Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 42800-TR

PROJECT APPRAISAL DOCUMENT

FOR

A US$197.4 MILLION AND €65 MILLION (US$300 MILLION EQUIVALENT) LOAN

TO

TURIdYE SINAI KALKINMA BANKASI A.Q. (TSKB)

AND

A US$150 MILLION AND €94.9 MILLION (US$300 MILLION EQUIVALENT) LOAN

TO

TURIdYE IHRACAT KREDI BANKASI A.Q. (EXIMBANK)

WITH

THE GUARANTEE OF THE REPUBLIC OF TURKEY

FOR

THE FOURTH EXPORT FINANCE INTERMEDIATION PROJECT

APRIL 25,2008

Private and Financial Sector Development Department Turkey Country Unit Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

~

Vice President: Shigeo Katsu Country Director: Ulrich Zachau

Sector Director: Fernando Montes-Negret Sector Manager: Lalit Raina

Team Leader: Steen Byskov

(Exchange Rate Effective March 12,2008)

A L M BDDK CEO CBT CIRR CIS CPS DC ECA EFIL I EFIL I1 EFIL I11 EFIL IV EU FSL FMR FMS FX GOT IFRS ICB ICR IF1 ISA ISR ISP LAC1 NCB NS YTL OECD O M PFI PIU SCL SMP SOE TSKB Eximbank

Currency Unit = New Turkish Lira (TRY) New Turkish Lira 1 = 0.820 US$

US$1 = 1.22 New Turkish Lira

FISCAL YEAR July 1 -June 30

ABBREVIATIONS AND ACRONYMS

Asset and Liability Management Banking Regulation and Supervision Agency Chief Executive Officer Central Bank o f Turkey Commercial Interest Reference Rate Commonwealth o f Independent States Country Partnership Strategy Direct Contracting Export Credit Agency or Europe & Central Asia (Region) Export Finance Intermediation Loan Second Export Finance Intermediation Loan Third Export Finance Intermediation Loan Fourth Export Finance Intermediation Loan European Union Fixed Spread Loan Financial Monitoring Reports Financial Management System Foreign Exchange Government o f Turkey International Financial Reporting Standards International Competitive Bidding Implementation Completion Report International Financial Institution International Standards on Auditing Implementation Status Report International Shopping Procedures Loan Administration Change Initiative National Competitive Bidding National Shopping New Turkish Lira Organization for Economic Cooperation and Development Operational manual Participating Financial Intermediary (bank or leasing company) Project Implementation Unit Single Currency Loan Staff Monitored Program Statement o f Expenditure Tiirkiye Sinai Kalkinma Bankasi (the Borrower) Tiirkiye Ihracat Kredi Bankasi (the Borrower)

FOR OFFICIAL USE ONLY

PROEJCT APPRAISAL DOCUMENT

Republic o f Turkey

FOURTH EXPORT FINANCE INTERMEDIATION LOAN (EFIL IV)

TABLE OF CONTENTS

MAIN REPORT I . STRATEGIC CONTEXT AND RATIONALE .......................................................... 1

A . B . C . I1 . A . B . C . D . E .

Country and Sector Issues ........................................................................................ 1 Background and Rationale ........................................................................................ 2 Higher Level Objectives to which the Project Contributes ..................................... 2 PROJECT DESCRIPTION .................................................................................... -2 Lending Instrument .................................................................................................. 2

Project Development Objective and Key Indicators ................................................. 3 Project Components .................................................................................................. 3 Lessons Learned and Reflected in the Project Design .............................................. 4 Alternatives Considered and Reasons for Rejection ................................................. 5

I11 . PROJECT IMPLEMENTATION ............................................................................... - 5 A . Partnership Arrangements ....................................................................................... - 5 B . Institutional and Implementation Arrangements ...................................................... 6 C . Monitoring and Evaluation o f OutcomesResults .................................................... - 6 D . Sustainability ........................................................................................................... - 6 E . Critical Risks and Possible Controversial Aspects ................................................... 7 F . Loan Conditions and Covenants ................................................................................ 8

IV . APPRAISAL SUMMARY .......................................................................................... 9 A . Economic and Financial Analyses ............................................................................ 9 B . Technical ................................................................................................................... 9 C . Fiduciary ................................................................................................................... 9 D . Social ..................................................................................................................... -10 E . Environment - Category FI ..................................................................................... 10 F . Safeguard Policies - Occupational Health and Safety in the Ship-building Industry ....................................................................................................................................... 10 G . Readiness ................................................................................................................ 11

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

iii

TECHNICAL ANNEXES

Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies ............. 16 Annex 3: Results Framework and Monitoring ................................................................. 17 Annex 4: Project Description ........................................................................................... 18 Annex 5: Project Costs (millions) .................................................................................... 22

Annex 7: Financial Management, Audit and Disbursement Arrangements ...................... 42

Annex 9: Environmental Review Procedures .................................................................... 55 Annex 10: Occupational Health and Safety in the Shipbuilding Industry ....................... 57

Annex 12: Statement o f Loans and Credits ...................................................................... 60

Annex 1: Country and Sector Background ........................................................................ 12

Annex 6: Implementation Arrangements ......................................................................... 23

Annex 8: Procurement Arrangements .............................................................................. 49

Annex 1 1: Project Processing ........................................................................................... 59

Annex 13: Turkey at a Glance .......................................................................................... 63 Annex 14: Map IBRD 3 1 1 OOR .................................................................. $64

iv

TURKEY

Development Total:

FOURTH EXPORT FINANCE INTERMEDIATION LOAN (EFIL IV)

0.00 600.00 600.00

PROJECT APPRAISAL DOCUMENT

EUROPE AND CENTRAL ASIA

ECSPF

Date: April 25, 2008 Country Director: Ulrich Zachau Sector ManagerDirector: Lalit Raina

Team Leader: Steen Byskov Sectors: General finance sector (50%); General industry and trade sector (50%) Themes: Other financial and private sector development (P) Environmental screening category: Financial Intermediary Assessment

Project ID: PO96858

Lending Instrument: Specific Investment Loan

[XI Loan [ 3 Credit [ 3 Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): US$197.4 million and €65 million (US$300 million equivalent) loan to Turkiye Sinai Kalkinma Bankasi A.S. (TSKB) And US$] 50 million and €94.9 million (US$300 million equivalent) loan to Turkiye Ihracat Kredi Bankasi A.S. (Eximbank) Proposed terms: TSKB - A flexible Loan with fixed spread, level repayment o f principal, the final maturity o f the loan i s 28.5 years including a 7 year grace period. Eximbank - A flexible Loan with fixed spread, level repayment o f principal, the final maturity

Borrower: Turkiye Sinai Kalkinma Bankasi (TSKB) and Turkiye Ihracat Kredi Bankasi (Turk Eximbank); Guarantor: Republic o f Turkey Responsible Agency: Turkiye Sinai Kalkinma Bankasi (TSKB) and Turkiye Ihracat Kredi Bankasi (Turk Eximbank); Turkey

V

Project implementation period: Start June 30,2008 End: June 30,2013 Expected effectiveness date: July 15, 2008 Expected closing date: June 30, 2013 Does the project depart from the CAS in content or other significant respects? Re$ PAD I. C. Does the project require any exceptions from Bank policies?

I s approval for any policy exception sought from the Board? Does the project include any critical risks rated “substantial” or “high”? Ref: PAD III.E.

[ ]Yes [XINO

[ ]Yes [XINO

[ ]Yes [XINO

[ ]Yes [XINO

Have these been approved by Bank management? [ ]Yes [ IN0

.I

[XIYes [ ]No Does the project meet the Regional criteria for readiness for implementation? Ref: PAD I K G. .I

Project development objective Re$ PAD IIJ (i) Support exports by providing medium and long-term working capital and investment finance to exporting firms (ii) Improve the ability o f the financial sector to provide financial resources to firms through development o f financial intermediaries Project description Re$ PAD II.C., Technical Annex 4 The f i rst component (US$ 300 million equivalent) i s a credit l ine to TSKB. The credit l ine will be provided to TSKB, with a government guarantee, which TSKB will pass on in the form o f subsidiary finance to participating financial intermediaries for further on-lending to eligible private exporters. The second component (US$296.3 million equivalent) i s a credit l ine to Eximbank. The credit l ine will be provided to Eximbank, with a government guarantee, which Eximbank will on-lend to eligible private exporters. The third component (US$ 3.7 million) will finance improved risk management capacity at Eximbank. Which safeguard policies are triggered, if any? Re$ PAD N E . , Technical Annex 9 Environment. The project has been assigned Category “FI” in accordance with World Bank safeguard policy OP/BP/GP 4.0 1 (Environmental Assessment). Al l sub-loans to be financed under the EFIL IV will be subjected to a well established environmental review process.

Significant, non-standard conditions, if any, for: Re$ PAD III. F. Board presentation:

Loadcredit effectiveness:

Covenants applicable to project implementation:

None

None

See paragraph 3 1 o f the PAD

I. STRATEGIC CONTEXT AND RATIONALE

A. COUNTRY AND SECTOR ISSUES

1. Turkey sustained strong growth in the 6 years after the 2001 crisis, but investment levels remained modest, and the growth was increasingly driven by domestic demand. Economic growth averaged 6.8 percent, and the Turkish economy continued to grow at a healthy pace in 2007-albeit slower than the previous years as real GDP growth slowed down to 4.5 percent. Fixed investment/GDP at 17-22 percent, however, was well below that 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 continued economic performance.

2. Improving access to investment finance for exporters can help the private sector achieve higher levels o f private investment and export growth. Access to finance i s a recognized impediment to firms’ expansion in Turkey (as highlighted by the 2007 Turkey Investment Climate Assessment). Exporters need investment finance to expand capacity and to improve productivity to gain competitiveness. The February 2008 Implementation Completion and Results report for the EFIL I1 project shows how credit l ine financing can help exporters gain access to credit and grow their exports.

3. In recent months, like other emerging markets the Turkish economy has been affected by global volatility related to US sub-prime mortgage markets as well as a challenging domestic political environment. Since end 2007, Turkish bond spreads have widened by only about 30 basis points more than the overall EMBI+ index, while the Turkish Lira has depreciated by about 11 percent against the US dollar. These numbers suggest that Turkey has weathered recent worsening global conditions reasonably well. Sti l l , the economy faces significant risks: (i) the current account deficit; (ii) substantial external debt; (iii) fiscal loosening in 2007 (though the government has targeted a higher primary surplus for 2008); and (iv) slowing disinflation. As high returns on Turkish assets have brought large capital inflows, the economy has become more exposed to changes in investor risk appetite. The project i s therefore designed to be as resilient as possible to the materialization o f such risks; the project’s relevance would even increase if financial-sector liquidity were to tighten further.

4. Turkey’s financial sector i s increasing i t s lending to the private sector, but lending remains mostly short term. The sector s t i l l suffers from very short maturity o f domestic deposits and has relied on syndicated loans from international lenders o f 1-2 years maturity to fund i t s 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 l ine project helps the financial sector overcome this impediment to investment finance.

5 . The project complements financial sector policy efforts underway by the Government and supported by World Bank analytical and advisory work as well as by

1

lending. Reforms options aimed at improved financing conditions for f i r m s are discussed in the recent Turkey Investment Climate Assessment (ICA, 2007), and the Financial Sector Assessment (2008) produced under the Financial Sector Assessment Program (FSAP). Financial sector reforms are discussed in the Second Turkey Competitiveness and Employment Generation Development Policy Loan (CEDPL 11) and include bank and non-bank supervision and regulation, capital market development, improved accounting and auditing, strengthened credit information on f i r m s , and improvements to the use o f movable collateral.

B. BACKGROUND AND RATIONALE

6. The main rationale for the Bank’s involvement i s to address the development need for medium to long term funds for investment and medium term working capital needs o f exporting enterprises, and to deepen and broaden financial intermediation. Access to finance i s a recognized impediment to f i r m s ’ growth as evidenced for example in the Turkey Investment Climate Assessment. The Implementation Completion and Results Report (ICR) for EFIL I1 showed how credit l ines to exporters could be effective in helping them achieve growth in exports. The Independent Evaluation Group (IEG) confirmed the Highly Satisfactory rating o f EFIL 11.

7. The Implementation Performance o f 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 i s in compliance with a l l legal covenants, and the Participating Financial Intermediaries (PFIs) are in compliance with prudential and eligibility requirements. Disbursements after effectiveness have proceeded better than expected.

c. HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES

8. EFIL IV wi l l help develop a better financial sector and a more dynamic business sector as it engages in international competition. Enterprise and financial sector performance i s expected to continue to improve in the short and medium term. In the longer run, export growth supported by the proposed operation i s expected to have an overall positive impact on poverty alleviation, job creation and private sector growth in Turkey.

11. PROJECT DESCRIPTION

A. LENDING INSTRUMENT

9. TSKB has selected the flexible loan with fixed spread for US$197.4 million and €65 million with level repayment o f principal, a 7 year grace period, and 28 % years o f total loan term. TSKB has also opted for the possibility o f currency and interest rate conversions and establishment o f 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 o f principal, a 5 % year grace period, and 30 years o f

2

total loan terms. Eximbank has also opted for the possibility o f currency and interest rate conversions and establishment o f interest rate caps and collars.

B. PROJECT DEVELOPMENT OBJECTIVE AND KEY INDICATORS

1 1. The project’s development objectives are to:

0 Support exports by providing medium and long term working capital and investment finance to exporting firms; and

0 Improve the ability o f the financial sector to provide financial resources to firms through development o f financial intermediaries

12. The project aims to help exporters by providing US$600 million in medium and long term financing, which i s 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 through development o f financial intermediation in the Turkish private financial sector by banks and leasing companies. Through development o f project finance expertise and medium and long term lending appraisal, the project indirectly supports capacity building in the financial institutions. Moreover, the project will, through dialogue with the banking and leasing sectors, deepen the policy discussions between the Turkish authorities and the World Bank and, albeit indirectly, support the ongoing reform in the financial sector. Institutional development at Eximbank financed by the project will help it improve risk management capacity and lead to a more sophisticated institution that can prudently carry out i t s functions.

