Document of The World Bank FOROFFICIAL USEONLY ReportNo: 42800-TR PROJECTAPPRAISAL DOCUMENT FOR A US$197.4 MILLION AND 65 MILLION (US$300 MILLION EQUIVALENT)LOAN TO TURIdYE SINAIKALKINMA BANKASIA.Q. (TSKB) AND A US$150MILLION AND 94.9 MILLION (US$300 MILLION EQUIVALENT) LOAN TO TURIdYE IHRACAT KREDIBANKASIA.Q. (EXIMBANK) WITH THE GUARANTEEOF THE REPUBLIC OF TURKEY FOR THE FOURTHEXPORT FINANCEINTERMEDIATIONPROJECT APRIL 25,2008 Private and Financial Sector DevelopmentDepartment Turkey Country Unit Europe and Central Asia Region This document has a restricteddistributionand may be usedby recipientsonly inthe performance of their official duties.Its contents may not otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate EffectiveMarch 12,2008) Currency Unit = New TurkishLira(TRY) New TurkishLira 1 = 0.820 US$ US$1 = 1.22 New TurkishLira FISCALYEAR July 1-June 30 ABBREVIATIONSAND ACRONYMS ALM Asset and Liability Management BDDK Banking Regulation and SupervisionAgency CEO Chief Executive Officer CBT Central Bank of Turkey CIRR Commercial Interest Reference Rate CIS Commonwealthof 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 SecondExport Finance Intermediation Loan EFIL I11 Third Export Finance Intermediation Loan EFIL IV Fourth Export Finance Intermediation Loan EU EuropeanUnion 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 Standardson 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 Cooperationand Development OM Operationalmanual PFI Participating Financial Intermediary (bank or leasing company) PIU Project Implementation Unit SCL Single Currency Loan SMP StaffMonitored Program SOE Statement of Expenditure TSKB Tiirkiye Sinai Kalkinma Bankasi(the Borrower) Eximbank Tiirkiye Ihracat Kredi Bankasi(the Borrower) Vice President: Shigeo Katsu ~ CountryDirector: UlrichZachau Sector Director: FernandoMontes-Negret Sector Manager: LalitRaina Team Leader: Steen Byskov FOROFFICIAL USE ONLY PROEJCT APPRAISAL DOCUMENT Republic of Turkey FOURTH EXPORT FINANCE INTERMEDIATIONLOAN (EFIL IV) TABLE OF CONTENTS MAIN REPORT I STRATEGICCONTEXTANDRATIONALE.......................................................... . A Country and Sector Issues ........................................................................................ . 1 B. Backgroundand Rationale........................................................................................ 1 2 2 I1. C. Higher Level Objectivesto which the ProjectContributes ..................................... -2 A . LendingInstrument.................................................................................................. PROJECTDESCRIPTION.................................................................................... 2 B. Project DevelopmentObjective and Key Indicators................................................. 3 D LessonsLearnedandReflectedinthe ProjectDesign.............................................. C ProjectComponents.................................................................................................. 3 E. Alternatives Consideredand Reasons for Rejection................................................. .. 4 5 I11 PROJECTIMPLEMENTATION............................................................................... A PartnershipArrangements ....................................................................................... . . - 5 B. Institutionaland ImplementationArrangements...................................................... - 5 D. Sustainability........................................................................................................... -6 C. Monitoringand Evaluationof OutcomesResults.................................................... 6 -6 7 F Loan Conditions and Covenants................................................................................ E Critical Risks andPossible ControversialAspects ................................................... .. IV. APPRAISAL SUMMARY.......................................................................................... 8 9 A Economic and FinancialAnalyses............................................................................ . B. Technical................................................................................................................... 9 9 ................................................................................................................... 9 D. Social ..................................................................................................................... -10 C. Fiduciary E. Environment Category FI..................................................................................... - 10 F. SafeguardPolicies- OccupationalHealthand Safety inthe Ship-buildingIndustry ....................................................................................................................................... G Readiness................................................................................................................ . 10 11 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. iii TECHNICAL ANNEXES Annex 1: Country and Sector Background........................................................................ Annex 2: Major Related ProjectsFinancedby the Bank and/or Other Agencies .............12 16 Annex 4: Project Description ........................................................................................... Annex 3: Results Frameworkand Monitoring ................................................................. 17 18 Annex 6: Implementation Arrangements ......................................................................... Annex 5: Project Costs (millions) .................................................................................... 22 23 Annex 7: Financial Management, Audit and DisbursementArrangements...................... 42 49 Annex 9: Environmental Review Procedures.................................................................... Annex 8: ProcurementArrangements .............................................................................. Annex 10: Occupational Health and Safety inthe Shipbuilding Industry ....................... 55 57 59 Annex 12: Statement o f Loans and Credits...................................................................... Annex 11: Project Processing........................................................................................... 60 Annex 14: Map IBRD311OOR .................................................................. Annex 13: Turkey at a Glance.......................................................................................... 63 $64 iv TURKEY FOURTHEXPORT FINANCEINTERMEDIATION LOAN (EFIL IV) PROJECTAPPRAISAL DOCUMENT EUROPEAND CENTRAL ASIA ECSPF Date: April 25, 2008 Team Leader: Steen Byskov Country Director: UlrichZachau Sectors: Generalfinance sector (50%); Sector ManagerDirector: Lalit Raina Generalindustryandtrade sector (50%) Themes: Other financial andprivate sector development (P) Project ID: PO96858 Environmentalscreeningcategory: Financial IntermediaryAssessment LendingInstrument: Specific InvestmentLoan [XI Loan [ 3 Credit [ 3 Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: TotalBank financing (US$m.): US$197.4 million and65 million (US$300million equivalent) loan to Turkiye Sinai Kalkinma BankasiA.S. (TSKB) And US$]50 million and94.9 million (US$300millionequivalent)loanto Turkiye IhracatKredi BankasiA.S. (Eximbank) Proposedterms: TSKB - A flexible Loanwith fixed spread, levelrepaymentof principal, the final maturity of the loan i s 28.5 years includinga 7 year grace period. Eximbank - A flexible Loanwith fixed spread, levelrepaymentof principal,the final maturity Development Total: 0.00 600.00 600.00 Borrower: Turkiye Sinai KalkinmaBankasi(TSKB) and Turkiye IhracatKredi Bankasi(Turk Eximbank); Guarantor:Republicof Turkey ResponsibleAgency: Turkiye Sinai Kalkinma Bankasi(TSKB) and Turkiye Ihracat KrediBankasi (Turk Eximbank); Turkey V Projectimplementationperiod: Start June 30,2008 End:June 30,2013 Expectedeffectiveness date: July 15, 2008 Expectedclosing date: June 30, 2013 Does the projectdepart from the CAS incontent or other significant respects? Re$ PAD I.C. [ ]Yes [XINO Doesthe project require any exceptions from Bank policies? [ ]Yes [XINO Havethese beenapprovedby Bank management? [[ ]Yes [XINO ]Yes [ IN0 I s approval for any policy exceptionsought from the Board? Does the project include any critical risks rated"substantial" or "high"? Ref:PAD III.E. [ ]Yes [XINO .I Does the project meet the Regionalcriteria for readinessfor implementation? Ref:PAD I K G. [XIYes [ ]No .I Projectdevelopmentobjective Re$ PAD IIJ (i) Support exports by providingmedium and long-termworking capitaland investmentfinance to exportingfirms (ii) Improvethe ability ofthe financial sector to providefinancial resourcesto firms through developmentof financial intermediaries ProjectdescriptionRe$ PAD II.C., TechnicalAnnex 4 The first component (US$ 300 million equivalent)is a credit line to TSKB. The credit line will be providedto TSKB, with a government guarantee, which TSKB will pass on inthe form of subsidiary finance to participatingfinancial intermediariesfor further on-lendingto eligible privateexporters.The second component (US$296.3 million equivalent)is a credit line to Eximbank.The credit line will be providedto Eximbank, with a government guarantee, which Eximbank will on-lendto eligible privateexporters.The third component(US$ 3.7 million) will finance improvedrisk management capacity at Eximbank. Which safeguardpolicies are triggered, ifany? Re$ PAD N E . , TechnicalAnnex 9 Environment.The project has beenassignedCategory "FI" inaccordancewith World Bank safeguardpolicy OP/BP/GP4.0 1(EnvironmentalAssessment).All sub-loansto be financed underthe EFIL IV will be subjectedto a well establishedenvironmentalreviewprocess. Significant, non-standardconditions, if any, for: Re$ PAD III.F. Boardpresentation: None Loadcrediteffectiveness: None Covenantsapplicableto project implementation: See paragraph31 o f the PAD I. STRATEGICCONTEXTANDRATIONALE A. COUNTRYAND SECTOR ISSUES 1. Turkey sustainedstronggrowth inthe 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 Turkisheconomy continuedto 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/GDPat 17-22percent, however, was well below that o f 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 o f GDP in 2006 before slightly narrowing down to 5.7 percent in 2007. Private investment and export growth are therefore essential for Turkey's continuedeconomic 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 recognizedimpedimentto firms' expansioninTurkey (as highlightedby the 2007 Turkey InvestmentClimate Assessment). Exporters need investment finance to expandcapacity and to improve productivityto gain competitiveness.The February 2008 Implementation Completion and Results report for the EFIL I1project shows how credit line financing canhelp exportersgain 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 depreciatedby 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 (thoughthe 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 o f such risks; the project's relevancewould even increase iffinancial-sector liquidity were to tightenfurther. 