Documentof The World Bank FOR OFFICIAL USEONLY ReportNo: T7701 TECHNICAL ANNEXES TO THE MOP CHANGES TO SECTIONS OF THE PROJECT APPRAISAL DOCUMENT OF THE TURKEY ACCESS TO FINANCE FOR SMALL AND MEDIUM ENTERPRISESPROJECT May 20,2007 Privateand FinancialSector DevelopmentUnit ECCU6 EuropeandCentralAsia Region This document has a restricteddistribution and may be used by recipients only inthe performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOROFFICIAL USE ONLY TABLE CONTENTS OF II The included annexes are revised sections ofthe original Project Appraisal Document.New text is highlightedingrey. Data Sheet.............................................................................................................................. 3 Annex A: Result Framework and Monitoring Indicators....................................................... 4 Annex B: Revised Project Description................................................................................... 8 Annex C: Critical Risks and possible controversial aspects................................................. 11 Annex D: Loadcredit conditions and covenants .................................................................. 12 Annex E:Detailed Project Description ................................................................................ 13 Annex F: Tiirkiye Sinai Kalkinma Bankasi (TSKB) Assessment ........................................ 21 Annex G:Halkbank Assessment.......................................................................................... 29 Annex H: Financial Management and Disbursement Arrangements.................................... 39 Annex I:Procurement Arrangements ................................................................................... 48 Annex J: Safeguard Policy Issues ........................................................................................ 51 Annex K:Project Costs........................................................................................................ 53 Annex L:Project Preparation and Supervision .................................................................... 54 This document has a restricted distribution and may be used by recipients only in the performance of their official duties.Its contents may not be otherwise disclosed without World Bank authorization. 2 DATA SHEET ACCESSTO FUVANCE SMALL AND MEDIUM POR ENTERPRISES Fernando Montes-Negret Country Director: Ulrich Zachau Guarantor: Republic of Turkey Responsible agency: Turkiye Sinai Kalkinma Bankasi (TSKB) and Tiirkiye Halk Bankasi(IFalkbank) - - Board approved --X RVP approved - - Does the amended project require any exceptions to Bank policies? -Yes X No Have these been approved by Bank management? - Yes X No I s approval for any policy exception sought from the Board? -Yes 3 No The project objectives and outcomes have not changed. Source US$ Euros Total (Euro equivalent) Borrower 0 0 0.00 3 ANNEXA: RESULT FRAMEWORKMON~TORING AND INDICATORS (Replaces Annex 3 inthe PAD, page 30) PDO Outcome 1: Loans' Maturity Provide mediumterm Halkbank and TSKB. loans to SMEs financed under the project. Outcome 2: Local currency lending currency. currency option needs to be Provide local currency loans to SMEs financed 4 under the project. currency. Outcome 3: Geographical Number ofprovinces with active SME YR2-3: determine ifthe coverage' clients financed under the project - geographical targeted areas ry and in need to be changed. (see Annex Eto this MOP). Number o f SME clients in the project throughout the countryand in the Eastern and Centra/ Regions. Numberof loans financed bythe project Disbursedamount financed by the project Outcome 4: Quality o f the For both Halkbank and TSKB, percentage portfolio under the of non-performing SME loans2extended proposed project under the project i s below 5% o f the total project portfolio. 'Non-performingloansare Outcome indicatorsmeasuringcoverage inthe EasternandCentral Regionsapply to Halkbankonly. defined as category 111, 1V and V loans according to the BRSA definition. 5 v, Lr D 0 Ih 0 v ANNEXB: REVISEDPROJECT DESCR~PT~ON (Replaces Project Description inthe PAD, pages 10-12) LendingInstrument The proposed lending instrument is a Financial Intermediary Loan (FIL), using IBRD funds, with TSKB and Halkbank as financial intermediaries and implementation agencies. The World Bank will enter into two separate lega Halkbank. The FIL will be a Fixed Spread Loan (FSL) in Euro with an embedded conversion option for sw below provides a more detailed description o f the proposed dual currency lendinginstrument. ProjectDevelopmentObjectiveand Key lndicators The project's main development objective is to increase Turkish SMEs' access to medium term finance. Key proposed indicators to measure project outcomes include (see Annex A to this MOP for a complete list): (a) Number o f SMEs and SME portfolios financed under the project; (b) Share ofmedium term-financing (more than 12months) inthe total SME loanportfolio financed under the project; (c) Non-performing loan ratios for the project; (d) Share of credit line disbursed in local currency under the project; and (e) Number o fprovinces with active SME clients financed under the project. To assess project implementation progress, the World Bank will also monitor the amount o f credit disbursed over the originally planned disbursement. In addition to the indicators included above and in Annex A to this MOP, the project will monitor basic indicators providing an obervien, o f (a) the profile o f SMEs financed under the project (e.g., amount o f sales, number o f norkers, economic sector); (b) the lending technologies used by TSKB and Halkbank (e.g., use of credit scoring models or the information provided by the credit bureau to grant loans to SMEs); and (c) overall increase in access to finance for the SME sector in Turkey. These indicators will be monitored for analytical purposes only and serve as useful inputs to define policies and projects aimed at fbrther improving access to credit for SMEs in Turkey. ProjectComponents 8 equipment, or civil works) and leases. There will be no sector restrictions. However, a cap o f about 30 percent o f the total lending amount will be applied to the tourism sector. SMEs operating in the tourism sector include "hotels, motels, resorts, pensions, holiday villages, and camping sites." Concerns have been raised that demand from this sector i s high, and the cap will ensure sectoral diversification o f the program. The compliance of TSKB and Halkbank with the 30 percent cap requirement for the tourism industry will be monitored during project supervision on the basis o f a specific financial management report. credit line to due to its strong branch presence in the targeted region combined with its focus on the SME segment and its plans to further grow its SME portfolio. Additional criteria for selecting Halkbank were its financial soundness, the recent good performance o f its credit portfolio, and the size o f its current credit portfolio in the targeted region, creating confidence that the bank will be able to disburse the loans in a sound manner (see Annex G to For the EuropeanCommission's definitionof SMEs, see: Commission of the EuropeanCommunities, 2004: Working Paper SEC (2005) 170,page 6. 9 this MOP).' To ensure coverage of the underserved eastern and central regions of the country, Halkbank will dedicate at least 25 million to SMEs in those regions. As Mith TSKB for Component 1, Halkbank will assume the credit risk for Component 2. The World Bank's loan to TSKB and Halkbank will start as a Fixed Spread Loan (FSL) local currency obligation for the converted portion o f the loans. To re-denominate part of the RY, the World Bank Treasury executes, with a market counterpart, a Euro- swap. The World Bank passes to the borrower the terms of the swap it t transaction. If the maturity o f the conversion is shorter than the maturity o f the loan, then at the maturity o f the conversion, the borrower will have the option to roll over the conversio swap market still exists at that time), or to revert the remaining obligation to Euros . Ifthe borrower chooses to roll over the conversion, it will not be exposed to currenc t there will be interest rate risk because the loan will be converted at market interest rates at that time. Our su ket indicates that, at this point in time, it is possible to execute Euro-TRY swaps for up to 10 years. For conversion o f disbursed amounts to TRY, a minimum amount o f 3 million equivalent will be required in order for the World Bank Treasury to enter into a swap with the market counterpart to effect the transaction. The conversion date (which is the start o f the conversion period) will always fall on the next interest payment date following the execution date o f the conversion request. The FSL Conversion Guidelines will apply when requesting, accepting and effecting conversions on Fixed-Spread Loans. The guidelines are posted on the World Bank Treasury's page at the web address: http://treasury.worldbank.org/Services/Financial+Products/Current+Products/Fixed+Spread+L oan+ (FSL).html. Additional information on the structure o f the loan will be included in the Operational Manuals o f TSKB and Halkbank. Annex E to this MOP includes a detailed description of the project components. The Annex provides (a) the exact geographic regions to which Halkbank has committed to lend 25 million, (b) the terms andconditions ofthe World Bank loans to TSKB and Halkbank, and (c) the eligibility criteria for the SMEs that will receive hnds from TSKB and Halkbank. 10 ANNEX c:CRITICAL RISKSAND POSSIBLECONTROVERSIALASPECTS (Replaces Critical Risksand Possible Controversial Aspects inthe PAD, page 16) Risk Risk Mitigating Measures Rating Generic Risk (To Project Development Objtictive) Macroeconomc risk. M Reforms to reduce the country's macroeconomc risks are underway The medium-termfinancing inlocal currency provided through the proposed project will mitigate the impact o f potential macroeconomc risks on SMEs Government c o m m e n t to reforms inthe M Many financial reforms and reforms to improve overall condiuons for SME financial sector or to overall reforms development are already underway Ongoing and upcomng technical and supportlng SME development (e g , financial support from the World Bank inboth areas (e g., PFPSAL 111, new business environment reforms) i s not development policy loan operation on employment and growth) will help the sustained, or Government priorities change Government mamtain its reform focus and efforts Project-Specific Risks (To Component R e d d __ _For_Both _ Compments_ . . - - -.- - . - - - __ .-_ __ - - "I-_--- -_ . -- Markedlyimproved financing conditions The local currency financing provides an lnteresting option for TSKB and for Turlash bankscould render the credit Halkbank that i s not readily-vailable inthe marke; The team is workmg to line un-competitive, considering the need ensure that fiduciary and safeguard reqwrements o f the credit lines are to comply with fiduciary and safeguard streamlined and place a minimumburden on the participating banks, based t o requirements under the proposed World expenence from the EFILprojects. ............ Bankproject. .............................................................. Component 1 0 M The World Bank Teamhasassessed TSKB's ability to reachSMEs(Anna F). TSKB currently has250 clients anddisbursed300 milhoninthe past year to SMEsthat meet the requirements under this operatran. Onthat basis, it i s Ikelythat TSKB wllbe ableto placethe funds. Component 2 0 N The World Bank Team has assessed Halkbank's abilityto reach SMEs(Annex G). Halkbankhas 584 branchesand a loanbook ofe4.4 billion, mostly to SMEs. Therefore, the loan amount under theprojectis small compared to tht number o fclients and the amount o fbusiness Halkbankhaswith SMEs, makmgit very likgllythat it can placethe funds. Higher credit risk and lower than expected \ The World Bank team has directly ashessed Halkbank's needs fir funds basid demand for medium-term credit for SMEs on its current portfolio, aggregate credit growth to firms, and Halkbank's located inthe targeted regions where credit growth plans in the targeted regions (Annex Gj The World Bank team's min is less developed. mitigabon measure agamst possible lo\\ demand has been establishing a total credit line that is only about 50 percent ofthe total amount that Halkbank stated it could disburse dunng the life o f the project and only about 25 percent o f its current portfolio extended on commercial terms in the region A second operation could be prepared in case Halkbank's demand turns out to be as htrong as predicted during project preparation Implementationdelays due to the fact that M In-depth e\ aluation of Halkbank's financial, procurement, and en\ ironment,il some implementation arrangements (e.g., capacity during project preparation (AnnexesG, H, I,and JJ. environmental safeguards) are being introduced for the first time at Halkbank. Wsetings betneen Halkbank and TSKB to facilitate an exchange o f expenence betueen the two institutions, particularll on requirements to ......................................................................................................................................................................... ensure that Halkbank meets environmental safeguards. " ~ Go;emment influence on Halkbank lending N Halkbankis inthe process ofbeingprivatized andis increasingly operating on decisions. a commercial basis. As the privatization process moves forward, the Government's influence over the operation o fthe bank through its governance i s expected to be continually reduced. Halkbankis due to beprivatized. Post- M The project is currently well in line with Hatkbank's szrategy and main h e of privatrzation, the new strategic owner may business,andwith the latest revisions to the projects, it shouldr e m an cancel the remainingpart o fthe project ifit amactive operation for Haikbank. Halkbank is currently scheduled for an IPO is viewed as not beinginline with inMay of2007anditislikelytotakeseveral monthsbefore anewsslrategic` Halkbank's hture strategy. owner takes over the bank RiskRating:H(HighRisk), S (SubstantialRisk), M(ModerateRisk), N (Negligibleor Low Risk). 11 ANNEX D:LOAN/CREDIT CONDlTlONSAND COVENANTS` (Replaces Section on Loan/Credit Conditions and Covenants in PAD, page 17) Board Conditions: 0 For both Halkbank and TSKB: submission o f revised Operational Manuals for the SME project to the World Bank and approval o f the revised manuals by the banks' boards. Effectiveness Conditions: 0 World Bank satisfactory legal opinions on the Loan and Guarantee Agreements for both TSKB and Halkbank. General Covenants: 0 TSKB and Halkbank to maintain satisfactory financial management systems for the project, including records and accounts, and prepare financial statements satisfactory to the World Bank. Annual project accounts and an IFRS audit o f TSKB's and Halkbank's financial statements to be provided within six months o f each year-end during the implementation period (audits to be carried out b y independent external auditors in accordance with International Auditing Standards and International Financial Reporting Standards, under terms o f reference satisfactory to the World Bank). 0 TSKB and Halkbank each to maintain a PIU with satisfactory staffing and other resources as required for effective project implementation. 0 TSKB and Halkbank to monitor project performance in accordance with the agreed performance monitoring indicators. 0 Compliance by Halkbank and TSKB to applicable prudentialregulations set out by BRSA. TSKB and Halkbank to submit to the World Bank for prior review the first two sub-loans. `The first effectiveness condition included in the originalProject Appraisal Document -For TSKB: signingofat least two subsidiary loan agreementswith two PFIssatisfactory to the World Bank-has been removed. 12 ANNEXE: DETAILED PROJECTDESCRlPTION' (Replaces Annex 4 in the PAD, pages 35-44) The appendices below describe indetail: Appendix E-1. Geographical division Appendix E-2. Terms and conditions for TSKB o Loan terms and conditions between the World Bank andTSKB o Eligibility criteria for SMEs o Terms and conditions between TSKB and SMEs Appendix E-3. Terms and conditions for Halkbank o Loanterms and conditions between the World Bank and Halkbank o Eligibility criteria for SMEs o Terms and conditions between Halkbank and SMEs 7Underterms andconditionsthat apply to TSKB, the "eligibility conditions for the PFIs"; "terms andconditionsof subsidiary loansbetweenTSKB andPFIs" and"terms andconditionsbetweenPFk andSMEs"havebeeneliminated. 13 APPENDKE-1:GEOGRAPHICAL DIVISION South East Anatolia, all provinces: Adiyaman, Batman, Diyarbakir, Gaziantep, Kilis,Mardin, Siirt, Sanliurfa, and Simak. East Anatolia, all provinces: A&, Ardahan, Bingol, Bitlis, Elazig, Erzincan, Erzurum, Hakkari, Igdir, Kars, Malatya, Mus, Tunceli, andVan. Central Anatolia, selected provinces: Sivas, Kayseri, and Yozgat. Black Sea, selected provinces: Corum, Amasya, Samsun, Ordu, Giresun, Rize, Trabzon, Bayburt, Artvin, Giimiishane, and Tokat. Mediterranean, selected provinces: Kahraman Maras, Hatay, and Osmaniye. will not include Adana. The following criterion mustbe used to identify the location of a 0 Ifa loanis for an investment or a project, the location ofthe investment or project determines the region. If proceeds are used for working capital, the location in which the materials and other inputs are used determines the region. 14 APPENDIXE-2: SUMMARYOFTERMS AND CONDITIONSFORTSKB Loanterms andconditions between the World Bankand TSKB TSKB will draw the loan's credit line finds inEuros of the outstanding amount into TRY. The loan will b Ifacurrency conversion into TRY isrequested: The World Bank enters into a swap with a market counterpart, and the pricing will be based directly on the terms achieved on the swap between the World Bank and the market counterpart plus a transaction fee o f 0.02% annually. The pricing o f the converted portion o f the loan will be based on a market transaction that the World Bank undertakes with a swap counterpart and would be the TRY equivalent o f the EUR LIBOR + fixed spread for the maturity o f the conversion. Borrowers may refer to internationally recognized swap screen quotes for indicative rates. However, it should be noted that the actual pricing would be based on the swap transaction undertaken by the World Bank with the swap counterpart. TSKB will pay the World Bank a front-end fee o f 1 percent, less any waiver, an annual commitment fee of 0.75%, less any waiver, on undisbursed balances; the commitment fee will be payable nith effect from 60 days after loan signing. TSKB must maintain, for the duration o f the project implementation period, a Project Implementation Unit (PIU) staffed with qualified personnel and capable o f satisfactorily implementing all aspects o f the project. Beginning with year-end 2006 and for the duration o f the project implementation period, TSKB must annually submit an audit report, that: (i)is prepared in accordance with International Auditing Standards and International Financial Reporting Standards; and (ii)has an unqualified audit opinion, except as the World Bank shall otherwise agree. TSKB will be subject to monitoring o f the outcome and output indicators in Annex A to this MOP "Results Framenork and Monitoring" on a yearly basis. TSKB will be subject to monitoring o f the indicators in the Financial Management Reports in the Operational Manuals on a semi-annual basis, and must submit semi-annual financial management progress reports to the World Bank. 0 TSKB will maintain a set o f documentation for all sub-loans at headquarters and make them available for ex-post review by the World Bank or by externalauditors as necessary. 15 0 SMEs will be required to keep copies of invoices for all expenses financed with working capital and investment loans received under the proposed project. SMEs will be required to send to TSKB headquarters copies o f invoices for expenses financed with investment loans. Invoices for expenses financedwith working capital loans may be kept by the SMEs. 0 TSKB illmake its best effort possible to utilize all payments madeby SMEs under the sub-loans M to finance additional development projects to further the development o f SMEs. Eligibility Criteria for SMEs For the purpose o f this project, SMEs are defined as firms with less than US$20 million in sales and fewer than 250 employees. All private small and medium enterprises (private ownership more than 50 percent), irrespective of their sector, will be eligible for participation as sub-borrowers on a commercial basis. The maximum lending amount for the tourism sector should not exceed 30 percent o f the total amount lent to TSKE3 by the World Bank (Le., 30 million). SMEs operating in the tourism sector are defined as: hotels, motels, resorts, pensions, holiday villages and camping sites. Terms and Conditions of Sub between and 0 SMEsmustmeet the eligibility criteria identified inthe section above. Sub-loans and leasesmay be made for both working capital and investmentpurposes. Sub-loans and leases can be denominated inany currency. Sub-loans and leases under the operation will be assessed using TSKJ3's regular credit assessment methodology. In addition to TSKB's regular credit assessment criteria, minimumrequirements for loans and leases extended under the proposed project include: + Sub-borrowers may have a maximum debt`equity ratio o f 80:20 after receipt o f the sub- loadlease. + For all loans exceeding 750,000 (or the equivalent in other currencies), sub- cash flow statement following a format agreed upon with TSIU3. + For all loans ,sub-borrowers, after receipt ofthe sub-loadlease, should beprojected to generate enough cash during the pay-back period o f the sub-loan/lease to maintain a minimumdebt service coverage ratio o fat least 1:1. 