World Bank Documentdocuments.worldbank.org/curated/en/804081468338410035/pdf/mul… · TURKEY - AKDENIZ FOREST UTILIZATION PROJECT (LOAN 957-TU) April 21, 1986 Industry Department

Document o

The World BankFOR OFFICIAL USE ONLY

Report No. 6153

PROJECT COMPLETION REPORT

TURKEY - AKDENIZ FOREST UTILIZATION PROJECT

(LOAN 957-TU)

April 21, 1986

Industry Department

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bak,k authorization.

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CURRENCY EQUIVALENTS

Currency Unit - Turkish Lire

Appraisal Year US$1.00 - TL 14.0Peappraisal Year US$1.00 = TL 15.0Investment Period US$1.00 = TL 14.0-300Completion Year US$1.00 = TL 300Closing Date US$1.00 = TL 167

GOVERNMENT OF TURKEY FISCAL YEAR

March 1 - February 28 (through 1381)March I - December 31 (1982)January 1 - December 31 (from 1983)

WEIGHTS AND MEASURES

m3 - cubic meterm3/y - cubic meter per yeartpy - tons per year

ABBREVIATIONS

SEKA - Turkiye Seluloz ve Kagit Fabrikalari(State Economic Enterprise for Pulp and Paper)

MOF - Ministry of Forests (new Ministry of Agriculture,Forestry, and Rural Affairs - MAFRA)

FAO - Food and Agriculture Organization of the United NationsUNDP - United Nations Development ProgrammeEIB - European Investment BankUK - United KingdomFRG - Federal Republic of GermanyICB - International Competitive BiddingDYB - Devlet Yatirim Bankasi (State Investment Bank)

THE WORLD BANK FOR 0MCM1 use ONLYWashington, D.C. 20433

U.S.A.

OIke of Ditectr-CialOperatioms Evalkatn

April 21, 1986

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report: Turkey - Akdeniz ForestUtilization Project (Loan 957-TU)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report: Turkey - Akdeniz Forest Utilization Project (Loan957-TU)" prepared by the Industry Department. Under the modified systemfor project performance auditing, further avaluation of this project bythe Operations Evaluation Department has not been made.

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

FOR OFFICL4L USE ONLY


TURKEY - AKDENIZ FOREST UTILIZATION PRO.£ECT

(LOAN 957-TU)

TABLE OF CONTENTS

Page No.

PREFACE ....,i

BASIC DATA........ , , , i

HIGHLIGHTS ........ . .,...... iv

I. INTRODUCTION ..................... - .... ........ 1

II. PROJECT BACKGROUND 1

A. Project Preparations Appraisal and Loan Approval 1B. Project Description and Objectives 3

III. PROJECT IMPLEMENTATION AND MANAGEMENT ..... 4

A. Achievement of Project Objectives .... 4B. Project Scope Changes 5C. Project Management 5D. Employment and Training ............ 5E. Use and Performance of Consultants 6F. Procurement 6G. Implementation Schedule 6Ho Ecology 7I. Capital Costs, Financing and Loan Disbursement 8

IV. OPERATING PERFORMANCE .... ......... 10

A. Production Build-up 10B. Market Developments 11

V. FINANCIAL PERFORMANCE ........ 12

A* Basis of Projections ............... **...* . 12B. Value of Sales and Production Cost 12

VI. ECONOMIC PERFORMANCE ... ..... .... 14

VII. BANK ROLE AND LESSONS LEARNED ...... 14

This documnot has nstricted disributon and may be use y ripents only in the pefowmancof theif officl duties Its contents may not oterwsie be discosd without World lank authorztion.

Table of Contents (cont'd)Page No.

ANNEXES3-1 Procuremert of Bank-Financed Goods and Services by

Country of Origin ........ ........ ........................ 163-2 Implementation Schedule ............... ..................... 173-3 Capital Costs and Financing Required ... ................... 183-4 Estimated and Actual Disbursement Schedules ................ 193-5 Actual Inflatlon Indices ................................... 20

4-1 Historical Paper and Paperboard Consumption in Turkey ...... 21

5-1 Historical Development of Sackkraft and Linerboard Prices .. 225-2 Appraisal Estimate and Actual Manufaturing Costs ........... 235-3 Financial Projection .... ease ............................... 245-4 Cost and Benefit Streams for Financial Rate of Return ...... 30

6-1 Assumptions Used in Economic Analysis ...................... 326-2 Cost and Benefit Streams for Economic Rate of Return ....... 346-3 Cost and Benefit Streams for Economic Rate of Return

(With Sawmill Not Operating) ..... ......................... 357-1 Comments from the Borrower ............. ..................... 36


TURKEY - AKDRNIZ FOREST UTILIZATION PROJECT

(LOAN 957-TU)

PREFACE

Loan 957-TU for the Antalya Forest Utilization Project was signedon January 28, 1974, but because of a change in site and subsequentreappraisal, was resubmitted to the Board in March 1976 and only becameeffective on Msy 26, 1976. The loan was closed on June 30, 1982, withUS$30,000 rema,ning undisbursed.

The main objective of the loan was to finance the construction ofan integrated industrial complex comprising a sawmill, a pulp mill, and apapermill, including all the necessary ancillary installations andpollution abatement facilities. In addition a portion of the loan was tocover forestry improvements in order to ensure adequate wood supply to theindustrial part.

This Project Completica Report has been prepared by the IndustryDepartment using data prepared by the Borrower and reviewed by a Bankmission in May 1984. Preparation -if the report was delayed beyond closingdate of the loan until the project was completed (using EIB funds) and wentinto commercial operation about two years later. The Borrower's comments havebeen taken into account in finalizing the report and are reproduced in Annex 7-1.

This Project has not been audited by the Operations EvaluationDepartment.

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(LOAN 957-TU)

BASTC DATA

Project DataAs of 1/31/86

Out-Original Disbursed Cancelled Repaid standing

Loan amount (US$ million) 40.00 39.97 0.03 17.94 22.03

Cumulative Loan Disbursements

FY 1976 1977 1978 1979 1980 1981 1982

Planned at Reappraisal 10.0 30.0 40.0 - - - -Actual 15.6 28.5 32.3 35.5 39.5 39.9 39.97Z of Planned ^56 95 81 89 99 99.7 99.9

AppraisalEstimate a/ Actual

Start of Physical Implementation 2/76 3/76Original Appraisal Date - 6/73Board Approval - 1/15/74Re-appraisal - 11/75Board Re-approval - 3/76Loan Signing - 1/28/74Effectiveness - 5/26/76Loan Closing 6/30/82 6/30/82Date of Physical Completion 3/79 12/83Completion Time (months) 36 92Time Overrun (months) - 56Date of Start-up: Sawmill 6/78 9/81

Papermill 6/79 1/84Fixed Cost b/ (USs million) 234.2 282.5Cost Ovetrun bj (US$ million) - 48.3Total FVnancing Required (US$ million) 279.5 377.5Financial Rate of Return (%) 9.7 5.1Economic Rate of Return (M) 14.0 7.9

a/ Data are given for the reappraisal which was necessitated by a majorchange in the project site location.

b/ Not including working capital or interest during construction.

Industry DepartmentMay 1985

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(LOAN 957-TU)

Mission Data

No. of No. of ReportMission Month/Year Days a/ Staff Date

Appraisal 6/73 20 7 12/17/73Re-appraisal 11/75 15 7 3/19/76Supervision I 5/74 7 2 6/17/74Supervision II 11/76 3 3 12/3/76Supervision III 5/77 13 2 6/3/77Supervision IV 11/77 6 3 12/20/77Supervision V 5/78 13 2 5/16/78Supervision VI 1/79 14 2 2/28/79Supervision VII 9/79 14 2 10/5/79Supervision VIII 3/80 21 1 4/10/80Supervision IX 12/80 10 3 1/12/81Supervision X 7/81 16 2 8/31/81Supervision XI 9/82 17 2 10/15/82Completion 6/84 10 2 6/8/84

a/ In most cases, supervision misstons were combined with supervision ofthe Balikesir Newsprint Project (Loan 1258-TU), for which a ProjectCompletion Report was issued in June 1984.

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(LOAN 957-TU)

HIGHLIGHTS

1. This project was originally known as the Antalya Forest UtilizationProject and was sited in Antalya Province. Because of perceived threats tothe environment and tourism, the project was moved to a more industrializedarea in adjacent Icel Province. The change in site caused a two-year delayand required a reappraisal (para. 3.02). The relocated project suffered froma protracted implementation period due to general economic difficulties inTurkey during which the country experienced severe shortages of materials aswell as substantial shortages in local and foreign funds which caused delaysin shipment of equipment and slowing of construction work at the site.Repeated failures during the testing of the locally supplied recovery boilernecessitated major repairs and caused serious delays. From the start ofphysical implementation at the new site, the project took 92 months to com-plete and experienced a 35% cost overrun, a major portion of which was forinterest during construction (paras. 3.08, 3.14, 3.15).