14. The results o f the project will be measured by the export and investment performance o f the sub-borrowers, the amount o f medium and long term lending extended to exporters in Turkey, the scope o f financial intermediaries included, the payment performance o f 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 o f i t s predecessor EFIL I11 project which i s currently being successfully implemented, but will have an additional Borrower Eximbank in addition to TSKB. The project will have three components. The first component (US$300 million equivalent) i s a replication o f the EFIL I11 project which i s a single-component project consisting o f a credit l i ne to TSKB as the Borrower and implementing agency. TSKB will intermediate the funds through PFIs, which in turn will on-lend to eligible private exporters.

16. In the second component (US$296.3 million equivalent), Eximbank will borrow and act as an additional implementation agency lending directly to exporters. Inclusion o f Eximbank will expand the reach o f the project into the shipbuilding and machine-

building sectors. Eximbank will focus on these sectors because o f their promising export and growth potentials and because it i s well placed to serve them due to i t s established relations. The demand i s expected to be strong in the shipbuilding sector, which has expanded rapidly in the last few years and has jumped from being ranked 23rd to now being ranking 6th in the world. A recent EU requirement that tankers entering member states' harbors to be double hulled has created new business opportunities, which Turkish shipbuilders are well placed to exploit. Ship builders are now looking for medium and long term financing to expand their capacity as well as for bridge finance' to fund the construction o f ships. The machine-building industry has grown rapidly from a total o f US$2.9 billion in sales in 2003 to US$8.7 billion in 2007 and i s another key export industry demanding medium and long term investment finance. The second component adds to the scope o f the f i rst component and scales up the development impact.

17. The third component (US$3.7 million) will finance improved risk management capacity at Eximbank. In addition to building back-up capacity for i t s 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 ls t , 2008. The component will include:

0 Improved emergency management and the establishment o f disaster recovery center as it will be required by regulators for operational risk management;

Implementation o f a ratings based credit appraisal system and monitoring as required under Basel 11;

0 Upgraded IT infrastructure to support the above improvements.

Consulting services to assist in credit appraisal for sub-loans in shipbuilding and machine building industries

18. and TSKB.

The Government o f Turkey i s providing a guarantee for the loans to Eximbank

D. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN

19. EFIL IV i s following a series o f three successful operations which have been progressively improved and streamlined. A simple and flexible design i s important for successful implementation o f credit lines, and the EFIL I V design retains the simple nature o f EFIL I11 and some requirements have been removed or simplified. I t i s important to keep a minimum number o f statutory requirements; e.g. avoiding constraints like minimum sub-loan size, maturity, currency denomination, sub-borrower co-financing requirements, sectoral lending focus, etc., but using sensible financial indicators for the selection o f both the PFIs and the sub-borrowershb-projects in l ine with established market practices. Given that the project i s primarily dealing with the private sector a number o f procurement requirements that are unsuitable for private sector borrowers

' Bridge finance refers to the working capital tied up in the ship while it i s 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 o f the credit l ines by engaging with potential sub-borrowers has also been an important lesson to ascertain the potential uptake of the funds.

20. The application process has been closer aligned with existing business practices at PFIs to speed up the implementation o f the project. Eligibility constraints and reporting requirements that go beyond what PFIs normally require increases transaction cost o f the project, slows implementation, and may have a tendency to shift funds to firms with relatively better access to finance. EFIL IV i s simplifying the application forms and cash flow analysis for PFIs and to a greater extent relying on existing credit appraisal practices.

21. The Implementation Completion Reports for EFIL I and EFIL I1 noted that onerous environmental, procurement, and other project requirements tend to lead to funds being allocated more restrictively. The fixed costs incurred by these requirements make it relatively more attractive for PFIs to lend the loan funds to fewer customers with greater loan sizes. PFIs have indicated that project requirements made it uneconomical to cater to the smallest borrowers. For leasing companies, loan sizes under EFIL I1 were generally twice what they were for the leasing companies’ entire portfolio indicating that bigger firms are targeted in the project. Streamlining safeguard requirements in the context o f credit l ines and carefully designing information requirements to minimize compliance costs while serving the safeguard objectives will help ensure successful implementation and better achievement o f the development objectives, and the environmental procedures have been streamlined in this spirit.

E. ALTERNATIVES CONSIDERED AND REASONS FOR REJECTION

22. Since EFIL IV i s being undertaken as a repeater project based on the success o f 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 implementation arrangements as in the EFIL I11 facility will be maintained. The new borrower Eximbank was the original borrower in EFIL I and i s well aware o f the development objectives and the process flows related to the project. Given the absence o f any material changes from the EFIL 111, the EFIL I V qualifies as a repeater project, which will continue to serve the needs o f exporters and PFIs for medium and long-term investment and working capital funds.

111. PROJECT IMPLEMENTATION

A. PARTNERSHIP ARRANGEMENTS

23. Through the series o f EFIL operations and other engagements, the World Bank has built strong relationships with counterparts in Turkey including the Turkish Bankers’ Association, and the Turkish Association o f Leasing Companies. In addition the Bank maintains dialogue with the regulators o f the financial sector through i t s other engagement.

5

B. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS

24. Component I will be implemented by an experienced team at TSKB implementing EFIL I11 and two other World Bank projects. Component I1 and I11 will be implemented by a team at Eximbank consisting o f several members with experience from the implementation o f EFIL I. Eximbank has already established a PIU team for implementation, and the team as been engaged in the preparation o f 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 l ine component and the institutional development component.

25. The eligibility criteria for PFIs and for sub-borrowers will remain largely as in EFIL 111. One change i s that the definition o f exporters will be expanded to include service exports such as tourism, and the definition o f exporters will be brought in line with the national accounts definition o f exports. Another change i s that Eximbank exclusively will be serving the ship-building and machine-building exporters.

c. MONITORING AND EVALUATION OF OUTCOMES/RESULTS

26. The indicators are linked to export performance, the scope o f financial intermediary participation, and on sub-loadlease performance. In addition, supervision missions will get information with regard to (a) planned employment impact associated with the project, (b) financial performance o f the Borrower and PFIs, and (c) loan distribution by PFI, firm size, sector, and geographical location.

27. The indicators will be effectively monitored. TSKB developed an IT system to interface with PFIs for sub-loan applications and monitoring. Financial performance o f TSKB and the PFIs will be monitored through independent auditors’ reports and separate letters confirming adherence to the eligibility requirements. TSKB and Eximbank will perform occasional consistency check and cross referencing for the data.

D. SUSTAINABILITY

28. The project i s designed to enable participants to continue the activities independent o f 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 o f the financial intermediaries as well as those o f the sub- borrowers will become self-sustainable. TSKB will build lending relationships and experience with PFIs, and Eximbank and the PFIs will expand their client bases and hone their skills in making medium- and long-term credit. EFIL IV will enable them to demonstrate that medium term lending can be a profitable business proposition. Exporters will build credit history with financial intermediaries and improve their financial records and documentation required for bank loans, thus improving their ability to gain access to credit. These effects will be gradual and are expected to be partially achieved throughout the l i f e o f the project.

6

E. CRITICAL RISKS AND POSSIBLE CONTROVERSIAL ASPECTS

29. The overall risk level appears low, although several risks should be 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 considering the currently low level o f credit there should s t i l l be demand for medium-term credits.

Systemic liquidity contraction: The international credit crunch brought on by poor sub- prime mortgage loan performance in the U.S. raises concerns about the exposure o f the project to a reversal o f capital flows from emerging markets including Turkey. With a current account deficit o f 5.7 percent o f GDP and substantial external debt, economic performance i s exposed to international investor sentiment. The project i s partially hedged against a systemic liquidity contraction, and the project becomes increasingly relevant if FX liquidity contracts. Because the project finances exporters, it i s partially hedged against domestic economic performance, and a depreciation o f the Turkish currency would improve the performance o f those borrowers whose main markets are international. Because the loans provided by the project are long term, they help both the financial intermediaries and the sub-borrowers manage liquidity risk, and thus the project becomes increasingly relevant in the face o f financial outflows from Turkey. The earlier successful implementation o f EFIL I during the 1999/2001 financial crisis i s 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 l ines in Turkey have tended to have lower non-performing loans ratios than the banking sector in general, and the loan performance will be monitored during supervision.

Improved financing conditions for Turkish financial intermediaries and a loss of competitiveness of the credit line: The project would be crowded out if the market weakness it attempts to address improves, i.e. if medium and long-term financing became available at competitive costs to Turkish financial intermediaries. In this case, the development objective would already be served by the private sector, and it is, therefore, not a risk to the development objective, but only a risk to project implementation. However, the likelihood o f such a risk i s quite low over the anticipated project implementation time period.

Inadequate implementation capacity of Borrowers: The large loan amount requires strong implementation capacity o f the borrowers. TSKB i s already successfully implementing the EFIL I11 project as well as two other World Bank credit lines, and there i s l i t t le risk that it will not be able to successfully continue. Eximbank was the borrower and successfully implemented the first EFIL project. The World Bank was fully satisfied with Eximbank’s commercially oriented implementation. Both borrowers have been assessed against the OP8.30 criteria and are found to be suitable for the project (Annex 6.1 and 6.2).

7

Lack of demand for the credit line from ship and machine buildingfirms: Lack o f demand could be driven either by the availability o f alternative funds, in which case the development objective would be reached, or by loss o f competitiveness o f the sectors. The availability o f the credit line i s helping the f i r m s staying competitive thus mitigating the latter risk.

Delays due to World Bank fiduciary and safeguard requirements: The fiduciary and safeguard requirements o f the credit l ines incur a substantial cost to the borrowers. The procedures have been streamlined based on experience from past EFIL projects, and since both the borrowers and the PFIs are experienced with World Bank projects, they should be able to continue to effectively implement these requirements without incurring excessive delays.

Governance and corruption risks. Governance arrangements are a crit ical factor whilst looking at project management. Safeguards are established regarding financial management and procurement, and because most transactions are between private parties, the incentive structure o f the operation reinforces proper usage o f the funds, and supervision missions wil l assess the proper implementation o f the project. TSKB i s a privately owned and publicly traded bank lending to private financial intermediaries and private exporters, and i s therefore subject to public transparency and disclosure, and private sector governance and monitoring standards. I t s governance track record over i t s over 50 years o f operating history has been o f very high quality and has been reviewed and vetted several times. Eximbank i s also subject to both rigorous Government audit inspections, as well as external audit requirements. In addition, since i t s inception it has maintained a reputation and track record o f highly professional and transparent operations. In addition, both Borrowers are subject to regulation and supervision by the BDDK, the banking regulator.

F. LOAN CONDITIONS AND COVENANTS

30. Effectiveness conditions:

0 None.

3 1. General covenants:

Both Borrowers will maintain satisfactory financial management systems including records and accounts, and prepare financial statements satisfactory to the World Bank. Annual project accounts and IFRS audit o f financial statements wil l be provided within six months o f each year end during the implementation period. Audits wi l l be carried out under terms o f reference satisfactory to the World Bank.

0 The Borrowers wi l l each maintain PIUs with satisfactory staffing and other resources as required for effective project implementation.

8

0 The Borrowers will each monitor project performance in accordance with the operational manual.

0 Both Borrowers shall implement credit l ines in accordance with the provisions o f the Loan Agreements and Operational Manual, including the eligibility criteria for PFIs and Beneficiary Enterprises, agreed upon terms and conditions for on- lending and monitoring and reporting requirements

IV. APPRAISAL SUMMARY

A. ECONOMIC AND FINANCIAL ANALYSES

32. As there i s no clear way o f defining the project costs, a traditional economic/financial analysis cannot be conducted. The approach taken i s to measure the development results in relation to the amounts intermediated as shown in the development framework (Annex I).

B. TECHNICAL

33. Provisions are included in the project to ensure that lending rates reflect the cost o f intermediating the funds including an appropriate credit risk margin as required by OP8.30. The financial condition o f both Borrowers i s good, they have proven their ability to maintain low non-performing loans ratios, and the capacity to implement the project i s viewed as strong. (See Annex 6 for additional detail on the Borrowers).

C. FIDUCIARY

34. The project financial management systems at TSKB and Eximbank have been assessed by the task team. The current financial management arrangements for the project are satisfactory at both banks. Al l o f the subcategories o f financial management are rated satisfactory for both banks. To assess the continued soundness o f TSKB and Eximbank, their compliance with domestic prudential regulations will be monitored through (a) prudential regulation compliance certified annually by auditors and (b) annual audit reports. TSKB and Eximbank will each maintain records and will ensure appropriate accounting for the EFIL IV funds. Financial Management Reports (FMRs) will continue to be prepared at predetermined regular intervals and will be submitted to the World Bank no later than 45 days after the end o f the period. The formats o f 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 i s an existing borrower familiar with procurement procedures o f the Bank, the procurement risk at TSKB i s rated low. Though Eximbank was a borrower for the EFIL I, it i s engaging with the Bank after an extended gap and the procurement risk at Eximbank i s rated medium. Local private sector commercial practices will be followed for procurement o f goods and works contracts each worth less than US$10 million. The procurement performance o f each bank will be reviewed annually.

9

D. SOCIAL

35. By increasing access to finance and growth o f private sector it i s expected that the operation will have a positive impact on employment. Because o f the widely dispersed nature o f the project, it i s not expected to have material social impacts.

E. ENVIRONMENT - CATEGORY FI

36. The project has been assigned Category “FI” in accordance with World Bank safeguard policy OP/BP/GP 4.0 1 (Environmental Assessment). Al l sub-loans to be financed under the EFIL IV will be subjected to a well established environmental review process. TSKB i s currently implementing the procedures successfully, Eximbank has experience from the first EFIL project, and EFIL IV team has discussed the requirements in detail and i s confident about Eximbank’s ability to perform the necessary duties. The procedures and requirements incorporate the Republic o f Turkey’s regulatory requirements for Environmental Review. Environmental Assessment policies (OP/BP 4.01) will apply to EFIL IV. Environmental issues o f sub-borrowers and their sub- projects will be addressed through the sub-loan environmental eligibility assessment. Environmental review procedures are described in Annex 9.

