FOR OFFICIAL USE ONLY Report No: PADHI01050 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON TWO PROPOSED LOANS IN THE AMOUNTS OF EUR 250 MILLION AND USD 240.7 MILLION (US$ 500 MILLION EQUIVALENT) TO TÜRKİYE KALKINMA VE YATIRIM BANKASI A.Ş. FOR A FORMAL EMPLOYMENT CREATION - 2 PROJECT (P507276) MARCH 10, 2025 Social Protection & Jobs Europe And Central Asia This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective January 31, 2025) Currency Unit = Turkish Lira (TL) TL 35.86 = US$1 US$0.03 = TL 1 TL 37.21 = EUR 1 EUR 0.03 = TL 1 EUR 1 = US$0.96 FISCAL YEAR January 1 - December 31 Regional Vice President: Antonella Bassani Regional Director: Michal J. Rutkowski Country Director: J. Humberto Lopez Practice Manager: Paolo Belli Task Team Leader(s): Sirma Demir Seker, Siddharth Hari, Etkin Ozen ABBREVIATIONS AND ACRONYMS AM Accountability Mechanism BRSA Banking Regulation and Supervision Agency EA Earthquake Affected E&S Environmental and Social ECA Europe and Central Asia EIS Enterprise Information System ERET Environmental Risk Evaluation Tool ESF Environmental and Social Framework ESG Environment, Social, and Governance ESMS Environmental and Social Management System ESS Environmental and Social Standard FEC Formal Employment Creation Project FM Financial Management FX Foreign Exchange GDP Gross Domestic Product GHG Greenhouse Gas GoT Government of Türkiye GRM Grievance Redress Mechanism GRS Grievance Redress Service IFC International Finance Corporation IFR Interim Financial Reports IFRS International Financial Reporting Standards IIR Informative Inventory Report ILO International Labour Organization IPF Investment Project Financing KOSGEB Small and Medium Enterprises Development Organization of Türkiye LCR Liquidity Coverage Ratio LE Large Enterprises LFS Labor Force Survey M&E Monitoring and Evaluation MFD Maximizing Finance for Development MoU Memorandum of Understanding MSMEs Micro, Small, and Medium Enterprises NPL Non-Performing Loans NPV Net Present Value NUTS-2 Nomenclature of Territorial Units for Statistics -2 OHS Occupational Health and Safety PDO Project Development Objective PFI Participating Financial Institution PIU Project Implementation Unit POM Project Operations Manual PP Procurement Plan PPSD Project Procurement Strategy for Development SGK Turkish Social Security Institution SMEs Small and Medium Enterprises SOE Statement of Expenditure STEP Systematic Tracking of Exchanges in Procurement TKYB Development and Investment Bank of Türkiye (Türkiye Kalkınma ve Yatırım Bankası) TUIK Turkish Statistical Institute UNDP United Nations Development Program WBG World Bank Group The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT TABLE OF CONTENTS DATASHEET ........................................................................................................................... i I. STRATEGIC CONTEXT ..................................................................................................... 1 A. Project Strategic Context .................................................................................................................1 B. Sectoral and Institutional Context ...................................................................................................2 II. PROJECT DESCRIPTION .................................................................................................. 6 A. Project Development Objective .......................................................................................................6 B. Theory of Change and PDO Indicators .............................................................................................6 C. Project Beneficiaries ........................................................................................................................7 D. Project Components ........................................................................................................................8 E. Role of Partners ..............................................................................................................................11 F. Lessons Learned and Reflected in the Project Design....................................................................11 III. PROJECT IMPLEMENTATION ........................................................................................ 13 A. Institutional and Implementation Arrangements ..........................................................................13 B. Results Monitoring, Evaluation, and Verification Arrangements ..................................................14 C. Disbursement Arrangements .........................................................................................................14 IV. PROJECT APPRAISAL SUMMARY .................................................................................. 15 A. Technical, Economic and Financial Analysis (if applicable)............................................................15 B. Fiduciary .........................................................................................................................................20 C. Environmental, Social and Legal Operational Policies ...................................................................22 V. KEY RISKS .................................................................................................................... 24 ANNEX 1. RESULTS FRAMEWORK ........................................................................................ 25 ANNEX 2: FINANCIAL INTERMEDIARY ASSESSMENT: TKYB................................................... 31 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT @#&OPS~Doctype~OPS^dynamics@padbasicinformation#doctemplate DATASHEET BASIC INFORMATION Project Operation Name Beneficiary(ies) Turkiye Formal Employment Creation 2 Project Environmental and Social Risk Operation ID Financing Instrument Classification Investment Project P507276 Substantial Financing (IPF) @#&OPS~Doctype~OPS^dynamics@padprocessing#doctemplate Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Performance-Based Conditions (PBCs) [ ] Small State(s) [✓] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternative Procurement Arrangements (APA) [ ] Hands-on Expanded Implementation Support (HEIS) Expected Approval Date Expected Closing Date 31-Mar-2025 31-Mar-2031 Bank/IFC Collaboration No Proposed Development Objective(s) The project development objective is to enhance the conditions for formal job creation by firms operating in earthquake affected provinces. Components Component Name Cost (US$) i The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Loans to SMEs and LEs for formal job creation 498,550,000.00 Capacity-building support to firms and project management and 200,000.00 implementation support @#&OPS~Doctype~OPS^dynamics@padborrower#doctemplate Organizations Borrower: TÜRKİYE KALKINMA VE YATIRIM BANKASI A.Ş. Contact Title Telephone No. Email Özlem Cinemre Executive Vice President +90 (216) 636 ozlem.cinemre@kalkinma.com.tr 8730 Implementing Agency: TÜRKİYE KALKINMA VE YATIRIM BANKASI A.Ş. Contact Title Telephone No. Email Ibrahim Halil Oztop CEO +90 (216) 636 ibrahim.oztop@kalkinma.com.tr 8700 @#&OPS~Doctype~OPS^dynamics@padfinancingsummary#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? No Is this project Private Capital Enabling (PCE)? No SUMMARY Total Operation Cost 500.00 Total Financing 500.00 of which IBRD/IDA 500.00 Financing Gap 0.00 DETAILS World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 500.00 @#&OPS~Doctype~OPS^dynamics@paddisbursementprojection#doctemplate ii The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Expected Disbursements (US$, Millions) WB Fiscal Year 2025 2026 2027 2028 2029 2030 2031 2032 Annual 0.00 60.00 75.00 90.00 100.00 100.00 75.00 0.00 Cumulativ e 0.00 60.00 135.00 225.00 325.00 425.00 500.00 500.00 @#&OPS~Doctype~OPS^dynamics@padclimatechange#doctemplate PRACTICE AREA(S) Practice Area (Lead) Contributing Practice Areas Social Protection & Jobs Finance, Competitiveness and Innovation CLIMATE Climate Change and Disaster Screening Yes, it has been screened and the results are discussed in the Operation Document @#&OPS~Doctype~OPS^dynamics@padrisk#doctemplate SYSTEMATIC OPERATIONS RISK- RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ Moderate 2. Macroeconomic ⚫ Moderate 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Moderate 5. Institutional Capacity for Implementation and Sustainability ⚫ Moderate 6. Fiduciary ⚫ Moderate 7. Environment and Social ⚫ Substantial 8. Stakeholders ⚫ Moderate 9. Overall ⚫ Moderate @#&OPS~Doctype~OPS^dynamics@padcompliance#doctemplate iii The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT POLICY COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [ ] Yes [✓] No ENVIRONMENTAL AND SOCIAL Environmental and Social Standards Relevance Given its Context at the Time of Appraisal E & S Standards Relevance ESS 1: Assessment and Management of Environmental and Social Risks and Relevant Impacts ESS 10: Stakeholder Engagement and Information Disclosure Relevant ESS 2: Labor and Working Conditions Relevant ESS 3: Resource Efficiency and Pollution Prevention and Management Relevant ESS 4: Community Health and Safety Relevant ESS 5: Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Relevant ESS 6: Biodiversity Conservation and Sustainable Management of Living Natural Relevant Resources ESS 7: Indigenous Peoples/Sub-Saharan African Historically Underserved Not Currently Relevant Traditional Local Communities ESS 8: Cultural Heritage Relevant ESS 9: Financial Intermediaries Relevant NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS). @#&OPS~Doctype~OPS^dynamics@padlegalcovenants#doctemplate LEGAL Legal Covenants Sections and Description iv The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Loan Agreement (LA) Section I.A.1.(a) of Schedule 2 “For purposes of Project implementation, the Borrower shall: Establish and maintain a Project Implementation Unit (“PIU”), throughout Project implementation..” LA Section I.A.1.(b) of Schedule 2 “For purposes of Project implementation, the Borrower shall: ensure that the PIU functions at all times in a manner and with staffing and budgetary resources necessary and appropriate for the implementation of the Project, including, as a minimum, a procurement specialist, a financial management specialist, an environmental specialist, a social specialist, an occupational health and safety specialist, and a monitoring and evaluation focal point, with terms of reference and qualifications acceptable to the Bank.” LA Section I.B.1. of Schedule 2 “The Borrower shall maintain, throughout Project implementation, a Project Operations Manual (“POM”), in substance and manner acceptable to the Bank”. LA Section I.C.1. of Schedule 2: For the purpose of carrying out Part 1 of the Project, the Borrower shall ensure that (a) the selection criteria for Eligible Beneficiary Firms, (b) the eligibility criteria for selecting Subprojects, (c) the terms and conditions for the Borrower’s provision of Sub-loans to Eligible Beneficiary Firms, and (d) the procedures for approving Subprojects, set forth and/or referred to in Annex 1 of this Schedule 2, as further detailed in the POM, are followed. LA Section I.C.2. of Schedule 2: The Borrower shall utilize the principal repayments received from Eligible Beneficiary Firms from the repayment of Sub-loans to provide additional Sub-loans for Subprojects, to the same or other Eligible Beneficiary Firms under Part 1 of the Project in accordance with paragraph 1 of this Section I.C (each case, “Reflows”) following the accumulation of the equivalent of US$ 100,000,000 in the reflows fund before the Closing Date; said Reflows shall be for at least one additional financing cycle, and the launch of the additional Sub-loans shall occur within 1 year after accumulation of the said US$100,000,000 equivalent, and up to 15% of the withdrawn amount under Category 1 on the date when the accumulation of said US$100,000,000 equivalent is achieved.; LA Section I.D.1. of Schedule 2: The Borrower shall ensure and shall cause the Eligible Beneficiary Firms to ensure that the Project is carried out in accordance with the Environmental and Social Standards, in a manner acceptable to the Bank. LA Section I.E.1.(a) of Schedule 2 The Borrower shall: prepare and furnish to the Bank not later than February 28th of each year during the implementation of the Project, a proposed Annual Work Plan and Budget LA Section I.C.2.(a) of Annex 1 to Schedule 2: The Borrower shall ensure that, unless otherwise agreed to by the Bank in writing and thereafter set forth in the POM: (i) the LE Sub-loan for any individual Subproject to be carried out by an Eligible LE shall not exceed USD 25,000,000 equivalent, and (ii) the aggregate amount of outstanding Sub-loans to any one Eligible LE shall not exceed USD 40,000,000 equivalent. LA Section I.D. 1 of Annex 1 to Schedule 2: Each LE Sub-loan to Eligible LEs shall be approved by the Borrower on the basis of: (a) a description of the Eligible LE and an appraisal of the Subproject, including a description of the expenditures, proposed to be financed out of the proceeds of the Loan; (b) the proposed terms and conditions of the Sub-loan, including the schedule of amortization of the Sub-loan; (c) evidence of compliance with the POM; (d) such other information as the Bank or the Borrower shall reasonably request; and (e) an Employment Plan, including: (i) the expected number of workers to be hired (including women and Youth) and (ii), the nature of the workers’ employment (i.e. full-time, part-time, permanent, temporary). LA Section I.D. 2 of Annex 1 to Schedule 2: Unless otherwise agreed to by the Bank, the Borrower shall ensure that: (a) the first LE Sub-loan, irrespective of size, shall be subject to the prior review and approval of the Bank; (b) any LE Sub- loan to be provided to an Eligible LE in an amount exceeding the equivalent of USD 23,000,000 shall be subject to the prior review and approval of the Bank, and (c) all LE Sub-loans not subject to prior review by the Bank may be subject to ex-post review by the Bank. LA Section II.C.2.