Document of The World Bank
FOR OFFICIAL USE ONLY
Report No: 42800-TR Public Disclosure Authorized
PROJECT APPRAISAL DOCUMENT
FOR
A US$197.4 MILLION AND €65 MILLION (US$300 MILLION EQUIVALENT) LOAN
TO
TURIdYE SINAI KALKINMA BANKASI A.Q. (TSKB) Public Disclosure Authorized AND
A US$150 MILLION AND €94.9 MILLION (US$300 MILLION EQUIVALENT) LOAN
TO
TURIdYE IHRACAT KREDI BANKASI A.Q. (EXIMBANK)
WITH
Public Disclosure Authorized THE GUARANTEE OF THE REPUBLIC OF TURKEY
FOR
THE FOURTH EXPORT FINANCE INTERMEDIATION PROJECT
APRIL 25,2008
Private and Financial Sector Development Department Turkey Country Unit Europe and Central Asia Region Public Disclosure Authorized
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS
(Exchange Rate Effective March 12,2008)
Currency Unit = New Turkish Lira (TRY) New Turkish Lira 1 = 0.820 US$ US$1 = 1.22 New Turkish Lira
FISCAL YEAR July 1 -June 30 ABBREVIATIONS AND ACRONYMS
ALM Asset and Liability Management BDDK Banking Regulation and Supervision Agency CEO Chief Executive Officer CBT Central Bank of Turkey CIRR Commercial Interest Reference Rate CIS Commonwealth of Independent States CPS Country Partnership Strategy DC Direct Contracting ECA Export Credit Agency or Europe & Central Asia (Region) EFIL I Export Finance Intermediation Loan EFIL I1 Second Export Finance Intermediation Loan EFIL I11 Third Export Finance Intermediation Loan EFIL IV Fourth Export Finance Intermediation Loan EU European Union FSL Fixed Spread Loan FMR Financial Monitoring Reports FMS Financial Management System FX Foreign Exchange GOT Government of Turkey IFRS International Financial Reporting Standards ICB International Competitive Bidding ICR Implementation Completion Report IF1 International Financial Institution ISA International Standards on Auditing ISR Implementation Status Report ISP International Shopping Procedures LAC1 Loan Administration Change Initiative NCB National Competitive Bidding NS National Shopping YTL New Turkish Lira OECD Organization for Economic Cooperation and Development OM Operational manual PFI Participating Financial Intermediary (bank or leasing company) PIU Project Implementation Unit SCL Single Currency Loan SMP Staff Monitored Program SOE Statement of Expenditure TSKB Tiirkiye Sinai Kalkinma Bankasi (the Borrower) Eximbank Tiirkiye Ihracat Kredi Bankasi (the Borrower)
~ Vice President: Shigeo Katsu Country Director: Ulrich Zachau Sector Director: Fernando Montes-Negret Sector Manager: Lalit Raina Team Leader: Steen Byskov FOR OFFICIAL USE ONLY
PROEJCT APPRAISAL DOCUMENT
Republic of Turkey
FOURTH EXPORT FINANCE INTERMEDIATION LOAN (EFIL IV)
TABLE OF CONTENTS
MAIN REPORT I. STRATEGIC CONTEXT AND RATIONALE ...... 1 A . Country and Sector Issues ...... 1 B . Background and Rationale ...... 2 C . Higher Level Objectives to which the Project Contributes ...... 2 I1. PROJECT DESCRIPTION ...... -2 A . Lending Instrument...... 2 B . Project Development Objective and Key Indicators ...... 3 C . Project Components ...... 3 D. Lessons Learned and Reflected in the Project Design...... 4 E. Alternatives Considered and Reasons for Rejection...... 5 I11. PROJECT IMPLEMENTATION...... -5 A . Partnership Arrangements ...... -5 B. Institutional and Implementation Arrangements ...... 6 C . Monitoring and Evaluation of OutcomesResults ...... -6 D. Sustainability ...... -6 E. Critical Risks and Possible Controversial Aspects ...... 7 F. Loan Conditions and Covenants ...... 8 IV. APPRAISAL SUMMARY ...... 9 A . Economic and Financial Analyses ...... 9 B . Technical ...... 9 C . Fiduciary ...... 9 D. Social ...... -10 E. Environment - Category FI ...... 10 F. Safeguard Policies - Occupational Health and Safety in the Ship-building Industry ...... 10 G. Readiness ...... 11
This document has a restricted distribution and may be used by recipients only in the performance of their official duties . Its contents may not be otherwise disclosed without World Bank authorization .
iii TECHNICAL ANNEXES Annex 1: Country and Sector Background...... 12 Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies ...... 16 Annex 3: Results Framework and Monitoring ...... 17 Annex 4: Project Description ...... 18 Annex 5: Project Costs (millions) ...... 22 Annex 6: Implementation Arrangements ...... 23 Annex 7: Financial Management, Audit and Disbursement Arrangements ...... 42 Annex 8: Procurement Arrangements ...... 49 Annex 9: Environmental Review Procedures ...... 55 Annex 10: Occupational Health and Safety in the Shipbuilding Industry ...... 57 Annex 11: Project Processing ...... 59 Annex 12: Statement of Loans and Credits ...... 60 Annex 13: Turkey at a Glance ...... 63 Annex 14: Map IBRD 3 11 OOR ...... $64
iv TURKEY
FOURTH EXPORT FINANCE INTERMEDIATION LOAN (EFIL IV)
PROJECT APPRAISAL DOCUMENT
EUROPE AND CENTRAL ASIA
ECSPF
Date: April 25, 2008 Team Leader: Steen Byskov Country Director: Ulrich Zachau Sectors: General finance sector (50%); Sector ManagerDirector: Lalit Raina General industry and trade sector (50%) Themes: Other financial and private sector development (P) Project ID: PO96858 Environmental screening category: Financial Intermediary Assessment Lending Instrument: Specific Investment Loan
[XI Loan [ 3 Credit [ 3 Grant [ ] Guarantee [ ] Other:
For Loans/Credits/Others: Total Bank financing (US$m.): US$197.4 million and €65 million (US$300 million equivalent) loan to Turkiye Sinai Kalkinma Bankasi A.S. (TSKB) And US$]50 million and €94.9 million (US$300 million equivalent) loan to Turkiye Ihracat Kredi Bankasi A.S. (Eximbank) Proposed terms: TSKB - A flexible Loan with fixed spread, level repayment of principal, the final maturity of the loan is 28.5 years including a 7 year grace period. Eximbank - A flexible Loan with fixed spread, level repayment of principal, the final maturity
Development Total: 0.00 600.00 600.00
Borrower: Turkiye Sinai Kalkinma Bankasi (TSKB) and Turkiye Ihracat Kredi Bankasi (Turk Eximbank); Guarantor: Republic of Turkey Responsible Agency: Turkiye Sinai Kalkinma Bankasi (TSKB) and Turkiye Ihracat Kredi Bankasi (Turk Eximbank); Turkey
V Project implementation period: Start June 30,2008 End: June 30,2013 Expected effectiveness date: July 15, 2008 Expected closing date: June 30, 2013 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Re$ PAD I.C. Does the project require any exceptions from Bank policies? [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [ ]Yes [XINO Ref:.I PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Ref:.I PAD IKG. Project development objective Re$ PAD IIJ (i) Support exports by providing medium and long-term working capital and investment finance to exporting firms (ii) Improve the ability ofthe financial sector to provide financial resources to firms through development of financial intermediaries Project description Re$ PAD II.C., Technical Annex 4 The first component (US$ 300 million equivalent) is a credit line to TSKB. The credit line will be provided to TSKB, with a government guarantee, which TSKB will pass on in the form of subsidiary finance to participating financial intermediaries for further on-lending to eligible private exporters. The second component (US$296.3 million equivalent) is a credit line to Eximbank. The credit line will be provided to Eximbank, with a government guarantee, which Eximbank will on-lend to eligible private exporters. The third component (US$ 3.7 million) will finance improved risk management capacity at Eximbank. Which safeguard policies are triggered, if any? Re$ PAD NE., Technical Annex 9 Environment. The project has been assigned Category “FI” in accordance with World Bank safeguard policy OP/BP/GP 4.0 1 (Environmental Assessment). All sub-loans to be financed under the EFIL IV will be subjected to a well established environmental review process.
Significant, non-standard conditions, if any, for: Re$ PAD III.F. Board presentation: None Loadcredit effectiveness: None Covenants applicable to project implementation: See paragraph 3 1 ofthe PAD I. STRATEGIC CONTEXT AND RATIONALE
A. COUNTRY AND SECTOR ISSUES
1. Turkey sustained strong growth in the 6 years after the 2001 crisis, but investment levels remained modest, and the growth was increasingly driven by domestic demand. Economic growth averaged 6.8 percent, and the Turkish economy continued to grow at a healthy pace in 2007-albeit slower than the previous years as real GDP growth slowed down to 4.5 percent. Fixed investment/GDP at 17-22 percent, however, was well below that of other emerging markets that have sustained high growth for long periods. Moreover, the strong growth performance was accompanied by a widening current account deficit, which increased to about 6 percent of GDP in 2006 before slightly narrowing down to 5.7 percent in 2007. Private investment and export growth are therefore essential for Turkey’s continued economic performance.
2. Improving access to investment finance for exporters can help the private sector achieve higher levels of private investment and export growth. Access to finance is a recognized impediment to firms’ expansion in Turkey (as highlighted by the 2007 Turkey Investment Climate Assessment). Exporters need investment finance to expand capacity and to improve productivity to gain competitiveness. The February 2008 Implementation Completion and Results report for the EFIL I1 project shows how credit line financing can help exporters gain access to credit and grow their exports.
3. In recent months, like other emerging markets the Turkish economy has been affected by global volatility related to US sub-prime mortgage markets as well as a challenging domestic political environment. Since end 2007, Turkish bond spreads have widened by only about 30 basis points more than the overall EMBI+ index, while the Turkish Lira has depreciated by about 11 percent against the US dollar. These numbers suggest that Turkey has weathered recent worsening global conditions reasonably well. Still, the economy faces significant risks: (i) the current account deficit; (ii)substantial external debt; (iii)fiscal loosening in 2007 (though the government has targeted a higher primary surplus for 2008); and (iv) slowing disinflation. As high returns on Turkish assets have brought large capital inflows, the economy has become more exposed to changes in investor risk appetite. The project is therefore designed to be as resilient as possible to the materialization of such risks; the project’s relevance would even increase if financial-sector liquidity were to tighten further. 4. Turkey’s financial sector is increasing its lending to the private sector, but lending remains mostly short term. The sector still suffers from very short maturity of domestic deposits and has relied on syndicated loans from international lenders of 1-2 years maturity to fund its credit expansion, but these syndicated loans are now also more difficult to access with tightening international credit conditions. The refinancing risk from international capital markets makes financial institutions in Turkey hesitant to expand credit beyond 1-2 years. By providing long term funding, the credit line project helps the financial sector overcome this impediment to investment finance. 5. The project complements financial sector policy efforts underway by the Government and supported by World Bank analytical and advisory work as well as by
1 lending. Reforms options aimed at improved financing conditions for firms are discussed in the recent Turkey Investment Climate Assessment (ICA, 2007), and the Financial Sector Assessment (2008) produced under the Financial Sector Assessment Program (FSAP). Financial sector reforms are discussed in the Second Turkey Competitiveness and Employment Generation Development Policy Loan (CEDPL 11) and include bank and non-bank supervision and regulation, capital market development, improved accounting and auditing, strengthened credit information on firms, and improvements to the use of movable collateral.
B. BACKGROUNDAND RATIONALE
6. The main rationale for the Bank’s involvement is to address the development need for medium to long term funds for investment and medium term working capital needs of exporting enterprises, and to deepen and broaden financial intermediation. Access to finance is a recognized impediment to firms’ growth as evidenced for example in the Turkey Investment Climate Assessment. The Implementation Completion and Results Report (ICR) for EFIL I1 showed how credit lines to exporters could be effective in helping them achieve growth in exports. The Independent Evaluation Group (IEG) confirmed the Highly Satisfactory rating of EFIL 11.
7. The Implementation Performance of the ongoing predecessor operation, EFIL 111, continues to be strong. The implementation performance ratings for all categories (Procurement, Financial Management, Safeguards) are highly satisfactory in the current ISR, TSKB is in compliance with all legal covenants, and the Participating Financial Intermediaries (PFIs) are in compliance with prudential and eligibility requirements. Disbursements after effectiveness have proceeded better than expected.
c. HIGHERLEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES
8. EFIL IV will help develop a better financial sector and a more dynamic business sector as it engages in international competition. Enterprise and financial sector performance is expected to continue to improve in the short and medium term. In the longer run, export growth supported by the proposed operation is expected to have an overall positive impact on poverty alleviation, job creation and private sector growth in Turkey.
11. PROJECT DESCRIPTION
A. LENDINGINSTRUMENT
9. TSKB has selected the flexible loan with fixed spread for US$197.4 million and €65 million with level repayment of principal, a 7 year grace period, and 28 % years of total loan term. TSKB has also opted for the possibility of currency and interest rate conversions and establishment of interest rate caps and collars.
10. Eximbank has selected the flexible loan with fixed spread for US$l50 million and €94.9 million with level repayment of principal, a 5 % year grace period, and 30 years of
2 total loan terms. Eximbank has also opted for the possibility of currency and interest rate conversions and establishment of interest rate caps and collars.
B. PROJECT DEVELOPMENTOBJECTIVE AND KEYINDICATORS
1 1. The project’s development objectives are to:
0 Support exports by providing medium and long term working capital and investment finance to exporting firms; and
0 Improve the ability of the financial sector to provide financial resources to firms through development of financial intermediaries
12. The project aims to help exporters by providing US$600 million in medium and long term financing, which is currently difficult for Turkish firms to access. The financing will help exporters invest in export development projects and support the growth of Turkey’s exports.
13. The project also aims to improve the quality, and safety of, and access to, finance through development of financial intermediation in the Turkish private financial sector by banks and leasing companies. Through development of project finance expertise and medium and long term lending appraisal, the project indirectly supports capacity building in the financial institutions. Moreover, the project will, through dialogue with the banking and leasing sectors, deepen the policy discussions between the Turkish authorities and the World Bank and, albeit indirectly, support the ongoing reform in the financial sector. Institutional development at Eximbank financed by the project will help it improve risk management capacity and lead to a more sophisticated institution that can prudently carry out its functions.
14. The results of the project will be measured by the export and investment performance of the sub-borrowers, the amount of medium and long term lending extended to exporters in Turkey, the scope of financial intermediaries included, the payment performance of the sub-borrowers in the project, and assessments of Eximbank’s risk management practices (see Annex 3).
C. PROJECTCOMPONENTS
15. The proposed EFIL IV project will substantially maintain the design of its predecessor EFIL I11 project which is currently being successfully implemented, but will have an additional Borrower Eximbank in addition to TSKB. The project will have three components. The first component (US$300 million equivalent) is a replication of the EFIL I11 project which is a single-component project consisting of a credit line to TSKB as the Borrower and implementing agency. TSKB will intermediate the funds through PFIs, which in turn will on-lend to eligible private exporters.
16. In the second component (US$296.3 million equivalent), Eximbank will borrow and act as an additional implementation agency lending directly to exporters. Inclusion of Eximbank will expand the reach of the project into the shipbuilding and machine- building sectors. Eximbank will focus on these sectors because of their promising export and growth potentials and because it is well placed to serve them due to its established relations. The demand is expected to be strong in the shipbuilding sector, which has expanded rapidly in the last few years and has jumped from being ranked 23rd to now being ranking 6th in the world. A recent EU requirement that tankers entering member states' harbors to be double hulled has created new business opportunities, which Turkish shipbuilders are well placed to exploit. Ship builders are now looking for medium and long term financing to expand their capacity as well as for bridge finance' to fund the construction of ships. The machine-building industry has grown rapidly from a total of US$2.9 billion in sales in 2003 to US$8.7 billion in 2007 and is another key export industry demanding medium and long term investment finance. The second component adds to the scope of the first component and scales up the development impact.