2. The sawmill portion of the project was commissioned in 1981, andran briefly at design capacity. However, since that time, capacity utiliza-tion has been less than 3% due to the lack of market in a period of depressedconstruction activity in Turkey (para. 4.01). The pulp and paper mill wentinto commercial operation in January 1984 and experienced a very successfuloperation with capacity utilization reaching 80% of design in only 4 months,far in excess of the appraisal estimate which anticipated only 50% in thefirst full year, a level normally expected in industrialised countries.Paper quality has been good and the product is in high demand. M"-.ufacturingcosts are higher than appraisal estimates primarily due to increased costs ofchemicals, fuel, and electric power (para. 5.05).

3. The financial and economic rates of return are both lower thanestimated at appraisal, 5.1% compared with 7.9X for FRR, and 8.1% comparedwith 14.0% for ERR. The major reasons these rates are lower are the highercapital cost, the shortage of local and foreign funds, and the extended im-plementation period with the result that capital expenditures were made wellin advance of any benefits being received (para. 5.07).

4. The Bank was involved in this project since the early days of proj-ect identification and preparation and played an important role in assistingSEKA and the Government. Lessons learned from this project are (paras.7.01-7.05):

(a) The potential difficulties in coordinating activities between vari-ous public sector entities should not be underestimated, particu-larly if this involves change in well-established procedures.

(b) In spite of tne significant cost increase resulting from the sitechange, neither the Bank nor EIB loan was increased and theadditional funds were expected co be provided by the Government.However, the Government was unable to provide such funds in atimely manner with the result that the project was delayedfurther and cests again increased. Additional sources of foreignexchange had to be located late in the implementation period. Afirm and realistic financing plan would have helped significantlyto minimize delays and cost overrun.

(c) If local manufacture of technically complex equipment is to beencouraged, adequate technical assistance is essential tominimize any adverse impact on timely project implementation andoperation.

(d) If consultants are hired to assist with project management, it isimportant to establish for them clear lines of authority andresponsibility in order to avoid confusion during projectimplementation which might cause delays and other problems.



(LOAN 957-TU)

I. INTRODUCTION

1.01 Turkish forest resources are the fourth most extensive in Europe,but are low-yielding and underutilized. Since the early 1960s, withfinancial assistance from the United Nations Development Programme (UNDP)and technical assistance from the Food and Agriculture Organization of theUnited Nations (FAO,, Turkey has been planning and implementing a programof rationalization ard expansion aimed at improving the efficiency of itsforest industries and the utilization of this resource.

1.02 The first major investment project planned within this programwas the Antalya Forest Utilization Project which was appraised by the Bankin 1973 and for which a loan was approved in 1974. Because of localopposition to the Antalya site, the project did not proceed, but wasreformulated at a new site as tl. Akdeniz Forest Utilization Project, whichwas appraised in 1975, and is the subject of this Project CompletionReport.

1.03 Meanwhile, in 1974, a second project in the forest industriessubsector, the Balikesir Newsprint Project (Loan 1257-TU), was identifiedand prepared in 1974 and appraised in 1975. A third project, whichinvolves rehabilitation of three of the larger paper mills in the countryand a program of technical assistance, was approved in May 1985.

1.04 The Akdeniz Forest Utilization Project was thus the beginning ofa major and continuing program of support to Turkey's forest industries.This program is assisting the country to improve the effectiveness ofutilization of its valuable and renewable forest resources, to supply thegrowing domestic demand for industrial forest products.

II. PROJECT BACKGROUND

A. Project Preparation, Appraisal and Loan Approval

2.01 Bank involvement in Turkey's forest industries began in 1969 whenthe FAO/IBRD Cooperative Program first developed project proposals forutilizing the forest resources of southern Turkey. In 1972, the Bank wasappointed Executing Agency for a UNDP-financed study of the project andCanadian consultants were appointed to carry out the feasibilityinvestigations. A counterpart team was formed in Turkey, includingrepresentatives of the Ministry of Forestry and Seluloz ve KagitFabrikalari (SEKA) - the state-owned pulp and paper company. This joint

effort was the first time that integrated regional forestry development hadbeen attempted in Turkey.

2.02 Detailed feasibility studies for the Antalya project werecompleted early in 1973 and, on the basis of these studies, the project wasappraised in June 1973. A key issue raised during the appraisal was thequestion of the site and the possible conflict between industrialdevelopment and the tourist potential of the Antalya coast. It was notedthat the choice of site was made only after a careful review of a number ofalternative possibilities by an inter-ministerial committee chaired by theState Planning Organization. The site choice was made after considerationof nine alternatives, with a view to minimizing adverse effects on regionaltouristic and agricultural development, even though this had led to modestincreases in cost. Further, it was agreed that the mill would be equippedwith all of the proven facilities to reduce the discharge of odor andparticulates to a minimum level and with liquid treatment facilitiesappropriate to a seacoast location. Total project cost was estimated to beUS$170.0 million, with a foreign exchange cost of US$68 million, of whichthe Bank was asked to finance US$40 million and the European InvestmentBank (EIB) US$25.5 million, with the Government providing the balance ofUS$2.5 million. On this basis, a loan of US$40 million was approved by theBank's Executive Directors on December 17, 1973 (Loan 957-TU). The loanwas at an interest rate of 7.25% p.a. and for 16 years, including 5 yearsof grace. onlending to the project was to be through DYB at an interestrate of 9% p.a. and to be covered by a subsidiary loan agreement.

2.03 SEKA moved to acquire the selected site in Antalya Province, butmet with intense local opposition, primarily because of a perceivedconflict with tourism. A second site in Antalya Province was identifiedbut acquisition was again opposed. Province-wide opposition to the projectbecame widespread and the project attracted national attention.Ultimately, the Government of Turkey decided that the project should not bebuilt in Antalya at all and SEKA was instructed to find a suitable siteoutside the province.

2.04 The search then concent:ated in the adjacent province of Icel, tothe east of Antalya, where the narrGv coastal plain was already heavilyindustrialized and where there is litt'le t4urist potential. A suitablelocation was identified at Tasucu, near Silifke in Icel province, and inmid-1975, SEKA instructed the consulting engineers to update the originalfeasibility study based on the new site, taking into account changesrelated to the relocation of the project and increases in costs resultingfrom the two-year delay in project implementation. Because the originalcost estimates had been completed early in 1973, before the rapid priceescalation of the mid-1970s had commenced, these increases wereconsiderable. The name of the project was changed to Akdeniz (the Turkishname for the Mediterranean Sea). The new study was completed in September1975.

2.05 The revised project was appraised in November 1975 on the basisof the new site and the updated cost estimates. Meanwhile, SEKA had

proceeded with engineering designs and equipment procurement andexpenditures of about US$7.5 million had been made for which reimbursementwould be sought. Total project cost had increased to US$279.5 million,including US$89.4 million in foreign exchange. The project was resubmittedto the Bank's Executive Directors in March 1976. It was proposed that thegrace period of the Bank loan be extended by 1-1/2 years to help counterthe effects of the delay, but no other changes to the amount, terms orconditions of the Bank loan were proposed. The Executive Directorsapproved the revisions and the loan was declared effective on May 26, 1976.

B. ProJect Description and Objectives I/

2.06 The project's primary objective was to make more intensive use ofTurkey's forest resources to supply the growing need for kraft packagingpaper and board and for sawnwood. To ensure an integrated approach, theproject included a forestry component as well as an industrial componentconsisting of a sawmill as well as a pulp and paper mill. A studiescomponent was also included to finance further studies within tne sector.Specifically, the project comprised:

(a) A Forestry Component, consisting primarily of road-building andtransport equipment to help ensure the deliveries of the813,000 m3 of pulplogs and sawlogs required by the project;

(b) An Industrial Component, consisting of a sawmill with aproduction capacity of 170,000 m3/y of construction gradesawnwood, a pulp and paper mill with a capacity to produce either155,000 tpy of kraft linerboard or 90,000 tpy of sackkraft paper,or any combination of the two, and a technical assistancecomponent covering operation and training; and

(c) A Studies Component to finance studies for the future developmentof the forest industries subsector.

2.07 The Akdeniz Project was the first in Turkey to seek theadvantages of integrating a sawmill with a pulp and papermill on the samesite and under a single management. The objectives of such integrationare:

(a) larger diameter and better quality logs can be delivered to thesawmill to be converted to higher value products and the sawmillwaste wood such as trimmings and rejects, which are fullyacceptable for pulping, passed on to the pulpmill to supplementsmaller and lower quality logs from the forest;

1/ Descriptive and other material relates to the revised Project, theAkdeniz Forest Utilization Project. Reference is made to the originalAntalya project only when this is necessary for a clear understandingof particular aspects.

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(b) utilities such as steam and electric power can be economicallysupplied to the sawmill from the pulp mill's generatingfacilities and;

(c) economies can be achieved in administrative, management andmaintenance costs by sharing between the two production units.

