Document of The World Bankdocuments.worldbank.org/curated/en/287801467998195147/...2015/06/30 · Document of The World Bank Report No: ICR00003275 IMPLEMENTATION COMPLETION AND RESULTS

Document of The World Bank

Report No: ICR00003275

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-75380 IBRD-75390 IBRD-80150)

ON

US$330 MILLION AND €182.7 MILLION (US$600 MILLION EQUIVALENT) LOANS

TO

TURKIYE SINAI KALKINMA BANKASI (TSKB)

AND

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

TO

TURKIYE IHRACAT KREDI BANKASI (EXIMBANK)

WITH

THE GUARANTEE OF THE REPUBLIC OF TURKEY

FOR

THE FOURTH EXPORT FINANCE INTERMEDIATION PROJECT

June 23, 2015

Finance and Markets Turkey Country Unit Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective June 8, 2015)

Currency Unit= New Turkish Lira (TRY) TRY 1.00 = US$ 0.36 US$ 1.00 = TRY 2.77

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS

AF Additional Financing BRSA Bankacılık Düzenleme ve Denetleme Kurumu, Banking Regulation and

Supervision Agency CAS Country Assistance Strategy CBRT Central Bank Republic of Turkey CPS Country Partnership Strategy D/E Debt-to-equity ratio DSCR Debt service coverage ratio EFIL Export Finance Intermediation Loan EIB European Investment Bank Eximbank Turkiye Ihracat Kredi Bankasi A.S.GDP Gross Domestic Product IBRD International Bank For Reconstruction And Development ICR Implementation Completion and Results Report IFI International Financial Institution IEG Independent Evaluation Group IL Investment Loan ISR Implementation Status And Results IT Information Technology M&E Monitoring And Evaluation PAD Project Appraisal Document PDO Project Development Objective PFI Participating Financial Institution PIU Project Implementation Unit SME Small And Medium Enterprise TL Turkish lira TSKB Turkiye Sinai Kalkinma BankasiTUIK Türkiye İstatistik Kurumu, Turkish Statistical Institute WCL Working capital loan

Vice President: Laura Tuck

Country Director: Martin Raiser

Practice Manager: Aurora Ferrari

Project Team Leader: Ilias Skamnelos

ICR Team Leader: Samuel Munzele Maimbo

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TURKEY Fourth Export Finance Intermediation Loan (EFIL IV)

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives, and Design .............................................. 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 7 3. Assessment of Outcomes .......................................................................................... 19 4. Assessment of Risk to Development Outcome ......................................................... 27 5. Assessment of Bank and Borrower Performance ..................................................... 27 6. Lessons Learned ....................................................................................................... 30 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 32 Annex 1. Project Costs and Financing .......................................................................... 33 Annex 2. Outputs by Component ................................................................................. 34 Annex 3. Economic and Financial Analysis ................................................................. 42 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 43 Annex 5. Beneficiary Survey Results ........................................................................... 44 Annex 6. Stakeholder Workshop Report and Results ................................................... 45 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 46 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 54 Annex 9. List of Supporting Documents ...................................................................... 55 MAP .............................................................................................................................. 56

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A. Basic Information

Country: Turkey Project Name: Fourth Export Finance Intermediation Loan (EFIL IV)

Project ID: P096858 L/C/TF Number(s): IBRD-75380,IBRD-75390,IBRD-80150

ICR Date: 06/23/2015 ICR Type: Core ICR

Lending Instrument: FIL Borrower: TSKB AND TURK EXIM BANK

Original Total Commitment:

USD 600.00M Disbursed Amount: USD 855.71M

Revised Amount: USD 900.00M

Environmental Category: F

Implementing Agencies: Turkiye Sinai Kalkinma Bankasi (TSKB) Turkiye Ihracat Kredi Bankasi (Turk Eximbank)

Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 02/08/2008 Effectiveness: 06/19/2008 06/19/2008

Appraisal: 03/31/2008 Restructuring(s):

03/17/2011 06/13/2011 10/10/2012 05/17/2013

Approval: 05/22/2008 Mid-term Review:

Closing: 06/30/2013 12/31/2014 C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Satisfactory

Risk to Development Outcome: Moderate

Bank Performance: Satisfactory

Borrower Performance: Satisfactory

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C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Highly Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Satisfactory

Overall Bank Performance:

Satisfactory Overall Borrower Performance:

Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance

Indicators QAG Assessments (if

any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Banking 15 15

General finance sector 20 20

General industry and trade sector 50 50

SME Finance 15 15

Theme Code (as % of total Bank financing)

Export development and competitiveness 40 40

Micro, Small and Medium Enterprise support 20 20

Other Financial Sector Development 20 20

Other Private Sector Development 20 20 E. Bank Staff

Positions At ICR At Approval

Vice President: Laura Tuck Shigeo Katsu

Country Director: Martin Raiser Ulrich Zachau

Practice Manager/Manager: Aurora Ferrari Lalit Raina

Project Team Leader: Ilias Skamnelos Steen Byskov

ICR Team Leader: Samuel Munzele Maimbo

ICR Primary Author: Aminata Ndiaye

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F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) (i) Support exports by providing medium- and long-term working capital and investment

finance to exporting firms; and (ii) Improve the ability of the financial sector to provide financial resources to firms through development of financial intermediaries. Revised Project Development Objectives (as approved by original approving authority) N/A (a) PDO Indicator(s)

Indicator Baseline

Value

Original Target Values (from approval

documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Export growth by participating firms relative to sector export growth (median)

Value (Quantitative or Qualitative)

n/a >0 5.96

Date achieved 05/22/2008 12/31/2014 12/31/2014 Comments (incl. % achievement)

Fully achieved.

Indicator 2 : Non-performing loans/total loan:(a) by amount and (b) by number of loans, all measured among loans included in the project

Value quantitative or Qualitative)

n/a

(a) lower than sector weighted NPL ratio in the economy (4 percent in June 2014) (b) less than 5 % of all loans in the project

(a) 3.0 percent (US$25.2 million)(b) 2.7 percent (10 NPLs)


Fully achieved.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline

Value

Original Target Values (from

approval documents)

Formally Revised Target

Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Amount provided to exporters under the project Value (Quantitative or Qualitative)

0 US$596.3 million US$896 million US$856 million

Date achieved 05/22/2008 06/30/2013 12/31/2014 12/31/2014 Comments (incl. % achievement)

Fully disbursed - difference due to exchange rate differential.

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Indicator 2 : Number of banks and leasing companies included in the project Value (Quantitative or Qualitative)

0 12 13


Fully achieved.

Indicator 3 : Amount of investments in projects supported by investment loans


0 US$328.5 million

greater than amounts disbursed for investment loans and leases

US$328.5 million

Date achieved 05/22/2008 06/30/2013 12/31/2014 12/31/2014 Comments (incl. % achievement)

Indicator 4 : Share of medium term financing (more than 12 months) in total PFI loan portfolio


55% 59% 50%


The value of this indicator dropped from 63 percent in June 2014 to 50 percent in end-2014.

Indicator 5 : Number of beneficiary enterprises Value (Quantitative or Qualitative)

0 320 304


95% achieved.

G. Ratings of Project Performance in ISRs

No. Date ISR Archived

DO IP Actual

Disbursements (USD millions)

1 09/26/2008 Satisfactory Satisfactory 60.47 2 10/15/2008 Satisfactory Satisfactory 60.47 3 06/26/2009 Satisfactory Satisfactory 176.37 4 12/16/2009 Satisfactory Satisfactory 290.06 5 09/25/2010 Satisfactory Satisfactory 350.64 6 11/29/2010 Satisfactory Satisfactory 359.37 7 07/17/2011 Satisfactory Satisfactory 388.07 8 09/10/2011 Satisfactory Satisfactory 392.32 9 05/15/2012 Satisfactory Highly Satisfactory 681.60

10 12/26/2012 Satisfactory Highly Satisfactory 787.67 11 10/21/2013 Satisfactory Highly Satisfactory 848.77 12 06/22/2014 Satisfactory Highly Satisfactory 853.46 13 12/24/2014 Satisfactory Satisfactory 853.46

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H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

DO IP

03/17/2011 N S S 383.15 18-month extension of project closing date, with additional financing

06/13/2011 S S 386.62 Eximbank’s request to lift sector restrictions due to an unanticipated lack of demand

10/10/2012 S HS 767.74 One-time waiver for TSKB related to procurement thresholds

05/17/2013 S HS 799.93

US$1.5 million were reallocated from Eximbank’s institutional development component to its credit line

The Project was restructured four times in response to market demand. First, the project closing date was extended by 18 months at the time of the additional financing. Second, Eximbank’s request to lift sector restrictions due to an unanticipated lack of demand eventually led to a second restructuring in June 2011. The project’s environmental framework was concomitantly revised. In October 2012, the third project restructuring consisted of granting a one-time waiver for TSKB related to procurement thresholds. Finally, in May 2013, US$1.5 million were reallocated from Eximbank’s institutional development component to its credit line, justified by cost savings and the use of Eximbank’s own resources. I. Disbursement Profile

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1. Project Context, Development Objectives, and Design The Fourth Export Finance Intermediation Loan (EFIL IV) Project, complemented with additional financing once, totaled US$900 million equivalent. The original project approved by the World Bank in May 2008 comprised two loans: (1) a credit line of US$300 million equivalent for Turkiye Sinai Kalkinma Bankasi (TSKB) and (2) a credit line of US$296.3 million equivalent for Turkiye Ihracat Kredi Bankasi A.S. (Eximbank), accompanied by US$3.7 million equivalent for Eximbank’s institutional development. Both loans were guaranteed by the government of Turkey and entailed two currencies (euros and U.S. dollars). TSKB fully disbursed its original credit line by end-2010 and obtained additional financing ofUS$300 million equivalent in March 2011.

At the closing of the project in December 2014, the project had fully disbursed the loan amount for TSKB and Eximbank. Eximbank actually disbursed fully in end-June 2013. By end-November 2014, a total of US$8461 million was disbursed to 304 distinct exporters in Turkey. Overall, Eximbank and TSKB granted 369 subloans for investment and working capital purposes between 2008 and 2014.

1.1 Context at Appraisal

Country and Sector Background. Turkey sustained strong economic growth after the 2001 crisis but also a large current account deficit. Economic growth averaged 6.8 percent and stayed above 4.5 percent during the period 2002–07. Investment levels remained modest, however, and growth was increasingly driven by domestic demand. The strong growth performance was accompanied by a widening current account deficit, which increased to about 6 percent of gross domestic product (GDP) in 2006 before slightly narrowing to 5.7 percent in 2007.

Over the past decade, as Turkey emerged as an important player in international trade, trade imbalances have become more pronounced. Turkey is the EU’s fifth largest export partner and seventh largest import partner. Between 2002 and 2008, trade volumes have significantly and continuously increased. Trade accounted for almost 45 percent of GDP in 2008, up from 38 percent in 2002. The Turkish economy’s openness to international trade is relatively higher than that of comparable economies, such as Brazil and India (23 and 42 percent of GDP respectively in 2008). As imports have outgrown exports, however, the trade balance deficit has constantly widened over the period. The trade deficit increased from US$15 million in 2002 (6.7 percent of GDP) to US$70 million in 2008 (i.e., 9.4 percent of GDP).

At project appraisal, the Turkish economy was facing considerable uncertainties in the domestic and international markets. The larger current account deficit (8.2 percent), high inflation, depreciating lira, and challenging domestic political environment started to

1 Due to exchange rate differentials, the total amount of the EFIL loan portfolio as reported by banks and leasing companies (US$846 million) is lower than the amount reported in our system (US$856 million). In the remainder of this report, we will refer to US$846 million as this corresponds to the sum of individual loan amounts reported by TSKB and Eximbank at the time of the ICR. This is also to be consistent with our use of individual loan data to assess the project’s performance.

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threaten the achievements of the previous decade. These conditions were exacerbated by the enhanced turmoil in global financial markets due to the U.S. subprime mortgage crisis. With uncertainty surrounding domestic demand, exports were recognized as a driver of growth. At the time of appraisal, the looming global economic slowdown was seen as likely to slow export growth but not significantly affect the demand for medium-term credit. The Turkish financial sector, however, was still recovering from the 2001 crisis, and continuing macroeconomic volatility led to difficulties for exporting companies in accessing investment finance.

Turkey, like other emerging markets, began experiencing increased market volatility. Between end-2007 and March 2008, Turkish bond spreads had widened by only about 30 basis points more than the overall EMBI+ index, while the Turkish lira had depreciated by about 11 percent against the U.S. dollar. These factors led to a weakening of the risk appetite and capital outflows, which in turn precipitated financial system fragilities.

Within the first six months of EFIL IV, Turkey felt the first impact of the global economic downturn. Between May and October 2008, the Istanbul Stock Exchange fell 35 percent, and the Turkish lira depreciated by 21 percent against the U.S. dollar. Also, while total exports overall grew by 31 percent between January and October, compared to the previous year, a 2 percent decline in October is noteworthy,2 led by a 22 percent decrease in exports of motor vehicles and related-industry products, which represented about a fifth of total exports.

Rationale for Bank Assistance. During Country Partnership Strategy (CPS) discussions in November 2007, the Turkish authorities requested the World Bank to provide additional medium- to long-term financing for exporters. The ongoing EFIL III project was expected to close in June 2008, two years ahead of schedule. Authorities requested additional resources for exporters in the form of credit lines to be intermediated through the ongoing EFIL III borrower (TSKB) and a potential new borrower, Eximbank, which had been engaged in the first EFIL operation. Demand for affordable longer-term foreign currency funds was still strong, given the prohibitively high interest rates (policy rates of more than 16 percent) and the very short loan maturities (70 percent of corporate loans had a maturity of three years or less). The follow-up operation would largely maintain the design of its successful predecessors—EFIL I (1999), II (2004), and III (2005) projects—which had provided a timely and focused response to the demand from banks and exporting companies for medium- and long-term funding, both at pre- and post-crisis periods.

Additionally, the project was designed to encourage longer-term investment finance to boost private sector development. In a context of very short maturity for domestic deposits, Turkish banks relied on syndicated loans of 1-2 year maturity to extend credit to the private sector. Given the increased refinancing risk in the international markets and the worsening global conditions, Turkish banks were hesitant to provide credit with a maturity

2 The central bank identifies October 2008 as the time when the impact of the global financial crisis on domestic and external demand became apparent. Putting an end to a six-year growth streak, trade volumes contracted for the first time in October 2008 and continued to decline in line with international trade trends.