(a) of Annex 1 to Schedule 2: The Borrower shall ensure that, unless otherwise agreed to by the Bank in writing and thereafter set forth in the POM: (i) the Sub-loan for any individual Subproject shall not exceed USD v The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT 3,000,000 equivalent, and (ii) the aggregate amount of outstanding Sub-loans to any one Eligible SME shall not exceed USD 6,000,000 equivalent. LA Section II.D.1. of Annex 1 to Schedule 2: Each SME Sub-loan shall be approved by the Borrower on the basis of: (a) a description of the SME and an appraisal of the Subproject, including a description of the expenditures proposed to be financed out of the proceeds of the Loan; (b) the proposed terms and conditions of the Sub-loan, including the schedule of amortization of the Sub-loan; (c) evidence of compliance with the POM; (d) such other information as the Bank or the Borrower shall reasonably request; and (e) Employment Plan, including: (i) the expected number of workers to be hired (including women and Youth) and (ii), the nature of the workers’ employment (i.e. full-time, part-time, permanent, temporary). LA Section II.D.2 of Annex 1 to Schedule 2: Unless otherwise agreed to by the Bank, the Borrower shall ensure that: (a) the first three Sub-loans, irrespective of size, shall be subject to the prior review and approval of the Bank; (b) any SME Sub-loan of an amount exceeding the equivalent of USD 2,750,000 shall be subject to the prior review and approval of the Bank, and (c) all SME Sub-loans not subject to prior review by the Bank may be subject to ex-post review by the Bank. LA Section III. of Annex 1 to Schedule 2: The Borrower shall ensure that: (i) the first two Subprojects of category B+ (as per the Borrower’s ESMS) shall be subject to the prior review and approval of the Bank, and (ii) the first two Subprojects of category B- (as per the Borrower’s ESMS) under the Project shall be subject to the prior review and approval of the Bank. LA Section IV of Annex 1 to Schedule 2 to the LA: The Borrower shall achieve the participation of (i) Eligible SMEs, in the ratio of at least 70% of the total Eligible Beneficiary Firms, and (ii) Women-inclusive Firms in a ratio of at least 20% of the total Eligible Beneficiary Firms. @#&OPS~Doctype~OPS^dynamics@padconditions#doctemplate Conditions Type Citation Description Financing Source the Borrower has prepared Article 4.01 (a) of the Loan and adopted a Project Effectiveness IBRD/IDA Agreement Operations Manual acceptable to the Bank. the PIU referred to in Section I.A.1. of Schedule 2 Article 4.01 (b) of the Loan to the Loan Agreement has Effectiveness IBRD/IDA Agreement been established in a manner acceptable to the Bank. the Borrower has designated a senior Article 4.01 (c) of the Loan management focal point on Effectiveness IBRD/IDA Agreement environmental and social performance of Subprojects. vi The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT I. STRATEGIC CONTEXT A. Project Strategic Context 1. Türkiye’s development achievements over the past two decades have been remarkable. Real gross domestic product (GDP) growth averaged 5.4 percent between 2002 and 2022, resulting in income per capita (in real terms) that more than doubled over the same period. Moreover, growth was accompanied by rapid poverty reduction, with the poverty rate (US$6.85 2017 purchasing power parity poverty line) halving from above 20 percent in 2007 to less than 10 percent in 2021. As in other countries, the COVID-19 pandemic had a negative impact on growth in 2020, but the country was one of the few globally that did not register a GDP contraction that year, instead growing 1.9 percent. This performance was largely due to the Government’s economic policy response to the pandemic, which focused on loosening monetary policy and rapid credit expansion. Türkiye then achieved double-digit GDP growth in 2021 (11.4 percent) and maintained significant momentum in 2022 (5.5 percent) and 2023 (5.1 percent). Yet, the policy framework that helped the country navigate the COVID-19 shock also heightened macroeconomic risks created by high inflation (annual inflation reached 44 percent in December 2024, after peaking at 85.5 percent in October 2022), currency depreciation (83 percent against the US dollar between January 2020 and December 2024), and declines in reserve buffers. 2. Following the May 2023 Presidential elections, a new economic team took over and started implementing a program to normalize the economy. This includes monetary policy tightening, with the policy interest rate increasing from 8.5 percent in May 2023 to 50.0 percent in March 2024 (with the first rate cut to 47.5 percent in December 2024), the unwinding of financial regulations, and fiscal revenue measures to curtail the fiscal deficit. Markets are reacting positively, with five-year credit default swaps declining from above 500 basis points in May 2023 to around 250 in December 2024. All major rating agencies have upgraded Türkiye’s sovereign credit rating. In the context of the disinflationary program, the Government of Türkiye (GoT) projects end-2025 inflation at 17.5 percent, whereas GDP growth for 2024 and 2025 is projected at 3.5 percent and 4.0 percent, respectively. Current World Bank projections are less optimistic, anticipating end-2025 inflation at 23 percent, and GDP growth at 3.2 percent in 2024 and 2.6 percent in 2025. 3. In February 2023, three severe earthquakes hit southeast Türkiye, resulting in high demands for recovery and reconstruction. On February 6, 2023, two earthquakes of magnitude 7.8 and 7.5 hit southeast Türkiye and Syria, followed by thousands of aftershocks, and another earthquake of magnitude 6.7 on February 20, 2023. The epicenters of the first two earthquakes were in Kahramanmaraş Province with neighboring provinces of Adana, Adıyaman, Diyarbakır, Elazığ, Gaziantep, Hatay, Kilis, Malatya, Osmaniye, and Şanlıurfa all suffering damages. The epicenter of the third earthquake was in Hatay. According to official statistics, the earthquakes resulted in over 50,000 casualties, injuries to 107,000 people, damage or destruction of 1.9 million housing units, and almost 2 million people in need of shelter in camps and container settlements. The World Bank’s Global Rapid Post-Disaster Damage Estimation estimated initial direct physical damages of the earthquakes at US$34.2 billion, accounting for 4 percent of Türkiye’s 2021 GDP. A joint assessment by the GoT, European Union (EU), United Nations Development Programme (UNDP), and the World Bank estimated recovery and reconstruction needs at US$81.5 billion. 4. Türkiye’s exposure to climate hazards is considered high, and the earthquake affected (EA) region is also subject to these climate vulnerabilities. In recent years, Türkiye has been increasingly affected by climate-induced hazards, including the intense wildfires of 2021 and 2024 as well as heavy rains, severe flooding, and extreme heatwaves in 2023.1 1Turkish State Meteorological Service (2024). The State of Türkiye’s Climate in 2023. Climate and Agricultural Meteorology Department, Ankara. http://www.emcc.mgm.gov.tr/files/State_of_the_Climate_in_Turkey_in_2023.pdf Page 1 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT The high probability of these events threatens lives, livelihoods, natural resources and the economy across provinces.2 The provinces covered by the project,3 located in the south-east region, are also exposed and highly vulnerable to climate- induced shocks such as river and coastal floods, landslides, extreme heat, and wildfires, and geophysical hazards such as earthquakes according to a study by a think tank.4 B. Sectoral and Institutional Context 5. Türkiye’s labor market faces structural challenges. New labor force entrants outpace job creation, resulting in a pattern of insufficient employment growth, especially for women and youth. The elasticity of employment to economic growth has decreased in recent years. As a result, Türkiye’s economy is characterized by relatively high unemployment, especially among women, while female participation and employment rates are lower than the average reported for upper middle-income countries.5 Informality remains higher than in most European countries,6 and large regional disparities persist in labor market outcomes.7 6. The earthquakes of February 2023 exacerbated existing regional labor market disparities. In 2022, the labor force participation and employment rates in each of the 18 EA provinces were lower than the national averages of 53.1 percent and 47.5 percent, respectively.8 Most of these provinces also had higher unemployment rates. The region has wide gender gaps: within the regions encompassing these provinces,9 the female labor force participation rate was below the national average.10 The earthquakes had a devastating effect on labor market outcomes in these provinces—for example, applications for unemployment benefits increased by 23 percent in the 18 affected provinces during January- May 2023 (relative to a declining trend in the rest of the country). Worker numbers, which had been increasing by over 60 percent between 2019 and 2022, dropped by around 30 percent in 2023,11 further evidence of the devastating effects of the earthquakes and in line with other studies showing negative effects on labor market outcomes.12 Women were particularly affected. Care and domestic work responsibilities increased because of the earthquake. Female employment and women-inclusive businesses were more negatively affected.13 14 2 World Bank. 2023. Türkiye Adaptation and Resilience Assessment – A Whole-of-Economy Approach to Climate and Disaster Risks 3 In this Project, the EA provinces or EA region refer to the 11 provinces worst hit by the earthquake (Adana, Adıyaman, Diyarbakır, Elazığ, Gaziantep, Hatay, Kahramanmaraş, Kilis, Malatya, Osmaniye, Şanlıurfa) as well as 7 neighboring provinces (Batman, Bingöl, Kayseri, Mardin, Niğde, Sivas and Tunceli). Given the Project's location in a seismic zone, in the event of a future earthquake, a restructuring of the Project may be considered to expand coverage to additional affected provinces. 4 Think Hazard – Türkiye. 5 Source: World Bank Data. https://data.worldbank.org/ Additionally, according to estimates from the Turkish Statistical Institute (TUIK) 2023 Labor Force Survey (LFS), the female labor force participation rate was only 35.8 percent in 2023, half that reported for men (71.2 percent). The female unemployment rate stood at 12.6 percent in 2023, above the male rate (7.7 percent). 6 Source: https://ilostat.ilo.org/topics/informality/ 7 ORHAN, H. S. K., & GÜLEL, F. E. (2016). Regional unemployment in Turkey: A spatial panel data analysis. Journal of Social Security, 6(2), 47-67. 8 Source: TUIK. 9 Regions refer to the statistical geographic classification of the Nomenclature of Territorial Units for Statistics -2 (NUTS-2). NUTS-2 includes 26 sub- regions in Türkiye. 10 According to TUIK 2023 LFS results, in those regions, female labor force participation was between 25 and 32 percent while Türkiye’s average was 35.8 percent. 11 Source: Enterprise Information System (EIS) data (2019 - 2023). 12 For example, a study by the International Labour Organization (ILO) found a reduction in economic activity (hours of work) of 16 percent. Source: ILO. 2023. The effects of the February 2023 Earthquake on the Labor Market in Türkiye. 13 For example, based on EIS data from 2022 and 2023, the number of female employees decreased by 35 percent, compared to a 30 percent decline registered for all employees. 14 UN WOMEN (2023). Brief on Earthquake in Türkıye: ̇ Impacts and Priorities for Women and Girls. Page 2 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT 7. Labor market challenges worsened due to extensive damage and disrupted economic activity from the earthquakes and rising climate risks. In 2023, around 27,500 small and medium enterprises (SMEs) and 860 large enterprises (LEs) operated in the EA provinces.15 SMEs employed nearly 713,000 workers, while LEs employed almost 500,000. Further, a low share of firms was led or managed by women: only 8.4 percent of SMEs, and one third of large firms.16 Businesses suffered severe damage due to the earthquake. For example, data from 11 out of the 18 EA provinces show that 5,600 SMEs were damaged and nearly 1,000 SMEs lost business due to economic disruptions and worker displacement.17 Additionally, there is a high concentration of firms and jobs in the provinces covered by the project, such as Gaziantep and Sanliurfa, which are highly and increasingly exposed to climate risks,18 including drought risks, extreme heat days, and rising temperatures which can reduce firms’ revenues by lowering labor productivity and raising operational costs.19 8. Constrained access to finance is a key factor limiting formal job creation, especially among SMEs. Maturity and currency mismatches in Turkish banks' balance sheets, combined with improving but challenging macro-financial conditions, restrict long-term finance availability and limit their capacity to provide loans affordable by SMEs. About 30 percent of Turkish firms cite access to finance as their top business constraint, compared to 15 percent in the Europe and Central Asia (ECA) region. Only 20 percent of SMEs had access to long-term credit in 2023, compared to one third of LEs.20 The recent earthquakes and local climate hazards worsened these challenges, compounded by barriers like lack of collateral, information asymmetry, limited alternative financing, and reduced bank lending due to economic downturns in the region. 9. Banking sector loans in EA provinces declined by 46.5 percent in real terms, with provinces like Hatay, Adıyaman, Bingöl, and Elazığ seeing drops over 50 percent.21 Non-performing loans (NPLs) fell by 23.8 percent, likely due to government interventions such as debt restructuring. The earthquake's economic impact underscores the need for targeted financial interventions and support to rebuild economic resilience and address liquidity gaps, particularly for SMEs. 10. Within the SME segment, certain categories of firms are particularly disadvantaged. Firms in less developed regions are less likely to have a loan or line of credit than their peers (26 percent versus 36 percent).22 Women-inclusive, young, and firms operating in less developed provinces face tighter credit conditions due to being perceived as higher risk. Women-managed firms are less likely to have access to credit, face stricter collateral requirements, and are more likely to have loan applications rejected.23 They also report access to finance as their biggest obstacle, and the share is higher for firms with female top managers compared to those with male top managers (41.6 percent versus 28.4 percent).24 15 EIS data (2019-2023). 16 Given that the ownership structure cannot be observed in EIS, female leadership is measured by occupation codes: if at least one director is female, a company is classified as women-led. Source: EIS dât (2019 - 2023). 17 Small and Medium Enterprises Development Organization of Türkiye (KOSGEB), 2023. 18 'Firms’ Vulnerability to Climate Change Dashboard' as part of the Firms & Climate Adaptation Policy Tool of the WB Investment Climate Unit. 19 Roberta V. Gatti;Asif M Islam; Casey Maue;Esha Dilip Zaveri.2024. Thirsty Business: A Global Analysis of Extreme Weather Shocks on Firms. Washington, D.C. : World Bank Group. 20 EIS data (2019 - 2023). Access to credit is measured through the share of firms reporting a credit record in their balance sheet. 21 Real percentage changes in banking sector loans (BRSA data) between December 2022 and September 2024, deflated by the consumer price index. 22 EIS data 2019-2023. 23 Enterprise Survey 2019. 24 https://www.enterprisesurveys.org/. In addition, only one fourth of women aged 15+ borrowed from a financial institution compared to 50.9 percent of men aged 15+. Source: Türkiye - Global Findex Database 2021: Country Brief, World Bank, 2023 Page 3 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Relatedly, only 12 percent of SMEs and LEs in the project provinces with credit have a female director. 25 Despite a relatively high share of female entrepreneurs in Türkiye,26 as of September 2024, loans to women entrepreneurs totaled TL 198 billion, just 1.3 percent of all loans.27 Gender gaps in access to finance are driven by lack of economic awareness and discrimination, with evidence suggesting financial information-seeking behavior also plays a role.28 11. Global evidence suggests that addressing credit constraints can promote employment generation through several channels. There is a strong link between credit constraints and employment, as long-term investments are critical for job creation.29 Expanded access to longer-term credit can enable firms to make investments they were previously unable to, boosting productivity and increasing labor demand in a sustained manner.30 Addressing credit constraints creates productivity gains and could, therefore, also generate more employment in the medium to long term.31 Further, the financing can also be used directly to hire or retain workers, especially those with shorter work experience and higher expected productivity.32 Finally, effects on employment may be observed due to recovery of assets, positive spillover effects along the value chain, and a boost to local economic activity. Evidence from the COVID-19 pandemic also shows that, in terms of boosting employment, providing relief to credit constraints can have a stronger effect on employment in the long term than, for instance, subsidizing labor.33 Other second-order welfare effects are also possible. For example, public lending helps beneficiaries establish credit relationships with more financial intermediaries and increase their use of variable inputs.34 12. Increased focus on SMEs can help strengthen their resilience and protect them against external shocks that may lead to financial and job losses. Due to factors such as their size, limited managerial capacity, poor corporate governance or restricted access to financial markets, SMEs are particularly vulnerable to disruptions in business activity caused by external shocks. Observed and anticipated climate hazards, along with geophysical events in the provinces covered by the Project—such as floods, landslides, wildfires, and earthquakes—can disrupt business activities, particularly in sectors like agriculture, damage infrastructure, and cause disruptions in transportation and logistics, all of which contribute to potential financial and job losses for SMEs. 25 EIS data (2023). 