F. BUILDING INDUSTRY

SAFEGUARD POLICIES - OCCUPATIONAL HEALTH AND SAFETY IN THE SHIP-

37. Shipbuilding i s an industry with high risk for workers, and extra precaution i s being taken to ensure that occupational health and safety i s adequate. The Ministry o f Labor and Social Security recently, and in collaboration with the industry, introduced training requirement and certification o f workers’ health and safety on shipyards. Sub- loans will only be given to qualified shipbuilders. Details are provided in Annex 10.

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP 4.0 1) [ 41 11 Natural Habitats (OP/BP 4.04) [I [ J 1 Pest Management (OP 4.09) [I [J I Physical Cultural Resources (OP/BP 4.1 1) [I [ JI Involuntary Resettlement (OP/BP 4.12) [I [ JI Indigenous Peoples (OP/BP 4.10) [I [ JI Forests (OP/BP 4.36) [I [JI Safety o f Dams (OP/BP 4.37) [I [ J I Projects in Disputed Areas (OP/BP 7.60)* [I [ J I Projects on International Waterways (OPBP 7.50) [I [ J I

* By supporting the proposed project, the Bank does not intend to prejudice the f inal determination o j the parties‘ claims on the disputed areas

10

G. READINESS

38. approved by the Board the borrowers are ready to approve sub-projects.

Both borrowers have PIUs in place and a finalized operational manual. Once

11

TECHNICAL ANNEXES

Annex 1: Country and Sector Background

1. The contribution o f the financial sector to efficiency and growth has been limited in the past by volatile economic and financial conditions. Financial intermediation remains l o w in Turkey as compared to countries at similar income levels. While the financial sector efficiently mobilized savings, the mobilized funds have historically not been used to support private sector investments and have instead largely been invested in a few large f i r m s and in government securities. Therefore, the financial sector has neither allocated capital to the private sector efficiently, nor has it diversified risks for investors.

2. Improved allocation o f capital requires deepening financial intermediation. Turkeys' financial sector i s developing rapidly but i s s t i l l well behind comparator countries. Since the 2001 crisis credit to the private sector doubled to 35 percent o f GDP, but much o f the growth has been in consumer credit, and inadequacies remain in the Turkish credit market, where financial reporting i s underdeveloped, credit information on firms i s scarce, and use o f collateral i s 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 f i r m s in Turkey. Continued financial sector pol icy reforms are necessary to support sound credit growth.

3. The interest rate and maturity terms offered to Turkish f i r m s remain poor b y international comparison. As shown in Figure 1 and Figure 2, firms in Turkey face high interest rates and short maturities relative to other emerging markets in the region which impacts their ability to invest in themselves.

Figure 1: Nominal interest rate, 2005 Figure 2: Average loan maturity, 2005

25 1

Source: BEEPS Source: BEEPS

12

4. Econometric evidence suggests that finance can help support exports. Access to finance i s positively associated with the propensity to export. The recently published Turkey Investment Climate Assessment (2007) shows that f i r m s with external finance in the form o f bank loans had a 4.6 percent greater likelihood o f being classified as exporters than f i r m s without such loans. I t also showed that leverage, measured as external resources as a share o f total liabilities i s reflected positively in exports as a share o f sales.

The EFIL IV aims to increase the financial intermediation by the financial sector to exporters to effectively assist the sector.

Profi le o f export sector

5. Exports have grown at an impressive pace despite several challenges (Figure 3). Total exports tripled between 2000 and 2006 in dollar terms. The increase in exports was faster during initial period o f 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 200 1 , boding well for the sustainability o f future export growth.

6. However, Turkey’s export figures are relatively l o w in comparison to those o f other recently industrialized economies and EU countries. I t i s also important to note that Turkey’s ‘export propensityYy2 which 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 i t s industrial capacity (Figure 4).

Export propensity i s calculated as the value o f manufactured exports divided by the added value o f total manufacturing activities within the country. This ratio can be greater than 100 percent because the numerator i s in total terms while the denominator i s only the added value, as opposed to the total output.

13

Figure 3: Exports and imports

60 v) 70

z 6 0 fi 50

50 4 40 8 *" 40 B

3 20

e 30 8 30 20 -

10 I O

0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 I ExpoiVGDP (nght axis) -Export (left axls)

0 ImpoiVGDP (nght axis) -Import (left axis)

Source: Central Bank of Turkey.

7. Turkey's export growth has been faster than in most comparator countries in recent years (figure 5). The average annual growth rate o f exports in volume terms has been consistently in the double-digit range over the last decade. This growth i s 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, and Spain). Among the comparator countries analyzed only China has observed much higher export growth rates than those observed in Turkey.

Figure 4: Manufactures exports as a share of GDP and manufacturing export propensity

(2004) 100% T T 3.5

3.0 90% 80% i5

60% 2.0 8 g 40% r

a 0 70% 2.5 't

1.5 ' $ 50%

1 30% 1.0 H 0.5

20% 10% 0%

- Manufacturing exparts / GDP t Export propensity

Source: UN Comtrade and World Bank WDI.

Figure 5: Annual Average Growth of Exports (In Constant USD Terms) of Goods and

Services

10

5

I L O 392- 1999 2000-2002 2ou.3-230s

8. The sustainability o f high growth will eventually depend on the capacity o f the Turkish economy to maintain and further improve its competitiveness by investing in the industry.

9. The EFIL I V aims to address the development need for the sector by providing medium and long term funds for investment and working capital to the exporters. Access to EFIL I V will enable a diverse group o f exporters to access medium term funds. The inclusion o f lending to shipbuilding and machine builders allow access to investment finance for sectors that have done better and help in the internationalization o f the Turkish economy. Internationalization i s measured by whether trade (imports plus exports) as a share o f GDP grows or shr inks. Thus, sectors above the downward sloping l ine 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 jumped from 23rd rank in terms o f dead weight tons (DWT) in 2002 to 6th rank in 2007. They rank 1'' in small tonnage chemical tanker and 4th in mega yacht building. In 2002, 37 shipyards were operational which has been expanded to 65 in 2008. Plans are under way to expand them to 125 with a 9.2 M DWT/year capacity making it # 4'h in the world. The exports have increased to US$1.4 bi l l ion in 2006 up from US$231 million in 2006.

Figure 6: Trade Performance o f Turkish Sectors 1996-Today

3.0

8 2.0

8 1.0

t

Q

.5

6 0.0

-1.0

Motor vehicles? Machinery and

0

equipm /--, Other Transport (Shipbuilding) f J

Manufacture of basic metals

apparab2,' products, etc 0 0 /' '

'. 0 /'

Chemicals, etc

f Crude petroleum and

natural gas

-1.0 0.0 1 .o 2.0 3.0 Change in ImportdGDP

Source: Turkstat. *: Today reflects last quarter o f 2005 and first three quarters o f 2006.

1 1. 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 Related Projects Financed by the Bank and/or Other Agencies

1. The proposed EFIL IV i s a repeater project o f the predecessors EFIL I, I1 and 111. The first EFIL was implemented during 1999-2003 and was very successful in disbursing nearly the full amount o f the Loan (US$252.5 million), reaching out to many different exporting industries al l 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 o f the prudential requirements for the banks. The second EFIL showed even better results and the credit l i ne (US$300 million) was fully disbursed by June 2007, two years ahead o f projections. Financial intermediary participation, as measured by the number o f PFIs participating in the project was high with 11 PFIs. The impressive trend continued with the third EFIL and the amount (US$300 million) i s expected to be fully disbursed by June 2008.

Major Related Projects (active) Financed by the Bank and/ or other Agencies TURKEY: Access to Finance for SMEs

Targeted - Name of ProjecVLoan Organization sector Total Amount Export Finance Intermediation Loan 3 World Bank Exporters $300M Renewable Energy Loan World Bank Energy firms $202M SME Financing World Bank SMEs €160M SME Financing World Bank SMEs $48M SME Development Global Credit EIB SMEs E300M SME Global Loan IV EIB SMEs E250M SME Global Loan V EIB SMEs €250M Autoproductor and Energy Project EIB Firms €40M TSKB APEX Loan EIB SMEs €1 50M Halkbank EIB EIB SMEs E300M AFD Halkbank Credit Line Agence Franqaise de DBveloppement SMEs €50M AFD Halkbank Credit Line Agence Franqaise de DBveloppement SMEs €50M AFD TSKB Credit Line Agence Franqaise de DBveloppement SMEs €50M AFD TKB Credit Line Agence Franqaise de DBveloppement SMEs €20M JBlC SME Credit Line JBlC SMEs JPY27BN CEB Credit Council of Europe Development Bank SMEs €ZOOM Small Enterprise Program EU, KFW, CEB SMEs €75M K M I Industrial Pollution Prevention Loan Kreditanstalt fur Wiederaufbau SMEs €9,7M Source: Turkish Treasury

16

Annex 3: Results Framework and Monitoring

Support export competitiveness by providing medium and long term working capital and investment finance to exporting firms

Sources: National accounts and financial statistics as published by the Central Bank and BDDK.

Private investment/GDP Export growth Credit to the private sector/GDP NBFI assets/GDP

Increased exports by participating exporters

Export multiplier: Incremental export growth by participating

Increased scope of participating financial intermediaries

Increased medium and long term lending to participating exporters

Sub-loan performance in project

exporters /disbursed loan amounts, Targets: >1 Amount disbursed to exporters. Target: disbursement projections.

Improved risk management capacity at Eximbank

Investments by sub-borrowers

Additional information for country’s and CPS development objective: Job creation

Number o f banks and leasing companies included in the project. Target: 6 Non-performing loans/total loan to be measured in number o f loans as well as amounts. Target: <5 percent. Successful implementation o f Eximbank’s technical capacity for future compliance with BDDK’s Basel I1 related requirements for risk management practice Amount o f investments planned in projects supported by investment loans Number o f jobs created in the firms financed by the project

Source: Project reporting.

Source: Project reporting.

Source: Project reporting.

Source: Project reporting.

Source: Project reporting.

Source: Project reporting.

17

Annex 4: Project Description

1, The first component (US$300 million equivalent) i s a replication o f the EFIL I11 project which i s a single-component project consisting o f a credit l ine to TSKB. The credit l ine will be provided to TSKB, with a government guarantee, while TSKB will pass it on in the form o f subsidiary finance to participating financial intermediaries for further on-lending to eligible private exporters.

2. In the second component (US$296.3 million equivalent) Eximbank will borrow and act as an additional implementation agency directly to finance exporters. Eximbank will cater exclusively to the ship-building and machine-building industries because o f their promising export and growth potentials and because it i s well placed to serve these sectors due to i t s established relations.

3. The third component (US$3.7 million) will finance improved risk management capacity at Eximbank. In addition to building back-up capacity for i t s critical IT system to better manage operational risk and upgrading the existing IT systems in, it will help the bank in for Basel I1 implementation that started in January lSt, 2008. The component will include:

0

0

Improved emergency management and the establishment o f disaster recovery center as it will be required by regulators for operational risk management; Implementation o f a ratings based credit appraisal system and monitoring as required under Basel 11; Upgraded IT infrastructure to support the above improvements. Consulting services to assist in credit appraisal for sub-loans in shipbuilding and machine building industries

18

Appendix 4.1 Terms and Conditions

For TSKB

For TSKB, the following terms and conditions shall apply: Initial and ongoing compliance with applicable laws and regulations issued by the Turkish authorities, as certified by independent external auditors on an annual basis; For the duration o f the project implementation period, beginning with year-end 2007, submission o f an audit report, that i s (i) prepared in accordance with International Auditing Standards and International Financial Reporting Standards; and (ii) has an unqualified audit opinion, except as the World Bank shall otherwise agree;

PFI and Sub-Borrower Eligibility Criteria

1. Selection o f Participating Financial Intermediaries:

PFIs will be selected based their expression o f interest in participating in the project and on acceptance by TSKB o f their credit risk as well as the following eligibility criteria:

2.

e

e

e

3.

e

e

e e

For banks:

Total assets during the last two years to exceed a minimum o f US$500 million equivalent on average General compliance with legal and regulatory requirements applicable to the banking industry, including but not limited to such prudential regulations as minimum capital adequacy ratio, maximum foreign currency exposure limits, maximum large exposure to single and connected clients and maximum insider lending limits, etc., duly certified by the banks’ auditors every year and confirmed by management as o f June 30fh every year Audited IFRS financial statements

For leasing companies:

Total lease receivables during the last two years (for which data are available) to exceed a minimum o f US$30 million equivalent on average New lease volume during the last two years (for which data are available) to exceed a minimum o f US$20 million equivalent on average Compliance with BDDK prudential norms General compliance with legal and regulatory requirements applicable to the leasing industry, including but not limited to such regulations as minimum equity capital o f no less than TRY3 million, the total sum o f lease exposures not exceeding 30 times equity capital, and the total sum o f exposures to related parties not exceeding 15 times the equity capital, duly certified by the leasing companies’

19

external auditors every year and confirmed by management as o f June 30th every year Audited financial 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 o f the World Bank loan conditions. The creditworthiness o f the sub-borrowers will be assessed by 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, in coordination 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 i t se l f 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 I1 and EFIL 111, the prior review requirements will be waived. However they will apply for new PFIs and for the $5.OM sub-project threshold. Maximum cumulative loan amount to any sub-borrower may not exceed US$10 million.

For Eximbank:

For Eximbank, the following terms and conditions shall apply:

Initial and ongoing compliance with applicable laws and regulations issued by the Turkish authorities, as certified by independent external auditors on an annual basis; For the duration 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) has an unqualified audit opinion, except as the World Bank shall otherwise agree;

20

5. Eligible sub-borrowers:

Private (private ownership more than 50 percent) exporters in the Shipbuilding, Shipyard and Machine Building industries, will be eligible for participation as sub-borrowers. The prospective sub-borrowers wil l 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 environmental ru les stated as part of the World Bank loan conditions. The creditworthiness of the sub-borrowers will be assessed by the Eximbank, subject to the minimum requirement that the sub-borrowers maintain a maximum debt equity ratio of 85:15 and an average debt service coverage ratio of 1.1: 1 (both after receipt of the sub-loan) unless agreed otherwise by the World Bank. The World Bank, in coordination with Eximbank, will carry out a prior review o f the first two sub-loan applications as well as of sub-loans exceeding US$5 million. Maximum cumulative loan amount to any sub-borrower may not exceed US$20 million.

