Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 42026-TR
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
INTERNATIONAL FINANCE CORPORATION
MULTILATERAL INVESTMENT GUARANTEE AGENCY Public Disclosure Authorized COUNTRY PARTNERSHIP STRATEGY
WITH
THE REPUBLIC OF TURKEY
FOR THE PERIOD FY 2008-2011
January 25,2008 Public Disclosure Authorized
Turkey Country Management Unit Europe and Central Asia Region
International Finance Corporation Central and Eastern Europe Department
Multilateral Investment Guarantee Agency
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 Public Disclosure Authorized authorization. DATE OF LAST CAS - PROGRESS REPORT (November 8,2005)
CURRENCY EQUIVALENTS (Exchange rate as ofDecember 3 1,2007) Currency Unit = YTL US$l.OO = YTL 1.16
FISCAL YEAR January 1 - December 31
ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities IPARD Instrument for Pre-Accession for BEEP EBRDiWorld Bank Business Rural Development Environment and Enterprise IPO Initial Public Offerings Performance Survey JPPR Joint Portfolio Performance Review CAD Current Account Deficit LI Local Initiative CAP Common Agricultural Policy M&E Monitoring & Evaluation CAE Country Assistance Evaluation MDG Millennium Development Goal CAS Country Assistance Strategy MIC Middle Income Country CAS CR Country Assistance Strategy MIGA Multilateral Investment Guarantee Completion Report Agency CCT Conditional Cash Transfer OECD Organization for Economic Co- CEDPL Programmatic Competitiveness and operation and Development Employment Development Policy PFMC Public Financial Management and Loan Control Law CPI Consumer Price Index PISA Assessment: Program for CPS Country Partnership Strategy International Student Assessment DPL Development Policy Loan PIU Project Implementation Unit DOD Disbursed and Outstanding Debt PPA Public Private Partnership EBRD European Bank for Reconstruction PPDPL Programmatic Public Sector and Development Development Policy Loan EU European Union R&D Research and Development FDI Foreign Direct Investment RDA Regional Development Agency GDP Gross Domestic Product SBA Stand-by Agreement GNP Gross National Product SME Small and Medium Enterprise GRECO Group of States against Corruption SWAP Sector-wide Approach IBRD International Bank for Reconstruction TEMAD Turkish Emergency Management and Development Agency IEG Independent Evaluation Group UMR Under-Five Mortality Rate IFC International Finance Corporation WBI World Bank Institute IMF International Monetary Fund WBG World Bank Group IMR Infant Mortality Rate YTL New Turkish Lira (Yeni Turk Lira) IPA Investment Promotion Agency IBRD IFC 1 Vice President Shigeo Katsu Lars Thunell Director Ulrich Zachau Shahbaz Mavaddat Team Leader Ina-Marlene Ruthenberg George Konda FOR OFFICIAL USE ONLY
TABLE OF CONTENTS
Executive Summary ...... i
I. Country Context ...... 1 A . Political and Social Context ...... 1 B. Recent Economic Developments ...... 2 C . Medium-term Prospects ...... 4
I1. Turkey’s Vision and Key Development Challenges ...... 6 A . Improved Competitiveness and Employment Opportunities ...... 6 B. Equitable Human and Social Development ...... 10 C . Efficient Provision of High Quality Public Services ...... 14
I11. Turkey-World Bank Group Partnership ...... 20 A . Past Bank Group Assistance ...... 20 B. Lessons Learned...... 21 C . Strategic Objectives and Results Framework ofthe New Country Partnership Strategy (CPS) ...... 23 D. Overall Approach...... 25 E. Areas of Engagement ...... 26 a) Improved Competitiveness and Employment Opportunities...... 26 b) Equitable Human and Social Development ...... 31 c) Efficient Provision ofHigh Quality Public Services ...... 34 F. Working with Other Development Partners ...... 37 G. Bank Financing ...... 38 H. External Debt Sustainability and Bank Exposure ...... 41
IV. Risks ...... 42
V . Conclusion ...... 45
This document has a restricted distribution and may be used by recipients only in the performance of their official duties . Its contents may not be otherwise disclosed without World Bank authorization . Tables and Boxes