III. PROJECT IMPLEMENTATION AND MANAGEMENT

A. Achievement of Project Objectives

3.01 The principal objective of the project, to reduce imports throughincreased production, has been achieved, with the pulp and paper millproducing approximately 70% of its design production In its first year ofoperation. This production, amounting to 68,000 tons, at the estimatedlong-term CIF price, represents a foreign exchange saving of approximatelyUS$35 million. The broader objectives of more efficient use of the mainraw material, wood, through integration of sawmill and pulpmill, plus thesignificant energy savings resulting from delivering wood with bark intactso that it can be removed in the mill and used as fuel, have not beenachieved. Failure to achieve this was also experienced, at leastinitially, in the Balikesir Project,2/ and is due to a continuation offorestry practices which provide for hand-barking in the forest,3/ and anapparent disregard for allocating logs for their best use. However, in1984, considerable progress has been achieved at the Balikesir mill whichnow receives about 80% of its wood with bark intact. It is expected thatsimilar progress can be made at the Akdeniz mill, and is to be followed upas part of the Pulp and Paper Rehabilitation Project (para 1.03). Thesawmill component of the project, although successfully started up andoperated at design capacity for short periods, has been largely unutilized,due to a severely depressed market in a period of low construction activityin Turkey. Prior to the implementation of the Balikesir Project, MOF wasthe sole operator of sawmills in the public sector and was reluctant to seetheir role diminished somewhat by the construction of a large modernsawmill at Balikesir, only to be repeated at Akdeniz.4/ The result was astrained relationship between SEKA and MOF, and SEKA has not always beenable to obtain wood in appropriate volumes and quality. Furthermore,although the project was originally conceived to optimize the utilizationof coniferous wood from the Antalya forest, because the site was changed, asignificant portion of the wood supply will come from other regions, so theoptimum use of Antalya wood has not been achieved. Finally, projectcompletion took almost eight years instead of three years.

2/ See PCR for Balikesir Newsprint Project (Loan 1258-TU) dated June1984.

3/ The MOF has indicated that this procedure is required to preventinsect infestations under the bark. However, with proper schedulingfor prompt delivery from forest to mill, this problen can becircumvented.

4/ Although construction of the Akdeniz sawmill came first, Balikesirstarted operating sooner.

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B. Project Scope Changes

3.02 The change in site location from Antalya to Tasucu represented asubstantial deviation from the original project and required theconstruction of a fleet of tugs and barges to move most of the Antalya woodby sea, plus suitable log storage and harbor facilities at Antalya andTasucu. However, since reappraisal of the project at the new locationthere have been no changes in project scope.

C. Project Management

3.03 The project was implemented by the Akdeniz Muessesesi, i.e., theAkdeniz Establishment, a legally established subsidiary of SEKA. It wasrecognized that the Akdeniz establishment was not sufficiently experiencedto undertake total project management so the Canadian consulting firm whichdid the original Antalya feasibility studies and the updated study afterthe site change, was retained by SEKA for detailed design and projectmanagement, including all aspects of procurement and suDervision oferection for both the plant machinery and the civil works. However, clearlines of responsibility were not established, and there was insufficientmanagement autonomy at the project level to deal adequately with majorfinancial and physical implementation problems that arose.

D. Employment and Training

3.04 Akdeniz currently employs 973 nationals, which is about 13%higher than the 857 total estimated at the time of appraisal but about 3%less than the 1,000 estimated in the Consultant's feasibility study.Management and some key operating staff were transferred from other SEKAmills. However, the larger portion of operating and maintenance personnelwas recruited locally from a worker population based almost entirely onagriculture. Unlike the Balikesir mill which experienced many changes intop management before it began operating, the Akdeniz project hasexperienced a stable management team, due in part to the desirable locationof the plant on the Mediterranean coast and a well established township.The current mill manager is only the third, the first two having beenpromoted to senior positions at SEKA headquarters. The Technical AssistantMill Manager has been in that position since the start of projectimplementation, and was part of SEKA's team during project preparation.

3.05 The consultants who did the project management were retained bySEKA for operational assistance and training. They conducted training atthe mill site through classroom instruction avi hands-on experience duringImplementation and start-up. Some key personnel were also trained in theconsultants' headquarters and in operating mills in North America. It issignificant that the majority of operating and maintenance personnel, evensome in key positions, were drawn from the local agricultural labor force,people who had no experience in industrial operations. The successfulstart-up of the mill (para 4.02) and its continued excellent operation,even after the departure of the expatriate operating team, attests to asuccessful training program.

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E. Use and Performance of Consultants

3.06 The main consultant for this project was involved in projectpreparation, implementation, training, and start-up. Prior to thisproject, SEKA had undertaken mostly turnkey projects and the engineeringapproach used for Akdeniz was new and unfamiliar to SEKA. Throughoutimplementation there were many delays, and at times SEKA expresseddissatisfaction with some of the consultant's employees whose performancecould only be judged after they had worked at the site. SEKA'sdissatisfaction at times with the consultant was due in part to unclearlines of responsibility for project management between SEKA and theconsultants and the lack of experience of the Akdeniz Establishment inmanagement of such a large project. However, overall, the consultants'performance is judged generally satisfactory by SEKA and the Bank, and inthe area of training, their contribution provided excellent results.

F. Procurement

3.07 The major equipment financed by the Bank was procured underinternational competitive bidding, and was distributed among 13 countriesof which the major ones were Finland (342), UK (27%), and the FRG (112).Details are in Annex 3-1. EIB-financed equipment was procured under EIBrules and limited to European supply. There was one major procurementdispute which contributed to implementation delay. This involved thechemical recovery boiler which was originally tendered through ICB. Thelowest evaluated bid was from a Japanese supplier, but subsequent to theevaluation SEKA decided the boiler should be supplied locally. Bankfinancing for the package was withdrawn 5/ and the Turkish Governmentagreed to make up the foreign exchange requirement for the package. Afurther complication arose when SEKA's consultants refused to accept thelocal supplier's technical capability to build this specialized boiler, andinsisted that suitable licensing and technical assistance arrangements beestablished with one of the few well known manufacturers of thisspecialized equipment. After several months' delay, such an arraigementwas finalized, but this did not prevent major problems arising later(para 3.10). Although it was difficult to establish beforehand that thelocal contractor could not perform satisfactori.y, on hindsight this wasa case where more forceful Bank intervention could have prevented a majorproblem.

G. Implementation Schedule

3.08 A comparison of the Implementation schedule for the revisedproject at the time of reappraisal with the actual experience Is given inAnnex 3-2. At reappraisal, start-up was expected in the fourth quarter of1978, but in fact production did not begin until the end of 1983, a delayof about 5 years.

3.09 Moving the project outside of Antalya Province to the final siteat Tasucu caused a major delay in project implementation from the original

5/ However, no misprocurement was established and no loan funds werecancelled.

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schedule. During this period SEKA continued certain project activities,including basic engineering, and all the major items of equipment wereordered using foreign exchange provided by the Government fordownpayments. However, before acquisition of the new site was finalizedand civil works commenced, almost two years had passed. Moreover, fromthis point in early 1976, almost 20% of the available financing had alreadybeen spent, and still project completion took five years longer thanvisualized at the time of reappraisal. Although the Bank and EIB loans hadbeen signed prior to the site change, the loans did not become effectiveuntil after reappraisal and amendment of the legal documents. The delay,and the site change, resulted in significant Increases in capital cost and,from the outset, the project suffered from severe shortages of both localand foreign funds. Also during this period, locally produced constructionmaterials were scarce in Turkey, and in some cases the project had toutilize foreign exchange to import materials which would normally have comefrom local sources. Progress payments were seriously delayed to suppliersof equipment which had been ordered prior to loan effectiveness, and inseveral cases contracts expired and equipment was sold to others. WhenSEKA reordered, the ma-aufacturing process had to start again, resulting infurther delays. Erection contractors also slowed their activitiss whenpayments were not made on time.

3.10 A major impediment to commissioning the mill was the chemicalrecovery boiler, for which ICB was suspended by SEKA and the contractawarded to a local supplier (para 3.07). Hydrostatic testing of thepressure parts failed at zero pressure and inspectors of the licensingcompany discovered that substandard material had been used and thatworkmanship was inferior. Repairs were made but in subsequent testingadditional points of failure were uncovered and again found to be caused bypoor workmanship and incorrect or inferior materials. Ultimately, suitablereplacements and repairs were successfully completed and the boiler wasfired with spent pulping liquor in December 1983, after a total erectiontime of five years, compared with a normal period of not more than twoyears. These problems confirm the original judgement of the consultantsagainst the local supplier. Also the Bank must share some of theresponsibility for the delay since it did not make a strong enough protestagainst buying this critical equipment from an inexperienced supplier.This unit is vital to the operation of the plant and the delay in itscompletion prevented the entire plant from operating.

H. Ecology

3.11 Kraft pulp mills, which employ a chemical pulping process,utilize large volumes of fresh water which subsequently must be dischargedas effluent. This liquid effluent contains dissolved organic and inorganicmaterials, suspended solids, and is darkly colored. It can be toxic toaquatic life and consume oxygen in the receiving water. Moreover, it cancause darkening in the receiving water and generate unsightly foam. In thecase of the Akdeniz mill, all of these potential problems have been fullyaddressed. Plant design provided for maximum recirculation of water,including the installation of a water-cooling tower, to minimize the volume

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of effluent. A primary effluent clarifier followed by settling basins wasprovided to eliminate suspended solids and to reduce partly biochemicaloxygen demand and toxicity, and foam-breaking towers were installed on theeffluent pipeline. Rather than discharging effluent to Tasucu Bay near themll site, a 10 km buried pipeline was installed to carry effluent anddischarge it through a submerged multi-port diffuser 600 meters offshorefrom a remote point of land where deep water and strong currents areavailable to dilute fully and disperse the treated effluent.