26 Based on information from the World Bank Gender Data Portal, the share stood at 17.6 percent in 2022, at similar levels to the Netherlands, for example. 27 Banks Association of Türkiye data as 2024 Q3. 28 Source: Pahlevan Sharif, S., Ahadzadeh, A. S., & Turner, J. J. (2020). Gender differences in financial literacy and financial behavior among young adults: The role of parents and information seeking. Journal of Family and Economic Issues, 41(4), 672-690. 29 For example, see Ayyagari, Juarros, Martinez Peria, and Singh (2021). “Access to Credit and Job Growth: Firm-Level Evidence across Developing Countries”, Review of Finance, Volume 25, Issue 5; Gerlach-Kristen, P., O'Connell, B., & O'Toole, C. (2015). ”Do credit constraints affect SME investment and employment?” The Economic and Social Review, 46(1, Spring), 51-86.; The Global Financial Development report 2015-2016: long- term finance Global financial development report Washington, D.C.: World Bank Group. 30 Sommer, C. (2024). “The Impact of Long-Term Finance on Job Quality, Investments and Firm Performance: Cross-Country Evidence.” European Journal of Development Research, 36: 764-776. 31 Rodríguez‐Pose, A., Ganau, R., Maslauskaite, K., & Brezzi, M. (2021). Credit constraints, labor productivity, and the role of regional institutions: Evidence from manufacturing firms in Europe. Journal of Regional Science, 61(2), 299-328; Caggese, A. & V. Cuñat. (2013) “Financing constraints, firm dynamics, export decisions, and aggregate productivity.” Review of Economic Dynamics, 16: 177-193. 32 Caggese, A., Cuñat, V., & D. Metzger (2019). “Firing the wrong workers: Financing constraints and labor misallocation.” Journal of Financial Economics, 133(3): 589-607. 33 Albert, C., Caggese, A., & B. González. (2020) “The short- and long-run employment impact of COVID-19 through the effects of real and financial shocks on new firms.” Banco de España Working Paper 2039. 34 Cao, S., & Leung, D. (2020). Credit constraints and productivity of SMEs: Evidence from Canada. Economic Modelling, 88, 163-180. Page 4 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT 13. LEs are important drivers of job creation and improved job quality. LEs contribute to more than half of the net job creation in ECA.35 In Türkiye, the share of formal employment in LEs has increased substantially—from around 28 percent in 2006 to more than 37 percent in 2021. Moreover, new jobs created by LEs are more persistent.36 LEs are important not only in terms of job creation, but also in terms of the quality of the employment they provide 37 – they pay higher salaries and tend to offer better employment to workers with a basic education. In fact, employment in LEs contributes to the long-term skill development of younger workers.38 14. Investing in LEs is also crucial for economic resilience. LEs tend to have higher total factor productivity and higher rates of productivity growth, and they are more likely to innovate and invest in research and development.39 They also have extensive linkages with other firms and customers, which can bring about positive spillovers to SMEs and other firms in the areas in which they operate and can also determine the trade patterns of entire regions, as they account for a disproportionate portion of the exports.40 Moreover, due to their size, LEs can be responsible for a sizeable share of a region’s economic activity. In this sense, and given their centrality in the business ecosystem, expanding financial access to LEs can contribute to improving the overall resilience of EA provinces. 15. Building on the successes of the Formal Employment Creation Project (FEC) (P171766), the proposed project aims to address key credit constraints in the EA provinces to spur formal job creation. The FEC supported job creation by financing firms via three instruments: (a) direct lending by the Development and Investment Bank of Türkiye (Türkiye Kalkınma ve Yatırım Bankası, TKYB) to LEs (b) APEX lending by TKYB to Participating Financial Institutions (PFIs) for SMEs, and (c) grants to firms conditional on meeting certain employment targets. As of January 2025, over 7,500 jobs have been created under the project. The proposed project builds on the successes of FEC and includes a simplified design under which TKYB will provide longer-term credit directly to SMEs and LEs in the EA provinces, as a way to spur job creation. Increased access to credit will be complemented by capacity support for firm owners. The project will operate in the 11 provinces most affected by the earthquake, as well as in 7 neighboring provinces that also have trade and business relations with the EA provinces and suffered damage. The project will also serve as a vehicle for the TKYB to expand its coverage of SMEs, a previously underserved and highly vulnerable firm type, and will include activities to enhance TKYB’s capacity to serve these firms and contribute to their climate-resilience awareness. 16. The proposed project is part of a comprehensive World Bank Group (WBG) package to support Türkiye’s EA region, complementing broader efforts to strengthen the labor market and foster economic recovery. WBG’s support encompasses reconstruction of infrastructure; provision of public services; and economic recovery through fast-tracked new projects, existing initiatives, analytical work, and technical assistance. The Project complements ongoing efforts to restore access to public services, resilient housing, and agricultural recovery while focusing on employment maintenance and job creation. It aligns with the WBG’s broader initiatives, including active labor market programs and rural labor 35 Kostopoulos, C., Izvorski, I., Torre, I., Iacovone, L., Lokshin, M., Record, R., and S. Doczi. (forthcoming). Greater Heights. Growing to High Income in Europe and Central Asia. Washington, DC: World Bank. 36 Ayhan, S., Lehmann, H., and S. Pelek. (2023). “Job creation and job destruction in Turkey: 2006-2021”, IZA Discussion Paper 16491, Bonn. 37 Ciani, A., Hyland, M. C., Karalashvili,N., Keller, J., Ragoussis, A. and T. Tran. (2020). Making It Big: Why Developing Countries Need More Large Firms. Washington, DC: World Bank 38 Arellano-Bover, J. (2022). “The Effects of Labor Market Conditions at Entry on Workers’ Long-Term Skills.” The Review of Economics and Statistics, 104(5): 1028–1045 39 Ciani, A., Hyland, M. C., Karalashvili,N., Keller, J., Ragoussis, A. and T. Tran. (2020). Making It Big: Why Developing Countries Need More Large Firms. Washington, DC: World Bank 40 Gabuert, C., and O. Itskhoki. (2021). “Granular Comparative Advantage” Journal of Political Economy, vol. 129 (3): 871-939. Page 5 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT market strengthening interventions. Additionally, it complements the World Bank’s current operations aimed to support micro, small and medium enterprises (MSMEs).41 While these initiatives target microbusinesses and the agricultural sector, the proposed project addresses the unmet demand for support for financially and commercially viable credit- constrained SMEs and LEs, which remain vital for sustained economic recovery and job creation. II. PROJECT DESCRIPTION A. Project Development Objective 17. The Project Development Objective is to enhance the conditions for formal job creation by firms operating in earthquake affected provinces. B. Theory of Change and PDO Indicators 18. The project will positively influence the conditions for formal employment generation via three channels. First, it will provide longer-term financing to provide funds for new jobs, working capital, and investments. This financing will relax financial constraints which are expected to make available financial resources for firms to hire or retain employees and increase productivity and consequently labor demand. Further, other second-order effects on employment due to the recovery of assets, positive spillover effects along the value chain, and boost to the local economy are all expected to drive up labor demand. It is expected that the project will contribute to reducing the climate vulnerabilities of local firms and jobs by enhancing access to finance and increasing the labor demand, thereby fostering a greater capacity of firms and people to adapt to and withstand local climate hazards and their impacts. Second, it will provide capacity building support to firms on a range of issues related to financial management (FM) and intermediation, environmental and social (E&S), gender, climate resilience and market analysis. This will result in improved capacity among firms to build, sustain, and grow businesses, and to access financing. Third, it will expand TKYB’s capacity in serving SMEs, which are particularly vulnerable to climate change, and provide loans in line with TKYB’s ESMS, which is compliant with the World Bank’s E&S standards. These activities will leverage TKYB’s development banking expertise and increase access to finance for the EA region. 19. The impact of the project depends on several assumptions. First, it assumes that there are no negative events, such as macroeconomic crises, disasters, or other types of natural and/or human hazards. Second, the Project’s success critically depends on the demand for loans from SMEs and LEs. Third, it assumes that the capacity building provided to firms is useful and firm owners demand it. Figure 1 below depicts the project’s Theory of Change. 41For example, the “Post-Earthquake Micro, Small and Medium Enterprises (MSME) Recovery Project” (P181068) provided financial support to microbusinesses through KOSGEB, the “Emergency Firm Support Project” (P174112) supports SMEs and the International Finance Corporation (IFC) provides a US$530 million financing package for small businesses through private banks. Other relevant projects include rebuilding Small Industrial Estates (P502837), benefiting MSMEs, and the Agriculture Sector Recovery in Türkiye's Earthquake-affected Provinces Project (P181428), which supports climate-resilient infrastructure. Page 6 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Figure 1. Theory of Change 20. The following indicators and sub-indicators will track progress towards the PDO: • Number of firms in the earthquake affected provinces receiving sub-loans o Share of which are SMEs o Share of which are women-inclusive • Share of beneficiary firms that maintain or increase their employment after receiving the sub-loan o Share of SME beneficiary firms that maintain or increase their employment after receiving the sub-loan C. Project Beneficiaries 21. The project will have two groups of direct beneficiaries as well as several indirect beneficiaries. The first group of direct beneficiaries will be firms (SMEs and LEs) which receive financing and capacity-building support, allowing them to implement longer-term investments and meet their needs for working capital. This will enable them to expand production, maintain and expand their workforce, improve business performance, and ultimately boost productivity. This increased productivity, along with financing and capacity-building support, will enhance their capacity to withstand the impacts of local climate hazards. Beneficiary firms will be SMEs and LEs, including women-inclusive firms. The second group of beneficiaries will be employees hired or retained as a result of the financing provided to firms. In addition to the two groups of direct beneficiaries, the project will also have indirect beneficiaries through spillover effects. First, the financing provided by the project will spur economic activity in the EA provinces, resulting in benefits to other firms along the value chain and the broader local economy. Second, the project will support the TKYB in developing its capacity to directly serve SMEs at a larger scale, which will help expand financial access to a relatively underserved segment of the market and support their climate resilience awareness given their heightened Page 7 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT vulnerability. D. Project Components 22. The project will enable TKYB to support firms operating in EA provinces to enhance the conditions for formal job creation. In addition to being adversely affected by the earthquake, these provinces are likely to be exposed to increased climate hazards. The project will consist of two components: (i) loans to SMEs and LEs for formal job creation and (ii) capacity building support to firms and project management and implementation support.42 Component 1: Loans to SMEs and LEs for formal job creation (US$239.89 million + EUR 249.37 million) 23. Under this component, TKYB will extend sub-loans directly to eligible firms in the project provinces. The primary focus is to support firms in their recovery and enhance formal employment creation in these provinces. Both investment and working capital loans will be eligible under the project, ensuring that the financing provided addresses the immediate and long-term needs of beneficiary firms including those exacerbated by climate hazards. 24. The Project will leverage TKYB’s role as a development bank to lend directly to beneficiary firms. This direct lending approach will offer the benefits of the World Bank financing, such as extended loan maturities and technical support, to SMEs. This is especially beneficial in the EA provinces where commercial options are constrained by shorter maturities and higher risks. TKYB has built the necessary systems and expertise to meet World Bank standards, and can, therefore, more efficiently handle the E&S requirements of the project. 25. TKYB will assume the credit risk of the sub-loans to the beneficiary firms. Loan applications will be evaluated in accordance with TKYB’s credit risk and project evaluation frameworks. TKYB will ascertain the eligibility of the loan to ensure that it meets the project’s objectives, including potential for job creation, with the details to be set out in the Project Operations Manual (POM), while managing its credit risks. Loan terms and conditions, including minimum loan maturities, will be specified in the POM to ensure alignment with the project’s objectives. The cost of lending from TKYB to eligible firms will, at a minimum, include the funding cost incurred by TKYB from the IBRD, an on-lending margin to cover TKYB's administrative expenses, and a credit risk margin based on the specific sub-borrower, associated with market conditions and fees due under the Turkish banking regulations.43 Sub-loans to firms may be offered in either Turkish Lira or foreign exchange (FX), as determined by TKYB’s assessment. If loans are provided in Turkish Lira, TKYB will hedge the associated FX risks. 26. The project’s focus is aligned with TKYB’s strategic emphasis on enhancing sustainability, climate and economic resilience, and employment in EA provinces. TKYB has initiated work on identifying a pipeline of potential beneficiary firms operating in EA provinces, ensuring strong alignment with the Project’s objectives. Both investment and working capital loans which have job creation potential, including for women and youth, will be eligible. While the exact sub- financing will be determined during implementation, the primary focus will be on job creation and retention, and beneficiary firms are expected to utilize financing for activities such as purchasing or replacing equipment, expanding production capacity, implementing energy-efficient and climate-resilient measures, and financing the hiring or retention of workers. Assessment of firms will be based on the job creation (or retention) potential in the sub-loan application, as 42 The front-end fee is to be paid from the loan proceeds, thus, the allocation for each component is reduced accordingly. 