0

0

0

0

21

Annex 5: Project Costs (millions)

Component Local Foreig n/Total

Credit Line

TSKB (TBD)

Eximbank

Institutional Development Eximbank

Total Project cost

US% e

197.4 65.0

146.3 94.9

3.7

347.3 159.9

22

Annex 6: Implementation Arrangements

1. TSKB i s the borrower for the Component I o f EFIL IV, and the Undersecretariat o f Treasury will provide the guarantee to the World Bank on behalf o f 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 implementation o f EFIL IV. The PIU’s responsibilities, functions and staffing details are given in the Operational Manual. The profile o f TSKB and the working arrangements are given below in annex 6.1

2. Eximbank i s the borrower for Component I1 and I11 and the Undersecretariat o f Treasury will provide the guarantee to the World Bank on behalf o f the Government o f Turkey. Eximbank has identified a program manager and a PIU team to implement the project. The program manager and several o f 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 l i ne component and the institutional development component. The profile o f Eximbank i s given below in annex 6.2.

23

Annex 6.1: Profile o f the Borrower - Component I -TSKB

Overview o f TSKB

1. TSKB i s the largest private investment and development bank in Turkey and accounts for 1.5 percent o f bank loans in Turkey. TSKB mostly takes credit risk with banks, and assessing the creditworthiness o f banks i s therefore at the core o f i t s business. I t was one o f the PFIs in the EFIL I project and currently i s the borrower o f the EFIL I1 and EFIL I11 Loans. As such, it i s well known to the World Bank team through a regular exchange o f views on the implementation o f the EFILs, and through reviews o f TSKB’s audited reports and other financial reporting required under the projects. TSKB maintains an overall sound financial and operational structure, and i s fit to undertake the financial liability and operational commitments o f Component I of 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

Loans 2,393 1,757 Securities 1,503 868

Deposits 0 0

Branches (number) 3 3

2. TSKB’s main business i s to extend medium and long te rm loans. 99 % o f i t s loans are in foreign currency. Trade credit and financial leases are also important products for the bank. Finally, TSKB provides a wide range o f 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 o f i t s stock i s held by non-strategic investors and are traded on Istanbul Stock Exchange (see Annex Figure I. 1 below). As o f December 2007, TSKB had a staff o f 314, with an average length o f service in the bank o f 10 years, and an average age o f 36 years. TSKB has insignificant transactions with i t s 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 o f TSKB i s seen as sound.

24

Figure 1: Ownership of TSKB

lsbank (Turkey’s largest

\

Vakifbank (Large state owned private bank), 50% -sit ty bank), 8%

Stock Exchange, 42%

Source: TSKB website.

Suitability of TSKB as Counterpart for Component 1

4. With more than half o f i t s credit portfolio reflecting credit risk in other banks, TSKB has very good experience assessing bank credit risk, which will be i t s main responsibility under Component 1. Furthermore, TSKB has extensive experience with intermediation o f funds from international organizations, including the European Investment Bank (EIB), Japan Bank for International Cooperation (JBIC), Kreditanstalt f ir Wiederaufbau (KfW), Council o f European Development Bank (CEB), IFC, and Agence Francaise de Development (AFD). TSKB enjoys a special status, which allows the banks to receive Government guarantees on their borrowings and thus makes it eligible for World Bank loans.

Financial Soundness and Risk Exposures

5. TSKB i s a profitable and solvent bank with a sound liquidity position and moderate market risk exposures. I t has a large credit portfolio mostly in foreign currency, exposing the bank to indirect exchange rate risk and shocks to the real sector. The risks are mitigated by extensive use o f bank guarantees, collateral taking, and lending to f i r m s 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 l ine with the largest and best rated banks in the country. Strong capitalization, improved asset quality and profitability, stable funding, and the bank’s niche position as the key positives are cited in the ratings, together with the key risks are related to low fee and commission income and the volatile economic environment in Turkey.

25

Table 2: Rating by Fitch Ratings

TSKB Akbank Isbank Garanti Bank Foreign Currency Long Term Issuer Default Rating BB- BB BB BB Foreign Currency Short Term Issuer

Local Currency Long Term Issuer

Local Currency Short Term Issuer

Default Rating B B B B

Default Rating BB+ BBB- BBB- BBB-

Default Rating B F3 F3 F3 Source: Fitch Ratings. Note: Ratings as o f December, 2007.

Table 3: Ratings by Moody Ratings

TSKB Akbank Isbank Garanti Bank Financial Strength Rating D+ C- D+ C- Foreign Currency Long Term Rating B1 B1 B1 B1

Source: Moody’s Ratings. Note: Ratings as of April 2007.

7. Solvency. TSKB has increased i t s equity, which now amounts to US$634 million or 15.1 percent o f assets, which i s in l i ne with the Turkish banking system. On a risk weighted basis, the capital adequacy ratio o f 27.6 i s very high, reflecting the frequent use o f bank guarantees and f i rst 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 weighted assets 17.9 24.2 28.9 Capital adequacy ratio 19.5 27.6 32.9 Capital/totai assits 13.2 15.1 14.5

Source: Banks Association of Turkey and staffcalculations. Note: The banking system reflects September data, and TSKB reflect December data.

8. Credit risk and loan portfolio performance. TSKB’s loan portfolio i s large and amounts to US$2.195 million, or 52 percent of i t s assets plus another US$198 million in lease receivables. I t has a low risk profile, as illustrated by the low risk weights applied under the regulatory rules with 57 percent o f loans receiving a 100 percent risk weight. The 23 percent o f i t s loans are to banks or with a bank guarantee, which allows the 20

26

percent risk weight. An additional 19 percent of i t s loans are risk weighted at 50 percent, reflecting the use of mortgage collateral.

9. The bank’s gross NPLs, at 0.7 percent, i s lower than the Turkish banking system average and has been reduced to less than one sixth since 2003. The reduction in NPLs reflect mostly collections on existing NPLs, while wr i te offs were about a third of collections. Gross additions to NPLs in 2006 and 2007 and were just US$3 million Thus, the performance of TSKB’s loan portfolio i s highly satisfactory. TSKB provisions i t s NPLs 100 percent, which i s a conservative provisioning policy.

10. Almost al l of the TSKB’s outstanding loans 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 i s mitigated for borrowers that are naturally hedged, for instance by being price takers in export markets. However, even exporters are not perfectly hedged, and collateral value will typically depreciate, and this indirect exposure to exchange rate shocks therefore remains a concern. On balance, TSKB’s loan portfolio has a moderate credit risk profile.

11, Profitability. TSKB’s profitability i s in line with the Turkish banking system as well as with international standards, with ROAA of 3.3 percent and ROAE o f 22.2 percent. The low operating expenses ref lect in part that the bank does not engage in costly retail operations and in part that the bank i s efficiently run.

12. Liquidity. Because TSKB does not take deposits, its liability side is very stable and well protected from liquidity shocks, as confirmed by the very high liquid assetdshort term liabilities ratio of 129 percent. Liabilities are almost entirely borrowings, while interbank money market liabilities take a portion for funding the liquid assets. In contrast to the Turkish Banking sector in general, TSKB has very long term liabilities because it intermediates funds from IFIs with long maturities. This leaves TSKB very resil ient to liquidity shocks.

13. Market risk exposures. TSKB’s direct market risk exposures are very moderate because it does not collect deposits and has a long term funding base and therefore i s able to extend loans with maturities more or less matching the funding it receives. Moreover, since i t s balance sheet i s dominated by foreign currency, the bank i s not very exposed to fluctuations in local currency interest rates. TSKB has manageable short net foreign position amounting to 3.1 percent of i t s capital.

Operational Policy 8.30 (OP 8.30) Considerations

14. The OP 8.30 applies to TSKB for the proposed operation. In summary, the conditions are viewed as being met for TSKB as an APEX institution. Regarding the specific issues under OP 8.30:

(a) adequate profitability, capital, and portfolio quality, as confirmed by Jinancial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank

27

TSKB i s a well capitalized, profitable bank with a sound loan portfolio. The bank prepares financial statements in accordance with Turkish regulations, as well as in accordance with IFRS and the statements are viewed as adequate. TSKB’s December 3 1, 2007 audited financial statements were prepared by independent auditors (Deloitte) according to BDDK standards. This audit opinion was unqualified and certified that TSKB as o f December 3 1,2007, was in full 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 3 1,2007.

- 2007 2006 - 2005 Capital Adequacy Ratio 27.6% 32.9% 37% Single Client Exposure 12% 11% 6% Ratio Group Exposure Ratio 13% 11% 9% Gross NPL Ratio 0.7% 1.3% 2% Loan Loss Provisioning 100% 100% 100% Foreign Currency Open -3.65% 2% -1% Positiodequity

(8) acceptable levels of loan collections

Gross N P L 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 o f TSKB’s loan portfolio i s very good - see also section on credit risk and loan portfolio performance above.

(c) appropriate capacity, including stafJing, for carrying out subproject appraisal (including environmental assessment) and for supervising subproject implementation

The World Bank has extensive and recent experience working with TSKB, and it has proved i t s ability to fulfill the requirements o f the World Bank. Under this operation, TSKB will be lending to banks, which i s a common activity for TSKB.

(d) capacity to mobilize domestic resources

TSKB i s not allowed to collect deposits, and borrows limited amounts in the domestic interbank money market through rep0 operations (US$717 million). Most o f i t s 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 i s a publicly traded privately owned and profitable bank that makes decisions on a commercial basis.

28

&I appropriate prudential policies, administrative structure, and business procedures

TSKB i s subject to bank regulations and appears to fol low a prudent approach to risk management. IFC recently extended a US$50 mi l l ion subordinated loan to TSKB confirming that institution’s trust in TSKB’s procedures. A separate assessment o f financial management i s being conducted and i s attached in Annex 7.

29

Annex 6.2: Profile of the Borrower - Component I1 and I11 - Eximbank

1. Eximbank i s Turkey's official exportimport bauexport credit agency and was established in 1987 as the successor institution to the Turkish State Investment Bank. Eximbank's objectives are to increase the competitiveness o f Turkish exporters and contractors working abroad as well as to create opportunities for them in newly emerging markets. Through i t s export credit, insurance and guarantee programs Eximbank has provided support for 8 percent o f Turkey's total exports in 2007. Eximbank i s not a profit-oriented institution and i s exempt from corporate income tax. The Turkish Treasury i s the sole owner o f the bank and has agreed to a zero dividend policy with a l l profits allocated to retained earnings.

2. Eximbank was the borrower and implementing agency for EFIL I and implemented that project successfully. The team that implemented EFIL I i s mostly still at Eximbank, and the PIU team for EFIL IV i s mostly comprised o f staff with experience from EFIL I.

Legal Foundation

3. Eximbank was established by Law No. 3332 "On the Transformation o f the State Investment Bank into the Export Credit Bank o f Turkey Inc." o f March 25th, 1987 and Cabinet Decree No. 87/11914 "Principles Relating to the Reorganization o f the State Investment Bank under the Name o f the Export Credit Bank o f Turkey, Inc". The Cabinet Decree specified how the State Investment Bank was to be transformed into a joint stock company, and also mandated the use o f two classes o f shares- A and B - which differ from each other only insofar as the Class A shares (representing 5 1 percent o f the total number o f shares) must remain in the ownership o f the Treasury, while the Class B shares (representing 49 percent) may be transferred by the Treasury to public and private banks, financial institutions, insurance companies and other entities. The matters which remain out o f scope o f the Cabinet Decree are governed by the Turkish Commercial Code. The Articles o f Association o f the bank, prepared on the basis o f the Cabinet Decree, are registered in the Trade Registry.

Corporate Governance and Organization Structure

4. Supervisory Board. The Treasury's ownership rights in Eximbank are exercised by a Supervisory Board (the "Supreme Advisory and Credit Guidance Committee") which consists o f several undersecretaries o f economy-related ministries headed by Prime Minister or a State Minister appointed by Prime Minister, the Governor o f the Central Bank o f Turkey, the Chairman, Vice Chairman and Chief Executive Officer o f Eximbank. The Supervisory Board approves the annual lending, insurance & guarantee programs and sets limits for the credits to be extended and insurance & guarantee cover to be issued either on an aggregated basis or by countries, sectors and product groups. The Board o f Directors o f the Bank i s obliged to observe these limits.

5. Board of Directors. The Board o f Directors i s charged with responsibility for al l other decisions concerning Eximbank's operations. The Board consists o f seven Directors, one o f whom, the Chief Executive Officer (CEO), i s appointed by a joint

30

decree o f the State Minister responsible for Eximbank, the Prime Minister and the President o f the Republic, while the remaining six are directly appointed by the State Minister responsible for Eximbank. This i s an interim arrangement, pending the holding o f the first general shareholders meeting which would occur upon transfer o f some or al l o f the Class B shares by the Treasury, after which four Directors would be elected by the holders o f the Class A shares and the remaining two by the holders o f the Class B shares. The Board o f Directors elects a Chairman and Deputy Chairman among i t s elected members. Eximbank i s managed and represented on a day-to-day basis by the CEO, to whom several o f the powers o f the Board o f Directors are delegated.

6. Senior Management and Stafl The CEO i s assisted by four Deputy General Managers. As o f year-end 2007, Eximbank employed 392 staff (including Directors), 66 o f whom have a post-graduate degree and 196 have a graduate degree. The average length o f employee service i s around 17 years and the average age 4 1 years.

Products and Services

7. Eximbank’s products and services include short term pre-shipment and post- shipment export credits, medium term buyers’ credits, and export insurance and guarantees. Short-term pre-and post-shipment export credits are extended to Turkish exporters in Turkish Lira or foreign currency, either directly by Eximbank or indirectly via Turkish commercial banks. Medium and long-term export credit programs finance the export o f capital goods and turnkey projects to be undertaken by Turkish contractors abroad. Most o f 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 o f export credit to foreign buyers.