0 The credit assessment files will be kept at TSKB's headquarters. Information on the share o f public ownership in the SME, as well as on the geographical location where the funds will be applied (see conditions above), will also be maintainedfor each SME at TSKB's headquarters. 16 t as the Bank shall otherwise agree, the aggregate amount of to any one SME shall not exceed the equivalent o f2,500,000. 0 For the first two sub-loans or leases, irrespective o f size, prior review required. All sub-loans andleases not subject to prior review can be subject to ex-post review by the World Bankinorder to verify compliance with the subsidiary and sub-loadlease agreement terms. The relevant authorities must certify that the SMEs meet environmental laws and standards in force inTurkey. The World Bank policy on environmentalassessment will also be complied with. Goods and works on the World Bank's negative list will not be eligible for financing. Sub-borrowers must comply with the World Bank's proc o f goods and works to be financed under project sub-loans 17 APPENDiX E-3: SUMMARYOF TERMS AND CONDITiONSFOR HALKBANK Conditions between Halkbank and the World Bank Halkbank will draw the loan's credit line funds in Euros and will be able to convert all or portions o f the outstanding EUR obligation into TRY. The loan will be a Fixed Ifacurrency conversion into TRY is requested: + The World Bank enters into a swap with a market counterpart, and the pricing will be based directly on the terms achieved on the swap between the World Bank and the market counterpart plusa transaction fee of0.02%annually. + The pricing o f the converted portion o f the loan will be based on a market transaction that the World Bank undertakes with a swap counterpart and would be the TRY equivalent o f the EUR LIBOR + fixed spread for the maturity o f the conversion. Borrowers may refer to internationally recognized swap screen quotes for indicative rates. However, it should be noted that the actual pricing would be based on the swap transaction undertaken by the World Bank with the swap counterpart. On 50 million (the original loan amount), Halkbank will pay the World Bank a front-end fee o f 1 percent, less any waiver, and an annual commitment fee o f 0.75%, less any waiver, on undisbursed balances; the commitment fee will be payable with effect from BO days after loan signing. On 50 million (the additional loan amount), Halkbank will pay the World Bank an annual commitment fee o f 0.75%, less any waiver, on undisbursed balances; the commitment fee will be payable with effect from 60 days after loan signing. Halkbank must create and maintain, for the duration o f the project implementation period, a Project Implementation Unit (PIU) staffed with qualified personnel and capable o f satisfactorily implementing all aspects o f the project. and for the duration o f the project implementation period, Halkbank must annually submit an audit report that (i)i s prepared in accordance with International Auditing Standards and International Financial Reporting Standards; and (ii) has an unqualified audit opinion, except as the World Bank shall otherwise agree. Halkbank will be subject to monitoring o f the outcome and output indicators in Annex A to this MOP "Results Framework and Monitoring" on a yearly basis. 18 Halkbank will be subject to monitoring o f the indicators in the Financial Management Reports in the Operational Manuals on a semi-annual basis, and must submit semi- annual financial management progress reports to the World Bank. 0 Halkbank will maintain a set o f documentation for all sub-loans at headquarters and make them available for ex-post review by the World Bank or b y external auditors as necessary. SMEs will be required to keep copies of invoices for all expenses financed with working capital and investment loans received under the proposed project. SMEs will be required to send to Halkbank headquarters copies o f invoices for expenses financed with investment loans. Invoices for expenses financed with working capital loans maybe kept by the SMEs. 0 Halkbank will make its best effort possible to utilize all payments made by SMEs under the sub-loans to finance additional development projects to hrther the development o f SMEs. EligibilityCriteria for SMEs For the purpose of this project, SMEs are defined as firms with less than US$20 million insales and fewer than 250 employees. All private small and medium enterprises (private ownership more than 50 percent), irrespective o f their sector, will be eligible for participation as sub-borrowers. The maximum lending amount for the tourism sector should not exceed 30 percent o f the total amount lent to Halkbank by the World Bank (i.e., . SMEs operating in the tourism sector are defined as: hotels, motels, resorts, pensions, holiday villages and camping sites. Terms and Conditionsbetween Halkbankand the Sub-Borrower SMEs 0 SMEs mustmeet the eligibility criteria identified inthe section above. Sub-loans may be made for both working capital and investmentpurposes. Sub-loans can be denominated in any currency. 0 investment loans under the operation will be assessed using Halkbank's investment loan evaluation framework, and working capital loans will be assessed using Halkbank's working capital loan assessment framework, including its credit scoring system.8 The two systems are slated to be merged, and Halkbank will inform iBRD o f 'At appraisal, the World Bank team conductedadetailedreview of Halkbank's evaluationsystem, which it deemed advanced and sound. The system includesa detailed assessment ofboth the SME's andthe owner's 19 anges to the system. In addition to (including cash flow statements for loans extended under the proposed project include: + Sub-borrowers may have a maximumdebuequity ratio o f 80:20 after receipt o f the sub-loan. + Sub-borrowers, after receipt o f the sub-loan, should be projectedto generate enough cash duringthe pay-back period o f the sub-loan to maintain a minimum debt service coverage ratio o f at least 1:1. The credit assessment files will be kept at the PIU or with the SME loan department, both located at Halkbank headquarters. Information on the share o f public ownership in the SME as well as on the geographical location where the funds will be applied (see conditions above) will also be maintained for each SME at Halkbank headquarters. Sub-loan pricing and maturity will be determinedby with the proviso that the lending interest rate must, at a minimum, cover the cost o f World Bank funds, credit risk and operational costs. Except as the Bank shall otherwise agree, the aggregate amount o f outstanding sub- loans to any one SME shall not exceed the equivalent o f2,500,000. For the first two sub-loans, irrespective o f size, prior review by the World Bank will be required. All sub-loans not subject to prior review can be subject to ex-post review by the World Bank in order to verify compliance with sub-loan agreement terms. The relevant authorities must certify that the sub-borrowers and sub-projects meet environmental laws and standards in force in Turkey. The World Bank policy on environmental assessmentwill also be complied with. Goods and works on the World Bank's negative list will not be eligible for financing. Sub-borrowers must comply with the World Bank's procurement procedures for the f goods andworks to be financed under project sub-loans financial statements(including cash flow statements), collection and evaluation o f all information available at the local credit bureaus, and an evaluation o fthe SME's soundnesson the basis o f several financial ratios anda credit scoring system. Furtherdocumentation on Halkbank's credit assessment is available upon request. 20 ANNEX F:TURKIYESINAI KALKINMABANKASI(TSKB) ASSESSMENT' (Replaces Appendix 6 A inthe PAD, pages 47-53) Overview of T S K B TSKB is the largest private investment and development bank in Turkey and accounts for 1.5 percent of bank loans in Turkey (see Table F.1for key indicators on the bank). It was one o f the PFIs in the EFIL Iproject and currently is the borrower o f the EFIL 11and EFIL 111Loans. As such, it is well known to the World Bank team through a regular exchange o f views on the implementation o f the EFILs, and through reviews o f TSKB's audited reports and other financial reporting required under the projects. TSKB maintains an overall sound financial and operational structure, and is fit to undertake the financial liability o f the Loan's Component 1 and operational commitments to act as the PIU and as a retail bank for this project. Table F.1: TSKB kev indicators December Million Share of System/ 2005 US$ Percent /1 Assets 2,460 0.8 Deposits 0 0.0 I2 Loans 1,302 1.o Securities 823 0.7 Branches (number) 1 0.0 Source: Bunk Association of Turkey undstujjcalculutions il Shares o fsystemreflect September 2005 data. 12 Includes leasing assets worth US$ 177million. TSKB's main business is to extend medium and long term loans. About three quarters o f its loans are in foreign currency. Trade credit and financial leases are also important products for the bank. Finally, TSKB provides a wide range o f investment banking services, including public offerings, private equity fund management, mutual fund management, and investment advisory services. These services, however, represent a small part o f the bank's activities, with net fees and commission amounting to just 6 percent o f net interest income in 2005. As an investment and development bank, TSKB ildeposits,andithasonlythreelocations" including recently opened branches in Izmir and Ankara. Table bank's summary balance sheet and income statement. 'Unless otherwise noted, data in this section reflect 2005 and are basedon audited financial statements. loExcludingan off-shore branch inBahrain. 