Public Disclosure Authorized
No. P-35
RESTRICTED
Public Disclosure Authorized
This report is restricted to use within the Bank.
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
Public Disclosure Authorized
REPORT AND RECOMMENDATIONS
OF THE
PRESIDENT
TO THE
EXECUTIVE DIRECTORS
Public Disclosure Authorized
ON THE
PROPOSED LOAN
TO THE
REPUBLIC OF TURKEY
June 6, 1952
Ii'ITE2a^;:TI0NAL BANK FOR RECOSTRUCTIvOT ANID DEVELOP. L1'T
REPORT AND RCOlS;.EDDATIO1,1S OF TIfEl PRL'SIDENT
TO TIE EXECUTIVE DIRECTORS CONCEMUIiMG
PROPOSED L0A,T TO TKL REPUBLIC OF TURI2Y
submit the folloM:lin- retiport and recommendations with regard to
r25,200,.000
a proposed loan to the .e-oublic of Wurkey in the amount of ..
.or the .,eyh.an Proiect.
1.
T
PART I - IIISTORIQaL
This Project rwas ori,-inall,, presented to the 3an!: as one of
2.
several. proiects for :i:hich loins were recuested b- the Turkish ^overnment on LiarO 5, l2.2. 'etailed tecluahcal e.:zamination of the Project
was ma6e by a Bank consultanit in urkey; in l9.{, On the basis of the
surve,,- mission, .wihich visited Turkey in 1950 to
report of the .3ankL'
study its ecaonom and to make recommend-tions for a develQ'ment nrogr.nm.
thae Banl: recomelended that consideration of the _eybhan Project be postponed.
In the summer of 1951, the Turk.ish Government iformallv aslked
a portion o' the Proj,ect, iiicluding the
financnJ
dam and most of the pow.-er facilities but excludin' the flood control
and irriration wlorks and the remainder of the pow.ter f2cilities. A
Bank missioin visited Turkey in Jec?mber 1951 avd. Janvarzy 19,52, and after
and the
ezerL-.in,n, Turke-t s econornic situation, its invetmaent pro-ara,
relation of the Seyhan P'roject to that proramn, concluded that ne;otiations
could be oDened for a loan for a portion of the revised .-roiect. For this
purpose the 2anlc, on J nuary, 28, 1952, invited the aovernment to send a
delegation to ..ashin-ton.
3.
the Bank to conlsidel'
.e~;otlations concernin, the pro-:osed loan wiere condLucted in ..ashk.
in:toi during !iarch and i.pril 195.2. '.uthorized ne;otiators for the RePu'blic of Tur-:1oy -were Tis Excellenc;y: 1eridun C,. rlkin, Turkish *mbassador
Hahit .X1ar.
in z;shin,ton; i,r. IUelih 2.,seiibel, CoLisellor of EmbassY; ,'i.r.
2ineancial Counsellor of ;nmbessy; Uir. iHunir i.ostpr, Deputyr Director Ceneral
of the Treasurr; and Lir. .Enin Yumer, director General of the 2:lectricaj
Studies Institute.
The .an:: has -reviously made two loans to the Republic of Turkey,
5.
one of -12, 00OO0 for port develo-.rnent and consoruction -rojects, and
another of .3,900,000 for a _rain stora,,e p-roject. I_oth rwere si lned on
.u_ly 7, 1950. Turlkey has also -,uaranteed a loain of .9,000,000 which the
Baii.. made on Octobor 2$, 1950 to the Industrial .. evelopment Bank of Turkey.
PI.RT II - PURPOSE AIM DE.~CRIPTIT.i'
01' PROPOSED LOVUT
-orrower
6.
The Borrowver would be the Republic of Turkey, a member of the Bank.
- 2 Amount
The loan vould be in the amount of
7.
thereof in other currencies.
25,200,000, or the equivalent
Purpose
The proceeds of the loan would be used to acquire from abroad equip8.
rent, supplies and services for constructing a dam on the Seyhan River,
installing tvwo 18,000 kw electrical generators and building a power transmission system. The dam and its related installations would supply power,
assist in controlling floods and store 'rater for irrigation.
These wiorks are the rajor part of the Seyhan Project, w'hich also
9.
includes construction of levees to control floods on three rivers and
expansiQn of the existing irrigation system. The whole Project is estimated to cost the equivalelet of about I,67 riillion, of which about 1,10.5
million has been spent to date for levees and the beginning of the irrigation systemi
According to present estimates, about .10,700,000 of the proceeds
10,
of the loani would be used for purchases in the United.States, and the remaining v1U,500,000 for purchases in various European countries.