17. The third component (US$3.7 million) will finance improved risk management capacity at Eximbank. In addition to building back-up capacity for its critical IT system to better manage operational risk and upgrading the existing IT systems, it will help the bank for Basel I1 implementation that started January lst, 2008. The component will include:
0 Improved emergency management and the establishment of disaster recovery center as it will be required by regulators for operational risk management;
Implementation of a ratings based credit appraisal system and monitoring as required under Basel 11;
0 Upgraded IT infrastructure to support the above improvements.
Consulting services to assist in credit appraisal for sub-loans in shipbuilding and machine building industries
18. The Government of Turkey is providing a guarantee for the loans to Eximbank and TSKB.
D. LESSONSLEARNED AND REFLECTEDIN THE PROJECT DESIGN
19. EFIL IV is following a series of three successful operations which have been progressively improved and streamlined. A simple and flexible design is important for successful implementation of credit lines, and the EFIL IV design retains the simple nature of EFIL I11 and some requirements have been removed or simplified. It is important to keep a minimum number of statutory requirements; e.g. avoiding constraints like minimum sub-loan size, maturity, currency denomination, sub-borrower co-financing requirements, sectoral lending focus, etc., but using sensible financial indicators for the selection of both the PFIs and the sub-borrowershb-projects in line with established market practices. Given that the project is primarily dealing with the private sector a number of procurement requirements that are unsuitable for private sector borrowers
' Bridge finance refers to the working capital tied up in the ship while it is under construction.
4 were amended to make it more client friendly while ring fencing it against any possible deviation from the safeguards. Getting a better idea for the possible utilization of the credit lines by engaging with potential sub-borrowers has also been an important lesson to ascertain the potential uptake of the funds.
20. The application process has been closer aligned with existing business practices at PFIs to speed up the implementation of the project. Eligibility constraints and reporting requirements that go beyond what PFIs normally require increases transaction cost of the project, slows implementation, and may have a tendency to shift funds to firms with relatively better access to finance. EFIL IV is simplifying the application forms and cash flow analysis for PFIs and to a greater extent relying on existing credit appraisal practices.
21. The Implementation Completion Reports for EFIL I and EFIL I1 noted that onerous environmental, procurement, and other project requirements tend to lead to funds being allocated more restrictively. The fixed costs incurred by these requirements make it relatively more attractive for PFIs to lend the loan funds to fewer customers with greater loan sizes. PFIs have indicated that project requirements made it uneconomical to cater to the smallest borrowers. For leasing companies, loan sizes under EFIL I1 were generally twice what they were for the leasing companies’ entire portfolio indicating that bigger firms are targeted in the project. Streamlining safeguard requirements in the context of credit lines and carefully designing information requirements to minimize compliance costs while serving the safeguard objectives will help ensure successful implementation and better achievement of the development objectives, and the environmental procedures have been streamlined in this spirit.
E. ALTERNATIVESCONSIDERED AND REASONSFOR REJECTION
22. Since EFIL IV is being undertaken as a repeater project based on the success of earlier EFILs there is limited rationale to search for other alternatives. One borrower in EFIL IV will again be TSKB (Turkish Industrial Development Bank). Similar development objectives and implementation arrangements as in the EFIL I11 facility will be maintained. The new borrower Eximbank was the original borrower in EFIL Iand is well aware of the development objectives and the process flows related to the project. Given the absence of any material changes from the EFIL 111, the EFIL IV qualifies as a repeater project, which will continue to serve the needs of exporters and PFIs for medium and long-term investment and working capital funds.
111. PROJECT IMPLEMENTATION
A. PARTNERSHIPARRANGEMENTS
23. Through the series of EFIL operations and other engagements, the World Bank has built strong relationships with counterparts in Turkey including the Turkish Bankers’ Association, and the Turkish Association of Leasing Companies. In addition the Bank maintains dialogue with the regulators of the financial sector through its other engagement.
5 B. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS
24. Component I will be implemented by an experienced team at TSKB implementing EFIL I11 and two other World Bank projects. Component I1 and I11 will be implemented by a team at Eximbank consisting of several members with experience from the implementation of EFIL I. Eximbank has already established a PIU team for implementation, and the team as been engaged in the preparation of the project. The PIU team will set up and maintain the financial management and reporting system for the project and will implement both the credit line component and the institutional development component.
25. The eligibility criteria for PFIs and for sub-borrowers will remain largely as in EFIL 111. One change is that the definition of exporters will be expanded to include service exports such as tourism, and the definition of exporters will be brought in line with the national accounts definition of exports. Another change is that Eximbank exclusively will be serving the ship-building and machine-building exporters.
c. MONITORINGAND EVALUATIONOF OUTCOMES/RESULTS
26. The indicators are linked to export performance, the scope of financial intermediary participation, and on sub-loadlease performance. In addition, supervision missions will get information with regard to (a) planned employment impact associated with the project, (b) financial performance of the Borrower and PFIs, and (c) loan distribution by PFI, firm size, sector, and geographical location.
27. The indicators will be effectively monitored. TSKB developed an IT system to interface with PFIs for sub-loan applications and monitoring. Financial performance of TSKB and the PFIs will be monitored through independent auditors’ reports and separate letters confirming adherence to the eligibility requirements. TSKB and Eximbank will perform occasional consistency check and cross referencing for the data.
D. SUSTAINABILITY
28. The project is designed to enable participants to continue the activities independent of the project on a commercial basis as the Turkish financial sector’s access to medium and long term funding increases. If economic policies continue to be successful, longer maturity funding becomes available, and the financial sector continues to develop, the activities of the financial intermediaries as well as those of the sub- borrowers will become self-sustainable. TSKB will build lending relationships and experience with PFIs, and Eximbank and the PFIs will expand their client bases and hone their skills in making medium- and long-term credit. EFIL IV will enable them to demonstrate that medium term lending can be a profitable business proposition. Exporters will build credit history with financial intermediaries and improve their financial records and documentation required for bank loans, thus improving their ability to gain access to credit. These effects will be gradual and are expected to be partially achieved throughout the life of the project.
6 E. CRITICAL RISKSAND POSSIBLE CONTROVERSIAL ASPECTS
29. The overall risk level appears low, although several risks should be considered:
Macroeconomic performance: A global economic slow down is expected for 2008, and a significant slow down would decrease exporters’ performance and demand for credit. Export growth would slow but probably remain positive. The appetite for credit would decline, but considering the currently low level of credit there should still be demand for medium-term credits.
Systemic liquidity contraction: The international credit crunch brought on by poor sub- prime mortgage loan performance in the U.S. raises concerns about the exposure of the project to a reversal of capital flows from emerging markets including Turkey. With a current account deficit of 5.7 percent of GDP and substantial external debt, economic performance is exposed to international investor sentiment. The project is partially hedged against a systemic liquidity contraction, and the project becomes increasingly relevant if FX liquidity contracts. Because the project finances exporters, it is partially hedged against domestic economic performance, and a depreciation of the Turkish currency would improve the performance of those borrowers whose main markets are international. Because the loans provided by the project are long term, they help both the financial intermediaries and the sub-borrowers manage liquidity risk, and thus the project becomes increasingly relevant in the face of financial outflows from Turkey. The earlier successful implementation of EFIL Iduring the 1999/2001 financial crisis is a testament to the project structure’s resilience.
Credit risk of exporters: If the exporters lose competitiveness or global demand declines, Eximbank and the PFIs may experience high defaults. The EFIL credit lines in Turkey have tended to have lower non-performing loans ratios than the banking sector in general, and the loan performance will be monitored during supervision.
Improved financing conditions for Turkish financial intermediaries and a loss of competitiveness of the credit line: The project would be crowded out if the market weakness it attempts to address improves, i.e. if medium and long-term financing became available at competitive costs to Turkish financial intermediaries. In this case, the development objective would already be served by the private sector, and it is, therefore, not a risk to the development objective, but only a risk to project implementation. However, the likelihood of such a risk is quite low over the anticipated project implementation time period.
Inadequate implementation capacity of Borrowers: The large loan amount requires strong implementation capacity of the borrowers. TSKB is already successfully implementing the EFIL I11 project as well as two other World Bank credit lines, and there is little risk that it will not be able to successfully continue. Eximbank was the borrower and successfully implemented the first EFIL project. The World Bank was fully satisfied with Eximbank’s commercially oriented implementation. Both borrowers have been assessed against the OP8.30 criteria and are found to be suitable for the project (Annex 6.1 and 6.2).
7 Lack of demand for the credit line from ship and machine buildingfirms: Lack of demand could be driven either by the availability of alternative funds, in which case the development objective would be reached, or by loss of competitiveness of the sectors. The availability of the credit line is helping the firms staying competitive thus mitigating the latter risk.
Delays due to World Bank fiduciary and safeguard requirements: The fiduciary and safeguard requirements of the credit lines incur a substantial cost to the borrowers. The procedures have been streamlined based on experience from past EFIL projects, and since both the borrowers and the PFIs are experienced with World Bank projects, they should be able to continue to effectively implement these requirements without incurring excessive delays.
Governance and corruption risks. Governance arrangements are a critical factor whilst looking at project management. Safeguards are established regarding financial management and procurement, and because most transactions are between private parties, the incentive structure of the operation reinforces proper usage of the funds, and supervision missions will assess the proper implementation of the project. TSKB is a privately owned and publicly traded bank lending to private financial intermediaries and private exporters, and is therefore subject to public transparency and disclosure, and private sector governance and monitoring standards. Its governance track record over its over 50 years of operating history has been of very high quality and has been reviewed and vetted several times. Eximbank is also subject to both rigorous Government audit inspections, as well as external audit requirements. In addition, since its inception it has maintained a reputation and track record of highly professional and transparent operations. In addition, both Borrowers are subject to regulation and supervision by the BDDK, the banking regulator.
F. LOANCONDITIONS AND COVENANTS
30. Effectiveness conditions:
0 None.
3 1. General covenants:
Both Borrowers will maintain satisfactory financial management systems including records and accounts, and prepare financial statements satisfactory to the World Bank. Annual project accounts and IFRS audit of financial statements will be provided within six months of each year end during the implementation period. Audits will be carried out under terms of reference satisfactory to the World Bank.
0 The Borrowers will each maintain PIUs with satisfactory staffing and other resources as required for effective project implementation.
8 0 The Borrowers will each monitor project performance in accordance with the operational manual.
0 Both Borrowers shall implement credit lines in accordance with the provisions of the Loan Agreements and Operational Manual, including the eligibility criteria for PFIs and Beneficiary Enterprises, agreed upon terms and conditions for on- lending and monitoring and reporting requirements
IV. APPRAISAL SUMMARY
A. ECONOMICAND FINANCIALANALYSES
32. As there is no clear way of defining the project costs, a traditional economic/financial analysis cannot be conducted. The approach taken is to measure the development results in relation to the amounts intermediated as shown in the development framework (Annex I).
B. TECHNICAL
33. Provisions are included in the project to ensure that lending rates reflect the cost of intermediating the funds including an appropriate credit risk margin as required by OP8.30. The financial condition of both Borrowers is good, they have proven their ability to maintain low non-performing loans ratios, and the capacity to implement the project is viewed as strong. (See Annex 6 for additional detail on the Borrowers).
C. FIDUCIARY
34. The project financial management systems at TSKB and Eximbank have been assessed by the task team. The current financial management arrangements for the project are satisfactory at both banks. All of the subcategories of financial management are rated satisfactory for both banks. To assess the continued soundness of TSKB and Eximbank, their compliance with domestic prudential regulations will be monitored through (a) prudential regulation compliance certified annually by auditors and (b) annual audit reports. TSKB and Eximbank will each maintain records and will ensure appropriate accounting for the EFIL IV funds. Financial Management Reports (FMRs) will continue to be prepared at predetermined regular intervals and will be submitted to the World Bank no later than 45 days after the end of the period. The formats of the FMRs have been agreed with both TSKB and Eximbank. Procurement will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA dated May 2004 revised in October 2006”. Procurement capacity at TSKB and Eximbank has been assessed. Since TSKB is an existing borrower familiar with procurement procedures of the Bank, the procurement risk at TSKB is rated low. Though Eximbank was a borrower for the EFIL I,it is engaging with the Bank after an extended gap and the procurement risk at Eximbank is rated medium. Local private sector commercial practices will be followed for procurement of goods and works contracts each worth less than US$10 million. The procurement performance of each bank will be reviewed annually.
9 D. SOCIAL
35. By increasing access to finance and growth of private sector it is expected that the operation will have a positive impact on employment. Because of the widely dispersed nature ofthe project, it is not expected to have material social impacts.
E. ENVIRONMENT- CATEGORY FI
36. The project has been assigned Category “FI” in accordance with World Bank safeguard policy OP/BP/GP 4.0 1 (Environmental Assessment). All sub-loans to be financed under the EFIL IV will be subjected to a well established environmental review process. TSKB is currently implementing the procedures successfully, Eximbank has experience from the first EFIL project, and EFIL IV team has discussed the requirements in detail and is confident about Eximbank’s ability to perform the necessary duties. The procedures and requirements incorporate the Republic of Turkey’s regulatory requirements for Environmental Review. Environmental Assessment policies (OP/BP 4.01) will apply to EFIL IV. Environmental issues of sub-borrowers and their sub- projects will be addressed through the sub-loan environmental eligibility assessment. Environmental review procedures are described in Annex 9.
F. SAFEGUARD POLICIES - OCCUPATIONAL HEALTHAND SAFETY IN THE SHIP- BUILDING INDUSTRY
37. Shipbuilding is an industry with high risk for workers, and extra precaution is being taken to ensure that occupational health and safety is adequate. The Ministry of Labor and Social Security recently, and in collaboration with the industry, introduced training requirement and certification of workers’ health and safety on shipyards. Sub- loans will only be given to qualified shipbuilders. Details are provided in Annex 10.
Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.0 1) [ 41 11 Natural Habitats (OP/BP 4.04) [I [J 1 Pest Management (OP 4.09) [I [JI Physical Cultural Resources (OP/BP 4.1 1) [I [ JI Involuntary Resettlement (OP/BP 4.12) [I [ JI Indigenous Peoples (OP/BP 4.10) [I [ JI Forests (OP/BP 4.36) [I [JI Safety of Dams (OP/BP 4.37) [I [JI Projects in Disputed Areas (OP/BP 7.60)* [I [JI Projects on International Waterways (OPBP 7.50) [I [JI
* By supporting the proposed project, the Bank does not intend to prejudice the final determination ojthe parties‘ claims on the disputed areas
10 G. READINESS
38. Both borrowers have PIUs in place and a finalized operational manual. Once approved by the Board the borrowers are ready to approve sub-projects.
11 TECHNICAL ANNEXES
Annex 1: Country and Sector Background
1. The contribution of the financial sector to efficiency and growth has been limited in the past by volatile economic and financial conditions. Financial intermediation remains low in Turkey as compared to countries at similar income levels. While the financial sector efficiently mobilized savings, the mobilized funds have historically not been used to support private sector investments and have instead largely been invested in a few large firms and in government securities. Therefore, the financial sector has neither allocated capital to the private sector efficiently, nor has it diversified risks for investors.
2. Improved allocation of capital requires deepening financial intermediation. Turkeys' financial sector is developing rapidly but is still well behind comparator countries. Since the 2001 crisis credit to the private sector doubled to 35 percent of GDP, but much of the growth has been in consumer credit, and inadequacies remain in the Turkish credit market, where financial reporting is underdeveloped, credit information on firms is scarce, and use of collateral is inefficient. In particular, movable collateral (as opposed to land and buildings) suffers from legal impediments and inadequate collateral registration. Improving those institutional underpinnings is likely to support greater access to finance for firms in Turkey. Continued financial sector policy reforms are necessary to support sound credit growth.