Table 1: Selected Medium-tern Macroeconomic Indicators ...... , .. , , ., ...... 4 Table 2: Baseline Debt Dynamics ...... 5 Table 3 : Poverty and Inequality, 1994-2005,...... , .. . . ,. . . , .. , , , , , , .. , , ,. , , , , , , , ,. , , , .. , , ,. . ,, ,, ,. , ., . . . . , . .. 11 Table 4: Strategic Goals and FY04-06 CAS Framework ...... 22 Table 5: Turkey’s Ninth Development Plan Shapes the World Bank Group CPS ...... 27 Table 6: Indicative Turkey CPS Program FY 08-11 ...... 28
Figure 1 : Distribution of 15 Yr. Old Students by Proficiency Level, Turkey, EU & OECD . 13 Figure 2: Changes in Infant Mortality Rates in Turkey Between 1970 and 2007 ...... 14 Figure 3: Legal and Judicial Issues ...... 17 Figure 4: Turkey Portfolio Indicators vs. Bank and ECA (FY07) ...... 20 Figure 5: Gross External Debt to GNP Ratio...... 41 Figure 6: Gross External Debt to GNP Ratio...... 41 Figure 7: Share of Short-term External Debt in Total Private Sector External Debt Stock ... 42
Box 1: Government Program ...... 6 Box 2: Joint Portfolio Performance Review (JPPR) Lessons Learned ...... 24 Box 3: WBI in Turkey: An Integrated Multi-Year Capacity-Building Program ...... 34 Box 4: CPS - Civil Society Consultations ...... 38
Annexes:
Annex 1 : Results Matrix Annex 2: Major Development Partners Annex 3: World Bank Group Private Sector Strategy Annex 4: CAS Completion Report (FY04-07) Annex A2: At a Glance Table Annex B2: Selected Indicators ofBank Portfolio and Management Annex B3: IBRD/IDA Program Summary Annex B3: IFC Investment Operations Program and MIGA Annex B4: Summary ofNon-lending Services Annex B5: Social Indicators Annex B6: Key Economic Indicators Annex B7: Key Exposure Indicators Annex B8: Committed and Disbursed Outstanding Investment Portfolio Annex B8: Operations Portfolio (IBRDADA and Grants) EXECUTIVE SUMMARY
1. Turkey’s economic development has global significance, given its size, role as a regional power, and strategic location, bridging East and West. Turkey is a member of the Organization for Economic Co-operation and Development (OECD), and the prospect of European Union (EU) accession remains a key anchor of political and economic reforms. Turkey, with a population of 70.6 million, is one of the large middle-income partners of the World Bank Group (WBG).’ ii. Turkey has one of the world’s 20 largest economies. Gross Domestic Product (GDP) reached US$400 billion, and GDP per capita reached around US$5,500 in 2006, following a spectacular recovery from a deep economic crisis in 2001.2 Turkey has succeeded in reducing poverty, from about 28 percent of the population in 2003, to about 18 percent in 2006, pulling more than 7 million people out of p~verty.~Fewer than 10,000 people, or less than 0.0 1 percent ofthe population, are extremely poor, living on US$l or less a day. At the same time, some social indicators lag behind those of countries with similar incomes. ... 111. Turkey’s vision for development, set out in its Ninth Development Plan 2007- 2013, is “a country with an information society, growing in stability, sharing more equitably, globally competitive and fully completed her coherence with the European Uni~n.~”In achieving this goal, Turkey can build on a track record of six years of stabilization, rapid economic growth, and declining poverty. iv. The goal of the new Bank Group Country Partnership Strategy (CPS) for FY08- 11 is for the Bank Group to be a partner with Turkey in realizing her development vision-to achieve fast and sustained growth with equity-through full integration into the Government’s formulated development strategy. Accordingly, the CPS is shaped directly by Turkey’s Ninth Development Plan and by the Government’s Program and aims at contributing to three main development pillars: (i) improved competitiveness and employment, (ii)equitable human and social development, and (iii)efficient provision of high-quality public services.