Terms
The loan rrould bear initerest at the rate of 4-3/45 per annum, in11.
cluding the statutory commission of J$.
The commitment charge rrould be 3/4 of 1% per annum and vwould accrue
12.
from the effective date of the loan or fromu September 10, 1952, whichever
was the earlier.
13,
The loan wlould be for a term of-25 years and would be amortized by
semi-annual payments commencing April 1, 1957, ancl calculated fto retire
the loan oy maturity, as set out in Schedule 1 to the draft loan agreement.
I consider that the proposed schedule for the repaymenit of principal
14.
and the rate of interest and other charges in connection with the proposed
loan are reasonable and appropriate to the Project.
PART III - IEGhL :LSTRtFLviTh:_S iiTD MIGAW AUTJORITY
A draft loan agreement betrreen the Republic of Turkey and the Bank
15.
is attached as Appendix I. Except for the provisions aescribed below, it
follows the customary form. In accordance with the constitutional practice
of the Borrower, the Grand :ational Assembly of Turkey would ratify the loan
agreement.
16.
(a) Because the w,orks for which a Banlk loan would be made are
only a part of the entire Seyhan Project, provision has been made
throughout the draft loan agreement for distinction betr!een the obligations
of the Borrow,rer regarding the entire Project and the Banl-financed portion.
It should be noted that, in accordance with Section 5.01, the Borrower
wrould be obliged to carry out the entire Seyhan 2roject.
(b) Oection 2.02 of the draft loan agreement provides that no
withdrawals can be made until consulting engineers have been appointed
by the Borro%,er and until the Culkurova Porrer Utility Company (see paragraph
27 belov) has been formed and T.L. 4,000,000 of its subscribed capital has
been paid in. However, provision is made in a separate letter for -w.ithdraw-al rights writh respect to a maximum of .300,000 for engineering fees,
(c) Section 5.11 provides that, if the Borrower transfers the
ovmership of any substantial property included in the Project, the Borrower
shall malce adequate provision for compliance w-rith the obligations imposed
by Section 5,02 (records, inspection and information) and Section 5.10
(operation and maintenance).,
(d) Section 9.03 of Loan Reaulations Yo. 3 (Elffective Date) has
been amended so as to provide that the loan agreement rould become effective
15 days after the Borrower has furnished the Bank satisfactory evidence that
the events set forth in Section 9.01 of the Loan Regulations have occurred,
In a sup?lemental agreement, the Borrower would undertalce to submit the
required evidence informally in advance so as to give the Bank an opportunity
to determine whether, and to advise the BQrrow-er thiat, the evidence is satisfactory to the Baic., These arrangements, made at the request of the Borrower
in order to comply with constitutional practice in onneection with the ratification of the loan, are the same as those made with respect to previous loans
to Turkey.
17.
A supplemental letter to be signed in conjuncti 6 n with the loan
agreement would provide that, if a portionlof the loan remains undisbursed
after completion of tlhe works *shich it is intended to finance, the Bank
would be prepared to amend the loan agreement to perrmiit use of the remaining sum for expansion of the irrigation networ-'* which wrould distribute water
stored by the da>i.
18.
On June 5, 1952, there were distributed to the Executive Directors
(R-601):
a. A technical report oh "The Seyhan River Multipurpose ProJect in
Turkey," which sumzr6izes and appraises the Seyhan Project, and
b.
A report oni the "Economic Positioni and Prospects of Turkey)"
which provides the economic background against which the proposed loan should be considered and Turkeyts ability to finance the Project and to service the proposed loan should be
evaluated.
19.
The report of the Committee provided for in Article III, Section X
(iii) of the Articles of Agreement of the 3ank is attached as Appendix II.Justification for the Project
20.
The Seyhan Project provides for the development of the fertile Adana
Plain in South Central Turkey, which juts Into the northeast corner of the
Mediterranean Sea. The development is based on the control and utilization
of the Seyhan River,
21.
The Adana Plain is a delta formed by three rivers, of which the Seyhan
is the largest and most important. It contains some of Turkeyts best agricultural land and is particularly well-suited for groving cotton, oilseeds
and citrus fruits. Its main urban centers, Adana, Tarsus and Mersin, are
important industrial centers. Mersin i9 Turkeyts second largest Mediter-.
ranean port. The area has some mineral resources and there is reason to
believe it may contain petroleum deposits* The development of this region
has thus far been retarded by floods and by an insufficiency of electric
power and of water for irrigation.
22.
