No. P-35 RESTRICTED

Public Disclosure Authorized This report is restricted to use within the Bank.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

REPORT AND RECOMMENDATIONS

OF THE

PRESIDENT

TO THE

Public Disclosure Authorized EXECUTIVE DIRECTORS

ON THE

PROPOSED LOAN

TO THE

REPUBLIC OF TURKEY Public Disclosure Authorized

June 6, 1952 Ii'ITE2a^;:TI0NAL BANK FOR RECOSTRUCTIvOT ANID DEVELOP. L1'T

REPORT AND RCOlS;.EDDATIO1,1S OF TIfEl PRL'SIDENT TO TIE EXECUTIVE DIRECTORS CONCEMUIiMG PROPOSED L0A,T TO TKL REPUBLIC OF TURI2Y

1. T submit the folloM:lin- retiport and recommendations with regard to a proposed loan to the .e-oublic of Wurkey in the amount of ..r25,200,.000 .or the .,eyh.an Proiect.

PART I - IIISTORIQaL

2. This Project rwas ori,-inall,, presented to the 3an!: as one of several. proiects for :i:hich loins were recuested b- the Turkish ^overn- ment on LiarO 5, l2.2. 'etailed tecluahcal e.:zamination of the Project was ma6e by a Bank consultanit in urkey; in l9.{, On the basis of the report of the .3ankL' surve,,- mission, .wihich visited Turkey in 1950 to study its ecaonom and to make recommend-tions for a develQ'ment nrogr.nm. thae Banl: recomelended that consideration of the _eybhan Project be postponed.

3. In the summer of 1951, the Turk.ish Government iformallv aslked the Bank to conlsidel' financnJ a portion o' the Proj,ect, iiicluding the dam and most of the pow.-er facilities but excludin' the flood control and irriration wlorks and the remainder of the pow.ter f2cilities. A Bank missioin visited Turkey in Jec?mber 1951 avd. Janvarzy 19,52, and after ezerL-.in,n, Turke-t s econornic situation, its invetmaent pro-ara, and the relation of the Seyhan P'roject to that proramn, concluded that ne;otiations could be oDened for a loan for a portion of the revised .-roiect. For this purpose the 2anlc, on J nuary, 28, 1952, invited the aovernment to send a delegation to ..ashin-ton. k. .e~;otlations concernin, the pro-:osed loan wiere condLucted in ..ash- in:toi during !iarch and i.pril 195.2. '.uthorized ne;otiators for the Re- Pu'blic of Tur-:1oy -were Tis Excellenc;y: 1eridun C,. rlkin, Turkish *mbassador in z;shin,ton; i,r. IUelih 2.,seiibel, CoLisellor of EmbassY; ,'i.r. Hahit .X1ar. 2ineancial Counsellor of ;nmbessy; Uir. iHunir i.ostpr, Deputyr Director Ceneral of the Treasurr; and Lir. .Enin Yumer, director General of the 2:lectricaj Studies Institute.

5. The .an:: has -reviously made two loans to the Republic of Turkey, one of -12, 00OO0 for port develo-.rnent and consoruction -rojects, and another of .3,900,000 for a _rain stora,,e p-roject. I_oth rwere si lned on .u_ly 7, 1950. Turlkey has also -,uaranteed a loain of .9,000,000 which the Baii.. made on Octobor 2$, 1950 to the Industrial .. evelopment Bank of Turkey.

PI.RT II - PURPOSE AIM DE.~CRIPTIT.i' 01' PROPOSED LOVUT

-orrower

6. The Borrowver would be the Republic of Turkey, a member of the Bank. - 2 -

Amount

7. The loan vould be in the amount of 25,200,000, or the equivalent thereof in other currencies.

Purpose

8. The proceeds of the loan would be used to acquire from abroad equip- rent, supplies and services for constructing a dam on the Seyhan River, installing tvwo 18,000 kw electrical generators and building a power trans- mission system. The dam and its related installations would supply power, assist in controlling floods and store 'rater for irrigation.

9. These wiorks are the rajor part of the Seyhan Project, w'hich also includes construction of levees to control floods on three rivers and expansiQn of the existing irrigation system. The whole Project is esti- mated to cost the equivalelet of about I,67 riillion, of which about 1,10.5 million has been spent to date for levees and the beginning of the ir- rigation systemi

10, According to present estimates, about .10,700,000 of the proceeds of the loani would be used for purchases in the United.States, and the re- maining v1U,500,000 for purchases in various European countries.