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beyond 1-2 years. By providing banks with longer tem funding, the project was designed to help overcome this constraint to investment finance. Moreover, the project would help the financial sector further develop its investment lending business by demonstrating that term lending can be a viable business proposition while building the necessarily skills at participating financial intermediaries (PFIs) to appraise term loans.

The project is consistent with the FY04–07 Country Assistance Strategy (CAS) at time of appraisal and remained fully consistent with the subsequent Country Partnership Strategies. The top priorities of the FY04–07 CAS for the medium term included completing the banking and financial sector reforms and filling the current gap in accessing credit facilities, which is supported by this project. Subsequently, the CPS FY08–11 aimed at improving the business climate and identified export growth and stability of financial markets as key outcomes. Then, under the first objective (para. v) of the FY12–16 CPS, “Enhanced Competitiveness and Employment,” planned CPS activities include the provision of medium- and long-term funding to exporters. Finally, the Turkish Government in its Ninth Development Plan (2007–13) included competitiveness in export markets as one of the main objectives, with the improvement of the financial system as a way to achieve this.

The credit line operation complemented a comprehensive package of Bank analytical, advisory, and financial support to Turkey’s financial sector policy efforts. Reform options aimed at improved financing conditions for firms were discussed in the 2007 Investment Climate Assessment and the 2008 Financial Sector Assessment produced under the Financial Sector Assessment Program. Financial sector reforms related to capital market development and credit information, among others, were also included in Development Policy Lending discussions.

The credit line also complemented existing credit facilities provided by international organizations. TSKB managed several credit lines that provided financing to small and medium Turkish enterprises (not exclusively exporters). Eximbank received two credit lines from the European Investment Bank (EIB) — €100 million in 2008 and €75 million in 2012. This credit line financed mid-cap exporters, given the EIB’s objective of financing small and medium enterprises (SMEs).

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The project specified the following PDO:

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

Improve the ability of the financial sector to provide financial resources to firms through development of financial intermediaries

To measure progress toward the achievement of the PDO, the following performance indicators were approved:

Private investment as a percentage of GDP Export growth Credit to the private sector as a percentage of GDP

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Assets of nonbank financial institutions as a percentage of GDP

Key indicators for measuring project outcomes were: The increased volume of exports by participating exporters The amount of investments by participating exporters supported by the project The increased scope of financial intermediation as measured by the number of PFIs

(banks and leasing companies) that participate in EFIL IV The increased medium- and long-term lending extended to participating exporters The payment performance of subborrowers The improved risk management capacity at Eximbank

The project was also designed to monitor a broader indicator—employment impact3—which would feed into the development objective of the country and of the CPS. In addition, the Project Appraisal Document (PAD) specified that TSKB would collect information on: (1) financial performance of PFIs and itself; and (2) loan distribution by PFIs, firm size, sector, and geographical location. These additional monitoring efforts aimed to provide sufficient information for a comprehensive assessment of the project’s contributions beyond its core objectives.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The PDO did not change during project implementation; key indicators were however revised at the time of the additional financing. In 2011, the results framework was amended to facilitate the measurement of project-specific contributions.4 Changes were introduced to allow the results framework to adjust not only for the general economic environment but also for sector-specific circumstances. Table 1 summarizes amendments to project indicators along with their justification, as published in the Additional Financing (AF) project paper.

In the course of the results framework’s revision, two indicators were dropped. After the restructuring in 2011, the project’s employment impact was no longer monitored as a key indicator. In addition, the indicator related to component 3 was dropped from the results framework. These changes may have been undertaken, on grounds that these indicators did not best reflect the core PDOs or that performance on these indicators could be influenced by other factors (such as economy-wide developments). The team, while having clear rationales for dropping the indicators, did not properly reflect these in the formal restructuring documentation. The team continued to report extensively on progress toward successful implementation of component 3 in aide-memoires.

3 TSKB would collect planned employment data, at the time of the subloan application. 4Each participating exporter’s performance would be measured against its sub-sector's performance

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Table 1: Amendments to the Original Results Framework Original indicator Change Rationale for change PDO Export multiplier: incremental export growth by participating exporters/disbursed loan amounts

Revised: Export growth by participating firms relative to sector export growth (median)

Revision of existing results indicator to make it more project specific by comparing it to the sectors in which each enterprise operates, thereby controlling for general developments in the economy.

Nonperforming loans/total loan to be measured in numbers as well as amounts

Revised: Nonperforming loans/total loan (1) by amount and (2) by number of loans, all measured among loans included in the project

Revision of existing results indicator to make it more project specific by comparing it to sector weighted nonperforming loan ratios, thereby controlling for general developments in the economy.

Export growth Private investments/GDP Nonbank financial institution assets/GDP Credit to the private sector/GDP

Dropped The indicators measure the whole economy, and the project is unlikely to have any significant impact at this scale. The new indicators are designed to better measure the project’s contribution.

Intermediate outcomes Amount provided to exporters under the project

Continued

Number of banks and leasing companies included in the project

Continued

Amount of investments in projects supported by investment loans

Continued

Share of medium-term financing (more than 12 months) in total PFI loan portfolio

New The indicator is measured for the total portfolio of the PFIs, not just for the loans in the project. This is to assess whether the PFIs increase the share of medium-term finance in their portfolio or whether they use the credit line as a substitute for other medium-term loans they would have given under any circumstances.

Number of beneficiary enterprises

New Included as an additional measure of the impact of the project.

1.4 Main Beneficiaries The beneficiaries for this project were not discussed in the PAD or in the AF project paper. However, based on the project’s components, the beneficiaries of EFIL IV are: (1) exporters; and (2) TSKB, Eximbank, and PFIs (banks and leasing companies).

The primary beneficiaries for this project are exporters and Eximbank (through component 3).Through components 1 and 2, exporters would benefit from the provision of medium- and long-term finance to make productive investments at a time of (1) reduced international funding due to the financial crisis; (2) increasing demand for longer term credit; and (3) inability of the financial sector to support these trends at a reasonable cost.

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Eximbank would benefit from improved risk management capacity. The institutional strengthening of Eximbank is an integral part of EFIL IV, under component 3.

The secondary beneficiaries were the PFIs, Eximbank (through component 2), and TSKB. PFIs and Eximbank, as retail lenders, would benefit from access to medium- and long-term funding to help them expand their medium- and long-term lending and leasing activities, while reducing maturity mismatches that lead to both interest rate risk and refinancing risk. In addition, the project’s requirements for compliance with banking/leasing regulations and financial covenants would help ensure that the PFIs remain financially sound. With regard to TSKB, the project would increase its long-term funding and intermediation capacity in the financial sector. The ultimate objective was to strengthen and improve the ability of the Turkish financial sector to provide medium- and long-term financial resources to the enterprise sector.

1.5 Original Components (as approved) The project substantially maintained the design of the predecessor EFIL III project but added an additional borrower.

Component 1 (US$197.4 million and €65 million) was a quasi-replication of EFIL III, which consisted of a credit line to TSKB, as borrower and an implementing agency. TSKB passed on funds to PFIs for further on-lending to eligible exporters. TSKB operated as a wholesaler, and entered into subsidiary loan agreements with both banks and leasing companies. There were no pre-allocations between PFIs and no sector restrictions. The definition of exporters was expanded to include service exports such as tourism.

Component 2 (US$l50 million and €94.9 million) was designed as a credit line for exporters through Eximbank. Eximbank operated as a retail lender, lending directly to exporters in the shipbuilding and machine-building sectors only. The restrictions were justified by (1) these sectors’ promising export and growth potentials; and (2) Eximbank’s established relations with these sectors. Component 3 (US$3.7 million) was a loan to Eximbank to improve risk management capacity. In addition to building backup capacity for Eximbank’s critical information technology (IT) system to better manage operational risk and upgrading the existing IT systems, the component would support Basel II implementation that started January l, 2008.

Loans to TSKB and Eximbank were provided by the World Bank, with a government of Turkey guarantee.

1.6 Revised Components Component 1 was scaled up once. In March 2011, the Board approved an additional loan in the amount of US$180 million and €87.8 million (US$300 million equivalent) for TSKB.

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Component 2 was revised in June 2011 to lift the initial restrictions on eligible sectors5. With the global financial crisis, demand from the originally approved sectors—ship building, shipyard building, and machine building—slumped. At Eximbank’s request, the project was revised to extend medium- and long-term financing to other sectors. Going forward, the World Bank would approve subloans to exporters in other sectors, on a “no objection” basis.

1.7 Other significant changes With regard to component 1, TSKB proceeded with several reallocations among PFIs throughout the life of the project. At the beginning of the project, 42 percent of loan proceeds were allocated toward leasing companies. At the end of the project, including reallocations and additional financing, leasing companies accounted for 41 percent of total funds (see table A2.2 in annex 2). TSKB efficiently allocated project funds to match demand and performance, thereby avoiding implementation delays.

In May 2013, a reallocation of US$1.5 million from component 3 to component 2 (credit line) was undertaken at Eximbank’s request. The initial US$3.7 million allocation of component 3 was underutilized, due to lower procurement costs, and utilization of in-house capacity and resources in some instances instead of loan proceeds. Table A2.5 in annex 2 summarizes planned and actual activities financed.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry Although presented as a repeater project, EFIL IV is different in some ways from the previous EFIL operations. During the identification mission, the Turkish Treasury expressed a preference for a single operation for the two borrowers, either as additional financing to EFIL III or a new project, in a relatively short time frame. The Regional Operations Committee (ROC) decided to prepare EFIL IV as a repeater project, given the added complexity of the project:

Size: all previous EFIL projects consisted of a credit of US$300 million. EFIL IV scaled up resources, by doubling the amount to be intermediated to exporters.

Borrower and intermediation: Previous EFILs were implemented as a single component with one bank acting as a wholesaler. This time, two banks were involved with different approaches: one wholesaler and one retail lender.

Institutional development: EFIL I was the only predecessor operation that included an institutional development component, which consisted of IT equipment, related services, and training. EFIL IV specifically targeted risk

5 The restructuring was undertaken because, although sector restrictions were not specified per se in the loan agreement, the loan agreement specifically referred to the 2008 operations manual which set these restrictions. During the restructuring, the text in the loan agreement was amended to refer to the revised 2011 operations manual for sector eligibility.

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management and banking regulation. In addition, 10 percent of funds available in the third component were originally earmarked for capacity building at Eximbank related to project implementation (recruitment of consultants for loan appraisal).

Given the similarities with earlier projects, however, the ROC agreed to move forward with streamlined procedures. The project’s preparation, design, and quality at entry were mostly in line with lessons learned from previous EFIL operations and other credit lines:

(i) Consistency with Bank and government priorities. The project supported the government’s strategic priorities and was aligned with the FY04–07 CAS and the FY08–11 CPS during preparation and design.

(ii) Simple and somewhat flexible design, with a minimum of statutory requirements. Currency and interest rate: The World Bank’s loan included the option for both

borrowers to convert loans into an “approved currency,” or from variable to fixed interest rate (and vice versa). To be consistent with the project’s target beneficiaries (exporters), lending in local currency was not allowed.

Eligibility criteria: the definition of exporters was expanded to include service exports (i.e. tourism) for the first time in EFILs, in line with the national definition. The revision was introduced to respond to TSKB’s demand from the tourism sector. Concomitantly, sector restrictions were introduced in response to Eximbank’s original intention of serving the ship-building primarily6, and to some extent the machine building sector. The decision was reversed with the 2011 restructuring, after which eligibility was granted on a no-objection basis, after justification. The EFIL I Implementation Completion and Results Report (ICR) recommended that sector restrictions in these types of operations should be avoided.

Sublending: There were no rigid pre-allocations per PFIs (for TSKB) nor per sector (for Eximbank). Sublending was hence demand driven, in line with EFIL II ICR recommendations that quotas were not desirable. Moreover, exporters were eligible to receive financing for both working capital and investments, and subloans could be denominated in any currency. This flexibility was especially relevant in response to the global financial crisis. Nevertheless, the World Bank continued to monitor the share of subloans that were related to investments.

(iii) Inclusion of leasing in credit lines. The inclusion of leasing companies as financial intermediaries was continued from the successful experience under EFIL II and III. This helped: (1) reach smaller exporters who do not necessarily have access to bank loans but do have access to leases; and (2) assist development of the leasing sector and thereby deepen the financial sector.

6 The EU requirement for double-hull tankers starting in 2003 created a strong demand for the Turkish shipbuilding sector, which had been a major provider of such ships in EU markets. Eximbank also targeted this sector to consolidate its experience in large-value project finance.

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(iv) Quality of participating financial institutions: Both TSKB and Eximbank were selected on the basis of sound bank analysis and audited financial performance data. The World Bank preparation team conducted detailed assessments of both banks. Both borrowers were deemed well capitalized and profitable, with a sound loan portfolio. TSKB, a private development bank, was rated by both Fitch Ratings and Moody’s and received ratings in line with the largest and best-run banks in the country. Eximbank, state-owned, is the export bank. Both borrowers had previous experience with World Bank’s EFIL operations, as a wholesale or retail lender.

(v) Lower transaction costs for PFIs, through simplification of the application process. EFIL IV simplified the application forms and reduced the eligibility and reporting requirements for PFIs, closely aligning these with business practices, in order to reduce the transaction costs. Earlier ICRs had indeed highlighted that onerous environmental, procurement, and other project requirements tend to lead to a more restrictive allocation of funds, to larger transactions, and to firms with a better access to finance.

(vi) Decentralized decision making and sound incentive structure for wholesale lending. With TSKB carrying the credit risk of and selecting PFIs and PFIs carrying the credit risk of and selecting exporters, the selection of project participants rested on the entities that are best capable of identifying good financial intermediaries and exporting firms. Qualitative criteria set out in the project and monitored during supervision helped ensure that these choices were made on a sound basis.

(vii) Incorporation of other lessons learned in previous EFIL projects. Important lessons were: (1) use of established market practices for the selection of both the PFIs and the exporters/subprojects; (2) use of procurement requirements that are suitable for private sector borrowers to make the project more client friendly and ensure its expeditious implementation; (3) combine the borrower and implementing agency functions in one and the same entity for higher quality and expeditious project implementation; and (4) engaging with potential subborrowers to ascertain the potential uptake of the credit line.