43 The details of the cost of lending will be specified further in the POM. Page 8 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT one of the selection criteria, enhancing firms’ long-term competitiveness which will build their resilience to external shocks. To achieve this and recognizing the strong connection between long-term investments and employment creation, the loans provided to LEs under the project will aim for long average maturities compared to TKYB’s representative loan portfolio which is not financed under this project. Additionally, firms will commit to meeting E&S standards in line with TKYB’s ESMS and implementing sustainable practices in their operations. 27. Sub-loan size and tenor. The average sub-loan amount provided for employment creation is expected to be around US$1.75 million. The amount of an individual sub-loan will not exceed US$3 million for SMEs and US$25 million for LEs, with the possibility of higher loan amounts if there is significant job creation potential. For any sub-loan request exceeding US$25 million for LEs and US$3 million for SMEs, World Bank approval will be necessary. The total exposure, which is the aggregate amount of outstanding sub-loans to any one SME, shall not exceed US$6 million. The maximum exposure to a single LE shall not exceed US$40 million. The minimum sub-loan term for investment loans will be 12 months. For large loans, TKYB will be encouraged to leverage funds from its own or other lenders’ sources. Once US$100 million is accumulated in the reflows fund, TKYB will use these reflows for additional employment creation financings during the availability period until the Project closing date, up to 15 percent of the withdrawn amount for at least one additional financing cycle. As standard practice, TKYB requires its borrowers to provide at least 20 percent equity financing for the investment projects it finances. However, given the conditions in the EA provinces, TKYB may not seek this contribution for projects with high job creation potential. Additionally, TKYB will offer a long-term maturity for investment sub-loans financed under the project, which will have a longer maturity compared to their respective portfolio for LEs. For working capital loans to SMEs, TKYB will assess the market conditions, job potential, and loan demands of the firm. If the demanded maturity is short-term, TKYB may provide a revolving loan facility for SMEs that may offer short- term loans but enable long-term access to finance throughout the project's lifetime. This will ensure that firms benefit from this project by being able to access finance for longer-term investment projects than is generally available on the market. It will also provide the opportunity for the maturity advantage of using the IBRD loan to be transferred to the final beneficiaries, depending on market conditions. The health of the project portfolio will also be tracked by TKYB, based on the NPLs under the project, and TKYB will make its best efforts to ensure that NPLs constitute less than 5 percent of its total loan portfolio. 28. Firm selection criteria. In addition to financial viability and potential to create jobs (including for women and youth), beneficiary firm selection will be based on alignment with the Project’s geographic scope and exclusion list. Additional criteria will include firm size and women-inclusivity. Further, sub-loans will comply with TKYB’s Environmental and Social Management System (ESMS) and the World Bank’s Environmental and Social Framework (ESF) and will be screened for their climate risk in line with the TKYB’s ESMS. 29. Geographical scope. As described above, firms operating in the 18 EA provinces of the country will be eligible for financing under the component- Adana, Adıyaman, Diyarbakir, Elazig, Gaziantep, Hatay, Kahramanmaras, Kilis, Malatya, Osmaniye, Şanlıurfa, Sivas, Bingöl, Kayseri, Mardin, Tunceli, Niğde, and Batman. Emphasis will be given to subprojects to be carried out in the provinces of Adana, Adıyaman, Diyarbakir, Elazig, Gaziantep, Hatay, Kahramanmaras, Kilis, Malatya, Osmaniye, and Şanlıurfa. Further, in the provinces of Batman, Bingöl, Kayseri, Mardin, Niğde, Sivas, and Tunceli, emphasis will be given to firms with trade or business ties with the other 11 EA provinces. 30. Firm size. Both SMEs and LEs will be eligible for sub-loans under this Project, with at least 70 percent of beneficiary firms being SMEs, which are more vulnerable to the impacts of local climate hazards such as extreme heat or droughts. Page 9 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT SMEs are defined as firms having fewer than 250 employees,44 and LEs are defined as those with more than 250 employees at the time of applying for a sub-loan under the Project. In 2023, there were approximately 27,500 SMEs and 860 LEs in the Project’s target region.45 Of these, 3,306 SMEs and 254 LEs in the region were exporters. In 2023, the region officially registered approximately 1.2 million workers. Table 1: Number of Firms and Workers by Size in EA Provinces - All versus Exporting Firms (2019-2023) All Firms in EA Exporting Firms in EA Number of Workers Provinces Provinces Years SMEs Large SMEs Large SMEs LEs 2019 21,469 504 2,815 226 656,885 342,332 2020 26,076 615 2,831 253 813,175 421,251 2021 26,782 774 3,146 268 877,853 545,999 2022 32,064 917 3,553 284 1,052,159 638,931 2023 27,551 860 3,306 254 712,944 483,537 Source: Based on EIS data. EA provinces cover the 18 provinces described above. 31. Women-inclusive firms. At least 20 percent of loan beneficiary firms will be women inclusive which have faced greater barriers to adapt and cope with the negative impacts of climate change. To achieve this, TKYB will use its internal gender toolkits which are based on an ongoing-technical assistance with the Frankfurt School. These activities consist of awareness-raising activities for TKYB clients, and training of TKYB staff which will be further detailed in the POM. The project will rely on special outreach campaigns to target women-inclusive firms and may partner with women entrepreneurship and/or women business associations to achieve targeted outreach and awareness about the project. TKYB will provide knowledge/training on financial instruments and literacy, specifically tailored to women-led companies, via TKYB’s internal training infrastructure. Component 2. Capacity-building support to firms and project management and implementation support (US$0.2 million) 32. This component will include three activities. First, it will enhance the capacity of loan beneficiary firms. For SMEs, this component will support capacity building on financial management issues via TKYB’s existing infrastructure. It will also provide training on financial analysis and reporting, economic research, climate resilience and mitigation,46 and sustainability to beneficiary firms throughout the implementation of the project. As was the case under FEC, TKYB will assess the training needs of loan beneficiary firms based on which the topics for the capacity-building activities will be finalized. Capacity-building training will be provided virtually via a training platform and will include assessments to measure participant learning. All loan beneficiary firms will be eligible to receive capacity building support, and non- beneficiary firms linked to loan beneficiaries through the value chain may be provided access to these services based on 44 The standard definition of SMEs in Türkiye includes firms with more than 10 and fewer than 250 employees which is used for the analysis carried out in this document. However, firms with less than 10 employees will also be eligible for the sub-loans under the Project. 45 EIS Data (2023). 46 Trainings on climate adaptation may include topics such as understanding local climate risks, climate risk assessment and management or business continuity planning to address local climate shocks. Trainings on climate mitigation may include topics such as energy efficiency and renewable energy, carbon offsetting or sustainable production and consumption. Page 10 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT criteria set out in the POM. Special attention will be given to women-inclusive firms via targeted outreach to inform them about the availability of these capacity building opportunities. 33. Second, this component will support project implementation. This may include, among others, day-to-day project management, which may encompass key consultants for the technical review of plans submitted by the applicant firms and supervision; subproject development costs, including marketing, outreach, and awareness-raising campaigns targeting industries; implementing financing requirements in compliance with the World Bank’s fiduciary requirements; and ensuring adherence to the ESMS in line with the World Bank’s ESF. Additionally, it will include training and capacity building for the project Implementation Unit (PIU) staff, as well as implementation of gender and citizen engagement activities. The TKYB already has in place an established Monitoring and Evaluation (M&E) system. This component may also finance the improvement of this M&E system, if necessary. 34. Third, there will be activities to strengthen TKYB’s capacity to reach and support SMEs. This project will serve as a vehicle for the TKYB to expand its clientele to SMEs. TKYB is committed to undertaking the actions necessary to achieve this, including (a) developing outreach strategies for SMEs; (b) adapting systems to evaluate credit, E&S and operational risks; (c) adjusting credit and ESMS policies; and (d) developing improved M&E systems for SMEs. TKYB will implement an SME strategy which will be developed under the POM. The SME strategy will detail the various steps that will be undertaken including describing potential partnerships and collaborations with relevant stakeholders and institutions to ensure successful implementation of the Project. This strategy will also include the arrangements for the establishment of the SME Growth and Resilience Facility which will provide long-term support to high-performing SMEs with job creation potential. Through this facility, eligible SMEs will gain access to targeted capacity building trainings for FM and E&S, which will enhance their sustainability and competitiveness and equip them with the tools needed for long-term success. TKYB may complement the activities provided under the project with other activities financed by its own resources, if necessary. E. Role of Partners 35. TKYB will engage in active collaboration with some relevant institutions and some key stakeholders to ensure the successful implementation of the Project. The collaborations will include activities around targeted outreach and support for SMEs as well as reaching women-inclusive firms into the Project. The specific models of collaboration will be detailed in the POM. F. Lessons Learned and Reflected in the Project Design 36. The proposed project builds on the successes and lessons learned from global evidence supporting private sector development, job creation, and strengthening the labor market. The Project takes lessons from global World Bank operational experience, which underlined that preserving firm-worker links, when facing temporary but severe shocks, is an important determinant of an economy’s ability to bounce back quickly as soon as the shock dissipates and is an important metric of its resilience. A recent report found no evidence that the significant temporary shock or the government support policies aimed at assisting firms and preserving employment during the COVID-19 pandemic had a Page 11 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT negative impact on allocative efficiency.47 Even though the COVID crisis was a different shock compared to the earthquake, the principle of using similar employment-preservation, time-bound public support measures, with clear targeting and eligibility criteria, remains and will be applied in this project. Further, global evidence suggests strong links between access to finance and job creation in firms, which forms the conceptual building block of this Project. Expanded access to credit can enable firms to make investments they were previously unable to, boosting productivity and increasing labor demand. This is particularly the case for long-term credit.48 Further, the financing can also be used directly to hire or retain workers, especially those with shorter tenure and higher expected productivity. 49 Finally, effects on employment may also be observed due to recovery of assets, positive spillover effects along the value chain, and a boost to local economic activity. 37. Conceptually, the proposed project incorporates several lessons from the implementation of similar interventions. From an implementation perspective the project design reflects the following lessons learned from previous emergency and crisis-response operations in Türkiye and in other countries: (a) simple and flexible design, allowing for operational adjustments; (b) reliance on financially and technically sound partners as implementing agencies; (c) clear definition of target beneficiaries to ensure limited World Bank resources are directed to where they are most needed; (d) use of quantitative eligibility criteria to ensure viability of end-borrowers; and (e) the partner’s capacity to follow the World Bank’s fiduciary and E&S requirements. 38. While closely following the design of FEC, the project includes certain adjustments reflecting the needs of the target region. The project builds on the successes and lessons learned from the implementation of FEC and introduces modification to the Project design aligned with the urgent needs of the EA provinces. While FEC included multiple financing modalities (direct lending, APEX lending, and grants), the proposed project will include only the direct lending modality, for both LEs (as in FEC) and SMEs. In addition to being a simplification, this modification reflects the operational agility, considering challenges for ESMS capacity building for other institutions, and urgent needs of the EA provinces as well as targeted beneficiary firms. This approach ensures that the benefits of the World Bank financing are passed on to firms. 39. The project addresses a critical market failure exacerbated by the earthquake, which has severely affected SMEs and underserved firms, including women-owned, and disaster-affected businesses, already credit-constrained in normal times. This timely intervention serves as a critical step to support firms in adapting, surviving, and maintaining their role as job creators. Lending by deposit-taking private and state banks have not expanded to the region, despite the efforts of the Credit Guarantee Fund to shift their behavior. Also, their capacity to focus on sustainability priorities and protecting jobs is limited. On-lending through other financial institutions would reduce the effectiveness of the financing for the SMEs by shortening loan maturities and adding layers of complexity in the EA provinces which are under financial tightness. In response, TKYB, as a state-owned development bank, will provide credit lines targeting these vulnerable segments with longer-term financing when necessary, ensuring faster disbursement through direct lending. The project is designed not only to address liquidity gaps but also to protect and create jobs in disaster-affected regions, as many of 47 Apedo-Amah, Marie Christine; Avdiu, Besart; Cirera, Xavier; Cruz, Marcio; Davies, Elwyn; Grover, Arti; Iacovone, Leonardo, et al.;2020. “Unmasking the Impact of COVID-19 on Businesses: Firm Level Evidence from across the World.” Policy Research Working Paper; No. 9434, World Bank Washington, DC. 48 Sommer, C. (2024). “The Impact of Long-Term Finance on Job Quality, Investments and Firm Performance: Cross-Country Evidence.” European Journal of Development Research, 36: 764-776. 