21 Table F.2: Summary balance sheet and income statement for TSKB and the banking system TSKB TurkishBanking System Million US$,December 2005 (September2005 for system) YTL FX Total YTL FX Total ASSETS CASHAND BALANCES WITH THE CBT 0 0 0 4,080 3,436 7,515 TRADING SECURITlES (Net) 0 0 0 6,423 7,389 13,812 Of whichpublic sector securities 0 0 0 6,279 7,357 13,636 BANKS AND OTHER FINANCIAL INSTITUTIONS 30 63 94 4,883 11,873 16,757 Of whichforeign banks 0 28 28 1,678 10,528 12,207 INVESTMENTSECURITIES AVAILABLE FOR SALE (Net) 594 229 823 35,909 18,621 54,531 LOANS/I 226 1,036 1,302 69,946 31,331 101,277 Short term 3 32 75 0 39,534 13,000 52,534 Mediumand longterm 249 1,011 1,260 29,866 18,310 48,176 Loans underfollow-up 26 7 33 5,301 160 5,461 Specific provisions (-) 26 7 33 4,755 139 4,894 INVESTMENT SECURITIES HELD TO MATURITY (Net) 0 0 0 29,078 8,012 37,089 Of whichpublic sector securities 0 0 0 25,993 6,768 32,761 RESERVEDEPOSITS 0 19 19 3,795 6,760 10,555 PROPERTY AND EQUIPMENT (Net) 28 0 28 6,841 12 6,853 OTHER ASSETS 170 25 195 18,307 3,722 22,029 TOTAL ASSETS 1,088 1,372 2,460 179,261 91,156 270,417 LIABILITIES DEPOSlTS 0 0 0 104,137 67,358 171,495 Of which savings deposits 0 0 0 58,201 0 58,201 Of whichpublrc Jector deposits 0 0 0 6,317 0 6,317 Of whichforeign currency deposits 0 0 0 0 63,991 63,991 INTERBANK MONEY MARKET 290 62 352 9,573 3,118 12,691 FUNDS BORROWED 21 1,554 1,576 2,574 26,096 28,670 Of whichforeign banks 8 1,401 1,409 1,861 24,904 26,765 FUNDS 0 0 0 3,939 5 3,944 PROVISIONS 32 5 38 5,004 309 5,312 OTHER LIABlLlTIES 6 79 85 9,874 3,227 13,101 SHAREHOLDERS'EQUITY 409 1 410 34,840 365 35,205 TOTAL LIABILITlES 759 1,701 2,460 169,941 100,477 270,417 INCOMESTATEMENT INTERESTINCOME 181 30,910 Of which interest on loans 61 14,979 Of which Intereston securities 109 14,009 INTERESTEXPENSE 80 17,245 NET INTERESTINCOME 100 13,665 NET FEES AND COMMlSSIONS INCOME 6 3,562 NET TRADING INCOME 7 1,654 OTHER OPERATINGINCOME 21 1,944 TOTAL OPERATING INCOME 135 20,865 PROVISIONFORLOANLOSSES OR OTHERRECEIVABLES(-) 7 4,153 OTHEROPERATINGEXPENSES(-) 37 10,47 1 NET OPERATlNG INCOME 91 6,241 PROFIT/LOSSESFROMASSOCIATES AND SUBSIDIARIES 1 290 NET MONETORY POSITIONGAIN/LOSS 0 0 INCOME BEFORE TAXES 93 6,531 PROVISIONFORTAXES ONINCOME -19 -2,503 NET OPERATlNG INCOME/EXPENSEAFTER TAXES 74 4,029 EXTRAORDINARYINCOMEEXPENSEAFTER TAXES 0 0 NET PROFIT/LOSSES 74 4,028 Source.BAT and staff calculations. Note: Incomestatement data are annualized. /IForTSKB,leasereceivablesareincludedunderloans. 22 TSKB i s owned by Turkey's largest private bank, Isbank, it has a minority stake from the state controlled bank, Vakif Bank, and 41 percent o f its stock is held by non-strategic investors and i s traded on the Istanbul Stock Exchange (see Figure F.l). As o f December 2005, TSKB had a staff o f 286, with an average length o f service in the bank of 10 years, and an average age of 36 years. TSKB has transactions with its owners and related parties amounting to US$85 million in loans and US$23 innon-cash loans. Figure F.1: Ownership o f TSKB Isbank (Turkey'slargest Vakifbank (Large stateowned Stock Exchange,42% Source: TSKB website Suitability of TSKB as Counterpart for Component 1 Investment Bank, Japan Bank for International Cooperation, Kreditanstalt f i r Government guarantees on its borrowings. Financial Soundness and Risk Exposures TSKB i s a profitable and solvent bank with a sound liquidity position and moderate market risk exposures. It has a large credit portfolio, mostly in foreign currency, exposing the bank to indirect exchange rate risk and shocks to the real sector. The risks are mitigated by extensive use o f bank guarantees, collateral taking, and lending to firms with foreign currency earnings. Onbalance, TSKB is viewed as a sound bank. TSKB is rated by both Fitch Ratings and Moody's and receives ratings in line with the largest and best ratedbanks in the country-see Tables F.3 and F.4. Strong capitalization, improved asset quality and profitability, stable funding, and the bank's niche position as 23 the key positives are cited in the ratings. The key risks are related to low fee and commission income and the volatile economic environment inTurkey. Table F.3: Ratings by Fitch Ratings Garanti TSKB Akbank Isbank Bank Long Term Rating BB- BB- BB- BB- Short Term Rating B B B B Local Currency LongTerm Rating BB- BB+ BB- BB- Local Currency Short Term Rating B B B B Source: Fitch Rutings Notes: Ratings as ofDecember 9,2005 As ofNovember 2006, TSKB was upgraded to BB. Table F.4: Ratings by Moody's Ratings Garanti TSKB Akbank Isbank Bank Financial Strength Rating D+ D+ D D+ ForeignCurrency Long Term Rating B1 B1 B1 B1 Source: Moody 's Ratings Note: Ratingsas of December 14, 2005 Solvency. TSKB has increased its capital, which now amounts to US$410 million or 16.7 percent o f assets, in line with the Turkish banking system. (See Table F.5.) On a risk weighted basis, the capital adequacy ratio o f 36.8 is very high, reflecting the frequent use o f bank guarantees, which lead to a 20 percent risk weighting o f loans. The bank i s thus well capitalized. Table F.5: Solvency Banking Svstem TSKB Percent io05 2005 2004 Tier l/risk weighted - assets 24.1 34.9 40.5 Capital adequacy ratio 23.3 36.8 42.8 Capital/total assets 11.9 16.7 15.8 Source BunksAssociation of Turk) andstuff tulculutions Note The bankmg systemreflects Septemberdata, and TSKB reflects December data Credit risk and loan portfolio performance. TSKB's loan portfolio is large and amounts to US$1,302 million (including USD 173 million in lease receivables), or 53 percent o f its assets. It has a low risk profile, as illustrated by the low risk weights applied under the regulatory rules (see Figure F.2) with only 36 percent o f loans receiving a 100 percent risk weight. The majority o f its loans (52 percent) are to banks or with a bank guarantee, which allows the 20 percent risk weight. An additional 11 percent o f its loans are risk weighted at 50 percent, reflecting the increasingly popular use o f mortgage collateral. 24 Figure F.2: Risk weighting o f loans, December 2005 Source: Bunks Associuti~inof Turkey undstufl culculutions The bank's gross N P L ratio, at 2.3 percent, i s below those o f the Turkish banking system (see Table F.6) and has been reduced by more than half since 2003. The reduction in NPLs reflects mostly collections on existing NPLs, while write offs were about a third of collections. Gross additions to NPLs in 2004 and 2005 were just US$2.2 million or less than a quarter o f a percent o f net loans. Thus, the performance o f TSKB's loan portfolio i s very good. TSKB provisions its NPLs 100 percent reflecting a conservative provisioning policy. Table F.6: Credit risk BankingSystem T S K B Percent 2005 2005 2004 Gross NPLs/gross loans 11 4.6 2.3 3.7 Gross NPLs (incl. substandard)/gross loans /1 5.1 2.5 4.1 Gross NPLdcapital 15.2 9.6 15.0 Loan provisionsNPLs (incl. substandard) 89.6 100.0 100.0 Loanprovisionsicapital 15.2 9.6 16.4 Source BunkAsJociurion of Turkeyand stufl culmlutions Note: The banking system reflects September data, and TSKB reflect December data. /1 Including financial lease receivables. TSKB's outstanding loans are about three quarters in foreign currency. In case of a depreciation o f the Turkish Lira, this creates credit risk for the bank as the value o f the loan in Lira terms increases. This risk i s mitigated for borrowers that are naturally hedged, for instance by being price takers in export markets. However, even exporters are not perfectly hedged, collateral value will typically depreciate, and this indirect exposure to exchange rate shocks therefore remains a concern. On balance, TSKB's loan portfolio has a moderate credit risk profile. 25 Profitability. TSKB's profitability i s in line with the Turkish banking system (see Table F.7) as well as with international standards, with ROA o f 3.6 percent and ROE of 21.4 percent. The low operating expenses reflect in part that the bank does not engage in costly retail operations and inpart that the bank i s efficiently run. Table F.7: Profitability Banking System TSKB Percent 2005 2005 2004 Real return on average assets 1.6 3.6 2.3 Real return on average equity 11.6 21.4 13.3 Net interest income less provisions/average assets 3.8 4.5 3.9 Net interest income less provisions/gross income 45.6 69.4 51.5 Other operating expenses/grossincome 50.2 27.3 21.1 Net trading income/gross income 7.9 4.8 1.4 Source BunksAssociution of Turkeyund stufl ~ u l ~ ~ l u t i i ~ n s Note The bankingsystemreflects September data, and TSKB reflect December data Liquidity. Because TSKB does not take deposits, its liability side i s very stable and well protected from liquidity shocks, as confirmed by the very high liquid assets/short term liabilities ratio in Table F.8. As shown in Table F.2, liabilities are almost entirely borrowings, while interbank money market liabilities are small. This leaves TSKB very resilient to liquidity shocks. Table F.8: Liquidity Banking System TSKB Percent 2005 2005 2004 Liquid assets/total assets 39.1 38.1 31.1 Liquidassetshhort term liabilities 280 2,484 2,503 Source: Bunks Associution of Turkeyund stuf culmlucions Note: The bankingsystemreflects September data, and TSKB reflectDecember data Market risk exposures. TSKB's direct market risk exposures are very moderate because it does not collect deposits and has a long term hnding base and therefore is able to extend medium and long loans without the maturity mismatches that banks normally have to carry. Moreover, since its balance sheet i s dominated by foreign currency (see Table F.9), the bank is not very exposed to fluctuations in local currency interest rates. TSKB has manageable short net foreign position amounting to 2.2 percent o f its capital as of the end o f 2005. 26 Table F.9: Exchange rate risk Banking Svstem TSKB 200 Percent 2005 5 2004 Net foreign exchange positionon bskapital -5.8 17.6 -5.4 Net foreign exchange position on and off bdcapital -1.5 -2.2 -5.5 Foreigncurrency denominated loans/total loans 30.9 76.4 91.2 Foreigncurrency denominated assetshotal assets 33.7 55.8 68.8 Foreigncurrency denominated liabilitiedtotal liabilities 37.2 69.1 74.8 Source: BunksAssociation of Turkeyund stuff culculutions Note: The banking systemreflects September data, and TSKB reflect December data. Operational Policy 8.30 (OP 8.30) Considerations OP 8.30 applies to TSKB for th . Insummary, the conditions are viewed as being met for TSKB Regarding the specific issuesunder OP 8.30: (a) Adequate profitability, capital, and portfolio quality, as confirmed by financial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank. TSKB is a well capitalized, profitable bank with a sound loan portfolio. The bank prepares financial statements in accordance with Turkish regulations, as well as in accordance with IFRS and the statements are viewed as adequate. (6) Acceptable levels of loan collections Gross NPL levels are below those o f the Turkish banking sector as a whole, and collections on NPLs are strong, while new NPLs are a small fraction o f the bank's loan book. Thus, the performance of TSKB's loan portfolio i s very good-see also the section on credit risk and loan portfolio performance above. (c) Appropriate capacity, including staffing, for carrying out sub-project appraisal (including environmental assessment)andfor supervising sub-project implementation. The World Bank has extensive and recent experience working with TSKB, and it has proven its ability to (d) Capacity to mobilize domestic resources 27 TSKB is not allowed to collect deposits, and borrows limited amounts in the domestic interbank money market through rep0 operations (US$352 million). Most o f its borrowings are from foreign banks (US$1,409 million). Rather than an inability to mobilize domestic resources, the predominance o f foreign bank liabilities reflects TSKB's ability to attract them at more favorable terms. (e) Adequate managerial autonomy and commercially oriented governance TSKB is a publicly traded privately owned and