V. Pillar I: Improved Competitiveness and Employment Opportunities. Government goals and outcomes to which the WBG program will contribute to under this pillar include (i)sound macro-policies leading to sound public debt and external position, (ii) increased private investment through improved export competitiveness and deeper and broader financial markets, (iii)increased employment, and (iv) reliable and efficient energy supply. Accordingly, analytic and advisory services (AAA)-including economic and sector work, dialogue, workshops, panels, and expert groups-is planned, inter alia, on selected
I Turkey is the largest borrower in the Europe and Central Asia Region and it has been the third largest World Bank borrower in terms of new commitments of over US$1.5 billion during the last three years. Turkey is currently IFC’s fifth largest exposure after Russia, India, China and Brazil. As of September 2007, IFC’s committed portfolio totaled US$1.6 billion. * The Turkish authorities are completing work to update the data series for Turkey’s GDP to account for the structural evolution ofTurkey’s economy. The update, which is expected to revise GDP upwards and to be released in the coming months, may affect key macroeconomic indicators. National poverty data, TurkStat, end 2006. Turkey’s Ninth Development Plan 2007-2013, Page 1 1, para. 1. growth issues (e.g., employment, informality), Turkey’s investment climate, its energy strategy, female labor force participation, financial sector aspects, and public private partnerships. WBG financing under this pillar is planned in the same thematic focus areas- with specific operations and investments expected in the areas of competitiveness, access to export and small and medium enterprise (SME) finance, employment, and private-public financing of skill training and social inclusion as they relate to employment. The CPS also envisages substantial Bank Group financing in the energy sector, which reflects the importance of energy security and energy efficiency for the economy, as well as the priority the Government places on the energy sector and on continued substantial Bank Group engagement. Infrastructure, especially energy and transport, is expected to be a priority area for IFC financing, while Bank support for the railway sector is expected to continue. vi. Pillar 11: Equitable Human and Social Development. Government goals and outcomes to which the WBG program will contribute to under this pillar include (i)increased effectiveness of the social security system and improved income distribution as well as improved social inclusion and the fight against poverty, (ii)making the health system more effective, and (iii)enhancing the educational system and increasing the sensitivity of education to labor demand. The CPS envisages continued extensive Bank engagement- including analysis, advice, and financing-as Turkey’s partner in the implementation of social security reform as well as social inclusion and welfare policy. Parametric and institutional changes in the pension and health insurance systems, supported by the Bank, are expected to improve the long-term financial sustainability and equity of the social security system and dramatically increase access to health services for the most vulnerable groups of the population, through the introduction of fiscally sustainable universal health insurance. In view of the critical importance of skills to improve competitiveness and employment, and its role in reducing inequalities, education will remain a priority area for the WBG program. Following the completion of the Bank-supported primary education project, ongoing and planned future Bank and IFC financing is expected to focus on secondary and tertiary education as well as technical and vocational skill training, both public and private. vii. Pillar 111: Efficient Provision of High Quality Public Services. Government goals and outcomes to which the WBG program will contribute to under this pillar include (i)a better structured public expenditure system, (ii)strengthened public sector governance, and (iii)improved local service delivery and disaster preparedness. The planned WBG program will include analysis, advice and dialogue on public expenditure and finance, public debt management, regional development and municipal finance, and natural disaster risk assessment. Planned IBRD financing includes continued programmatic policy-based lending in support of strengthened public administration and governance and improved public service delivery, in addition to social security reform, as well as financing for investments to strengthen Turkey’s cadastre and judiciary systems, municipal infrastructure and services, irrigation, and natural disaster preparedness. IFC financing is expected to focus on private sector participation in urban transport as well as water, wastewater and waste management sectors, as and when further private sector participation occurs in these sectors. The CPS also envisages further exploration of the possible use of the joint WB-IFC Sub-national Financing Facility, which provides financing to sub-sovereign public entities without sovereign guarantees. viii. Flexibility is a guiding characteristic of the CPS. The CPS is demand driven and is designed and will be implemented flexibly, so as to respond to evolving priorities, with an