(viii) Identification of risks and associated mitigation measures. Risks included (1) macroeconomic risks due to the global economic slowdown expected in 2008 with ensuing lower demand for the credit line; (2) risk of systemic liquidity contraction due to substantial capital outflows; and (3) implementation risks, including Eximbank’s first operation as a retail lender. Mitigating factors included the economy’s demonstrated resilience to negative shocks and exporters’ track record of resilience to macroeconomic instability. At the project level, the Bank team had strong confidence in TSKB’s and Eximbank’s institutional, financial, and technical capacity, given their successful prior experience in managing foreign credit lines (including the World Bank’s EFILs). The lack of demand from Eximbank’s core sectors, although raised in the ROC meeting, was not addressed in the project’s risk matrix. Design flexibility would have been an appropriate mitigating measure.

2.2 Implementation The project was effective in June 2008, just a month after board approval. Eximbank’s credit line disbursed within the original project closing date; and TSKB, including the additional financing disbursed fully by the amended closing date (the initial credit line was

10

fully disbursed almost three years ahead of schedule). Factors that affected implementation outcomes can be organized into four categories.

A. The effect of the global financial crisis

Significant volatility in the Turkish economy: after a recession in 2009, the Turkish economy recovered in 2010 and settled at a more modest growth level of 3 percent in 2014, compared to the previous decade. Between May 2013 and January 2014, the lira depreciated by almost 15 percent as a result of the Fed’s tapering message and domestic political tensions. The Turkish central bank (CBRT) responded with strong monetary policy tightening and significant increases in interest rates. Since May 2014, the CBRT has cut interest rates in several steps. However, high inflation and renewed depreciation of the lira leave little room for the central bank to support economic growth.

Depressed demand for exports: In 2008, total exports reached US$130 billion, 18 percent of GDP. Turkish exports were down by 23 percent in 2009, then gradually recovering to return in 2011 to their 2008 level. Exports in the manufacturing industry followed a similar trend. The manufacturing of transport equipment (excluding motor vehicles, but including ships) was hardest hit, and still has not fully recovered. This sector can serve as a proxy for the shipbuilding sector. The machine-building sector fared slightly better during the crisis.

Overall, demand from export markets declined, in particular in the EU which represented 50 percent of Turkish exports. Eximbank was the most affected because its target sectors were very sensitive to the global economy. TSKB was affected to a lesser extent, given the largely unmet demand for export finance across all sectors.

Figure 2: Evolution of exports, 2008-12 (Base year: 2008)

Contraction of private investment and leasing activities: Real private investment dramatically dropped from 30 percent per year until 2004, to reach 2.6 percent in 2007 and minus 22.5 percent in 2009, before slowly returning to its normal levels in 2011. Due to the investment finance nature of leasing as well as

40

60

80

100

120

140

2009 2010 2011 2012 2013

%

Exports Exports/GDP

40

60

80

100

120

140

Transportequipment

(excl. vehicles)

Machinery andequipment

TotalManufacturing

%

2009 2010 2011 2012 2013

11

regulatory change7 introduced in 2007, the leasing business was severely hit by the financial crisis: total transaction volumes sharply fell from US$8.3 billion in 2007 to under US$2.2 billion in 2009. The industry is traditionally focusing on the SME segment, where credit risk has been increasing and demand has been weakening more than among larger firms.

Larger transaction size:8 The average amount of subloans and leases was higher over the 2008–10 period (EFIL IV) at US$1.8 million compared to US$1.5 million in 2006–09 (EFIL III). Although the average size of bank loans decreased slightly to US$2.4 million from US$2.6 million, the transaction size of leasing companies increased to US$1.5 million, up from US$1.2 million. In addition, 42 percent of subloans (by number and 13 percent by amount) were below US$1 million, compared with 51 percent (by number) and 22 percent (by amount) in EFIL III. Furthermore, the smallest loan was US$110,243 in EFIL IV twice as high as in EFIL III (US$50,293). Given the similar conditions in EFIL III and IV, the trend can be attributed to the leasing companies’ response to the crisis, highlighting the shift away from SMEs. This is confirmed by individual loan data from the additional financing. During the 2011–14 period, the average size of leasing transactions decreased to US$1.1 million, below EFIL III levels. Over the same period, the size of bank loans increased to US$3.1 million.

Lower investment financing than expected: o TSKB: 50 percent of the credit was used for investment purposes between 2008

and 2010. Although high, this is lower than in EFIL III, during which 67 percent of the total amount was used for investment purposes. During the period of the additional financing (2011–14), the ratio of investment loans to working capital loans was still lower, 51:49. This reflects the overall low demand for investment financing in the economy: while the volume of corporate loans steadily increased in the overall banking sector between 2008 and 2013, the ratio of investment loans to working capital loans decreased from 41:59 to 34:66 over the same period. The project thus helped sustain investments.

o Eximbank: During project implementation, in response to market demand, Eximbank’s focus has explicitly shifted from lending for increased capacity (to satisfy the projected demand) and investment financing to funding working capital (to allow companies to continue operating). By end-2014, 7 percent of

7 As of year-end 2007, the Turkish Finance Ministry increased the VAT rate from 1 percent to 18 percent. In December 2011, the VAT rate returned to 1 percent, for machinery and equipment. This reversal has supported the leasing activity. 8 The comparison is possible for TSKB, which was only a wholesaler in previous operations, with an equivalent amount of US$300 million for exporters. For Eximbank, this discussion would not be relevant because of the sector restrictions, the switch from wholesale to retail lending and more generally the type of exporters that received financing.

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dollar-denominated loans and a third of euro-denominated loans financed investments. In total, 14 percent of Eximbank’s credit line funded investments.

Lending pipeline: further data analysis on TSKB’s credit line shows that the debt/equity ratio (D/E) and debt service coverage ratio (DSCR) of firms that received financing during the crisis were different from those financed post-crisis. 79 subloans did not meet at least one of the financial requirements‒i.e. a minimum DSCR ratio of 1.1 and a maximum D/E ratio of 85:159. Greater flexibility and relaxing financial conditions for borrowers are consistent with market practices in response to crises. With regard to PFIs’ response to the crisis, the data suggest that beneficiaries in 2008–10 had lower D/E ratios and DSCR compared with those in 2011–14 (figure 3). Beneficiaries were less aggressive but riskier (could less afford the loans). The average DSCR stood at 1.5 in 2008–10 and 2.3 in 2011–14, which entails that PFIs were willing to finance subborrowers who faced either lower incomes or higher debt service during the crisis. With regard to the D/E ratio, the average leverage of subborrowers was lower during the crisis. This suggests that PFIs were willing to lend to exporters with higher levels of debt after the crisis, to support their growth. Annex 2 provides more information on subborrowers.

Figure 3: Lending requirements: Firms’ characteristics

Tightened funding conditions: Turkish banks found it more difficult or expensive to obtain funds from international credit markets. For example, in 2009, TSKB decided not to roll over its expiring syndicated loans. The increasing cost of new financing for the banks made the EFIL IV funds relatively more attractive and resulted in increased demand from TSKB, Eximbank, and PFIs for the credit line.

B. Take up of Eximbank’s credit line

Sector restrictions: As mentioned above, Eximbank focus on the shipbuilding and machine-building sectors was motivated by an anticipated surge in demand following new EU regulation. This increased demand did not materialize with the crisis and exporters, who had expressed interest in Eximbank’s financing at appraisal, became more cautious. Eximbank’s first disbursements occurred in June 2009, one year after effectiveness. Given the experience of other PFIs (through the

9 As per TSKB, all subborrowers met financial covenants at the time of application, and ad projected based on cash flow forecasts. Financial covenants were no longer met, possibly due to market conditions, during the pay-back period of their loan.

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TSKB credit line), the lower demand at the beginning of the project can be attributed to the specific, large negative effect of the crisis on the targeted sectors. By end-2010, demand from the machine-building sector was quasi-nonexistent (two subloans of €1.4 million and US$4.5 million in 2009; one subloan of US$1.1 million in 2010); and demand from the ship-building sector consisted of working-capital loans. Between April and September 2010, Eximbank did not receive any new applications. Eximbank later decided to limit its exposure to the ship-building sector. As of end-April 2011, three years after project approval, about a third of funds were committed, close to 90 percent of which were for shipbuilders. After restrictions were relaxed with the project restructuring, Eximbank financed demand from the electric and electronics, the automotive supplier (auto parts), and the metalware industries. Eximbank accelerated its marketing efforts through branches, liaison offices, and sector meetings and built a large pipeline portfolio. As a result, Eximbank’s disbursements accelerated: an additional 60 percent of loan funds were disbursed between October 2011 and 2012.

Credit risk: In line with its existing procedures and market practices, Eximbank still required EFIL IV subborrowers to present a bank guarantee. During project implementation, and is response to the difficulty for its clients to provide sufficient collateral, Eximbank expanded the range of collateral to include guarantees from the national credit guarantee fund. Considering the cost of obtaining bank guarantees, Eximbank also decided to adjust its pricing to remain competitive.

C. Revision of the environmental framework

In the course of the 2011 additional financing and restructuring, the environmental frameworks applicable to subloans of TSKB and Eximbank were revised. This revision follows a broader World Bank review of safeguards practices undertaken in FY11. The revision aimed to clarify the environmental assistance process and eliminate redundancies. Modifications included: (1) eliminating a redundant screening category and using only Turkish and World Bank environmental assessment screening classifications; (2) clarifying the separation of environmental due diligence of current enterprise performance from environmental risk assessment of the subprojects; (3) clarifying the application of World Bank environmental assessment screening categories to all investment subprojects; (4) identifying explicit environmental risk factors to be considered for both enterprises and subprojects through the introduction of a negative list of ineligible enterprises and through the introduction of distinct criteria for subprojects involving either physical construction, process improvement, or working capital; (5) providing specific guidance for determining whether subprojects would trigger World Bank policies on International Waterways and Safety of Dams, with such projects not being eligible for financing; and (6) outlining procedures necessary for compliance with World Bank Cultural Properties safeguards policy both for known historic sites and for "chance finds" during excavation activities.

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D. Other developments

Underserved regions: The World Bank’s SME 1 Project (approved in June 2006 and closed in April 2012) was the precursor to several projects in Turkey, financed by the World Bank and other development partners that explicitly targeted underserved regions. While the EFIL IV project was neither designed nor expected to channel funds to subborrowers in underserved regions, 17 subloans of US$34 million (4 percent by amount and 4.6 percent by number) were disbursed in “priority development regions” such as Çorum, Kahramanmaraş, or Karaman. None of these became nonperforming by end-2014. Overall, 35 percent of EFIL IV funds financed exporters outside of the “developed regions” (i.e., Istanbul, Kocaeli, Ankara, Izmir, Bursa, Adana, and Antalya.). A more detailed analysis of lending in underserved regions is presented in annex 2.

Table 2: EFIL IV loan portfolio by region

Region

Amount disbursed

(US$) %

Number of

subloans %

Avg. maturity (months)

Max. maturity (months)

Developed 550,073,314 65% 236 64% 49 96 Other (“Tigers”) 261,668,284 31% 116 31% 50 84 Underserved 34,267,174 4% 17 5% 48 72 Total 846,008,773 100% 369 100% 49 96

Eximbank’s institutional development component: component 3 was included in the project to help Eximbank upgrade its risk-management capacity and prepare for the implementation of Basel II requirements. With regard to risk management capacity, the project aimed to upgrade the IT infrastructure, through the supply and installation of disaster recovery IT System, and the installation of risk management software. The former was financed from project funds, while the latter ended up being financed from Eximbank’s own resources. With regard to Basel II implementation, the Turkish Banking Regulation and Supervision Agency (BRSA) had decided, at the time of project appraisal, that Basel II rules related to credit risk management would be implemented starting in January 2009. As a result, the project had earmarked US$350,000 for the implementation of a rating-based credit appraisal and monitoring system at Eximbank, as required under Basel II. Although loan proceeds were intend to establish a credit scoring system, Eximbank ended up using its own resources instead for activities related to Basel II (see Annex 2). In the end, Eximbank started reporting its capital adequacy ratio under Basel II to the BRSA in July 1, 2012 and US$1.5 million were reallocated from component 3 to component 2.

Crowding-in: TSKB participated in the previous EFIL II and III operations and benefited from its strong relationship with the World Bank to strengthen its credibility with other international financial institutions. Between 2009 and 2013, TSKB has signed multilateral funding agreements totaling US$2.9 billion. Outstanding long-term funding amounted to US4.1 billion in 2014Q1 (91 percent of total funding) and had an average maturity of 12 years. With regard to wholesale funding, TSKB has developed a strong relationship and experience with financial

15

institutions in Turkey. Eximbank launched a follow-up export credit program in end-2012 that aims to provide medium- to long-term financing for working capital and investments. Since its launch, Eximbank has disbursed TL1billion and reported strong interest. The program builds upon its experience with World Bank and EIB loans.

Figure 4: Outstanding funding

Figure 5: Sources of long-term funding

Source: TSKB

2.3 Monitoring and Evaluation (M&E) Design, Implementation, and Utilization The results framework was revised in 2011 to better reflect the PDO. The original Monitoring and Evaluation (M&E) framework designed PDO indicators that, although effectively monitored during project supervision, did not measure the project’s contribution but rather measured the overall performance of the Turkish economy. This was common practice at the time the project’s M&E framework was designed. These macro indicators were dropped during the preparation of the Additional Financing. Two indicators, previously designed as intermediate outcome indicators, were amended and then upgraded as PDO indicators. As such, since 2011, the PDO indicators were adequately measuring the project’s impact.

The 2011 revision also aimed to manage expectations of the project’s outcomes. Revisions were made to intermediate outcome indicators to improve the ability to attribute any observed results directly to the project. The performance of exporters would be compared with that of nonparticipating exporters within their subsectors for greater comparability. In addition, the Bank team attempted to monitor the impact on the maturity structure of the balance sheet of participating PFIs beyond the direct impact of the bridge loan.

The M&E arrangements were not fully described in the PAD. TSKB’s M&E capacity based on EFIL III’s experience was discussed. However, the PAD did not provide details on Eximbank’s M&E arrangements. Moreover, M&E arrangements were not mentioned in either operational manual, where the results framework and M&E responsibilities were omitted. For example, D/E and DSCR information could not be retrieved for Eximbank’s subborrowers. Finally, the PAD did not define baseline benchmarks and targets for several indicators. Targets were, however, set in the first aide-memoire and Implementation Status and Results Report (ISR).