Terms

11. The loan rrould bear initerest at the rate of 4-3/45 per annum, in- cluding the statutory commission of J$.

12. The commitment charge rrould be 3/4 of 1% per annum and vwould accrue from the effective date of the loan or fromu September 10, 1952, whichever was the earlier.

13, The loan wlould be for a term of-25 years and would be amortized by semi-annual payments commencing April 1, 1957, ancl calculated fto retire the loan oy maturity, as set out in Schedule 1 to the draft loan agreement.

14. I consider that the proposed schedule for the repaymenit of principal and the rate of interest and other charges in connection with the proposed loan are reasonable and appropriate to the Project.

PART III - IEGhL :LSTRtFLviTh:_S iiTD MIGAW AUTJORITY

15. A draft loan agreement betrreen the Republic of Turkey and the Bank is attached as Appendix I. Except for the provisions aescribed below, it follows the customary form. In accordance with the constitutional practice of the Borrower, the Grand :ational Assembly of Turkey would ratify the loan agreement. 16. (a) Because the w,orks for which a Banlk loan would be made are only a part of the entire Seyhan Project, provision has been made throughout the draft loan agreement for distinction betr!een the obligations of the Borrow,rer regarding the entire Project and the Banl-financed portion. It should be noted that, in accordance with Section 5.01, the Borrower wrould be obliged to carry out the entire Seyhan 2roject.

(b) Oection 2.02 of the draft loan agreement provides that no withdrawals can be made until consulting engineers have been appointed by the Borro%,er and until the Culkurova Porrer Utility Company (see paragraph 27 belov) has been formed and T.L. 4,000,000 of its subscribed capital has been paid in. However, provision is made in a separate letter for -w.ith- draw-al rights writh respect to a maximum of .300,000 for engineering fees,

(c) Section 5.11 provides that, if the Borrower transfers the ovmership of any substantial property included in the Project, the Borrower shall malce adequate provision for compliance w-rith the obligations imposed by Section 5,02 (records, inspection and information) and Section 5.10 (operation and maintenance).,

(d) Section 9.03 of Loan Reaulations Yo. 3 (Elffective Date) has been amended so as to provide that the loan agreement rould become effective 15 days after the Borrower has furnished the Bank satisfactory evidence that the events set forth in Section 9.01 of the Loan Regulations have occurred, In a sup?lemental agreement, the Borrower would undertalce to submit the required evidence informally in advance so as to give the Bank an opportunity to determine whether, and to advise the BQrrow-er thiat, the evidence is satis- factory to the Baic., These arrangements, made at the request of the Borrower in order to comply with constitutional practice in onneection with the ratifi- cation of the loan, are the same as those made with respect to previous loans to Turkey.

17. A supplemental letter to be signed in conjuncti 6 n with the loan agreement would provide that, if a portionlof the loan remains undisbursed after completion of tlhe works *shich it is intended to finance, the Bank would be prepared to amend the loan agreement to perrmiit use of the remain- ing sum for expansion of the irrigation networ-'* which wrould distribute water stored by the da>i. 18. On June 5, 1952, there were distributed to the Executive Directors (R-601):

a. A technical report oh "The Seyhan River Multipurpose ProJect in Turkey," which sumzr6izes and appraises the Seyhan Project, and

b. A report oni the "Economic Positioni and Prospects of Turkey)" which provides the economic background against which the pro- posed loan should be considered and Turkeyts ability to fin- ance the Project and to service the proposed loan should be evaluated.

19. The report of the Committee provided for in Article III, Section X (iii) of the Articles of Agreement of the 3ank is attached as Appendix II.-

Justification for the Project

20. The Seyhan Project provides for the development of the fertile Adana Plain in South Central Turkey, which juts Into the northeast corner of the Mediterranean Sea. The development is based on the control and utilization of the Seyhan River,

21. The Adana Plain is a delta formed by three rivers, of which the Seyhan is the largest and most important. It contains some of Turkeyts best agri- cultural land and is particularly well-suited for groving cotton, oilseeds and citrus fruits. Its main urban centers, Adana, Tarsus and Mersin, are important industrial centers. Mersin i9 Turkeyts second largest Mediter-. ranean port. The area has some mineral resources and there is reason to believe it may contain petroleum deposits* The development of this region has thus far been retarded by floods and by an insufficiency of electric power and of water for irrigation.