3. The interest rate and maturity terms offered to Turkish firms remain poor by international comparison. As shown in Figure 1 and Figure 2, firms in Turkey face high interest rates and short maturities relative to other emerging markets in the region which impacts their ability to invest in themselves.
Figure 1: Nominal interest rate, 2005 Figure 2: Average loan maturity, 2005
25 1
Source: BEEPS Source: BEEPS
12 4. Econometric evidence suggests that finance can help support exports. Access to finance is positively associated with the propensity to export. The recently published Turkey Investment Climate Assessment (2007) shows that firms with external finance in the form of bank loans had a 4.6 percent greater likelihood of being classified as exporters than firms without such loans. It also showed that leverage, measured as external resources as a share oftotal liabilities is reflected positively in exports as a share of sales.
The EFIL IV aims to increase the financial intermediation by the financial sector to exporters to effectively assist the sector.
Profile of export sector
5. Exports have grown at an impressive pace despite several challenges (Figure 3). Total exports tripled between 2000 and 2006 in dollar terms. The increase in exports was faster during initial period of the recovery after the crisis with 32.4 percent average annual increase in 2002-2004. In 2006, exports posted 12.2 percent increase in real terms. The composition of exports have also continuously changed towards more high tech products, such as automotive, electrical and electronic equipment and machinery since 200 1, boding well for the sustainability offuture export growth.
6. However, Turkey’s export figures are relatively low in comparison to those of other recently industrialized economies and EU countries. It is also important to note that Turkey’s ‘export propensityYy2which is a measure of the relative importance of manufactured exports within the overall manufacturing activity in the country, appears relatively high. This confirms that Turkey is successfully competing in the global economy and suggests that it has further potential to increase its industrial capacity (Figure 4).
Export propensity is calculated as the value of manufactured exports divided by the added value of total manufacturing activities within the country. This ratio can be greater than 100 percent because the numerator is in total terms while the denominator is only the added value, as opposed to the total output.
13 Figure 3: Exports and imports Figure 4: Manufactures exports as a share of GDP and manufacturing export propensity (2004) v) 70 60 z60 100% T T 3.5 fi 50 90% 3.0 50 4 40 8 80% i5 *"40 B a0 70% 2.5 't 30 e8 30 60% 2.0 8 50% - 20 $ 3 20 1.5 g 40% r' 10 IO 1 30% 1.0 H 20% 0 0 0.5 10% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 0% IExpoiVGDP (nght axis) 0 ImpoiVGDP (nght axis) -Export (left axls) -Import (left axis) Source: Central Bank of Turkey. -Manufacturing exparts / GDP t Export propensity Source: UN Comtrade and World Bank WDI. 7. Turkey's export growth has Figure 5: Annual Average Growth of Exports been faster than in most comparator (In Constant USD Terms) of Goods and countries in recent years (figure 5). Services The average annual growth rate of exports in volume terms has been consistently in the double-digit range over the last decade. This growth is slightly higher than that observed in the new Member States or other emerging markets, and much higher than the one recorded in the so- called 'cohesion countries' within the EU (Greece, Ireland, Portugal, 10
and Spain). Among the comparator 5 countries analyzed only China has
observed much higher export growth I LO rates than those observed in Turkey. 392- 1999 2000-2002 2ou.3-230s
8. The sustainability of high growth will eventually depend on the capacity of the Turkish economy to maintain and further improve its competitiveness by investing in the industry.
9. The EFIL IV aims to address the development need for the sector by providing medium and long term funds for investment and working capital to the exporters. Access to EFIL IV will enable a diverse group of exporters to access medium term funds. The inclusion of lending to shipbuilding and machine builders allow access to investment finance for sectors that have done better and help in the internationalization of the Turkish economy. Internationalization is measured by whether trade (imports plus exports) as a share of GDP grows or shrinks. Thus, sectors above the downward sloping line in (Figure 6) have become increasingly international. Both Shipbuilding and
14 Machine Exporters have along with motor vehicles and trailers and manufacture of account for a large part of Turkey's integration into the global economy.
10. The shipyard Figure 6: Trade Performance of Turkish Sectors industry in Turkey has 1996-Today jumped from 23rd rank in terms of dead weight tons 3.0 (DWT) in 2002 to 6th rank Motor vehicles? 0 in 2007. They rank 1'' in Machinery and equipm /--, small tonnage chemical 8 2.0 Other Transport (Shipbuilding) f Q J tanker and 4th in mega Manufacture of yacht building. In 2002, 37 basic metals 1.0 8 apparab2,'products, etc 0 shipyards were operational .5 '. 0 0 /' '/' which has been expanded to Chemicals, etc 65 in 2008. Plans are under 6t 0.0 them way to expand to 125 Crude petroleumf and with a 9.2 M DWT/year natural gas -1.0 capacity making it # 4'h in -1.0 0.0 1.o 2.0 3.0 the world. The exports have Change in ImportdGDP increased to US$1.4 billion in 2006 up from US$231 Source: Turkstat. *: Today reflects last quarter of 2005 and first three quarters of 2006. million in 2006.
1 1. Similarly the machinery and accessories sector has undergone tremendous growth. They account for 7.1% of total exports and stand at US$7 billion. The sector is increasingly becoming more competitive and helping spur the industrialization of the country.
15 Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies
1. The proposed EFIL IV is a repeater project of the predecessors EFIL I,I1 and 111. The first EFIL was implemented during 1999-2003 and was very successful in disbursing nearly the full amount of the Loan (US$252.5 million), reaching out to many different exporting industries all across Turkey by financing close to 100 exporting sub-projects, and strengthening the financial sector by having the project PFIs undergo a comprehensive risk management assessment and implement resulting recommendations, even before risk management became an integral part of the prudential requirements for the banks. The second EFIL showed even better results and the credit line (US$300 million) was fully disbursed by June 2007, two years ahead of projections. Financial intermediary participation, as measured by the number of PFIs participating in the project was high with 11 PFIs. The impressive trend continued with the third EFIL and the amount (US$300 million) is expected to be fully disbursed by June 2008.
Major Related Projects (active) Financed by the Bank and/ or other Agencies TURKEY: Access to Finance for SMEs Targeted- Name of ProjecVLoan Organization sector Total Amount Export Finance Intermediation Loan 3 World Bank Exporters $300M Renewable Energy Loan World Bank Energy firms $202M SME Financing World Bank SMEs €160M SME Financing World Bank SMEs $48M SME Development Global Credit EIB SMEs E300M SME Global Loan IV EIB SMEs E250M SME Global Loan V EIB SMEs €250M Autoproductor and Energy Project EIB Firms €40M TSKB APEX Loan EIB SMEs €1 50M Halkbank EIB EIB SMEs E300M AFD Halkbank Credit Line Agence Franqaise de DBveloppement SMEs €50M AFD Halkbank Credit Line Agence Franqaise de DBveloppement SMEs €50M AFD TSKB Credit Line Agence Franqaise de DBveloppement SMEs €50M AFD TKB Credit Line Agence Franqaise de DBveloppement SMEs €20M JBlC SME Credit Line JBlC SMEs JPY27BN CEB Credit Council of Europe Development Bank SMEs €ZOOM Small Enterprise Program EU, KFW, CEB SMEs €75M KMI Industrial Pollution Prevention Loan Kreditanstaltfur Wiederaufbau SMEs €9,7M Source: Turkish Treasury
16 Annex 3: Results Framework and Monitoring
Support export competitiveness Sources: National accounts and by providing medium and long Private investment/GDP financial statistics as published by term working capital and Export growth the Central Bank and BDDK. investment finance to exporting Credit to the private sector/GDP firms NBFI assets/GDP
Increased exports by participating Export multiplier: Incremental Source: Project reporting. exporters export growth by participating exporters /disbursed loan amounts, Targets: >1 Increased medium and long term Amount disbursed to exporters. Source: Project reporting. lending to participating exporters Target: disbursement projections.
Increased scope of participating Number of banks and leasing Source: Project reporting. financial intermediaries companies included in the project. Target: 6 Sub-loan performance in project Non-performing loans/total loan Source: Project reporting. to be measured in number of loans as well as amounts. Target: <5 percent. Improved risk management Successful implementation of capacity at Eximbank Eximbank’s technical capacity for future compliance with BDDK’s Basel I1 related requirements for risk management practice Investments by sub-borrowers Amount of investments planned Source: Project reporting. in projects supported by investment loans Additional information for Number ofjobs created in the Source: Project reporting. country’s and CPS development firms financed by the project objective: Job creation
17 Annex 4: Project Description
1, The first component (US$300 million equivalent) is a replication of the EFIL I11 project which is a single-component project consisting of a credit line to TSKB. The credit line will be provided to TSKB, with a government guarantee, while TSKB will pass it on in the form of subsidiary finance to participating financial intermediaries for further on-lending to eligible private exporters.
2. In the second component (US$296.3 million equivalent) Eximbank will borrow and act as an additional implementation agency directly to finance exporters. Eximbank will cater exclusively to the ship-building and machine-building industries because of their promising export and growth potentials and because it is well placed to serve these sectors due to its established relations.
3. The third component (US$3.7 million) will finance improved risk management capacity at Eximbank. In addition to building back-up capacity for its critical IT system to better manage operational risk and upgrading the existing IT systems in, it will help the bank in for Basel I1 implementation that started in January lSt,2008. The component will include:
Improved emergency management and the establishment of disaster recovery center as it will be required by regulators for operational risk management; 0 Implementation of a ratings based credit appraisal system and monitoring as required under Basel 11; Upgraded IT infrastructure to support the above improvements. 0 Consulting services to assist in credit appraisal for sub-loans in shipbuilding and machine building industries
18 Appendix 4.1 Terms and Conditions
For TSKB
For TSKB, the following terms and conditions shall apply: Initial and ongoing compliance with applicable laws and regulations issued by the Turkish authorities, as certified by independent external auditors on an annual basis; For the duration of the project implementation period, beginning with year-end 2007, submission of an audit report, that is (i)prepared in accordance with International Auditing Standards and International Financial Reporting Standards; and (ii)has an unqualified audit opinion, except as the World Bank shall otherwise agree;
PFI and Sub-Borrower Eligibility Criteria
1. Selection of Participating Financial Intermediaries:
PFIs will be selected based their expression of interest in participating in the project and on acceptance by TSKB oftheir credit risk as well as the following eligibility criteria:
2. For banks:
e Total assets during the last two years to exceed a minimum of US$500 million equivalent on average e General compliance with legal and regulatory requirements applicable to the banking industry, including but not limited to such prudential regulations as minimum capital adequacy ratio, maximum foreign currency exposure limits, maximum large exposure to single and connected clients and maximum insider lending limits, etc., duly certified by the banks’ auditors every year and confirmed by management as of June 30fh every year e Audited IFRS financial statements
3. For leasing companies:
e Total lease receivables during the last two years (for which data are available) to exceed a minimum of US$30 million equivalent on average e New lease volume during the last two years (for which data are available) to exceed a minimum of US$20 million equivalent on average e Compliance with BDDK prudential norms e General compliance with legal and regulatory requirements applicable to the leasing industry, including but not limited to such regulations as minimum equity capital of no less than TRY3 million, the total sum of lease exposures not exceeding 30 times equity capital, and the total sum of exposures to related parties not exceeding 15 times the equity capital, duly certified by the leasing companies’
19 external auditors every year and confirmed by management as of June 30th every year Audited financial statements as per BDDK requirements The leasing company should have been profitable for at least two out of the last three years ofoperations
Eligible sub-borrowers:
Private (private ownership more than 50 percent) exporters. Exporters include those in the Tourism and Construction (abroad) sectors, which provide export services using the National Accounts definition of exports. The prospective sub-borrowers must prepare and present a complete sub-loan package consisting of TSKB credit application form and such other information which TSKB and the World Bank could reasonably request, as well as satisfy the procurement and environmental rules stated as part of the World Bank loan conditions. The creditworthiness of the sub-borrowers will be assessed by the PFIs, subject to the minimum requirement that the sub-borrowers maintain a maximum debt equity ratio of 85:15 and an average debt service coverage ratio of 1.1: 1 (both after receipt of the sub-loan and or lease) unless agreed otherwise by the World Bank. The World Bank, in coordination with TSKB, will carry out a prior review of the first two sub-loan applications of each of the participating banks and leasing companies to satisfy itself about the credit analysis process carried out by these financial intermediaries. In addition, the World Bank will carry out prior review of sub-loan applications exceeding US$5 million. For the first two sub-loans with existing PFIs of EFIL I1 and EFIL 111, the prior review requirements will be waived. However they will apply for new PFIs and for the $5.OM sub-project threshold. Maximum cumulative loan amount to any sub-borrower may not exceed US$10 million.
For Eximbank:
For Eximbank, the following terms and conditions shall apply:
Initial and ongoing compliance with applicable laws and regulations issued by the Turkish authorities, as certified by independent external auditors on an annual basis; For the duration of the project implementation period, beginning with year-end 2005, submission of an audit report, that is (i)prepared in accordance with International Auditing Standards and International Financial Reporting Standards; and (ii)has an unqualified audit opinion, except as the World Bank shall otherwise agree;
20 5. Eligible sub-borrowers:
Private (private ownership more than 50 percent) exporters in the Shipbuilding, Shipyard and Machine Building industries, will be eligible for participation as sub-borrowers. 0 The prospective sub-borrowers will have to prepare and present a complete sub- loan package consisting of Eximbank credit application form and such other information which Eximbank and the Bank could reasonably request, as well as satisfy the procurement and environmental rules stated as part of the World Bank loan conditions. 0 The creditworthiness of the sub-borrowers will be assessed by the Eximbank, subject to the minimum requirement that the sub-borrowers maintain a maximum debt equity ratio of 85:15 and an average debt service coverage ratio of 1.1: 1 (both after receipt of the sub-loan) unless agreed otherwise by the World Bank. 0 The World Bank, in coordination with Eximbank, will carry out a prior review of the first two sub-loan applications as well as of sub-loans exceeding US$5 million. 0 Maximum cumulative loan amount to any sub-borrower may not exceed US$20 million.
21 Annex 5: Project Costs (millions)
Component Local Foreig n/Total
Credit Line US% e
TSKB (TBD) 197.4 65.0
Eximbank 146.3 94.9
Institutional Development 3.7 Eximbank
Total Project cost 347.3 159.9
22 Annex 6: Implementation Arrangements
1. TSKB is the borrower for the Component Iof EFIL IV, and the Undersecretariat of Treasury will provide the guarantee to the World Bank on behalf of the Government of Turkey. TSKB will also be an implementing agency for the project, and will use the existing EFIL 111 Project Implementation Unit (PIU) within TSKB headed by an Executive Vice President for the implementation of EFIL IV. The PIU’s responsibilities, functions and staffing details are given in the Operational Manual. The profile of TSKB and the working arrangements are given below in annex 6.1
2. Eximbank is the borrower for Component I1 and I11 and the Undersecretariat of Treasury will provide the guarantee to the World Bank on behalf of the Government of Turkey. Eximbank has identified a program manager and a PIU team to implement the project. The program manager and several of the PIU team members were directly involved with the first EFIL project and are thus experienced with World Bank project implementation. The PIU team will set up and maintain the financial management and reporting system for the project and will implement both the credit line component and the institutional development component. The profile of Eximbank is given below in annex 6.2.
23 Annex 6.1: Profile of the Borrower - Component I-TSKB
Overview of TSKB
1. TSKB is the largest private investment and development bank in Turkey and accounts for 1.5 percent of bank loans in Turkey. TSKB mostly takes credit risk with banks, and assessing the creditworthiness of banks is therefore at the core of its business. It was one of the PFIs in the EFIL Iproject and currently is the borrower of the EFIL I1 and EFIL I11 Loans. As such, it is well known to the World Bank team through a regular exchange of views on the implementation of the EFILs, and through reviews of TSKB’s audited reports and other financial reporting required under the projects. TSKB maintains an overall sound financial and operational structure, and is fit to undertake the financial liability and operational commitments of Component Iof the EFIL IV.