4. Turkey's financial sector is increasingits lendingto 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 overcomethis impedimentto investmentfinance. 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, strengthenedcredit information on firms, and improvements to the use of movable collateral. B. BACKGROUND RATIONALE AND 6. The mainrationale for the Bank's involvement i s to address the development need for medium to long term funds for investment and mediumterm 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 proceededbetter than expected. c. HIGHER LEVEL 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. PROJECTDESCRIPTION A. LENDING INSTRUMENT 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 establishmentof interest rate caps and collars. B. PROJECTDEVELOPMENT OBJECTIVE AND KEYINDICATORS 11. The project's developmentobjectives are to: 0 Support exports by providing medium and long term working capital and investmentfinance to exportingfirms; and 0 Improve the ability of the financial sector to provide financial resources to firms throughdevelopment 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 o f Turkey's exports. 13. The project also aims to improve the quality, and safety of, and access to, finance throughdevelopment of financial intermediationinthe Turkishprivate financial sector by banks and leasing companies. Through development of project finance expertise and mediumand longterm lendingappraisal, the project indirectly supports capacitybuilding inthe financial institutions.Moreover,the project will, throughdialoguewith the banking and leasingsectors, deepenthe policy discussionsbetweenthe Turkishauthorities andthe 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 leadto a more sophisticatedinstitutionthat canprudentlycarry 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. PROJECT COMPONENTS 15. The proposed EFIL IV project will substantially maintain the design of its predecessor EFIL I11project which is currently being successfully implemented, but will have an additional Borrower Eximbank inadditionto TSKB. The project will have three components. The first component (US$300 million equivalent) is a replication of the EFIL I11project which i s a single-componentproject consistingof a credit line to TSKB as the Borrower and implementing agency. TSKB will intermediate the funds through PFIs, which inturn will on-lendto eligibleprivateexporters. 16. Inthe second component (US$296.3 million equivalent), Eximbank will borrow and act as an additionalimplementationagency lendingdirectly to exporters.Inclusionof Eximbank will expand the reach of the project into the shipbuilding and machine- building sectors. Eximbankwill focus on these sectors because of their promisingexport and growth potentials and because it is well placedto 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 23rdto now being ranking 6th in the world. A recent EU requirement that tankers entering member states' harbors to be double hulled has creatednew 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-buildingindustry 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 ofthe first componentand scales upthe development impact. 17. The third component (US$3.7 million) will finance improved risk management capacity at Eximbank. In addition to building back-upcapacity 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 requiredby regulators for operationalrisk management; Implementation of a ratings based credit appraisal system and monitoring as requiredunder Basel11; 0 UpgradedIT infrastructure to support the above improvements. Consulting services to assist in credit appraisal for sub-loans in shipbuilding and machinebuildingindustries 18. The Government of Turkey is providing a guarantee for the loans to Eximbank and TSKB. D. LESSONSLEARNED REFLECTED AND INTHE 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 minimumnumberof statutoryrequirements; e.g. avoidingconstraints likeminimumsub-loansize, maturity, currency denomination, sub-borrowerco-financing requirements, sectoral lending focus, etc., but using sensible financial indicators for the selection o f 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 ' Bridgefinance refersto the working capitaltied up inthe 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 ascertainthe potentialuptakeofthe funds. 20. The applicationprocess has beencloser aligned with existingbusinesspracticesat PFIs to speed up the implementationof the project. Eligibility constraints and reporting requirements that go beyondwhat 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 simplifyingthe applicationforms and cash flow analysis for PFIs and to a greater extent relying on existing credit appraisal practices. 21. The Implementation Completion Reports for EFIL Iand EFIL I1 noted that onerous environmental, procurement,and other project requirementstendto leadto funds being allocated more restrictively. The fixed costs incurred by these requirementsmake 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 leasingcompanies, loan sizes under EFIL I1were generally twice what they were for the leasing companies' entire portfolio indicatingthat 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 environmentalprocedureshave been streamlinedinthis spirit. E. ALTERNATIVESCONSIDEREDAND REASONS REJECTION FOR 22. Since EFIL IV i s being undertaken as a repeater project based on the success of earlier EFILs there i s limited rationale to search for other alternatives. One borrower in EFIL IV will again be TSKB (Turkish Industrial Development Bank). Similar development objectives and implementationarrangementsas in the EFIL I11facility 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. Giventhe absence of any material changes from the EFIL 111, the EFIL IV qualifies as a repeaterproject, which will continue to serve the needs of exporters and PFIs for medium and long-terminvestmentand working capitalfunds. 111. PROJECT IMPLEMENTATION A. PARTNERSHIPARRANGEMENTS 23. Through the series of EFIL operations and other engagements, the World Bank has built strong relationshipswith 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 IMPLEMENTATIONARRANGEMENTS 24. Component I will be implemented by an experienced team at TSKB implementingEFIL I11and two other World Bank projects. Component I1and I11will be implementedby a team at Eximbankconsisting of several memberswith experiencefrom the implementation of EFIL I. Eximbank has already established a PIU team for implementation,and the team as been engaged inthe preparationof 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 developmentcomponent. 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 exclusivelywill be servingthe ship-buildingand machine-buildingexporters. c. MONITORING EVALUATIONOUTCOMES/RESULTS AND OF 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 regardto (a) planned employment impact associated with the project, (b) financial performance of the Borrower and PFIs, and (c) loan distributionby PFI, firm size, sector, and geographicallocation. 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 monitoredthrough independentauditors' reports and separate letters confirming adherence to the eligibility requirements. TSKB and Eximbank will performoccasional consistency check and cross referencingfor 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 expandtheir client bases and hone their skills in making medium- and long-term credit. EFIL IV will enable them to demonstratethat mediumterm lendingcan be a profitablebusinessproposition.Exporters will build credit history with financial intermediariesand improve their financial records and documentationrequiredfor bank loans, thus improvingtheir ability to gain access to credit. These effects will be gradualand are expectedto be partially achievedthroughout the life ofthe project. 6 E. CRITICALRISKSANDPOSSIBLECONTROVERSIALASPECTS 29. The overall risk levelappears low, althoughseveral risks shouldbe considered: Macroeconomic performance: A global economic slow down i s 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 consideringthe currently low level of credit there should still be demand for medium-termcredits. Systemic liquidity contraction: The internationalcredit 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 providedby the project are longterm, they help boththe financial intermediaries and the sub-borrowersmanage liquidity risk, and thus the project becomes increasinglyrelevant inthe face of financial outflows from Turkey. The earlier successful implementationof 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-performingloans ratios than the banking sector in general, and the loanperformancewill be monitoredduring 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 attemptsto address improves, i.e. ifmedium 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 implementationtime period. Inadequate implementation capacity of Borrowers: The large loan amount requires strong implementation capacity of the borrowers. TSKB is already successfully implementingthe EFIL I11project as well as two other World Bank credit lines, and there i s little risk that it will not be able to successfully continue. Eximbank was the borrower and successfully implementedthe 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 demandfor 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 i s 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 implementthese 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 managementand procurement, and because most transactions are betweenprivate 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. Inaddition, 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 bankingregulator. F. LOAN CONDITIONSAND COVENANTS 30. Effectivenessconditions: 0 None. 31. Generalcovenants: 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 resourcesas requiredfor effective project implementation. 8 0 The Borrowers will each monitor project performance in accordance with the operationalmanual. 