to sub-project financing.

24. 8IDO was the implementing agency which was to provide morecomprehensive technical assistance to SMrs, another major objective of theproject. In addition to assisting SMIs through SIDO, technical assistancefunds were also allocated to 8IDO to strengthen its organizational structureand capability to carry out its role. 8IDO utilized the latter portion of theTA funds to establish an efficient MIS system and to procure main frame andpersonal computers. To improve its effectiveness in providing TA to SMIs,

SIDO was expected to expand its extension services. For this purpose, SIDOwas supposed to open six more branches in addition to its centers in Ankaraand Gaziantep. SIDO opened three more branches in Istanbul, Bursa, and Konya.Beyond these steps, SIDO was not able to carry out the task envisioned for itunder the project because of a series of structural problems andorganizational changes that occurred during the implementation period of theproject. SIDO's failure to implement an extension service meant that theproject failed to improve SMI's access to technical services as envisioned.However, the credit program did proceed and may have alleviated this problemby providing SMIs with the financial resource to procure technical serviceswithout SIDO assistance.

G. Proiect Sustainabilitv

25. One of the objectives of the Bank's strategy for SMI lending toTurkey was to assist the Government of Turkey to promote labor intensive SMIsand thus contribute to job creation. Due to continuation of high inflation,which leads to high cost of investment funds and higher uncertainty in projectfinancing, it is unlikely that the uninterrupted supply of funds for financingSMI investments can be achieved. The same considerations apply to the demandfor funds by SM.I. As a result of the scarcity of available resources forterm financing and high interest rates, sustaining the desired level ofprivate SKI investments is even more difficult. Despite the environment, theoverall collection ratios related to the loan funds of the Fl's have been93.9% for SYRB and 89% for HB. It would appear therefore that the financialviability and sustainability of the sub-projects financed under the loan isabove average. The repayment performance of the sub-projects indicate theirability to generate expected benefits over their useful life, testifies to theefficiency of the project selection system put in place by the FIs and totheir effort to monitor project implementation.

26. SKI I has achieved some success in enhancing the institutionalstructure for financial assistance to SKI. It was the first Bank project inTurkey which introduced a commercial Bank (HS) as a financLal intermediary.The project sought to take advantage of the vast branch network of HB inreaching a wide range of SKIs, while assisting US in its structural andorganizational strengthening. HE successfully implemented a series ofinstitutional and organizational development programs. Thus, HB added a newdepartment for project evaluation and reorganized its fund credits departmentto follow up the performance of the existing medium and long term loans intheir portfolio. The sustainability of the performance of the two FIs hasbeen achieved through improvements in both the quality of the balance sheetand the operational structure. SMI II, which is the follow up Bank loan inthe same sector (Loan 3067-TU), has also benefitted from the improved projectappraisal skills in both FIs.

H. Bank Performance

27. At the preparation and appraisal stages of the project the Bankemphasized the development of efficient SMIs to help alleviate urbanunemployment and increase exports of labor intensive industrial products. The

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project met or exceeded the targeted employment estimates. However, theproject could not meet the cost per job estimates. The exposure of SYUB torelatively more capital intensive projects, and the lower than expectedcapacity utilization ratios could be counted as the reasons of this outcome.It should also be added that, another cause of this result could be theunderestimation of the expected average cost per job by the Bank at appraisalof the project.

28. Although, from project identification to board presentation, theBank sought assurances that there would be a balanced geographicaldistribution of the loan proceeds, this was not realized. On the contrary,almost 90% of the funds for sub-loans were utilized by three relatively moredeveloped geographic regions, and only the remaining 10% was disbursed to thelesser developed four regions. The Bank tried to emphasize this condition byrequiring 70% of the allocation of HB to finance very small SSI. This issuewas also dealt with as a covenant of the Project Agreement between the Bankand HB. However, HB failed to comply with the covenant. Only about 32% ofHB's allocation were disbursed to very small SSI. Unfortunately, thesupervision missions did not forcefully address this matter and there waslittle reference made in the supervision reports.

29. The Bank was successful in introducing a new financialintermediary (HB), to assist improving SMIs access to term finance. HEutilized the segment of the loan which was earmarked for training, to trainits staff especially in the area of project appraisal. These events inducedinstitutional and organizational developments in HB. In addition to this,both FIe expanded their medium and long term credit portfolios, especially infavor of SMIs.