Table 1: TSKB Key Indicators
TSKB TSKB Million US$ 2007 2006 Assets 4,195 2,881 Deposits 0 0 Loans 2,393 1,757 Securities 1,503 868 Branches (number) 3 3
2. TSKB’s main business is to extend medium and long term loans. 99 % of its loans are in foreign currency. Trade credit and financial leases are also important products for the bank. Finally, TSKB provides a wide range of investment banking services including public offerings, private equity fund management, mutual fund management, and investment advisory services.
3. TSKB is owned by Turkey’s largest private bank, Isbank, it has a minority stake from state owned Vakif Bank, and 41.5 percent of its stock is held by non-strategic investors and are traded on Istanbul Stock Exchange (see Annex Figure I.1 below). As of December 2007, TSKB had a staff of 314, with an average length of service in the bank of 10 years, and an average age of 36 years. TSKB has insignificant transactions with its owners and related parties amounting to US$94 million in loans and US$2lmillion in non-cash loans. While such transactions are generally a concern, the main owner of TSKB is seen as sound.
24 Figure 1: Ownership of TSKB
lsbank (Turkey’s largest Vakifbank (Large state owned private bank), 50% -sit ty bank), 8% \
Stock Exchange, 42%
Source: TSKB website.
Suitability of TSKB as Counterpart for Component 1
4. With more than half of its credit portfolio reflecting credit risk in other banks, TSKB has very good experience assessing bank credit risk, which will be its main responsibility under Component 1. Furthermore, TSKB has extensive experience with intermediation of funds from international organizations, including the European Investment Bank (EIB), Japan Bank for International Cooperation (JBIC), Kreditanstalt fir Wiederaufbau (KfW), Council of European Development Bank (CEB), IFC, and Agence Francaise de Development (AFD). TSKB enjoys a special status, which allows the banks to receive Government guarantees on their borrowings and thus makes it eligible for World Bank loans.
Financial Soundness and Risk Exposures
5. TSKB is a profitable and solvent bank with a sound liquidity position and moderate market risk exposures. It has a large credit portfolio mostly in foreign currency, exposing the bank to indirect exchange rate risk and shocks to the real sector. The risks are mitigated by extensive use of bank guarantees, collateral taking, and lending to firms with foreign currency earnings. On balance, TSKB is viewed as a sound bank.
6. TSKB is rated by both Fitch Ratings and Moody’s and receives ratings in line with the largest and best rated banks in the country. Strong capitalization, improved asset quality and profitability, stable funding, and the bank’s niche position as the key positives are cited in the ratings, together with the key risks are related to low fee and commission income and the volatile economic environment in Turkey.
25 Table 2: Rating by Fitch Ratings
TSKB Akbank Isbank Garanti Bank Foreign Currency Long Term Issuer Default Rating BB- BB BB BB Foreign Currency Short Term Issuer Default Rating B B B B Local Currency Long Term Issuer Default Rating BB+ BBB- BBB- BBB- Local Currency Short Term Issuer Default Rating B F3 F3 F3 Source: Fitch Ratings. Note: Ratings as of December, 2007.
Table 3: Ratings by Moody Ratings
TSKB Akbank Isbank Garanti Bank Financial Strength Rating D+ C- D+ C- Foreign Currency Long Term Rating B1 B1 B1 B1 Source: Moody’s Ratings. Note: Ratings as of April 2007.
7. Solvency. TSKB has increased its equity, which now amounts to US$634 million or 15.1 percent of assets, which is in line with the Turkish banking system. On a risk weighted basis, the capital adequacy ratio of 27.6 is very high, reflecting the frequent use of bank guarantees and first degree mortgages, which lead to a 20 and 50 percent risk weighting of loans. The bank is, indeed, well capitalized.
Table 4: Solvency
Banking-I Svstem TSKB Percent 2007 2007 2006 Tier l/risk weighted assets 17.9 24.2 28.9 Capital adequacy ratio 19.5 27.6 32.9 Capital/totai assits 13.2 15.1 14.5 Source: Banks Association of Turkey and staffcalculations. Note: The banking system reflects September data, and TSKB reflect December data.
8. Credit risk and loan portfolio performance. TSKB’s loan portfolio is large and amounts to US$2.195 million, or 52 percent of its assets plus another US$198 million in lease receivables. It has a low risk profile, as illustrated by the low risk weights applied under the regulatory rules with 57 percent of loans receiving a 100 percent risk weight. The 23 percent of its loans are to banks or with a bank guarantee, which allows the 20
26 percent risk weight. An additional 19 percent of its loans are risk weighted at 50 percent, reflecting the use of mortgage collateral.
9. The bank’s gross NPLs, at 0.7 percent, is lower than the Turkish banking system average and has been reduced to less than one sixth since 2003. The reduction in NPLs reflect mostly collections on existing NPLs, while write offs were about a third of collections. Gross additions to NPLs in 2006 and 2007 and were just US$3 million Thus, the performance of TSKB’s loan portfolio is highly satisfactory. TSKB provisions its NPLs 100 percent, which is a conservative provisioning policy.
10. Almost all of the TSKB’s outstanding loans are in foreign currency. In case of a depreciation of the Turkish Lira, this creates credit risk for the bank as the value of the loan in Lira terms increases. This risk is mitigated for borrowers that are naturally hedged, for instance by being price takers in export markets. However, even exporters are not perfectly hedged, and collateral value will typically depreciate, and this indirect exposure to exchange rate shocks therefore remains a concern. On balance, TSKB’s loan portfolio has a moderate credit risk profile.
11, Profitability. TSKB’s profitability is in line with the Turkish banking system as well as with international standards, with ROAA of 3.3 percent and ROAE of 22.2 percent. The low operating expenses reflect in part that the bank does not engage in costly retail operations and in part that the bank is efficiently run.
12. Liquidity. Because TSKB does not take deposits, its liability side is very stable and well protected from liquidity shocks, as confirmed by the very high liquid assetdshort term liabilities ratio of 129 percent. Liabilities are almost entirely borrowings, while interbank money market liabilities take a portion for funding the liquid assets. In contrast to the Turkish Banking sector in general, TSKB has very long term liabilities because it intermediates funds from IFIs with long maturities. This leaves TSKB very resilient to liquidity shocks.
13. Market risk exposures. TSKB’s direct market risk exposures are very moderate because it does not collect deposits and has a long term funding base and therefore is able to extend loans with maturities more or less matching the funding it receives. Moreover, since its balance sheet is dominated by foreign currency, the bank is not very exposed to fluctuations in local currency interest rates. TSKB has manageable short net foreign position amounting to 3.1 percent of its capital.
Operational Policy 8.30 (OP 8.30) Considerations
14. The OP 8.30 applies to TSKB for the proposed operation. In summary, the conditions are viewed as being met for TSKB as an APEX institution. Regarding the specific issues under OP 8.30:
(a) adequate profitability, capital, and portfolio quality, as confirmed by Jinancial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank
27 TSKB is a well capitalized, profitable bank with a sound loan portfolio. The bank prepares financial statements in accordance with Turkish regulations, as well as in accordance with IFRS and the statements are viewed as adequate. TSKB’s December 3 1, 2007 audited financial statements were prepared by independent auditors (Deloitte) according to BDDK standards. This audit opinion was unqualified and certified that TSKB as of December 3 1,2007, was in full compliance with the applicable banking laws and regulations of the BDDK. Prudential financial ratios (as per audited and published financial statements prepared according to BDDK regulations) of TSKB given below, affirm a strong financial structure as of December 3 1,2007.
-2007 2006 -2005 Capital Adequacy Ratio 27.6% 32.9% 37% Single Client Exposure 12% 11% 6% Ratio Group Exposure Ratio 13% 11% 9% Gross NPL Ratio 0.7% 1.3% 2% Loan Loss Provisioning 100% 100% 100% Foreign Currency Open -3.65% 2% -1% Positiodequity
(8) acceptable levels of loan collections
Gross NPL levels are lower than the Turkish banking sector as a whole, and collections on NPLs are strong, while new NPLs were a small fraction of the bank’s loan book. Thus, the performance of TSKB’s loan portfolio is very good - see also section on credit risk and loan portfolio performance above.
(c) appropriate capacity, including stafJing, for carrying out subproject appraisal (including environmental assessment) andfor supervising subproject implementation
The World Bank has extensive and recent experience working with TSKB, and it has proved its ability to fulfill the requirements of the World Bank. Under this operation, TSKB will be lending to banks, which is a common activity for TSKB.
(d) capacity to mobilize domestic resources
TSKB is not allowed to collect deposits, and borrows limited amounts in the domestic interbank money market through rep0 operations (US$717 million). Most of its borrowings are from foreign banks and institutions (US$2,626 million). Rather than an inability to mobilize domestic resources, the predominance of foreign bank liabilities reflects TSKB’s ability to attract them at more favorable terms.
(e) adequate managerial autonomy and commercially oriented governance
TSKB is a publicly traded privately owned and profitable bank that makes decisions on a commercial basis.
28 &Iappropriate prudential policies, administrative structure, and business procedures
TSKB is subject to bank regulations and appears to follow a prudent approach to risk management. IFC recently extended a US$50 million subordinated loan to TSKB confirming that institution’s trust in TSKB’s procedures. A separate assessment of financial management is being conducted and is attached in Annex 7.
29 Annex 6.2: Profile of the Borrower - Component I1 and I11 - Eximbank
1. Eximbank is Turkey's official exportimport bauexport credit agency and was established in 1987 as the successor institution to the Turkish State Investment Bank. Eximbank's objectives are to increase the competitiveness of Turkish exporters and contractors working abroad as well as to create opportunities for them in newly emerging markets. Through its export credit, insurance and guarantee programs Eximbank has provided support for 8 percent of Turkey's total exports in 2007. Eximbank is not a profit-oriented institution and is exempt from corporate income tax. The Turkish Treasury is the sole owner of the bank and has agreed to a zero dividend policy with all profits allocated to retained earnings.
2. Eximbank was the borrower and implementing agency for EFIL I and implemented that project successfully. The team that implemented EFIL Iis mostly still at Eximbank, and the PIU team for EFIL IV is mostly comprised of staff with experience from EFIL I.
Legal Foundation
3. Eximbank was established by Law No. 3332 "On the Transformation of the State Investment Bank into the Export Credit Bank of Turkey Inc." of March 25th, 1987 and Cabinet Decree No. 87/11914 "Principles Relating to the Reorganization of the State Investment Bank under the Name of the Export Credit Bank of Turkey, Inc". The Cabinet Decree specified how the State Investment Bank was to be transformed into a joint stock company, and also mandated the use of two classes of shares- A and B - which differ from each other only insofar as the Class A shares (representing 5 1 percent of the total number of shares) must remain in the ownership of the Treasury, while the Class B shares (representing 49 percent) may be transferred by the Treasury to public and private banks, financial institutions, insurance companies and other entities. The matters which remain out of scope of the Cabinet Decree are governed by the Turkish Commercial Code. The Articles of Association of the bank, prepared on the basis of the Cabinet Decree, are registered in the Trade Registry.
Corporate Governance and Organization Structure
4. Supervisory Board. The Treasury's ownership rights in Eximbank are exercised by a Supervisory Board (the "Supreme Advisory and Credit Guidance Committee") which consists of several undersecretaries of economy-related ministries headed by Prime Minister or a State Minister appointed by Prime Minister, the Governor of the Central Bank of Turkey, the Chairman, Vice Chairman and Chief Executive Officer of Eximbank. The Supervisory Board approves the annual lending, insurance & guarantee programs and sets limits for the credits to be extended and insurance & guarantee cover to be issued either on an aggregated basis or by countries, sectors and product groups. The Board of Directors ofthe Bank is obliged to observe these limits.
5. Board of Directors. The Board of Directors is charged with responsibility for all other decisions concerning Eximbank's operations. The Board consists of seven Directors, one of whom, the Chief Executive Officer (CEO), is appointed by a joint
30 decree of the State Minister responsible for Eximbank, the Prime Minister and the President of the Republic, while the remaining six are directly appointed by the State Minister responsible for Eximbank. This is an interim arrangement, pending the holding of the first general shareholders meeting which would occur upon transfer of some or all of the Class B shares by the Treasury, after which four Directors would be elected by the holders of the Class A shares and the remaining two by the holders of the Class B shares. The Board of Directors elects a Chairman and Deputy Chairman among its elected members. Eximbank is managed and represented on a day-to-day basis by the CEO, to whom several of the powers of the Board of Directors are delegated.
6. Senior Management and Stafl The CEO is assisted by four Deputy General Managers. As of year-end 2007, Eximbank employed 392 staff (including Directors), 66 of whom have a post-graduate degree and 196 have a graduate degree. The average length of employee service is around 17 years and the average age 4 1 years.
Products and Services
7. Eximbank’s products and services include short term pre-shipment and post- shipment export credits, medium term buyers’ credits, and export insurance and guarantees. Short-term pre-and post-shipment export credits are extended to Turkish exporters in Turkish Lira or foreign currency, either directly by Eximbank or indirectly via Turkish commercial banks. Medium and long-term export credit programs finance the export of capital goods and turnkey projects to be undertaken by Turkish contractors abroad. Most of these programs involve direct lending, although certain insurance and guarantee activities fall into this category. Insurance programs provide cover against commercial and political risks for Turkish exporters selling on credit, investors and overseas contractors. Guarantee programs provide political and commercial risk coverage to Turkish banks financing export transactions through the provision of export credit to foreign buyers.
8. During its first years of existence Eximbank has concentrated on the provision of short-term export credits. However, in the long-run, the bank intends to place more emphasis on insurance and guarantee programs, and medium and long-term trade and project finance, while leaving short-term trade finance to Turkish commercial banks.
9. In line with the annual programs endorsed by the Supervisory Board, Eximbank’s facilities are structured to reflect strategic priorities for Turkey’s export sector. Thus, the country limits for a selected group of priority countries are generally set at higher levels than for non-priority countries, and Eximbank has separate facilities for small and medium-sized exporters and for exporters located in priority development areas. The latter facility, available only in TL, is the only facility carrying a preferential interest rate (1 percent below comparable TL interest rates on other facilities).
31 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I Sources of Funding and AssetLiability Management
10. Eximbank’s main sources of funding are its capital base, provided directly by the Turkish Treasury which is the 100 percent owner of the bank, local and foreign commercial banks loans, loans from other export credit agencies and international financial institutions (IFIs), and, since 1997, borrowing in international capital markets. Funding composition has been as follows:
Figure 1: Balance Sheet-Liability Composition
7 -~ TURK EXIM Bank Balance Sheet-Liability Composition
Q InternationalSources I Domestic Sources 6~ Debt Securities lssued 1 Other
2003 2004 2005 2006 2007
11. Eximbank is essentially running a matched book both as concerns the maturity and the currency composition of its assets and liabilities. Short term TL export credits are funded by the TL capital base; short term FX export credits are funded by short term FX loans from local and foreign banks; and medium & long term FX buyers’ credits are funded by medium & long term loans from other export credit agencies, IFIs and FX denominated bond issues in international capital markets. Cross currency FX risk is hedged through the use of currency swaps and forwards. As a result, Eximbank has very limited FX exposure of 5 to 10 million US$ average (during the past two years a net long position of max 50 million US$ and a net short position of min 20 million US$ on a total balance sheet size of around US$3 billion) and very small mismatches across the entire maturity spectrum of its liability base.
Since Eximbank does not accept customer deposits, its main sources of funding are bilateral funding from commercial banks, raising money in the international loan and capital markets, and direct funding from the Turkish Treasury by way ofcapital injections.