profitable bank that makes decisions on a commercial basis. @ Appropriate prudential policies, administrative structure, and businessprocedures TSKB is subject to bank regulations and follows a prudent approach to risk management. IFC recently extended a US$50 million subordinated loan to TSKB confirming that institution's trust in TSKB's procedures. A separate assessment o f financial management i s being conducted and i s attached in Annex H. 28 ANNEX G:HALKBANK ASSESSMENT" (Replaces Appendix 6B inthe PAD, pages 54-62) Overview of Halkbank Halkbank i s a large deposit-taking state bank primarily serving SME customers throughout Turkey. It is the 6thlargest bank inTurkey b y assets and has the fourth largest branch network'* (see Table G.1 for key indicators). The bank currently has the Turkish Government as its sole shareholder, but the bank i s slated for privatization, and the Privatization Administration has hired a financial advisor (investment bank) to bring Halkbank to the market. Inpreparation for privatization, the bank has been operationally restructured through the closing o f branches and substantial reduction o f staff, while expanding its loan portfolio to increase profitability in line with its strategy. In order to ensure successfbl privatization and maximize the value to the Government as the bank's shares are sold, strategic and operational decisions are increasingly made on a commercial basis. Substantial financial and operational restructuring over the past few years have contributed to the bank now being financially sound as well as profitable. Untilrecently, the bank had ajoint board o f directors with another major state bank, Ziraat Bank, but in preparation for the privatization, Halkbank now has its own board. The board approves policies, strategies, and principles for the bank. In line with industry practice, the bank has a risk management unit reporting directly to the board. An organizational chart for the bank i s included in Figure F.1at the end o fthis Appendix. Table G.1:Halkbank kev indicators Billion Share of December *Oo5 US$ System/ Dercent Assets 20.2 6.8 Deposits 15.6 8.6 Loans 4.6 4.1 Securities 12.7 11.9 Branches (number) 584 9.4 Source: BRSA und stu~culculutions Suitability of Halkbank as Counterpart for Component 2 Unless otherwisenoted, data inthis sectionreflect 2005 and are from the BankingRegulation and SupervisionAgency. l2 By December2005, Halkbank hadreducedits numberofbranchesto 584 inpart as aresult ofbranch consolidation after the merger with Pamukbank. 29 its SME business. Halkbank's vision reads, "Becoming the leading SME bank o f the country.. .." In fact, Halkbank's portfolio i s already dominated b y commercial credit (with a significant share o f SMEs), while the bank extends very little consumer credit (14 percent o f loans). Halkbank has a relatively strong presence in the ,where credit i s less developed. While the Turkish banking system only has 7.6 percent o f its loan portfolio in the targeted regionI3(as defined in Annex E to this MOP), Halkbank has 26 percent o f its loan portfolio (or US$693 million) in this area.14Details on the loans in the two relevant parts o f the country are provided in Table G.2. Table G.2: Halkbank loan portfolio by region Million US$ Western Targeted end-April, 2005 region region Total Total credits 1,980 693 2,673 Net NPLs 51 0 51 Gross NPLs 802 61 863 Source: Hulkbunk Halkbank's participation in the project is thus well aligned with its strategy. Halkbank is seeking to strengthen its position as an SME bank by increasing its product range and growing its portfolio to that segment. As its large portfolio o f non-tradable investment securities mature, the portfolio will shift towards tradable securities and loans. Halkbank has the lowest loans-to-deposit ratio in Turkey, at 30 percent, compared to an average loans-to-deposit ratio o f 62 percent in the banking system. This suggests that Halkbank has a large customer base that is currently not exploited in terms o f extending credit. Financial Soundness and Risk Exposures Halkbank is a well-capitalized and profitable bank with relatively small market risk exposures. The bank's assets are not very liquid, but the liability side does not appear to be risky from a liquidity perspective. The loan portfolio has performed well in the past two years, and the bank appears to be run in a sound manner. Table G.3 includes Halkbank's financial statements compared with those o f the Turkish banking system. The section below includes a detailed evaluation o f Halkbank's financial and operational performance. As of December 2003, basedonthe most recent availabledata. Figurescalculatedon the basisofthe RegionaldistributionincludedinAppendix E-1. l4As ofApril 2005. 30 Table G.3:Summary balance sheet and income statement for Halkbank and thebanking 68 135 6.672 4.493 11.171 237 1.302 5.678 7.270 12% 456 562 9.131 14.612 23.743 176 1.321 39.397 18.808 58.205 514 4.614 80.656 31.m 112548 898 5.450 149 5.593 883 4.8% 131 5 . m 723 10.055 28.937 6.717 35.654 243 808 4.013 6.845 10.858 532 5.564 10 5.574 mm 772 73 845 22574 3.186 25.760 maAssFIs 17.714 2490 2O.m 202.622 93.3.839 %461 IIAm4m ML m m A L ML Ex ma l3Ktms 12265 3342 15.607 115.437 66.132 181.569 3 0 - 30 10.846 2422 13.268 165 180 345 7.230 33.354 40.584 760 5 765 4.067 4 4.071 497 14 511 5.751 337 6.088 408 151 559 7.522 3.231 10.753 mQEKmmsH&l-rY 2387 - 2.387 39.710 418 40.128 ma- 16,512 3.682 20.204 l90.563 105898 %461 IKC&lE SIA- mAL mAL lNrmEsrw 2.776 31.588 738 15.324 1.936 14.072 2.086 17.923 690 13.668 116 4.103 160 1.582 201 2248 1.167 21.601 86 4.840 522 10.291 559 6.470 9 287 568 6.757 171 2492 397 4.265 ~ Y I h C / E X P . A F I E R T A X E S rnPFlOFlT/Los'SEs 397 4.265 Source: Banking Regulation and Supervision Agency undStujf Culculutions 31 Solvency. With a capital adequacy ratio o f 50 percent (see Table G.4), the bank is highly solvent when measured against risk-weighted assets. The much lower capital-to-assets ratio o f 12percent reflects the bank's large holding o f Government debt securities with 0 percent risk weighting. Table G.4: Solvency BankingSystem Halkbank SeP Dec Sep Dec Percent 2005 2005 2005 2004 Tier l/risk weighted assets 24.1 49.9 57.4 60.7 Capital adequacy ratio 23.3 49.6 56.2 58.9 CapitaUtotal assets 11.9 11.8 11.2 11.4 Souree BAT and stuff calmlarions Credit risk and loan portfolio performance. The bank's gross NPLto-total loans ratio is high at 19 percent" (see Table G.5). However, it largely reflects old non-performing loans that have been h l l y provisioned for but not written off. Current portfolio performance is sound. A substantial portion o f the NPLs are carried over from Emlak Bank, which failed during the crisis and was merged with Halkbank. Specific provisions are made for 98 percent o f gross NPLs'~,and no loans have been written off in the past three years. New non-performing loans (including sub-standard), net o f collections during the period 2003 to 2005 amounted to less than 1.5 percent o f the bank's current loan portfolio. The recent performance o f Halkbank's loan portfolio is thus sound. Halkbank's borrowers are widely dispersed, and concentrations are not a concern. In contrast to private banks, Halkbank extends 89 percent o f loans in local currency and therefore does not expose itself to indirect currency depreciation risk'7such as i s otherwise common in Turkey. 15NPL ratio is 14 percentas ofthe endofMarch,2006 inpart as aresult ofimprovedcollectionsand in part as aresult ofloan growth. l6Halkbank has a policy to provision IO0percent for non-performingloans. The difference between provisioninglevels and 100percentreflect loansguaranteedby the TurkishTreasury for which the provisioningpolicy doesnot apply. 17Indirectcurrency depreciationrisk refers to the credit risk associatedwith lendinginforeigncurrency. In Lira terms, depreciationwill increase the value ofthe loan, while the borrower's financialsas well as the value ofthe collateralis likely to remain constant. 32 Table G.5: Credit risk Banking System Halkbank SeP Sep Dec Percent 2005 2005 2004 Gross NPLs/gross loans 4.6 18.7 21.0 Gross NPLs (incl. substandard)/gross loans 5.1 20.0 22.1 Gross NPLdcapital 15.2 38.5 39.7 Loan provisions/NPLs (incl. substandard) 89.6 98.2 96.5 Loan provisionskapital 15.2 40.4 40.3 Source BAT and stuff culculunonJ Profitability. The bank i s highly profitable b y both Turkish and international standards, with real ROA o f 2.1 and real ROE o f 17.5 (see Table G.6). As the Turkish banking market evolves, new sources of profits must be developed. Halkbank's non-marketable securities are currently being remunerated above would-be-market prices, and as they mature they will be partially replaced with lower yielding assets. Halkbank has a greater portion o f its assets invested in Government securities than private Turkish banks, and return on this position i s likely to decline in the future. Halkbank's ability to sustain its current high level o f profitability will depend on its ability to shift its portfolio in response to changing profit opportunities. However, even a lower level o f profitability would not endanger Halkbank's financial soundness. Table (3.6: Profitability Banking System Halkbank Dec Dec Dec Percent 2005 2005 2004 Return on averageassets 1.7 2.1 2.9 Returnon averageequity 11.8 17.5 23.7 Net interest income less provisions/average assets 3.5 3.1 6.7 Net interest income less provisions/gross income 40.9 51.8 73.3 Other operating expenses/gross income 47.6 44.7 32.0 Source BAT andstuffculculutions Liquidity. Halkbank's liquidity ratios are below the rest of the banking system (see Table G.7), because 79 percent of its securities are investment securities held to maturity. Most o f these are non-tradable Government securities issued to recapitalize the bank after the 2001 crisis, and as they mature they will be partially replaced by marketable securities, thus improving the liquidity of the bank over the medium term. The improved liquidity position i s evident from the change between 2004 and 2005. Even in the near term, the liquidity position does not appear risky. In part, short term liabilities are only slightly higher than short term assets, and in part the bank enjoys an implicit guarantee on its liabilities from its Government ownership, thus reducing the risk o f a run on deposits and other short term liabilities. 