I. Borrower Performance

30. At all stages of the project cycle, the Government indicated itsagreement that, the introduction of an interest rate structure, FERIS, whichwould help to maintain active demand, but would eliminate subsidies, wasessential for the success of overall policy of the economy relyingincreasingly on market for_.es. To this end, the Government issued the decreeand regulations that specified how FERIS would operate in 1985, and alsostated that the FERIS fund should be self financing. However, the governmentcould not achieve this objective. The PERIS rate was negative, some years upto 25 percentage points, in real terms from 1984 to 1991, with the exclusionof the year of 1986. Of course, this situation perpetuated distortions in thecredit market.

31. Also as a result of the incentive policy of the Government, theeven distribution of project funds among subsectors could not have beenrealized. The largest portion (43%) of the project funds were employed forfinancing textiles subsector, which is a reflection of subsectoral breakdownof investment incentive certificates given to manufacturing sector (Annex 4).

32. The decisions of the Government to change the organizationalstructure, and enlarge the area of responsibility which lead to major

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budgetary changes in SIDO, altered the needs and priorities of thisinstitution. This development had a negative impact on the technicalassistance component especially related to extending TA funds to SKI. As aresult of this development, project funds which were earmarked for thispurpose had to be reallocated.

J. Lessons and Recommendations

33. The credit component of the loan has been disbursed earlier thananticipated at appraisal and the collection ratios of the Participating CreditInstitutions (PCIs) have been above acceptable levels. The negative interestrates that have been charged to the sub-loans could be one of the notablereasons for this positive outcome. Also, another determinant would be theadvancements realized by the FIs in terms of their project evaluation andfollow up capabilities.

34. On the other hand, the same success has not been achieved indeveloping alternative long-term resources for financing SKI investments, thusincreasing SMIs' access to term finance. one of the main reasons of thisfailure have been the distortions in the credit market created by negativereal FURIS interest rates. The existence of such subsidized interest rateprevented development of competitive interest rates, and thus, deterred thedevelopment of alternative resources for term financing. Therefore,elimination of preferential and subsidized credits, regardless of their degreeof association with the Bank loans, would be a requisite for the success offuture Bank loans especially in their efforts to assist the Government tosecure and improve the availability of alternative resources for termfinancing of SM? investments.

35. Provision of technical assistance for SMIs by a government agency,such as SIDO, wvil succeed only if there is close collaboration with theprivate sector. Without private sector involvement, such programs quicklybecome bureaucratic and unresponsive to the needs of the sector they aresupposed to assist. Technical assistance for financial intermediaries wasmore successful since objectives were not only clear but shared by both theBank and the institutions concerned. In the case of HB, this lead to adecision to use its own resources indicating the value it attached to the TA.

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Part Ils PROJECT REVIW rROM BORROWER'S PERSPECTIVE

36. The following comments on the draft PCR were submitted by theUndersecretariat of Treasury and Foreign Trade of the Prime Ministry of theRepublic of Turkey.

37. We would like to extend our deep appreciation for your invaluablecontributions and kind cooperation during the implementation period of thereferred project and also for well prepared Project Completion Report.

38. The small and medium scale industry is the one of the key sectorof our economy and has a great impact on the industrialization process ofTurkey. In this context, I would like to firstly convey some comments on theBorrowers Performance Section and then on others.