The purpose of the Seyhan Project is to prevent flood damage on the
Adana Plain; to increase agricultural production (part of which can be
exported) by providing for irrigation; and to assist in expanding industries
and public facilities by raising power production. The Project includes
construction of a system of levees along the Seyhan River south of Adana, and
along the Ceyhan anid Berdan Rivers; collection canals at the foothills of the
Taurus Mountains to catch the run-off of small streams; a multi-purpose earth
dam vwhich wi4. provide 1450 million cubic meters of storage and will assist
in controlling floods, supply power, and provide irrigation waters; power
generating facilities of ultimately 54S000 kw.; a power transmission system;
and new irrigation canals on both sides of the river to increase the area
under irrigation from the present 17,000 hectares to 14h,00O hectares.
23.
The portion of the Seyhan Project for which the present loan is prowposed is the key factor in the entire Prbject; it is scheduled to be completed in 1956. It would complete the flood control system, provide the power
and transmigpion system, and create the storage required for irrigation. The
works thus financed would stimulate the agricultural and industrial production
of the Adana Plain and make a significant contribution to the economic development of Turkey.
24.
Aside from loss of life, average annual losses due to flood are esti.mated at about $2,800,000. The system of levees 4ong the Seyhan, Ceyhan
and Berdan rivers shouldbe completed in 1952, Completion of these levees and
the construction of the proposed dam would safeguard crops now subject to
-5damage or ruin by floods, wvould increase the area under cultivation,,and
would ultimately yield higher tax revenues to the Government as a result
of the upward revaluation of land,
25t
Public and private industries and utilities in the area are now
seriously short of power, which is presently being supplied by numerous
small hydro- and thermal- plants fed by coal, oil and even oilcake, and
by expensive mechanical power. Consumption of power, both electric and
mechardical. in 1951 was only 39 million k.w. Lack of capacity has re*stricted the use of powver by existing consumers, and has discouraged the
establishment of new enterprises. The two generators to be financed by
'the Bank will potentially provide 200 million kwh, which would more than
cover the estimated need of 154 million kwh for the number of new cons\mers expected in 1965. The complete Seyhan Project, with the addition
of a third generator in 1965 or later, will ultimately provide 284 million
1vrh annually, sufficient to meet the requirements of the area probably for
the next twenty years and to permit significant expansion of cotton ginning,
textile production and food processing enterprises, as well as public
facilities including seapqrts and airports.
26.
Expansion of the irrigation system, which would occur between
1956 and 1961, would raise crop yields and expand agricultural production,
especially of cotton, oilseeds and fruit crops. Cotton, which has become
Turkey's largest export, is expected to find fQreign markets. Oilseeds
also contribute greatly to Turkey's exports, The net value of additional
agricultural production resulting from the Project after the irrigation
system is completed is conservatively estimAted at about $16 million
annually.
27,.
Under the provisions of a decree of the Turkish Cabinet establishing the arrangements under which the,Project rwould be constructed and
operated, the dam -would remain the property of the State and would be
operated, together with the levees and irrigation system, by the Government.
The power-generating and transmission facilities, however, would be turned
over to the Cukurova Power Utility Company, now in process of formation,
in which private equity would hold a majority of the shares and the Government (through the State-owned Etibank) a minority. The bulk of its capital
would be used to defray the cost of the power facilities included in the
Project. The power facilities would be operated as a profit-making enterprise; the irrigation system, as a non-profit, largely self,-supporting
service; and the flood control works, as a governmental expense.
28.
I am satisfied that the Project is well conceived and that its
implementation is a high priority in the development of the Turkish economy.
The Economic Situation
29.
Turkey has made significant progress in the strengthening and expansion of her economy in the twro years since the previous assessment of
Turkey t s creditworthiness (Report R-307 , March 23, 1950). As a result of
Turkey's post-war investment program, bolstered by E*C.A, aid, the economy
has increased its output and holds promise of further growth, The results
in agricuL,ture,. the mainstay of the Turkish economy, have been particularly
gratifying! VWhile favorable weather conditions greatly pontributed to this
improvezent, it was at least in part due to the post-war investment program.
By increasing the area under cultivation and the use of mechanical equipment,
Turkey produced in 1951 the largest cereal crop in its history., The same
factors raised cotton production in 1951 to about two-and-a-half times the
pre-war level, and made it the second most important crop. It is particularly
6.6
auspicious for the future of Turkey's bconomy that the expansion of
agricultural production has occurred in such stakle comrodities as cereals
and cotton,
traditional
substantial
for which a
for which there should be A better foreign market than for the
semi-luxury crops, tobacco; nuts and dried fruitsi Similarly,
increases have occurred in the production of noni-ferrous metals,
strong foreign demand exists.
30.