22. The purpose of the Seyhan Project is to prevent flood damage on the Adana Plain; to increase agricultural production (part of which can be exported) by providing for irrigation; and to assist in expanding industries and public facilities by raising power production. The Project includes construction of a system of levees along the Seyhan River south of Adana, and along the Ceyhan anid Berdan Rivers; collection canals at the foothills of the Taurus Mountains to catch the run-off of small streams; a multi-purpose earth dam vwhich wi4. provide 1450 million cubic meters of storage and will assist in controlling floods, supply power, and provide irrigation waters; power generating facilities of ultimately 54S000 kw.; a power transmission system; and new irrigation canals on both sides of the river to increase the area under irrigation from the present 17,000 hectares to 14h,00O hectares.

23. The portion of the Seyhan Project for which the present loan is prow- posed is the key factor in the entire Prbject; it is scheduled to be com- pleted in 1956. It would complete the flood control system, provide the power and transmigpion system, and create the storage required for irrigation. The works thus financed would stimulate the agricultural and industrial production of the Adana Plain and make a significant contribution to the economic de- velopment of Turkey. 24. Aside from loss of life, average annual losses due to flood are esti.- mated at about $2,800,000. The system of levees 4ong the Seyhan, Ceyhan and Berdan rivers shouldbe completed in 1952, Completion of these levees and the construction of the proposed dam would safeguard crops now subject to -5- damage or ruin by floods, wvould increase the area under cultivation,,and would ultimately yield higher tax revenues to the Government as a result of the upward revaluation of land, 25t Public and private industries and utilities in the area are now seriously short of power, which is presently being supplied by numerous small hydro- and thermal- plants fed by coal, oil and even oilcake, and by expensive mechanical power. Consumption of power, both electric and mechardical. in 1951 was only 39 million k.w. Lack of capacity has re- *stricted the use of powver by existing consumers, and has discouraged the establishment of new enterprises. The two generators to be financed by 'the Bank will potentially provide 200 million kwh, which would more than cover the estimated need of 154 million kwh for the number of new con- s\mers expected in 1965. The complete Seyhan Project, with the addition of a third generator in 1965 or later, will ultimately provide 284 million 1vrh annually, sufficient to meet the requirements of the area probably for the next twenty years and to permit significant expansion of cotton ginning, textile production and food processing enterprises, as well as public facilities including seapqrts and airports.

26. Expansion of the irrigation system, which would occur between 1956 and 1961, would raise crop yields and expand agricultural production, especially of cotton, oilseeds and fruit crops. Cotton, which has become Turkey's largest export, is expected to find fQreign markets. Oilseeds also contribute greatly to Turkey's exports, The net value of additional agricultural production resulting from the Project after the irrigation system is completed is conservatively estimAted at about $16 million annually.

27,. Under the provisions of a decree of the Turkish Cabinet establish- ing the arrangements under which the,Project rwould be constructed and operated, the dam -would remain the property of the State and would be operated, together with the levees and irrigation system, by the Government. The power-generating and transmission facilities, however, would be turned over to the Cukurova Power Utility Company, now in process of formation, in which private equity would hold a majority of the shares and the Govern- ment (through the State-owned Etibank) a minority. The bulk of its capital would be used to defray the cost of the power facilities included in the Project. The power facilities would be operated as a profit-making enter- prise; the irrigation system, as a non-profit, largely self,-supporting service; and the flood control works, as a governmental expense.

28. I am satisfied that the Project is well conceived and that its implementation is a high priority in the development of the Turkish economy. The Economic Situation

29. Turkey has made significant progress in the strengthening and ex- pansion of her economy in the twro years since the previous assessment of Turkey t s creditworthiness (Report R-307 , March 23, 1950). As a result of Turkey's post-war investment program, bolstered by E*C.A, aid, the economy has increased its output and holds promise of further growth, The results in agricuL,ture,. the mainstay of the Turkish economy, have been particularly gratifying! VWhile favorable weather conditions greatly pontributed to this improvezent, it was at least in part due to the post-war investment program. By increasing the area under cultivation and the use of mechanical equipment, Turkey produced in 1951 the largest cereal crop in its history., The same factors raised cotton production in 1951 to about two-and-a-half times the pre-war level, and made it the second most important crop. It is particularly 6.6 auspicious for the future of Turkey's bconomy that the expansion of agricultural production has occurred in such stakle comrodities as cereals and cotton, for which there should be A better foreign market than for the traditional semi-luxury crops, tobacco; nuts and dried fruitsi Similarly, substantial increases have occurred in the production of noni-ferrous metals, for which a strong foreign demand exists.