39. Concerning the implementation of Foreign Exchange Risk InsuranceScheme (FERIS), there is no doubt that this scheme made positive effects onthe acceleration of the disbursement of funds. As a result, the loan amounthave been disbursed earlier than anticipated at appraisal. The main purposeof establishing such a system is to protect small scale investors from thedevaluation of the Turkish Lira when they borrow long-term foreign exchangeloans. It is a matter of fact that high volatility of interest rates andcurrency values in financial markets has created an important degree ofinterest and currency exposure which can not be managed by small scaleenterprises on their own. At the beginning of the FERIS implementation, FERISrate was determined by the Central Bank's rediscount rate applied to preferredinvestment. If the Central Bank rate was not selected as a reference rate,there was no chance to attract investors to use the Loan proceeds. For thisreasons, eventhough the FERIS interest rate became negative level at thebeginning of the implementation period, it had prevented competition withrespect to Central Banks rediscount facilities for preferential credits.Actually, as a consequence of elimination of Central Banks rediscountfacilities, FERIS interest scheme passed to floating interest rate adjustedon a monthly basis according to last three month arithmetic average ofauctioned interest rate of three-month Treasury Bill. Within this framework,FERIS interest rate have been reached to positive real level and caused toLoan proceeds much more expensive than all preferential credits. In fact,although the Loan Agreement of SKI I stated that subborrower pay FERISinterest rate to the intermediary banks and these banks pay FERIS rate minusan intermediation fee of 4% to the FERIS, the intermediary banks actually paidcurrent FERIS rate minus an intermediation fee of 4% to the FERIS, theintermediary banks actually paid current FERIS rate without cuttingintermediation fee to FERIS according to the decision of Money and CreditBoard. For these reason, intermediary banks collected the intermediation feesfrom subborrowers thus increased the real cost of funds to subborower by 4%Nevertheless, after the introduction of floating FERIS rate, the average rateimplemented during the project approximated to real level and disbursementrate of the loans under FERIS slowed down as observed such Loan like 3067-TU,3077-TU.

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40. Furthermore, the largest portion of the project funds were used tofinance textile sector projects. But it is not only reason for that textilesector is favored by Government on the distribution of the incentivecertificates but also that Turkish manufacturing sector has a comparativeadvantage on textile because of mainly low labor cost and accessible foreignmarkets. Nevertheless, it is true that the even distribution of project fundsamong geographic region was not be realized. There is no adequate investmentdemand in those region, although heavily subsidized preferential credit shavebeen given.

41. In line with restructuring of SIDO as SMIDO, has dealt moreeffectively with small and medium scale e.nterprises through providingtechnical assistance and consultancy. However, due to reorganization, SMIDOwas delayed to use the technical assistance component (T.A.) of Loan. In thisregard, Treasury indicated a quick response and reallocated the unused part ofT.A. component to SYKB for relenting this component to the eligible projects.Thus the whole amount of Loan have been almost disbursed until the closingdate.

42. on the other hand, both of the intermediary banks have failed atsome degree to achieve the target of cost per job which became US $ 17.000contrary to estimated US $ 10.000 at appraisal. However the most importantaim of the project, job creation has been largely achieved roughly 20.000 jobshave been created as compared to 18.000 estimated at appraisal. In fact,through the capacity utilization ratio increment, overall cost per job will becertainly diminished. Since very small project projects create more costefficient job opportunities, one of the other reason for higher cost per jobmay be counted as the low level of very small project financing by Halkbank.

43. Furthermore, SMI I is the first World Bank Loan in Turkey whichintroduced a commercial bank, Halkbank, as a financial intermediary. Thesuccessful project implementation of Halkbank lead to the participation ofseveral commercial bank in some following Bank Loans such as 3067-TU, 3346-TU.

44. As a consequence, it is clear that the Project has been quitesuccessful in increasing SMI's access to suitable financial sources andencouraging the participating intermediary banks to expand their SMIactivities.

45. The individual comments of SYKB and Halkbank regarding the ProjectCompletion Report are also conveyed in the enclosures.

COMMENTS OF SYRB

46. The small and medium scale industry sector plays an important rolein the industrialization of Turkey. The SMI firms are crucial in the economicand social achievements of Turkey in the sense that, they are mostly laborintensive, need less capital for unit of output and have good exportprospects. The SMI firms also contribute to the performance of largerenterprises through sub-contracting, as well as they develop themselves andconstitute a backlog to prospective larger scale industries.

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47. SYXB, in the utilization of the SMI Loan 2647-TU was alsosuccessful as in the case of IBRD Loan 1952-TU. The projects were generallylocated in developed regions and textiles continued to be the leading offinance. The amount allocated to SYKB, out of the proceeds of this loan, wasoriginally 80 million USD equivalent. Pursuant to the amendment dated April15, 1992, made to the subsidiary loan agreement of April 14, 1986, signedbetween Treasury and SYR8 this allocation was increased to USD 80,584,250equivalent.