0 BothBorrowers shall implementcredit lines inaccordancewith the provisions of the LoanAgreementsand OperationalManual, includingthe eligibility criteriafor PFIs and BeneficiaryEnterprises, agreeduponterms and conditions for on- lendingand monitoringand reportingrequirements IV. APPRAISAL SUMMARY A. ECONOMIC AND FINANCIAL ANALYSES 32. As there is no clear way of defining the project costs, a traditional economic/financialanalysis cannot be conducted. The approachtaken is to measure the development results in relation to the amounts intermediated as shown in the developmentframework (Annex I). B. TECHNICAL 33. Provisions are includedin 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 conditionof bothBorrowersis good, they have proventheir ability to maintainlow non-performingloans ratios, and the capacity to implement the project i s viewed as strong. (See Annex 6 for additionaldetail onthe Borrowers). C. FIDUCIARY 34. The project financial management systems at TSKB and Eximbank have been assessedby the task team. The current financial management arrangementsfor the project are satisfactory at bothbanks.All o f 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. FinancialManagement 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 procurementproceduresof the Bank, the procurementrisk at TSKB is ratedlow. Though Eximbank was a borrower for the EFIL I,it is engagingwith 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 procurementperformance of each bank will be reviewedannually. 9 D. SOCIAL 35. By increasing access to finance and growthof private sector it is expectedthat the operation will have a positive impact on employment. Because of the widely dispersed nature o f the project, it i s not expectedto have materialsocial impacts. E. ENVIRONMENT - CATEGORY FI 36. The project has been assigned Category "FI" in accordance with World Bank safeguard policy OP/BP/GP 4.01 (Environmental Assessment). All sub-loans to be financed under the EFIL IV will be subjectedto a well establishedenvironmentalreview process. TSKB is currently implementing the procedures successfully, Eximbank has experiencefrom the first EFIL project, and EFIL IV team has discussedthe 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. Environmentalreviewproceduresare describedinAnnex 9. F. SAFEGUARDPOLICIES OCCUPATIONAL HEALTH SAFETYINTHE SHIP- - AND 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 givento qualifiedshipbuilders.Details are providedinAnnex 10. Safeguard Policies Triggered by the Project Yes No EnvironmentalAssessment (OP/BP 4.01) [ 41 11 NaturalHabitats(OP/BP 4.04) [I [ J Pest Management (OP 4.09) [I [JI [JI1 PhysicalCultural Resources (OP/BP4.11) [I InvoluntaryResettlement(OP/BP 4.12) [I [JI IndigenousPeoples (OP/BP 4.10) [I [JI Forests(OP/BP4.36) [I [JI Safety ofDams (OP/BP 4.37) [I [JI ProjectsinDisputedAreas (OP/BP 7.60)* [I [JI Projectson International Waterways(OPBP 7.50) [I [JI * By supporting theproposed project, the Bank does not intend toprejudice thefinal determination ojtheparties` 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 beenlimited 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 investedin a few large firms and ingovernment securities. Therefore, the financial sector has neither allocated capital to the private sector efficiently, nor has it diversified risks for investors. 2. Improved allocation o f 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 o f GDP, but much of the growth has been in consumer credit, and inadequacies remain in the Turkishcredit market, where financial reporting i s 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 i s 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 inthemselves. Figure 1:Nominalinterestrate, 2005 Figure2: Average loan maturity, 2005 251 Source: BEEPS Source: BEEPS 12 4. Econometric evidence suggests that finance can help support exports. Access to finance i s 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 o f total liabilities i s reflected positively inexports 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 indollar 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 o f exports have also continuously changed towards more high tech products, such as automotive, electrical and electronic equipment and machinery since 2001,boding well for the sustainability o f future export growth. 6. However, Turkey's export figures are relatively low in comparison to those o f other recently industrialized economies and EU countries. It i s also important to note that Turkey's `export propensityYy2which i s a measure o f the relative importance of manufactured exports within the overall manufacturing activity in the country, appears relatively high. This confirms that Turkey i s successfully competing in the global economy and suggests that it has further potential to increase its industrial capacity (Figure4). Export propensity is calculatedas the value of manufactured exports divided by the added value of total manufacturing activities within the country. This ratio can be greater than 100percent because the numerator is in total terms while the denominator is only the added value, as opposed to the total output. 13 Figure3: Exportsand imports Figure4: Manufacturesexports as a share of GDP and manufacturingexport propensity (2004) v) 70 60 z 6 0 100%T T 3.5 fi 50 90% 50 4 3.0 *"40 'H 40 8 i5 e-3 20 B a 70%80% 0 2.5 't 8 30 30 $ 50% 60% 2.0 8 20 1.5 1g 40% r 10 I O 30% 1.0 0 0 20% 0.5 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 10% - I (nghtaxis) ExpoiVGDP 0ImpoiVGDP(nghtaxis) 0% -Export (left axls) -Import (left axis) Source: Central Bank of Turkey. Manufacturingexparts / GDP tExport propensity Source: UN Comtrade and WorldBank WDI. 7. Turkey's export growth has been faster than in most comparator Figure5: AnnualAverage Growthof Exports countries in recent years (figure 5). (In ConstantUSDTerms)of Goods and The average annual growth rate of Services exports in volume terms has been consistently inthe 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 countries analyzed only China has 5 observedmuchhigher export growth I L O rates thanthose observedinTurkey. 392- 1999 2000-2002 2ou.3-230s 8. The sustainability of high growth will eventually depend on the capacity of the Turkish economy to maintainand further improve its competitivenessby investing inthe industry. 9. The EFIL IV aims to address the development need for the sector by providing medium and longterm funds for investmentand working capitalto the exporters. Access to EFIL IV will enable a diverse group o f 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 downwardsloping line in (Figure 6) have become increasingly international. Both Shipbuilding and 14 Machine Exporters have along with motor vehicles and trailers and manufacture o f account for a large part o f Turkey's integration into the global economy. 10. The shipyard industry in Turkey has Figure 6: Trade Performance of Turkish Sectors jumped from 23rd rank in 1996-Today terms of dead weight tons (DWT) in 2002 to 6th rank 3.0 in 2007. They rank 1'' in Machinery and Motor0vehicles? small tonnage chemical tanker and 4th in mega 8Q 2.0 equipm OtherTransport (Shipbuilding) f /--, J yacht building. In 2002, 37 Manufacture of basic metals shipyards were operational 8 1.0 .5 '. apparab2,'products,etc 0 0 which has beenexpanded to 0 /' '/' Chemicals,etc 65 in 2008. Plans are under 6t 0.0 way to expand them to 125 f with a 9.2 M DWT/year Crude petroleum and natural gas capacity making it # 4'h in -1.0 the world. The exports have -1.0 0.0 1.o 2.0 3.0 increased to US$1.4 billion Change in ImportdGDP in 2006 up from US$231 Source: Turkstat. millionin2006. *: Today reflectslast quarter of 2005 and first three quarters o f 2006. 11. Similarly the machinery and accessories sector has undergone tremendous growth. They account for 7.1% o f total exports and stand at US$7 billion. The sector i s increasingly becoming more competitive and helping spur the industrialization o f the country. 15 Annex 2: Major RelatedProjectsFinancedby the Bankand/or Other Agencies 1. The proposedEFIL IV is a repeater project of the predecessors EFIL I,I1and 111. The first EFIL was implementedduring 1999-2003and was very successful indisbursing 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 intermediaryparticipation, as measuredby the number of PFIsparticipatinginthe project was high with 11 PFIs. The impressive trend continued with the third EFIL and the amount (US$300 million) is expectedto be fully disbursedby 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 RenewableEnergy Loan World Bank Energyfirms $202M SME Financing World Bank SMEs 160M SME Financing World Bank SMEs $48M SME Development GlobalCredit EIB SMEs E300M SME Global Loan IV EIB SMEs E250M SME Global LoanV EIB SMEs 250M Autoproductor and Energy Project EIB Firms 40M TSKB APEX Loan EIB SMEs 150M 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 Franqaisede DBveloppement SMEs 20M JBlC SME Credit Line JBlC SMEs JPY27BN CEB Credit Councilof Europe DevelopmentBank SMEs ZOOM Small Enterprise Program EU, KFW, CEB SMEs 75M KMI Industrial Pollution Prevention Loan Kreditanstaltfur Wiederaufbau SMEs 9,7M Source: TurkishTreasury 16 Annex 3: Results Framework and Monitoring Support export competitiveness Sources: Nationalaccountsand by providingmedium and long Private investment/GDP financial statistics as published by term working capitaland Exportgrowth the Central Bank and BDDK. investment finance to exporting Creditto the private sector/GDP firms NBFI assets/GDP Increasedexports by participating Exportmultiplier: Incremental Source: Project reporting. exporters export growth by participating exporters /disbursed loan amounts, Targets: >1 Increasedmediumand longterm Amount disbursedto exporters. Source: Project reporting. lendingto participatingexporters Target: disbursement projections. Increasedscope of participating Number of banks and leasing Source: Project reporting. financial intermediaries companies includedinthe project.Target: 6 Sub-loanperformance inproject Non-performingloans/total loan Source:Project reporting. to be measured in number of loansas well as amounts. Target: <5 percent. Improvedrisk management Successfulimplementation of capacity at Eximbank Eximbank's technical capacity for future compliance with BDDK's Basel I1related requirementsfor risk management practice Investmentsby sub-borrowers Amount of investmentsplanned Source: Project reporting. in projectssupportedby 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, Thefirst component (US$300 million equivalent) is a replicationof 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-lendingto eligibleprivateexporters. 2. Inthe second component (US$296.3 million equivalent) Eximbank will borrow and act as an additional implementationagency 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 placedto serve these sectors due to its establishedrelations. 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 bettermanage operationalrisk and upgradingthe existing IT systems in, it will help the bank infor BaselI1implementationthat started inJanuary lSt,The component will 2008. include: Improved emergency management and the establishment of disaster recovery center as it will be requiredby regulators for operationalrisk management; 0 Implementation of a ratings based credit appraisal system and monitoring as requiredunder Basel11; UpgradedIT infrastructure to supportthe above improvements. 