2,848 3,0163,351

3,769 4,030 4,062

94 258 296 175 267 247

2009 2010 2011 2012 2013 2014Q1

US$ mlnLT funding (>1yr)

ST funding(<1yr)

2%

3%

3%

4%

8%

8%

29%

44%

EBRD

AFD

IDB

IFC

CEB

KfW

EIB

IBRD

16

Despite initials shortcoming in the design of the M&E framework, performance was monitored by the team during implementation. Project performance was consistently reported in supervision reports (ISRs and AMs) throughout the project life, except for component 3— institutional development of Eximbank. After 2011, there were no indicator to monitor to progress toward the implementation of Basel II risk management requirements.10 As a result, component 3 was removed from the results framework.

2.4 Safeguard and Fiduciary Compliance Procurement, financial management, and environmental safeguards requirements were detailed in the project operational manual. Eximbank and TSKB had different roles during project implementation, given the different financing models. The project operational manual provided guidance to Eximbank, TSKB, and PFIs. TSKB’s and Eximbank’s manuals were revised during the life of the project to update the environmental procedures. Eximbank and TSKB established project implementation units that effectively undertook all project arrangements. TSKB’s engineering department, which was responsible for the supervision of procurement and environmental practices, had extensive experience with World Bank procedures. The operating systems of Eximbank and TSKB were fully aligned with the project’s accounting, supervision, and reporting requirements. In addition, no disruption was experienced when Eximbank’s headquarters moved to Istanbul from Ankara.

Implementation of fiduciary and environmental safeguards procedures was satisfactory during project implementation. The well-developed operational manual along with the experience and proactivity of TSKB, contributed to effective safeguards and fiduciary compliance. TSKB upgraded the existing environmental and social risk assessment tool within the application forms to help PFIs screen and assess subprojects easily and more efficiently. TSKB transferred its environmental safeguard knowledge to PFIs and also conducted before and after reviews. In addition, TSKB continued to use an in-house loan application, approval, and monitoring system, which was shared with PFIs. This tool was also used for financial management purposes, as PFIs could submit withdrawal applications directly to TSKB through this web-based platform. Since 2010, in addition to information provided by PFIs, PFI visits and subborrowers visits, TSKB has voluntarily prepared audit reports related to the Project's environmental and procurement related aspects. With regard to Eximbank, the availability of the World Bank’s specialists in the Ankara office provided timely support to ensure compliance with World Bank procedures, when necessary. Eximbank also designated staff responsible for environmental safeguard issues, which resulted in the full compliance with environmental safeguard procedures. Finally, the World Bank specialists provided several trainings to TSKB and Eximbank on fiduciary and environmental safeguards procedures

PFIs and exporters reported implementation challenges related to:

10 At the time of the ICR, the Bank team offered the use of Eximbank’s own resources to comply with the BRSA’s Basel II requirements for risk management practice, as an explanation for why the indicator was dropped.

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Procurement: The systematic requirement to provide invoices for small amounts was perceived as an undue burden. PFIs were required to keep records of working-capital expenditures to justify their eligibility during the World Bank’s annual post-reviews on a spot-check basis. Eligible working-capital expenditures included utility costs, which are generally small in amount. PFIs would rather have subborrowers keep their own records and rely on audit reports to verify the eligibility of expenditures. In comparison, for non-EFIL working-capital loans, PFIs request only a procurement plan (or spreadsheet of planned transactions) at the time of the loan application. Procurement requirements were otherwise found to be generally in line with commercial practices.

Safeguards: The project’s environmental safeguards requirements were found to be unnecessarily demanding, given the similarities between the World Bank environmental safeguard policies and the national legislation. In practice, however, the project’s environmental requirements were limited mainly to due-diligence document collection (i.e. proof of compliance) because the majority of subloans financed working-capital or equipment leasing. World Bank procedures require proper documentation showing environmental compliance for all projects financed from Bank funds.

2.5 Post-completion Operation/Next Phase In EFIL IV, PFIs (including TSKB and Eximbank) have again successfully demonstrated that medium- and long-term lending remains a viable business proposition, even in periods of economic downturn. According to the project’s closing data, NPLs represented 2.7 percent of subloans by number and 3.0 percent by amount. As of June 2014, the NPL ratio was 2.8 percent in the banking sector and 7.1 percent in the leasing sector. Based on a 72:28 distribution of the EFIL IV loan portfolio between banks and leasing companies, the project’s NPL ratio is much lower than the sector-weighted average of 4 percent. In addition, the project’s average loan maturity was 49 months, up from 43 months for EFIL III. Also, in EFIL IV, two-third of subloans had a maturity of four years or more, compared to around half the loans in EFIL II. In comparison, the share of bank loans to corporates with a maturity of more than 3 years increased from 24 percent in 2003 (EFIL II) to 41 percent in 2013 (EFIL IV). Over the same period, the share of corporate loans with a maturity of less than a year decreased from 42 to 34 percent.

The EFIL IV project reached 13 PFIs, of which 3 were newcomers, compared to previous EFIL operations. The project helped, on the one hand, to strengthen credit appraisal procedures among PFIs and, on the other hand, to ensure their compliance with strict prudential standards (prudential ratios were monitored throughout the project). In EFIL IV, there were three EFIL newcomers and six PFIs that had participated in prior EFIL operations (excluding EFIL III). While the EFIL program covered a total of 24 PFIs,11 slightly over half (13)—six banks and seven leasing companies—participated in EFIL IV.

11 There are actually 26 PFIs, 2 of which merged with others during the EFIL series.

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Throughout the EFIL series, the World Bank has provided US$1.8 billion to provide over 900 subloans to Turkish exporters, intermediated through 24 PFIs. The successive credit lines have provided almost US$800 million for investment purposes (44 percent). Since EFIL III, both dollar-denominated and euro-denominated loans have been provided to satisfy foreign-currency needs. Exporters have built credit history with PFIs and improved the financial records and documentation required for bank loans, thus improving their ability to gain access to credit. Unfortunately, data constraints have prevented an assessment of the financial profile of repeat EFIL subborrowers over time.

Table 3: Participating financial institutions in EFIL operations (amounts in millions) EFIL 1 EFIL 2 EFIL 3 EFIL 4

BANKS (7) (5) (5) (7) Is Bank $60 $74/€13 TSKB $30 ** ** ** Garanti Bank $10 Koç Bank (later Yapi) $54 YapiKredi Bank $62 $73 $52/€13 Dis Bank/Fortis Bank $28 $28 TEB $42 $35/€13 Oyakbank $44 Finansbank $40/€10 Alternatifbank $25/€10 $20/€27.8 Tekstilbank $13 Denizbank $10 ING Bank $32/€30 Exim Bank ** $150/€95 LEASING COMPANIES (0) (6) (6) (7) Garanti Leasing $37 $13/€5 $71/€7 TEB leasing $20 $10/€10 Fortis Leasing $19 FFK Fon Leasing $18 $40/€10 YapiKredi Leasing $13 $20/€20 $25/€12 Halk Leasing $6 $10 Is Leasing $25/€10 $30/€12 Alternatif Leasing $10 €7.8 Finans Leasing $4/€15 Ak Leasing $18/€7

** indicates that the bank was as wholesale lender for the project.

It is the first time that an EFIL project is closing without a successor EFIL project in the pipeline or approved. There is currently no project that exclusively supports exporters. However, the Innovative Finance Project, which was approved in July 2014, aims to improve access to longer-term Islamic finance and to factoring for SMEs and export-oriented enterprises. In addition, two other lines of credit for SMEs are ongoing. Table 4 below summarizes credit lines aiming to finance Turkish companies.12

12Lines of credit that provide financing for energy efficiency have been excluded, because they serve a different purpose.

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The aggregate long-term development impact of all EFIL operations is outside of the scope of this EFIL IV ICR but deserves further attention. To date, the development impact of previous EFIL operations has been individually rated satisfactory, highly satisfactory, and highly satisfactory, respectively, taking each of these projects as standalone operations. With the closing of this last EFIL operation, the country team could take the opportunity to review the EFIL series as part of a larger effort to provide support to exporters in Turkey and holistically analyzing the impact achieved over time on borrowers, PFIs and exporters. Such an assessment would help draw overall lessons to be learned, which can be shared across the Bank. For example, an analysis of repeat EFIL subborrowers may provide additional insights into the longer-term impact of Bank financing and yield lessons for future lines of credit. Moreover, such a study would lead to a better understanding of the additionality of the EFIL program. Two evaluations of EFIL operations undertaken in 2011 actually reported that more than two-thirds of exporters would have been able to at least partially finance their investment and working-capital needs in the absence of the EFIL program. These preliminary findings deserve to be further investigated.

Table 4: Financial sector lines of credit Project Name

Year Amount($M)

Closing Borrower

EFIL I 7/1999 252.5 8/2003 EXIMBANK (whole sale)

EFIL II 1/2004 303.1 9/2009 TSKB (whole sale)

EFIL III 5/2005 305.0 6/2010 TSKB (whole sale)

SME I 6/2006 150.0 4/2012 TSKB (retail) Halkbank (retail)

SME I (AF1) 6/2007 50.0 4/2012 Halkbank (retail)

EFIL IV 5/2008 600.0 12/2014 TSKB (whole sale) EXIMBANK (retail)



SME II 6/2010 500.0 3/2015 Ziraat (retail), Vakif (retail), Kalkinma (wholesale)

EFIL IV (AF) 5/2011 300.0 12/2014 TSKB (whole sale)

SME III 6/2013 300.0 12/2017 Ziraat (wholesale) Innovative Finance

7/2014 250 12/2018 TSKB (wholesale)

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation The project remains highly relevant to Turkey’s development priorities. The project was fully in line with the CAS/CPS priorities at preparation and during implementation, as well as the 2007–13 Government’s Development Plan. The project is also fully consistent with the FY12–16 CPS, as well as the Tenth National Development Plan (NDP) (2014–18) and the 2023 Turkish Exports Strategy. The latter strategy, which was initiated by the Ministry of Economy and the Turkish Exporters Assembly, aims to reach US$500 billion worth of exports by 2023, while the NDP provides an intermediate target of US$277 million by 2018.

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The project design reflected the identified financing constraints facing exporters. As attested by the 2011 survey of EFIL beneficiaries, the project, through the provision of financing through PFIs, was able to contribute to the alleviation of financing constraints for beneficiaries. As the Turkish economy started to recover, the availability of financing to exporters was still affected by the weak economic performance in the EU countries and by exchange rate volatility.

The project and the additional financing for TSKB provided essential funding during the crisis. In the context of an unprecedented international liquidity crisis, the project provided for a quick disbursement instrument and countercyclical term funding, at reasonable cost. As a wholesale, TSKB quickly allocated funds to PFIs. For the original project in 2008, TSKB allocated 63 percent of the credit line within two months of effectiveness. For the AF, all subsidiary loan agreements were signed within six months of effectiveness. Demand from PFIs can only attest to demand in the real economy. For exporters, funding through EFIL IV was provided at competitive rates.

The project relied on multiple delivery models: wholesale versus retail, banks versus leasing companies. These coexisting models had two potential benefits: greater reach and comparison of performance, in what could have been considered a quasi-experiment. Wholesale lenders are able to reach several financial intermediaries with the end-goal of exposing a potentially larger number of exporters to the project’s benefits, thanks to an extended branch network, clientele, and product offering. Leasing companies, however, are effective relays for investment finance.

The project also provided a learning opportunity for PFIs and Turkish exporters. Three new PFIs participated in EFIL IV and benefited from TSKB’s experience in procurement, safeguards, and overall IFI requirements. Two PFIs indicated that they updated their loan documentation to some extent after their first exposure to EFIL requirements. Also, PFIs said that they sometimes used EFIL to build relationships with new clients, as a “training tool” or test for their commitment and capabilities. In addition, the choice of TSKB as a continuous apex structure in the last EFIL operations (following its first participation as a PFI) established a knowledge-exchange platform: TSKB delivered regular training sessions on key project requirements.

Three factors contributed to TSKB’s good disbursement performance, which ultimately justified the unprecedented scaling up of its credit line: (1) experience as a wholesale lender in Turkey; (2) familiarity with World Bank credit line operations and processes; and (3) multiplicity and diversity of PFIs, along with TSKB’s support and monitoring of PFIs.

Due to its timeliness, the project, as a whole, disbursed above estimates. By end-September 2010, two year into implementation, almost 60 percent of funds had been disbursed to exporters. TSKB had disbursed 96 percent of its credit line. Eximbank experienced a slower take-up with the crisis. The two sectors that were targeted by Eximbank, although quite strategic given their high export potential, were severely affected by the global crisis through the ensuing slump in international demand. After the project was restructured in June 2011 and Eximbank invested additional marketing efforts (greater use of regional branches, liaison offices and sector representatives, and exporters

21

association), disbursements surged from 30 to more than 90 percent in 12 months. Finally, the rationale for approving Eximbank’s request to act as retail lender is best explained, in hindsight, by the desire to target two strategic sectors.

In practice, there were missed opportunities. First, the project could not reach smaller exporters as originally intended as they, during a period of crisis, were more sensitive to the project’s requirements. Second, most often the project’s funds went to finance existing clients rather than attracting new clientele. These two arguments naturally suggest that the project could not by design reach the more financially constrained exporters. Third, the project provided both more competitively-priced and longer maturities for beneficiaries. It is hence difficult to disentangle the impact of either on (1) the attractiveness of the funding and (2) the performance of project beneficiaries. Fourth, the project stops short of being able to make any recommendation on the most efficient model in this quasi-experiment, given the lack of direct competition between PFIs (they cater to different clientele). Nonetheless, the project was still able to provide insights into the different financing needs of exporters, depending on their profile (sector, location, and size) and the type of financial intermediary. Annex 2 presents an analysis of loan data by PFI type and by regions, which suggests that leasing companies may be an effective vehicle for financing the investment needs of smaller exporters and banks in reaching out to firms in less developed regions13.

Component 3 was not strongly connected to the project’s development objectives. The US$3 million component was designed to ensure Eximbank’s compliance with Basel II requirements, US$350,000 of which had been earmarked to increase its credit appraisal capacity. Unfortunately, the implementation of the component was partial: 60 percent of the component’s funds have been used, the rest was reallocated to component 2. While IT upgrades and disaster risk management systems were financed from project funds, Eximbank decided to use its own resources to fund activities related to Basel II implementation and the risk management software. Furthermore, technical assistance for credit appraisal was canceled with less than 5 percent of funds utilized. Over the project implementation period, Eximbank started reporting to the BRSA under Basel II standards in mid-2012. This component, as originally planned, built upon the “Roadmap for Basel II” that was developed by Eximbank in October 2005 but became less attractive by the time the project was being implemented. In hindsight, this component did not have an optimal design for either the World Bank or Eximbank, and several activities financed did not relate to credit risk management or Basel II.