48. Total withdrawals made by SYKB amounted to USD 79,640,F43.26 whichincluded the residual amount at the Special Account after the closing of thebooks. After making the refund of the deposit of USD 7,056.01 at the SpecialAccount the final withdrawals amount to USD 79,633,487.25. References made tothese in the statistical information section of the draft project completionreport we think, need revision.

49. our further remarks on the Project Completion Report relating toSKI Loan (2647-TU) are as follows:

50. In connection with the FERIS interest rates applied to sub-loansfalling under this loan, rates applied by the Central Bank for the fixedinvestment rediscount loan was used. The main reason why the Central Bank'srediscount rate was chosen as reference was to prevent a competition.Meanwhile, as the consequence of the Central Bank's new approach in thedirection of terminating its project finance, Loan 2647-TU was not facingcompetition from the rediscount facility from on 1989.

51. During the loan negotiations Treasury insisted on reducing thelevel of loans proposed to SIDO and in order to facilitate the actions andperformances to be taken by SIDO, SYRB and HB offered their financial supportwhich would partially make up the reduction in the proposed IBRD loans. Inthis respect as agreed SYKB donated TL 90 million through Dec 31, 1986- Dec31, 1988.

52. The data SYKB presented regarding the actual job created by sub-projects financed is likely to increase as sub-projects approach full capacityutilization. Accordingly overall cost per job will be reduced

53. Towards the later years of the availability of the loan, projectsmatching the criteria of the loan regarding the cost per job were decreasingand perhaps it was an indicator of the new trend in the business circlesavoiding manpower.

COMMENTS OF HALNBANK

54. We would like to inform you that we have reviewed the ProjectCompletion Report of Small and Medium Scale Industry Project Loan No. 2647-TUwhich had been enclosed in you letter dated 04.03.1993, no. DEI-VI-I-105/28996and mall changes have to be made in page 14, article 5/A;

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* HB's allocation for on-lending to eligible subprojectsactual (US$) should be 18,126,714.24.

* The figures written for SIDO'e allocation consultantservices should be written for HB's allocation fortraining.

* The figure. written for SIDO's allocation consultantservices should be written for HB's allocation fortraining.

55. However, we have no objection on the general evaluation of theProject Completion Report of Small and Medium Scale Industry Project (LoanNo.2647-TU).

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Part IIIs STATISTICAL INFORMATION

1. Related Rank LanslCredits

LasnICred1t Tftle Purpose Date of Status/Comnts_ dfpt~~~~~~~~Wovat_ _

Loan 1754-TU and 1755-TU To assist financing of 09/04/79 Closed or 12131/85. ReuainingPrivate Sector Textiles subprojects to eontribute to balances of USS0.13 N andProject the development US$1.32 N were cancel led from

modernization, increase in Loans 1754 and 1755 TUproductivity and expect respectively.capacity of the private

I____________________ textiles sector of the country

Loan 1952-TU Labor To provide credit to support 03/03/81 Closed on 06/30/86. USS39.54 NIntensive Industry the development of Labor was disbursed. balance ofProject Intensive Small and Nodium USS0.46 N was cancelled.

Scale Enterprises

Loan 2714-TU First To create a more efficient 06/10/86 Closed on 06/30/91. FullyFinancial Sector financial sector by developing disbursed.Adjustment Loan a greater variety of financial

instnments which wouldcontribute to a revival of

_ _ _ _ _ private investmentLoan 2901-TU tndustrial To support the efforts for 03/22/88 The loan closing date isExport Oevelopment expanding industrial export by 06/30/93. However, the loan isProJect providing financial support to already fully disbursed.

private expect-orientedprojects" and improving theinstitutional framework for

l ______________________ expect finance.Loan 2964-TU Second To suport the developoent of 06/21/88 Closed on 12/31/92. US$100 NFinanciat Sector a more efficient and deeper was not disbursed.Adjustment Loan financiat sector which woutd

mobilize end allecate fundsmore efficiently thisgenerating a higher level ofinvestments as well as ahigher rate of return

To promote and support 05/23/89 The closing date is 06/30/95.Loan 3067-TU Second efficient SNI investment and Disbursements are ahead ofsmall and Nedium Scale operations; to improve credit schedule.Industry Project access for SNI by increasing

the number of financialinstitutions that can serve asefficient intermediaries forSNI finance and by providinocredit at efficient marketprices; improving SN! productquality and expending theirmarkets by providirg technfcal

________________________ and marketing assistance. _

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LoanVCredit Title Purpose Date of Status/Comments

_______ ~_ _._ILoan 3077-TU To provide funds through 06/15/89 The closing date is 12/31/95.Agroindustry Project participating Credit I

Institutions to financialtyand economically viableprivate sector agroindustryprojects for Increasing theagroindustry output.