As of September 2007; the outstanding funding portfolio of the Bank consists of;
- A syndicated loan in an amount US$50 Million with a maturity of 1 year, - A syndicated loan in an amount of EURO 225 Million with a maturity of 1 year, - Another syndicated loan in the amount US$175 Million with a maturity of 3 years at 8 August 2006,
33 - Fiscal and Public Sector Adaptation Credit, provided by the World Bank to Turkish Treasury in accordance with the agreement signed on 12 July 2001, is transferred to the Bank for the development of the export oriented real sector in the amount of US$200 million, - two lines of credit at an amount of JPY 6,6 billion under the guarantee of Turkish Treasury, from JBIC (Japanese Bank for International Cooperation) for the support of the projects in third world countries by Turkish businessman, - The revolving loan borrowed from Black Sea Trade and Development Bank within the context of the relationships of the Bank amounts to US$36 million renewable for 6 months, - Bilateral borrowing from international bank in the amount of EURO 15 million.
Assets composition and credit policies
12. On the asset side, Eximbank’s loan-to-asset ratio during the last five years has been quite high (over 79 percent on average), as can be seen from the following chart. Short term export loans are still the most important asset category.
Figure 2: Balance Sheet-Asset Composition
For short term TL export ~ I credits, Eximbank’s stated I TURK EXlM Bank Balance Sheet-Asset pricing policy is to provide I Composition I funding to exporters at 2-5 1 percent below local money market rates as of 2007. As its TL denominated capital base is the main source of funding, 0 Securities Eximbank still earns a i significant positive lending spread on this type of lending.
For short term FX export ~ Short Term Export credits, Eximbank’s stated 1 Credits pricing policy is to earn a 2003 2004 2005 2006 2007 positive spread of approximately 23 basis points over its average weighted costs funds, allowing it to fully cover its overhead costs.
13. For medium and long term FX buyers’ credits, Eximbank abides by the OECD Consensus Arrangements3. In practice, Eximbank’s lending rates are generally well above commercial interest reference rates (CIRR) minimum rates, incorporating a risk premium for country risk, buyer risk, loan maturity, quality of collateral, etc. Eximbank’s stated pricing policy for medium and long term credits is to earn a positive spread of approximately 22 basis points over its average weighted cost of funds, still enough to cover its overhead costs.
In the context of the EU Customs Union between Turkey and the EU which was established in early 1996, Turkey adopted OECD Consensus Arrangement principles and provisions set by Council Decision of the EU on officially supported export credits. Eximbank’s medium term buyers’ credit, insurance and guarantee operations are subject to these provisions. Eximbank is also a full member of the Berne Union and Turkey, represented by Eximbank, became a member of the OECD Group on Export Credits and Credit Guarantees in April 1998. 34 14. At times of crisis lending spreads can temporarily decline, and for the short and medium term FX lending can temporarily become negative, as lending rates are adjusted to increases in funding costs with a time lag in order to allow Eximbank to cushion the impact of sudden interest rate shocks for exporters. However, on an aggregate basis, Eximbank's lending spreads always have been and are likely to remain sufficiently positive to cover its operating costs due to its zero TL cost capital base.
15. Eximbank's export credit insurance operations are short term in nature. Although total export insurance coverage turnover reached nearly 4.7 billion US$ in 2007, premium income still constitutes only a small portion of Eximbank's net income (7.4 percent in 2007).
16. For both its short and medium/long term export insurance cover, Eximbank's premium rates are comparable to those of other export credit agencies, as evidenced by the disclosures in this respect made by all export credit agencies to the Berne Union.
Credit Rating
17. Eximbank received an initial credit rating from Standard & Poor's and Moody's in 1997 in order to be able to borrow in international money and capital markets without Government guarantee. Moody's has assigned a Bal foreign currency issuer rating to Eximbank on 8 June 2006 which is two notches higher than Turkey's sovereign rating
Table 1: Rating by S&P
Eximbank Foreign Currency Long Term Issuer Default Rating BB- Foreign Currency Short Term Issuer Default Rating B Local Currency Long Term Issuer Default Rating BB Local Currency Short Term Issuer Default Rating B Source: S & P Ratings., March 2008
Capital Adequacy and Asset Quality
18. The Law No. 3332 establishing Eximbank provides in Article 4 (C) that losses incurred by the bank in its credit, insurance and guarantee operations as a result of political risk are to be met by the Treasury. In addition, the Treasury and Eximbank executed a Guideline for Procedures on November 6, 1997 setting out the procedures by which claims for reimbursement are to be made. Eximbank must advise the Treasury of the amount of the claim by September of each year. The Treasury will then apply to include these funds in the Republic of Turkey's consolidated central Government annual budget for the following year. If approved for inclusion in the budget, payment will be made to Eximbank, following approval of the budget, at the time budgetary payments are made. To date, this mechanism has worked in a satisfactory manner in practice.
35 19. While the responsibility for political risk is thus clearly assigned to the Treasury, Eximbank retains the commercial risk on all of its operations. For its short term direct lending export credit operations, the commercial risk exposure is nearly fully transferred to the local banking system as Eximbank routinely obtains local bank guarantees for its exposure to Turkish exporters. Thus, in all of its short term lending (direct and wholesaling through the banking system), its credit exposure is nearly exclusively to the Turkish banking system. Eximbank has a bank risk monitoring unit to monitor this exposure, which was created with the assistance of Citibank US. While this unit is able to monitor bank risk, there is some room for improving the analytical techniques being used which have not fully kept up with recent best practice standards (e.g., BIS capital adequacy ratios) and the scale of Eximbank’s lending operations to the Turkish banking system.
20. For its medium term buyers’ credit operations, Eximbank always obtains a sovereign guarantee from the buyers’ country. These guarantees generally do not distinguish between commercial and political risk, and therefore the default risk in practice is born by the Treasury. For its short term export credit insurance operations which cover mainly commercial risk, approximately 70 percent of the risk is reinsured with prominent reinsurance companies such as Munich Re and Swiss Re. Medium term insurance cover is mainly for political risk and thus default risk is again born by the Treasury.
Loan Loss Provisioning Rules ;
21. The new Banking Law requires banks to classify their loans and to set aside provisions for the non-performing loans accordingly, but banks that do not collect deposit, including Eximbank, are exempt from making such provisions. However, although Eximbank is not legally obliged to, it has done and will continue to implement its long-standing conservative approach to provisioning.
(1) Specific Provisions-Provisions for non-performing short-term loans - the amount and the percentage of the non-performing loans (NPL) of Eximbank are very insignificant in respect of short-term export credits. The Bank has set aside 100% provisions for short- term non-performing receivables amounting to TRY 46 million as at December 3 1,2007. (2) General Provisions - The Bank also provides general provisions (1% of the cash loans, 0.2% of the non-cash loans) for the amount of all assets as well as for the amount of guarantees.
In summary, as at December 31, 2007, the total amount of provisions with respect to the exposure on the outstanding loans, insurance and guarantees and employee termination benefit was TRY 107 million.
Earnings and Liquidity
22. As indicated earlier, Eximbank’s pricing policies have allowed it to maintain and even improve its net interest income margin on an aggregate basis, as can be seen from the following chart:
36 Figure 3: Income and Expense Analysis
TURK EXlM Bank-Income and Expense Analysis
700.000
600.000 -e Net Interest incom
500.000 +Net income I- 400.000 C Loan Loss -Q Rovision Expense 3 300.000 0 I Other Operating 200.000 Expense Ff +Other Operating 100.000 Income 0 2003 2004 2005 2006 2007
23. This chart also indicated that Eximbank’s non-interest operating expense and loan loss provision expense have been kept in check as the bank’s business has grown. As a result, the bank’s return on assets and return on equity consequently has improved over the last four years:
Table 2: Eximbank - Return Assets/Return on Equity
Percent 2003 2004 2005 2006 2007 ROA 4.7 4.3 9.1 7.9 9.3 ROE 18.5 13.1 21.9 15.3 17.2
24. As a result of Eximbank’s matched asset/liability profile, the liquidity profile of Eximbank has remained relatively stable during the last five years:
37 Figure 4: Liquidity Ratios
I TURK EXlM Bank -Liquidity Ratios 70 60 50 40 30 20 10 0 2003 2004 2005 2006 2007
+READILY MARKETABLE ASSETS +VOLATILE LIABILITIES AS PERCENT AS PERCENT OF TOTAL ASSETS (%) OF TOTAL LIABILITIES (%)
25. As Eximbank's short-term pre-shipment credits are mostly self-liquidating, Eximbank should be in a position to generate enough liquidity from its short term loan portfolio in case it would face sudden liquidity needs beyond its readily marketable asset portfolio.
Credit Programs
26. Eximbank provides financial support to Turkish exporters starting from the early stages of production against export commitments through several credit programs. Short-term export credits are extended both directly by Eximbank and indirectly using selected commercial banks as intermediaries. Short-term export credits are extended with a maturity of up to 12 months and 18 months in YTL and foreign currency respectively and the relevant exposure as of September 2007 is given in the following table:
38 Table 3: Loan Portfolio 31.12.2007 (000 YTL)
nt’l Transport Marketing
Risk Management Practices at Eximbank
27. After the issuance of the Basel I1 accord and EU’s directive to adopt it, the BDDK decided to implement Basel I1 for banks in Turkey and published in May 2005 “The Road Map for Basel 11” which consists of the basic policies and strategies for the convergence to Basel 11. The framework suggested implementation on January ISt,2008 of the standardized approach for scoring models with the advanced approach to be implemented a year later. The schedule was delayed by a year, so the ratings models must now be in place by January Is‘,2009.
28. In response, Eximbank’s Board of Directors has approved “Bank’s Road Map for Basel 11” in October 2005. Within the framework of the roadmap, a re-organization was implemented in 2007. Following this reorganization, company and bank information and analysis activities were centralized under Risk Analysis and Assessment Division consisting of Bank Analysis, Company Analysis and Information divisions. As a preparation for BASEL 11, the new department started activities to establish and operate a credit scoring system. BDDK decided to 39 implement BASEL I1 rules pertaining to the credit risk at the beginning of 2009. In accordance with the BDDK deadline for the start of BASEL 11, Risk Analysis and Assessment Department will complete the procedures regarding to establish scoring system and begin to use scoring system for company and bank analysis. As a preparation to the scoring system Eximbank’s Board of Directors has recently approved the procedure of review and adjustment of financial statements of the companies. The Bank is planning to use IBRD credits’ institutional development component to finance necessary expenditures in regard to the establishing of credit risk model including scoring system and market risk model. The likely approach to establishing a scoring model for firms is to purchase software, build date over the first 5 years, and then implement the internal ratings based model.
29. The risk management unit was originally established in 2002 with a reporting structure directly to the board through audit committee. The risk management unit has four professional staff, and together with the internal control unit (four professional staff) and internal audit board (three professional staff) report directly to the audit committee of Eximbank’s executive board in line with best practices. Operational risk is already being measured, and the regulator imposes a charge to capital for operational risk.
Operational Policy 8.30 (OP 8.30) Considerations
30. The OP 8.30 applies to Eximbank for the proposed operation. In summary, the conditions are viewed as being met for Eximbank. Regarding the specific issues under OP 8.30:
(a) adequate profitability, capital, and portfolio quality, as confirmed by financial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank
Eximbank is a well capitalized, profitable bank with a sound loan portfolio. The bank prepares financial statements in accordance with Turkish (BDDK) regulations and those are viewed as adequate. Eximbank’s December 3 1, 2007 audited financial statements were prepared by independent auditors (PricewaterhouseCoopers) according to BDDK standards. The audit opinion was unqualified and certified that Eximbank as of December 31, 2007, was in full compliance with the applicable banking laws and regulations of the BDDK. Prudential financial ratios of Eximbank given below (as per audited and published financial statements prepared according to BDDK regulations), affirm a strong financial structure as ofDecember 3 1,2007.
-2007 -2006 -2005 Capital Adequacy Ratio 100% 127% 69% Single Client Exposure Ratio 14.3% 17.4% 15.4% Group Exposure Ratio NIA NIA NIA Gross NPL Ratio 1.3% 1.5% 1.4% Loan Loss Provisioning 100% 100% 100% Foreign Currency Open Position/equity 0.32% 3.14% 0.83%
(b) acceptable levels of loan collections
40 Gross NPL levels are low at just over 2 percent and are fully provisioned. The low level of NPLs attests to the commercial orientation of Eximbank’s lending operations.
(c) appropriate capacity, including stafJing, for carrying out subproject appraisal (including environmental assessment) and for supervising subproject implementation
The World Bank has previous experience working with Eximbank, and it proved its ability to fulfill the requirements of the World Bank, Under this operation, Eximbank will be lending directly to firms, which is a common activity for Eximbank.
(d) capacity to mobilize domestic resources
Eximbank is not allowed to collect deposits, but it is rated by international ratings agencies and is borrowing internationally.
(e) adequate managerial autonomy and commercially oriented governance
Eximbank is a separate legal entity owned by Turkish Treasury. The bank has the capacity to assess credit risk, and it is committing to making decisions on a commercial basis in the EFIL IV project.
appropriate prudential policies, administrative structure, and business procedures
Eximbank is subject to bank regulations and appears to follow a prudent approach to risk management. A separate assessment of financial management is being conducted and is attached in Annex 7.
41 Annex 7: Financial Management, Audit and Disbursement Arrangements
1. The overall financial management risk for EFIL IV is moderate. A summary of the risk assessment for the project is as follows:
Table 1: Summary of Risk Assessment
FM Risk Risk Mitigating Measures Residual Rating Risk Inherent Risk Country Level. Moderate There is a well functioning banking system regulated Moderate Specialized regulatory by the Banking Regulation Supervisory Agency. agencies each devise and enforce their own and different obligations without adequate coordination. Entity Level Both implementing entities are strong banks that are fully in compliance with BDDK regulations. Project Level- PFIs will be Moderate TSKB has been successfully implemented EFIL I1 Low involved in the project and and is successfully implementing EFIL Ill. EXIM will act as a retailer Eximbank successfully implemented EFIL I. for the first time. Disbursements will be made to export companies upon submission of invoices. Overall Inherent Risk Moderate Low Control Risk Budgeting - , Both banks Low Low have their own budgeting procedures and the project will be taken into consideration in budget formulations and revisions Accounting- Both banks Low Low have well fimctioning accounting systems and the projects will be full integrated into these systems. Internal Controls. The Low Low projects will be subject to the internal controls procedures existing in the banks. Disbursements from the loan account will be made upon submission of invoices by the beneficiary enterprises. Funds Flow. Traditional Low Low disbursement will be used. Financial Reporting Low Low Auditing - Both bank are Low Low required to submit audited financial statements to Overall Control Risk I Moderate I Low Overall FM Risk I Moderate I Low
Country Issues
2. A Country Financial Accountability Assessment (CFAA) for Turkey was carried out in 2001. The CFAA report identified some weaknesses in the Turkish financial accountability, in both the public and the private sector. Main findings in the public sector accountability covered issues like failure to define and control the entirety of public funds, incomplete audit coverage, weak forces of public accountability, narrow accounting model and procurement risks. Main findings in the private sector accounting and auditing point to the existence of a regulatory approach where specialized agencies each devise and enforce their and different obligations without adequate coordination and where there is no common general platform.
3. EFIL IV will be disbursed through banks, financial leasing companies and directly to sub-borrowers. The accounting and auditing requirements applicable to the Banks and financial leasing companies in Turkey are determined by the Banking Regulation and Supervision Agency (BDDK). Banks and financial leasing companies submit quarterly financial reports to the BDDK and publish audited annual financial statement^.^ Only auditors approved by the BDDK may carry out such audits. Any changes of auditor must also be approved, and a change can be imposed where there is dissatisfaction with the performance of the auditor. The external auditor is required to report to the BDDK on banks’ and financial leasing companies internal control and risk management systems, as well as being obliged to report direct to the BDDK with respect to certain issues which may threaten the going concern nature of a bank or financial leasing company.