30. The major problem created by Turkey's investment progran ari6es fbom its demands on local currency resources. In recent years substantial ahd continous resort to the Central Bank for public expenditures has expanded monetary circulation and caused both wholesale and retail prices to rise in the immediate post-war years. But prices have not increased to the extent that might have been expected in the past two years. Although an import surplus financed by foreign assistance helped to reduce the full inflationary impact of the monetary expansion, the major factor in restraining inflation has been the growth in the output of the Turkish economy. Indeed, the recent growth of production and the expansion of the money economy have made desirable a moderate injection of new money into the economy.

31, In the 1952-budget, the Government proposes to cover the bulk of the deficit by non-inflationary means, having recourse to the Central Bank for only T.L, 10 million, a very moderate-sum in the light of Turkey's recent fiscal history. The government bopd market has shown considerable strength, a fact which stems in large part from the compulsory reduction of interest rates in mid-1951, But this strength is also indicative of public confidence in the growth of the Turkish economy and in the Government's financial position. The Government's recent offer to the public of T*L. 60 million in bonds was oversubscribed. It represented a threefold increase over the sale in 1949, the most recent previous offer of public securities. The increase in bank deposits of T.L. 150 million in the past two'years had in itself created a compulsory market for T.L. 30 million of bonds, for banks are required by law to hold reserves of one-fifth of their deposits in the form of government bonds.

32, As a consequence of increased production, Turkish exports have developed very favorably in the past several years. The record of cotton has been particularly impressive. In 1950, it replaced tobacco as Turkey's major export. Exports generally have risen, until they.covered about 90 per cent of imports in 1950, despite the high level of imports resulting from the investment program. In 1951, however, exports covered only 80% of imports; substantial inventories of exportable products were carried over to the current year. The long run outlook for Turkish exports appears to be favorable, providing Turkish prices are kept in line with world market conditions and providing high levels of production, employment and income are maintained in the U. S. and in the 0.E.E.C1 countries,

33. Turkeyvs post vwar development program, which has required unusually heavy imports, has produced a continuing deficit in her balance of payments, This deficit has been covered in recent years by external assistance. Its magnitude this year may be expected to be held down to the amount of aid forthcoming from M.S*A,, now estimated at about $70 million. If external economic assistance ceases, the expected increases in exports and possible reductions in imports should enable Turkey to balance her external accounts once again. -7-

34. Turkey's present external debt amounts to the equivalent of 1P273 million, of which the largest portion is a dollar debt of 0i149 nillioc. The half-yearly service payments on the 1939 Armaments Credits from the United Kirgdom and France, of which the equivalent of $58 million is now outstanding, have not been made since June 30, 1951. The Turkish Govern- ment has advised the Bank that negotiations on the subje&t will take place in the near future,

35. Service payments on the over-all debt amount to about 10 per cent of Turkey's current annual export earnings. Interest accounts for one-third and amortization for two-thirds of the total. Dollar service payments represent about 15 per cent of dollar earnings, and involve a sum which Turkey should be able to meet since she normally enjoys a dollar surplus. The additional annual charges wihich Turkey would have to assume as a result of the proposed loan of $25,200,000 are small in comparison with the benefits to be derived from the Project. Annual service during the period of amortization would be about $1.9 million. This sum, together with existing dollar debt service of about $7.5 million in 1957, is about the same as the current servce and is con- sidered to be within Turkey's capacity to service dollar obligations. Prosnects of Fulfillment of Obligations

36. The present economic and financial position and prospects of Turkey and the fiscal policies of the Government indicate that adequate provision will be made for the local currency required for the Project, as well as for the additional foreign exchange required for the parts of the Project not to be financed by the Bank. 37. The Seyhan dam, power plant and related transmission system were designed by the International Engineering Company. The principal features of the design wlere checked and subsequently revised in consultation with a commission of three internationally known engineers. Provision has been made in the loan documents to assure the employmiient of competent and ex- perienced engineers and contractors, and the training of operating personnel.

PART V . COMPLIANCE 111TH ARTICLES OF AGREMENT

38. I am satisfied that the proposed loan complies with the require- ments of the Articles of Agreement of the Banc.

PART VI - RECOQP'l2qDATTOlPS

39. 1 recommend that the Bank at this time grant to the Republic of Turkey a loan of $25,200,000 for a term of 25 years, with interest,(including commission) and commitment charges at such rates, and on such other terms as are specified in the draft loan agreement attached hereto as Appendix I.

/s/ R.L. GARN.R Washington, D.C. Vice President June 6, 1952