Loan 3346-TU Private To finance financially and 06/13/91 The closing date is 12/31/96.Investment Credit economically viable private Disbursements are slower thanProject investments, especially export forecasted.

oriented activities, to thelcountry's productive capacity:to continue to assist theprivate development banks intheir business and resourcediversification programs: tosupport sustainedimptementation of theGovernment's banking reformsat the intermediary level.

2. Project Timetable

Item Date Ptwened Date Revised Date Actual

Preparation 09/13/84 to 09127/84

Appraisal Mission 11/19/94 to 12/07/84 11/20/84 to 12/06/84

Loan Negotiations 04/29/85 11/06/85 11/06/85 to 11/22/85

Board Approval 06/18/85 01/07/86

Loan Signature 01/17/86

Loan Effectiveness 04/17/86 05/14/86

Loan Closing 06/30/92 12/31/92 12/31/92

Loan Completion 03/31/93 09/30/93

3. Loan Disbursement

Cumulative Estimated and Actual Disbursement (by fiscal year)(US$ Millions)

__________________ 1986 `1987 1988 1989 1990 1991 199 1993

Appraisal Estimate 12.0 39.0 66.0 85.0 96.0 100.0 l

Actual 5.93 35.99 70.31 87.48 95 .87 98.34 98.91 98.97

Actual as X of N.A 299.91 180.31 132.5X 112.8# 102.4X 98.9%estimate a____ I_ -

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4. Proiect Implementation

_ndicators , A1aisal Estimte | Actual

X amount of SSI financed 47,43 43,68

X amount of very smali 13,09 5,95enterprises financed

X amount of enterprises targer 16,26 5,12than SW financed

HuWber of subprojects financed 200 185by SYKS

Number of subprojects financed 500 202by HB

TotaL Number of subprojects 700 387financed

Number of SHIs benefited from TA 350 6funds if SIDO (per year)(financed by project funds)

Number of SXis received 50 3assistance from SIDO for exportpromotion (per year)(financed by project funds)

Number of additional branch 8 5officer to be established bySIDO

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S. Proiect Costs and Financina

A. pKigc¢ ggts

Appraisal Estivate (uS) Revised Actuat._________ _________ _________ _____________ _U SS) (U S$)

SYKlBs allocation for 80,000000 80.682,700 79,522,5?4.62on-ending to eligiblesubproJects

NBPs allocation for 18,400,000 18,620,000 18,126,T4.24on-lending to eligiblesubproJects

NHis altocation to be utitlzed 300.000 0 0for consultants' services fororganizational development

NB s allocation for training 50,000 45,750 45,749.40

SD00's allocation for 7466000 190,000 188,441.52consultants' services

SlDOs allocation for equipment 424,000 424,000 395,251.93and reference materials.

23,889 .70SI00's allocation for training 80,000 37,550

B. Project Finance (USSl

Source Plamed Revised F FinalIGeD E eniture Categories 100.300,000 986966,491.15

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6. Proiect Results

,_.*wrval ActualIndicatora Estivate _

(Total) Totat SYK8 N8I

UNmber of direct jobs created 18,000 19,997 11,594 8.403

Average cost per job tUS5) 10,000 17,039 22,858e 9,009

7. Status of Covenants

Legal _ats ont Description Deadline for coplianer Status

Loan Agreement SIDO's report on Ankara and December 31,1988 O.KSection 3.05 Gaziantep Centers

Loan Agrement Audits Annual Financial Not later than 6 months O.KSection 4.01 (a) Statements after each fiscal year

ProJect agreement SYKB Debt/Equity ratio of 10.1 Project Completion O.Ksection 4.02 (a)

Project agreement Hm witl provide 701 of the finds not compliedsection 2.08 (b) for the subproject financing, to with

,;______________I finance very small SIS

Notes: O.K: Covenant complied with

6 To be eligibte for financing alt subprojects should have a maximun average capital investment, excludingland and buildings of USS 18,000 per job. However, the SAR estimate for average cost per job was USS 10,000.