49 Caggese, A., Cuñat, V., & D. Metzger (2019). “Firing the wrong workers: Financing constraints and labor misallocation.” Journal of Financial Economics, 133(3): 589-607. Page 12 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT these firms are key drivers of employment. While the US$500 million equivalent project is modest compared to the banking sector’s US$457 billion loan book,50 it focuses on segments overlooked by private banks, minimizing crowd-out risks and fostering resilience, job creation, and economic recovery in disaster-hit areas. Additionally, the significant E&S requirements of the project are more efficiently handled by TKYB, which has built the necessary systems and expertise as a development bank to meet World Bank standards. While FEC included capacity-building support for beneficiary firms (which will continue under the proposed project), this project will include dedicated support for enhancing TKYB’s capacity to reach and serve SMEs, which are a new segment of the market for TKYB. III. PROJECT IMPLEMENTATION A. Institutional and Implementation Arrangements 40. The Project will be implemented by TKYB as the financial intermediary, based on the Loan Agreement between IBRD and TKYB, under the repayment guarantee of the Ministry of Treasury and Finance. TKYB is an experienced implementing agency for development finance institutions projects, including those financed by the World Bank. As a state-owned development bank, it is well suited to implement the proposed operation. TKYB focuses its activities on identified market gaps, including inadequate job creation. As the implementer of the ongoing FEC, it has gained valuable experience in jobs-related interventions, including working closely with SMEs under the grant component, which will be helpful in the implementation of the proposed project. TKYB has a highly capable engineering and environment departments with deep understanding of the E&S aspects and ability to estimate costs and benefits of subprojects. TKYB has already developed a well-functioning M&E platform (Kayist) for the FEC, which can be adapted and further improved quickly (if necessary) for the proposed project. Additional reasons for selecting TKYB include its financial soundness, its good performance in previous and existing IBRD operations, and its strategic shift towards emphasizing sustainability as a key priority. Annex 2 provides a more detailed financial intermediary assessment for TKYB. 41. TKYB recognizes the social, economic, and financial impacts of climate change, as reflected in its Climate Change Mitigation and Adaptation Policy, which was established as a strategic priority in 2023. TKYB is strongly committed to climate mitigation and environmental sustainability. TKYB actively monitors greenhouse gas (GHG) emissions from its operational activities, aims for sustainability targets, and supports climate mitigation practices such as energy and resource efficiency. Notably, 46 percent of TKYB's portfolio is dedicated to renewable energy and energy efficiency projects. By the end of 2023, TKYB financed 6 percent of Türkiye's renewable energy capacity and contributed to the reduction of 4.6 million metric tons of CO2 through its financed projects. Additionally, TKYB implemented educational programs throughout 2023 to raise public awareness of climate change and strengthen efforts to mitigate environmental impacts. In recognition of its climate-related efforts, TKYB achieved a score of B (Management Level) under the Carbon Disclosure Project Climate Change Program in 2023. This score indicates that the TKYB’s climate change activities are well-managed and demonstrate a commitment to continuous improvement. TKYB continues to play a pivotal role in addressing the impacts of climate change in Türkiye. Through its financing of projects that reduce GHG emissions and its support for investments that enhance climate adaptation, TKYB remains a key driver of sustainable development in the region. 50 BRSA, December 2024 Page 13 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT 42. TKYB will establish and maintain a robust PIU necessary and appropriate for the project. That PIU will also manage this project’s activities and carry out all fiduciary responsibilities. The PIU capacity might be enhanced by additional TKYB staff and/or external consultants, as needed, to effectively handle its expanded responsibility of managing the Project. The PIU responsibilities will include (a) coordinating subproject identification/development including marketing, outreach, and awareness-raising campaigns; (b) coordinating the TKYB’s direct lending to SMEs and large firms under the Project in compliance with subproject eligibility criteria which will be detailed in POM; (c) ensuring adherence to all fiduciary and safeguard requirements of the Word Bank by the sub-loan borrowers; (d) providing FM arrangements for the project; (e) carrying out all necessary procurements; and (f) ensuring M&E and reporting based on agreed results indicators. 43. TKYB may complement the activities under the Project by other activities financed by its own resources, if necessary, to ensure successful implementation. TKYB will cover additional costs (not covered by IBRD financing under Component 2) related to (a) project management and implementation, (b) the necessary investments in its own capacity (such as hiring staff), and (c) as needed, setting up partnerships and cooperation models with relevant institutions and key stakeholders to ensure that the project is implemented successfully. The SME strategy, which TKYB will develop as part of the POM, will offer a detailed roadmap for TKYB’s capacity building and for potential collaborations with stakeholders. 44. A POM will be developed and finalized before effectiveness. The POM will detail the criteria for implementation, firm selection, and responsibilities of potential stakeholders and institutions involved in the Project. It will also elaborate on the details of the SME Strategy. B. Results Monitoring, Evaluation, and Verification Arrangements 45. The PIU will provide progress reports on the PDO and intermediate indicators every six months. The PIU will prepare semiannual project progress reports, semiannual reports presenting the progress with the key indicators related to the Project,51 and semiannual E&S monitoring reports to be shared with the World Bank. The TKYB is accustomed to collecting such information from beneficiary enterprises for previous World Bank projects. Additionally, a well- functioning M&E platform (Kayist) built for the FEC may be adapted and, if necessary, further improved for the project, especially to monitor the employment results under the Project. A midterm and end line citizen engagement survey will be conducted by TKYB to seek feedback from beneficiary firms on their satisfaction with the project. The PIU will discuss the survey results with the World Bank, and the results will inform project implementation, as appropriate. The financial performance of TKYB will be monitored through independent auditors’ reports and separate management letters confirming adherence to prudential norms. C. Disbursement Arrangements 46. The Project will disburse using the traditional disbursement techniques. There will be two Designated Accounts for the project, and the ceiling amount, minimum application size for payments directly from the loan account for the issuance of Special Commitments, as well as the Statement of Expenditure (SOE) limits will be defined in the Disbursement and Financial Information Letter. Two authorized signatories will sign the withdrawal applications. The full documentation in support of SOEs, including completion reports and certificates, will be retained by TKYB for at least two 51Key indicators will include Results Framework indicators, and some other indicators related to the Project and template of the report will be presented in the POM. Page 14 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT years after the World Bank has received the audit report for the fiscal year in which the last withdrawal from the loan account was made. This information will be made available for review during supervision visits by World Bank staff and for annual audits. Disbursements for expenditures above the SOE thresholds will be made against the presentation of full documentation of the expenditures. IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis (if applicable) 47. The project is estimated to create 17,000 jobs of which 10,000 are direct jobs and 7,000 are better and indirect jobs, and will generate benefits through several channels. First, it will generate additional formal jobs by easing financial constraints, which will generate a positive cash flow to the region by increasing wages compared to informal employment or increased income compared to the average unemployment benefit. In addition to direct job creation, there will be indirect job creation via the local employment multiplier. The local employment multiplier measures the indirect job creation that occurs when a new job is created in a particular sector or firm.52 It captures the spillover effects of an initial job on job creation in other local businesses and industries within the same region or community. Next, additional employment results in sales growth in local labor markets due to an increase in demand.53 Lastly, access to longer-term finance provides firms with the means to undertake investments or assume risks they might otherwise avoid. These investments, in turn, have the potential to drive productivity improvements over time and can also help increase wages of existing workers in beneficiary firms (referred to as ’better jobs’). 48. The first step in the economic analysis is to estimate the impact of the project on direct job creation. For this, the analysis relies on employment coefficients from EIS data. Employment elasticity measures how sensitive employment is to changes in economic output or another variable like loan size, wages, or firm revenue. The most common way to calculate employment elasticity is to estimate it using a log-log regression model. The economic analysis relies on a log- log regression using EIS data from 2019 to 2023 in the 18 project provinces and estimates the effect of logged longer- term financial loans and logged employment. The resulting coefficient represents the percentage change in employment based on a 1-percent change in long-term loans. These coefficients are estimated separately for SMEs54 and LEs. The regression controls for time-specific shocks, such as the COVID-19 pandemic, and sector fixed effects to control for time- invariant differences across economic sectors that affect both credit availability and employment, such as varying capital intensity, employment norms, risk profiles, and regulatory environments at the sector level. The analysis reveals employment elasticities of 0.19 percent for SMEs and 0.3 percent for LEs. 49. The coefficients are combined with additional information from EIS data to calculate the number of direct formal jobs created through the Project. The employment coefficients are multiplied by the average baseline number of jobs per firm as well as the average loan size as a share of the average long-term loan for SMEs and LEs respectively. Based on a total amount of US$498.55 million for Component 1 and an SME ratio of 70 percent, the calculation reveals that the project generates, on average, 12 additional jobs per targeted SME (an increase of 19 percent over the average 52 Thompson, G. E. (1959). An investigation of the local employment multiplier. The Review of Economics and Statistics, 61-67. 53 Davis, S. J., & Haltiwanger, J. (1990). Gross job creation and destruction: Microeconomic evidence and macroeconomic implications. NBER macroeconomics annual, 5, 123-168. 54 The definition of SMEs in the economic analysis follows the official national definition: “SME” means a private enterprise that employs between 11 and 249 employees. Page 15 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT number of jobs per SME in the project region) and 88 additional jobs per LE (an increase of 11.9 percent over the average number of jobs per LE). In total, these add up to 2,473 additional jobs in SMEs and 7,565 additional jobs in LEs, totaling just over 10,000 direct jobs. 50. An alternative estimate of the number of jobs created through the project comes from the results of the FEC. Based on employment data as of June 2024, FEC has generated 3,414 jobs in SMEs under its APEX component based on sub-loan amounts of approximately US$148.5 million, and 3,452 jobs in LEs under the direct lending component based on a sub-loan amount of US$128 million, which when extrapolated to FEC-2 (based on assumptions regarding average sub-loan sizes) provides an estimate of 10,000-12,000 direct jobs. Combining the estimates based on EIS data as well as the results of FEC, the project will target the creation of 10,000 direct jobs. 51. In addition to direct job creation, the Project can lead to productivity increases in beneficiary firms and also result in better jobs. Estimates from international literature show positive effects of access to long-term finance on productivity.55 For example, in the case of Brazil, the conditional average labor productivity and total factor productivity increased by 9 and 11 percent, respectively, among smaller firms.56 Similarly, evidence from Italy shows that negative credit-supply shocks resulted in a decrease in firm productivity.57 The negative effect of credit constraints on productivity is typically larger for SMEs than for LEs.58 Increased labor productivity would result in higher wages, leading to better jobs. Given that it might not be possible to extrapolate the productivity estimates from other studies to the context of this project, several estimates are explored, varying the coefficient from 1 to 9 percent. The economic analysis assumes that firm-level productivity increases directly translate into profit increases. 52. The project is also estimated to create indirect jobs. The multiplier effect of direct jobs ranges from 0.26 to 1.89 additional jobs for each new job.59 The large range is because several factors including the skill level of workers and sector of activity influence this elasticity. A simple extrapolation using these elasticities would results in 2,610 to 18,971 indirect jobs. However, it must be noted that (a) the elasticity range comes from a study using data from the United States and its external validity to the Türkiye is not known, (b) the project will operate in the EA provinces of the country, which is faced with challenging economic conditions, and (c) job creation (both direct and indirect) is influenced by several factors, including broader economic conditions. Overall, therefore, indirect employment effects are difficult to predict, so uncertainty needs to be factored into the estimation. Based on these factors, the project is estimated to create a total of 10,000 direct jobs and 7,000 better and indirect jobs.60 55 de Sousa, F. L., & Ottaviano, G. I. 2018. “Relaxing Credit Constraints in Emerging Economies: The Impact of Public Loans on the Productivity of Brazilian Manufacturers.” International economics 154: 23-47. 56 Cavalcanti, T., & Vaz, P. H. 2017. “Access to Long-Term Credit and Productivity of Small and Medium Firms: A Causal Evidence.” Economics Letters 150: 21-25. 57 Dörr, S., Raissi, M., & Weber, A. 2018. “Credit-Supply Shocks and Firm Productivity in Italy.” Journal of International Money and Finance 87: 155- 171. 58 Rodríguez‐Pose, A., Ganau, R., Maslauskaite, K., & Brezzi, M. 2021. “Credit Constraints, Labor Productivity, and the Role of Regional Institutions: Evidence from Manufacturing Firms in Europe.” Journal of Regional Science 61 (2): 299-328. 59 Moretti, E. 2010. “Local Multipliers.” American Economic Review 100 (2): 373-377. 