11 appropriate mix of instruments. The Government’s priorities will drive the program, and the WBG will seek to mobilize the best available technical expertise and international experience and, working together with the authorities, find, develop, and support integrated development solutions. The two main reasons for flexibility in the composition and phasing of WBG financing, reflecting the Turkish authorities’ preference, are the intrinsic and persistent uncertainties and volatility in global financial markets and the rapid evolution of the Turkish economy. Such flexibility is also consistent with the implementation of the Bank Group’s MIC Strategy.’ ix. The WBG offers Turkey its full range of analytic, advisory, and financing instruments. The CPS envisages IBRD engagement through free-standing and programmatic economic and sector work, just-in-time TA and advice, WBI capacity building, investment and policy lending at the project, program, sector, local, and country level, contingent financing tools (such as for catastrophic risks), as well as banking advisory services. Development policy lending is expected to account, on average, for around fifty percent of IBRD financing. This substantial share of development policy lending reflects the authorities’ strong interest in DPLs to accompany and support Turkey’s ongoing reform agenda, primarily because of the Bank’s comparative advantage in policy advice and support linked to flexible budget financing. IFC also expects to provide a wide variety of products and services in Turkey-including loans, equity, quasi equity, and syndicated loans. MIGA guarantees are available as well. x. The CPS envisages Bank financing equivalent to new commitments up to USs6.2 billion. The phasing of Bank financing and the mix of DPLs and investment financing will be flexible. Thus, Bank financing may be front-loaded, back-loaded, or evenly phased, and the share of DPLs may exceed or fall short of the expected fifty percent average in any one year and over the 4-year CPS period-depending on the economic circumstances in Turkey and the substantive content and pace of implementation of the Turkish authorities’ economic reform and investment programs. The levels of actual Bank financing will also depend substantially on the availability and terms of other financing, such as from domestic and international financial markets, the EIB, EU, and other development partners. xi. The design of the CPS and the Bank Group program reflects lessons learned, which have emerged from close collaboration with the authorities, the Completion Report for the FY03-07 CAS, and the Independent Evaluation Group (IEG’s) Country Assistance Evaluation (CAE) , which covered the 1993-2004 period. Three main lessons are that (i)the programmatic approach to development policy lending has proven useful; (ii) high quality analytical work has been critical as a basis for the in-country policy dialogue on key development challenges; and (iii)ownership and flexibility will be essential for the effectiveness of the new CPS-specifically, reliance on the leadership of the authorities in defining the program, and increased flexibility in terms of lending levels and instruments, content to respond to emerging priorities, and portfolio implementation.
5 Strengthening the World Bank’s engagement with IBRD partner countries (DC2006-0014), September 7, 2006 and Strengthening the World Bank’s engagement with IBRD partner Countries (DC2007-0022), October 9,2007
... 111 xii. The Bank Group will continue collaborating closely with Turkey’s development partners. Among these partners, the EU is particularly important, because of the process of Turkey’s EU membership accession and the significant volume of EU financial assistance on grant terms as well as through EIB. The Bank has become more filly engaged with the members of the United Nations (UN) system, especially in the social sectors and in poverty alleviation and local developmentlparticipation. Turkey also receives significant development support from the Islamic Development Bank, the Montreal Protocol, the OPEC Fund, and bilateral ODA from a number of countries. Collaboration with the IMF will continue to focus on public sector and financial sector reforms, along with macroeconomic monitoring. xiii. Turkey’s economic program and its Bank Group support continues to entail non-negligible risks. The main risks factors include: (i)political economy risks-where the most important remaining political risks (after resolution of the political uncertainties before and after the 2007 elections) relate to the process of constitutional reform and the border tensions with Iraq, with the EU accession anchor expected to remain a major unifying force behind political and economic reforms and to continue mitigating risks; (ii)external vulnerabilities-where investors will observe the development of Turkey’s large current account deficit and reliance on capital inflows, and where maintaining satisfactory macroeconomic performance and continuation of structural reforms will be the key to mitigating external financing risks; (iii)risk of natural disasters-where Turkey is one of the most vulnerable countries to natural disaster but continues to invest substantially in preparedness and mitigation; and (iv) reform implementation risks-where social consensus on the reform program and sufficient institutional capacity are needed for the implementation of the CPS, and which itself includes a host of planned activities that help promote such consensus and help build the requisite capacity. xiv. As of January 2008, Turkey enjoys a combination of political and economic stability, with a single-party government with broad public support and a clear mandate, an overall still favorable global economic environment, prospects of EU accession, and favorable long-term population dynamics. These circumstances provide Turkey with an historic opportunity, by continuing its strong economic policies and programs, to achieve sustained high income growth and better lives for the Turkish people and, over the medium term, approach the levels of income and development in other OECD countries and in the EU. This CPS aims for the WBG to be a partner with Turkey in realizing this opportunity.