0 Consulting services to assist in credit appraisal for sub-loans in shipbuilding and machinebuildingindustries 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 independentexternalauditors 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 FinancialReporting Standards; and (ii)hasanunqualifiedauditopinion,exceptastheWorldBank shall otherwise agree; PFI and Sub-BorrowerEligibilityCriteria 1. Selection of ParticipatingFinancialIntermediaries: PFIs will be selectedbased their expressionof interest inparticipatinginthe project and on acceptance by TSKB o f their creditrisk as well as the following eligibility criteria: 2. For banks: e Total assets during the last two years to exceed a minimum o f US$500 million equivalenton 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 certifiedby the banks' auditorsevery year and confirmed by management as of June 30fhevery year e Audited IFRSfinancial statements 3. For leasingcompanies: e Total lease receivables during the last two years (for which data are available) to exceed a minimumofUS$30millionequivalent on average e New lease volume during the last two years (for which data are available) to exceeda minimumof US$20 millionequivalent on average e Compliancewith BDDK prudentialnorms e General compliance with legal and regulatory requirements applicable to the leasing industry, includingbut 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, andthe total sum of exposures to relatedparties not exceeding 15 times the equity capital, duly certifiedby the leasingcompanies' 19 external auditors every year and confirmed by management as o f June 30thevery year Auditedfinancial statements as per BDDK requirements The leasing company should have been profitable for at least two out o f the last three years o f operations 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 o f exports. The prospective sub-borrowers must prepare and present a complete sub-loan package consisting o f 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 o f the sub-borrowers will be assessedby the PFIs, subject to the minimum requirement that the sub-borrowers maintain a maximum debt equity ratio o f 85:15 and an average debt service coverage ratio o f 1.1: 1 (both after receipt o f the sub-loan and or lease) unless agreed otherwise by the World Bank. The World Bank, incoordination with TSKB, will carry out a prior review o f the first two sub-loan applications o f each o f 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 o f sub-loan applications exceeding US$5 million. For the first two sub-loans with existing PFIs o f EFIL I1and 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. ForEximbank: 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 independentexternal auditors on an annual basis; For the duration o f the project implementation period, beginning with year-end 2005, submission o f an audit report, that i s (i)prepared in accordance with International Auditing Standards and International Financial Reporting Standards; and (ii) anunqualifiedauditopinion, exceptastheWorldBank has 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 prospectivesub-borrowers will have to prepare and present a complete sub- loan package consisting o f Eximbank credit application form and such other information which Eximbank and the Bank could reasonably request, as well as satisfy the procurement and environmentalrules 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 requirementthat the sub-borrowersmaintaina maximum debt equity ratio of 85:15 and an average debt service coverage ratio of 1.1: 1 (bothafter receiptofthe sub-loan) unless agreedotherwise by the World Bank. 0 The World Bank, in coordinationwith 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: ProjectCosts (millions) Component Local Foreign/Total Credit Line US% e TSKB (TBD) 197.4 65.0 Eximbank 146.3 94.9 InstitutionalDevelopment 3.7 Eximbank Total Project cost 347.3 159.9 22 Annex 6: ImplementationArrangements 1. TSKB is the borrower for the Component Iof EFIL IV, and the Undersecretariat o f Treasury will providethe guarantee to the World Bank on behalfof the Government o f 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 implementationof EFIL IV. The PIU's responsibilities, functions and staffing details are given inthe OperationalManual. The profile of TSKB andthe working arrangementsare givenbelow inannex 6.1 2. Eximbank is the borrower for Component I1and I11 and the Undersecretariatof 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 i s 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 inthe EFIL Iproject and currently is the borrower of the EFIL I1 and EFIL I11Loans. 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 auditedreports and other financial reporting requiredunder the projects. TSKB maintains an overall sound financial and operational structure, and i s fit to undertake the financial liability and operational commitments of Component Iof the EFIL IV. Table 1: TSKB Key Indicators T S K B T S K B 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 mainbusiness 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 i s 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 i s held by non-strategic investors and are traded on Istanbul Stock Exchange (see Annex Figure I. 1below). As o f 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 i s seen as sound. 24 Figure1: Ownershipof TSKB lsbank(Turkey'slargest Vakifbank (Large state owned private bank), 50%-sit tybank),8% \ Stock Exchange,42% Source: TSKBwebsite. Suitability of TSKB as Counterpartfor Component1 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. FinancialSoundness and Risk Exposures 5. TSKB i s a profitable and solvent bank with a sound liquidity position and moderate market risk exposures. It has a large credit portfolio mostly inforeign 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 i s viewed as a sound bank. 6. TSKB i s rated by both Fitch Ratings and Moody's and receives ratings in line with the largest and best rated banks inthe 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 GarantiBank ForeignCurrencyLong Term Issuer Default Rating BB- BB BB BB ForeignCurrencyShort Term Issuer Default Rating B B B B Local CurrencyLong Term Issuer Default Rating BB+ BBB- BBB- BBB- Local CurrencyShort Term Issuer Default Rating B F3 F3 F3 Source: Fitch Ratings. Note: Ratingsas of December, 2007. Table 3: Ratings by Moody Ratings TSKB Akbank Isbank GarantiBank FinancialStrengthRating D+ C- D+ C- ForeignCurrencyLong Term Rating B1 B1 B1 B1 Source: Moody's Ratings. Note: Ratingsas of April 2007. 7. Solvency. TSKB has increased its equity, which now amounts to US$634 million or 15.1 percent of assets, which i s in line with the Turkish banking system. On a risk weighted basis, the capital adequacy ratio o f 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 o f loans. The bank is, indeed, well capitalized. Table 4: Solvency Banking Svstem TSKB - I Percent 2007 2007 2006 Tier l/risk weightedassets 17.9 24.2 28.9 Capitaladequacyratio 19.5 27.6 32.9 Capital/totaiassits 13.2 15.1 14.5 Source: Banks Association of Turkey and staffcalculations. Note: The bankingsystem reflects September data, and TSKB reflectDecember 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, reflectingthe use of mortgagecollateral. 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 reductionin NPLs reflect mostly collections on existing NPLs, while write offs were about a third of collections.Gross additionsto NPLs in2006 and 2007 and were just US$3 million Thus, the performance of TSKB's loan portfolio is highly satisfactory. TSKB provisions its NPLs 100percent, which is a conservativeprovisioningpolicy. 10. Almost all of the TSKB's outstandingloans are in foreign currency. In case o f 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 beingpricetakers inexport markets.However,even exportersare not perfectly hedged, and collateral value will typically depreciate, and this indirect exposureto exchange rate shocks therefore remains a concern. On balance, TSKB's loan portfolio has a moderatecredit risk profile. 11, Profitability. TSKB's profitability i s 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 operationsand inpartthat 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 interbankmoneymarket 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 becauseit does not collect deposits andhas a longterm fundingbase and therefore is able to extend loans with maturities more or less matchingthe funding it receives. Moreover, since its balance sheet i s dominatedby foreign currency, the bank i s not very exposed to fluctuations in local currency interest rates. TSKB has manageable short net foreign positionamountingto 3.1 percentof its capital. OperationalPolicy 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 statementsprepared 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 31, 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 December31,2007, was infull compliance with the applicable banking laws and regulations o f the BDDK. Prudential financial ratios (as per audited and published financial statements prepared according to BDDK regulations) o f TSKB given below, affirm a strong financial structure as o f December 31,2007. - 2006 2007 - 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 o f the bank's loan book. Thus, the performance of TSKB's loan portfolio is very good - see also section on credit risk and loanportfolio 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 o f the World Bank. Under this operation, TSKB will be lendingto 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 o f its borrowings are from foreign banks and institutions (US$2,626 million). Rather than an inability to mobilize domestic resources, the predominance o f foreign bank liabilities reflects TSKB's ability to attract them at more favorable terms. (e) adequate managerial autonomy and commercially oriented governance TSKB is apublicly traded privately owned andprofitable bank that makes decisions on a commercialbasis. 28 &I appropriate prudential policies, administrative structure, and business procedures TSKB i s 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 o f financial management i s beingconducted and is attached inAnnex 7. 29 Annex 6.2: Profile of the Borrower-ComponentI1and I11-Eximbank 1. Eximbank is Turkey's official exportimport bauexport credit agency and was established in 1987 as the successor institutionto 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 innewly 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 allocatedto retainedearnings. 2. Eximbank was the borrower and implementing agency for EFIL I and implementedthat project successfully. The team that implementedEFIL Iis mostly still at Eximbank, and the PIUteam for EFIL IV i s mostly comprised of staff with experience from EFIL I. Legal Foundation 3. Eximbank was establishedby 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 mandatedthe use of two classes of shares- A and B - which differ from each other only insofar as the Class A shares (representing 51 percent of the total number o f shares) must remain inthe ownership of the Treasury, while the Class B shares (representing49 percent)may be transferredby 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 registeredinthe Trade Registry. CorporateGovernanceand OrganizationStructure 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 undersecretariesof economy-relatedministries headedby 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 extendedand insurance & guarantee cover to be issued either on an aggregated basis or by countries, sectors and product groups. The Boardof Directors ofthe Bank is obligedto observethese limits. 