3.12 Kraft pulp mills may also potentially discharge particulatematter and odorous gases to the atmosphere. The Akdeniz mill has beenequipped with a high-efficiency electrostatic precipitator to removeparticles from flue gas and with a modern "low-odor" boiler. Miscellaneoussmall discharges of odorous gases are collected and destroyed by burning ina kiln.

3.13 All of these systems have worked as designed and no adverseeffects on the environment have been noted.

I. Capital Costs, Financing and Loan Disbursement

3.14 The actual total financing required for the project wasUS$377.5 million equivalent of which US$155.4 million (42%) was for directand indirect foreign exchange, compared with the appraisal estimate ofUS$279.5 million, of which US$89.4 million (32%) was foreign exchange. The35% increase in required financing, amounting to US$98 million equivalent,is mainly attributed to the long delays in project implementation,resulting in higher interest charges (US$54.5 million or 56%) and priceescalation on machinery, equipment, and civil works (US$43.5 million or44%). However, in spite of this, the installed cost of the plant was only21% higher than the appraisal estimate, which tuder the circumstances isreasonable. Capital cost estimates are given in Arnex 3-3 and aresummarized below:

Turkey - Capital Cost Estimate(US$ million) a!

Appraisal Estimate ActualFor- For-

Local eign Total Local eign Total

Installed Cost 152.2 82.0 234.2 177.9 104.6 282.5Working Capital 15.4 1.2 16.6 9.8 2.0 11.8Interest During Construction 22.5 6.2 28.7 34.4 48.8 83.2

Total Financing Required 190.1 89.4 279.5 222.1 155.4 377.5OME= === m= ==

a/ Local costs are converted at the official rates of exchange in forceeach year during disbursements. The figures are subject to some errorsince the exact timing of disbursements is not precisely known.

-9-

3.15 The major source of cost overrun is interest accrued on theforeign loans during the construction period, which increased almosteig1.t-fold over the appraisal estimate. Most of the foreign loans werecommitted early in the implementation period when major foreign equipmentitems were purchased and have been accumulating interest charges over muchof the extended implementation period. Moreover, the project wasimplemented during a period of high domestic and international inflationwhich affected costs of a wide variety of miscellaneous materials such aspipe and wiring which were purchased throughout the construction period.Also the appraisal estimates were based on prices of equipment that in somecases was subsequently sold to others (para 3.09) and had to be reorderedat higher cost.

3.16 In order to meet the total project costs EIB agreed to a secondloan which became effective in 1979, and DYB provided foreign 4unds from anIBRD line of credit (Loan No. 1379-TU). The Government provided foreignexchange from its own sources in addition to all of the local currencyrequirements. However, all of these were slow in coming and thiscontributed to project delay. The financing plan is shown below:

Turkey - Akdeniz Financing Plan(US$ million)

Appraisal ActualLocal Foreign Total Local Foreign Total

Covernment/SEKA/DYB 190.1 33.3 223.4 222.1 57.6 279.7EIB - 21.0 21.0 - 42.7 42.7IBRD - 35.1 35.1 - 35.1 35.1DYB (IBRD Line of Credit) - - - - 20.0 20.0

Total 190.1 89.4 279.5 222.1 155.4 377.5- - --- _

3.17 After reappraisal the closing date of the loan was set atJune 30, 1982, and this date was maintained. All but US$30,000 of the loanwas disbursed. Annex 3-4 provides a comparison of appraisal and actualdisbursement profiles, and a summary follows:

Turkey - Akdeniz Project Cumulative Disbursements(US$ million)

Appraisal Estimate Actual

1976 10.0 15.601977 30.0 28.501978 40.0 32.301979 - 35.501980 - 39.501981 - 39.901982 - 39.97

- 10 -

3.18 The actual allocation of the loan proceedu compared with theappraisal estimates was as follows:

Turkey - Akdeniz Project Loan Allocation(US$ million)

Category Appraisal Actual

I. Equipment & Vehicles for Forestry Part 3.3 3.21II. Plant & Equipment for Industrial Part 15.9 20.21

III. Consulting Services 8.8 15.29IV. Interest & Other Charges 4.8 1.26V. Unallocated 7.2 _

Total 40.0 39.97

IV. OPERATINC PERFORMANCE

A. Production Build-up

4.01 The sawmill component of this integrated project was commissionedin November 1981, about two years earlier than the rest of the mill. Aftera successful commissioning and performance trials which demonstrated thesawmill's capability of operating at design capacity, the mill has beenoperated only intermittently, producing a mere 5,545 m3 of sawnwood fromstart-up until March 1983, and nothing since then. This represented, up toMarch 1983, less than 3% utilization of design capacity. This dismalperformance is no reflection on the physical plant or SEKA's ability tooperate it, but is due to the lack of market for construction grade lumberduring a period of economic depression in Turkey. What little demand thereis for sawnwood can easily be met by the existing public and private sectormills. Furthermore, SEKA has been unsuccessful in exporting sawnwood,partly because of a general and serious worldwide surplus of sawmillingcapacity and partly because of SEKA's lack of marketing experience. Thepossibility of leasing these facilities is under serious consideration.

4.02 The pulp and paper mill production record on the other hand hasbeen remarkable. In the fourth month of operation, April 1984, the millproduced at a rate of 80% the plant's design capacity. For the whole ofthe first year, production was at about 70% of design capacity, comparedwith an estimated 50% in the appraisal report. The following table showsthe actual production by months and the percentage of design capacityreached.

- 11 -

Turkey - Akdeniz Producticn Performance

ActualActual as % of

1984 (tons/month) Capacity a/

January 1,633 22February 4,690 61March 5,463 61April 7,147 80May 5,436 60June 7,052 81July 5,272 59August 7,012 84September 7,024 77October 5,818 78November 4,007 53December 7,666 101

a/ Capacity depends on grade mix and is rated at 90,000 tpyon sackkraft and 155,000 tpy on linerboard. The figuresshown in this table are calculated on a weighted averagecapacity depending on actual grade mix.

4.03 Quality of the Akdeniz sackkraft has been good since start-up andcustomers are eager to buy from Akdeniz rather than SEKA's other sackkraftmill at Caycuma. This is an unexpected situation, as the main determinantof quality is the wood raw material which, according to laboratory tests,is inferior at Akdeniz. The fact that the quality ranking is the reverseof what is expected demonstrates that excellent process control isbeing achieved at Akdeniz.

B. Market Developments

4.04 At the time of reappraisal, it was estimated that the existingdomestic demand for sackkraft and linerboard would grow at an average rateof about 8% per year up to 1990, and for the actual start-up year, 1984,the domestic demand would be 115,000 tpy for sackkraft and 56,000 tpy forlinerboard. The actual demands were slightly below this level forsackkraft at approximately 95,000 tpy and higher for linerboard at64,000 tpy.

4.05 On the basis of historical consumption of paper and paperboard(Annex 4-1), elasticity of demand against per capita GNP is calculated at1.2. At an estimated GNP growth of 5.0%/yr, and population growth of2%/yr, it is projected that domestic demand for sackkraft and linerboarddemand will be as follows:

- 12 -

Turkey - Akdeniz Forest Utilization ProjectProjected Domestic Demand for Sackkraft and Linerboard

(tons)

Year Sackkraft Linerboard

1984 (actual) 95,000 64,0001985 102,000 69,0001986 111,000 75,0001987 120,000 81,0001988 129,000 87,0001989 140,000 94,0001990 151,000 102,000

The above figures are within 15% of the estimates made at the time ofappraisal. When the Akdeniz mill reaches its full capacity in 1987,production is projected to be 55,000 tons of sackkraft and 75,000 tons oflinerboard. As Akdeniz will be the sole domestic producer of linerboa-id,there will be no difficult) selling all its production. In the case ofsackkraft, SEKA's Caycuma mill produces about 55,000 tpy, so in 1987, whenthe domestic demand is estimated at 120,000 tons, the combined tonnage ofCaycuma and Akdeniz, 110,000 tons, will still be below domesticrequirements. In sunmary, the market for Akdeniz production of sackkraftand linerboard appears to be secure. Akdeniz has been designed to produceeither grade and its production program can be altered as necessary toserve the market most efficiently and to make fullest use of the installedfacilities.

V. FINANCIAL PERFORMANCE

A. Basis of Projections

5.01 The assumptions used for the financial analysis of the projectare discussed in the following paragraphs. The basic projections have beenprepared at first quarter 1984 price levels and converted to US dollars atan exchange rate of TL 325 per US$1.00.

B. Value of Sales and Production Cost

5.02 Volumes. The mill started operations in January 1984. Thefollowing table shows actual production and the forecast for annualproduction buildup till the mill reaches its designed capacity in 1988.