iv I. COUNTRY CONTEXT
A. Political and Social Context
1. Turkey’s economic development has global significance, given its size, role as a regional power, and strategic location, bridging East and West. Turkey is a member of the Organization for Economic Co-operation and Development (OECD), as well as a regional power, bridging East and West. Turkey has one of the world’s 20 largest economies, with a population of 70.6 million. Gross Domestic Product (GDP) reached US$400 billion, and GDP per capita reached US$5,500 in 2006, following a spectacular recovery from a deep economic crisis in 2001.6 Turkey is one of the large middle-income partners of the World Bank Group (WBG).
2. In parliamentary elections in July 2007, Turkey’s governing party (the Justice and Development Party) won an absolute majority in Parliament and a renewed mandate to form a single party government. In August 2007, Mr. Abdullah Giil, former Minister of Foreign Affairs, became Turkey’s 11th President. The new Government is pursuing an ambitious program of economic and institutional reforms, underpinned by an agenda for comprehensive constitutional reform.
3. The prospect of Turkey’s European Union (EU) accession remains a key anchor of political and economic reforms. The accession negotiations started at the end of 2005, but an impediment emerged soon thereafter, related to Turkey’s obligation to implement fully the Additional Protocol (October 23, 1970) to the Agreement Establishing an Association Between the European Economic Community and Turkey (the Ankara Agreement, September 12, 1963). At the end of 2006, the EU decided to suspend the negotiations of 8 out of 35 chapters. Popular support for Turkey’s EU accession is rather uneven in the EU member countries and has also weakened in Turkey itself. Notwithstanding temporary setbacks, the EU harmonization agenda and accession process are expected to continue in the years ahead. Indeed, the Government has prepared a six-year program of economic, social, and institutional harmonization with the EU Acquis Communitaire. In its Action Plan, dated October 8, 2007, the Government reiterated its commitment to implement EU-related reforms, highlighting their importance for Turkey’s own development. Negotiations on one chapter, science and research, were opened and provisionally closed in June, 2006. As of October 2007, negotiations on three out of 35 chapters ofthe Acquis were open.
4. Turkey has been successful in reducing poverty. At the same time, some social indicators lag behind those of countries with similar or higher incomes. According to Government statistics, poverty was reduced from about 28 percent in 2003 to approximately 18 percent in 2006, pulling more than 7 million people out ofpoverty. Less than 0.01 percent
The Turkish authorities are completing work to update the data series for Turkey’s GDP to account for the structural evolution ofTurkey’s economy. The update, which is expected to revise GDP upwards and to be released in the coming months, may affect key macroeconomic indicators. Turkey is the largest borrower in the Europe and Central Asia Region, and it has been the third largest World Bank borrower in terms of new commitments of over US$1.5 billion during the last three years. Turkey is currently IFC’s fifth largest exposure after Russia, India, China and Brazil. As of September 2007, IFC’s committed portfolio totaled US$1.6 billion.
1 of the population is extremely poor, living on US$1 or less a days8 Nevertheless, infant and maternal mortality rates are well above those of most comparator middle-income countries, inequality is high, there are significant regional differences and migration to major urban centers continues at a rapid pace. Social inclusion remains a challenge.
B. Recent Economic Developments
5. Turkey produced a spectacular recovery after the 2001 crisis and people’s lives have improved significantly. During the past five years, Turkey’s vibrant private sector rebounded, and economic growth exceeded 7 percent on average. Inflation was brought down from 70 percent in 2001 to single digits, although the inflation target was significantly missed in 2006, in part on the account of high oil prices. Net public debt fell from over 90 percent of GNP in 2001 to 45 percent in 2006. Improved macroeconomic stability led to reduced spreads in international capital markets and higher levels of FDI, especially in the past two years.