Weak monitoring and evaluation arrangements affected the quality of data collected. The quality of data provided for the ICR is heterogeneous, and varies across indicators and PFIs. Key data (such as investments generated, employment or financial health of borrowers) are unavailable for several subborrowers.

EFIL operations, although successively implemented in a short time frame, are considered standalone projects. There are several implications to this: (1) PFIs do not

13 These observations may not be generalizable to the overall financial sector, as this project specifically target exporters meeting certain eligibility criteria.

22

see their participation in an EFIL project as a long-term commitment to the project’s long-term and development objectives; (2) as a corollary, EFIL funds were used only once to extend longer-term loans to exporters; reflows were not required14 and (3) data collection efforts were sustained only until funds are disbursed; once PFIs had fully used their allocation, it is difficult to obtain information on beneficiaries15.

3.2 Achievement of Project Development Objectives

The PDOs, in the way they had been stated and measured at the time of the ICR, were fully achieved. The revised PDO indicators measure the project’s impact more adequately than the original indicators. Support exports by providing medium- and long-term working capital and investment finance to exporting firms.

Exports: The project contributed to export growth and helped increase the amount of medium-term financing for exporters at a time of growing global credit constraints. Total exports of participating firms grew by six percentage points more than exports in their relative sectors.16 Further analysis shows that the project’s impact was stronger during the crisis (2008–10), as the export growth of participating firms was 10 percentage points higher than that of their relative sector. Even more important, during this period, the median export growth rate of participating firms was 50 percent, while Turkish exports contracted by 13 percent. Overall, the performance of participating firms would be even stronger, if 2013 had not been a difficult year for Turkish exports. The indicator has been significantly reduced from 14 percentage points (based on 2012 exports) to 6 percentage points (based on 2013 exports), due to a substantial fall of exports in the metalware sector in 2013. Exports in this sector fell by 31% in 2013, compared to 2012 and 21% of the EFIL IV loan portfolio is comprised of loans to exporters in this sector.

Volumes: The credit line provided US$846 million equivalent of medium- and long-term (maturity of more than 12 months) financing to 309 exporters through Eximbank and 12 PFIs (leasing companies and banks through TSKB). US$609

14 Actually, for the first time in EFIL operations, EFIL IV loan agreements all included some language to provide for the future use of subloans’ proceeds to finance additional export development projects (optional for Eximbank) or finance projects for “the development of Turkish export sector” (required for PFIs unless otherwise agreed; no requirement for TSKB). 15 PFIs were not able to obtain such information from subborrowers, especially when the subloan was already fully repaid. 16The median relative growth differential between participating firms and their corresponding sector (per TUIK classification) was 5.96. In other words, for any given sector, the median export growth rate of participating firms was almost 6 percentage points higher than the sector’s growth rate. Some caveats need to be considered in the calculation of this PDO indicator: (1) the calculation is based on the latest available figures, with the latest exports data not always available (2013 at best); (2) for firms received a loan 2008 and 2009, export data start only in 2009; as a result, these firms’ exports before taking the loan are unknown;

23

million was provided through six banks, including Eximbank, and US$237 million through seven leasing companies. These amounts respectively represent 0.2 percent of total non-consumer bank loans as of end-December 2014 and 3.4 percent of leasing volumes in 2013, as reported by the Turkish Banking Regulation and Supervision Agency (BRSA).

Maturity: The maturity of subloans and leases was 49 months on average. The average maturity was 43 months early in the project (2008–10), reflecting the difficult financial conditions during the crisis17 and then increased to 53 months between 2011 and 2014. Sixty-three percent of loans with a maturity of two years or less were approved before 2011. All EFIL IV loans had a maturity of over one year, compared with 66 percent in the banking sector (as of June 2014).These results also confirm a trend in the overall banking sector to provide longer-term financing: 59 percent of corporate loans in 2008 had a maturity of over one year. These results are also in line with the findings of an external evaluation of EFIL operations undertaken in 2011, in which exporters surveyed ranked longer maturities as the main benefit of the program.

Figure 6: Loan distribution by maturity (number and volumes)

Regions and Sectors: Loans were concentrated in the Marmara region (58 percent in amount), although the share of loans in this region is decreasing compared to previous EFIL operations: EFIL II (74 percent) and EFIL III (60 percent).18 In terms of sectors, over half of EFIL IV funds financed exporters in the metalware sector (21 percent), textile sector (19 percent), and ship-building sector (14 percent).

Based on the original outcome indicator assessing the direct impact of the project on exports, the project also exceeded its target. The export multiplier (measuring incremental exports of firms divided by total loan amount) was 3.8, compared to a target of 1. In other words, for every US$1 disbursed in loans, participating firms increased their exports by US$3.8. Aggregate exports of participating firms almost doubled over the

17The distribution between working capital and investment loan was stable during the life of the project at 61:39. The different maturity structure is thus not a result of increased demand for working capital during the crisis, but rather the willingness of financial intermediaries to provider long-term financing. 18Unfortunately, the EFIL I ICR did not provide information on the geographical distribution of loans.

0%

5%

10%

15%

20%

25%

30%

<12 12-24 24-36 36-48 48-60 60-72 72+

% t

otal

months

% total amount % loans (number)

24

period, while total Turkish exports grew by 19 percent. During the 2008-10 period (prior to project restructuring), the target was also achieved, with an export multiplier of 4.5.

The project exceeded all but one of the original PDO indicators. Total Turkish exports increased from US$107.3 billion in 2013 to US$157.6 billion in 2014. Between 2007 and 2013 (latest published data), credit to the private sector as percentage of GDP grew from 28 to 70 percent. The share of non-bank financial assets as percentage of GDP also increased from 3.1 percent to 4.2 percent. However private investments declined from 18 percent of GDP to 16 percent in 2013. These indicators are however irrelevant, because they were not linked to the project. Also, it is not possible to conclude evaluate the project’s performance because no target had been assigned.

Improve the ability of the financial sector to provide financial resources to firms through the development of financial intermediaries. The project provided financing to exporters through banks and leasing companies, thereby contributing to the development of financial intermediaries. As the leasing industry underwent a difficult period during the first years of the project due to the new regulation affecting the industry,19 the project has contributed to an increased ability of leasing companies to provide financing. Moreover, there was a record number of participating financial intermediaries in EFIL IV compared to previous operations. Three new PFIs also participated for the first time in an EFIL operation, which increases the impact of the project in the financial sector. Notwithstanding an increased reach of the project and the global crisis, the credit risk of the project was actually lower than the sector weighted averages. The project NPL ratio was 2.7 percent in number (below the 5 percent target) and 3.0 percent in volume (below the 4 percent target).20 Finally, the project has contributed to a healthy financial sector since all project participants were required to maintain strong financial health throughout the life of the project. TSKB, Eximbank, and the PFIs have all fully complied with the project’s financial covenants.

Employment at participating exporters. Although not a core indicator in the project M&E framework, the employment impact of EFIL IV loans has been monitored by Eximbank and inconsistently by a few PFIs. Exporters who have been financed by Eximbank achieved 3.3 percent employment growth between 2009 and 2013. In total, based on 164 responding exporters financed by Eximbank and other PFIs, EFIL IV loans helped 60 percent of firms create a few additional jobs and 34 percent of subborrowers sustain existing jobs, at a time when most companies were laying off employees. The employment data are however not exhaustive, as more than 40 percent of firms did not provide employment data.

Two intermediate outcome indicators, added at the time of the additional financing, were not fully achieved. First, the number of beneficiary exporters was lower than planned by 5 percent (304 enterprises compared with 320 planned). This is explained by the number of repeat borrowers (US$116 million loans disbursed to 54 enterprises that had already

19Leasing volumes sharply decreased from US$8.2 billion in 2007 to US$2.2 billion in 2009, before gradually increasing to US$7 billion in 2013. 20 The NPL ratio was 2.9 percent in the banking sector and 7.1 percent in the leasing sector. Based on the 72:28 EFIL IV loan portfolio distribution, the weighted NPL ratio against which we are comparing project performance is 4 percent.

25

received EFIL IV loans). Second, the share of medium and long-term financing (MLT financing defined as having a maturity over 12 months) in the total loan portfolio of PFIs fell from 55 percent at the time of additional financing to 50 percent at project closing, below the target of 59 percent. In the additional financing paper, this new indicator had been introduced to “assess whether PFIs [would] increase the share of medium-term finance in their portfolio or […] use the credit line as a substitute for other medium-term loans they would have given under any circumstances”. Given the low levels of funding provided by EFIL IV compared to the size of PFIs involved, it is highly unlikely that EFIL IV funds were used as mere substitute for overall MLT lending. In addition, the target was exceeded in June 2014, when the share was 63 percent (suggesting renewed difficulty thereafter in accessing longer-term financing due to market volatility).

3.3 Efficiency

The project was highly efficient in generating exports. For every dollar of loan disbursed, participating firms grew their exports by 3.8 dollars.

In addition, based on data received for 164 firms (54 percent of total subborrowers), 40 percent of loans were used to sustain the firms’ activities during difficult times (i.e. no employment generation). The final employment impact of the project is uncertain because a large number of firms did not respond: it is not possible to accurately estimate the number of jobs created per US$100,000 loan granted. Furthermore, causality cannot be established, in the absence of rigorous project evaluation.

Finally, the project fully disbursed the original loan amount by the original closing date (TSKB and Eximbank), and the additional financing by the revise project closing date (TSKB).

3.4 Justification of Overall Outcome Rating Rating: ― Satisfactory The project development objectives continue to be highly relevant for Turkey and the World Bank’s strategy. Despite important design challenges, including the choice of PDO indicators at project approval, the project exceeded its development objectives on time, despite a crisis context. Moreover, successful project restructurings have addressed the design challenges identified above.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

The project’s has an indirect impact on poverty through the beneficiaries. The project helped exporters mitigate the impact of the crisis (working capital) and sustain their activities, in order to grow and generate (preserve) employment. The majority of borrowers actually financed investments, despite the difficult economic conditions. The project thus helped maintain Turkish private sector investments. At the macroeconomic level, the project supported the development of exports, which contribute to economic growth, employment, and social development. Furthermore, for the first time in the EFIL series,

26

EFIL IV authorized lending to the tourism sector, which is one of the largest foreign-exchange earning sectors of the Turkish economy. EFIL IV provided US$37 million in investment finance to the tourism sector (11 percent of total investment loans). Finally, the project disbursed US$31 million in the four regions, whose share of the population living below the US$5 PPP poverty line is greater than the national average.

(b) Institutional Change/Strengthening

On the one hand, the project helped strengthen credit appraisal procedures among PFIs and, on the other hand, it helped ensure PFIs’ compliance with strict prudential standards (prudential ratios were monitored throughout the project). In EFIL IV, there were three EFIL newcomers and six PFIs that had participated in prior EFIL operations but not EFIL III. Out of the 24 PFIs across all EFIL operations, slightly over half—six banks and seven leasing companies—participated in EFIL IV and directly provided financing to Turkish exports, both in euros and dollars. Furthermore, all PFIs (including TSKB and Eximbank) have successfully demonstrated that medium- and long-term lending is a viable business proposition, even in periods of economic downturn. Finally, PFIs have built capacity to assess the environmental risks and impacts of borrowing firms.

TSKB has been a wholesale lender since EFIL II, when it developed a web-based IT system to process applications from PFIs. For EFIL III, TSKB further enhanced the system for an expeditious interaction with PFIs and reduced the scope for errors. In EFIL IV, TSKB upgraded the existing environmental and social risk assessment tool within the application forms to help PFIS screen and assess subprojects easily and more efficiently. Furthermore, capitalizing on its experience with EFIL loans, TSKB signed multilateral funding agreements totaling US$2.9 billion between 2009 and 2013.

Following the approval of EFIL IV, Eximbank signed two loans with the European Investment Bank totaling €175 million (2008 and 2012). In addition, Eximbank launched in end-2012 a program, based on its EFIL IV experience. The program is designed to provide medium and long-term finance to exporters and had disbursed TL 1 billion (US$431 million equivalent21) as of end-December 2014. Finally, in a narrower sense through the technical assistance component, the loan contributed to increasing Eximbank's IT and risk management capacity.

(c) Other Unintended Outcomes and Impacts (positive or negative)

PFIs, through their participation in EFIL loans, built the infrastructure and capacity to work with other IFIs and have a greater awareness of available sources of funding. TSKB and Eximbank insisted were able to leverage their World Bank experience to obtain additional funding from other IFIs or the market.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops N/A

21 US$1= 2.32 TL as of 12/31/2014

27

4. Assessment of Risk to Development Outcome Rating: Moderate Risks to development outcomes are related to the general country and financial sector risks and export performance, in addition to the project-specific risks. Country risks include the geopolitical context and turbulence in the financial markets. In October 2014, the International Monetary Fund and Fitch warned against foreign funding dependence and foreign exchange lending in the Turkish banking sector. Central bank data show that the short-term foreign debt of banks (i.e., maturing in less than two years) has more than doubled over the past four years to US$94 billion, representing 40 percent of the total foreign debt of banks. These trends may affect the provision of medium- to long-term foreign exchange loans to exporters. Nonperforming loans in the banking sector have however remained low despite the sharp depreciation of the lira since 2013, but are expected to rise in a context of decelerated credit growth. Project-specific risks are related to the future performance of TSKB, Eximbank, other PFIs, and end-beneficiaries. The financial performance of TSKB, Eximbank, and other PFIs has been monitored during supervision missions. Even during challenging times, all PFIs complied with project requirements.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately satisfactory The project design was highly relevant to strategic priorities and to requests of the Turkish government and responded to a request for fast assistance to the financial sector. The project ensured that project beneficiaries reflected the national definition of exporters to include the tourism sector. The project was designed to support the government’s export growth and diversification strategy, by providing much-needed medium and long-term finance to exporters through different channels during the global financial crisis. The decision to allow Eximbank to exclusively lend to heavy financing sectors, such as ship building and machine building, was carefully considered and relied on a demand assessment from potential subborrowers22. This is confirmed, for example, by the US$169 million loan applications for which Eximbank had already received non-objection from the World Bank as of end-September 2009. Some of these commitments did not materialize due to the crisis, and Eximbank’s performance lagged because of the project’s restrictions to two sectors. It would have been useful if the PAD and legal agreements provided the

22 While project preparation documents offered information on the high demand for financing from the two sectors, the rationale for having any type of sector restrictions in this credit line was not discussed.