5. Board of Directors. The Board of Directors is chargedwith 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 responsiblefor Eximbank.This is an interim arrangement, pendingthe holding of the first general shareholders meeting which would occur upontransfer of some or all o f the Class B shares by the Treasury, after which four Directors would be electedby the holders of the Class A shares and the remainingtwo by the holdersof 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 severalofthe powers of the Boardof Directorsare delegated. 6. Senior Management and Stafl The CEO is assisted by four Deputy General Managers. As of year-end2007, Eximbank employed 392 staff (including Directors), 66 of whom have a post-graduate degree and 196 have a graduate degree. The average lengthof employeeservice is around 17 years and the average age 41 years. Productsand 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 projectsto be undertakenby 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. Duringits first years of existenceEximbank has concentratedon the provisionof 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 projectfinance, while leavingshort-termtrade finance to Turkishcommercialbanks. 9. Inline with the annual programsendorsedby the SupervisoryBoard, Eximbank's facilities are structuredto reflect strategicpriorities 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, i s the only facility carrying a preferentialinterest rate (1 percentbelow comparableTL interest rates on other facilities). 31 I I I II I I II I I I I I I I I I I I II I I I IIII I I I I I I Sources of Fundingand AssetLiability Management 10. Eximbank's main sources of funding are its capital base, provided directly by the Turkish Treasury which i s the 100 percent owner o f the bank, local and foreign commercial banks loans, loans from other export credit agencies and international financial institutions (IFIs), and, since 1997,borrowing ininternational capital markets. Funding compositionhas beenas follows: Figure 1: BalanceSheet-LiabilityComposition 7 -~ TURK EXIM Bank Balance Sheet-Liability Composition Q InternationalSources I Domestic Sources 16~ Debt Securities lssued Other 2003 2004 2005 2006 2007 11. Eximbank i s essentially running a matched book both as concerns the maturity and the currency composition o f its assets and liabilities. Short term TL export credits are funded by the TL capital base; short term FX export credits are fundedby 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 i s hedged through the use o f currency swaps and forwards. As a result, Eximbank has very limited FX exposure o f 5 to 10 million US$average (duringthe 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 o f its liability base. Since Eximbank does not accept customer deposits, its main sources o f funding are bilateral funding from commercial banks, raising money inthe international loan and capital markets, and direct funding from the TurkishTreasury by way o f capital injections. As of September 2007; the outstanding fundingportfolio ofthe Bank consists of; --- A syndicated loan inan amount US$50 Millionwith a maturity o f 1 year, A syndicated loan inan amount of EURO225 Millionwith a maturity o f 1year, Another syndicated loan in the amount US$175 Million with a maturity o f 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 inthird 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 inthe amount of EURO 15 million. Assets compositionand 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. Figure2: BalanceSheet-Asset Composition For short term TL export I credits, Eximbank's stated I ~ TURK EXlM Bank Balance Sheet-Asset pricing policy i s to provide II Composition funding to exporters at 2-5 1 percent below local money market rates as of 2007. As its TL denominated capital base i s the main source of funding, i Eximbank still earns a 0Securities 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 overheadcosts. 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. Inthe context of the EU CustomsUnionbetweenTurkey and the EU which was establishedin early 1996, Turkey adopted OECD Consensus Arrangement principles and provisions set by Council Decisiono f the EU on officially supported export credits. Eximbank'smedium 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 lendingspreads 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 remainsufficiently positiveto cover its operating costs due to its zero TL cost capitalbase. 15. Eximbank's export credit insurance operations are short term in nature. Although total export insurancecoverageturnover reachednearly 4.7 billion US$in2007, premium incomestill constitutes only a smallportion of Eximbank'snet income(7.4percent in2007). 16. For both its short and medium/longterm export insurance cover, Eximbank's premium rates are comparable to those of other export credit agencies, as evidenced by the disclosures in this respectmade by all exportcredit agencies to the BerneUnion. 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 higherthan Turkey's sovereignrating Table 1: Ratingby S&P Eximbank Foreign Currency LongTerm Issuer Default Rating BB- Foreign Currency Short Term Issuer Default Rating B Local Currency LongTerm Issuer Default Rating BB Local Currency Short Term Issuer DefaultRating B Source: S & P Ratings., March 2008 CapitalAdequacy and Asset Quality 18. The Law No. 3332 establishingEximbank provides in Article 4 (C) that losses incurred by the bank inits 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 Procedureson November 6, 1997 setting out the proceduresby which claims for reimbursement are to be made. Eximbankmust 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 consolidatedcentral Government annual budget for the following year. Ifapprovedfor inclusion inthe budget, payment will be made to Eximbank, following approval of the budget, at the time budgetary payments are made. To date, this mechanismhas 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 i s 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 i s 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 i s able to monitor bank risk, there is some room for improvingthe analytical techniques being usedwhich 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 reinsuredwith prominent reinsurance companies such as Munich Re and Swiss Re. Medium term insurance cover is mainly for political risk and thus default risk i s again born by the Treasury. Loan Loss ProvisioningRules; 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 suchprovisions. However, although Eximbank is not legally obliged to, it has done and will continue to implement its long-standing conservative approachto provisioning. (1) Specific Provisions-Provisions for non-performing short-term loans - theamount 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 receivablesamounting to TRY 46 million as at December31,2007. (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 107million. Earningsand 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 Figure3: Incomeand ExpenseAnalysis TURK EXlM Bank-Income and Expense Analysis 700.000 - 600.000 -eNetInterestincom 500.000 +Net income I- 400.000 C Loan Loss Q 3 300.000 Rovision Expense Ff0 I Other Operating 200.000 Expense +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 returnon assets and returnon equity consequentlyhas improvedover the last four years: Table 2: Eximbank-ReturnAssets/Returnon 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 o f Eximbank has remainedrelatively stable duringthe 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 LIABILITIESAS PERCENT AS PERCENTOF TOTAL ASSETS (%) OF TOTAL LIABILITIES (%) 25. As Eximbank's short-term pre-shipment credits are mostly self-liquidating, Eximbank should be in a positionto generate enough liquidity from its short term loan portfolio in case it would face sudden liquidity needs beyondits readilymarketable 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-termexport credits are extendedwith 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 inthe following table: 38 Table 3: Loan Portfolio 31.12.2007 (000 YTL) nt'lTransportMarketing RiskManagement Practicesat Eximbank 27. After the issuance of the Basel I1 accord and EU's directive to adopt it, the BDDK decided to implement Basel I1for banks in Turkey and publishedin 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 implementationon January ISt, 2008 of the standardized approachfor scoring models with the advanced approach to be implemented a year later. The schedule was delayedby a year, so the ratingsmodelsmust now be inplaceby January Is`, 2009. 28. Inresponse, Eximbank's Boardof Directorshas approved"Bank's RoadMap for Basel 11" in October 2005. Within the framework of the roadmap, a re-organizationwas 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 implementBASEL I1rules pertaining to the credit risk at the beginningof 2009. Inaccordance 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 o f Directors has recently approved the procedure o f review and adjustment o f financial statements o f the companies. The Bank is planning to use IBRD credits' institutional development component to finance necessary expenditures inregard to the establishing o f credit risk modelincluding scoring system and market risk model. The likely approach to establishing a scoring model for firms i s to purchase software, build date over the first 5 years, and then implementthe internal ratings basedmodel. 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 o f 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 beingmet 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 i s 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 31, 2007 audited financial statements were prepared by independent auditors (PricewaterhouseCoopers) according to BDDK standards. The audit opinion was unqualified and certified that Eximbank as o f December 31, 2007, was in full compliance with the applicable banking laws and regulations o f the BDDK. Prudential financial ratios o f Eximbank given below (as per audited and published financial statements prepared according to BDDK regulations), affirm a strong financial structure as o f December 31,2007. - - - 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 lendingoperations. (c) appropriate capacity, including stafJing, for carrying out subproject appraisal (including environmental assessment)andfor 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 directlyto firms, which i s a commonactivity for Eximbank. (d) capacity to mobilize domestic resources Eximbank is not allowed to collect deposits, but it is rated by international ratings agencies and i s borrowinginternationally. (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 i s committing to makingdecisions on a commercialbasis in the EFIL IV project. appropriate prudentialpolicies, administrative structure, and businessprocedures Eximbank is subject to bank regulations and appears to follow a prudent approach to risk management.A separate assessment of financial management is beingconducted and is attached inAnnex 7. 