6. Good policies and credible external anchors have been critical for Turkey’s economic success since the 2001 crisis. Turkey’s impressive economic performance is due first and foremost to credible and sustained stabilization, with strong fiscal discipline at its core, combined with an ongoing structural reform agenda. Two International Monetary Fund (IMF) programs, WBG support of the structural reform programs, and the beginning of the EU accession negotiations in 2005, constituted the external anchors of the successful program.
7. The authorities implemented major reforms over the past five years. In the financial sector, the Central Bank’s independence was established and maintained, the banking sector was restructured, and the banking supervision was strengthened through the adoption of a new banking law and implementing regulations. In the public sector, the public procurement system was overhauled, and a new Public Financial Management and Control Law was adopted with a major impact on the transparency of public finances. In the agricultural sector, subsidies were drastically cut and replaced with direct income support. Privatization, especially in the past two years, picked up considerably. Privatization revenues in those two years (exceeding US$16 billion) were almost twice as high as combined privatization revenues in the previous 18 years. The increase in Foreign Direct Investment (FDI) has been equally impressive. FDI inflows amounted to US$2.9, 10.0 and 20.0 billion in 2004, 2005 and 2006, respectively. FDI inflows are expected to have reached US$18.2 billion (about 3.7 percent of GDP) in 2007. This is an unprecedented sum in Turkey’s history where annual FDI flows often amounted to no more than a mere US$1 billion a year. Most recently, Turkey embarked on an ambitious social security reform, whose design has been supported by the Bank. The originally designed reform is currently being adjusted due to a ruling by the Constitutional Court from December 2006.
8. Despite the good economic performance of the past years, macroeconomic vulnerabilities remain. Turkey has weathered the recent uncertainties and the ongoing market volatility originating from US sub-prime mortgage losses, demonstrating much improved resilience of the economy. Nevertheless, the Turkish economy still faces significant risks arising from its large Current Account Deficit (CAD), at 8.2 percent of GDP
National poverty data, TurkStat.
2 at end-2006, comparatively high public debt burden, recent loosening in fiscal stance, and slowing disinflation process. The possible materialization of risks hinges on international as well as domestic events.
9. Fiscal performance has been strong since 2002, notwithstanding a loosening earlier in 2007. The primary surplus for the public sector averaged 6.7 percent of GNP in the period 2003-06. However, the large majority of public expenditures remain inflexible, including the public sector wage bill, transfers to cover the social security deficit, and servicing of public debt. This means the state has limited ability to invest in infrastructure and labor skills, and promoting Research and Development (R&D). The pending social security reform is critical for long-term fiscal sustainability. The 2007 primary surplus target of the overall public sector was revised to 6.7 percent of the Gross National Product (GNP) from 6.5 percent during the Sixth Review of the IMF Stand-By Arrangement (SBA). Nevertheless, the central government budget underperformed in the period January-October, 2007. In this period, the cumulative primary surplus ofthe central government, calculated as per the IMF definition, decreased by almost 36 percent on an annual basis-due partly to expenditure overruns in the first half of the year, and partly to lower than expected tax revenues as economic activity slowed down and domestic sales declined during 2007. In October 2007, the Government revised its year-end public sector primary surplus projection to 4.1 percent of GNP and set a headline primary surplus target of 5.5 percent of GNP for end-2008’. Achieving this headline primary surplus target is expected to be challenging unless revenue performance strengthens.
10. The Central Bank adopted a formal inflation targeting regime in 2006. According to the implementation framework, the inflation targeting approach adopted allows for reasonable flexibility, by attaching an uncertainty band of plus or minus two percentage points around the headline Consumer Price Index (CPI) program target. Reaching the historically low level of 7.7 percent end-year rate in 2005, inflation increased to 9.7 percent in 2006 -at close to double the 5 percent end-year target. The annual rate of inflation at 8.4 percent as of November, 2007 was higher than the year-end target of 4 percent. Nevertheless, the Central Bank decreased its policy rate by 125 basis points between September and November 2007 in view of expected deceleration ofprices in coming months owing to the lagged impact ofmonetary tightening. The end-2007 annual CPI inflation at 8.4 percent was above the upper uncertainty band.