8. During i t s first years o f existence Eximbank has concentrated on the provision o f short-term export credits. However, in the long-run, the bank intends to place more emphasis on insurance and guarantee programs, and medium and long-term trade and project finance, while leaving short-term trade finance to Turkish commercial banks.

9. In line with the annual programs endorsed by the Supervisory Board, Eximbank’s facil i t ies are structured to reflect strategic priorities for Turkey’s export sector. Thus, the country limits for a selected group o f 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 preferential interest rate (1 percent below comparable TL interest rates on other facilities).

31

I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I

Sources o f Funding and AssetLiability Management

10. Eximbank’s main sources of funding are i t s 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 in international capital markets. Funding composition has been as follows:

Figure 1: Balance Sheet-Liability Composition

TURK EXIM Bank Balance Sheet-Liability Composition -~ 7

Q International Sources I Domestic Sources 6~ Debt Securities lssued 1 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 i t s assets and liabilities. Short term TL export credits are funded by the TL capital base; short term FX export credits are funded by short term FX loans from local and foreign banks; and medium & long t e r m 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 mi l l ion US$ average (during the past two years a net long position o f max 50 mi l l ion U S $ and a net short position of min 20 mi l l ion US$ on a total balance sheet size o f around US$3 billion) and very small mismatches across the entire maturity spectrum o f i t s liability base.

Since Eximbank does not accept customer deposits, i t s main sources o f funding are bilateral funding from commercial banks, raising money in the international loan and capital markets, and direct funding from the Turkish Treasury by way o f capital injections.

As o f September 2007; the outstanding funding portfolio o f the Bank consists of;

- - -

A syndicated loan in an amount US$50 M i l l i on with a maturity o f 1 year, A syndicated loan in an amount o f EURO 225 M i l l i on with a maturity o f 1 year, Another syndicated loan in the amount US$175 M i l l i on 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, i s transferred to the Bank for the development o f the export oriented real sector in the amount o f US$200 million, two lines o f credit at an amount o f JPY 6,6 billion under the guarantee o f Turkish Treasury, from JBIC (Japanese Bank for International Cooperation) for the support o f the projects in third world countries by Turkish businessman, The revolving loan borrowed from Black Sea Trade and Development Bank within the context o f the relationships o f the Bank amounts to US$36 million renewable for 6 months, Bilateral borrowing from international bank in the amount o f EURO 15 million.

-

-

-

Assets composition and credit policies

12. On the asset side, Eximbank’s loan-to-asset ratio during the last five years has been quite high (over 79 percent on average), as can be seen from the following chart. Short term export loans are s t i l l the most important asset category.

Figure 2: Balance Sheet-Asset Composition For short term TL export ~ I

credits, Eximbank’s stated I pricing policy i s to provide I funding to exporters at 2-5 1 I

percent below local money market rates as o f 2007. As its TL denominated capital base i s the main source o f funding, Eximbank s t i l l earns a significant positive lending spread on this type o f lending. For short term F X export credits, Eximbank’s stated pricing policy i s to earn a

approximately 23 basis points over its average weighted costs

positive spread o f

TURK EXlM Bank Balance Sheet-Asset Composition

2003 2004 2005 2006 2007

funds, allowing it to fully cover its overhead

i 0 Securities

~ Short Term Export 1 Credits

costs.

13. For medium and long term F X 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 o f collateral, etc. Eximbank’s stated pricing policy for medium and long term credits i s to earn a positive spread o f approximately 22 basis points over i t s average weighted cost o f funds, still enough to cover i t s overhead costs.

In the context o f the EU Customs Union between Turkey and the EU which was established in early 1996, Turkey adopted OECD Consensus Arrangement principles and provisions set by Council Decision o f the EU on officially supported export credits. Eximbank’s medium term buyers’ credit, insurance and guarantee operations are subject to these provisions. Eximbank i s also a full member o f the Berne Union and Turkey, represented by Eximbank, became a member o f the OECD Group on Export Credits and Credit Guarantees in April 1998.

34

14. At times o f cr is is lending spreads can temporarily decline, and for the short and medium term FX lending can temporarily become negative, as lending rates are adjusted to increases in funding costs with a time lag in order to allow Eximbank to cushion the impact o f sudden interest rate shocks for exporters. However, on an aggregate basis, Eximbank's lending spreads always have been and are likely to remain sufficiently positive to cover i t s operating costs due to i t s zero TL cost capital base.

15. Eximbank's export credit insurance operations are short term in nature. Although total export insurance coverage turnover reached nearly 4.7 billion US$ in 2007, premium income s t i l l constitutes only a small portion o f Eximbank's net income (7.4 percent in 2007).

16. For both i t s short and medium/long term export insurance cover, Eximbank's premium rates are comparable to those o f other export credit agencies, as evidenced by the disclosures in this respect made by al l export credit agencies to the Berne Union.

Credit Rating

17. Eximbank received an initial credit rating from Standard & Poor's and Moody's in 1997 in order to be able to borrow in international money and capital markets without Government guarantee. Moody's has assigned a Bal foreign currency issuer rating to Eximbank on 8 June 2006 which i s two notches higher than Turkey's sovereign rating

Table 1: Rating by S&P

Eximbank Foreign Currency Long Term Issuer Default Rating BB- Foreign Currency Short Term Issuer

Local Currency Long Term Issuer

Local Currency Short Term Issuer Default Rating B Source: S & P Ratings., March 2008

Default Rating B

Default Rating BB

Capital Adequacy and Asset Quality

18. The Law No. 3332 establishing Eximbank provides in Article 4 (C) that losses incurred by the bank in i t s credit, insurance and guarantee operations as a result o f political risk are to be met by the Treasury. In addition, the Treasury and Eximbank executed a Guideline for Procedures on November 6, 1997 setting out the procedures by which claims for reimbursement are to be made. Eximbank must advise the Treasury o f the amount o f the claim by September of each year. The Treasury will then apply to include these funds in the Republic o f Turkey's consolidated central Government annual budget for the following year. If approved for inclusion in the budget, payment will be made to Eximbank, following approval o f the budget, at the time budgetary payments are made. To date, this mechanism has worked in a satisfactory manner in practice.

35

19. While the responsibility for political risk i s thus clearly assigned to the Treasury, Eximbank retains the commercial risk on all o f i t s operations. For i ts 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 i t s exposure to Turkish exporters. Thus, in all o f i t s short te rm lending (direct and wholesaling through the banking system), i t s credit exposure i s nearly exclusively to the Turkish banking system. Eximbank has a bank risk monitoring unit to monitor th is exposure, which was created with the assistance of Citibank US. While this unit i s able to monitor bank risk, there i s some room for improving the analytical techniques being used which have not fully kept up with recent best practice standards (e.g., BIS capital adequacy ratios) and the scale o f Eximbank’s lending operations to the Turkish banking system.

20. For i t s 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 i s born by the Treasury. For i t s short te rm export credit insurance operations which cover mainly commercial risk, approximately 70 percent o f the risk i s reinsured with prominent reinsurance companies such as Munich Re and Swiss Re. Medium t e r m insurance cover i s mainly for political risk and thus default risk i s again born by the Treasury.

Loan Loss Provisioning Rules ;

21. The new Banking Law requires banks to classify their loans and to set aside provisions for the non-performing loans accordingly, but banks that do not collect deposit, including Eximbank, are exempt from making such provisions. However, although Eximbank i s not legally obliged to, it has done and wi l l continue to implement i t s long-standing conservative approach to provisioning.

(1) Specific Provisions-Provisions for non-performing short-term loans - the amount and the percentage o f the non-performing loans (NPL) o f Eximbank are very insignificant in respect o f short-term export credits. The Bank has set aside 100% provisions for short- term non-performing receivables amounting to TRY 46 million as at December 3 1,2007.

(2) General Provisions - The Bank also provides general provisions (1% o f the cash loans, 0.2% o f the non-cash loans) for the amount o f al l assets as well as for the amount o f guarantees.

In summary, as at December 31, 2007, the total amount o f provisions with respect to the exposure on the outstanding loans, insurance and guarantees and employee termination benefit was TRY 107 million.

Earnings and Liquidity

22. As indicated earlier, Eximbank’s pricing policies have allowed it to maintain and even improve i ts net interest income margin on an aggregate basis, as can be seen from the following chart:

36

Figure 3: Income and Expense Analysis

Percent ROA ROE

TURK EXlM Bank-Income and Expense Analysis

2003 2004 2005 2006 2007 4.7 4.3 9.1 7.9 9.3

18.5 13.1 21.9 15.3 17.2

700.000

600.000

500.000 - 400.000

3 300.000

I- C Q

0 Ff 200.000

100.000

0 2003 2004 2005 2006 2007

-e Net Interest incom

+ Net income

Loan Loss Rovision Expense

I Other Operating Expense

+Other Operating Income

23. This chart also indicated that Eximbank’s non-interest operating expense and loan loss provision expense have been kept in check as the bank’s business has grown. As a result, the bank’s return on assets and return on equity consequently has improved over the last four years:

Table 2: Eximbank - Return Assets/Return on Equity

24. As a result o f Eximbank’s matched asset/liability profile, the liquidity profile o f Eximbank has remained relatively stable during the last five years:

37

Figure 4: Liquidity Ratios

I TURK EXlM Bank -Liquidity Ratios

70

60

50

40

30

20

10

0 2003 2004 2005 2006 2007

+READILY MARKETABLE ASSETS +VOLATILE LIABILITIES AS PERCENT AS PERCENT OF TOTAL ASSETS (%) OF TOTAL LIABILITIES (%)

25. As Eximbank's short-term pre-shipment credits are mostly self-liquidating, Eximbank should be in a position to generate enough liquidity from its short term loan portfolio in case it would face sudden liquidity needs beyond its readily marketable asset portfolio.

Credit Programs

26. Eximbank provides financial support to Turkish exporters starting from the early stages o f production against export commitments through several credit programs. Short-term export credits are extended both directly by Eximbank and indirectly using selected commercial banks as intermediaries. Short-term export credits are extended with a maturity o f up to 12 months and 18 months in YTL and foreign currency respectively and the relevant exposure as o f September 2007 i s given in the following table:

38

Table 3: Loan Portfolio 31.12.2007 (000 YTL)

nt’l Transport Marketing

Risk Management Practices at Eximbank

27. After the issuance o f the Basel I1 accord and EU’s directive to adopt it, the BDDK decided to implement Basel I1 for banks in Turkey and published in May 2005 “The Road Map for Basel 11” which consists o f the basic policies and strategies for the convergence to Basel 11. The framework suggested implementation on January ISt, 2008 o f the standardized approach for scoring models with the advanced approach to be implemented a year later. The schedule was delayed by a year, so the ratings models must now be in place by January Is‘, 2009.

28. In response, Eximbank’s Board o f Directors has approved “Bank’s Road Map for Basel 11” in October 2005. Within the framework o f the roadmap, a re-organization was implemented in 2007. Following this reorganization, company and bank information and analysis activities were centralized under Risk Analysis and Assessment Division consisting o f Bank Analysis, Company Analysis and Information divisions. As a preparation for BASEL 11, the new department started activities to establish and operate a credit scoring system. BDDK decided to

39

implement BASEL I1 rules pertaining to the credit risk at the beginning o f 2009. In accordance with the BDDK deadline for the start o f 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 i s planning to use IBRD credits’ institutional development component to finance necessary expenditures in regard to the establishing o f credit risk model including 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 implement the internal ratings based model.

29. The risk management unit was originally established in 2002 with a reporting structure directly to the board through audit committee. The risk management unit has four professional staff, and together with the internal control unit (four professional staff) and internal audit board (three professional staff) report directly to the audit committee o f Eximbank’s executive board in l ine with best practices. Operational risk i s already being measured, and the regulator imposes a charge to capital for operational risk.

Operat ional Policy 8.30 (OP 8.30) Considerations

30. The OP 8.30 applies to Eximbank for the proposed operation. In summary, the conditions are viewed as being met for Eximbank. Regarding the specific issues under OP 8.30:

(a) adequate profitability, capital, and portfolio quality, as confirmed by financial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank

Eximbank 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 3 1, 2007 audited financial statements were prepared by independent auditors (PricewaterhouseCoopers) according to BDDK standards. The audit opinion was unqualified and certified that Eximbank as 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 3 1,2007.

- 2007 - 2006 - 2005 Capital Adequacy Ratio 100% 127% 69% Single Client Exposure Ratio 14.3% 17.4% 15.4% Group Exposure Ratio NIA NIA NIA Gross NPL Ratio 1.3% 1.5% 1.4%

Foreign Currency Open Position/equity 0.32% 3.14% 0.83%

Loan Loss Provisioning 100% 100% 100%

(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 o f Eximbank’s lending operations.

(c) appropriate capacity, including stafJing, for carrying out subproject appraisal (including environmental assessment) and for supervising subproject implementation

The World Bank has previous experience working with Eximbank, and it proved i t s ability to fulfill the requirements o f the World Bank, Under this operation, Eximbank will be lending directly to f i rms, which i s a common activity for Eximbank.

(d) capacity to mobilize domestic resources

Eximbank i s not allowed to collect deposits, but it i s rated by international ratings agencies and i s borrowing internationally.

(e) adequate managerial autonomy and commercially oriented governance

Eximbank i s a separate legal entity owned by Turkish Treasury. The bank has the capacity to assess credit risk, and i t i s committing to making decisions on a commercial basis in the EFIL IV project.

appropriate prudential policies, administrative structure, and business procedures

Eximbank i s subject to bank regulations and appears to follow a prudent approach to risk management. A separate assessment o f financial management i s being conducted and i s attached in Annex 7 .

41

Annex 7: Financial Management, Audit and Disbursement Arrangements

1. assessment for the project i s as follows:

The overall financial management risk for EFIL IV i s moderate. A summary o f the risk

FM Risk Risk Mitigating Measures Rating

Table 1: Summary o f Risk Assessment

Residual Risk

Inherent Risk Country Level. Specialized regulatory 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 involved in the project and EXIM will act as a retailer for the first time.