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necessary flexibility to respond more effectively to the developing economic context,23 for example including a language that would provide for the inclusion of other sectors as needed to facilitate implementation. In addition, component 3 is a weak element in the projects’ design, given the type of activities that were ultimately financed by the projects.

The M&E framework for EFIL IV however marked some improvement from previous operations with regard to end-project targets: previous ICRs had repeatedly pointed to the complete absence of baseline and targets. However, there were shortcomings in the M&E framework and arrangements. First, the original PDO indicators measured financial sector development at a macro level and were disconnected from the project’s activities. These indicators did not appear in previous EFIL operations, but are in line with the Bank’s M&E practices at the time of approval. Second, M&E arrangements were incomplete in the PAD, and not discussed in the operational manual, which did not also include the project’s results framework. A direct consequence was that the level of investments made by beneficiaries was not tracked by most financial institutions, although it was a specified outcome indicator. Third, one of the end-year targets, the targeted number of PFIs, was underambitious: the target was set at 6, whereas EFIL III achieved 10 PFIs and EFIL II through a US$300 million loan. Overall, the weakness of the M&E framework and arrangements at entry did not allow for a proper assessment of the project’s impact. Overall, given the project’s full disbursement, especially during the global crisis and the satisfactory outcomes described above, the rating of the Bank’s quality at entry issues ought to give in this ICR more weight to the project’s technical design (i.e. ensuring that the loan amount is disbursed to exporters that are viable) relative to the project’s M&E framework. On the one hand, the project’s satisfactory outcomes can be directly attributed to the strong technical design, which includes the selection of strong financial institutions, the inclusion of leasing companies and builds on previous EFIL operations. On the other hand, the original M&E weaknesses had an impact on how the project’s outcomes were monitored, rather than the outcomes themselves. The discussion above aims to highlight how the M&E framework would have enabled the Bank to better capture the project outcomes. The main hindrance on project performance were rather the (i) limited flexibility highlighted by the global crisis, and its impact on the sectors which Eximbank had focused on, and (ii) component 3’s design.

The Bank’s quality at entry is thus rated moderately satisfactory. (b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: Satisfactory

Project supervision was undertaken regularly and entailed field visits to borrowers, PFIs, and end-beneficiaries. TSKB and Eximbank praised the World Bank’s effective

23 The legal agreements specifically referred to the operational manual approved in 2008, as opposed to “the latest operational manual approved by the World Bank”, for example. This explains the need to fully restructure the project, as opposed to only revising the operational manual.

29

collaboration. Aide-memoires and ISRs following implementation support mission were submitted on time and provided updated information on economic developments in Turkey and their impact on EFIL IV. The field-based presence of a financial sector specialist and the fiduciary and safeguards team was well appreciated by TSKB and Eximbank. ISR ratings for TSKB’s component were fully in line with project performance. The Bank also revised the M&E framework to address design issues, and indicators were consistently tracked. In addition, the scope of monitoring was expanded to include geographical, size, and sectoral distribution of subloans. Regional quality guidelines—including those related to the size of the project—required a full-fledged project restructuring for the necessary design adjustments early in the project. The Bank was slow to undertake a project restructuring on Eximbank’s component (request sent in August 2010 and project restructuring effective in June 2011). The Bank’s lateness in restructuring following Eximbank’s first concerns in 2009 was due to the team’s desire to fully accommodate the declining yet still in place demand, while assessing the sectors’ future trends. It is only when the demand and disbursements fully stalled that the restructuring was undertaken to return to a flexible design. Finally, the ISR performance ratings of component 2 and 3 failed to show sufficient candor, and issues raised in previous ISRs were not followed up in subsequent ones. The satisfactory Supervision rating is justified by the successful completion of a large-scale project with two borrowers, the additional financing in response to strong market demand, the successful project restructurings and the considerable efforts extended by the Bank between 2011 and 2014 in addressing implementation bottlenecks. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory Based on the above, the overall rating for Bank performance is Satisfactory.

5.2 Borrower Performance (a) Government Performance Rating: Highly Satisfactory The performance of the government of Turkey as a guarantor was highly satisfactory. The government demonstrated strong ownership of the project and commitment to its objectives. In addition, the government supported the development of the leasing industry with the adoption in November 2012 of a specific law that recognizes the activity and made available new products, such as operational leasing, sales, and lease backs. Furthermore, in December 2011, the government reduced from 18 percent to 1 percent the value-added tax for machinery and equipment leases. (b) Implementing Agency or Agencies Performance Rating: Satisfactory

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The performance of TSKB was highly satisfactory, given its proactive support to PFIs, its upgraded IT infrastructure for project implementation and interaction with PFIs, its monitoring of PFI compliance with the project’s environmental framework, and its swift reaction to market conditions (change of pricing, maturity, and reallocation of funds between PFIs, as necessary). Also, TSKB complied with all project requirements. The performance of Eximbank was satisfactory. Eximbank complied with all requirements throughout project implementation and proactively monitored developments related to its initial target sectors. Also, despite all implementation delays, Eximbank fully disbursed the loan within 18 months of closing date. This was the first time that Eximbank had acted a retail lender in an EFIL operation; after initial adjustments to the World Bank’s fiduciary requirements, Eximbank demonstrated its ability to effectively provide subloans. Eximbank also adjusted rapidly to market conditions, as it shifted its focus from investment loans to working-capital loans and engaged in discussions with the Bank about lifting sector restrictions be lifted as early as 2009. However, Eximbank did not propose new sectors for inclusion and a related demand assessment, as requested by the World Bank, until mid-2010. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory Based on the satisfactory ratings of the government performance and of the implementing agencies, the overall rating for borrower performance is satisfactory.

6. Lessons Learned

Key lessons for ongoing and future operations are:

Flexibility of project design and responsiveness to market conditions reduce implementation delays. For any project, the design context is inevitably different from the implementation context. Market conditions evolve during implementation, and adjustments are necessary to minimize implementation delays and maximize the project’s developmental impact. Eligibility restrictions of any kind are thus counterproductive, especially during times of hardship. Sector, geographical and gender-based restrictions although motivated by strong development objectives, often fail to account for a possible over-sensitivity of the specific target beneficiaries to adverse market conditions. The project’s design is most often unable to provide the necessary flexibility in IBRD/IDA operations to ensure that project development objectives remain within reach. Rather than restricting the scope of benefits, the project should seek to achieve supplemental developmental outcomes through incentives. Both the World Bank and borrowers need to have the ability to quickly change activities, increase resources, or amend project arrangements, as needed, in response to deteriorating economic conditions. In the same vein, legal documents should provide for the inevitable small adjustments that enable the project to perform better during implementation.

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Sector and regional targets/quotas are unnecessary and counterproductive. The performance of the EFIL IV project would have been unequivocally lower, if specific lending targets and quotas had been imposed on financial intermediaries. Eximbank had the flexibility to lend more to the ship-building sector, while it awaited the machine-building to eventually pick up (which never happened). Similarly, the project was able to disburse US$34 million to exporters in the underserved regions in the absence of such a target. Project data show that the financial profile and loan terms of subborrowers may vary by region and sector. The allocation of project funds to firms is better left to financial intermediaries for the selection of sound subborrowers. Incentives, however, be necessary to increase efforts to lend in sectors and regions that are traditionally less attractive to financial intermediaries.

There is an inherent trade-off between the World Bank’s project requirements and objectives to reach the smaller, financially underserved firms. Project requirements increase the transaction costs for PFIs who find it more attractive to lend to larger firms and in larger amounts. PFIs themselves indicated that there were built-in disincentives to lend to small, first-time subborrowers. This is also true for leasing companies, which have been included since EFIL II as eligible PFIs in order to expand the project reach to smaller subborrowers. Even within the beneficiary group of Turkish exporters, which are larger and more sophisticated than the average Turkish SMEs, the project’s fiduciary and environmental requirements had an impact on the project’s outreach. In addition, the credit eligibility criteria (requirements on firm leverage and debt service coverage) had to be relaxed during the implementation of the project to avoid excluding exporters, who would otherwise not be eligible to receive this longer-term financing. It is only fair to assume that all these project requirements will necessarily have a larger and negative impact on the outcomes of credit line operations targeting smaller firms. PFIs, however, recognize that project requirements contribute to capacity building not only for themselves (i.e., familiarity with IFI procedures) but also for subborrowers. For example, PFIs sometimes select subborrowers for financing through EFIL funds to groom them for future relationships (stricter requirements from the beginning help ensure better financial relationships). In summary, while project requirements are essential for fiduciary, safeguards, and capacity-building purposes, careful project design should try to minimize transaction costs to reach the target markets.

The World Bank’s experience with LoCs in Turkey suggest that a wholesale model is preferable to a retail lending model. A wholesale design increases the project’s overall impact. First, a wider range of financial intermediaries increases the number and diversity of potential project beneficiaries and may ultimately lead to funding of underserved firms. Second, the wholesale design enables new financial intermediaries to gain experience in working with international organizations, which will help them develop other sources of funding. Third, wholesale lending encourages a healthy competition and causes less market distortion than retail lending, as the benefits are spread over a large share of the financial sector. However, in crisis times (which requires quick disbursement) and

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for projects with specific targets (sectors, regions), direct lending may offer advantages, given higher margins. In such specific cases, flexibility is essential to be able to adjust to the developing economic context in a timely manner, as the experience of EFIL shows.

Alignment with business practices increases the project’s attractiveness. In Turkey, commercial practices have been assessed as acceptable with regard to World Bank procurement requirements. As a result, project procurement requirements should be similar to existing practices of PFIs for subloan preparation and record-keeping requirements. Given the recurrent complaints of PFIs and subborrowers, a clear definition of working-capital expenditures and distinctions between procurement and non-procurement working-capital expenditures is warranted. The Innovative Finance Project is already following this approach, which should be widespread among all credit line operations.

Strong M&E design and effective arrangements are necessary for a better assessment of outcomes. The impact of a project extends beyond the loan amount extended to firms and employment generation. First, it is often more interesting to analyze the loan purposes, the nature of investments, and productivity over time. Second, employment data do not capture the firm’s activities and life cycle. Investments may lead to employment substitution, stagnation, and even reduction, as confirmed by beneficiary site visits. Furthermore, the operational manual and the subsidiary loan agreements should have a section on monitoring and evaluation requirements for the project similar to those related to safeguards and fiduciary responsibilities. Overall, project documents should clearly document M&E arrangements and all project components should be monitored. The weakness of EFIL IV’s M&E framework has produced incomplete data that are at best inconclusive on the project’s indirect impact. Furthermore, based on the M&E experience of the EFIL series, it is advisable to seek stronger, longer-term commitments to monitoring project beneficiaries, well beyond the disbursement of project funds up to project closing. Return borrowers from previous similar operations should also be identified at the time of application as they may offer additional insights on the overall program’s impact. Finally, efforts to improve World Bank projects’ M&E framework to strengthen accountability and outcomes measurement should be pursued. Current M&E frameworks with weak performance indicators, such as the original PDO indicators for this project, should be revised accordingly.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies See Annex 7

(b) Co-financiers N/A

(c) Other partners and stakeholders N/A

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate

(USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

Total Baseline Cost 600.00 900.00 150%

Physical Contingencies

0.00

0.00

Price Contingencies

0.00

0.00

Total Project Costs 598.50 898.05 150% Front-end fee PPF 0.00 0.00 Front-end fee IBRD 1.50 1.95 130%

Total Financing Required 600.00 900.00

(b) Financing

Source of Funds Type of

Cofinancing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 0.00 0.00 International Bank for Reconstruction and Development

600.00 900.00 150%

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Annex 2. Outputs by Component Table A2.1: Results framework

Baseline End-2014 Target PDOs Export growth by participating firms relative to sector export growth (median)

n/a 5.96(*) >0

Nonperforming loans/total loan (1) by amount and (2) by number of loans, all measured among loans included in the project

n/a

(1) 3.0 percent (US$25.2mln)

(2) 2.7 percent (10 NPLs)

(1) lower than sector weighted NPL ratio in the economy (4 percent in June 2014) (2) less than 5 % of all loans in the project

Intermediate outcomes

Amount provided to exporters under the project

0

Fully disbursed. US$86 million (residual amounts only due to exchange rate differentials).

US$896 million

Number of banks and leasing companies included in the project

0 13 12

Amount of investments in projects supported by investment loans (**)

0 US$328.5mln Greater than amounts disbursed for investment loans and leases (US$328.5, end-2014)

Share of medium-term financing (more than 12 months) in total PFI loan portfolio

55% (June 2008)

50% (***) 59%

Number of beneficiary enterprises 0 304 320

Dropped indicators

Total exports in Turkey US$107bn (2007)

US$158bn Increase

Private investments/GDP (%) 18.8% (2007)

16% Increase

Nonbank financial institution assets/GDP (%)

2.2% (2007Q3)

4.2% Increase

Credit to the private sector/GDP (%)

29.5% (2007)

70%

Increase

Number of jobs created in the firms financed by the project

n/a 1,718 (****) Increase

Progress toward Basel II implementation for Turk Eximbank

n/a Achieved with Eximbank’s own resources

Eximbank has effectively implemented Basel II-related requirements for risk management as required by regulatory authorities.

Notes: (*) Some caveats need to be considered in the calculation of this PDO: (1) the calculation is based on the latest available figures, with the latest exports data not always available (2013 at best); (2) for firms that participated in EFIL IV in 2008 and 2009, export data start only in 2009; as a result, for these firms, the calculation involves only their relative export growth rate since 2009. (**) Before the AF, a target of 100% of the amount disbursed to exporters was set for this indicator. The target was later revised. Moreover, the data currently provided for this indicator are not accurate because most PFIs did not provide end-project data for the actual (or planned) investments (to be) financed from loan proceeds. Data provided by TSKB and Eximbank show investments of US104 million. (***) The value of this indicator dropped from 63 percent in June 2014 to 50 percent in end-2014. (****) Only a few PFIs provided information on this indicator. This end-project value is hence partial.

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A detailed analysis of the project’s results requires going beyond the original results framework and reviewing individual subloan data through the lenses of the project’s objectives.

Support exports by providing medium- and long-term working capital and investment finance to exporting firms.

Improve the ability of the financial sector to provide financial resources to firms through development of financial intermediaries.

1. TSKB (component 1) TSKB received US$600 million equivalent and signed subsidiary loan agreements with 12 PFIs. Reallocations were undertaken regularly to speed project disbursements. By end-2014, US$237 million equivalent (41 percent of TSKB’s credit line) were on-lent by leasing companies.