7The reason for this hish cost per job, according to SYKB, is the lower capacity utilization than exceptedin some sub-sect¢rs. Increase of capacity utilitzation would increase the eWployment created and thus, decreasethe average cost job.

8. Use of Bank Resources

A. Staff Inputs

Sta Of FST FY FYN FY87 FY8 FY89 FY9O FY9 FY92 FY93 TotalProject CSte - -

Preappraisal 1.6 19.7 - 21.3

Appraisal 54.9 2.2 57.1

Negotiations 11.8 11.8

Surervision 4.5 12.1 11.4 6.4 4.6 6.1 11.7 3.7 60.5

PCR (Planned) _ 9.0 9.0

._____________ , - ____ --______ ________ 159.7

B. Missions

Stage of Project Cysle Period/Report Date Nuiber of Days in Field overalt Project Comts|_.__ _______ ___.____ _. _ _._ __ ._A __ Persons Rating

Preparation 09/13/1984-09/27/1984 N.A." 14 N.A. Project objectives and design wasI ___.___._______________ _. _____________ _ . . discussed

Appraisal 1112011984-12/06/1984 N.A. 16 N.A The institutional and financialaspects were reviewed with thefinancial intermediaries, and termsand conditions to be applicabte to

| ____________________ . __________________ ______________ _________________ the proposed loan were discussed

Supervision 11/03/1986-11/10/1986 2 7 1 There were no major problems. Loanamount was almost half comnitted anddisbursements were ahead of schedule

e N.A: Not available

stage of Project Cycle PetriodReport Date OMber of Pays in Fietd Overall Project - nis-_________________ Person Ratin -

Supervision 04/13/1987-05/01/1987 1 18 1 No problems were identified.Commitments and disbursements of thecredit component were ahead ofschedule. SYK8 and NO performedsatisfactory in handling the Bank

|__________________ loan.

Supervision 10/12/1987-10/16/1987 1 4 1 Disbursements and commitments wereahead of schedule of the subprojectcomponent. However, the technicalassistance coWponents for both SIDOand HB were behind schedule. Thesedelays are mostly due toorganizationaL chantes in HB anddelays in submitting the consultants'I _______________________ ____________________ _ _______________ _ recommendations for SIDO.

Supervision 06/06/1989-06/16/1989 2 10 I The loan was fully comnitted.S300.000 which was allocated for He's Norganizational study was notutilized. This amount wasreallocated to lending (S220.000)and training ($80.000). The trainingan consultancy services componentsI _______________________ _____________________ ___________________ for SIO0 were to be redesigned.

Supervision 02/26/1990-03/09/199M 4 11 1 The disbursements were higher thanthe SAR estimates. There wasagreement between the Bank and S1DOto reallocate the uncommitted TAfunds for subproject lending to SYKBor HO.

Supervision 04/01/1991-04/13/1991 5 12 1 The progress of the project was foundsatisfactory. The project wasexpected to be completed on time andfunds would be fully utilized withthe extension to the commitmentdeadline and the reallocation of TA

______ ______ ______ _____ _ ____ ______ ______ _____ ___ ___ ___ ___ ___ _fun d s.

Stage of Project Cytet Period/Report Date Nuder of Days In Field Overall Project Cmoonts,____,_________ .___ Persons Rating

Supervision 12/02/1991-12/13/1991 7 11 1 The loan was altost fully comuitted.The TA couponent of the project didnot proceed as well due to anoverestimation of demand forconsultant services to SI through

.__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ :__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ S I D O .