9 See 2008 Annual Program and 2008 Economic Targets and Investments issued by the State Planning Organization. Table 1: Selected Medium-term Macroeconomic Indicators
2001 2002 2003 2004 2005 2006 2007 2008 2009 3Np Growth -9.5 7.9 5.9 9.9 7.6 6.0 5.0 5.5 5.5 .nvestment (% of GNp) 18.4 16.7 15.6 17.9 19.6 21.0 21.0 21.5 21.6 Public 5.7 5.4 4.2 3.7 4.3 4.3 4.3 4.3 4.4 Private 12.7 11.4 11.4 14.1 15.3 16.7 16.7 17.2 17.2 :PI Inflation 68.5 29.7 18.4 9.3 7.7 9.7 8.4 5.2 3.9 Vominal Interest Rate 99.1 63.5 44.1 24.9 16.2 18.0 19.3 18.4 14.9 Zurrent Account (billion $) 3.4 -1.5 -8.0 -15.6 -22.6 -32.8 -36.0 -43.8 -41.6 Exports (f.0.b.) 34.4 40.1 51.2 67.0 76.9 91.9 112.7 129.9 145.9 Imports (f.o.b.) -38.1 -47.4 -65.2 -90.9 -110.5 -133.2 -158.6 -182.3 -197.5 Zapital Account (billion $) -14.6 1.2 7.2 17.8 43.7 45.6 49.4 52.3 48.3 Overall Balance (billion $) -12.9 -0.2 4.1 4.3 23.2 10.6 13.4 8.5 6.7 Source: Government, IMF and WB estimates.
C. Medium-term Prospects
11. Conditions are in place for Turkey to sustain a growth rate of around five percent in the medium term. The strong growth in private investment expenditure in the period 2004-2006 - despite a slowdown in 2006, and the robust industrial production growth starting from the last quarter of 2005 are indicative of the improved prospects for sustained growth and employment generation. The medium-term projection of economic growth averaging 5 percent annually during 2007-2012 is underpinned by: (a) strong external anchors, supporting enhanced confidence in the policy framework; (b) improved macroeconomic stability, which would stimulate private investment and consumption demand; (c) stronger export performance, which would permit faster import and output growth; and (d) strong external inflows, including FDI.
12. Turkey’s large Current Account Deficit (CAD) is a source of concern. Together with the strong recovery in the economy, the CAD began widening in 2003. It continued deteriorating due to rising oil prices and the growing trade imbalance stimulated by the appreciation of the currency caused by reverse currency substitution and large capital inflows. After reaching a record high of 8.2 percent in 2006, the CAD to GDP ratio is expected to have narrowed to an estimate of 7.4 percent in 2007 due to slowing domestic demand and a moderate recovery in tourism revenues. In 2008, the CAD is projected to be around 8 percent of GDP again, because ofthe evolution in domestic demand, slowing global growth, high oil prices, and the recent appreciation ofthe YTL.
13. The quality of financing of the current account deficit has significantly improved, though risks remain. The share of non-debt creating inflows (FDI plus net errors and omissions) in total capital inflows grew to 51 percent in 2006 from 27 percent in 2004. Net FDI inflows reached a record high ofUS$19 billion in 2006, corresponding to 4.8 percent of GNP and covering almost 60 percent of the CAD. Nevertheless, debt-creating inflows still account for a significant share of total inflows. Maintaining high levels of non- debt creating inflows will be important for the continued sustainable financing of Turkey’s current account deficit.