60 International evidence and evidence from other projects by Multilateral Development Banks show that the costs associated with the creation of one job vary significantly by country and economic sector. The targeted cost-per-job ratio of FEC-2 lies within the range of existing estimates. Given the multiple factors which jointly determine job creation, the targets will be closely monitored during Project implementation and revised if necessary. Page 16 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT 53. The analysis estimates the increase in income per worker because of the project. Given that the project creates additional formal jobs, it generates income for these workers. Wages are higher in the formal than in the informal sector in Türkiye, and - in relative terms - these differences are especially marked for workers of SMEs. Data from the 2022 Household Labor Force Survey indicates that wages are more than two times higher in the formal than informal sector, both for workers of SMEs and LEs.61 The economic analysis relies on this data to calculate the benefit stream at the worker level, assuming that the average wage increase achieved by the project is equivalent to the average difference between formal and informal wages in SMEs and LEs. These calculations assume that the employment generation of the project mainly takes place through the formalization of informal workers. To address an alternative channel which could take place via the activation of unemployed people, a scenario analysis is included that calculates the benefit stream of workers based on the difference between formal wages in SMEs and LEs and the average unemployment benefit in Türkiye as well as an opportunity cost of zero. 54. Next, the analysis assumes that the additional demand effect, driven by increases in formal employment and workers’ income, is proportional to the relative increase in the number of workers. This translates the relative increase in the number of workers into a relative increase in profit among companies, assuming a proportional translation of additional workers into demand and ultimately additional profit. 55. The project will also generate costs for the firms benefiting from it. First, the companies have to pay the loan costs and related interest. It is assumed that the loan costs are spread out evenly across five years,62 with firms paying the officially reported average interest rate for commercial loans in Türkiye. Once the project concludes, firms must still pay for the higher wages due to the formalization and creation of jobs achieved through the project. Workers do not incur any costs, even after the project officially ends. 56. The project’s economic feasibility has been analyzed based on several scenarios. These scenarios include varying the time horizon to consider 5, 10, 15, 20, 25, and 30 years, gradually increasing the discount rate from 2.5 to 3.5 to 5 percent, varying the multiplier effect as it directly affects the total number of formal jobs created, and lastly considering different opportunity costs of formal jobs. As detailed in the paragraphs below, the scenario analysis shows that the project is economically feasible across the board, especially for longer time horizons. 57. The economic analysis is subject to limitations. First, it abstracts from benefits created through Component 2. These institutional reforms might generate long-term benefits beyond those modeled in the analysis because TKYB might extend financial facilities to the SME market that go beyond this project. It also neglects additional benefits that could emerge because of job creation, such as a decrease in social tensions or crime, or second-order, intergenerational welfare effects. In addition, it abstracts from potential job retention (protection) which could be an additional employment channel and from refinancing mechanisms and reflow of funds. 58. Besides these limitations, the analysis relies on strong assumptions. First, the direct, proportional translation of loan sizes into profits might not reflect the reality. Second, estimating the exact profit and employability elasticities is subject to empirical limitations and might suffer from spurious correlation beyond factors controlled for by fixed effects. Third, the true opportunity cost of employment is difficult to observe and measure, and the estimates used here might 61 Source: Own estimates based on national household labor force survey. 62 This approach assumes limited disbursement in the first year of the 6-year-long Project implementation period. Page 17 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT be a simplification. Similar observations apply to the multiplier effect. Moreover, the analysis relies on assumptions around the average loan sizes for SMEs and LEs (US$350,000 and US$5 million, respectively). These loan sizes, together with the SME target (70 percent), directly determine the number of firms. Lastly, the cash flow reflects a constant number of firms and workers per year, which is a simplification of how beneficiary firms and workers might onboard the project in reality. 59. The economic analysis reveals that the project is a worthwhile investment. Table 2 presents the results for three selected scenarios assuming a profit elasticity of 9 percent, a multiplier effect of 0.28 (lower bound), and an SME target of 70 percent. The net present value (NPV) is positive across the board for these scenarios and increases over time. This result is expected as firms assume the cost of the loan and interest rates during the initial five years. Afterwards, they benefit from productivity increases and increased demand for their goods and services but must pay the workers’ salaries. For workers, the project registers an immediate positive cash flow due to the increased income resulting from the formal employment creation. In concrete terms, using average loan sizes of US$350,000 for SMEs and US$5 million for LEs, EIS employment coefficients and multiplier effects to proxy the number of jobs created, the project generates an NPV of US$335 to US$2,689 million, considering a 10- to 30-year period, depending on the multiplier effect and the discount rate used. The lower the opportunity costs, the higher the NPV. The value of the NPV depends critically on the project’s potential to increase demand, profits, and jobs. Table 2: Sensitivity of NPV to Discount Rate, Time, Opportunity Costs, and Multiplier Effect – Selected Set of Scenarios Discount Opportunity Time NPV Scenario Rate Costs Frame (US$, millions) (%) 1 2.5 Informal wage 10 404.02 1 2.5 Informal wage 15 747.94 1 2.5 Informal wage 20 1,051.91 1 2.5 Informal wage 30 1,558.05 2 3.5 Informal wage 10 374.72 2 3.5 Informal wage 15 678.04 2 3.5 Informal wage 20 933.42 2 3.5 Informal wage 30 1,329.49 3 5.0 Informal wage 10 335.34 3 5.0 Informal wage 15 587.21 3 5.0 Informal wage 20 784.56 3 5.0 Informal wage 30 1,060.34 60. The project’s financial and economic feasibility critically depends on its potential to increase the profit among beneficiary firms. The Project’s NPV critically varies with the productivity (profit) coefficient (compare figure 2). For example, a coefficient of 5 percent would result in a positive NPV directly after the initial project implementation period. In contrast, a coefficient of 1 percent leads to a negative NPV during the first 10 years. These estimates show that the project’s possibility to generate growth is crucial for its success. The selection of firms with high growth potential will be critical for the project’s financial and economic feasibility. Page 18 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Figure 2: Sensitivity of NPV (in US$, millions) to Profit Coefficient – Selected Scenarios 1600 1400 NPV ( US$ Million) 1200 1000 800 600 400 200 0 -200 -400 1.0% 3.0% 5.0% 9.0% 1.0% 3.0% 5.0% 9.0% 1.0% 3.0% 5.0% 9.0% 1.0% 3.0% 5.0% 9.0% 1.0% 3.0% 5.0% 9.0% 5 10 15 20 30 Profit coefficient and time period Note: The NPV demonstrated in the graph relies on the following parameters: SME ratio is 70 percent, multiplier effect is 0.26 (so lower bound), discount rate is 3.5 percent, and opportunity costs are the average informal wages estimated from LFS 2022. 61. The proposed project is aligned with Türkiye’s national climate adaptation and mitigation policies and strategies. In the latest Nationally Determined Contributions, the country commits to become a low-carbon economy with a 41 percent reduction in GHG emissions by 2030 compared to business-as-usual, including measures such as active support for a green transition in the industry.63 On adaptation, in its recent Climate Change Adaptation Strategy and Action Plan (2024-2030), Türkiye identifies key priorities such as social protection policies that enhance public resilience and adaptation to existing or potential climate hazards and climate adaptation policies that promote equal opportunities to ensure the well-being of all segments of society, particularly vulnerable groups. The project also aligns with the strategic priority of Türkiye to integrate vulnerability and risk assessments across sectors, particularly the industry sector, into decision-making and monitoring processes.64 Lastly, the project is aligned with Türkiye’s 2053 Long Term Climate Strategy, where Türkiye recognizes the importance of a just transition, that prioritizes increasing the resilience of groups highly vulnerable to climate change such as women, workers at high risk of job loss and SMEs, while promoting inclusive employment and social cohesion. 62. Paris alignment. The proposed project is aligned with the goals of the Paris Agreement on both mitigation and adaptation. The operation was assessed for Paris alignment using the instrument method for Investment Project Financing (IPF) through a financial intermediary, based on a counterparty-based assessment. The results are as follows: (a) Assessment of Mitigation Risks: TKYB’s has a functional ESMS, in compliance with the World Bank’s ESF, which includes provisions for the efficient use of energy, water, and materials. GHG accounting will be conducted for relevant sub-loans, and measures will be taken to ensure compliance with Türkiye’s national regulations. TKYB will not finance activities on the universally non-aligned list;65 and (b) Assessment of Adaptation Risks: Climate hazards in the 18 provinces include floods, landslides, extreme heat, drought, and wildfires.66 TKYB’s ESMS mandates a climate risk 63 Republic of Türkiye. 2023. Updated First Nationally Determined Contribution 64 Republic of Türkiye. 2024. Climate Change Adaptation Strategy and Action Plan (2024 - 2030) 65 https://documents1.worldbank.org/curated/en/099220306162369703/pdf/IDU00ef11f9807471044870b9c6041d5dda75c78.pdf 66 https://thinkhazard.org/en/report/249-turkey Page 19 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT screening for investment sub-loans. TKYB will ensure that measures are adequate to manage any identified risks to acceptable levels. Investments with inherently high risk will be excluded. 63. Citizen engagement. Project activities will involve beneficiaries in two-way engagement processes, similar to those in the FEC. The project will develop and adopt a set of participatory tools for engaging beneficiaries, tailored to suit the firms and employees of the beneficiary firms. The FEC included strong citizen engagement-related activities, such as a citizen engagement survey for sub-loan beneficiary firms that helped identify challenges encountered during the loan application phase, leading to a simplified process. Building on this, the citizen engagement-related activities under the proposed project will include (a) a participatory needs assessment to understand the training needs of firms; (b) post- training assessments; (c) satisfaction surveys of beneficiary firms; and (d) the establishment of a grievance redress mechanism for all stakeholders to register complaints. A survey of beneficiary firms will be carried out to assess whether the financing provided under the project met their needs, and the results will be tracked as part of the Project Results Framework. B. Fiduciary (i) Financial Management 64. The FM assessment was performed in January 2025. TKYB is currently implementing FEC and has satisfactory FM arrangements in place. The same arrangements will be applicable for this project which are satisfactory for the World Bank. The FM risk and the consolidated fiduciary risk are moderate. The project will be financed by a loan from the World Bank. TKYB will provide sub-loans and capacity building support to SMEs and LEs for formal job creation. TKYB has experience in implementing financial intermediation loans funded by the World Bank and other multilateral development banks (MDBs), including in both direct lending and on‐lending through PFIs, with the most recent one being FEC. TKYB will implement the project within its existing organizational structure. A separate PIU will be established at TKYB for FEC- 2 that will be responsible for coordinating the implementation of this project and will also have fiduciary responsibility. The staff selected will have experience in procurement, FM, and M&E, and also provide technical support under the project, ensuring compliance with the World Bank requirements for procurement, reporting, auditing, and monitoring. 65. The details of internal controls procedures will be reflected in the POM which will follow the same format as that of FEC. The financial covenants are as follows: • Maintaining an FM system satisfactory to the World Bank throughout project implementation; • Compliance by TKYB with prudential regulations set out by the Banking Regulation and Supervision Agency (BRSA) and other authorities; • Annual audit of TKYB financial statements based on Turkish Accounting Standards or International Financial Reporting Standards (IFRS); • Annual audit of the project financial statements in accordance with the International Standards on Auditing; • Preparation of a POM satisfactorily covering the FM arrangements and internal controls procedures by effectiveness. 66. No budgeting procedures are envisaged as the project will mainly provide financing to beneficiary firms under Component 1. The Procurement Plan (PP) will define the expenditure under Component 2. The FM of the project will be fully integrated into TKYB’s own system which facilitates the follow-up of loans extended to the companies from the Page 20 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT initial application to the approval and monitoring stages. The unaudited interim financial reports (IFRs) and year-end reports will be generated using data in the system. The IFRs will be prepared semi-annually. The system has adequate security levels. TKYB has well-established loan application procedures that were also successfully applied under the FEC. TKYB has a department responsible for auditing its business processes. The transactions under the project will also be subject to internal audit in compliance with the audit program of the department. 67. Under the Project, TKYB will be required to submit its audited entity financial statements prepared in accordance with Turkish Accounting Standards (which are fully compatible with the IFRS) and project financial statements to the World Bank within six months following the end of the year. The project financial statements are required to be made publicly available in accordance with the World Bank guidelines. An abridged version of the audited project financial statements will be made publicly available, considering that the statements might have commercially sensitive information. Table 3. Project Audit Plan Audit Report Due Date Entity financial statements prepared in accordance Within six months after the end of each calendar year and also at with Turkish Accounting Standards the closing of the project. Within six months after the end of each calendar year and also at Project financial statements the closing of the project. (ii) Procurement 68. Procurement Regulations: The World Bank Procurement Regulations for IPF Borrowers dated September 2023 (‘Procurement Regulations’) will apply to Component 2 of the project. TKYB will assume full credit risk in on lending the financings to private sector borrowers under Component 1 of the project and therefore the Procurement Regulations do not apply to the procurement of goods, works, non-consulting services, and consulting services under Component 1 of the project (refer to paragraph 2.2 (b) of the Procurement Regulations). 