Moderate

Overall Inherent Risk

There i s a well functioning banking system regulated by the Banking Regulation Supervisory Agency.

Moderate

Control Risk Budgeting - , Both banks

Moderate

Moderate

have their own budgeting procedures and the project will be taken into consideration in budget formulations and revisions Accounting- Both banks have well fimctioning accounting systems and the projects will be full integrated into these systems. Internal Controls. The projects will be subject to the internal controls procedures existing in the banks. Disbursements from the loan account will be made upon submission o f invoices by the beneficiary enterprises. Funds Flow. Traditional disbursement will be used. Financial Reporting Auditing - Both bank are required to submit audited

TSKB has been successfully implemented EFIL I1 Low and i s successfully implementing EFIL Ill. Eximbank successfully implemented EFIL I. Disbursements wil l be made to export companies upon submission o f invoices.

L o w

financial statements to

Low

Low

Low

Low

Low

Low

Low

Low Low

Low

Low Low

Overall Control Risk I Moderate I

Country Issues

Low

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. Ma in 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. Ma in 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.

Overall FM Risk I Moderate I

3. EFIL IV will be disbursed through banks, financial leasing companies and directly to sub-borrowers. The accounting and auditing requirements applicable to the Banks and financial leasing companies in Turkey are determined by the Banking Regulation and Supervision Agency (BDDK). Banks and financial leasing companies submit quarterly financial reports to the BDDK and publish audited annual financial statement^.^ Only auditors approved by the BDDK may carry out such audits. Any changes 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 required to report to the BDDK on banks’ and financial leasing companies internal control and risk management systems, as well as being obliged to report direct to the BDDK with respect to certain issues which may threaten the going concern nature o f a bank or financial leasing company.

Low

4. Under the current EFIL I11 project the participating banks are required to be in compliance with the BDDK prudential ratios set forth in the banking law and regulations issued by BDDK. Also, the participating financial leasing companies are required to be in compliance with the BDDK prudential ratios set forth in the regulations issued by BDDK. Banks and financial leasing companies in Turkey are required to prepare financial statements in compliance with the BDDK accounting requirements. The BDDK requires Banks and financial leasing companies to comply with Turkish Accounting Standards set by the Turkish Accounting Standards Board. For regulatory purposes banks and financial leasing companies have to consolidate only the financial statements 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 in compliance with IFRS , where al l participations are subject to consolidation

5 . The BDDK also issues rules governing the external audit o f the financial statements o f banks and financial leasing companies and hence only auditors approved by the BDDK may carry out such audits. Both TSKB and Eximbank are ful ly in compliance with the BDDK prudential regulations.

The quarterly prudential reports are prepared in accordance with the decree 26430 dated February 10,2007 modified by the decree 2665 1 dated September 22,2007.

43

Strengths

6. The current EFIL I11 has been disbursing satisfactorily and the financial management arrangements for the project are highly satisfactory. TSKB will apply the same arrangements for EFIL IV. Eximbank, which i s the new implementing entity in EFIL IV i s also a very experienced through i t s role as the implementing institution for the EFIL I and had satisfactory FM arrangements during the implementation o f EFIL I.

Weaknesses and Action Plan

There are no specified financial management weaknesses for the project.

The Implementing Entity

7. TSKB will continue to be an implementing entity o f EFIL IV. TSKB was established in 1950 and i s one o f the leading investment banks in Turkey. The current EFIL I11 implementation arrangements in TSKB where a PIU team comprising o f experienced and qualified staff oversees the implementation and coordination activities i s satisfactory to the World Bank.

8. There will also be a new implementing entity for the repeater project; Eximbank. Eximbank was the implementing entity for the EFIL I. Eximbank was established in 1987 and i s the sole off icial export credit agency in Turkey. The Eximbank i s fully owned by the Turkish Government (the Turkish Treasury holds 100% o f the shares) and has been mandated to support foreign trade and Turkish contractorshnvestors operating overseas. A PIU team i s designated in Eximbank under the supervision o f one o f i t s deputy general managers to oversee the implementation o f EFIL IV. The designated staff will also be responsible for the coordination o f the project activities. The staffs in Eximbank’s PIU team includes those who worked previously under EFIL I and are very experienced and highly qualified.

The risk associated with implementing entity i s low.

Budgeting

9. The financing under EFIL IV forms a part o f TSKB’s own budgeting procedures. Since Eximbank i s also a limited liability company the only budgeting requirement i s to integrate the project to i t s own budgeting procedures.

The risk associated with budgeting i s assessed as low

Accounting

10. Staflng. Both banks will use their own staff for the financial management o f the project. The staffs assigned to work on the project both in TSKB and Eximbank are highly qualified and experienced. There i s a clear segregation o f duties between the staff with respect to evaluation o f applications, accounting and reporting.

1 1. Information systems. TSKB uses a web based application, approval and monitoring system for the ongoing EFIL I11 where i t acts as an APEX. The system i s accessible by the PFIs from the web. The PFIs make their initial application as well as their withdrawal applications from EFIL IV by using the system and are able to monitor the status o f each application real time

44

from the web. The system has adequate security levels and i s fully integrated into the management information system o f the bank. The quarterly FMRs are generated automatically by the system. Same system will be used for EFIL IV.

12. The accounting system of Eximbank i s an oracle based system that i s fully integrated with other applications o f the bank. I t i s developed in house and maintained and updated regularly by bank staff. Accounting o f banking transactions (like insurance/loans/financing) are done automatically in the system by staff and the Accounting department o f the bank obtains daily reports like the trial balances and BDDK prudential reports directly from the system. Since Eximbank will act as a retail bank in EFIL IV the project accounting will be fully integrated into i t s own system.

13. Accounting Policies and Procedures. The project operational manuals (OM) for EFIL IV prepared by TSKB and Eximbank separately are detailed about the work flows in the project and they also include the formats o f the Interim Unaudited Financial Reports.

The risk associated with accounting i s 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 i t through the system and the system generates an e-mail to the manager o f the financial analysis and engineering department. After the completion o f the financial and technical assessments a fax message and an electronic approval message i s generated by the system. The fax message i s signed by the managers o f the engineering department and the operations department and transmitted to the intermediary bank. Following this approval process the intermediary banks and the beneficiary enterprises could then send invoices for withdrawals. When this 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 i s completed the funds department (Treasury department) releases the funds from the special account with the approval o f the operations department and the credits division within operations generates the accounting records automatically through the system. Copies o f invoices relating to sub-loans extended by the PFIs to their clients are sent to and kept at TSKB.

15. Eximbank will use i t s own internal control systems for the implementation o f the credit line. Since Eximbank will lend directly to the beneficiary enterprises, technical and financial analysis o f the applications will be made by the Risk Analysis and Assessment Division o f Eximbank. The loan to the beneficiary enterprise will be processed by the Specific Loans Division and will be subject to the approval o f the Eximbank’s board. Disbursements will be made upon submission o f invoices and the invoices will be controlled for compliance by the Loans department. When the beneficiary enterprises request i s processed funds will be released from the designated account to the bank account o f the enterprise with the approval o f the financial and loans departments.

16. subject to their regular reviews.

Both banks have internal audit departments and the project related transactions will be

The risk associated with internal controls and internal audit i s low.

45

Funds Flow

17. There will be two special accounts in the name o f TSKB, one in USD and one in Euro for the project. Funds from the loan wil l be made available to PFIs following submission o f 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 o f i t s 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 f low i s low.

Retroactive Financing.

18. Retroactive Financing in an aggregate amount not exceeding $39.4 mi l l ion for the TSKB USD tranche and €13 mi l l ion for the TSKB EUR tranche, and $30 mi l l ion for the Eximbank USD tranche and €1 8.94 mi l l ion for the Eximbank for the EUR tranche, may be made in respect o f Sub-loans or Lease Financing made in accordance with criteria and procedures set forth in the Loan Agreement and Operational Manual before that date but after July 1" 2007.

Financial Reporting

19. Both banks will maintain records and will integrate the accounting for the funds provided for the project into their systems. The interim unaudited financial reports (IUFR) will be prepared semi-annually and will be submitted to the Bank no later than 45 days after the end o f 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 o f funds by loan customer and sector separately in US Dollars and Euros

22. project also include the format o f the IUFRs.

The IUFR templates will be attached to the Minutes o f Negotiations. The O M S for the

The risk associated with reporting and monitoring i s 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 o f EFIL I11 and these reports were also satisfactory to the Bank.

46

24. Annual audits o f Eximbank are also undertaken on an International Financial Reporting Standards (IFRS) basis in accordance with International Auditing Standards by Price Waterhouse Coopers (PWC). The last three years’ audit reports (in accordance with IFRS) are reviewed and al l were unqualified. Audit o f the EFIL IV financial statements (project sources and uses o f funds and designated account statement) will be integrated into the auditors TOR. Eximbank has been engaging the services o f international auditors and the former auditing arrangements under EFIL I were satisfactory to the Bank.

Audit Report

Entity financial statements

Project financial statements (PFS) including SOEs and designated account. PFS include sources and uses o f funds and designated account statement

25. TSKB and Eximbank separately.

The following chart identifies the audit reports that will be required to be submitted by

Due Date

Within six months after the end o f each calendar year

Within six months after the end o f each calendar year and also at the closing o f the project.

The risk associated with audit i s low.

B. Disbursement Arrangements

Each bank will have two designated accounts (DA); one in Euros and one in US Dollars. TSKB will have the designated accounts in i t se l f and they will have authorized allocations o f USD 40 million and Euros 13 million. Eximbank will have the designated accounts in one o f i t s overseas correspondent banks and the accounts will have authorized allocations o f USD 30 million and Euros 19 million. The withdrawal applications that will be submitted by banks will have two signatures p-indicated in their l i s t o f authorized signatures.

Applications documenting eligible expenditure utilized from the DAs will be submitted to the Bank on a quarterly basis, and will include a reconciled bank statement as well as other appropriate supporting documents.

Disbursements from the IBRD Loan Account will follow the transaction-based method, Le., traditional Bank procedures: Advances, Direct Payments, Special Commitments and Reimbursement (with full documentation and against Statements o f Expenditures (SOEs)). For payments, above the Minimum Application Size, as specified in the Disbursement Letter, the Borrower will submit withdrawal applications to the Bank for payments directly from the Loan Account. TSKB and Eximbank will prepare and authorize their withdrawal applications.

Disbursements will be made on the basis o f full documentation for Component C (a) contracts for goods costing more than the equivalent o f USD 400,000 each; (b) services under contracts o f more than the equivalent o f USD 200,000 for each consulting firm and more than the equivalent o f US$50,000 each for individual consultants. For Components A and B the records o f evidencing eligible expenditures for payments against sub-loans valued at USD 20 million

47

equivalent or more should be provided. Disbursements below these thresholds will be made according to certified Statement o f Expenditure (SOEs). Full documentation in support o f SOEs would be retained by the banks for at least two years after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account was made. This information will be made available for review during supervision by Bank staff and for annual audits which will be required to specifically comment on the propriety o f SOE disbursements and the quality o f the associated record-keeping.

C. Supervision Plan

During project implementation, the Bank will supervise the project’s financial management arrangements as follows; (i) during the Bank’s supervision missions financial management and disbursement arrangements will be reviewed to ensure compliance with the Bank’s minimum requirements, (ii) project’s semi-annual IUFRs, entity and project financial statements o f each bank and related audit reports and management letters will be reviewed. As required, a Bank- accredited financial management specialist will assist in the supervision process.

48

Annex 8: Procurement Arrangements

A. General

1. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 revised in October 2006; (Procurement Guidelines); and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 revised in October 2006 (Consultants’ Guidelines), and the provisions stipulated in the Legal Agreement. The procurement arrangements are described below.

B. Procurement of Goods and Works under Export Development Sub-projects (First and second components of the Project)

2. Procurement of Goods: Procurement of goods and related services (installation and maintenance) financed under the proposed project will be according to the World Bank Procurement Guidelines. For contracts below US$l 0.0 million equivalent, established local private sector commercial practices will be followed in accordance with paragraph 3.12 o f the Procurement Guidelines. Care has to be taken o f other relevant factors such as time of delivery, efficiency and reliability o f the goods and availability of maintenance facil i t ies and spare parts thereof, and in case o f non-consultant services, o f the quality and competence of the parties rendering them. Advertising in the local and international press will not be mandatory. However, International Competitive Bidding (ICB) would be required for individual contracts above US$lO.O million for goods and related services in accordance with Section I1 of the World Bank’s Procurement Guidelines. Al l 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 wil l not be eligible for financing out of the Loan. The procurement of the second hand goods i s not eligible for financing out of the Loan.

3. Procurement o f Works: Procurement of works financed under the proposed project will be according to the World Bank Procurement Guidelines. For civil works estimated to cost less than US$l 0.0 million equivalent per contract, established local private sector commercial practices will be followed in accordance with paragraph 3.12 o f the World Bank’s Procurement Guidelines. Care has to be taken of the capacity of the contractors and the cost and quality of the works. Advertising in the local and international press wil l not be mandatory. For contracts above US$lO.O million, International Competitive Bidding (ICB) would be required for individual contracts in accordance with Section I1 of the World Bank’s Procurement Guidelines. A l l ICB contracts for works shall be subject to prior review by the World Bank. Contracts placed by sub-borrowers on their subsidiary or affiliated companies will not be eligible for financing out of the Loan.

4. Private Sector Procurement Practice in Turkey: In the Country Procurement Assessment Report (CPAR) dated June 2001, i t 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 o f goods, the local practice i s to prepare the technical specifications and solicit quotations from the local and/or

49

international market. In case o f medium and large works, the technical specifications are usually prepared by consultant companies and bids are collected from qualified contractors. Minor works are generally tendered on a lump s u m 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 o f 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 ru le in the sector i s to procure the least cost goods, works and services consistent with minimum quality requirements.

C. Procurement of Goods and Employment o f Consultants under Component 111: Institutional Development and Technical Assistance to Eximbank

5 . Procurement of Goods: Under this component o f the Project, (i) the procurement o f 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 o f 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 required to be procured from the original database software supplier. See Table 2-Procurement Arrangements for the details o f the planned procurements. All ICB, D C contracts and f i rs t shopping contract are subject to the World Bank’s prior review. There will be no domestic preference in the procurements.