- 13 -

Turkey - Akdeniz Forest Utilization ProjectCurrent and Projected Production

1984 1985 1986 1987 1988

Sackkraft Paper ('000 tons) 57 40 50 55 55Linerboard ('000 tons) 12 70 70 75 75Sawnwood ('000 m3) - - 50 100 170

5.03 Prices. The historical development of domestic sackkraft andlinerboard prices is shown in Annex 5-1. The ex-factory list price, infirst quarter 1984, for sackkraft paper is TL 182,000 (US$560) per ton andfor linerboard is TL 173,000 (US$532) per ton, representing a 3% real priceincrease for sackkraft paper and about 14% real price dearease forlinerboard compared to prices at the time of appraisal. These absolute andrelative price changes for sackkraft paper and linerboard are in the rightdirections since historically SEKA's prices for sackkraft paper have beenlower than those for linerboard, while the international price of sackkraftis generally 5-15% higher than that of linerboard because of higher cost ofproduction.

5.04 The ex-factory price for sawnwood in the first quarter of 1984 isTL 35,750 (US$110) per m3 which is about 10% higher, in real terms, than atthe time of appraisal.

5.05 The estimated average production cost for the project productmix, excluding depreciation and financial charges, in 1984 terms is aboutTL 130,000 per ton as against TL 113,500 per ton at the time of appraisal(Annex 5-2), representing a 15% real increase in manufacturing costs. Thecost per ton for pulplogs decreased by about 10% while the cost of fuel oiland chemicals has increased by 139% and 196%, respectively. The increasein fuel oil and chemical costs is mainly due to higher real prices andpartly to higher specific consumption than estimated at the time ofappraisal.

5.06 Projected financial results for two major cases have beenprepared and are shown in Annex 5-3. These projections are for the papermill with sawmill operating and the case of sawmill not operating. For thecase of sawmill operating, the project is expected to show its first profitin 1986, the third year of operation. For the case of sawmill notoperating, the profitability will be delayed to 1988, the fifth year ofplant operation.

5.07 The internal financial rate of return (FRR) before taxes for thepaper mill with the sawmill operating is 5.1% (Annex 5-4) compared to 9.7%estimated at the time of appraisal. The lower rate of return is mainly dueto 4-1/2 years longer implementation period (para 3.08); higher capitalcost (para 3.14); and higher operating cost (para 5.05). The sensitivityanalysis indicates that with the sawmill not operating the FRR will bereduced from 5.1% to 2.9% (Annex 5-4). The sensitivity analysis indicatesthat 10% reduction in operating cost or 10% increase in ex-factory prices

- 14 -

would enhance the FRR from 5.1% to 6.2% and 6.8%, respectively. If thedelay in start-up caused by the recovery boiler and other problems couldhave been avoided and the production started two years sooner, the FRRwould have been 6.7%. (Furthermore, about US$25 million of interest duringconstructio. and US$30 million of price escalation could have beenavoided.)

VI. ECONOMIC PERFORMANCE

6.01 The assumptions concerning adjustments made to financial costsand beneftts to obtain economic values are detailed in Annex 6-1.Tradeable items are valued at their CIF border price, expressed in USdollars. For calculating economic benefits, it is assumed that priceswould remain constant in real terms during the life of the project. Thefinancial cost of electricity has been multiplied by a factor of 1.6 toapproximate its economic cost. The economic cost of pulpwood has beenestimated on the basis of its opportunity cost. Labor cost has been valuedat a shadow wage rate of 60% of its financial costs.

6*02 Economic cost and benefit streams and the economic rate of return(ERR) is shown in Annex 6-2. The ERR for the paper mill with sawmilloperating is 7.9% compared to 14.0% estimated at the time of appraisal.The lower ERR is mainly due to the completion delay ant higher operatingcosts than forecast at appraisal. The sensitivity analysis indicates thatwith the sawmill not operating the ERR will be reduced from 7.9% to 5.6%(Annex 6-3). If start-up could have been achieved two years earlier theERR would have improved to 10%.

VII. BANK ROLE AND LESSONS LEARNED

7.01 A fundamental objective of the Akdeniz Project which was notfully realized was to introduce to Turkey the concept of an integratedforest products industry which would allow optimum utilization of theforest. One major reason this objective was not achieved is that itrequires a major change in procedures in forest harvesting and marketing ofthe logs. Furthermore, introduction of sawmilling by SEKA reduced the roleof the Ministry of Forests in that manufacturing subsector, and tended toworsen the working relationship between Ministry of Forests and SEKA. Thelesson to be learned is that traditional practices are not easily changedeven though such change may make eminent technical and economic sense. TheBank should attempt such changes more slowly and only after a commitmenthas been received from all parties to try to make i': work.

7.02 As vith the Balikesir Newsprint Project (para 1.03), and manyother projects in various parts of the world, the Bank was too optimisticon implementation and disbursement schedule. Most of the delay was due toa general deterioration of Turkey's economy during the period, lack of

- 15 -

local and foreign funds, and slowdown by suppliers and contractors due tononpayment. Some of the delay could have been avoided by providing formore conservative contingencies in the cost estlmates and a correspondinglymore realistic financing plan. With such problems, it is difficult toassess the effectiveness of the project management of SEKA and the AkdenizEstabllshment, but it appears to have been weak, The Bank's appraisalshould have concentrated more on developing a more effective projectmanagement system.

7.03 A Bank participation in this project of US$40 million was agreedwhen the original Antalya project was appraised. The change in site andthe subsequent reappraisal (paras 2.02-2.05) took two years and during thisperiod the estimated foreign exchange cost of the project increased fromUS$68.0 million to US$89.4 million, but neither the Bank loan nor the EIBloan was increased and It was expected that the additional foreign exchangeof US$21.4 million would be provided by the Government. In fact theGovernment was unable to provide such funds in a timely manner andconsequently the project was delayed and costs increased even more to atotal foreign exchange requirement of US$155.4 million. These funds wereeventually provided through additicnal Governmment allocation, anadditional EIB loan, and from a portion of the IBRD line of credit to DYB.To rely solely on the Government to provide the additional foreign exchangein a timely manner was clearly unwise and the Bank should have adopted amore realistic approach and insisted on a more firm financing plan.

7.04 One major item of equipment, the chemical recovery boiler, waschiefly responsible for about two years' delay in project completion. Thisstemmed from the fact that the equipment was produced locally for the firsttime. While Bank projects should certainly encourage local manufacturingof equipment where appropriate, in a case such as this, involving fairlysophisticated technology, it is important to ensure adequate technicalassistance is provided, including a strong collaboration agreement withless local content the first time it is attempted and a more comprehensiveback-up supply system from the foreign licensor. In the case of a majorshift in procurement source mid-way through a project, the Bank should beprepared to take speedy corrective action to prevent such mistakes beforethey happen.

7.05 The Akdeniz Establishment was primarily responsible forimplementation of the project, but because of their lack of experience insuch a major assignment, consultants were hired to assist them with projectmanagement. The SEKA personnel, being unfamiliar with the role of aconsulting engineer, were unsuccessful in fully delegating authority to thedegree necessary to make such an arrangement work. Furthermore, this wasthe consultants' first major engineering assignment in Turkey and they werenot fully aware of Turkish systems. As a result it was not always clearwhat the line relationships were (among the owner, the consultant, and thecontractors) and situations arose where SEKA held the consultantsaccountable without giving them sufficient authority. The Bank should haverecognized this potential problem and insisted that the relationships beclearly deflned and agreed upon. However, as work progressed, mutualcooperation was improved.

- lb - ANNEX 3-1



(LOAN 957-TU)

Procurement of Bank-Financed Goods and Services by Country of Origin

Amount(US$ million equivalent) Percentage

Austria 0.24 0.6

Belgium 0.46 1.2

Canada 3.70 9.3

Finland 13.53 33.8

France 1.76 4.4

Federal Republic of Germany 4.46 11.2

Japan 0.67 1.7

Sweden 2.21 5.5

United Kingdom 10.75 26.8

United States 2.14 5.4

Others 0.05 0.1

Total 39.97 100.0

Industry DepartmentApril 1985

- 17 - A 3-2

- AR=Z Tr ULNITa PKV=

(LOAN 957-'U)

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

Ffralie Financig - _ oc_

Site Preparation &Civil Works _ x DOO C

quiopnt Proart -e - l

jor Wpm _

1,ed3s. I ICBA ntErectimn

cousicig & Start-p

- Pup & Paper Mil 1 M

- -xx=m Actual

Induatry Depeuntmay 1985

- 18 - ANNEX 3-3



(LOAN 957-TU)

Capital Coats and Financing Required

(US$ million)

Local Foreign TotalAppr. Actual Appr. Actual Appr. Actual

Civil Works 56.2 61.1 - - 56.2 61.1Machinery & Equipment 79.3 85.1 63.5 78.3 142.8 163.4Engineering/Training &Operational Assistance 1.5 2.1 17.2 25.4 18.7 27.5

Owner's Overhead/Pre-operating Expenses 7.9 16.8 1.3 0.9 9.2 17.7

Townsite 7.3 12.8 - - 7.3 12.8

Subtotal 152.2 177.9 82.0 104.6 234.2 282.5

Working Capital 15.4 9.8 1.2 2.0 16.6a/ 11.8Interest During Construction 22.5 34.4 6.2 48.8 28.7 83.2

Total Financing Required 190.1 222.1 89.4 155.4 279.5 377.5

a/ Working capital requirement at full capacity.