33 Table G.7:Liauiditv Banking Svstem Halkbank Dec Dec Dec Percent 2005 2005 2004 Liquidassetshotalassets 39.4 20.4 9.6 Liquidassets/shortterm liabilities /1 280 93.2 88.7 Source: BAT and stuff culculutions 11 2005 data reflect September Market risk exposures. Halkbank's market risk exposures are very moderate. The bank maintains almost balanced foreign currency positions both on and off balance sheet (see Table G.8).The securities held by Halkbank, although they have long maturities, carry little interest rate risk because they are repriced frequently. Table G.8:Exchange rate risk Banking System Halkbank Dec Dec Dec Percent 2005 2005 2004 Net foreign exchangeposition on bdcapital /1 -5.8 0.8 0.6 Net foreign exchangeposition on and off bdcapital /1 -1.5 0.0 0.6 Foreign currency denominated loans/total loans 28.3 11.1 10.9 Foreign currency denominated assets/totalassets 31.7 12.3 17.7 Foreigncurrency denominated liabilitiedtotal liabilities 35.7 18.3 24.6 Source BAT und stuff culculutions il 2005 datareflect September Subsidized Credits Halkbank extends two types o f subsidized credits, "fund credits" and "cooperative credits," that account for 38 percent o f total loans'* (see Table G.9 for an overview of loans by type and region). The subsidy elements are fully financed by sponsors outside Halkbank, and the subsidized credits are structured in a way that does not distort Halkbank's credit decision or interest rate setting for other loans. Table G.9:Halkbank loan portfolio b y loan type and region, end-April 2005 Million US$ Western Targeted region region Total Coop credits 712 285 998 Fundloans 392 219 610 Other loans 826 189 1,014 Total credits 1.980 693 2.673 Source: Halkbunk '*As o fDecember 2005. 34 Directly subsidized "cooperative credits" Cooperative credits are extended to small individual borrowers under credit cooperatives, and only borrowers organized under these credit cooperatives are eligible. The borrowers are small, and the scheme is akin to microfinance schemes seen in many other places. Halkbank receives a 6 percent subsidy from the Government in order to reduce interest on the loans. Credit risk is reduced by the joint liability o f the cooperative and the borrower. When payment from a borrower i s late, the amount i s charged directly from the cooperative's account. This program i s only offered b y Halkbank, and it is expected to be phased out over time. The loans are carried on Halkbank's balance sheet. Indirectly subsidized `tfund loans" Fund loans are financed by below market rate liabilities provided in the form of loans from, for instance, Turkish EXIM bank and IFIs including EIB. Halkbank is required to lend the finds according to certain criteria, such as location in specific industrial zones or to special groups o f borrowers such as SMEs. The proposed World Bank credit line will also fall in this category. The loans are priced fairly close to market prices, and Halkbank earns a normal spread, carries the credit risk for these loans, and has the loans recorded on its balance sheet. Some o f the fund loans are available to other banks in the market, including private banks, and Halkbank does not enjoy a favorable position vis-a-vis other banks with respect to these loans. Operational Policy 8.30 (OP 8.30) Considerations OP 8.30 applies to Halkbank for the proposed operation. In summary, the conditions are viewed as being met for Halkbank as an intermediary. Regarding the specific issues for financial intermediaries, under OP 8.30: (a) Adequate profitability, capital, and portfolio qual@, as confirmed by financial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank. Halkbank i s profitable and well capitalized, and its loan portfolio has performed well over the past two years-see the section on financial soundness and risk exposures. Halkbank prepares statements in accordance with regulations, and the statements are viewed as adequate. (b) Acceptable levels of loan collections Although Halkbank carries a large stock o f old non-performing loans, current loan collections are good-see the section on credit risk and loan portfolio performance under the section on financial soundness and risk exposures. (c) Appropriate capacity, including stafjng, for carrying out sub-project appraisal (including environmental assessment) andfor supervising sub-project implementation. On appropriate capacity, including staffing see also Annex H. Halkbank has nworth of loans to SMEs in equaling more the amount o f credit allocate 35 to under the proposed operation. Some o f Halkbank's current loans are ex sidies and may therefore not be good indicators the market. However, Halkbank still lends US$332 million, or allocation, in the targeted region excluding the cooperative loan region are small-both net and gross NPL levels are less in the targeted region than for the bank as a whole. Th (d) Capacity to mobilize domestic resources Halkbank has US$12.3 billion worth o f domestic deposits, proving its ability to mobilize domestic resources. (e) Adequate managerial autonomy and commercially oriented governance Halkbank i s owned by the Government and about to be privatized, possibly through an IPO. In case of an IPO, the Government will retain control until a private sector partner takes a majority stake in the bank. In preparation for privatization, business objectives have shifted to a commercial basis in order to maximize the value of the bank when the shares are sold. Since the Government still owns and controls the bank, it is clearly not totally autonomous and commercially oriented in its decision making. However, the team's assessment indicates that decisions are made sufficiently autonomously and that they are commercially oriented, as also evidenced by sound financials o f the bank. 36 flAppropriate prudential policies, administrativestructure, and businessprocedures. Halkbank complies with the regulations, and its balance sheet has a low risk profile. Credit decisions are made on a commercial basis (see section on subsidized credits for details), and the bank has a risk management unit reporting to the bank's board o f directors, according to international practice. Separate procurement and financial management assessments are included in 37 .. ANNEX H:FINANCIAL MANAGEMENTDISBURSEMENT AND ARRANGEMENTS19 (Replaces Annex 7 inthe PAD, pages 63-71) TURKEY: Access to Finance for SMEs A. Summary of Financial Management Arrangements The task team has conducted an assessment o f the adequacy o f the project financial management systems at TSKB and Halkbank. The current financial management arrangements for the project are satisfactory at bothbanks. A summary of the conclusions for both banks is as follows: I I I I Country Issues The Banking Regulation and Supervision Agency (BRSA) issued a new comprehensive regulation on accounting standards for banks in July 2002, which brings these standards in line with International Financial Reporting Standards (IFRS). However, the BRSA regulation does not require full application o f IFRS 27 (consolidation o f subsidiaries), as banks only have to consolidate their financial subsidiaries, while for non-financial subsidiaries separate financial statement disclosure i s mandated. The statements o f such non-financial subsidiaries are not IFRS-based,20however, and thus their disclosure will not allow the user to consolidate these with the IFRS-based consolidated statements of the parent bank and its financial subsidiaries. Also, as the IFRS are subject to change, any such change will necessitate an adjustment o fthe BRSA regulation. or publicly held, and only ifthe CapitalMarketsBoardof Turkey requiresthe use offull IFRSfor all listed or publicly heldentities, will the financial statements for suchnon- financial subsidiariesbe IFRS-basedandallow full consolidationwith the 1FRS-basedfinancialstatements of the parentbank andits financial subsdaries. 39 The BRSA also issues rules governing the external audit o f bank financial statements, and only auditors approved by the BRSA may carry out such audits. The "Regulation on Principles for Independent Auditing" and the "Regulation on Authorization o f the Auditing Institutions and Permanent or Temporary Withdrawal oftheir Authorities," both published in the Official Gazette Nr. 24657 on January 31, 2002 are broadly in line with ISA. TSKB and Halkbank have been assessed for compliance with BRSA prudential regulations by the project team and found to be in compliance. ImplementingEntity TSKB and Halkbank will each borrow 100 million equivalent under the proposed project. Both institutions will act as retailers and lend directly to eligible SMEs. The - . Treasury will be the guarantor o f the loans. Assessments for TSKB and Halkbank are available in Annex F and G o f this MOP respectively. Compliance with the prudential regulations set out b y Banking Regulatory Supervisory Authority (BRSA) is required for the continuing eligibility o f Halkbank . This will be monitored through (a) prudential regulation compliance certificates and (b) annual audit reports. The risk associated with both implementing entities is assessed as negligible. Budgeting As the project will be implemented by TSKB, which is a private bank, and Halkbank, which is a state owned bank with commercially oriented decision making, the only requirement is to have the necessary allocations as per their own budgetingprocedures. The risk associated with the budgeting process is assessedas negligibIe. Accounting The accounting and financial management capacities at both TSKB and Halkbank are satisfactory. They both have qualified personnel, adequate manuals and guidelines to conduct efficient financial management. The accounting and reporting systems at both banks are geared towards producing statements and information as required by Turkish laws and regulations. Considering that both banks have adequate accounting and reporting systems, the main transactions, (i.e., movements in the account, uses from will be in TSKB's and Halkbank's main g systems. The mai stem will be supported by a sub-system for project reportingpurposes. 