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Annex 1

PROJECT COXTION RRT

-TURKEY

SMALL AND MDIUM SCALE INDUSTRY PROJECTLOAN 2647-TU

Sectoral Allocation(Percentage Distribution and Number of Projects)

S_botor Total _ STO

_ _ _ber Amont Nuwber Amlt Numer

Agriculturat 0.6 3 1.5 2 0.4 1

Autmtive 1.8 14 4.9 12 1.1 2

Cmnt-Clay 3.9 29 12.4 23 1.9 6

aCbeical Indtry 11.4 53 9.8 20 11.8 33

Elttrmnics 5.8 10 2.5 4 6.4 6

Food 5.7 41 12.4 34 4.0 7

Forestry 1.4 15 5.8 13 0.4 2

Leather 0.8 8 1.0 5 0.7 3

Achines and wachine 2.3 21 6.3 18 1.2 3spares

Netal 9.9 36 7.8 16 10.4 20

Ninig 2.3 21 5.7 15 2.0 6

Press and Printing 1.9 13 1.7 5 1.9 8

Tatiele 42.6 98 28.2 35 45.9 63

Tourism 1.3 1 - - 1.6 1

others 8.3 24 10.3 24

Total 100.0 387 100.0 202 100.0 185

Source of Basic Data: Reeords of FIs.

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Annex 2

PROJCT -OMPLETION REPORT

SMALL AND MEDIUI SCALE INDUSTRY PROJECTLOAN 2647-TU

Average FERIS Interest Rates vs. Average WPII 1984-1992)

TIea FERIS Interast Rate WI Difference

1984 26X 50.3X -24.31

1985 35X 43.2X -8.2X

1986 351 29.6X 6.6X

198? 32X 32.1X -0.1X

198a 43X 68.3X -25.3X

1989 44X 64X -20.0X

1990 42.466 52.31 -9.84X

-s:;i S63.84X 55.3X 8.54X

1992 71.73n 62.1X 9.63X

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Anngx 3

PROJECT COMPLETION REPORT

TURKEY

SMALL AND MEDIUM SCALE INDUSTRY PROJECTLOAN 2647-TU

ftoraphic Distribution of Subloans

Tota l B SY S

Raglan x xmber Aaomut mudber Aaut _ ul_ _ A wunt

Narmra 236 65.41 91 47.23 145 69.68

aeean 63 20.29 43 25.14 20 19.15

Nedfteranean 5S 3.73 11 3.60 4 3.76

Niddt. Anatolia 31 3.01 24 9.90 7 1.39

Btack Sea 26 2.79 24 8.88 2 1.38

Eastern Anatolta 10 1.24 8 5.06 2 0.34

South-East Anatolfa 6 3.53 1 0.19 5 4.30

| tOtAL 387 100.00 202 100.00 185 100.00

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Annex 4

PROJECT COMPLETION REPORT

TURKEY

SMALL AND MEDIUM SCALE INDUSTRY PROJECTLOAN 2647-TU

Subsectoral Distribution of EncouragementCertificates in Manufacturing Sector

SECTORS 1987 1968 1969 1990 1991

Food & Beverage 6.93% 5.08% 10.7 11.19% 11.31%

Textile & Clothing 31.40% 45.53% 46.48% 44.77% 32.11X

Forestry Products 1.87% 1.42X 1.04% 2.33% 1.59X

Paper 1.43% 3.86% 0.62% 1.31% 0.64%

Leather & Leat. Pro. 1.87% 1.02% 1.66% 1.31% 0.96X

Rubber 4.00% 2.03% 1.66% 2.03% 1.59%

Chemicals 4.00% 5.89% 3.52% 4.80X 16.08%

Glassware 2.93% 1.83X 0.62% 0.58% 0.96%

Iron & Steel 2.93% 2.03% 3.52% 5.52% 2.55%

Non-Ferrous Metals 0.80% 0.41% 0.41% 0.29% 2.17X

Transport Vehicles 3.75% 5.69% 17.70% 6.69% 7.48%

Metal Goods 5.44% 3.46% 1.66% 3.92% 4.46%

Measuring Devices 1.07X 2.85% 0.83% 0.29% 0.58%

Machinery 1.87% 0.61% 1.24% 0.44% 1.27%

Electrical Machinery 0.80% 1.63% 1.04% 2.03% 1.75%

Electronics 1.07% 0.41% 0.42% 3.20% 1.27%

Cement 14.50% 6.91% 1.66% 3.20% 7.03%

Clay and Cement Prod. 9.60% 5.69% 1.66% 1.74% 1.43%

Ceramics 1.60% 1.63% 1.86X 2.18% 2.55%

Others 2.13% 2.03% 1.66% 2.18% 2.23%

TOTAL 100.00% 100.00% 100.00% 100.00% 100.00%

Source: SPO.