41 Annex 7: FinancialManagement,Audit and DisbursementArrangements 1. The overall financial management risk for EFIL IV is moderate. A summary of the risk assessment for the project i s as follows: Table 1: Summary of RiskAssessment FM Risk Risk Mitigating Measures Residual Rating Risk InherentRisk Country Level. Moderate There is a well functioningbankingsystem regulated Moderate Specialized regulatory by the BankingRegulationSupervisoryAgency. 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 ControlRisk Budgeting - ,Both banks Low Low have their own budgeting procedures and the project will be taken into consideration in budget formulationsand 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. Disbursementsfrom the loan account will be made upon submission of invoices by the beneficiary enterprises. Funds Flow. Traditional Low Low disbursementwill be used. Financial Reporting Low Low Auditing - Both bank are Low Low required to submit audited financial statements to Overall Control Risk Moderate Low Overall FM Risk II Moderate II 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 o f public funds, incomplete audit coverage, weak forces o f public accountability, narrow accounting model and procurement risks. Main findings in the private sector accounting and auditing point to the existence o f a regulatory approach where specialized agencies each devise and enforce their and different obligations without adequate coordination and where there i s 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 determinedby the Banking Regulation and SupervisionAgency (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 o f auditor must also be approved, and a change can be imposed where there i s dissatisfaction with the performance o f the auditor. The external auditor i s requiredto 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 o f 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 inthe banking law and regulations issued by BDDK. Also, the participating financial leasing companies are requiredto be in compliance with the BDDK prudential ratios set forth in the regulations issued by BDDK. Banks and financial leasing companies inTurkey are requiredto 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 o f 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 incompliance with IFRS,where all participations are subject to consolidation 5. The BDDK also issues rules governing the external audit o f 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 quarterlyprudentialreports are preparedin accordancewith the decree26430 datedFebruary 10,2007 modified by the decree 26651 dated September22,2007. 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 arrangementsfor EFIL IV.Eximbank, which is the new implementingentity inEFIL IV is also a very experienced through its role as the implementing institution for the EFIL Iand had satisfactory FM arrangements duringthe implementationofEFIL I. Weaknesses and Action Plan There are no specifiedfinancial management weaknesses for the project. The ImplementingEntity 7. TSKB will continue to be an implementing entity of EFIL IV. TSKB was established in 1950 and is one of the leadinginvestmentbanks in Turkey. The current EFIL I11implementation arrangements inTSKB where a PIUteam comprisingof experiencedand qualified staff oversees the implementationand coordinationactivities is satisfactoryto the WorldBank. 8. There will also be a new implementing entity for the repeater project; Eximbank. Eximbankwas the implementingentity 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 mandatedto support foreign trade and Turkish contractorshnvestorsoperating overseas. A PIU team is designatedin Eximbank under the supervision of one of its deputy general managers to oversee the implementationof EFIL IV. The designated staff will also be responsiblefor the coordinationof the project activities. The staffs inEximbank's PIU team includesthose who worked previously underEFIL Iand are very experiencedandhighly qualified. The risk associatedwith implementingentity 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 projectto its ownbudgetingprocedures. The risk associatedwith budgetingis assessedas low Accounting 10. Staflng. Bothbanks will use their own staff for the financial managementof the project. The staffs assigned to work on the project both inTSKB and Eximbank are highly qualified and experienced.There is a clear segregation of duties betweenthe staff with respectto evaluationof applications, accountingand reporting. 11. Information systems. TSKB uses a web based application, approval and monitoring system for the ongoing EFIL I11where 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 usingthe systemand are able to monitor the status of each applicationreal 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 usedfor 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 prudentialreports directly from the system. Since Eximbank will act as a retail bank inEFIL IV the project accountingwill be fully integratedinto its own system. 13. Accounting Policies and Procedures. The project operationalmanuals (OM) for EFIL IV preparedby TSKB and Eximbank separately are detailedabout the work flows inthe project and they also includethe formats ofthe InterimUnauditedFinancialReports. The risk associatedwith accountingis 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 transmittedto the intermediarybank.Followingthis approvalprocess the intermediarybanksand the beneficiary enterprises could then send invoices for withdrawals. When this i s 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 completedthe 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 accountingrecordsautomaticallythrough the system. Copiesof invoices relatingto sub-loansextendedby the PFIsto their clients are sent to and kept at TSKB. 15. Eximbank will use its own internal control systems for the implementationof 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 beneficiaryenterprises request i s processedfunds 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 regularreviews. The risk associatedwith internal controls and internal audit is low. 45 Funds Flow 17. There will be two special accounts inthe name of TSKB, one inUSD and one inEuro for the project. Fundsfrom the loan will be made available to PFIs following submissionof 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 o f 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 USDtranche and 18.94 million for the Eximbank for the EURtranche, may be made inrespect o f Sub-loans or Lease Financing made inaccordance with criteria and procedures set forth inthe Loan Agreement and Operational Manual before that date but after July 1" 2007. Financial Reporting 19. Bothbanks will maintainrecords 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 o f funds, project uses o f funds by PFI and project uses o f 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 o f funds (separately in US Dollars and Euros), project uses of funds by loan customer and sector separately inUS Dollars and Euros 22. The IUFR templates will be attached to the Minutes o f Negotiations. The OMSfor the project also include the format o f the 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 inaccordance with International Auditing Standards by Price Waterhouse Coopers (PWC). The last three years' audit reports (in accordance with IFRS) are reviewedand all were unqualified. Audit of the EFIL IV financial statements (project sources and uses o f funds and designated account statement) will be integratedinto the auditors TOR. Eximbank has been engagingthe services of international auditors and the former auditing arrangementsunder 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 DueDate 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 o f funds and project. designatedaccount statement The risk associatedwith audit is low. B. DisbursementArrangements Eachbank will have two designatedaccounts (DA); one in Euros and one inUS 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-indicatedintheir list of authorizedsignatures. Applicationsdocumentingeligible expenditureutilizedfrom the DAs will be submittedto the Bank on a quarterlybasis, and will include a reconciledbank statementas well as other appropriatesupporting 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 prepareand authorize their withdrawal applications. Disbursementswill be made on the basis of full documentation for Component C (a) contracts for goods costing more than the equivalent o f 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 certifiedStatement of Expenditure(SOEs). Full documentationin support of SOEs would be retainedby the banks for at least two years after the Bank has receivedthe 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 o f SOE disbursements andthe quality ofthe associatedrecord-keeping. C. SupervisionPlan 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- accreditedfinancial management specialist will assist inthe supervisionprocess. 