4. Under the current EFIL I11 project the participating banks are required to be in compliance with the BDDK prudential ratios set forth in the banking law and regulations issued by BDDK. Also, the participating financial leasing companies are required to be in compliance with the BDDK prudential ratios set forth in the regulations issued by BDDK. Banks and financial leasing companies in Turkey are required to prepare financial statements in compliance with the BDDK accounting requirements. The BDDK requires Banks and financial leasing companies to comply with Turkish Accounting Standards set by the Turkish Accounting Standards Board. For regulatory purposes banks and financial leasing companies have to consolidate only the financial statements of participations which are credit institutions and financial institutions. Additionally through corporate governance principles, BDDK requires banks and other financial companies to prepare financial statements that fully comply with Turkish Accounting Standards which are fully in compliance with IFRS, where all participations are subject to consolidation
5. The BDDK also issues rules governing the external audit of the financial statements of banks and financial leasing companies and hence only auditors approved by the BDDK may carry out such audits. Both TSKB and Eximbank are fully in compliance with the BDDK prudential regulations.
The quarterly prudential reports are prepared in accordance with the decree 26430 dated February 10,2007 modified by the decree 2665 1 dated September 22,2007.
43 Strengths
6. The current EFIL I11 has been disbursing satisfactorily and the financial management arrangements for the project are highly satisfactory. TSKB will apply the same arrangements for EFIL IV. Eximbank, which is the new implementing entity in EFIL IV is also a very experienced through its role as the implementing institution for the EFIL I and had satisfactory FM arrangements during the implementation ofEFIL I.
Weaknesses and Action Plan
There are no specified financial management weaknesses for the project.
The Implementing Entity
7. TSKB will continue to be an implementing entity of EFIL IV. TSKB was established in 1950 and is one of the leading investment banks in Turkey. The current EFIL I11 implementation arrangements in TSKB where a PIU team comprising of experienced and qualified staff oversees the implementation and coordination activities is satisfactory to the World Bank.
8. There will also be a new implementing entity for the repeater project; Eximbank. Eximbank was the implementing entity for the EFIL I.Eximbank was established in 1987 and is the sole official export credit agency in Turkey. The Eximbank is fully owned by the Turkish Government (the Turkish Treasury holds 100% of the shares) and has been mandated to support foreign trade and Turkish contractorshnvestors operating overseas. A PIU team is designated in Eximbank under the supervision of one of its deputy general managers to oversee the implementation of EFIL IV. The designated staff will also be responsible for the coordination of the project activities. The staffs in Eximbank’s PIU team includes those who worked previously under EFIL Iand are very experienced and highly qualified.
The risk associated with implementing entity is low.
Budgeting
9. The financing under EFIL IV forms a part of TSKB’s own budgeting procedures. Since Eximbank is also a limited liability company the only budgeting requirement is to integrate the project to its own budgeting procedures.
The risk associated with budgeting is assessed as low
Accounting
10. Staflng. Both banks will use their own staff for the financial management of the project. The staffs assigned to work on the project both in TSKB and Eximbank are highly qualified and experienced. There is a clear segregation of duties between the staff with respect to evaluation of applications, accounting and reporting.
11. Information systems. TSKB uses a web based application, approval and monitoring system for the ongoing EFIL I11 where it acts as an APEX. The system is accessible by the PFIs from the web. The PFIs make their initial application as well as their withdrawal applications from EFIL IV by using the system and are able to monitor the status of each application real time
44 from the web. The system has adequate security levels and is fully integrated into the management information system of the bank. The quarterly FMRs are generated automatically by the system. Same system will be used for EFIL IV.
12. The accounting system of Eximbank is an oracle based system that is fully integrated with other applications of the bank. It is developed in house and maintained and updated regularly by bank staff. Accounting of banking transactions (like insurance/loans/financing) are done automatically in the system by staff and the Accounting department of the bank obtains daily reports like the trial balances and BDDK prudential reports directly from the system. Since Eximbank will act as a retail bank in EFIL IV the project accounting will be fully integrated into its own system.
13. Accounting Policies and Procedures. The project operational manuals (OM) for EFIL IV prepared by TSKB and Eximbank separately are detailed about the work flows in the project and they also include the formats ofthe Interim Unaudited Financial Reports.
The risk associated with accounting is low.
Internal Control and Internal Auditing
14. TSKB has adequate internal control procedures for the projects and these controls are documented in the web based system. When a bank applies for a loan, they do it through the system and the system generates an e-mail to the manager of the financial analysis and engineering department. After the completion of the financial and technical assessments a fax message and an electronic approval message is generated by the system. The fax message is signed by the managers of the engineering department and the operations department and transmitted to the intermediary bank. Following this approval process the intermediary banks and the beneficiary enterprises could then send invoices for withdrawals. When this is done the system generates an e-mail to the Operations Manager. These invoices are controlled for compliance by the operations department and technically by the engineering department. When the request is completed the funds department (Treasury department) releases the funds from the special account with the approval of the operations department and the credits division within operations generates the accounting records automatically through the system. Copies of invoices relating to sub-loans extended by the PFIs to their clients are sent to and kept at TSKB.
15. Eximbank will use its own internal control systems for the implementation of the credit line. Since Eximbank will lend directly to the beneficiary enterprises, technical and financial analysis of the applications will be made by the Risk Analysis and Assessment Division of Eximbank. The loan to the beneficiary enterprise will be processed by the Specific Loans Division and will be subject to the approval of the Eximbank’s board. Disbursements will be made upon submission of invoices and the invoices will be controlled for compliance by the Loans department. When the beneficiary enterprises request is processed funds will be released from the designated account to the bank account of the enterprise with the approval of the financial and loans departments.
16. Both banks have internal audit departments and the project related transactions will be subject to their regular reviews.
The risk associated with internal controls and internal audit is low.
45 Funds Flow
17. There will be two special accounts in the name of TSKB, one in USD and one in Euro for the project. Funds from the loan will be made available to PFIs following submission of payment documents (invoices for the goods and works purchased by the export companies) to TSKB. Eximbank will have two designated accounts one in US Dollars and one in Euros in one of its correspondent banks. Funds from both accounts will be made available to the beneficiary enterprises upon submission and verification of invoices. The US Dollar designated account will also be used for the disbursements under the institutional development component.
The risk associated with fhds flow is low.
Retroactive Financing.
18. Retroactive Financing in an aggregate amount not exceeding $39.4 million for the TSKB USD tranche and €13 million for the TSKB EUR tranche, and $30 million for the Eximbank USD tranche and €1 8.94 million for the Eximbank for the EUR tranche, may be made in respect of Sub-loans or Lease Financing made in accordance with criteria and procedures set forth in the Loan Agreement and Operational Manual before that date but after July 1" 2007.
Financial Reporting
19. Both banks will maintain records and will integrate the accounting for the funds provided for the project into their systems. The interim unaudited financial reports (IUFR) will be prepared semi-annually and will be submitted to the Bank no later than 45 days after the end of the period.
20. The IUFRs will include the following reports for TSKB: designated account statement, project sources and uses of funds, project uses of funds by PFI and project uses of funds by beneficiary enterprises.
21. The IUFRs for Eximbank will include the following reports for Eximbank; designated account statement (separately in US Dollars and Euros), project sources and uses of funds (separately in US Dollars and Euros), project uses of funds by loan customer and sector separately in US Dollars and Euros
22. The IUFR templates will be attached to the Minutes of Negotiations. The OMS for the project also include the format ofthe IUFRs.
The risk associated with reporting and monitoring is low.
Auditing
23. TSKB's external auditors are Deloitte and Touche. They have audited TSKB IFRS financial statements in accordance with ISA for the year ended December 31, 2006 and they have submitted an unqualified audit opinion on their financial statements. Deloitte and Touche has also audited the financial statements of EFIL I11 and these reports were also satisfactory to the Bank.
46 24. Annual audits of Eximbank are also undertaken on an International Financial Reporting Standards (IFRS) basis in accordance with International Auditing Standards by Price Waterhouse Coopers (PWC). The last three years’ audit reports (in accordance with IFRS) are reviewed and all were unqualified. Audit of the EFIL IV financial statements (project sources and uses of funds and designated account statement) will be integrated into the auditors TOR. Eximbank has been engaging the services of international auditors and the former auditing arrangements under EFIL Iwere satisfactory to the Bank.
25. The following chart identifies the audit reports that will be required to be submitted by TSKB and Eximbank separately.
Audit Report Due Date
Entity financial statements Within six months after the end of each calendar year
Project financial statements (PFS) Within six months after the end of each including SOEs and designated account. calendar year and also at the closing of the PFS include sources and uses of funds and project. designated account statement
The risk associated with audit is low.
B. Disbursement Arrangements
Each bank will have two designated accounts (DA); one in Euros and one in US Dollars. TSKB will have the designated accounts in itself and they will have authorized allocations of USD 40 million and Euros 13 million. Eximbank will have the designated accounts in one of its overseas correspondent banks and the accounts will have authorized allocations of USD 30 million and Euros 19 million. The withdrawal applications that will be submitted by banks will have two signatures p-indicated in their list of authorized signatures.
Applications documenting eligible expenditure utilized from the DAs will be submitted to the Bank on a quarterly basis, and will include a reconciled bank statement as well as other appropriate supporting documents.
Disbursements from the IBRD Loan Account will follow the transaction-based method, Le., traditional Bank procedures: Advances, Direct Payments, Special Commitments and Reimbursement (with full documentation and against Statements of Expenditures (SOEs)). For payments, above the Minimum Application Size, as specified in the Disbursement Letter, the Borrower will submit withdrawal applications to the Bank for payments directly from the Loan Account. TSKB and Eximbank will prepare and authorize their withdrawal applications.
Disbursements will be made on the basis of full documentation for Component C (a) contracts for goods costing more than the equivalent of USD 400,000 each; (b) services under contracts of more than the equivalent of USD 200,000 for each consulting firm and more than the equivalent of US$50,000 each for individual consultants. For Components A and B the records of evidencing eligible expenditures for payments against sub-loans valued at USD 20 million
47 equivalent or more should be provided. Disbursements below these thresholds will be made according to certified Statement of Expenditure (SOEs). Full documentation in support of SOEs would be retained by the banks for at least two years after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account was made. This information will be made available for review during supervision by Bank staff and for annual audits which will be required to specifically comment on the propriety of SOE disbursements and the quality of the associated record-keeping.
C. Supervision Plan
During project implementation, the Bank will supervise the project’s financial management arrangements as follows; (i) during the Bank’s supervision missions financial management and disbursement arrangements will be reviewed to ensure compliance with the Bank’s minimum requirements, (ii) project’s semi-annual IUFRs, entity and project financial statements of each bank and related audit reports and management letters will be reviewed. As required, a Bank- accredited financial management specialist will assist in the supervision process.
48 Annex 8: Procurement Arrangements
A. General
1. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 revised in October 2006; (Procurement Guidelines); and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 revised in October 2006 (Consultants’ Guidelines), and the provisions stipulated in the Legal Agreement. The procurement arrangements are described below.
B. Procurement of Goods and Works under Export Development Sub-projects (First and second components of the Project)
2. Procurement of Goods: Procurement of goods and related services (installation and maintenance) financed under the proposed project will be according to the World Bank Procurement Guidelines. For contracts below US$l0.0 million equivalent, established local private sector commercial practices will be followed in accordance with paragraph 3.12 of the Procurement Guidelines. Care has to be taken of other relevant factors such as time of delivery, efficiency and reliability of the goods and availability of maintenance facilities and spare parts thereof, and in case of non-consultant services, of the quality and competence of the parties rendering them. Advertising in the local and international press will not be mandatory. However, International Competitive Bidding (ICB) would be required for individual contracts above US$lO.O million for goods and related services in accordance with Section I1 of the World Bank’s Procurement Guidelines. All procurement of goods and related services under contracts above US$lO.O million will be subject to the World Bank’s prior review (See Table 1). Contracts placed by sub-borrowers on their subsidiary or affiliated companies will not be eligible for financing out of the Loan. The procurement of the second hand goods is not eligible for financing out of the Loan.
3. Procurement of Works: Procurement of works financed under the proposed project will be according to the World Bank Procurement Guidelines. For civil works estimated to cost less than US$l0.0 million equivalent per contract, established local private sector commercial practices will be followed in accordance with paragraph 3.12 of the World Bank’s Procurement Guidelines. Care has to be taken of the capacity of the contractors and the cost and quality of the works. Advertising in the local and international press will not be mandatory. For contracts above US$lO.O million, International Competitive Bidding (ICB) would be required for individual contracts in accordance with Section I1 of the World Bank’s Procurement Guidelines. All ICB contracts for works shall be subject to prior review by the World Bank. Contracts placed by sub-borrowers on their subsidiary or affiliated companies will not be eligible for financing out of the Loan.
4. Private Sector Procurement Practice in Turkey: In the Country Procurement Assessment Report (CPAR) dated June 2001, it was determined that there are well established commercial practices for the procurement of goods, works and services by the private sector enterprises, autonomous commercial enterprises and individuals. In case of goods, the local practice is to prepare the technical specifications and solicit quotations from the local and/or 49 international market. In case of medium and large works, the technical specifications are usually prepared by consultant companies and bids are collected from qualified contractors. Minor works are generally tendered on a lump sum basis by collecting bids from a number of local contractors. When equipment and machinery is needed for expansion of existing facilities, the purchasers usually prefer proprietary goods from a single source for the sake of standardization and minimization of the operation and maintenance cost. Therefore, the local private sector or commercial practices can be considered to be consistent with the World Bank’s criteria with respect to economy and efficiency. The general rule in the sector is to procure the least cost goods, works and services consistent with minimum quality requirements.
C. Procurement of Goods and Employment of Consultants under Component 111: Institutional Development and Technical Assistance to Eximbank
5. Procurement of Goods: Under this component of the Project, (i)the procurement of Disaster Recovery Facility to establish an improved emergency management system and; (ii)the procurement of Information Systems for updating the existing IT infrastructure which are required to establish a credit appraisal system under Base1 I1 will be done by Eximbank. The procurement of IT equipment and related services shall be launched in accordance with the International Competitive Bidding (ICB) in accordance with Section I1 of the World Bank’s Procurement Guidelines. However, the contracts below US$400,000 equivalent may be procured through Shopping procedures in accordance with the provisions of paragraph 3.5 of the World Bank’s Procurement Guidelines. Goods which must be purchased from the original supplier to be compatible with existing equipment or are proprietary nature, may, with the World Bank’s prior agreement, be procured through Direct Contracting (DC) Procedures in accordance with the provisions of paragraph 3.6 of the World Bank’s Procurement Guidelines. As identified during pre-appraisal, only the “Database Identity Management and Security Software” is required to be procured from the original database software supplier. See Table 2-Procurement Arrangements for the details of the planned procurements. All ICB, DC contracts and first shopping contract are subject to the World Bank’s prior review. There will be no domestic preference in the procurements.
6. Procurement of Consulting Services: Under this component of the project the consultants will be employed by Eximbank (i)for the technical and financial reviews of the sub- loans under component I11 ofthe Project and; (ii)technical support for updating Eximbank’s IT infrastructure. The employment of technical experts shall be conducted through the selection of individual consultants in accordance with the provisions of the Section V of the World Bank Consultant Guidelines. The World Bank encourages Eximbank to advertise the required positions to collect the expression of interest of the best qualified consultants. In case the service is required from a consultancy firm, for the contracts below US$200,000 equivalent Selection Based on Consultants Qualification (CQS) method may be used in accordance with paragraph 3.7 and paragraph 3.8 of the World Bank’s Consultants’ Guidelines. The short list can comprise entirely national consultants. If the contracts with the Firms are above US$200,000 equivalent, Quality and Cost Based Selection (QCBS) will be applied in accordance with Section I1 of the World Bank’s Consultants’ Guidelines. All QCBS contracts and first CQS contract are subject to the Bank’s prior review, and all individual consultant contracts above US$50,000 equivalent shall be subject to the World Bank’s prior review.