- 19 - ANNEX 3-4



(LOAN 957-TU)

Estimated and Actual Disbursement Schedules(US$ million)

Fiscal Year Reappraisal Actualand Quarter Quarter Cumulative Quarter Cumulative

FY76 IIIIIIIV 10.0 15.6

FY77 I 2.5 18.1II 6.4 24.5III 1.1 25.6IV 30.0 2.9 28.5

FY78 I 1.5 30.0II 0.7 30.7III 0.8 31.5IV 40.0 0.8 32.3

FY79 I 1.3 33.6II 0.9 34.5III 0.4 34.9IV 0.6 35.5

FY80 I 0.6 36.1II 0.8 36.9III 2.2 39.1IV 0.4 39.5

FY81 I 0.2 39.7II 0.1 39.8III 0.0 39.8IV 0.1 39.9

FY82 III 0.07 39.97

Closing Date 6/30/82 6/30/82


- 20 - ANNEX 3-5



(LOAN 957-TU)

Actual Inflation Indices

(NUV) Index Domestic PriceInflation Inflation Index

Year (1983-100) a/ (1983-100) b/

1973 49.3 4.3

1974 61.8 5.4

1975 70.2 6.5

1976 71.5 7.6

1977 77.3 9.6

1978 90.9 15.6

1979 101.1 25.4

1980 19.5 49.4

1981 104.9 68.0

1982 103.1 83.6

1983 10C.O 100.0

1984 103.5

a/ Manufacturing Unit Value Index. Unit value index of manufacturedexports (SIT 5-8) from developed to developing countries on CIF basis(The UN Monthly Bulletin of Statistics).

b/ The World Bank: World Tables - 1983.


- 21 - ANNEX 4-1



(LOAN 957-TU)

Historical Paper and Paperboard Consumption in Turkey

ApparentCon-

Apparent aumptionPro- Con- Popu- per

Year duction Imports Exports sumption lation Capita…-…----- ('000 tons) -- ('000) (kg)

1962 86.0 37.1 - 123.1 28,933 4.251963 98.7 48.6 - 147.3 29,655 4.961964 106.3 26.8 - 133.1 30,394 4.381965 106.0 28.7 - 134.7 31,391 4.291966 117.1 48.6 - 165.7 31,934 5.191967 121.4 102.0 - 223.4 32,750 6.821968 129.3 112.1 - 241.4 33,585 7.191969 132.0 123.9 - 255.9 34,442 7.431970 151.1 120.3 - 271.4 35,604 7.621971 227.0 123.6 - 350.6 36,221 9.681972 313.4 40.6 - 354.0 37,132 9.531973 335.9 27.8 11.8 351.9 38,072 9.241974 363.3 23.3 10.3 376.3 39,036 9.641975 371.6 32.4 1.3 402.7 40,078 10.051976 387.1 60.1 1.5 445.7 40,915 10.891977 458.6 82.3 0.2 540.7 41,768 12.941978 426.9 63.8 0.2 490.5 42,640 11.501979 442.2 69.4 - 511.6 43,530 11.751980 455.5 101.6 2.6 554.5 44,431 12.481981 496.3 68.8 12.6 552.5 45,446 12.161982 537.3 73.1 24.2 586.2 46,459 12.62


-22 - ANNEX 5-1


TURKEY - AI)ENIZ FOREST UTILIZATION PROJECT

(LOAN 957-TU)

Historical Development of Sackkraft and Linerboard Prices(In current terms, ex-factory, Including tax)

Sackkraft LinerboardYear TL/ton V8$/ton o S/ton

1975 (March) 7,600 507 8,500 567

1983 (January) 120,450 617 109,500 562

1983 (April) 120,450 568 109,50 516

1983 (July) 127,000 568 121,000 540

1984 (January) 139,700 466 133,100 444

1984 (April) 182,000 560 173,000 532

1984 (June) 191,000 560 181,000 532

1984 (October) 229,600 560 225,600 550


- 23 - ANNEX 5-2



(LOAN 9S7-TU)

Appraisal Estimate and Actual Mpnufacturing Costs(At full capacity, in 1984 prices)

Kraft Sack Paper - 55,000 tons per yearLinerboard - 75,000 tons per year

AppraisalManufacturing Costs Estimate Actual

(TL million)Variable:Wood Cost 8,681 7,767Chemical 680 2,015Fuel Oil 925 2,210Electric Power 415 580Other Material 1,198 1,258

Total Variable 11,899 13,830

Fixed 2,852 3,087

Total Cost of Goods Sold (excl.Depreciation & Financial Charges) 14,751 16,917

Average Production Cost per Ton (excl.Depreciation & Financlal Charges) 113,469 130,131


ANNEX 5-3- 24 - Page I



(LOAN 957-TU)

Projected Production Volume and Income

1984 1985 1986 1987 1988Volume

Kraft Sack Paper (1000 tons) 57 40 50 55 55Linerboard (1000 tons) 12 70 70 75 75

Total Paper 69 110 120 130 130

Sawnwood (1000 m3) - - 50 100 170

Unit Prices (in constant 1984 terms)Kraft Sack (per ton) 560 560 560 560 560Linerboard (per ton) 530 530 530 530 530Sawnwood (per m3) 110 110 110 110 110

Sales Revenues (US$ million 1984 prices)Kraft Sack Paper 31.9 22.4 28.0 30.8 30.8Linerboard 6.4 37.1 37.1 39.8 39.8Sawnwood - - 5.5 11.0 18.7

Subtotal 38.3 59.5 70.6 81.6 89.3

Other Sales 1.9 3.0 3.3 3.5 3.5

Total 40.2 62.5 73.9 85.1 92.8

DeductionsSales Tax 4.0 6.3 7.3 8.5 9.;

Net Revenues 36.2 56.2 66.5 76.6 P3.5


ANNEX 5-3- 25 - Page 2



(LOAN 957-TU)

Projected Production Costs(in Constant 1984 Prices)

1984 1985 1986 1987 1988Variable Unit Production Costs (US$/ton):

A. Paper (US$ per ton)Pulpwood 115.0 115.0 115.0 115.0 115.0Chemical 47.5 47.5 47.5 47.5 47.5Fuel Ol 70.8 70.8 70.8 70.8 70.8Electric Power 14.9 14.9 14.9 14.9 14.9Other Materials 33.6 33.6 33.6 33.6 33.6

Total 281.8 281.8 281.8 281.8 281.8

B. Sawnwood (US$/m3)Sawlogs - - 80.0 80.0 80.0Utilities ---- included in papermill - -

Total - - 80.0 80.0 80.0

Annual Fixed Costs (US$ million)Fixed Utility and Other Costs 4.0 4.0 4.0 4.0 4.0Wages and Salaries 5.5 5.5 5*5 5.5 5.5Depreciation 16.1 16.1 16.1 16.1 16.1

Total 25.6 25.6 25.6 25.6 25.6

Total Annual Production Costs (US$ million)Variable:- Pulpwood 8.1 12.7 13.8 14.9 14.9- Pulpwood Credit from Sawmill Waste - - (1.4) (2.7) (4.6)- Sawlogs - - 4.0 8.0 13.6- Chemical 3.3 5.2 5.7 6.2 6.2- Fuel Oil 5.0 7.8 8.5 9.2 9.2- Fuel Oil Reduction from Bark - (0.9) (1.7) (2.4) (2.4)- Electric Power 1.0 1.7 1.9 2.1 2.1- Other Materials 2.4 3.7 4.0 4.3 4.3

Total Variable 19.8Total Annual Production Costs (US$ million)Variable:- Pulpwood 8.1 12.7 13.8 14.9 14.9Total Cost of Goods Sold 45.4 55.8 60.4 65.2 68.9


ANNEX 5-3-26 - Page 3



(LOAN 957-TU)

Projected Production Volume and Income(with Sawmill not operating)

1984 1985 1986 1987 1988VolumeKraft Sack Paper (1000 tons) 57 40 50 55 55Linerboard (1000 tons) 12 70 70 75 75

Total Paper 69 110 120 130 130

Unit Prices (in constant 1984 terms)Kraft Sack (per ton) 560 560 560 560 560Linerboard (per ton) 530 530 530 530 530

Sales Revenues (US$ million 1984 prices)Kraft Sack Paper 31.9 22.4 28.0 30.8 30.8Linerboard 6.3 37.1 37.1 39.8 39.8

Subtotal 38.2 59.5 65.1 70.6 70.6

Other Sales 1.9 3.0 3.3 3.5 3.5

Total 40.1 62.5 68.4 74.1 74.1

DeductionsSales Tax 4.0 6.2 6.8 7.4 7.4

Net Revenues 36.1 56.3 61.6 66.7 66.7





(LOAN 957-TU)

Projected Production Costs(with Sawmill not Operating)(In Constant 1984 Prices)