40 loans fi-omthe World Bank-EFIL 11, EFlL 111 and the Renewable Energy Loan. TSKB has updated the current manual to reflect the changes in the workflow that result from its role as a retail bank rather than an APEX bank. The risk associated with accounting policies and procedures in TSKB is assessed as negligible. Halkbank will be using its own accounting system and accounting oses. Semi-annual FMRs will be produced by the through the use of Excelworksheet upon with the Bank. The operations manual for the project will include the work flows for the SME project. The risk associated with accounting policies and procedures in Halkbank is assessed as negligible. In order to facilitate prompt disbursements for this operation, TSKB will have two designated accounts, one for Euro and the other for USD, and Halkbank will have one designated account. The account will be maintained at the institutions themselves under terms and conditions acceptable to the World Bank. Funds from the TSKB portion o f the loan will be made available to SMEs through the usual lending procedures o f TSKB. TSKB will keep the invoices for eligible expenditures submitted by the SMEs for investment loans. When working capital loans are extended to SMEs, TSKB will obtain and retain financial statements of the SMEs on an annualbasis in order to monitor their financial performance. The submission o f invoices for working capital loans is not required, but SMEs must keep them for ex-post review. Halkbank will apply its usual lending procedures for loans from the World Bank. A potential beneficiary enterprise will make its application to a Halkbank branch, which RegionaUGeneral Directorate. will collect initial information the market and, based on the firm's good standing, will give its report to the branch, which in turn will make the evaluation and prepare the loan proposal for the Loans Department o f Halkbank. The loan will then be submitted to the General ManagedDeputy General Manager, to the Credit Committee, and to Halkbank's Board o f Directors. After the approval o f t The branches will be responsible for controlling the already . They will be checking for mathematical correctness as well as available to the SMEs. 41 which they have extended working capital loans every twelve months. A copy o f these financial statements w,ill be made available at the head office. The changes in the working capital requirements o f the companies m,ill be monitored through these financial statements. The submission o f invoices for working capital loans is not required. The risk associatedwithfundsjow is assessedas negligible. FinancialReporting TSKB and Halkbank will maintain records and will ensure appropriate accounting for the hnds provided. The FMRs will be prepared semi-annually and will be submitted to the World Bank no later than 45 days after the end o f the period. The formats o f the FMRs have been agreed upon with both TSKB and Halkbank. Reporting will include the number o f employees o f the sub-borrower, its annual turnover, the province in which the sub-borrower i s located, and the sector to which the borrower belongs. The loans that will be extended to SMEs will be investment and working capital loans. Documentation that i s currently received by both banks for the investment and working capital loans from their customers will be relied upon for the purposes o f this project, and this information will be submitted to the World Bank on a summary basis as a part of the FMRs. Therisk associatedwith reporting and monitoring is assessedas negligible. Auditing TSKB and Halkbank will prepare separate project financial statements for the portions of the project they will implement. Annual and six-monthly (limited review) audits o f TSKB are undertaken on an InternationalFinancial Reporting Standards (IFRS) basis in accordance with lnternational Standards o fAuditing(EA) b y a reputed international auditing firm. The current auditors loitte and Touche's member firm in Turkey. were reviewed and all had clean audit opinions. An audit o f the SME 1 statements (project balance sheet, sources and uses o f hnds and account statement) will also be included in the auditors' terms o f reference. TSKB has been engaging the services o f international auditors for several years, and the engagement of an auditor will therefore not be a specific Board condition. Annual and six-monthly (limited review) audits o f Halkbank are undertaken on an InternationalFinancial Reporting Standards (IFRS) basis inaccordance with International Standards o f Auditing by a reputed international auditing firm. The current auditors of Halkbank are ments were audited by Ernst&Young. were reviewed. Financial statements for were unqualified, while there was a qualified opinion for the year-ended December 31, 2004, the qualification being "the methodology used to calculate the actuarial deficit on the hnds acquired with 42 the transfer o f insolvent Pamukbank's pension fund may differ from the methodology required by revised IAS 19." Audit of the SME project financial statements (project balance sheet, sources and uses of funds and account statement) will also be included in the auditors' terms o f reference. The risk associatedwith external audit is assessed as negligible. Weaknessesand Action Plan There are no significant weaknesses in the project. It i s concluded that the financial management arrangements for the project satisfy the Bank's minimumrequirements and noaction planis proposed. B. DisbursementArrangements lkbank will have one designated accoun ions acceptable to . These amounts are based on an estimated implementationperiod of Applicationsfor replenishment Withdrawal applications will be submitted to the World Bank regularly and will be accompanied by detailed statements o f expenditures and reconciled bank statements. Statement o f expenditure procedures will apply regardless of the currency o f expenditure for payments against sub-loans that are valued at less than 2.5 million equivalent (which i s also the maximum amount o f a sub-loan). TSKB and Halkbank will retain supporting documentation in accordance with normal commercial practices on all sub-loans and make these available for project supervision by World Bank staff and for external audit purposes. Minimumwithdrawal applicationsize 43 the USDportion o f the Loan for TSKB and 2 million equivalent for Halkbank -10% of the authorized allocation o f the designated account. These limits apply to applications for reimbursements and for replenishment o f the designated account. Retroactivefinancing Provisions have bee loans must have Submission of withdrawal applications Additional details on how hnds are to be withdrawn from this Loan are provided in the Disbursement Letter. Conversion procedure The World Bank's loan to TSKB and Halkbank will start as a Fixed Spread Loan (FSL) re-denominate part o f the loan ob e World Bank Treasury executes, with a market counterpart, a Euro swap. The World Bank passes to the borrower the terms o f the swap it obtains in its market transaction. If the maturity of the conversion i s shorter than the maturity o f the loan, then at the maturity o f the conversion, the borrower will have the option to roll over the conversion ( aP market still exists at that time), or to revert the remaining obligation to Euros If the borrower chooses to roll over the conversion, it will not be exposed to currency risk, but there will be interest rate risk because the loan will be converted at market interest rates at that time. Our survey indicates that, at this point in time, it i s possible to execute Euro-TRY swaps for up to 10 years. For conversion o f disbursed amounts to TRY, a minimum amount o f 3 million equivalent will be required in order for the World Bank Treasury to enter into a swap with the market counterpart to effect the transaction. The Conversion Date (which i s the start of the Conversion Period) will always fall on the next Interest Payment Date following the Execution Date o f the Conversion Request. The FSL Conversion Guidelines will apply when requesting, accepting and effecting conversions on Fixed-Spread Loans. The guidelines are posted on the World Bank Treasury's page at the web address: http://treasury.worldbank.org/Services/Financial+Products/Current+ProductsiFixed+Spread+Loan+(FSL).h tml. Additional information on the structure o f the loan will be included in the Operational Manuals o f TSKB and Halkbank. 44 As mentioned in the main document and in other sections of this Annex, the proposed loan will be allocated under separate loan agreements to TSKB for 100 million equivalent (60% in Euros (60,000,000) and 40% in US$ (US$48,056,000) and to Hakbank for 100 million, which will be on-lent to SMEs. For Halkbank, the allocation of loan proceedsbetween two columns is necessary to record the 50million increase in the loan package since the original Board approval of June 8, 2006. A ceiling o f about 30% of the loan amounts can be allocated to the tourism sector. The two tables below includea summary allocation of loan proceeds. 45 TSKB Category Amount ofthe Loan Amount ofthe Loan Percentageof Allocated Allocated Expendituresto be (expressedinEuro) (expressed inDollars) financed (1) Sub-loans andLease Financing (2) Front-endFee (3) Premiafor Interest Rate Caps and Interest Rate Collars TOTAL AMOUNT I HALKBANK II Original amount (1 49,875,000 1. Sub-loans to 2. Front end fee 0 3. Premia for caps and collars C. Supervision Plan During project implementation, the World Bank will supervise the project's financial management arrangements in two main ways: (i)reviewing the project's semi-annual financial management reports as well as the implementing banks' and project's annual audited financial statements and auditor's management letter; and (ii) during the World Bank's supervision missions, reviewing the project's financial management and disbursement arrangements (including a review of a sample of SOEs and movements on the designated account) to ensure compliance with the World Bank's minimum 46 requirements. Spot audits will be carried out on lending limits, SME eligibility criteria as outlined in Annex E to this MOP, and on the credit approval process applied for individual loans. As required, a World Bank-accredited Financial Management Specialist will assist inthe supervision process. 47 ANNEXI: PROCUREMENT ARRANGEMENTS (Replaces Annex 8 inPAD, pages 72, 74) A. General The procurementfor the proposedproject would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 andprovisions stipulatedin the LoanAgreement. The procurement arrangementsare described below. Procurement of Goods: Procurement of goods and related services (installation and maintenance) financed under the proposed project will be according to the World Bank Procurement Guidelines. For contracts below 2.5 million equivalent, established local private sector commercial practices will be followed in accordance with paragraph 3.12 o f the Procurement Guidelines. Care has to be taken o f other relevant factors such as time o f delivery, efficiency and reliability o f the goods, availability o f maintenance facilities and spare parts thereof, and in case of non-consultant services, o f the quality and competence o f the parties rendering them. Advertising in the local and internationalpress will not be mandatory. However, International Competitive Bidding (ICB) may be the most appropriate procurement method for the purchase o f large single items. The procurement o f goods and related services under all ICB contracts will be subject to the World Bank's prior review. Contracts placed by sub-borrowers on their subsidiary or affiliated companies will not be eligible for financing out o f the loan. The procurement of second handgoods i s not eligible for financing out o f the loan. Procurementof Works:Procurement of works financed under the proposed project will be according to the World Bank Procurement Guidelines. For civil works estimated to cost less than 2.5 million equivalent per contract, established local private sector commercial practices will be followed in accordance with paragraph 3.12 o f the Procurement Guidelines. Contracts placed by sub-borrowers on their subsidiary or affiliated companies will not be eligible for financing out o f the loan. B. Assessment of the Agency's Capacity to lmplement Procurementand Private