48 Annex 8: ProcurementArrangements A. General 1. Procurementfor the proposedproject would be carried out in accordance with the World Bank's "Guidelines: Procurementunder IBRD Loans and IDA Credits" datedMay 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 arrangementsare describedbelow. B. Procurementof Goods and Works under Export DevelopmentSub-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 o f the ProcurementGuidelines. Care has to be taken o f other relevant factors such as time of delivery, efficiency and reliability o f the goods and availability of maintenance facilities and spare parts thereof, and in case of non-consultant services, o f the quality and competence of the parties renderingthem. Advertisinginthe local and internationalpress will not be mandatory.However, International Competitive Bidding (ICB) would be required for individual contracts above US$lO.O million for goods and related services in accordance with Section I1 of the World Bank's ProcurementGuidelines. All procurement of goods and related services under contracts above US$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 financingout ofthe Loan. 3. Procurementof Works: Procurementof works financed underthe proposedprojectwill be accordingto the World Bank ProcurementGuidelines. For civil works estimated to cost less than US$l0.0 million equivalent per contract, established local private sector commercial practices will be followed in accordance with paragraph3.12 o f the World Bank's Procurement Guidelines. Care has to be taken ofthe capacity ofthe contractorsandthe cost and quality ofthe works. Advertising in the local and international press will not be mandatory. For contracts above US$lO.O million, International Competitive Bidding (ICB) would be required for individual contracts in accordance with SectionI1of the World Bank's ProcurementGuidelines. All ICB contractsfor works shall be subjectto prior reviewby the World Bank. Contracts placed by sub-borrowersontheir subsidiary or affiliated companieswill not be eligible for financing out ofthe 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 i s to prepare the technical specifications and solicit quotations from the local and/or 49 international market. Incase o f mediumand 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 o f local contractors. When equipment and machinery i s needed for expansion o f existing facilities, the purchasers usually prefer proprietary goods from a single source for the sake o f 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 i s to procure the least cost goods, works and services consistent with minimumquality requirements. C. Procurementof Goods and Employmentof Consultantsunder Component111: InstitutionalDevelopmentand TechnicalAssistance 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 o f 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 o f IT equipment and related services shall be launched in accordance with the International Competitive Bidding (ICB) in accordance with Section I1 o f 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 o f paragraph 3.5 o f 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 o f the World Bank's Procurement Guidelines. As identified during pre-appraisal, only the "Database Identity Management and Security Software" i s requiredto be procured from the original database software supplier. See Table 2-Procurement Arrangements for the details o f 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 o f the project the consultants will be employed by Eximbank (i)for the technical and financial reviews of the sub- loans under component I11 o f the Project and; (ii) technical support for updating Eximbank's IT infrastructure. The employment o f technical experts shall be conducted through the selection o f individual consultants in accordance with the provisions of the Section V o f the World Bank Consultant Guidelines. The World Bank encourages Eximbank to advertise the required positions to collect the expression o f interest o f the best qualified consultants. Incase the service i s 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 o f 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 o f 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. ProcurementPlan and GeneralProcurementNotice 50 7. Because of the demand-drivennature of the project, it is possible to estimate neither the sub-borrowersnor their procurementrequirementsunder Component Iand I1of the Project at the appraisal stage or during the implementation of the Project. Therefore, it is not possible for the borrowers to develop a ProcurementPlanwhich provides the basis for the procurementmethods. 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 I1of the Project. It i s expectedthat each sub-borrower will provide a list of procurementsplannedunder the sub-loan. Incase any sub-project includesICB, specialprocurementnoticewill be publishedinaccordance with the Procurement Guidelines. However, Eximbank, at appraisal, developed a Procurement Planfor Component I11ofthe Projectwhich provides the basis for the procurementmethodsand review thresholds. This planhas been agreed betweenEximbank and the Project Team on April 14, 2008 and is available from the Eximbank PIU team. It will also be available inthe 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 UnitedNations Development Business(UNDB) online for the Institutional development part of the ProjectinMay 2008. E.FrequencyofProcurementSupervisionand ReviewProcedures 8. The Bank will review the procurement arrangementsproposed/performedby TSKB and Eximbank every year, includingcontractpackaging,applicableprocedures,and the schedulingof the procurement processes, for its conformity with World Bank Procurement and Consultant Guidelines, the proposedimplementationprogramand disbursementschedule. (a) Prior Review for the Contractsunder ComponentIand 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 inparagraphs2 and 3 of Appendix 1to the World Bank ProcurementGuidelines. For Contracts awarded through ICB; prior review of all Bidding Documents, Bid Evaluation Reports, Recommendationsof Contract Award and draft Contractwill be conducted. For Contracts awarded through Commercial Practices; prior review of the first two contracts will be conductedfor 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 ProcurementPlan. (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 Iand I1 of the Project and one in five contracts for the Component I11of the Project. Post review of the procurement documents will normally be undertaken during the World Bank supervisionmissionor as the Bank may requestto 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 Capacityto ImplementProcurementand PrivateSector ProcurementPracticein Turkey 9. ProcurementCapacity Assessment: Incase of procurementunder sub-loansand 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 responsiblefor reviewing and monitoringthe compliance with the procurementrules by the PFIs and leasing companies, and their sub-borrowers (beneficiary enterprises). Specialists assigned for the procurementarrangements within the TSKB and Eximbank's PIUteams will be responsible for all procurementoversight 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 documentationrelated to specific procurementtransactions from the PFIs and sub-borrowersinorder to facilitate the Bank's reviews. 10. TSKB was responsiblefor the implementationof the similar EFIL I1project, and is still implementingthe EFIL I11project.No procurementproblem has been encounteredboth inEFIL I1and I11projects. 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-ElectronicEngineers) 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 o f the TSKB to implement procurement actions for the project has been carried out by the Bank's procurement specialist on January 30-31, 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 i s low in TSKB. 11. Eximbank successfully implementedthe 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 experiencedon the commercial procurementpractices. However, Eximbank does not have EngineeringDepartment 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 goodat usingelectronic communicationand documentation. 12. Since there i s 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 inthe ICB, the procurementunder the Project is put inthe moderaterisk 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 andEximbankupontheir request. 14. In order to reduce the procurement risk to Low in Eximbank the World Bank's procurement specialist will be involved inthe early stage of the procurementsunder Component I11 of the Project and will closely work with Eximbank staff. Eximbank will hire Technical Experts requiredfor the cost review of the sub-loanapplicationsbefore the approval of the first sub-loanapplicationfor investmentfinance purposes. Table 1: Thresholds for ProcurementMethods and Prior Review (US$Million equivalent) for ComponentIand I1of the Project Expenditure Category Thresholds ICB Commercial Practice Sub-loans Goods No threshold(apply when needed) 510 Civil works No threshold (applywhen needed) 510 Prior Review All contracts Firsttwo contracts in Component IandI1oftheProjectfinanced with the proceedsof the Loan 53 .1 j z 0 L F P VI i!8 y v) 8 E EE D 'E 6 E sg 5 C ,$ E m '5 1E e! Annex 9: Environmental Review Procedures 1. Inaccordancewith World Bank safeguardpolicy OP/BP/GP4.01 (Environmental Assessment), that incorporate the Republic of Turkey's regulatory requirements for Environmental Review (Regulation on Environmental Impact Assessment published in Official Gazette No: 25318, 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 preparean EnvironmentalAssessment Framework document acceptableto 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 proceduresutilized insimilar operationsinTurkey. 2. The framework documents of bothEximbank and TSKB will identifyinstitutional responsibilitiesfor each of the following elements: Sub-projectLoanPreparation 0 Environmentalscreeningcategory 0 Environmentalimpact assessment 0 Environmentalreviewprocess a Prior and postreview Sub-projectImplementation 0 Arrangements for environmental management, if necessary (mitigation and monitoring) a Preparingof environmentalscreening form A brief descriptionofarrangementsto be utilizedis presentedbelow: For sub-projectsthat do not require an EIA, PFI and Eximbank, in cooperation with the sub-borrower, will prepare an environmentalscreening form to define the environmental issues associatedwith the sub-projectand how they will be mitigatedand monitored. The sub-borrower will also be responsible for ensuring that all Government environmental approvals, permits and licenses are secured. Demonstrationof this due diligence would be providedto TSKB and Eximbank,which will review this informationas an element of their sub-project appraisal process. TSKB and Eximbank will examine selected sub- projectsat 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 PositiveDecision), (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 languageversion). TSKB and Eximbank would not be permittedto continue processing the sub-project until World Bank approval of the EIA and Addendum is offered and disclosure inTurkey andthe World Bank InfoShophas beencompleted.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 Directorateo f 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 environmentalrecommendationsfor the selectedenterprise. The World Bank supervision team will also review, ad hoc, environmentaldocumentation. 56 Annex 10: OccupationalHealthand Safety inthe ShipbuildingIndustry 1. Shipbuilding i s an industry with high risk for workers, and high levels o f work related accidents have been reported in the media with on average one death per month over the past three years. Therefore, extra precaution i s being taken to ensure that occupational health and safety i s adequate at participating sub-borrowers in the shipbuilding industry. 