Table A2.2: Allocation of TSKB credit line (2008-2014)

TSKB I TSKB II Total

(in millions) Initial allocation

Reallocations Initial allocation

Reallocations

Banks US$ € US$ € US$ € US$ € US$ €

İs Bank 40 34 13 74 13

YapıKredi 35 -10 34 13 -7 52 13

TEB 30 10 -15 -9.5 20 13 -0.2 35 13.3

Alternatif Bank 20 10 17.8 20 27.8

ING Bank 10 20 -8.3 20 13 2 4.9 32 29.6

Bank –sub total 95 40 15 108 52 -5 4.8 213 96.8

Leasing Companies

US$ € US$ € US$ € US$ € US$ €

Is Leasing 26.9 4.8 -15 18 7 29.9 11.8 YapıKredi Leasing

25 10 18 7 -18 -4.8 25 12.2

Halk Leasing 10 10

Garanti Leasing 30 18 7 23 71 7

TEB Leasing 10 10 10 10

Ak Leasing 18 7 18 7 Alternatif Leasing

7.8 7.8

Leasing subtotal 101.9 24.8 -15 72 35.8 5 -4.8 163.9 65.4

Total 196.9 64.8 180 87.8 376.9 152.6

316 loans (six of which non-performing) were provided for a total amount of US$577 million. The average loan size was US$1.8 million. Exporters in the textile and metalware sectors were dominant.

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Table A2.3: Breakdown of Subloans by Sector, Region, Size, and Beneficiary (TSKB)

Sector Amount

Number of Subloans

US$ (%) Count (%) Basic metals and fabricated metal products 90,492,630 15.7% 47 14.9%Chemicals and chemical products 14,587,929 2.5% 6 1.9%Construction 36,367,352 6.3% 20 6.3%Electrical, electronic and optical equipment 13,289,745 2.3% 7 2.2%Food products and beverages 61,726,854 10.7% 37 11.7%Furniture 8,085,676 1.4% 4 1.3%Hotels and restaurants 47,933,857 8.3% 18 5.7%Machinery and equipment N.E.C. 54,931,974 9.5% 38 12.0%Other transport equipment and logistics 20,883,280 3.6% 12 3.8%Paper and paper products 18,521,384 3.2% 10 3.2%Rubber and plastic products 35,102,856 6.1% 27 8.5%Textiles and textile products 164,010,663 28.4% 87 27.5%Wood and cork products 10,907,613 1.9% 3 0.9%TOTAL 576,841,813 100% 316 100%

Region US$ (%) Count (%) Marmara 344,659,178 59.7% 187 59.2%Mediterranean 74,506,369 12.9% 35 11.1%Central Anatolia 58,471,819 10.1% 29 9.2%Aegean 33,384,069 5.8% 24 7.6%East Anatolia 936,487 0.2% 1 0.3%Black Sea 1,500,000 0.3% 2 0.6%South East Anatolia 63,383,891 11.0% 38 12.0%TOTAL 576,841,813 100% 316 100%

Loan Size US$ (%) Count (%) < $250,000 3,407,481 0.6% 19 6%$250,000 - $500,000 13,119,422 2.3% 37 11.7%$500,000 - $1,000,000 60,221,920 10.4% 76 24.1%$1,000,000 - $2,500,000 174,523,232 30.3% 110 34.8%$2,500,000 - $5,000,000 238,080,110 41.3% 61 19.3%> $5,000,000 87,489,648 15.2% 13 4.1%TOTAL 576,841,813 100% 316 100%

Beneficiary size (latest export amounts) US$ (%) Count (%) < $5,000,000 100,406,907 17.4% 91 28.8%$5,000,000 - $20,000,000 141,648,699 24.6% 85 26.9%$20,000,000 - $50,000,000 165,363,598 28.6% 77 24.4%$50,000,000 - $100,000,000 95,570,494 16.6% 44 13.9%> $100,000,000 73,852,115 12.8% 19 6%TOTAL 576,841,813 100% 316 100%

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Figure A2.1 Financial profile of TSKB subborrowers

Table A2.4: Lending characteristics by PFI type (TSKB)

Total

amount disbursed

Average loan size

I/L W/C Average maturity (months)

Average firm D/E

ratio

Average firm DSCR ratio

Average size of firms

(exports)

Bank 59% US$2.7 million

16% 84% 39 61.5 1.6 US$64.7 million

Leasing companies

41% US$1.3 million

100%

0% 50 65.8 2.2 US$22.5 million

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2: Eximbank (Components 2 and 3) Eximbank disbursed fully in July 2013 under the original finance US$298 million equivalent credit line and US$2 million for institutional development. Fifty-three loans (four of which nonperforming) were approved for a total of US$269 million, predominantly in the ship-building and metalware sectors. The average loan size was US$5 million. A US$1.5 million reallocation of proceeds was undertaken in May 2013 from Eximbank’s institutional development component to its credit line, given lower procurement costs and Eximbank’s decision to complete some activities under its own resources (table A2.6). Table A2.5: Breakdown of Subloans by Sector, Region, Loan Size, and Beneficiary (Eximbank)

Sector Amount

Number of Subloans

US$ (%) Count (%) Basic metals and fabricated metal products 86,351,288 32.1% 20 37.7%Electrical, electronic and optical equipment 29,685,680 11.0% 4 7.5%Machinery and equipment N.E.C. 25,643,210 9.5% 12 22.6%Other transport equipment and logistics 31,796,120 11.8% 4 7.5%Ship building 95,690,662 35.6% 13 24.5%TOTAL 269,166,960 100% 53 100% Region US$ (%) Count (%) Marmara 144,376,282 53.6% 24 45.3%Mediterranean 10,000,000 3.7% 1 1.9%Central Anatolia 81,838,589 30.4% 22 41.5%Aegean 32,952,089 12.2% 6 11.3%Grand Total 269,166,960 100% 53 100% Loan Size US$ (%) Count (%) < $250,000 - - - -$250,000 - $500,000 297,833 0.1% 1 1.9%$500,000 - $1,000,000 2,846,529 1.1% 4 7.5%$1,000,000 - $2,500,000 20,139,298 7.5% 12 22.6%$2,500,000 - $5,000,000 67,042,688 24.9% 18 34%> $5,000,000 178,840,612 66.4% 18 34%TOTAL 269,166,960 100% 53 100% Beneficiary Size US$ (%) Count (%) < $5,000,000 36,649,686 13.6% 14 26.4%$5,000,000 - $20,000,000 92,087,789 34.2% 21 39.6%$20,000,000 - $50,000,000 50,064,360 18.6% 9 17%$50,000,000 - $100,000,000 48,365,125 18% 5 9.4%> $100,000,000 42,000,000 15.6% 4 7.5%TOTAL 269,166,960 100% 53 100%

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Table A2.6: Breakdown of activities planned and realized under component 3 (Eximbank)

Objective Activity Planned Actual Savings

Upgrade existing IT infrastructure

Procurement of PC, printer and scanner 200,000 216,208 -16,208

Database identity management & security software from Oracle including training

350,000 288,229 61,771

Log management, database application development, decision support

175,000 130,265 44,735

Personnel tracking system 40,000 78,719 -38,719

Microsoft Office 2007, Documentum applications, reporting tools

185,000 209,820 -24,820

Internet banking 200,000 Eximbank 200,000

COBIT training and consultancy 150,000 171,161 -21,161

TOTAL 1,300,000 1,094,402 205,598

Upgrade It for risk-management purpose

Supply and installation of disaster recovery IT System

1,300,000 1,082,881 217,119

Risk management software 400,000 Eximbank 400,000

TOTAL 1,700,000 1,082,881 617,119

TA for credit appraisal (credit line -related) Provision of consultants' services for strengthening credit risk management

Consultancy firm for technical/financial support for export development ship-building expert

150,000 12,106 Partly

used, due to lower demand in these sectors.

Appraisal was then in-house

only.

137,894

Consultancy firm for technical/financial support for export development machine-building expert

150,000 150,000

Technical support for export development; individual experts

50,000 50,000

TOTAL 350,000 12,106 337,894

Support Basel II implementation

Consulting services for BASEL II training of the personnel

200,000 Eximbank 200,000

Consulting Services for Credit Risk Scoring System

150,000 Eximbank 150,000

TOTAL 350,000 - 350,000

COMPONENT 3 TOTAL 3,700,000 1,510,611

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3. Lending in underserved regions Given the saliency of the issue, we will review the EFIL IV portfolio in the underserved regions, primarily with the objective of profiling subborrowers in these regions. The findings here may not be relevant for all projects in Turkey, given that EFIL IV targeted exporters that are generally larger than the average Turkish firms.

Seventeen loans of US$34 million were provided to exporters in underserved regions (4 percent of total amount disbursed). On average, exporters in these regions increased their exports by 21 percent after they have received an EFIL loan24. The average and median export growth for these firms were 21 and 27 percent respectively, within two years after they have received the loan. The export differential, as calculated in the PDO, for these firms only was 15.2 (compared with 5.96 for the overall EFIL IV sample). Loans were concentrated geographically in Kahramanmaraş (54 percent) and the textile sector (74 percent). The average loan size was US$2 million. Loans were mostly denominated in U.S. dollars, which suggests that the primary export destination is not the EU. Loans in priority regions were also exclusively provided by PFIs through TSKB’s credit line, which reinforces the argument for a wholesale lending approach.

Caution must be exercised in designing projects that aim to lend to these regions, because, as the table below suggest, the financial position of these firms may be different from those in more developed regions. It is, however, apparent that these firms are less leveraged and rely less on debt financing for their growth. Financial intermediaries may need to design specific products to address the financial needs of firms in these regions.

Table A2.7a: Lending by region PFI Loan type DSCR

bank leasing IL WCL Average maturity (months)

Average loan amount

Developed 73% 27% 41% 59% 49 US$2.33 million

Other (“Anatolian Tigers”) 68% 32% 37% 63% 50 US$2.25 million

Underserved 84% 16% 20% 80% 48 US$2.02 million

24 We do not try to attribute these results to the EFIL IV project, but rather try to compare with the overall project’s performance.

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Table A2.7b: Firms’ characteristics by region

D/E ratio DSCR

Min Average Max Min Average Max

Developed 10.0 63.6 99.4 1.0 2.2 82.9

Other (“Anatolian Tigers25”) 18.0 65.9 91.2 1.0 1.6 13.9

Underserved 30.9 59.6 87.0 1.0 1.4 3.1

The main conclusion that can be drawn from the analysis of data collected is that beneficiaries in less developed regions have a different profile from the average EFIL borrower. Reaching firms in the underserved regions will require some flexibility in eligibility requirements.

25 See Turkey’s Transitions (2014) for a discussion of Anatolian Tigers.

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Annex 3. Economic and Financial Analysis A traditional economic/financial analysis cannot be undertaken for this project, given that project costs cannot be determined. Project outcomes for the beneficiaries have been measured and discussed in other sections of the ICR.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members

Names Title Unit Responsibility/

Specialty Lending Halil Agah Senior Rural Development Specialist ECSAR - HIS Ayse Seda Aroymak Senior Financial Management Specialist GGODR Nasreen Chudry Bhuller Program Assistant GFMDR FuruzanBilir Operations Officer ECCU6 Steen Byskov Senior Financial Economist GFMDR TTL until 06/2012Salih Kemal Kalyoncu Senior Procurement Specialist GGODR Isfandyar Zaman Khan Program Leader ECCU5 Irina L. Kichigina Chief Counsel LEGLE Hannah M. Koilpillai Senior Finance Officer CTRFC-His Ahmet GurhanOzdora Senior Operations Officer ECSEG - HIS

Supervision/ICR Halil Agah Senior Rural Development Specialist ECSAR - HIS Esra Arikan Environmental Specialist GENDR Ayse Seda Aroymak Senior Financial Management Specialist GGODR Nasreen Chudry Bhuller Program Assistant GFMDR Furuzan Bilir Operations Officer ECCU6 Salih Kemal Kalyoncu Senior Procurement Specialist GGODR Selma Karaman Program Assistant ECCU6 Isfandyar Zaman Khan Program Leader ECCU5 TTL 06-10/2012 Zeynep Lalik Senior Financial Management Specialist GGODR Samuel Munzele Maimbo Lead Financial Sector Specialist GFMDR ICR TTL Aminata Ndiaye ET Consultant GFMDR ICR author Alper Ahmet Oguz Senior Financial Sector Specialist GFMDR Ahmet Gurhan Ozdora Senior Operations Officer ECSEG - HIS Ilias Skamnelos Senior Financial Sector Specialist GFMDR TTL 10/2012-end

(b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks US$ Thousands (including travel and consultant costs)

Lending FY07 21.54 FY08 40.96 196.12

Total: 217.66

Supervision/ICR FY09 36.10 150.37 FY10 33.48 141.91 FY11 19.14 116.38 FY12 26.49 80.98

FY13 16.75 108.20 FY14 15.57 67.23 FY15 33.12 133.5

Total: 798.57

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Annex 5. Beneficiary Survey Results N/A

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Annex 6. Stakeholder Workshop Report and Results N/A

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR TSKB 1. Assessment of the Project’s objective, design, implementation and operational experience

1.1 Project’s objective

Primary objective of the EFIL IV Project was to support exports by providing medium and long-term investment finance and working capital to private exporting enterprises (Beneficiary Enterprises). The secondary objective of the loan was the further improvement of the ability of the Turkish financial sector to provide financial resources to enterprises through further development of financial intermediaries, including banks and leasing companies. Evaluation of the results shows that the objectives of the Project were achieved.

1.2 Project’s design

The proceeds of the original loan and the additional financing under the EFIL IV Project were re-lent to five private banks and seven leasing companies (PFIs) in aggregate throughout the loan utilization period. The banks and the leasing companies that took part in the lending operations were selected pursuant to the eligibility criteria agreed between the Bank and TSKB. TSKB took the risk of the PFIs selected for participation. The terms and conditions of the Subsidiary Loan Agreements entered into between the Borrower and each PFI were approved by the Bank. The PFIs extended sub-loans to eligible private exporters for the financing of raw materials, spare parts, plant and equipment, and works, both for investment purposes as well as working capital. The PFIs assumed the credit risks of the Beneficiary Enterprises. As of the closure of the Project, the breakdown of funds allocated and utilized by each PFI under the Project is presented in the below tables.