69. Anti-Corruption Guidelines: The World Bank’s Guidelines on ‘Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and International Development Association (IDA) Credits and Grants’, dated October 15, 2006 and revised in January 2011 and as of July 1, 2016 (‘Anti-Corruption Guidelines’), will apply to the proposed project. 70. A General Procurement Notice will be published on the World Bank’s external website and United Nations Development Business online. 71. PPSD: A Project Procurement Strategy for Development (PPSD) for Component 2 has been prepared by TKYB and agreed by the World Bank as required by the Procurement Regulations to determine the optimum procurement approach to deliver the right procurement result under the proposed project. It is envisaged that the sizes of the procurements under Component 2 are generally small, and their risks are also low. TKYB is yet to define the estimated cost of the procurement packages after which the PP will be finalized. 72. Procurement risk assessment. The World Bank conducted a procurement assessment for the project in February 2025, focusing on TKYB in terms of (a) procurement regulatory framework and management capability, (b) integrity and oversight, (c) procurement process and market readiness, and (d) procurement complexity. While the Procurement Regulations will apply in the proposed project, the assessment concludes that (a) applicable procurement policies and Page 21 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT the regulatory system are designed broadly to meet core procurement principles of value for money, economy, efficiency, effectiveness, integrity, transparency, fairness, and accountability; (b) the TKYB has a clear system of accountability with clearly defined responsibilities and delegation of authority on who has control of procurement decisions; (c) there is a clearly identified target market for all procurements; and (d) TKYB effectively manages contracts to ensure delivery according to the contract conditions. Given TKYB’s experience under World Bank-financed projects and that the expected size of procurements under the project are small and with low risk, the overall procurement risk for the project is assessed as Low. The assessment was recorded in the Procurement Risk Assessment and Management System of the World Bank. 73. PP and procurement tracking. The Procurement Regulations require the TKYB to use the World Bank’s Systematic Tracking of Exchanges in Procurement (STEP), an online procurement tracking tool to prepare, clear, and update its PPs and conduct all procurement transactions. TKYB will create the PP through STEP before initiating any procurement activity under Component 2. The PPSD and the underlying PP will be updated at least annually or as required to reflect the actual project implementation needs. All the procurement-related complaints will be recorded in the STEP complaint module by TKYB. TKYB will not proceed with the next stage/phase of the procurement process, including awarding a contract without satisfactory resolution of the complaint(s). 74. Procurement supervision frequency. The World Bank will review the procurement arrangements performed by TKYB under Component 2, including contract packaging, applicable procedures, and the scheduling of the procurement processes, for their conformity with the Loan Agreement. Procurements that did not have ex ante due diligence by the World Bank will be subject to ex post due diligence on a sampling basis in accordance with the procedures set forth in Paragraph 4 of Annex II to the Procurement Regulations. A post review of the procurement documents will normally be undertaken annually and/or during the World Bank’s supervision mission, or the World Bank may request to review any contracts at any time. In such cases, the TKYB shall provide the WB with the relevant documentation for its review. 75. Operating costs will not be considered under World Bank procurement implementation. C. Environmental, Social and Legal Operational Policies @#&OPS~Doctype~OPS^dynamics@padlegalpolicy#doctemplate Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Area OP 7.60 No 76. The overall E&S risk rating is Substantial, as the project involves activities that, while not expected to create significant irreversible E&S risks to human and environmental health, still present considerable challenges. The structure of the project is based on providing loans to SMEs to LEs. Large-scale civil works are not expected within the project's scope; however, small-scale construction and rehabilitation works may be financed. A screening mechanism will be put in place to allow for the identification and exclusion of subprojects of high risk and those likely to have adverse impacts on sensitive areas (for example, nationally and internationally protected areas and cultural heritage). There are Page 22 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT no restrictions on sectoral basis at this stage, except for the exclusion list of TKYB and the World Bank (to be described in the POM). While the project has a broad sectoral scope, the project is expected to prioritize activities with the potential to create jobs and significant positive economic spillovers. However, certain polluting industries may also seek financing under the project. These industries could include manufacturing, construction, or agriculture, which inherently carry environmental risks such as resource depletion, pollution, and waste generation. The project may finance a wide range of activities, including: procurement of equipment and machinery that may generate hazardous waste (for example, e- waste, chemical waste); small-scale construction or upgrades within existing facilities that may involve excavation, installation, or structural modifications; and operational expansions in certain industries, potentially leading to increased emissions or waste. The project supported civil works and other operations may carry risks and cause adverse impacts, specifically, emissions of dust and vehicle exhausts impacting air quality, noise and vibration, generation of hazardous and non-hazardous waste and soil pollution, occupational health and safety (OHS)-related risks, traffic and road-related risks from increased traffic volume and movement of heavy-duty vehicles, and associated community health and safety. The potential impacts are mostly temporary, predictable and/or reversible, and the nature of the project does not preclude the possibility of avoiding or reversing them (although substantial investment and time may be required). There is a medium to low probability of serious adverse effects on human health and/or the natural environment (for example, due to accidents, toxic waste disposal), and there are known and reliable mechanisms available to prevent or minimize such incidents. To address these risks, the project will develop a robust screening and monitoring system for subprojects to ensure that E&S risks are identified and mitigated appropriately, strengthen the capacity of loan beneficiary firms through training on E&S safeguards, including pollution prevention, resource efficiency, and climate resilience, and include measures to ensure compliance with national environmental regulations and the World Bank’s Environmental and Social Standards (ESS). 77. The social risk is assessed as Moderate as the potential adverse social risks and impacts are not likely to be significant in scale or type and can be mitigated in a predictable manner. The project is designed to increase job creation in EA provinces which are already lagging regions in terms of poverty and unemployment and hence could result in positive social outcomes. Potential subprojects and their supporting activities are not yet entirely known. Although not very likely, the subproject activities may lead to limited land acquisition and involuntary resettlement. This may occur in cases of expansion of current facilities which may require additional land and associated facilities such as energy transmission lines that may be required as part of project activities. Risks to cultural heritage, and community health and safety are limited, and labor influx is not expected. The main social risks will be associated with labor and working conditions and OHS in beneficiary firms and social inclusion aspects, such as access to finance by women-led or women- managed industries, as they are likely to face greater obstacles in accessing finance in Türkiye including EA provinces. Also, sectors such as agriculture and textile can pose specific risks like child labor, exposure to hazards such as pesticides especially for vulnerable groups like women and children, and health hazards associated with waste management. These risks will be managed by the measures included in the project design and TKYB’s ESMS. Thus, the potential social impacts and commensurate risks are not significant and are rated as Moderate. 78. To address these risks, the project will implement several mitigation measures. These include a screening mechanism to identify and exclude high-risk subprojects and those with significant impacts on sensitive areas; TKYB’s ESMS to screen out potential risks to important habitats and ensure compliance with ESS; waste management plans to handle hazardous and non-hazardous waste appropriately; noise and dust control measures to minimize air quality impacts; OHS measures to ensure safe working conditions and manage occupational health and safety risks; traffic Page 23 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT management plans to address traffic and road safety risks; and community health and safety plans to mitigate impacts on local communities. Grievance Redress Services: 79. Grievance redress. Communities and individuals who believe that they are adversely affected by a project supported by the World Bank may submit complaints to existing project-level grievance mechanisms or the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred, or could occur, as a result of Bank non-compliance with its policies and procedures, and the Dispute Resolution Service, which provides communities and borrowers with the opportunity to address complaints through dispute resolution. Complaints may be submitted to the AM at any time after concerns have been brought directly to the attention of Bank Management and after Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s Grievance Redress Service (GRS), visit http://www.worldbank.org/GRS. For information on how to submit complaints to the Bank’s Accountability Mechanism, visit https://accountability.worldbank.org. V. KEY RISKS 80. The overall risk rating of the Project is Moderate. This rating considers the good performance of the FEC, including the absence of any important fiduciary or social issues, the strong experience of TKYB in implementing World Bank-financed operations, and the simplified technical design of this follow-on project and its implementation arrangements. The E&S risk is rated Substantial, while all other risks are rated as Moderate. 81. The E&S risk is Substantial. The project involves activities that, while not expected to create irreversible E&S risks to human and environmental health, still present considerable challenges. The main challenges include managing labor and working conditions, hazardous waste management, emissions of dust and vehicle exhausts affecting air quality, noise and vibration, and ensuring OHS in beneficiary firms. To address these risks, the project will implement several mitigation measures, including (a) screening of potential risks and exclusion of high-risk subprojects, (b) waste management plans to handle hazardous and non-hazardous waste appropriately, (c) OHS measures to ensure safe working conditions, and (d) community health and safety plans to mitigate impacts on local communities. 82. All other risks are Moderate. The Project builds on the lessons learned from the implementation of FEC with a simpler design focusing on direct lending. While this will be the first time that TKYB will be directly lending to SMEs at a large scale, which entails a potential risk, the design includes several features, including support under Component 2 and collaboration with key stakeholders, which will mitigate this risk. As such, the technical design risk as well as institutional capacity for implementation and sustainability risks are rated as Moderate. Fiduciary and macroeconomic risks are also rated as Moderate. Support from the Government as well as other stakeholders for projects that further job creation is strong, and hence relevant strategies and policies are expected to be conducive to the successful implementation of this Project. Given this, political and Governance risks and sector strategies and policies related risks, and stakeholder risks are rated as Moderate. Page 24 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT ANNEX 1. RESULTS FRAMEWORK @#&OPS~Doctype~OPS^dynamics@padannexresultframework#doctemplate PDO Indicators by PDO Outcomes Baseline Closing Period Enhanced conditions for formal job creation by firms operating in the earthquake affected areas Number of firms in the earthquake affected provinces receiving sub-loans (Number) May/2025 Mar/2031 0 286 ➢Share of which are SMEs (Percentage) May/2025 Mar/2031 0 70 ➢Share of which are women-inclusive (Percentage) May/2025 Mar/2031 0 20 Share of beneficiary firms that maintain or increase their employment after receiving the sub-loan (Percentage) May/2025 Mar/2031 0 75 ➢Share of SME beneficiary firms that maintain or increase their employment after receiving the sub-loan (Percentage) May/2025 Mar/2031 0 70 Intermediate Indicators by Components Baseline Closing Period Loans to SMEs and LEs for formal job creation Citizen engagement: Sub-loan beneficiaries report that project sub-finance reflected their needs (Percentage) May/2025 Mar/2031 0 80 Ratio of the average maturity of LE sub-loans under the project, to the average maturity of TKYB's regular portfolio (Number) May/2025 Mar/2031 Page 25 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT 1 >1 Number of new or better jobs created (Number) May/2025 Mar/2031 0 17,000 ➢Number of new or better jobs created for women (Number) May/2025 Mar/2031 0 4,500 ➢Number of new or better jobs created for youth (Number) May/2025 Mar/2031 0 2,600 Share of Non-Performing Loans (Percentage) May/2025 Mar/2031 0 <5 Capacity-building support to firms and project management and implementation support SME Growth and Resilience Facility Established (Text) May/2025 Mar/2031 No Yes Share of sub-loan beneficiary firms that receive capacity building support (Percentage) May/2025 Mar/2031 0 70 Page 26 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Monitoring & Evaluation Plan: PDO Indicators by PDO Outcomes Enhaced conditions for formal job creation by firms operating in the earthquake affected areas Number of firms in the earthquake affected region receiving sub-loans (Number) Description This indicator will track the number of firms (SMEs and LEs) which receive financing under this Project. Frequency Bi-Annual Data source TKYB administrative data Methodology for Data Collection TKYB Reports based on administrative data of loan provision Responsibility for Data Collection TKYB Share of which are SMEs (Percentage) Share of sub-loan beneficiary firms that have fewer than 250 employees at the time of submitting the sub-loan application. The Description denominator of this indicator is the total number of sub-loan beneficiary firms of the project, and the numerator is the number of sub-loan beneficiary firms of the project that had fewer than 250 employees at the time of submitting the sub-loan application. Frequency Bi-Annual Data source TKYB administrative data combined with beneficiary firm reports Methodology for Data Collection Reports counting the number of SME’s based on TKYB administrative data of loan provision and beneficiary firm declaration Responsibility for Data Collection TKYB Share of which are women-inclusive (Percentage) Share of loan beneficiary firms that are women-inclusive. Women-inclusive firms are defined as firms that: (a) are owned by women67 (that is, with