The major problem created by Turkey's investment progran ari6es fbom
its demands on local currency resources. In recent years substantial ahd
continous resort to the Central Bank for public expenditures has expanded
monetary circulation and caused both wholesale and retail prices to rise
in the immediate post-war years. But prices have not increased to the
extent that might have been expected in the past two years. Although an
import surplus financed by foreign assistance helped to reduce the full
inflationary impact of the monetary expansion, the major factor in
restraining inflation has been the growth in the output of the Turkish
economy.
Indeed, the recent growth of production and the expansion of the
money economy have made desirable a moderate injection of new money into
the economy.
31,
In the 1952-budget, the Government proposes to cover the bulk of
the deficit by non-inflationary means, having recourse to the Central Bank
for only T.L, 10 million, a very moderate-sum in the light of Turkey's
recent fiscal history. The government bopd market has shown considerable
strength, a fact which stems in large part from the compulsory reduction
of interest rates in mid-1951,
But this strength is also indicative of
public confidence in the growth of the Turkish economy and in the Government's
financial position. The Government's recent offer to the public of T*L. 60
million in bonds was oversubscribed. It represented a threefold increase
over the sale in 1949, the most recent previous offer of public securities.
The increase in bank deposits of T.L. 150 million in the past two'years had
in itself
created a compulsory market for T.L. 30 million of bonds, for
banks are required by law to hold reserves of one-fifth of their deposits
in the form of government bonds.
32,
As a consequence of increased production, Turkish exports have
developed very favorably in the past several years. The record of cotton
has been particularly impressive.
In 1950, it replaced tobacco as Turkey's
major export.
Exports generally have risen, until they.covered about 90
per cent of imports in 1950, despite the high level of imports resulting
from the investment program.
In 1951, however, exports covered only 80%
of imports; substantial inventories of exportable products were carried
over to the current year.
The long run outlook for Turkish exports appears
to be favorable, providing Turkish prices are kept in line with world market
conditions and providing high levels of production, employment and income
are maintained in the U. S. and in the 0.E.E.C1 countries,
33.
Turkeyvs post vwar development program, which has required unusually
heavy imports, has produced a continuing deficit in her balance of payments,
This deficit has been covered in recent years by external assistance.
Its
magnitude this year may be expected to be held down to the amount of aid
forthcoming from M.S*A,, now estimated at about $70 million. If external
economic assistance ceases, the expected increases in exports and possible
reductions in imports should enable Turkey to balance her external accounts
once again.
-734.
Turkey's present external debt amounts to the equivalent of 1P273
million, of which the largest portion is a dollar debt of 0i149 nillioc.
The half-yearly service payments on the 1939 Armaments Credits from the
United Kirgdom and France, of which the equivalent of $58 million is now
outstanding, have not been made since June 30, 1951. The Turkish Government has advised the Bank that negotiations on the subje&t will take place
in the near future,
35.
Service payments on the over-all debt amount to about 10 per
cent of Turkey's current annual export earnings. Interest accounts for
one-third and amortization for two-thirds of the total. Dollar service
payments represent about 15 per cent of dollar earnings, and involve
a sum which Turkey should be able to meet since she normally enjoys a
dollar surplus.
The additional annual charges wihich Turkey would have
to assume as a result of the proposed loan of $25,200,000 are small in
comparison with the benefits to be derived from the Project. Annual
service during the period of amortization would be about $1.9 million.
This sum, together with existing dollar debt service of about $7.5
million in 1957, is about the same as the current servce and is considered to be within Turkey's capacity to service dollar obligations.
Prosnects of Fulfillment of Obligations
36.
The present economic and financial position and prospects of Turkey
and the fiscal policies of the Government indicate that adequate provision
will be made for the local currency required for the Project, as well as
for the additional foreign exchange required for the parts of the Project
not to be financed by the Bank.
37.
The Seyhan dam, power plant and related transmission system were
designed by the International Engineering Company. The principal features
of the design wlere checked and subsequently revised in consultation with a
commission of three internationally known engineers. Provision has been
made in the loan documents to assure the employmiient of competent and experienced engineers and contractors, and the training of operating personnel.
PART V
.
COMPLIANCE 111TH ARTICLES OF AGREMENT
38.
I am satisfied that the proposed loan complies with the requirements of the Articles of Agreement of the Banc.
PART VI - RECOQP'l2qDATTOlPS
39.
1 recommend that the Bank at this time grant to the Republic of
Turkey a loan of $25,200,000 for a term of 25 years, with interest,(including
commission) and commitment charges at such rates, and on such other terms
as are specified in the draft loan agreement attached hereto as Appendix I.
Washington, D.C.
June 6, 1952
/s/ R.L. GARN.R
Vice President