2. The Ministry of Labor and Social Security (MoLSS) recently and incollaboration 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 o f sub-contractors for blue-collar labor. The rapid employment growth inthe industrymeans that many workers have little experience. The number o f workers employed in this sector increased from about 13,500 in 2002 to more than 33,000 in 2007. With the completion o f the shipyards under construction this figure i s expected to reach 60,000. The blue-collar work on the shipyards i s often done by sub-contractors making management o f 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, i s performing regular on site inspections on shipyards, but due to the lack o f enough inspection staff and time constraints, enforcement o f the occupational health and safety standards are weak. In a recent report by the MoLSS, 41 shipyards out o f 43 inspected were found to be failing the necessary requirements o f occupational health and safety. 5. Having reached a consensus on the necessity o f upgrading labor standards and the need for worker training with the shipbuildersassociation (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, i s also preparing a law related to occupational health and safety standards in general. This law i s 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 o f these regulations, a trilateral protocol between MoLSS, GISBIR and the Union was signed on February 25, 2008. This protocol i s related to starting the implementation o f the regulations related to training o f trainers for occupational health and safety standards. According to this protocol, training o f trainers for occupational health and safety will start and a cadre o f trainers will be trained which will be responsible for giving the same training for the shipyards. The protocol will bindboth the management o f 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 MoLSSwill inspect all the shipyards to assess the occupational health and safety conditions o f each shipyard and prepare a report on measures to be taken. Both o f these activities; (i) training o f trainers; and (ii)reports on measurement and assessment o f 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 I S 0 18001 certification, which i s related to the occupational health and safety standards i s a very expensive process, only three shipyards in Turkey have I S 0 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 I S 0 18001 certification as a future step. In the meantime, MoLSS officials are confident that certification o f the two requirements mentioned as part o f the regulations, will provide enough credibility regarding the: (i) quality o f the workers skills and training level; and (ii)fthequalityregardingtheoccupationalhealthandsafetystandards,intheshipyards. o The project team feels confident that certification o f these two conditions will be sufficient and satisfactory as part o f the 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 20th2008 Initial PID to PIC March 2lSt2008 March 23rd2008 Initial ISDS to PIC March 2lSt2008 March 23'd 2008 Appraisal March 3lst 2008 March 31'' 2008 Negotiations April 14th2008 April 14'h2008 BoardApproval May 22"d2008 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 1st 2010 Plannedclosing date June 3Oth 2013 Key institutions responsible for preparing the project: TSKB, Eximbank, The Turkish Treasury (Guarantor) Bank staff and consultantswho worked on the projectincluded: Steen Byskov Financial Sector Spec. ECSPF Gurhan A. Ozdora, Senior Operations Off. ECSSD Isfandyar Z. Khan Financial Sector Spec. ECSPF NasreenBhuller 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. FinancialManagement ECSPS Specialist Salih Kemal Kalyoncu Procurement Specialist ECSPS Irina Kichigina Senior Counsel LEGEM Hala D Khattar Sr. Financial Officer BDM 5The project was initially being processedas an Additional Financing and on guidance from ROC was changed into a repeaterproject 59 Annex 12: Statementof Loans and Credits Difference between expectedand 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 INFRASTRUCTUREPROJ PO96801 2007 ELECT DISTRIB REHAB 269.40 0.00 0.00 0.00 0.00 276.70 6.67 0.00 PO96400 2006 ECSEEAPL #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 180.21 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 PSSP2 465.40 0.00 0.00 0.00 0.00 330.45 82.88 0.00 PO94176 2005 ECSEEAPL #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 HEALTHTRANSIT (APL #I) 60.61 0.00 0.00 0.00 0.30 45.11 36.I4 7.2I 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 STATEMENTOF IFC's Heldand Disbursed Portfolio InMillionsofUSDollars 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 FinansLeasing 25.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 Gunkol 4.47 0.00 0.00 0.00 4.47 0.00 0.00 0.00 1998 IndoramaIplik 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.I 4 34.68 0.00 14.54 24.14 2006 StandardProfil 19.12 3.82 0.00 0.00 0.00 0.00 0.00 0.00 2006 TDD 31.87 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 EkonBank 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 6.11 0.00 0.00 3.30 6.11 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 PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2005 Avea 0.00 0.00 0.00 0.30 2001 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 h c 0.00 0.00 0.00 0.02 Total pendingcommitment: 0.03 0.01 0.00 0.38 62 Annex 13: Turkey at a Glance Turkev at a glance 3128107 POVERTY and SOCIAL Turteg F:::i Deuelopment diamond' 2006 Population,mid-year/h&wq) 72.9 460 810 GNIper capita /;Jt/a+mplM M$) 5,400 4,796 5,913 I Lifeexpectancy GNI /Af/acmplM lK$iWk:) 393.9 2,206 4,790 Average annualgrowth. 2000-06 Population&? 1.3 0.0 0.8 Labor force &7{? 2.1 0.5 1.3 GNI Gross Per primary Most recent estimate [latest year available. 2000-06) capita enrollment Poverty p ' d m a k e h & w n a h d ~ ( v & j 27 Urbanpopulation p'dfofdpqdakqt 68 64 71 Lifeenpectancy at birth [wa-:t 71 69 70 Infant mortality /prlm#)BLpMf.~t Child malnutrition p ~ ' d ~ ~ ~264 ~ 28 5) 26 Access to Improvedwater source Access to an improvedwater source p'dprpdabq) 96 Literacy p;'d&ake+v@l 92 93 87 97 93 Grossprimaryenrollment p ; ' d s W w w & b q ) 93 102 112 -L&a-w.mkf&+mW-WW - Male 96 103 106 Female 91 100 104 KEY ECONOMIC RATIOS and LONO-TERMTRENDS 1986 1996 2005 2006 Economic ratios' GDP (IKgCm! 75.6 181.5 363.4 402.7 Gross capitalformatlon1GDP 188 24.6 24.8 23.9 Enportsof goodsandServiceslGDP 13.3 21.5 27.4 28.2 Trade Grossdomestic savings1GDP 16.1 18.3 18.2 16.2 Grossnationalsavings1GDP 18.7 21.9 18.4 16.5 Current accountbalancelGDP -1.9 -1.3 *6.2 4 . 1 Interestpayments/GDP 2.0 1.9 1.8 Total debt/GDP 43.6 44.0 47.1 1 Total debt servicelexports 41.0 23.4 39.1 Present valueof debt1GDP k8.9 Present valueof debtletports 165.6 I Indebtedness 1986-96 1936-06 2005 2006 2006-10 /H+vm d g m w GDP 4.0 3.5 7.4 6.1 5.3 - mhy GDPper oapita 1.9 2.0 6.0 4.8 -r&a-w.*--wy 9.3 4.1 Exportsof goodsand services 8.4 10.3 8.5 8.5 STRUCTURE of the ECONOMY 1986 1996 2005 2006 I /::'ra'alq Growth of capital and GDP [XI 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 Householdfinalconsumptionexpenditure 76.4 70.2 68.7 70.7 Generalgov't final consumptionexpenditure 7.6 11.6 13.1 13.1 -50 Importsof goods andservices 16.1 27.8 34.0 35.9 I -GCF - P O O P I 1986-96 1996-06 2005 2006 /www mdswbY,' Growth of eiports and imports [ X ] Agriculture 1.2 0.9 5.6 2.9 40 1 Industry 5.0 3.8 6.5 7.4 Manufacturing 4.9 3.9 6.1 7.4 20 Services 4.1 3.4 7.6 5.6 0 Householdfinalconsumptionexpenditure 3.9 2.7 8.8 5.1 .20 Generalgov't final consumptionexpenditure 3.7 2.2 2.4 9.6 4 0 1 Gross capitalformation 5.5 4.6 10.3 5.5 Importsof goodsand services 10.1 8.7 11.5 7.1 ---Exports - e l m p o r t s Note 2006 dataarepreliminaryestimates This tablewas producedfrom theDeveiopmentEconomicsLDBdatabase 'Thediamondsshowfourkeyindicatorsinthecountry[inbold]comparedwithitsincome-groupaverageIfdataaremissing.thediamondwill be Incomplete 63 PRICES and GOVERNMENT FINANCE 1986 1996 2005 2006 I m?m=5riepiees Inflation [ x ) fli'&a?& Consumer prices 34.6 80.3 8.2 9.5 ImplicitGDP deflator 36.0 77.8 5.4 11.5 GiWermmwrf i a c e 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 I I Overallsurplusldeficit -8.6 -1.9 0.0 GDP deflator -0-CPI TRADE 1986 1996 2005 2006 (Insc*:t Erport and import levels [US$ mill.] Total exports [fob] 7,457 32,067 76,949 91,937 (50 0007 Agriculture and livestock 2.094 8.570 18.667 19,438 Mining and quarry products 1.626 3,687 4,393 4.521 Manufactures 6,398 30.834 72,670 87.179 100,000 Total imports [cif] 11,105 45,800 116,155 138.973 Food 452 2,531 2,208 2,537 50,000 Fueland energy 2,338 6,397 21,828 29,664 Capitalgoods 3,964 10,624 20,363 23,316 0 Exportpriceindex &W=mt 94 123 132 138 00 01 02 03 04 05 06 Import priceindex p?%'W=kWt 106 116 137 149 pJExports rn Imports Term5 of trade gRW=A'X?l 89 106 97 92 BALANCE of PAYMENTS 1986 1996 2005 2006 fim-ct Current account balance to GDP [ X ] Exportsof 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 Financingitems [net) 2,255 6,982 40,450 36,494 Changesin net reserves -790 .4.545 -17.847 -3.720 Ajem.. Reserves includinggold ,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 EXTERNALDEBT and RESOURCEFI.ovs 1986 1996 2005 2006 p/ss.&%-CL:t Composition of 2005 debt (US$ mill.) Total debt outstanding and disbursed 32,934 79,829 171,059 IBRO 4,662 4.260 5,829 6,854 I A:5.823 ~ ~ 7 1 IDA 174 124 71 65 G 14,646 Total debt service 4,473 10,912 41,920 IBRD 589 1,154 1.003 1.135 D 1.738 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 DisbUtsQmentS 636 489 461 1.796 A . l5RD E . Biloterol D. Other multilotcral F . Privata Principalrepayments 239 821 761 813 C IMF .IDA G . Short-tcrm Net flows 397 -332 -300 983 Interestpayments 355 340 249 329 Net transfers 42 -672 .549 654 -~ Note: This table was producedfrom the Development EconomicsLOB database 9128t07 64 IBRD 31100R 25° The map at this site is 35° 40° 45° This map was produced by the for reference only and is U K R A I N E ROADS Map Design Unit of The World Bank. not sanctioned for use in any World Bank Group The boundaries, colors, denominations SELECTED TOWNS AND CITIES document. Contact the and anyother information shownon this Map Design Unit for the NATIONAL CAPITAL map do not imply, on the part of The acquisition of maps to World Bank Group, any judgment on be used in World Bank INTERNATIONAL BOUNDARIES the legal status of any territory, or any Group documents. RIVERS endorsement or acceptance of such boundaries. 45° TURKEY 0 150 300 KILOMETERS 45° R O M A N I A 0 100 200 MILES R U S S I A N F E D . B l a c k S e a BULGARIA Sinop G E O R G I A Edirne Zonguldak To Akhaltsikhe Samsun Istanbul Trabzon GREECE Karabük Ordu Tekirdag Adapazari To Tbilisi Izmit Çankiri Amasya Giresun AZER. Bayburt Kars ARMENIA Çorum 40° Tokat Çanakkale Bursa Kirikkale 40° Eskisehir Yozgat Erzincan Erzurum Balikesir ANKARA Sivas Agri Kütahya AZER. T U R K E Y Manisa Elazig Usak Nevsehir Mus Murat Van Izmir Afyon Kayseri Bitlis Aydin ISLAMIC Konya Malatya Tigris Nigde Siirt REP. OF Denizli Maras Diyarbakir Burdur Isparta Hakkari Mugla Gaziantep IRAN Mersin Adana Sanliurfa Antalya Kilis To Tall Birak To SYRIAN A.R. I R A Q 25° 30°Mediterranean SeaAntakya Aleppo NOVEMBER 2004