D. Procurement Plan and General Procurement Notice
50 7. Because of the demand-driven nature of the project, it is possible to estimate neither the sub-borrowers nor their procurement requirements under Component Iand I1 of the Project at the appraisal stage or during the implementation of the Project. Therefore, it is not possible for the borrowers to develop a Procurement Plan which provides the basis for the procurement methods. Similarly, since the contract sizes and the methods can not be estimated it is not possible to prepare and publish a General Procurement Notice for Component Iand I1 of the Project. It is expected that each sub-borrower will provide a list of procurements planned under the sub-loan. In case any sub-project includes ICB, special procurement notice will be published in accordance with the Procurement Guidelines. However, Eximbank, at appraisal, developed a Procurement Plan for Component I11 of the Project which provides the basis for the procurement methods and review thresholds. This plan has been agreed between Eximbank and the Project Team on April 14, 2008 and is available from the Eximbank PIU team. It will also be available in the Project’s database and in the World Bank’s external website. The procurement plan will be updated annually or as required to reflect the actual implementation needs and improvement in institutional capacity. The contracts under Component I11 of the project are listed in Table 2 below. A General Procurement Notice will be published by Eximbank in the dgMarket and United Nations Development Business (UNDB) online for the Institutional development part of the Project in May 2008.
E. Frequency of Procurement Supervision and Review Procedures
8. The Bank will review the procurement arrangements proposed/performed by TSKB and Eximbank every year, including contract packaging, applicable procedures, and the scheduling of the procurement processes, for its conformity with World Bank Procurement and Consultant Guidelines, the proposed implementationprogram and disbursement schedule.
(a) Prior Review for the Contracts under Component I and I1of the Project: The following procurement action and documentation would be subject to Prior Review by the Bank in accordance with the procedures set forth in paragraphs 2 and 3 of Appendix 1 to the World Bank Procurement Guidelines.
For Contracts awarded through ICB; prior review of all Bidding Documents, Bid Evaluation Reports, Recommendations of Contract Award and draft Contract will be conducted.
For Contracts awarded through Commercial Practices; prior review of the first two contracts will be conducted for TSKB and Eximbank.
(b) Prior Review for the Contracts under Component I11 of the Project: Prior review thresholds and number of contracts subject to prior review are provided in the approved Procurement Plan.
(c) Post Review: The procurement documents for all other contracts shall be subject to the World Bank’s post review in accordance with the procedures set forth in paragraph 5 of Appendix 1 to the World Bank Procurement Guidelines on a random basis, one in ten contracts for Component I and I1 of the Project and one in five contracts for the Component I11 of the Project. Post review of the procurement documents will normally be undertaken during the World Bank supervision mission or as the Bank may request to review any particular contracts at any time. In such cases, the TSKB and Eximbank shall provide the Bank for its review the relevant documentation. The post review shall be conducted by the Bank’s Procurement Specialist. 51 F. Assessment of the Agency’s Capacity to Implement Procurement and Private Sector Procurement Practice in Turkey
9. Procurement Capacity Assessment: In case of procurement under sub-loans and leases, TSKB and Eximbank will be responsible for ensuring that the procurement rules for sub-loans and leases specified in the Loan agreement are followed by the sub-borrowers. TSKB will also be responsible for reviewing and monitoring the compliance with the procurement rules by the PFIs and leasing companies, and their sub-borrowers (beneficiary enterprises). Specialists assigned for the procurement arrangements within the TSKB and Eximbank’s PIU teams will be responsible for all procurement oversight for the management of the project. The PIU teams will keep the records and copies of the documents of the procurements handled through the intermediary banks and leasing companies or directly by the sub-borrowers. The documents related to the working capital expenditures will be kept by PFIs and Eximbank and these documents will be provided to the Bank whenever requested. The World Bank will conduct regular post reviews of the sub-projects not requiring a prior review. The PIU teams will be responsible for assembling the documentation related to specific procurement transactions from the PFIs and sub-borrowers in order to facilitate the Bank’s reviews.
10. TSKB was responsible for the implementation of the similar EFIL I1 project, and is still implementing the EFIL I11 project. No procurement problem has been encountered both in EFIL I1 and I11 projects. TSKB is also implementing similar World Bank financed projects for Small and Medium Enterprises and Renewable Energy. TSKB Engineering department is responsible for reviewing sub-loan applications through prior or post review to ensure that the procurement procedures described in the Loan agreement have been complied with by PFIs both in commercial and technical aspects. This department consists of 7 experienced Engineers (Mechanical, Chemical, Industrial, Civil and Electrical-Electronic Engineers) who are experts in their fields. The engineers are well aware of the market prices for the goods and works under consideration and have experience in the procurement activities. An assessment of the capacity of the TSKB to implement procurement actions for the project has been carried out by the Bank’s procurement specialist on January 30-3 1, 2008. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible from the procurement activities. The overall risk for procurement is low in TSKB.
11. Eximbank successfully implemented the EFIL Iproject as an APEX Bank. The number and the qualifications of the staff that will be responsible in managing the sub-loans to enterprises are sufficient for the satisfactory implementation of the project. The existing staff is very experienced on the commercial procurement practices. However, Eximbank does not have Engineering Department to review the cost estimates of the sub-loan applications. Majority of the staff do speak English and have good understanding on the Bank’s terminology. They are good at using electronic communication and documentation.
12. Since there is no Engineering department in its current organization structure for reviewing the costs in the sub-loan applications, and also different from EFIL Iproject, it will operate as retail lender, and there will be an ICB under the Institutional Development Component and its staff has limited experience in the ICB, the procurement under the Project is put in the moderate risk category for Eximbank.
52 13. The World Bank procurement staff will be in close interaction with the PIU teams at TSKB and Eximbank during the implementation of the Project, and will monitor the staffing, document quality, review procedure and archiving of the procurement documents. The World Bank’s procurement specialist will arrange procurement trainings to relevant staff in the TSKB and Eximbank upon their request.
14. In order to reduce the procurement risk to Low in Eximbank the World Bank’s procurement specialist will be involved in the early stage of the procurements under Component I11 of the Project and will closely work with Eximbank staff. Eximbank will hire Technical Experts required for the cost review of the sub-loan applications before the approval of the first sub-loan application for investment finance purposes.
Table 1: Thresholds for Procurement Methods and Prior Review (US$ Million equivalent) for Component I and I1of the Project
Expenditure ICB Commercial Practice Category Thresholds Sub-loans Goods No threshold (apply when needed) 510 Civil works No threshold (apply when needed) 51 0
Prior Review All contracts First two contracts in Component Iand I1 of the Project financed with the proceeds of the Loan
53 .1 z j 0 L
FP VI y i! i! 8 v) 8 E E
DE 'E 6
E 5 s g C E ,$ m
E
'51 e! Annex 9: Environmental Review Procedures
1. In accordance with World Bank safeguard policy OP/BP/GP 4.01 (Environmental Assessment), that incorporate the Republic of Turkey’s regulatory requirements for Environmental Review (Regulation on Environmental Impact Assessment published in Official Gazette No: 253 18, dated 16 December 2003, as supplemented by Article 10 of Environmental Act No: 2872 dated August 9th, 1983) the project has been assigned Category “FI”. Under this assignment, TSKB already has an established Environmental Assessment Framework document acceptable to the World Bank that defines environmental assessment procedures to be used in sub-project evaluation. Eximbank will prepare an Environmental Assessment Framework document acceptable to the World Bank that defines environmental assessment procedures to be used in sub-project evaluation. The Framework document is included as a separate chapter in the OM. Eximbank wishes to include the possibility of sub-projects that may, by Turkish environmental regulations, require an Environmental Impact Assessment Report. The OM will define procedures consistent with both Government of Turkey Environmental Assessment requirements and World Bank Environmental Assessment policies and procedures utilized in similar operations in Turkey.
2. The framework documents of both Eximbank and TSKB will identify institutional responsibilities for each of the following elements:
Sub-project Loan Preparation 0 Environmental screening category 0 Environmental impact assessment 0 Environmental review process a Prior and post review
Sub-project Implementation 0 Arrangements for environmental management, if necessary (mitigation and monitoring) a Preparing of environmental screening form
A brief description of arrangements to be utilized is presented below:
For sub-projects that do not require an EIA, PFI and Eximbank, in cooperation with the sub-borrower, will prepare an environmental screening form to define the environmental issues associated with the sub-project and how they will be mitigated and monitored. The sub-borrower will also be responsible for ensuring that all Government environmental approvals, permits and licenses are secured. Demonstration of this due diligence would be provided to TSKB and Eximbank, which will review this information as an element of their sub-project appraisal process. TSKB and Eximbank will examine selected sub- projects at their discretion.
3. For sub-projects that do require an EIA, the sub-borrower would be required to submit to TSKB and Eximbank: (a) the Ministry of Environment and Forestry EIA approval statement (Environmental Impact Assessment Positive Decision), (b) the MoEF
55 approved EIA together with an Addendum that would include any supplemental information required by the World Bank for “Category A” EIA projects. The EIA and “World Bank Addendum” would be reviewed and approved by the World Bank, and disclosed in Turkey (Turkish language version) and the World Bank InfoShop (English language version). TSKB and Eximbank would not be permitted to continue processing the sub-project until World Bank approval of the EIA and Addendum is offered and disclosure in Turkey and the World Bank InfoShop has been completed. The World Bank will have the authority to review and post review all sub-projects. The review of evaluations will ensure that: screening was performed consistently and accurately, the work was of satisfactory quality, recommendations specified by the granting of the approvals were followed, all documentation was properly filed and recorded, and the conditions of approval by the Provincial Directorate of MoEF or any other Government institutions and post review were met. During the project implementation, World Bank missions will supervise the overall screening process and implementation of environmental recommendations for the selected enterprise. The World Bank supervision team will also review, ad hoc, environmental documentation.
56 Annex 10: Occupational Health and Safety in the Shipbuilding Industry
1. Shipbuilding is an industry with high risk for workers, and high levels of work related accidents have been reported in the media with on average one death per month over the past three years. Therefore, extra precaution is being taken to ensure that occupational health and safety is adequate at participating sub-borrowers in the shipbuilding industry.
2. The Ministry of Labor and Social Security (MoLSS) recently and in collaboration with the industry introduced training requirement and certification of workers’ safety on shipyards. The project will leverage this initiative and plans to lend only to qualified shipbuilders.
3. The workers safety risk in shipbuilding industry is exacerbated by rapid employment growth and widespread use of sub-contractors for blue-collar labor. The rapid employment growth in the industry means that many workers have little experience. The number of workers employed in this sector increased from about 13,500 in 2002 to more than 33,000 in 2007. With the completion of the shipyards under construction this figure is expected to reach 60,000. The blue-collar work on the shipyards is often done by sub-contractors making management of safety more complicated. There are more than 380 sub contractor firms working in the shipbuilding sector. Due to increasing demand for labor, workers are often recruited hastily without regular training being given on the occupational health and safety issues
4. The MoLSS is the main agency dealing with the occupational health and safety issues, is performing regular on site inspections on shipyards, but due to the lack of enough inspection staff and time constraints, enforcement ofthe occupational health and safety standards are weak. In a recent report by the MoLSS, 41 shipyards out of 43 inspected were found to be failing the necessary requirements of occupational health and safety.
5. Having reached a consensus on the necessity of upgrading labor standards and the need for worker training with the shipbuilders association (GISBIR), the labor union, and the MoLSS, while working to upgrade the training qualifications and the regulations related to occupational health and safety standards in the shipyards specifically, is also preparing a law related to occupational health and safety standards in general. This law is expected to be enacted by June 30, 2008 and needs to become effective by September 2008, as per EU accession process. The MoLSS regulations related to occupational health and safety, are also prepared according to an EU directive (EEC 89/391) on occupational health and safety standards, and are expected to be issued in two months. Before the issuance of these regulations, a trilateral protocol between MoLSS, GISBIR and the Union was signed on February 25, 2008. This protocol is related to starting the implementation of the regulations related to training of trainers for occupational health and safety standards. According to this protocol, training of trainers for occupational health and safety will start and a cadre of trainers will be trained which will be responsible for giving the same training for the shipyards. The protocol will bind both the management of the shipyards and unions to have a trainer on occupational health and safety for each shipyard and commit to train all the workers on occupational safety
57 procedures and standards. This protocol will also force the subcontractors to abide with the same standards and failing to do so will be a reason for losing their contracts.
6. As a second condition of the protocol, the MoLSS will inspect all the shipyards to assess the occupational health and safety conditions of each shipyard and prepare a report on measures to be taken. Both of these activities; (i)training of trainers; and (ii)reports on measurement and assessment of workplace environment, will establish the base for upgrading the labor quality and the occupational health and safety standards for the shipyards. MoLSS officials indicated that since the IS0 18001 certification, which is related to the occupational health and safety standards is a very expensive process, only three shipyards in Turkey have IS0 18001 certification. However by implementing the regulations mentioned above, the MoLSS hopes to provide the fundamentals for a safe and healthy workplace which will eventually enable the shipyards to apply for IS0 18001 certification as a future step. In the meantime, MoLSS officials are confident that certification of the two requirements mentioned as part of the regulations, will provide enough credibility regarding the: (i)quality of the workers skills and training level; and (ii)of the quality regarding the occupational health and safety standards, in the shipyards. The project team feels confident that certification of these two conditions will be sufficient and satisfactory as part ofthe safeguards and eligibility criteria for the loans.