1984 1985 1986 1987 1988Variable Unit Production Costs (US$/ton):Paper (US$ per ton)Pulpwood 115.0 115.0 115.0 115.0 115.0Chemical 47.5 47.5 47.5 47.5 47.5Fuel Oil 70.8 70.8 70.8 70.8 70.8Electric Power 14.9 14.9 14.9 14.9 14.9Other Materials 33.6 33.6 33.6 33.6 33.6

Total 281.8 281.8 281.8 281.8 281.8

Annual Fixed Costs (US$ million)Fixed Utility and Other Costs 4.0 4.0 4.0 4.0 4.0Wages and Salaries 5.5 5.5 5.5 5.5 5.5Depreciation 16.1 16.1 16.1 16.1 16.1

Total 25.6 25.6 25.6 25.6 25.6

Total Annual Production Costs (US$ million)Variable:- Pulpwood 8.1 12.7 13.8 14.9 14.9- Chemical 3.3 5.2 5.7 6.2 6.2- Fuel Oil 5.0 7.8 8.5 9.2 9.2- Electric Power 1.0 1.6 1.8 1.9 1.9- Other Materials 2.4 3.7 4.0 4.3 4.3

Total Variable 19.8 31.0 33.8 36.5 36.5

- Fixed 25.6 25.6 25.6 25.6 25.6

Total Cost of Goods Sold 45.4 56.6 59.4 62.1 62.1





(LOAN 957-TU)

Financial Projection a/(in US$ million)

1984 1985 1986 1987 1988

Gross Revenues 40.2 62.5 73.9 85.1 92.8Sales Tax 4.0 6.3 7.3 8.5 9.3

Net Sales 36.2 56.2 66.6 76.6 83.5

Cost of Goods Sold 45.4 55.8 60.4 65.2 68.9

Operating Income (9.2) 0.4 6.2 11.4 14.6

Financial Charges b/ 6.0 5.6 5.2 4.8 4.4

Profit/(Loss) (15.2) (6.0) 1.0 6.6 10.2

ar Estimates in constant 1984 terms.b/ Assuming debt consolidation and conversion to equity in the same

proportion as adopted in SEKA as a whole.

Industry DepartmentMay 19d5




(LOAN 957-TU)

Financial Projection a/(With Sawmill Not Operating)

(in US$ million)

1984 1985 1986 1987 1988

Gross Revenues 40.1 62.5 68.4 74.1 74.1'es Tax 4.0 6.2 6.8 7.4 7.4

Net Sales 36.1 56.3 61.6 66.7 66.7

Cost of Goods Sold 45.4 56.6 59.4 62.1 62.1

Operating Income (9.3) (0.3) 2.2 4.6 4.6

Financial Charges b/ 6.0 5.6 5.2 4.8 4.4

Profit/(Loss) (15.3) (5.9) (3.0) (0.2) 0.2

a/ Estimates in constant 1984 terms.b/ Assuming debt consolidation and conversion to equity in the same

proportion as adopted in SEKA as a whole.




TURXEY - AKDENIZ FOREST UTILIZATION PROJECT

(LOAN 957-TU)

Cost and Benefit Streams for Financial Rate of Return(in millions of constant 1984 US dollars)

Capital Operating Net NetYear Costs Costs Revenues Benefit

1973 3.1 0.0 0.0 -3.11974 30.6 0.0 0.0 -30.61975 20.8 0.0 0.0 -20.81976 25.1 0.0 0.0 -25.11977 23.9 0.0 0.0 -23.91978 23.1 0.0 0.0 -23.11979 47.0 0.0 0.0 -47.01980 34.7 0.0 0.0 -34.71981 41.6 0.0 OeO -41.61982 38.8 0.0 0.0 -38.81983 42.9 0.0 0.0 -42.91984 0.0 29.3 40.2 10.91985 0.0 39.7 62.5 22.81986 0.0 44.3 73.9 29.61987 0.0 49.1 85.1 36.01988 0.0 52.8 92.8 40.01989 0.0 52.8 92.8 40.01990 0.0 52.8 92.8 40.01991 0.0 52.8 92.8 40.01992 0.0 52.8 92.8 40.01993 0.0 52.8 92.8 40.01994 0.0 52.8 92.8 40.01995 0.0 52.8 92.8 40.01996 0.0 52.8 92.8 40.01997 0.0 52.8 92.8 40.01998 0.0 52.8 92.8 40.01999 0.0 52.8 92.8 40.02000 -40.2 52.8 92.8 80.1

Notes: (1) Capital cost etccludes interest during constructioa.(2) Residual value is 10% of plant cost, plus working capital.(3) operating costs assume that sawmill reaches full production in

1987.

Financial rate of return - 5.1%.(Before Taxes)





(LOAN 957-TU)

Cost and Benefit Streams for Financial Rate of Return(with Sawmill not Operating)

(in millions of constant 1984 US dollars)


1973 3.1 0.0 0.0 -3.11974 30.6 0.0 0.0 -30.61975 20.8 0.0 0.0 -20.81976 25.1 0.0 0.0 -25.11977 23.9 0.0 0.0 -23.91978 23.1 0.0 0.0 -23.11979 47.0 0.0 0.0 -47.01980 34.7 0.0 0.0 -34.71981 41.6 0.0 0.0 -41.61982 38.8 0.0 0.0 -38.81983 42.9 0.0 0.0 -42.91984 0.0 29.3 40.1 10.81985 0.0 40.5 62.5 22.01986 0.0 43.3 68.4 25.11987 0.0 46.0 74.1 28.11988 0.0 46.0 74.1 28.11989 0.0 46.0 74.1 28.11990 0.0 46.0 74.1 28.11991 0.0 46.0 74.1 28.11992 0.0 46.0 74.1 28.11993 0.0 46.0 74.1 28.11994 0.0 46.0 74.1 28.11995 0.0 46.0 74.1 28.11996 0.0 46.0 74.1 28.11997 0.0 46.0 74.1 28.11998 0.0 46.0 74.1 28.11999 0.0 46.0 74.1 28.12000 -40.2 46.0 74.1 68.2

Notes: (1) Capital cost excludes interest during construction.(2) Residual value is 10% of plant cost, plus working capital.

Financial rate of return - 2.9%(Before Taxes)


ANNEX 6-1-32 - Page 1



(LOAN 957-TU)

Assumptions Used in Economic Analysis

A. Economic Rate of Return

1. Only four adjustments have been made to the financial projectionsin order to generate cost and benefit streams to calculate economic ratesof return for the project.

(a) Import parity prices have been used rather than domestic prices.

(b) For the economic analysis, electrical energy has been priced atthe long-run marginal cost of production. The present financialprice is only about 62% of this value.

(c) Labor has been valued at a shadow wage rate of 60% of itsfinancial costs.

(d) The economic cost of pulpwood fiber in Turkey has been estimatedat US$19 per cubic meter based on its potential opportunitycost. This estimate is based on the following analysis:

(i) Based on Exporting Wood

2. The major market is Japan which currently imports from NorthAmerica and Southeast Asia. Japanese importers buy FOB and transport chipsin special bulk carriers. For this analysis it is assumed price FOB Turkeywould be the same as FOB North America. Currently this is US$80/Bone DryUnit (BDU), which is equivalent to US$30/m3.

3. Turkish roundwood would have to be converted to chips and loadedto the Japanese bulk carrier. Total volume of pulpwood consumed by Akdenizis about 500,000 m3/y at full capacity (depends on grade mix). Conversioncosts are estimated at follows:

Capital cost for 500,000 m3/year plant, including civil works,chipping equipment, pneumatic handling and loading, and allengineering, overhead, and escalation, US$30.0 million. Assuming10-year life and no return on the investment this amounts to (30x 106) - (10 x 500,000) = US$6/m3.


Opoerating cost US$/year

Labor . 400,000Electric power 10 kWh/m3 at12$/kWh - 500,000(10)(0.12) = 600,000

Other materials, maintenance = 500,000Overhead + administration - 100,000

1,600,000 t 500 000 a 3.20say US$3.00/mi

Total conversion cost

Capital 6.00Operating 3.00Contingency (22%) 2.00

Total 11.00

Export parity price 30.00 - 11.00 - US$19/m3

(ii) Based on equivalent fuel value.

For pine chips, net heat from a boiler - 13 MJ/BDKg

lm3 - 400 BDKg

1m3 net heat from boiler - (400)(13) - 5,200 MJ/m3

Net heating value of fuel oil = 35,000 MJ/ton

1m3 wood - 5.200 - 0.149 ton fuel oil35,000

At a fuel oil price of US$200/ton, chip value as fuel200 (0.149) = 29.8, say US$30/m3.less conversion cost from logs to chips, as above, US$11/m3,therefore:

Price on the basis of fuel equivalent = 30.00 - 11.00 -US$19/m3which is the same as calculated on wood export basis.Therefore the economic price is taken as US$19/m3.