Sector ProcurementPracticein Turkey will be responsible pecified below are the records o f the procurements handled through respectively. The documents related to the working capital expenditures will be kept by the SMEs, and these documents will be provided to the Bank whenever requested. The World Bank will conduct regular post reviews o f the sub-projects not 48 requiring a prior review. The PIUSwill be re related to specific procurement transactions order to facilitate the Bank's reviews. TSKB was responsible for the implementation o f the similar EFIL-I and EFIL-I1projects, and no procurement problem was encountered in these projects. The EFIL-111project was approved by the Bank's Board in FY06. An assessment o f the capacity o f TSKB to implement procurement actions for the project was carried out by the procurement specialist on March 22, 2005. The assessment reviewed the organizational structure for implementing the project and the interaction among the project staff responsible for the procurement activities. The overall project risk for procurement is low. Halkbank i s a public Bank and has implemented two World Bank financed loans in the past: the Second Small and Medium Scale Industry Project (L3067) and the Agro Industry Project (L3077). Halkbank has very wide experience in similar transactions as the principal objective o f its establishment. An assessment o f the procurement capacity of Halkbank was carried out by the Salih Kemal Kalyoncu on July 18, 2005. The overall risk for procurement is average. Private Sector Procurement Practice in Turkey: In the Country Procurement Assessment Report dated June 2001, it was determined that there are well established commercial practices for the procurement o f goods, works and services by private sector enterprises, autonomous commercial enterprises and individuals. In case o f goods, the local practice is to prepare the technical specifications and solicit quotations from the local and/or international market. In case o f medium and large works, the technical specifications are usually prepared by consulting companies, and bids are collected from qualified contractors. Minor works are generally tendered on a lump sum basis by collecting bids from a number o f local contractors. When equipment and machinery i s needed for expansion o f existing facilities, the purchasers usually prefer proprietary goods from a single source for the sake o f standardization and minimization o f operational and maintenance costs. Therefore, local private sector or commercial practices can be considered to be consistent with the World Bank's criteria with respect to economy and efficiency. The general rule in the sector i s to procure the least cost goods, works and services consistent with minimumquality requirements. All SMEs financed under this loan should have private ownership. C. Procurement Plan and General Procurement Notice At the appraisal stage or during the implementation o f the project, it is not possible to estimate either the sub-borrowers or their procurement requirements. Therefore, it i s not possible for the borrower to develop a Procurement Plan which provides the basis for the procurement methods. Similarly, since the contract sizes and the methods cannot be estimated, it i s not possible to prepare and publish a General Procurement Notice. It i s expected that each sub-borrower will provide a list o f procurements planned under the sub-loan. In case any sub-project includes ICB, a special procurement notice will be published in accordance with the Procurement Guidelines. 49 D. Frequency of Procurement Supervision and Review Procedures The Bank will review the procurement arrangements proposed/performed by TSKB and Halkbank every year, including contract packaging, applicable procedures, and the scheduling of the procurement processes, for their conformity with Bank Procurement Guidelines and the proposed implementation program anddisbursement schedule. (a) Prior Review: The following procurement action and documentation would be subject to Prior Review b y the Bank in accordance with the procedures set forth in paragraphs 2 and 3 o fAppendix 1to the Procurement Guidelines. For Contracts awarded through ICB: prior review o f all Bidding Documents, BidEvaluation Reports, Recommendations of Contract Award and draft Contracts will be conducted. For Contracts awarded through Commercial Practices: prior review of first two contracts will be conducted for TSKB and Halkbank. (b) Post Review: The procurement documents for all other contracts shall be subject to the Bank's post review in accordance with the procedures set forth in paragraph 5 of Appendix 1 to the Procurement Guidelines on a random basis, one in five contracts. Post review o f the procurement documents will normally be undertaken during the annual Bank supervision mission or as the Bank may request to review any particular contracts at any time. In such cases, TSKB and Halkbank shall provide the Bank with the relevant documentation for its review. The post review shall be conducted by the Bank's Procurement Specialist. Table 1.1: Thresholds for procurement methods and prior review (in Euro million equivalent) Expenditure Category Procurement Method ICB Commercial Practice 1. Sub-loans and leases Goods No threshold 12.5 (Apply when needed) Works 12.5 Prior Review All contracts Firsttwo contracts from Halkbank and first two contracts from TSKB 50 ANNEXJ: SAPECUARDPOLICYISSUES (Replaces Annex 10in the PAD) TURKEY:Access to Finance for SMEs Environmental Assessment OP/BP/GP4.01 Halkbank each prepared an Environmental Assessment Framework document acceptable to the World Bank that defines environmental assessment procedures to be used in sub-project evaluation. These Framework documents will be included as separate chapters in the banks' respective Operations Manuals. Both TSKB and Halkbank wish to include the possibility o f sub- projects that may, by Turkish environmental regulations, require an Environmental Impact Assessment Report. The procedures defined for each bank are consistent with both Government o f Turkey Environmental Assessment requirem d World Bank Environmental Assessment policies and procedures utilized in operations in Turkey. Both framework documents identify institutional responsibilities for each o f the following elements: Sub-proiect LoanPreparation 0 Arrangements for environmentalmanagement (mitigation and monitoring) \ v Y' 0 Preparingofenvironmental screening form A briefdescription of arrangements to be utilized is presented below: For sub-projects that do not require an EIA, , in cooperation with the sub-project sponsor, will prepare an environmental screening form to define the environmental issues associated with the sub-project and how they will be mitigated and monitored. The sub-borrower will also be responsible for ensuring that all 51 in implementing these procedures and, if appropriate, examine selected sub-projects at their discretion. For sub-projects that do require an EIA, the sub-project sponsor would be required to Halkbank branches: (a) the MoEF EIA approval statement Assessment Positive Decision), (b) the MoEF approved EIA together with an Addendum that would include any supplemental information required by World Bank for "Category A" EIA projects. The EIA and "World Bank Addendum" would be reviewed and approved by the World Bank, and disclosed in Turke language version) and the World Bank InfoShop (English language version). Halkbank branches would not be permitted to continue processing the sub-project until World Bank approval of the EIA and Addendum is offered and disclosure in Turkey and the World Bank InfoShop has been completed. The World Bank will have the authority to review and post review all sub-projects. The review o f evaluations will ensure that: screening was performed consistently and accurately, the work was o f satisfactory quality, recommendations specified b y the granting o f the approvals were followed, all documentation was properly filed and recorded, and the conditions o f approval b y the Provincial Directorate o f MoEF or any other Government institutions and post review were met. During the project implementation, World Bank missions will supervise the overall screening process and implementation o f environmental recommendations for the selected enterprise. The World Bank supervision team will also review, ad hoc, environmental documentation. 21 Sub-projectsinvolvingworking capital (purchaseofmaterials) andiorpurchase of equipmentimachineryare not subject to Turkish or World BankEIA requirements.The sub-projectsponsor must demonstrate that any hazardousmaterialsor risky equipment(as definedby Turkish regulations) purchasedhas all necessaryGovernmentdocumentationfor environment andworker health andsafety. 52 ANNEX K:PROJECTCOSTS TURKEY: Access to Financefor SMEs Project cost by Local Foreign Total Component and/or Front end fee la Unallocated -- -_ -- -- -- Premia for -- _ _ -- -- __ __ -- __ __ interest rate caps and collars Total Baseline Cost -- _ _ Price Contingencies -_ __ -- -- -- -- -- Total Project Costs -- -- Interest during -- -- -- -- -- -- -- construction Front-endFee -- -- -- -- -- -- -- TotalFinancing -- -- Required /a The borrowers will pay the fiont end fee from the loanproceeds. 53 ANNEXL:PROJECTPREPARATlONAND SUPERVISION TURKEY: Access to Financefor SMEs Original Plan Revised Plan, followingthe Actual amendments PCN review 04/20/2005 04/20/2005 InitialPID to PIC 04/25/2005 Initial ISDS to PIC 04/25/2005 Appraisal 03/05/2006 04/06/2006 Negotiations 04/25/2006 04/25/2006 BoardRVP approval 06/08/2006 Negotiations of the amendments 04101I2007 BoardRVP approval of the amendments Planned date of effectiveness for 7/30/2006 Halkbank Planned date of effectiveness for 11/1/2006 TSKB Planned date of mid-termreview 06/20/2008 Planned closing date 08/20/2010 Key institutions responsible for preparation o fthe project: Halkbank, TSKB, The Turkish Treasury (guarantor). Bank staff and consultants who worked on the project included: Name Title Unit Halil Agah Senior Rural Development Specialist, Environmental ECSSD Advisor Andrina Ambrose Seda Aroymak ECSPF DilekBarlas Furuzan Bilir Operations Officer, DisbursementSpecialist ECCU6 Steen Byskov Consultant, Financial Economist ECSPF Marie-Helene Bricknell Country Manager ECCU6 Rodrigo Chaves Lead Economist ECSPR Roy Goo1 Principal Financial Officer BCFAL Sahh Kalyoncu Procurement Specialist ECSPS Selma Karaman Program Assistant ECCU6 Hala Khattar Weenarin Lulitanonda BCFBD Zeynep Lalik Mete Consultant, Financial Management Specialist ECSPF Marialisa Motta Sr. Private Sector Development Specialist, Task Team ECSPF Leader Jaap van Opstal Lead Counselor LEGFI Gurhan Ozdora Sr. Operations Officer ECSPF SusanaSanchez Sr. Financial Economist LCSFF Carlo Segni Consultant, Financial Specialist ECSPF HannahThomas Program Assistant ECSPF Steven Weisbrod Consultant, Financial Advisor LCSFF 54