58 Annex 11: Project Processing
Concept memorandum Approval Feb 8" 2008 Feb 8" 208
ROC review' March 20" 2008 March 20th 2008 Initial PID to PIC March 2lSt2008 March 23rd2008 Initial ISDS to PIC March 2lSt2008 March 23'd 2008 Appraisal March 3 lst2008 March 3 1'' 2008 Negotiations April 14th2008 April 14'h 2008 Board Approval May 22"d 2008
Planned date of Effectiveness for TSKB September 1St 2008 Planned date of Effectiveness for August 1'' 2008 Eximbank Planned date of mid-term review November 1 st 201 0 Planned closing date June 3 Oth 20 13
Key institutions responsible for preparing the project: TSKB, Eximbank, The Turkish Treasury (Guarantor)
Bank staff and consultants who worked on the project included:
Steen Byskov Financial Sector Spec. ECSPF Gurhan A. Ozdora, Senior Operations Off. ECSSD Isfandyar Z. Khan Financial Sector Spec. ECSPF Nasreen Bhuller Program Assistant ECSPF Selma Karaman, Program Assistant ECCU6 Halil Agah Senior Rural Development ECSSD Specialist Hannah Koilpillai Senior Finance Officer LOAFC Zeynep Lalik Financial Management ECSPS Specialist Furuzan Bilir Operations Officer ECCU6 Seda Aroymak Sr. Financial Management ECSPS Specialist Salih Kemal Kalyoncu Procurement Specialist ECSPS Irina Kichigina Senior Counsel LEGEM Hala D Khattar Sr. Financial Officer BDM
5 The project was initially being processed as an Additional Financing and on guidance from ROC was changed into a repeater project
59 Annex 12: Statement of Loans and Credits
Difference between expected and actual Original Amount in US$ Millions disbursements Proiect ID FY Pumose IBRD IDA SF GEF Cancel. Undisb. Orin. Fm. Rev’d PI00383 2007 ISTANBUL MUNICIPAL 322.15 0.00 0.00 0.00 0.00 322.15 28.00 0.00 INFRASTRUCTURE PROJ PO96801 2007 ELECT DISTRIB REHAB 269.40 0.00 0.00 0.00 0.00 276.70 6.67 0.00 PO96400 2006 ECSEE APL #3 (TURKEY) 150.00 0.00 0.00 0.00 0.00 131.26 -7.88 0.00 PO96262 2006 AVlAN FLU - TR 34.40 0.00 0.00 0.00 0.00 32.06 9.13 -1.32 PO93765 2006 GAS SECT DEVT 325.00 0.00 0.00 0.00 0.00 321.69 137.36 0.00 PO82822 2006 ACC TO FIN FOR SMEs 180.2 1 0.00 0.00 0.00 0.00 148.39 63.81 0.00 PO85561 2006 ELECTRICITY GENERATION REHAB 336.00 0.00 0.00 0.00 0.00 376.99 122.31 0.00 & RESTRUCTU PO78359 2005 SEISMIC RISK MITIGATION 400.00 0.00 0.00 0.00 0.00 378.84 110.48 0.00 PO81880 2005 MUNICIPAL SERVICES 275.00 0.00 0.00 0.00 0.00 257.55 11.83 0.00 PO93568 2005 EFIL 3 305.00 0.00 0.00 0.00 0.00 44.41 -96.27 0.00 PO94167 2005 PSSP 2 465.40 0.00 0.00 0.00 0.00 330.45 82.88 0.00 PO94176 2005 ECSEE APL #2 (TURKEY) (CRL) 66.00 0.00 0.00 0.00 0.00 46.72 6.02 0.00 PO77328 2005 RAIL RESTRUCT 184.70 0.00 0.00 0.00 0.00 181.47 124.18 18.47 PO66149 2005 SEC EDUC 104.00 0.00 0.00 0.00 0.00 113.68 44.97 0.13 PO74053 2004 HEALTH TRANSIT (APL #I) 60.61 0.00 0.00 0.00 0.30 45.11 36. I4 7.2 I PO72480 2004 RENEW ENERGY 202.03 0.00 0.00 0.00 1.01 81.59 42.57 0.00 PO70950 2004 ANATOLIA WATERSHED REHAB 20.00 0.00 0.00 0.00 4.30 9.03 -0.10 0.00 PO70286 2002 ARIP 600.00 0.00 0.00 0.00 39.86 85.62 125.48 -1.65 PO74408 2002 SRMP 500.00 0.00 0.00 0.00 0.00 1.09 I.09 1.09 Total: 4,799.90 0.00 0.00 0.00 45.47 3,184.80 848.67 23.93
TURKEY STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars
Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic 2005 Acibadem 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 2006 Acibadem 40.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1996 Arcelik 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 2005 Arcelik 101.99 0.00 0.00 101.99 101.99 0.00 0.00 101.99 2000 Arcelik LG Klima 2.82 0.00 0.00 0.00 2.82 0.00 0.00 0.00 2002 Assan 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00 2005 Assan 20.00 0.00 10.00 30.00 0.00 0.00 0.00 0.00 2002 Atilim 4.39 0.00 0.00 0.00 4.39 0.00 0.00 0.00 2005 Avea 120.00 0.00 0.00 0.00 120.00 0.00 0.00 0.00 2000 Banvit 6.67 5.00 0.00 0.00 6.67 5.00 0.00 0.00 2002 Beko 27.79 0.00 0.00 13.85 27.79 0.00 0.00 13.85
60 2001 Bilgi 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 2006 Bilgi 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1997 Borcelik 6.36 0.00 0.00 0.00 6.36 0.00 0.00 0.00 1994 CBS Holding 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 1990 Conrad 2.69 0.00 0.47 0.00 2.69 0.00 0.47 0.00 2002 Conrad 2.10 0.00 0.00 0.00 2.10 0.00 0.00 0.00 2002 EKS 8.11 0.00 0.00 0.00 8.11 0.00 0.00 0.00 1995 Entek 16.00 0.00 0.00 4.97 16.00 0.00 0.00 4.97 2006 Finans Leasing 25.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 200 1 Gunkol 4.47 0.00 0.00 0.00 4.47 0.00 0.00 0.00 1998 Indorama Iplik 3.75 0.00 0.00 0.00 3.75 0.00 0.00 0.00 2005 Intercity 15.00 5.00 0.00 27.75 15.00 5.00 0.00 27.75 2006 Intercity 44.62 0.00 0.00 0.00 0.00 0.00 0.00 0.00 I998 Ipek Paper 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.00 1988 Kiris 16.24 0.00 0.00 0.00 16.24 0.00 0.00 0.00 I990 Kiris 10.96 0.00 0.00 0.00 10.96 0.00 0.00 0.00 2004 Koclease 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1991 Kula 5.17 0.00 0.00 0.00 5.17 0.00 0.00 0.00 2004 Meteksan Sistem 0.00 0.00 7.56 0.00 0.00 0.00 7.56 0.00 2002 Milli Re 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2006 Milli Re 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Modem Karton 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 2005 Modem Karton 40.00 0.00 0.00 20.00 0.00 0.00 0.00 0.00 2004 OPET 25.00 0.00 0.00 40.00 25.00 0.00 0.00 40.00 2004 Oyak Bank 38.89 0.00 0.00 0.00 38.89 0.00 0.00 0.00 2005 PALEN 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2005 PALGAZ 10.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 1998 Pinar ET 1.57 0.00 0.00 0.00 I.57 0.00 0.00 0.00 2000 Pinar SUT 8.52 0.00 0.00 0.00 4.89 0.00 0.00 0.00 1999 SAKoSa 3.91 0.00 6.52 0.00 3.91 0.00 6.52 0.00 2006 Sanko Group 75.00 0.00 0.00 100.00 20.14 0.00 0.00 26.86 1990 Silkar Turizm 0.67 0.00 0.00 0.76 0.67 0.00 0.00 0.76 2003 Sise ve Cam 34.68 0.00 14.54 24. I4 34.68 0.00 14.54 24.14 2006 Standard Profil 19.12 3.82 0.00 0.00 0.00 0.00 0.00 0.00 2006 TDD 3 1.87 0.00 0.00 0.00 31.87 0.00 0.00 0.00 2005 TSKB 0.00 0.00 50.00 0.00 0.00 0.00 50.00 0.00 1989 Trakya Cam 0.00 0.00 0.03 0.00 0.00 0.00 0.03 0.00 1996 Trakya Cam 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1999 Trakya Cam 0.00 0.02 0.00 0.00 0.00 0.02 0.00 0.00 2002 Turk Ekon Bank 6.67 0.00 15.00 0.00 6.67 0.00 15.00 0.00 2005 Turk Ekon Bank 0.00 0.00 50.00 0.00 0.00 0.00 50.00 0.00 2001 Turkish PEF 0.00 9.59 0.00 0.00 0.00 6.40 0.00 0.00 I999 Uzel 6.1 1 0.00 0.00 3.30 6.1 1 0.00 0.00 3.30 1998 Viking 4.32 0.00 0.00 0.00 4.32 0.00 0.00 0.00 2005 YUCE 4.10 0.00 0.00 0.00 4.02 0.00 0.00 0.00 Total portfolio: 995.06 23.44 159.12 366.76 657.25 16.43 149.12 243.62
61 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2005 Avea 0.00 0.00 0.00 0.30 200 1 Akbank 0.03 0.00 0.00 0.00 2002 TEB III 0.00 0.00 0.00 0.05 2006 Intercity II 0.00 0.00 0.00 0.01 2002 Milli Reasurans 0.00 0.01 0.00 0.00 2004 Akbank BLoan hc 0.00 0.00 0.00 0.02 Total pending commitment: 0.03 0.01 0.00 0.38
62 Annex 13: Turkey at a Glance
Turkev at a glance 3128107
POVERTY and SOCIAL Deuelopment diamond' Turteg F:::i 2006 Population,mid-year /h&wq) 72.9 460 810 Life expectancy GNI per capita /;Jt/a+mplM M$) 5,400 4,796 5,913 GNI /Af/acmplM lK$iWk:) 393.9 2,206 4,790 I Average annual growth. 2000-06 Population &? 1.3 0.0 0.8 GNI Gross Labor force &7{? 2.1 0.5 1.3 Per primary Most recent estimate [latest year available. 2000-06) capita enrollment Poverty p'dmakeh&wnahd~(v&j 27 Urban popula tion p'dfofdpqdakqt 68 64 71 Life enpectancy at birth [wa-:t 71 69 70 Infant mortality /prlm#)BLpMf.~t 26 28 26 Child malnutrition p~'d~~~~)4 5 Access to Improved water source Access to an improved water source p'dprpdabq) 96 92 93 Literacy p;'d&ake+v@l 87 97 93 Gross primary enrollment p;'dsWww&bq) 93 102 112 - Male 96 103 106 -L&a-w.mkf&+mW-WW Female 91 100 104 KEY ECONOMIC RATIOS and LONO-TERM TRENDS
1986 1996 2005 2006 Economic ratios' GDP (IKgCm! 75.6 181.5 363.4 402.7 Gross capital formatlon1GDP 188 24.6 24.8 23.9 Trade Enports of goods and ServiceslGDP 13.3 21.5 27.4 28.2 Gross domestic savings1GDP 16.1 18.3 18.2 16.2 Gross national savings1GDP 18.7 21.9 18.4 16.5 Current account balancelGDP -1.9 -1.3 *6.2 4.1 Interest payments/GDP 2.0 1.9 1.8 Total debt/GDP 43.6 44.0 47.1 Total debt servicelexports 41.0 23.4 39.1 Present value of debt1GDP k8.9 Present value of debtletports 165.6 I Indebtedness 1986-96 1936-06 2005 2006 2006-10 /H+v mdgmw GDP 4.0 3.5 7.4 6.1 5.3 -mhy GDP per oapita 1.9 2.0 6.0 4.8 4.1 1 -r&a-w.*--wy Exports of goods and services 8.4 10.3 8.5 8.5 9.3
STRUCTURE of the ECONOMY 1986 1996 2005 2006 I Growth of capital and GDP [XI /::'ra'alq I Agriculture 20.1 17.4 10.7 9.7 50 Industry 26.2 26.0 26.6 26.8 Manufacturing 22.9 21.8 21.8 22.2 Services 53.7 56.6 62.7 63.5
Householdfinal consumption expenditure 76.4 70.2 68.7 70.7 -50 General gov't final consumptionexpenditure 7.6 11.6 13.1 13.1 Imports of goods and services 16.1 27.8 34.0 35.9 I -GCF -POOP I
1986-96 1996-06 2005 2006 Growth of eiports and imports [X] /www mdswbY,' Agriculture 1.2 0.9 5.6 2.9 40 1 Industry 5.0 3.8 6.5 7.4 20 Manufacturing 4.9 3.9 6.1 7.4 Services 4.1 3.4 7.6 5.6 0 Householdfinal consumption expenditure 3.9 2.7 8.8 5.1 .20 General gov't final consumptionexpenditure 3.7 2.2 2.4 9.6 40 1 Gross capital formation 5.5 4.6 10.3 5.5 ---Exports -elmports Imports of goods and services 10.1 8.7 11.5 7.1
Note 2006 data are preliminary estimates This table was produced from the Deveiopment Economics LDB database ' The diamonds show four key indicators in the country [in bold] compared with its income-group average If data are missing. the diamond will be Incomplete
63 PRICES and GOVERNMENT FINANCE 1986 1996 2005 2006 Inflation [x) m?m=5riepiees I fli'&a?& Consumer prices 34.6 80.3 8.2 9.5 Implicit GDP deflator 36.0 77.8 5.4 11.5 GiWermmwr fiace fl::::'cd&Y? i%Wes cwr&-_rj Current revenue 22.5 28.4 27.9 01 02 03 84 05 Current budget balance -2.0 -11.4 -9.9 GDP deflator -0-CPI Overall surplusldeficit -8.6 -1.9 0.0 I I TRADE 1986 1996 2005 2006 Erport and import levels [US$ mill.] (Insc*:t
Total exports [fob] 7,457 32,067 76,949 91,937 (50 000 7 Agriculture and livestock 2.094 8.570 18.667 19,438 Mining and quarry products 1.626 3,687 4,393 4.521 100,000 Manufactures 6,398 30.834 72,670 87.179 Total imports [cif] 11,105 45,800 116,155 138.973 Food 452 2,531 2,208 2,537 50,000 Fuel and energy 2,338 6,397 21,828 29,664 Capital goods 3,964 10,624 20,363 23,316 0 00 01 02 03 04 05 06 Export price index &W=mt 94 123 132 138 Import price index p?%'W=kWt 106 116 137 149 pJ Exports rn Imports Term5 of trade gRW=A'X?l 89 106 97 92
BALANCE of PAYMENTS 1986 1996 2005 2006 Current account balance to GDP [X] fim-ct Exports of goods and services 10,580 45,124 103,589 116.427 Imports of goods and services 12.008 48.731 121.847 144,304 51 RQsOUrCQbalance -1.428 -3.607 -18.258 -27,877 Net income *1,877 .2.927 -5,799 -6,584 Net current transfers 1.840 4,097 1.454 1.687 Current account balance -1.465 .2,437 .22,603 -32,774 Financing items [net) 2,255 6,982 40,450 36,494 Changes in net reserves -790 .4.545 -17.847 -3.720 Ajem.. Reserves including gold ,Q/ssm&cmsf 4,347 17,769 50,235 60,705 Conversion rate ,'ECh-&/sst 675.7 81,390.0 1.34E+6 1.43E+6
EXTERNAL DEBT and RESOURCE FI.ovs 1986 1996 2005 2006 Composition of 2005 debt (US$ mill.) p/ss.&%-CL:t Total debt outstanding and disbursed 32,934 79,829 171,059 IBRO 4,662 4.260 5,829 6,854 A:5.823 ~~71 174 124 71 65 I IDA G 14,646 Total debt service 4,473 10,912 41,920 D 1.738 IBRD 589 1,154 1.003 1.135 IDA 5 7 6 6 E 4.825 Composition of net resource flows Official grants 151 274 424 Official creditors 629 -844 -970 Private creditors 1.198 2.338 17.800 Foreign direct investment (net inflows] 125 722 9,805 Portfolio equity [net inflows) 0 191 5,669 F World Bank program 105,732 Commitments 1,277 255 1,232 40 A. l5RD E. Biloterol DisbUt sQmentS 636 489 461 1.796 IDA D. Other multilotcral F. Privata Principal repayments 239 821 761 813 C .IMF G. Short-tcrm Net flows 397 -332 -300 983 Interest payments 355 340 249 329 Net transfers 42 -672 .549 654 -~ Note: This table was produced from the Development Economics LOB database 9128t07
64 IBRD 31100R
25° 35° 40° 45° This map was produced by the UKRAINE ROADS Map Design Unit of The World Bank. The map at this site is The boundaries, colors, denominations SELECTED TOWNS AND CITIES for reference only and is and anyother information shownon this not sanctioned for use in NATIONAL CAPITAL map do not imply, on the part of The any World Bank Group INTERNATIONAL BOUNDARIES World Bank Group, any judgment on document. Contact the the legal status of any territory, or any Map Design Unit for the RIVERS endorsement or acceptance of such acquisition of maps to boundaries. be used in World Bank 0 150 300 KILOMETERS 45° Group documents. TURKEY 45°
ROMANIA 0 100 200 MILES
RUSSIAN FED. Black Sea BULGARIA
Sinop GEORGIA Edirne To Akhaltsikhe Zonguldak Samsun Istanbul Ordu Trabzon GREECE Adapazari Karabük To Tbilisi Tekirdag Amasya Giresun Izmit Çankiri Kars AZER. Bayburt ARMENIA Çorum Tokat 40° Bursa 40° Çanakkale Kirikkale Yozgat Eskisehir Erzincan Erzurum Agri Balikesir ANKARA Sivas AZER. Kütahya TURKEY Elazig Manisa Nevsehir Mus Usak Van Afyon Murat Izmir Kayseri Bitlis ISLAMIC Aydin Konya Malatya Tigris Siirt Nigde Maras Diyarbakir REP. OF Denizli Burdur Isparta Hakkari Mugla Gaziantep IRAN Adana Mersin Sanliurfa Antalya Kilis To Tall Birak To Antakya Aleppo SYRIAN A.R. IRAQ 25° 30° Mediterranean Sea NOVEMBER 2004