at least one female shareholder with a properly documented representative and managing powers); or (b) are managed by women (that is, with at least one female C-level manager or with at least 25 percent female representation in mid-level management); or (c) have a Description majority of employees who are women; or (d) employ a ratio of women higher than the average ratio observed in the respective sector; or (e) have increased the share of women employment by at least 5 percent in the previous year. The denominator of this indicator is the total number of sub-loan beneficiary firms of the project, and the numerator is the number of sub-loan beneficiary firms of the project that are women-inclusive. Frequency Bi-Annual Data source TKYB administrative data combined with beneficiary firm reports Reports counting the number of women-inclusive firms based on TKYB administrative data of loan provision and beneficiary firm Methodology for Data Collection declaration Responsibility for Data Collection TKYB Share of beneficiary firms that maintain or increase their employment after receiving the sub-loan (Percentage) 67 A women-owned business/women-owned enterprise/women-led enterprise is a business or enterprise that is: (a) at least 51 percent by vote and value owned by a woman or women, where such woman or women direct or cause the direction of management, policy, fiscal and operational matters; or (b) at least 20 percent by vote and value owned by a woman or women and: (i) has at least one woman in a senior executive role (for example, chief executive officer, chief operating officer, president, vice-president or similar senior executive management role); and (ii) if it has a board of directors or other managing board or committee, at least 30 percent of the members of such board or committee are women; or (c) carried out, or owned and operated by, a woman (or women). Page 27 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT The denominator of this indicator is the total number of sub-loan beneficiary firms of the project. The numerator is the number of sub-loan Description beneficiary firms of the project which have a number of employees that is equal to or higher than the number of employees they had at the time of sub-loan application. Frequency Bi-Annual Data source Project progress reports - Firm declaration during the lifetime of the sub-loan, Methodology for Data Collection - Analysis of the external firm level databases after the sub-loan maturity and during the implementation period of the Project Responsibility for Data Collection TKYB Share of SME beneficiary firms that maintain or increase their employment after receiving the sub-loan (Percentage) The denominator of this indicator is the total number of sub-loan beneficiary firms of the project which are SMEs (fewer than 250 Description employees at the time of submitting the sub-loan application). The numerator is the number of sub-loan beneficiary SMEs which have a number of employees that is equal to or higher than the number of employees they had at the time of sub-loan application. Frequency Bi-Annual Data source Project progress reports - Firm declaration during the lifetime of the sub-loan, Methodology for Data Collection - Analysis of the external firm level databases after the sub-loan maturity and during the implementation period of the Project Responsibility for Data Collection TKYB Monitoring & Evaluation Plan: Intermediate Results Indicators by Components Component 1: Loans to SMEs and LEs for formal job creation Number of new or better jobs created (Number) This indicator will be calculated as the sum of the following: (a) change in the number of employees of sub-loan beneficiary firms relative to the number of employees at the time of sub-loan application, (b) change in the Description employment of firms in the value chain of sub-loan beneficiary firms, and (c) number of workers in sub-loan beneficiary firms who experience an increase in wages after the provision of the sub-loan (relative to the average rate of wage inflation). Frequency Annual Data source Project progress reports, external firm level database - Firm declaration during the lifetime of the sub-loan for (a) the Description above; - Analysis of the external firm level databases for (a) after the sub-loan maturity; (b) and (c) during the Methodology for Data Collection implementation period of the Project. Provided that external firm level databases might be accessed with required frequency during the implementation period of the Project for all of (a), (b), and (c). Page 28 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Responsibility for Data Collection TKYB Number of new or better jobs created for women (Number) This indicator will be calculated as the sum of the following: (a) change in the number of women employees of sub- loan beneficiary firms relative to the number of employees at the time of sub-loan application, (b) change in the Description employment of women in firms in the value chain of sub-loan beneficiary firms, and (ciii) number of women workers in sub-loan beneficiary firms who experience an increase in wages after the provision of the sub-loan (relative to the average rate of wage inflation). Frequency Annual Data source Project progress reports, external firm level database - Firm declaration during the lifetime of the sub-loan for (a) the Description above; - Analysis of the external firm level databases for (a) after the sub-loan maturity; (b) and (c) during the Methodology for Data Collection implementation period of the Project. Provided that external firm level databases might be accessed with required frequency during the implementation period of the Project for all of (a), (b), and (c). Responsibility for Data Collection TKYB Number of new or better jobs created for youth (Number) This indicator will be calculated as the sum of the following: (a) change in the number of youth (ages 16 - 24) employees of sub-loan beneficiary firms relative to the number of employees at the time of sub-loan application, (b) Description change in the employment of youth (ages 16 - 24) in firms in the value chain of sub-loan beneficiary firms, and (c) number of youth (ages 16 - 24) workers in sub-loan beneficiary firms who experience an increase in wages after the provision of the sub-loan (relative to the average rate of wage inflation). Frequency Annual Data source Project progress reports, external firm level database - Firm declaration during the lifetime of the sub-loan for (a) the Description above; - Analysis of the external firm level databases for (a) after the sub-loan maturity; (b) and (c) during the Methodology for Data Collection implementation period of the Project. Provided that external firm level databases might be accessed with required frequency during the implementation period of the Project for all of (a), (b), and (c). Responsibility for Data Collection TKYB Citizen engagement: Sub-loan beneficiaries report that project sub-finance reflected their needs (Percentage) Description This indicator measures feedback from firms on whether the sub-loans provided reflected their needs. Frequency Bi-Annual Data source Project progress reports A midterm and end line citizen engagement survey will be conducted by the TKYB to seek feedback from Methodology for Data Collection beneficiary firms on their satisfaction with the project Page 29 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Responsibility for Data Collection TKYB Ratio of the average maturity of LE sub-loans under the project, to the average maturity of TKYB's regular portfolio (Number) The numerator will be the weighted average maturity of loans provided under the Project. The denominator will be Description the weighted average maturity of loans from TKYB’s representative portfolio not financed under the Project. This indicator will be calculated for LEs. Frequency Bi-Annual Data source Project progress reports Methodology for Data Collection TKYB Administrative Data Responsibility for Data Collection TKYB Share of Non-Performing Loans (Percentage) This indicator will track the share of non-performing loans (defined as loans that are more than 90 days past due) Description under the Project in TKYB’s total loan portfolio. Frequency Bi-annual Data source Project progress Reports Methodology for Data Collection TKYB Adminstrative Data Responsibility for Data Collection TKYB Component 2: Capacity-building support to firms and project management and implementation support SME Growth and Resilience Facility established (Text) The SME Growth and Resilience Facility will provide long-term support to high-performing SMEs with job creation potential. Through the facility, eligible SMEs will gain access to targeted capacity building trainings for financial Description management and E&S, which will enhance their sustainability and competitiveness and equip them with the tools needed for long-term success. The indicator will track the establishment of such a facility by the TKYB. Frequency Annual Data source Project progress reports, TKYB Administrative data Report generated using TKYB administrative data on participation of SMEs in the Facility Methodology for Data Collection Responsibility for Data Collection TKYB Share of sub-loan beneficiary firms that receive capacity building support (Percentage) The denominator of this indicator is the total number of sub-loan beneficiary firms of the project. The numerator is Description the total number of loan beneficiary firms that have participated in any of the capacity building support activities financed under Component 2 of the project. Frequency Bi-Annual Data source Project Progress reports Methodology for Data Collection TKYB and service provider’s administrative data Responsibility for Data Collection TKYB Page 30 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT ANNEX 2: FINANCIAL INTERMEDIARY ASSESSMENT: TKYB Background and Mandate TKYB, established in 1975, is Türkiye’s state-owned development and investment bank, mandated to support sustainable growth and national development priorities. Initially focused on channeling remittances to finance private sector development, its role has since expanded to provide project finance, corporate finance, and investment banking services in sectors like energy, manufacturing, education, and health. TKYB also supports renewable energy, energy efficiency, and resource-efficient projects, with a strong emphasis on sustainability and alignment with the Sustainable Development Goals and the Paris Agreement. By the end of 2024, 96 percent of its loan portfolio consisted of green and socially themed loans. The bank published its first Impact Report in 2021 and calculates and verifies GHG emissions in accordance with the ISO 14064 standard. TKYB has the second-highest environment, social and governance (ESG) score among Turkish banks. Governance and Ownership TKYB is 99.08 percent owned by the Ministry of Treasury and Finance, with the remaining shares publicly traded on Borsa Istanbul. The Board of Directors includes seven members, with five holding government roles, one serving as Chief Executive Officer, and one independent member devoid of official state engagement. The governance structure aligns with international best practices and Turkish banking regulations, including oversight by the BRSA. Financial Overview and Asset Quality As of Q3 2024, TKYB ranked as Türkiye’s 16th largest bank by assets, with TL 154.7 billion in total consolidated assets and TL 97.7 billion in consolidated gross loans. Its NPL ratio improved to 0.8 percent, reflecting strong asset quality due to its long-term project finance and apex lending model. Loan portfolio distribution was dominated by energy (45 percent), manufacturing (34 percent), and financial institutions (18 percent). TKYB’s capital adequacy ratio stood at 20.2 percent, significantly above regulatory requirements, supported by paid-in capital increases and retained earnings. TKYB is exposed to credit risk from direct lending (90 percent of gross loans at the end ofQ1 2024) and counterparty risk on Turkish banks from apex lending (10 percent). TKYB's long-term, gradually amortizing foreign currency lending (78 percent of gross loans at the end of –Q1 2024) and sectoral concentration risks amid macro volatility heighten its credit risks. NPLs remained low (66 percent specific reserves coverage; end-2023: 62 percent), despite some large insolvencies in recent years. The Stage 2 loans ratio was also moderate at 6.9 percent (14 percent of Stage 2 loans have been restructured), up from 4.0 percent at end-2023. Funding and Risk Management As a non-deposit-taking institution, TKYB relies on medium- and long-term funding from international financial institutions, with 93.2 percent of its funding backed by sovereign guarantees. Its foreign currency loans (80.6 percent of total loans) are matched with FX liabilities (83 percent), mitigating exchange rate risks. TKYB also employs derivatives and liquidity management tools to minimize mismatches and ensure financial stability. Despite its exemption from regulatory liquidity coverage ratio (LCR) requirements, TKYB’s LCR for foreign currency stood at 142.8 percent, reflecting its robust liquidity position. Role in Disaster-Affected Regions Page 31 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT In regions affected by disasters like the Kahramanmaraş earthquake, TKYB plays a vital role in providing financing and consultancy services for development and revitalization and enhancing its resilience. As of February 2023, its loan exposure in these areas was US$323 million, and it aims to more than double this under the project. Direct lending by TKYB will create a demonstration effect, establishing credit relationships and transaction track records for underserved firms. Capacity-building initiatives will also enhance financial literacy among SMEs, helping them diversify funding sources and improve their resilience. Sustainability and ESG Leadership TKYB is recognized as a leader in sustainability among Turkish banks. It was the first Turkish bank to sign IFC’s Operating Principles for Impact Management and has pioneered Türkiye’s first Low Carbon Economy Transition Bond and social sukuk. Its ESG risk score of 12.4 in 2024 places it among the top-rated development banks globally. The bank has also financed projects accounting for 6 percent of Türkiye’s renewable energy capacity, contributing to the sequestration of 4.6 million tons of CO2 emissions. Operational Highlights and Strategy TKYB employs 350 staff and operates under a centralized structure to maintain cost efficiency (cost-to-income ratio of 14.4 percent as of Q3 2024). Its net profit for the first nine months of 2024 was TL 4.36 billion, with a return on average equity of 39.3 percent, well above the banking sector average of 28.5 percent. The bank plans to expand its operations by increasing non-sovereign-backed financing and diversifying its funding sources through instruments like sustainable bonds and subordinated debt. TKYB is rated ‘BB-/Stable’ by Fitch, which is the same level as Türkiye’s sovereign rating. The rating continues to be equalized with the sovereign rating at the higher sovereign rating level, reflecting the bank's small size relative to sovereign resources, its largely treasury-guaranteed funding base, and the medium-term tenor of its non-guaranteed funding, as a result of which its potential need for support in the near term should be limited. Conclusion TKYB’s countercyclical role, focus on sustainability, and alignment with Türkiye’s national development priorities make it a key player in addressing market gaps in SME financing, job creation, and innovation, especially by supporting disaster recovery, fostering private capital mobilization, and promoting green and social investments. Page 32 The World Bank Formal Employment Creation 2 Project (P507276) PROJECT APPRAISAL DOCUMENT Figure A2.1: Loan Allocation Process at TKYB Note: This figure shows the general loan allocation process of TKYB which might differ for loan allocation processes for SMEs and working capital loans. Page 33