6. Under this component o f the project the consultants will be employed by Eximbank (i) for the technical and financial reviews o f 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 o f 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. In case 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 l i s t can comprise entirely national consultants. If the contracts with the Firms are above US$200,000 equivalent, Quality and Cost Based Selection (QCBS) wil l be applied in accordance with Section I1 o f the World Bank’s Consultants’ Guidelines. Al l QCBS contracts and f i rst CQS contract are subject to the Bank’s prior review, and al l individual consultant contracts above US$50,000 equivalent shall be subject to the World Bank’s prior review.

Procurement o f Consulting Services:

D. Procurement Plan and General Procurement Notice

50

7. Because of the demand-driven nature o f the project, it i s possible to estimate neither the sub-borrowers nor their procurement requirements under Component I and I1 o f the Project at the appraisal stage or during the implementation o f the Project. Therefore, i t i s not possible for the borrowers to develop a Procurement Plan which provides the basis for the procurement methods. Similarly, since the contract sizes and the methods can not be estimated it i s not possible to prepare and publish a General Procurement Notice for Component I and I1 o f the Project. I t i s expected that each sub-borrower will provide a l i s t o f procurements planned under the sub-loan. In case any sub-project includes ICB, special procurement notice will be published in accordance with the Procurement Guidelines. However, Eximbank, at appraisal, developed a Procurement Plan for Component I11 o f the Project which provides the basis for the procurement methods and review thresholds. This plan has been agreed between Eximbank and the Project Team on April 14, 2008 and i s available from the Eximbank PIU team. It will also be available in the Project’s database and in the World Bank’s external website. The procurement plan will be updated annually or as required to reflect the actual implementation needs and improvement in institutional capacity. The contracts under Component I11 o f the project are listed in Table 2 below. A General Procurement Notice will be published by Eximbank in the dgMarket and United Nations Development Business (UNDB) online for the Institutional development part o f the Project in May 2008.

E. Frequency of Procurement Supervision and Review Procedures

8. The Bank will review the procurement arrangements proposed/performed by TSKB and Eximbank every year, including contract packaging, applicable procedures, and the scheduling o f the procurement processes, for i t s conformity with World Bank Procurement and Consultant Guidelines, the proposed implementation program and disbursement schedule.

(a) Prior Review for the Contracts under Component I and I1 of the Project: The following procurement action and documentation would be subject to Prior Review by the Bank in accordance with the procedures set forth in paragraphs 2 and 3 o f Appendix 1 to the World Bank Procurement Guidelines.

For Contracts awarded through ICB; prior review o f al l Bidding Documents, Bid Evaluation Reports, Recommendations o f Contract Award and draft Contract will be conducted.

For Contracts awarded through Commercial Practices; prior review o f the first two contracts will be conducted for TSKB and Eximbank.

(b) Prior Review for the Contracts under Component I11 of the Project: Prior review thresholds and number o f contracts subject to prior review are provided in the approved Procurement Plan.

(c) Post Review: The procurement documents for a l l other contracts shall be subject to the World Bank’s post review in accordance with the procedures set forth in paragraph 5 o f Appendix 1 to the World Bank Procurement Guidelines on a random basis, one in ten contracts for Component I and I1 o f the Project and one in five contracts for the Component I11 o f the Project. Post review o f the procurement documents will normally be undertaken during the World Bank supervision mission or as the Bank may request to review any particular contracts at any time. In such cases, the TSKB and Eximbank shall provide the Bank for i t s review the relevant documentation. The post review shall be conducted by the Bank’s Procurement Specialist.

51

F. Assessment o f the Agency’s Capacity to Implement Procurement and Private Sector Procurement Practice in Turkey

9. Procurement Capacity Assessment: In case o f procurement under sub-loans and leases, TSKB and Eximbank will be responsible for ensuring that the procurement rules for sub-loans and leases specified in the Loan agreement are followed by the sub-borrowers. TSKB will also be responsible for reviewing and monitoring the compliance with the procurement rules by the PFIs and leasing companies, and their sub-borrowers (beneficiary enterprises). Specialists assigned for the procurement arrangements within the TSKB and Eximbank’s PIU teams will be responsible for a l l procurement oversight for the management o f the project. The PIU teams will keep the records and copies o f the documents o f 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 o f the sub-projects not requiring a prior review. The PIU teams will be responsible for assembling the documentation related to specific procurement transactions from the PFIs and sub-borrowers in order to facilitate the Bank’s reviews.

10. TSKB was responsible for the implementation o f the similar EFIL I1 project, and i s s t i l l implementing the EFIL I11 project. N o procurement problem has been encountered both in EFIL I1 and I11 projects. TSKB i s also implementing similar World Bank financed projects for Small and Medium Enterprises and Renewable Energy. TSKB Engineering department i s 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 o f 7 experienced Engineers (Mechanical, Chemical, Industrial, Civil and Electrical-Electronic Engineers) who are experts in their fields. The engineers are well aware o f the market prices for the goods and works under consideration and have experience in the procurement activities. An assessment o f 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 30-3 1, 2008. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible from the procurement activities. The overall risk for procurement i s low in TSKB.

11. Eximbank successfully implemented the EFIL I project as an APEX Bank. The number and the qualifications o f the staff that will be responsible in managing the sub-loans to enterprises are sufficient for the satisfactory implementation o f the project. The existing staff i s very experienced on the commercial procurement practices. However, Eximbank does not have Engineering Department to review the cost estimates o f the sub-loan applications. Majority o f the staff do speak English and have good understanding on the Bank’s terminology. They are good at using electronic communication and documentation.

12. Since there i s no Engineering department in i t s current organization structure for reviewing the costs in the sub-loan applications, and also different from EFIL I project, i t will operate as retail lender, and there will be an ICB under the Institutional Development Component and i t s staff has limited experience in the ICB, the procurement under the Project i s put in the moderate risk category for Eximbank.

52

13. The World Bank procurement staff wil l be in close interaction with the PIU teams at TSKB and Eximbank during the implementation o f the Project, and wil l monitor the staffing, document quality, review procedure and archiving o f the procurement documents. The World Bank’s procurement specialist wil l arrange procurement trainings to relevant staff in the TSKB and Eximbank upon their request.

14. In order to reduce the procurement risk to Low in Eximbank the World Bank’s procurement specialist will be involved in the early stage o f the procurements under Component I11 of the Project and will closely work with Eximbank staff. Eximbank will hire Technical Experts required for the cost review of the sub-loan applications before the approval o f the first sub-loan application for investment finance purposes.

Table 1: Thresholds for Procurement Methods and Prior Review (US$ Million equivalent) for Component I and I1 of the Project

ICB Commercial Practice Expenditure Category Thresholds Sub-loans Goods No threshold (apply when needed) Civil works No threshold (apply when needed)

Prior Review

510 51 0

All contracts First two contracts in Component I and I1 o f the Project financed with the proceeds of the Loan

53

.1 z

P

j

i!

0 L

F

y VI

8 v)

8

E E E D

'E 6

5 s g

,$

E

C E

m

E

'5 e! 1

Annex 9: Environmental Review Procedures

1. In accordance with World Bank safeguard policy OP/BP/GP 4.01 (Environmental Assessment), that incorporate the Republic o f Turkey’s regulatory requirements for Environmental Review (Regulation on Environmental Impact Assessment published in Official Gazette No: 253 18, dated 16 December 2003, as supplemented by Article 10 o f Environmental Act No: 2872 dated August 9th, 1983) the project has been assigned Category “FI”. Under this assignment, TSKB already has an established Environmental Assessment Framework document acceptable to the World Bank that defines environmental assessment procedures to be used in sub-project evaluation. Eximbank will prepare an Environmental Assessment Framework document acceptable to the World Bank that defines environmental assessment procedures to be used in sub-project evaluation. The Framework document i s included as a separate chapter in the OM. Eximbank wishes to include the possibility o f sub-projects that may, by Turkish environmental regulations, require an Environmental Impact Assessment Report. The O M will define procedures consistent with both Government o f Turkey Environmental Assessment requirements and World Bank Environmental Assessment policies and procedures utilized in similar operations in Turkey.

2. responsibilities for each o f the following elements:

The framework documents o f both Eximbank and TSKB will identify institutional

Sub-project Loan Preparation 0 Environmental screening category 0 Environmental impact assessment 0 Environmental review process a Prior and post review

Sub-project Implementation 0 Arrangements for environmental management, if necessary (mitigation and monitoring) a Preparing o f environmental screening form

A brief description o f arrangements to be utilized i s presented below:

For sub-projects that do not require an EIA, PFI and Eximbank, in cooperation with the sub-borrower, will prepare an environmental screening form to define the environmental issues associated with the sub-project and how they will be mitigated and monitored. The sub-borrower will also be responsible for ensuring that al l Government environmental approvals, permits and licenses are secured. Demonstration o f this due diligence would be provided to TSKB and Eximbank, which will review this information as an element o f their sub-project appraisal process. TSKB and Eximbank will examine selected sub- projects at their discretion.

3. For sub-projects that do require an EIA, the sub-borrower would be required to submit to TSKB and Eximbank: (a) the Ministry o f Environment and Forestry EIA approval statement (Environmental Impact Assessment Positive Decision), (b) the MoEF

55

approved EIA together with an Addendum that would include any supplemental information required by the World Bank for “Category A” EIA projects. The EIA and “World Bank Addendum” would be reviewed and approved by the World Bank, and disclosed in Turkey (Turkish language version) and the World Bank InfoShop (English language version). TSKB and Eximbank would not be permitted to continue processing the sub-project until World Bank approval of the EIA and Addendum i s offered and disclosure in Turkey and the World Bank InfoShop has been completed. The World Bank will have the authority to review and post review al l 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, al l documentation was properly filed and recorded, and the conditions of approval by the Provincial Directorate o 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 environmental recommendations for the selected enterprise. The World Bank supervision team will also review, ad hoc, environmental documentation.

56

Annex 10: Occupational Health and Safety in the Shipbuilding Industry

1. Shipbuilding 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 o f Labor and Social Security (MoLSS) recently and in collaboration with the industry introduced training requirement and certification o f 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 i s exacerbated by rapid employment growth and widespread use o f sub-contractors for blue-collar labor. The rapid employment growth in the industry means that many workers have l i t t le 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 f i r m s 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 i s 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 shipbuilders association (GISBIR), the labor union, and the MoLSS , while working to upgrade the training qualifications and the regulations related to occupational health and safety standards in the shipyards specifically, 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 bind both the management o f the shipyards and unions to have a trainer on occupational health and safety for each shipyard and commit to train a l l 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 wil l be a reason for losing their contracts.

6. As a second condition o f the protocol, the MoLSS will inspect al l 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 wil l eventually enable the shipyards to apply for I S 0 1800 1 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, wil l provide enough credibility regarding the: (i) quality o f the workers skills and training level; and (ii) o f the quality regarding the occupational health and safety standards, in the shipyards. 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

ROC review' Initial PID to PIC

Initial ISDS to PIC Appraisal

Negotiations Board Approval

Planned date o f Effectiveness for TSKB Planned date o f Effectiveness for Eximbank Planned date o f mid-term review

Planned closing date

Feb 8" 2008

March 20" 2008 March 2lSt 2008

March 2lSt 2008 March 3 lst 2008

April 14th 2008 May 22"d 2008

September 1 St 2008 August 1'' 2008

November 1 st 201 0

June 3 Oth 20 13

Feb 8" 208

March 20th 2008 March 23rd 2008

March 23'd 2008 March 3 1'' 2008

Apri l 14'h 2008

Key institutions responsible for preparing the project: TSKB, Eximbank, The Turkish Treasury (Guarantor)

Bank staff and consultants who worked on the project included:

Steen Byskov Financial Sector Spec. ECSPF Gurhan A. Ozdora, Senior Operations Off. ECSSD Isfandyar Z. Khan Financial Sector Spec. ECSPF

Nasreen Bhuller Program Assistant ECSPF Selma Karaman, Program Assistant ECCU6

Hali l Agah Senior Rural Development ECSSD

Hannah Koilpillai Senior Finance Officer LOAFC

Zeynep Lalik Financial Management ECSPS

Furuzan Bilir Operations Officer ECCU6 Seda Aroymak Sr. Financial Management ECSPS

Salih Kemal Kalyoncu Procurement Specialist ECSPS

Irina Kichigina Senior Counsel LEGEM

Hala D Khattar Sr. Financial Officer BDM

Specialist

Specialist

Specialist

The project was initially being processed as an Additional Financing and on guidance from ROC was 5

changed into a repeater project

59

Annex 12: Statement o f Loans and Credits

Difference between expected and actual

disbursements Original Amount in US$ Millions

Proiect ID FY Pumose IBRD IDA SF GEF Cancel. Undisb. Orin. F m . Rev’d

PI00383 2007

PO96801 2007 PO96400 2006 PO96262 2006 PO93765 2006 PO82822 2006 PO85561 2006

PO78359 2005 PO81880 2005 PO93568 2005 PO94167 2005 PO94176 2005 PO77328 2005 PO66149 2005 PO74053 2004 PO72480 2004 PO70950 2004 PO70286 2002 PO74408 2002

ISTANBUL MUNICIPAL INFRASTRUCTURE PROJ ELECT DISTRIB REHAB ECSEE APL #3 (TURKEY) AVlAN FLU - TR GAS SECT DEVT ACC TO FIN FOR SMEs ELECTRICITY GENERATION REHAB & RESTRUCTU SEISMIC RISK MITIGATION MUNICIPAL SERVICES EFIL 3

PSSP 2 ECSEE APL #2 (TURKEY) (CRL) RAIL RESTRUCT SEC EDUC HEALTH TRANSIT (APL #I) RENEW ENERGY ANATOLIA WATERSHED REHAB ARIP SRMP