- 34 - ANNEX 6-2



(LOAN 957-TU)

Cost and Benefit Streams for Economic Rate of Return(in millions of constant 1984 US dollars)


1973 3.1 0.0 0.0 -3.11974 30.6 0.0 0.0 -30.61975 20.8 0.0 0.0 -20.81976 25.1 0.0 0.0 -25.11977 23.9 0.0 0.0 -23.91978 23.1 0.0 0.0 -23.11979 47.0 0.0 0.0 -47.01980 34.7 0.0 0.0 -34.71981 41.6 0.0 0.0 -41.61982 38.8 0.0 0.0 -38.81983 42.9 0.0 0.0 -42.91984 0.0 24.7 42.9 18.21985 0.0 33.8 66.9 33.11986 6.0 36.6 78.7 42.11987 0.0 39.7 90.3 50.81988 0.0 41.0 98.0 57.01989 0.0 41.0 98.0 57.01990 0.0 41.0 98.0 57.01991 0.0 41.0 98.0 57.01992 0.0 41.0 98.0 57.01993 0.0 41.0 98.0 57.01994 0.0 41.0 98.0 57.01995 0.0 41.0 98.0 57.01996 0.0 41.0 98.0 57.01997 0.0 41.0 98.0 57.01998 0.0 41.0 98.0 57.01999 0.0 41.0 98.0 57.02000 -40.2 41.0 98.0 97.2

Notes: (1) Capital cost excludes interest during construction.(2) Residual value is 10% of plant cost, plus working capital.(3) Operating costs assume that sawmill reaches full production in

1987.

Economic rate of return - 7.9%.


- 35 - ANNEX 6-3



(LOAN 957-TU)

Cost and Benefit Streams for Economic Rate of Return(with Sawmill not Operating)

(in millions of constant 1984 US dollars)


1973 3.1 0.0 0.0 -3.11974 30.6 0.0 0.0 -30.61975 20.8 0.0 0.0 -20.81976 25.1 0.0 0.0 -25.11977 23.9 0.0 0.0 -23.91978 23.1 0.0 0.0 -23.11979 47.0 0.0 0.0 -47.01980 34.7 0.0 0.0 -34.71981 41.6 0.0 0.0 -41.61982 38.8 0.0 0.0 -38.81983 42.9 0.0 0.0 -42.91984 0.0 24.7 42.9 18.21985 0.0 34.7 72.4 37.71986 0.0 37.3 73.2 35.91987 0.0 39.8 79.3 39.51988 0.0 39.8 79.3 39.51989 0.0 39.8 79.3 39.51990 0.0 39.8 79.3 39.51991 0.0 39.8 79.3 39.51992 0.0 39.8 79.3 39.51993 0.0 39.8 79.3 39.51994 0.0 39.8 79.3 39.51995 0.0 39.8 79.3 39.51996 0.0 39.8 79.3 39.51997 0.0 39.8 79.3 39.51998 0.0 39.8 79.3 39.51999 0.0 39.8 79.3 39.52000 -40.2 39.8 79.3 79.7

Notes: (1) Capital cost excludes interest during construction.(2) Residual value is 10 of plant cost, plus working capital.

Economic rate of return - 5.6%.


ANNEX 7-1-36 - Page l of 4

?W.08AP :BUAS -.t&J* S E K A U'ODrNL"By82DABAON wK D E N i Z M V E S S E S E S IRUDOLVhUOSSh'

?DL8X :84?t. OUtto sa8t.t rR MODURLtJ O 16 ARAI' K WSR5TllIS TARtjt :Si,fl;Ste TtO. (SHIe) : 1

No. Servie

15227 PIan Orgo/607 16 December 1985COMMENTS FROM THE BORROWER

The World BankInternational Bank for Reconstruction and DevelopmentInternational Development association1818 H Street, N.W.Washington, D.C. 20433U. S. A.

attention: Mr. Yukinori Watanabe, DirectorOperations Evaluation Department

Reference: Project Completion Report - Turkey -akdeniz Forest Utilization Project (Loan 95?-TU)

Your letter dated 30 September 1985 and itsattachment

Our telex Sdr. No. 3359 Plan ve Org./551dated 18 November 1985

Dear Mr. Watanabe,

The comments of our Establishment only, on the Project Com-pletion Report, which is referred to above, are stuted dsfollows:

1) Paze 3. B - (a)

n...... 733,000 m3 of pulplogs And sawlogs required bythe project;"

Our Comment: Our wood requirement at full c4pacity isspecified to be 451,000 m3/y of pulplogs and 362,000 m3/yof sawlogs, i.e. raw-material of 813,000 m)/y in total,as will be seen in our consulting engineers' FeasibilityReport No. X3754/2 dated 15 September 1975, appendix 2,Page 1.

Text CorrectedThe figure of 733,000 m3/y in the Report is given inSandwell's Feasibility Report, Section 1 (Main Text),Page 29, as a comperative figure for &ntalya vs ,kdenizfor the year of 1988, the time which akdeniz has nozyet reached for linerboard production at full capacity.

iiot Cetaparda pukandaks numara ve iqaretlerimtfsi teb't@ rica chutur. _n.p No. b0**4H 8.IUo B_at M

-37 - ANNEX 7-1Page 2 of 4

S E BA t16 ARAlIK 198SAIDENIZ MO)ESSESESI .........a.. ..... .......

MCDOnRLU60

2) Page 5. D - 3.04

"Akdeniz currently employs 973 nation4ls, which is about13% higher than the 857 total estimated at the time ofappraisal, largely due to additional unskilled workers."

Our Comment: That figure is specified to be 1,000 in9awI!Ts Feasibility Report No. X3754/2 dated 15September 1975, Appendix 2, Page 7.

Text Edited

When Sandwell's figure of 1,000 is considered, it isclearly seen that the number of workers mentioned inyour report is 2.7% less than their figure.

3) Page 5. D - 3.04

"... The current mill manager is only the second, thefirst having been promoted to a senior position at SEKAheadquarters."

Text CorrectedOur Comments The current mill manager is only the third,the7Irtf iwo having been promoted to senior positions atSEKa headquarters.

4) Page 6. 3 - 3.06

'.... Throughout implementation there were many delays,and at times SEKa expressed dissatisfdction with the

Text Edited consultants' performance."

Our Comment: Throughout implementation there were manydIays, nd at times SEKA expressed dissatisfaction withsome of consultants' employees who were sent to the siteand whose performance was found to be inadequate by SEKAonly after those individuals had actually worked atAkdeaiz .

5) Page 6. F - 3.07

".... This involved the chemical recovery boiler which wasoriginally tendered through ICB. The lowest evaluated bidwas from a Japdnese supplier, but subsequeat to the evalu-ation SEKA decided the boiler should be supplied locally."

Text EditedIn addition to the above extract, on:

- Page 7, 3.10,- Page 14, 5.07,- Page 14, 6.02, and- Page 15, 7.04

B.1Wl 5.,smc - 7471

-38 - ANEX 7-1

S E K A 16 ARALIK j95 Page3of4AKDENIZ MOUSESESI 1 .. v ... .............. d............ , . sr.

MI)DDKOGOSAU0. V.. .........

of your report, it is stated that both the local supplierwas insufficient, and a two-year delay and loss of timewere caused, which the financial burden imposed by themeffected the project adversely.

Our Comments Installation of imported equipments of theproJi3 i completed at the end of 1982 and the projectwas started-up, as a whole, at the end of 1983. So, asa result of those, it can be considered that the delaywas for only one year after completion of installationand the majority of that one year was spent for thechemical recovery boiler. Also, as the problems withsome of the imported equipments were also resolved with-in that one-year-term, we are of the opinion that therecovery boiler delayed the start-up of the project byless than one year.

We would appreciate if you would please review once aga4nthe contexts pertaining to the chemical recovery boilerin your report.

6) Pae 8, H - 3.11

"..... through a submerged multi-port diffuser 1 km off-shore from ...... "

Text CorrectedOur Comment: That distance is about 600 meters.

7) Page 15. 7.05

"The SKLA personnel, being unfamiliar with the role of aconsulting engineer, were unwilling to delegate authorityfully to the degree aecessary to make such an arrangementwork."

Our Comment: Although the SEKA personnel, being unfamiliar~ith~the~role of a consulting engineer, were willing to

Text Edited delegate authority fully to the degree necessary to makesuch an arrangement work, it could not be realized as theconsulting engineer was not acquainted with the conditionsin Turkey initially.

However, as the work progressed, mutual co-operation wasimproved.

You are kiadly requested to be advised on above, and to furnish uswith a copy of the final report.

afual:. 3s. - 74785

- 39 ANNX 7-1

S E K A 1 6 ARALIK 18 Page 4 7of 4AKDENIZ M )ESSESESI ... De s., 5- .M ............................... .e. S aam ten .

MIUDORLO~O1SAe.ve ....4...

We once again thank you for extending the period for us todetermiue our comments.

Very Truly Yours,

cc: SEKA General DirectorateInvestments Dept.Iszmit Afehrnct OKXUR

b . c * s ?ed p,U, vve Org. $efl.-wi Tr la;i.su.jhends

Ielfilua tlaunaeid 7?sS

Documents

World Bank Documentdocuments.worldbank.org/curated/en/804081468338410035/pdf/mul… · TURKEY - AKDENIZ FOREST UTILIZATION PROJECT (LOAN 957-TU) April 21, 1986 Industry Department