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Under the Original Loan of the EFIL IV Project, five banks and five leasing companies acted as PFIs in on-lending the facility to eligible sub-borrowers. The breakdown of allocations from the original facility between banks and leasing companies was 58%-42% at the completion. Several reallocations throughout the loan utilization were made among the PFIs (mostly among banks) to ensure timely implementation of the Project. The loan which was signed for in 2008 was fully disbursed by 2010 year-end, about two and a half years ahead of the determined completion date.

The Loan Agreement of the Additional Financing to the EFIL IV project was signed in April 2011 in the amount of $300 million equivalent. The proceeds of the EFIL IV Additional Financing (EFIL IV AF) were re-lent to four banks and five leasing companies. By the closing of the Additional Financing, 60% of the funds have been utilized by the banks and 40% by the leasing companies. In line with the monitoring of sub-commitments TSKB made reallocations among the PFIs under EFIL IV AF as well. The Project was completed by the scheduled closing date; end of 2014.

1.3 Project’s implementation

The implementation of the loan scheme was successfully carried out by TSKB. The PFIs were chosen according to the agreed criteria and and their compliance with regulations and financial covenants were reported semi-annually to the Bank. 10 PFIs signed Subsidiary Loan Agreements with TSKB under the Original Loan and 9 under the Additional Financing.

The user-friendly web-based platform designed by TKSB’s IT department under EFIL II has been in use (with further modifications) under the following EFIL operations implemented by TSKB. All stages of sub-loan processing including the submission and approval of the original sub-loan applications, disbursement requests and disbursements to PFIs, including authorizations and transactions were performed through this system. The electronic system expedited the overall sub-loan processing cycle. TSKB gave trainings to the PFIs on the system, the environmental requirements of the loan, project appraisal, cash flow forecasts and disbursement process. The system was very much appreciated by the PFIs throughout the loan utilization period. In addition to the computerized record, TSKB also maintained backup paper files for those sub-loans where procurement and disbursements had taken place. During the implementation period, TSKB PIU remained providing consultancy services to the PFIs both on-line and via phone.

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1.4 Operational experience

During the preparation phase, a designated Project Implementation Unit (PIU) was established within TSKB in parallel with the Bank’s requirements under the supervision of an Executive Vice President to oversee the implementation of the project. TSKB’s PIU team worked closely with the Bank staff. As the primary project counterpart for the Bank, the PIU team was entrusted the overall administration of all aspects of both credit lines and the required reporting (FMRs) to the Bank. The interaction between TSKB and PFIs, and TSKB and the Bank was timely and efficient thoughout the Project.

The trainings given to the new PFIs regarding environmental issues and procurement, as well as project appraisal including cashflow projections improved the PFIs institutional capacity. Finally, TSKB’s wholesale lending function, became even more sophisticated and effective to the benefit of the overall Turkish private sector.

In EFIL IV, TSKB upgraded the existing environmental and social risk assessment tool embedded in the Application Forms to help the PFIs screen and evaluate sub-projects easily and more efficiently. Beginning with 2010, in addition to the PFI visits, the PFI provided information and project site visits, TSKB voluntarily prepared and submitted audit reports of the Project’s environmental and procurement related aspects.

2. Assessment of the outcomes of the Project against the agreed objectives

The Primary objective of the EFIL IV Project was to provide medium and long-term investment finance as well as working capital to private exporting enterprises. Under the Project, USD 600 million equivalent of funds were on-lent through 316 loans to eligible sub-borrowers. The primary objective has been well achieved.

The secondary objective of the loan was the further improvement in the ability of the Turkish financial sector to provide financial resources to the enterprise sector, through further development of intermediation by private financial institutions, including banks and leasing companies. 10 PFIs signed Subsidiary Loan Agreements with TSKB under the Original Loan and 9 under the Additional Financing. There was one newcomer bank PFI and one newcomer leasing company in the Project. Of the 5 banks who participated in the Original Loan, İşbank, TEB, Yapı Kredi Bank and ING Bank continued to on-lend under the Additional Financing as well. 3 of the 5 leasing companies from the Original Loan, namely İş Leasing, Yapı Kredi Leasing and Garanti Leasing also acted as PFIs under the Additional Financing and were joined by two more leasing companies, Ak Leasing (a newcomer) and Alternatif Leasing (who was present in EFIL III). Smaller exporting companies typically not serviced by the banking system were financed with the proceeds of the loan through the intermediation of the leasing companies.

Of the USD 300 million Original Loan, the equivalent of USD 173.6 million was on-lent as sub-loans and USD 126.4 million as lease financing. The loan amounts disbursed by banks and leasing companies under the Additional Financing of USD 300 million were USD 180.6 million and USD 119.4 million, respectively. For the overall Project, the breakdown between sub-loans and lease finance on-lent under the Original Loan and the Additional Financing in aggregate was 59% to 41%.

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The possibility of extending working capital loans as well as investment loans has enabled to compensate to a certain extent the negative effect of the financial crisis of 2008 and 2009 and when the demand for investment loans slowed down. Inclusion of service exports and the tourism sector, one of the main foreign exchange generating sectors, has also contributed to extending the Project’s reach. In line with demand and the pace of the disbursement of the facility TSKB made reallocations among the PFIs during the utilization period and ensured to avoid implementation delays.

Only a negligible amount was classified as non-performing loans. The operation’s main objective above all was to intensify the export volumes of Turkish companies through the well structured financial intermediation scheme. This objective has also been achieved.

The additional loan scaled-up the Project’s reach and its impact on both PFIs and the exporters. The achievements of the Project are not limited to only the implementation period of the Additional Financing (2011-2014), but also beyond that period, as the PFIs are required to use the reflows from initial sub-borrowers to exlusively finance new development projects to further the development of the export sector.

3. Evaluation of the borrower’s own performance during the preparation and implementation of the Project, and lessons learned that may be helpful in the future

As TSKB was one of the sub borrowers in EFIL I intermediated by Eximbank and acted as an APEX Bank and had the Borrower and the Implementing Agency functions in EFIL II and EFIL III operation, there weren’t any problems regarding the adaptation of the EFIL IV project. The ongoing cooperation between TSKB and the Bank in Apex banking has also resulted in the effective launch and implementation of the facility as expected.

The lessons learnt support the argument that credit lines need to be designed as flexible as possible and take into consideration local commercial practices. The documentation and paperwork involved and reporting requirements should be kept to a minimum, especially those pertaining to smaller loan amounts. Absence of caps both in terms of sub-financing allocations and reallocations also ensure timely response to performance and market conditions.

The sub-loans under the original loan have been mostly repaid by the Beneficiary Enterprises at the time of the ICR data collection. Therefore although the monitoring scheme of the Project has not experienced any major problems within the separate lines, collection of data pertaining to the Original Loan was a challenge especially in cases where the sub-borrowers were no longer in the PFI’s loan portfolio.

4. Evaluation of the performance of the Bank, any co financers, or of other partners during the preparation and implementation of the operation, including the effectiveness of their relationships, with special emphasis on lessons learned The Bank’s performance during the preparation and implementation stages was very satisfactory. During the preparation and implementation of the Original Loan and the Additional Financing parties (Bank staff in Washington, IBRD Ankara Office and TSKB PIU) had a very cordial relationship. The Borrower appreciated the prompt feedback of the

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Bank staff on issues that were brought up and actions relating to the implementation of the project were taken swiftly. 5. Information on the economic, financial, social, institutional, and environmental conditions. What has changed over the last thirteen years? A lot has changed. Nevertheless, from a simple trade-off viewpoint public & domestic debt has been swapped with private & external debt. Consumption increased and savings fell drastically. Hence, a rather large CAD popped up in the 2000s. In the 1990s, fiscal deficits and a soaring public debt were the main culprits behind the high & chronic inflation. In the 2000s, budget discipline ensured that both the public debt-to-GDP ratio and the inflation rate fell drastically. In return, the current account deficit became the main problem.

By 2011–end: the current account-to-GDP ratio hit 10%. Results: (a) Need for rebalancing (b) Need for soft landing. Both developments occurred in 2012; in fact, GDP growth fell down to 2.2%, implying harder than “soft landing”. However, in 2013 the economy was back to the old path. The current account-to-GDP ratio hit 8%, suggesting the need for a renewed rebalancing drive.

In 2014, domestic demand slowed down anew. Exports grew by 12.5% per annum between 1980 and 2014. Last year’s export growth rate is a mere 3.6%. However, the import bill fell,and net exports contributed significantly to GDP growth. The last quarters’ print implies a 2.82% momentum. That is, growth is likely to recede further in 2015, but only gradually. In 2014, contributions to growth read as: Household consumption 0.895 bps; public consumption 0.51 bps; net exports 1.784 bps; fixed capital formation (-) 0.26 bps. Had it not been for Q4 2014, contribution of net exports would have been even higher.

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In Q1 2015, domestic demand has been rather weak. 2015 sources of growth might echo those of 2014. There are at least two caveats here: (i) GDP growth itself is lower (ii) Oil prices + gold imports have both receded, causing the import bill to drop. A real shift between sources of growth –rebalancing-can be only be possible along a growth ray that either closely follows the potential growth rate or exceeds it. The potential GDP growth rate is about 4.2%, but the actual average of 2012-15 should be 3%. Net exports seem to be contributing more only because domestic demand and the growth rate itself fall.

The Lira appreciated both in real and in nominal terms for about 7 years after the 2001 crisis. The “wealth effect” –we felt richer than we really were due to overvalued currency-was partly felt because the exchange rate had become an argument of the production function. This claim is now a remnant of the past. TL has depreciated more than inflation in the last 6.5 years.

After Lehman the whole episode of appreciation has ended. The Lira stabilized against both the USD and the basket from time to time, but as trend, it depreciated. The CAGR of CPI stands at 7.58% whereas the depreciation CAGR of the Lira against the basket is 9.72% in the last 6.5 years that elapsed after Lehman. This trend will continue. As TL loses strength, its volatility also goes up. In turn, this translates into CPI and interest rate cycles, and further reduces visibility. Investments are on hold and the growth rate is now lower than before. A game changer is warranted at this stage.

Pass-through is about 12-15% for the headline CPI. Core inflation and the exchange rate hand in hand. FX volatility has also a bearing on inflation, but much less than the level of the exchange rate. CPI will go down a bit in 2015, but not as much as envisioned after the initial fall in oil prices. TL depreciation has already offset for the oil price bonus. We expect 7-7.5% CPI in 2015.

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Total loans increased at breakneck speed between 2003 and 2006. After the May-June 2006 turmoil their annual rate of increase dropped from 70% to 20% and equilibrated at around 35% until 2008. After Lehman there is another sharp decrease, and equilibration in the vicinity of 30%. Recently, the authorities talk about 15% as the new balanced path. Consumer loans started from scratch in 2003, and house & car loans jump-diffused between 2003 and 2006. Annual rates of increase reached 300-400% at that time; a phenomenon that will never occur again.

CAD (current account deficit) is cyclical. Trend CAD is about 6-6.5% of GDP, excluding the recent drastic change in oil prices. Non-energy CAD is not high: only in 2010-11 has it become important, i.e. 4%. 2002-13 average is 7.5% of GDP. Our2015 estimate is about 37 billion USD, i.e. 4.6-4.8 of GDP.

We may end 2015 with 7.5% CPI, 4.6% CAD, 2.8% GDP growth, 15% loan growth, with banking sector profitability declining by about one percentage point. The banking sector is financially healthy but increasing reliance on wholesale funding (syndication, securitization, Eurobond issuances, foreign currency deposits in overseas branches, sub loans) could bring the sector to a growth/profitability trade-off. As savings continue to decline, the local deposit base could not grow on a par with loan and asset growth; the share of foreign resources jumped from 4.9% in 2008 to 22% in 2015.

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Eximbank

The Export Finance Intermediary Loan (EFIL-IV) has been put into effect by the agreement between Türk Eximbank and the International Bank for Reconstruction and Development (World Bank) in 2008.

At the beginning, two sectors that were targeted by Eximbank, although quite strategic given their high export potential, were severely affected by the global crisis through the ensuing slump in international demand.

The utilization was limited for the shipbuilding and machine building industries in the beginning, but in July 2011 electric-electronic industry, automotive supplier industry and metal ware industry are included upon our sector expansion request.

As a result of difficulties in providing letter of guarantees, some ship building firms did not use their limits. In order to satisfy new demands, unused limits of shipbuilding firms cancelled.

After administrative restructuring in 2011, Turk Eximbank adopted new marketing strategy. With the inclusion of new sectors, Turk Eximbank held meetings with sector representatives, exporter associations; our regional offices, and representatives of our liaison offices in order to accelerate the implementation process of EFIL IV. Turk Eximbank also conducted follow-up visits with sector representatives and exporter associations.

As a result of these effective marketing efforts, TE has provided a huge increase in the loan utilization and almost completed all applications from the large pipeline.

We, as Turk Eximbank aim to carry on strong progress in the implementation of the project. Investment projects have been given priority as the recovery of the global economy continues and investment appetite increases in Turkey.

The operating systems of Eximbank were fully aligned with the project’s accounting, supervision, and reporting requirements. In addition, no disruption was experienced when Turk Eximbank’s headquarters moved to Istanbul from Ankara.

Turk Eximbank launched in end-2012 a new program, based on its EFIL IV experience. The program is designed to provide medium and long-term finance to exporters and had disbursed reached from USD 252.7 million in 2012 to USD 1,027.2 million as of 31.12. 2014.

Flexibility of project design and responsiveness to market conditions reduce implementation delays. For any project, the design context is inevitably different from the implementation context. Sector and regional targets/quotas are unnecessary and counterproductive.

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Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders N/A

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Annex 9. List of Supporting Documents 1. Project Appraisal Documents, Implementation Completion Report and IEG ICR

reviews: First, Second and Third Export Finance Intermediation Loan (EFIL I, II and III)

2. Fourth Export Finance Intermediation Loan (EFIL IV): i. Project Appraisal Document

ii. ROC meeting: Paper, Decision, comments iii. Loan agreements, Guarantee agreement and Supplemental Letters iv. Operational Manual v. Additional Financing and Restructuring papers – and amended

agreements vi. Project Aide memoires, ISRs, Financial Management and

Procurement Reports 3. Turkey: EFIL and SME Credit Line Projects- An Assessment of Outcomes (2011) 4. Turkey: Improving Conditions for SME Growth - Finance and Innovation (2011) 5. Turkey’s Transitions: Integration, Inclusion, Institutions Flagship Report (2014) 6. Turkey: Trade Finance Note (2014) 7. Country Partnership strategies

MAP