322.15

269.40 150.00 34.40

325.00 180.2 1 336.00

400.00 275.00 305.00 465.40 66.00

184.70 104.00 60.61

202.03 20.00

600.00 500.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.30 1.01 4.30

39.86 0.00

322.15

276.70 131.26 32.06

321.69 148.39 376.99

378.84 257.55

44.41 330.45 46.72

181.47 113.68 45.11 81.59 9.03

85.62 1.09

28.00

6.67 -7.88 9.13

137.36 63.81

122.31

110.48 11.83

-96.27 82.88 6.02

124.18 44.97 36. I 4 42.57 -0.10

125.48 I .09

0.00

0.00 0.00

-1.32 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

18.47 0.13 7.2 I 0.00 0.00

-1.65 1.09

Total: 4,799.90 0.00 0.00 0.00 45.47 3,184.80 848.67 23.93

TURKEY STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f US Dollars

Committed Disbursed

FY Approval Company

IFC IFC Loan Equity Quasi Partic. Loan Equity Quasi Partic

2005 2006 1996 2005 2000 2002 2005 2002 2005 2000 2002

Acibadem Acibadem Arcelik Arcelik Arcelik LG Klima Assan Assan Atilim Avea Banvit Beko

20.00 40.00 3.50 101.99 2.82 15.00

20.00 4.39 120.00 6.67 27.79

0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 5.00

0.00

0.00 0.00 0.00 0.00 0.00 0.00

10.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00

101.99 0.00 0.00

30.00 0.00 0.00 0.00

13.85

20.00 0.00 0.00 30.00 0.00 0.00 3.50 0.00 0.00

101.99 0.00 0.00

2.82 0.00 0.00 15.00 0.00 0.00 0.00 0.00 0.00 4.39 0.00 0.00

120.00 0.00 0.00 6.67 5.00 0.00

27.79 0.00 0.00

0.00 0.00 0.00

101.99 0.00 0.00 0.00 0.00 0.00 0.00

13.85

60

2001 2006 1997 1994 1990 2002 2002 1995 2006 200 1 1998 2005 2006 I998 1988 I990 2004 1991 2004 2002 2006 2002 2005 2004 2004 2005 2005 1998 2000 1999 2006 1990 2003 2006 2006 2005 1989 1996 1999 2002 2005 2001 I999 1998 2005

Bilgi Bilgi Borcelik CBS Holding Conrad Conrad EKS Entek Finans Leasing Gunkol Indorama Iplik Intercity Intercity Ipek Paper Kiris Kiris Koclease Kula Meteksan Sistem Milli Re Milli Re Modem Karton Modem Karton OPET Oyak Bank PALEN PALGAZ Pinar ET Pinar SUT SAKoSa Sanko Group Silkar Turizm Sise ve Cam Standard Profil TDD TSKB Trakya Cam Trakya Cam Trakya Cam Turk Ekon Bank Turk Ekon Bank Turkish PEF Uzel Viking YUCE

6.00 15.00 6.36 3.50 2.69 2.10 8.11 16.00 25.50 4.47 3.75 15.00 44.62 0.00 16.24 10.96 30.00 5.17 0.00 50.00 50.00 5.00 40.00 25.00 38.89 2.00 10.00 1.57 8.52 3.91 75.00 0.67 34.68 19.12 3 1.87 0.00 0.00 0.00 0.00 6.67 0.00 0.00 6.1 1 4.32 4.10

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.82 0.00 0.00 0.00 0.01 0.02 0.00 0.00 9.59 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.47 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 0.00 7.56 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.52 0.00 0.00

14.54 0.00 0.00

50.00 0.03 0.00 0.00

15.00 50.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.97 0.00 0.00 0.00

27.75 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

20.00 40.00

0.00 0.00 0.00 0.00 0.00 0.00

100.00 0.76

24. I 4 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.30 0.00 0.00

6.00 0.00 6.36 3.50 2.69 2.10 8.11

16.00 0.00

4.47 3.75

15.00 0.00 0.00

16.24 10.96 30.00

5.17 0.00 0.00 0.00 5.00 0.00

25.00 38.89 2.00 5.00 I .57 4.89 3.91

20.14 0.67

34.68 0.00

31.87 0.00 0.00 0.00 0.00 6.67 0.00 0.00 6.1 1 4.32 4.02

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 5.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.02 0.00

0.00 6.40 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.47 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 0.00 7.56 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6.52 0.00 0.00

14.54 0.00 0.00

50.00 0.03 0.00 0.00

15.00 50.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00 0.00 4.97 0.00 0.00 0.00

27.75 0.00 0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

40.00 0.00 0.00 0.00 0.00 0.00 0.00

26.86 0.76

24.14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.30 0.00 0.00

Total portfolio: 995.06 23.44 159.12 366.76 657.25 16.43 149.12 243.62

61

Approvals Pending Commitment

FY Approval Company Loan

2005 Avea 0.00 200 1 Akbank 0.03 2002 TEB III 0.00 2006 Intercity II 0.00 2002 Milli Reasurans 0.00 2004 Akbank BLoan h c 0.00

Equity

0.00 0.00 0.00 0.00 0.01 0.00

Quasi

0.00 0.00

0.00 0.00 0.00

0.00

Partic.

0.30

0.00 0.05

0.01 0.00 0.02

Total pending commitment: 0.03 0.01 0.00 0.38

62

Annex 13: Turkey at a Glance

Turkev at a glance 3128107

F:::i POVERTY and SOCIAL

2006 Population, mid-year /h&wq) GNI per capita /;Jt/a+mplM M$) GNI /Af/acmplM lK$iWk:) Average annual growth. 2000-06 Population &? Labor force &7{?

Deuelopment diamond' Turteg

72.9 5,400 393.9

1.3 2.1

Most recent estimate [latest year available. 2000-06) Poverty p ' d m a k e h & w n a h d ~ ( v & j Urban popula tion p'dfofdpqdakqt Life enpectancy at birth [wa-:t Infant mortality /prlm#)BLpMf.~t Child malnutrition p ~ ' d ~ ~ ~ ~ ) Access to an improved water source p'dprpdabq) Literacy p;'d&ake+v@l Gross primary enrollment p ; ' d s W w w & b q )

Male Female

27 68 71 26 4

96 87 93 96 91

KEY ECONOMIC RATIOS and LONO-TERM TRENDS 1986 1996

GDP ( I K g C m ! 75.6 181.5 Gross capital formatlon1GDP 188 24.6 Enports of goods and ServiceslGDP 13.3 21.5 Gross domestic savings1GDP 16.1 18.3 Gross national savings1GDP 18.7 21.9 Current account balancelGDP Interest payments/GDP Total debt/GDP Total debt servicelexports Present value of debt1GDP Present value of debtletports

-1.9 -1.3 2.0 1.9

43.6 44.0 41.0 23.4

1986-96 1936-06 2005 /H+v m d g m w GDP 4.0 3.5 7.4 GDP per oapita 1.9 2.0 6.0 Exports of goods and services 8.4 10.3 8.5

460 4,796 2,206

0.0 0.5

64 69 28 5

92 97

102 103 100

2005 363.4 24.8 27.4 18.2 18.4 *6.2

1.8 47.1 39.1 k8.9

165.6

810 5,913 4,790

0.8 1.3

7 1 70 26

93 93 112 106 104

2006 402.7

23.9 28.2 16.2 16.5 4 . 1

Life expectancy I GNI Gross Per primary capita enrollment

Access to Improved water source

- - L&a-w.mkf&+mW-WW

Economic ratios'

Trade

I Indebtedness 2006 2006-10

6.1 5.3 1 - mhy 4.8 4.1 - r&a-w.*--wy 8.5 9.3

STRUCTURE of the ECONOMY 1986 1996

/ : : ' r a ' a l q Agriculture 20.1 17.4 Industry 26.2 26.0

Manufacturing 22.9 21.8 Services 53.7 56.6 Household final consumption expenditure 76.4 70.2 General gov't final consumption expenditure 7.6 11.6 Imports of goods and services 16.1 27.8

/www mdswbY,' Agriculture Industry

Services Manufacturing

1986-96 1996-06

1.2 0.9 5.0 3.8 4.9 3.9 4.1 3.4

Household final consumption expenditure 3.9 2.7 General gov't final consumption expenditure 3.7 2.2 Gross capital formation 5.5 4.6 Imports of goods and services 10.1 8.7

2005 2006

10.7 9.7 26.6 26.8 21.8 22.2 62.7 63.5 68.7 70.7 13.1 13.1

34.0 35.9

2005 2006

5.6 2.9 6.5 7.4 6.1 7.4 7.6 5.6 8.8 5.1 2.4 9.6

10.3 5.5 11.5 7.1

I Growth of capital and GDP [ X I I 50

-50

I -GCF - P O O P I

Growth of eiports and imports [ X ]

40 1

20

0

.20

4 0 1 ---Exports - e l m p o r t s

Note 2006 data are preliminary estimates This table was produced from the Deveiopment Economics LDB database ' The diamonds show four key indicators in the country [in bold] compared with its income-group average If data are missing. the diamond will

be Incomplete

63

PRICES and GOVERNMENT FINANCE

m?m=5riepiees fli'&a?& Consumer prices Implicit GDP deflator

GiWermmwr f i a c e fl::::'cd&Y? i%Wes c w r & - _ r j Current revenue Current budget balance Overall surplusldeficit

TRADE

(Insc*:t Total exports [fob]

Agriculture and livestock Mining and quarry products Manufactures

Total imports [cif] Food Fuel and energy Capital goods

Export price index &W=mt Import price index p?%'W=kWt Term5 of trade gRW=A'X?l

Composition of 2005 debt (US$ mill.)

A:5.823 ~ ~ 7 1 I

BALANCE of PAYMENTS

fim-ct Exports of goods and services Imports of goods and services

Net income Net current transfers

Current account balance

Financing items [net) Changes in net reserves

Ajem.. Reserves including gold ,Q/ssm&cmsf Conversion rate ,'ECh-&/sst

EXTERNAL DEBT and RESOURCE FI

RQsOUrCQ balance

p/ss.&%-CL:t Total debt outstanding and disbursed

IBRO IDA

Total debt service IBRD IDA

Official grants Official creditors Private creditors Foreign direct investment (net inflows] Portfolio equity [net inflows)

World Bank program Commitments DisbUt sQmentS Principal repayments Net flows Interest payments Net transfers

Composition of net resource flows

1986

34.6 36.0

1986

7,457 2.094 1.626 6,398 11,105

452 2,338 3,964

94 106 89

1986

10,580 12.008 -1.428

*1,877 1.840

-1.465

2,255 -790

4,347 675.7

.ovs 1986

32,934 4,662

174

4,473 589

5

151 629

1.198 125

0

1,277 636 239 397 355

42

1996

80.3 77.8

22.5 -2.0 -8.6

1996

32,067 8.570 3,687

45,800 2,531 6,397

10,624

123 116 106

30.834

1996

45,124 48.731 -3.607

.2.927 4,097

.2,437

6,982 .4.545

17,769 81,390.0

1996

79,829 4.260

124

10,912 1,154

7

274 -844

2.338 722 191

255 489 821

340 -332

-672

2005 2006

8.2 9.5 5.4 11.5

28.4 27.9 -11.4 -9.9 -1.9 0.0

2005 2006

76,949 91,937 18.667 19,438 4,393 4.521

72,670 87.179 116,155 138.973 2,208 2,537

21,828 29,664 20,363 23,316

132 138 137 149 97 92

2005 2006

103,589 116.427 121.847 144,304 -18.258 -27,877

-5,799 -6,584 1.454 1.687

.22,603 -32,774

40,450 36,494 -17.847 -3.720

50,235 60,705 1.34E+6 1.43E+6

2005 2006

171,059 5,829 6,854

71 65

41,920 1.003 1.135

6 6

424

17.800 9,805 5,669

-970

1,232 40 461 1.796 761 813

-300 983 249 329

.549 654

Inflation [ x ) I

I I 01 02 03 84 05

GDP deflator - 0 - C P I

Erport and import levels [US$ mill.]

(50 000 7

100,000

50,000

0 00 01 02 03 04 05 06

pJ Exports rn Imports

Current account balance to GDP [ X ]

5 1

G 14,646

D 1.738

E 4.825

F 105,732

A . l5RD E . Biloterol IDA D. Other multilotcral F . Privata

C . IMF G . Short-tcrm

-~ Note: This table was produced from the Development Economics LOB database 9128t07

64

Edirne

Tekirdag

Istanbul

Çanakkale Bursa

Balikesir

Manisa

IzmirAydin

MuglaDenizli

Antalya

IspartaBurdur

Usak

Kütahya

Eskisehir

Afyon

IzmitAdapazari

Zonguldak

Karabük

Çankiri

Sinop

Samsun

Amasya

Çorum Tokat

SivasYozgatKirikkale

ANKARA

KayseriNevsehir

KonyaNigde

Mersin Adana

Antakya

Maras

Kilis

GaziantepSanliurfa

Malatya

Elazig

Diyarbakir SiirtBitlis

Hakkari

VanMus

Erzincan Agri

Kars

Erzurum

Bayburt

Trabzon

Giresun

OrduTo Tbilisi

This map was produced by theMap Design Unit of The World Bank.The boundaries, colors, denominationsand anyother information shownon thismap do not imply, on the part of TheWorld Bank Group, any judgment onthe legal status of any territory, or anyendorsement or acceptance of suchboundaries.

The map at this site isfor reference only and isnot sanctioned for use inany World Bank Groupdocument. Contact theMap Design Unit for theacquisition of maps tobe used in World BankGroup documents.

ROADSSELECTED TOWNS AND CITIESNATIONAL CAPITALINTERNATIONAL BOUNDARIESRIVERS

25°

30°

35° 40° 45°

25°

45°

40° 40°

45°

R O M A N I A

BULGAR IA

GREECE

SYR IAN A.R . I R A Q

ISLAMICREP. OF

IRAN

ARMENIAAZER.

G E O R G I A

R U S S I A N F E D .

U K R A I N E

AZER.

B l a c k S e a

Medi terranean Sea

T U R K E Y

To Akhaltsikhe

To Tall Birak

ToAleppo

Tigris

Murat

0 150 300 KILOMETERS

0 100 200 MILES

IBRD 31100R

NOVEMBER 2004

TURKEY