4 Table 2: Baseline Debt Dynamics
Gross Domestic Debt Stock 71.1 56.3 56.4 54.5 52.9 46.3 43.5 42.0 40.4 37.4 35.1 Net Debt Stock 90.5 78.5 70.4 63.5 55.4 44.6 40.7 39.2 36.2 33.2 31.4 Net Domestic Debt Stock 52.8 46.2 48.3 46.0 46.9 39.3 37.7 35.7 34.4 32.4 31.1 Domestic Interest Payments 21 23.0 15.9 14.8 11.7 7.6 6.0 6.1 6.5 7.8 7.0 5.4 Dom Debt Amortization 25.5 24.7 24.3 29.2 27.6 20.6 17.6 15.2 13.6 7.9 9.0 PSBR 31 16.7 12.5 9.6 4.8 -0.7 -0.7 2.2 2.4 2.1 1.7 1.1 Net External Debt Stock 37.7 32.3 22.1 17.5 8.5 5.2 3.0 3.6 1.8 0.8 0.3
IMacroeconornic Indicators I
CPI Inflation (%, DecDec) 68.5 29.7 18.4 9.3 7.7 9.7 8.6 8.5 5.2 3.9 4.0 GNP growth rate (%) -9.5 7.9 5.9 9.9 7.6 6.0 5.2 5.0 5.5 5.5 5.0 Primary Balance (% of GNP) 13 5.1 4.2 6.3 7.0 6.8 6.7 4.3 4.1 5.5 5.0 4.0 I ) For the Central Government 1)For the Consolidated Public Sector 3) Figures are in terms of annualized GNP as of June, 2007. Stock variables are as oflune 2007; others are annualized as of this date. 4) As oflune, 1007.
14. Foreign investors’ substantial and growing exposure in Turkish assets- reflected in the rising share of foreigners’ holdings in equity and bond market-has increased the economy’s vulnerability to changes in global risk appetite. As of November 2007, non-resident bond holdings amounted to YTL 35.7 billion, corresponding to about 31 percent of total market debt, while foreigners held almost 72 percent of Turkish equities. Such flows carry the risk of sudden reversals, due to a change in investors’ risk appetite for emerging market assets. Turkey’s flexible exchange rate regime and increased foreign exchange reserves help cushion against market volatility and mitigate the adverse effect of sudden reversals.
15. Turkey’s CAD is a particular concern because of its still substantial external debt. The external debt to GNP ratio fell from 77 percent in 2001 to an estimated 50 percent in 2007. It is projected to increase in the near term, at a decelerating pace, before beginning to stabilize at the end of the CPS period. The projected upward trend in the period 2008- 2009 mainly reflects an expected widening in the CAD in 2008. In this period, corporate sector external borrowing is expected to be the main driver of the projected increase in external debt ratio, as it has been in recent years. The gross external debt-to-exports ratio is projected to remain broadly stable, declining only moderately throughout the period.
16. The net public debt to GNP ratio, which fell from over 90 percent in 2001 to 45 percent in 2006, is projected to decline further, from about 40 percent in end-2007 to around 3 1 percent in 201 1-in a scenario of sustained growth, adherence to fiscal discipline, and a stable external environment and exchange rate. (See Table 2 above). Either a lower than projected primary fiscal surplus or a depreciation of the Turkish Lira would imply correspondingly higher public debt as a share of GNP. Also, public debt remains sensitive to interest and exchange rate movements as floating rate notes and foreign exchange (FOREX) denominated debt accounted for about 57 percent oftotal debt stock as ofJune, 2007.
5 17. The Central Bank has announced its goal to bring inflation down to 4 percent in the period 2008-2010. In 2006, inflation had reversed its downward trend of the previous years and risen back to about 10 percent. In 2007, CPI inflation fell again to 8.39 percent- but inflation stayed well above the Central Bank’s 4 percent target and the upper uncertainty band of 6 percent. Nevertheless, the core CPI index - excluding energy, unprocessed food, alcoholic beverages, tobacco products and gold - remained around 6 percent during 2007. In the first months of 2008, possible increases in food and energy prices may lead to a temporary increase in annual CPI inflation. The annual CPI inflation is projected to fall to about 5 percent in end-2008.
11. TURKEY’S VISION AND KEY DEVELOPMENT CHALLENGES
Box 1: Government Program
The development program of the Turkish Government is set out in three key documents that outline Turkey’s overarching development goals, the medium-term reform agenda, and specific actions and responsibilities within the Government. Ninth Development Plan 2007-2013: The Turkish General National Assembly approved this plan in 2006 and it has become Law No. 877. This framework provides a long-term perspective and represents unity in objectives by the public sector and civil society. It aims for an enhanced quality oflife through an inclusive development process. Government Action Plan: Separate short and medium-term plans translate the broader objectives of the Ninth Development Plan into specific operational actions for line ministries’ and Government agencies’ responsibilities. The Government issued a Quarterly Action Plan for the fourth quarter of 2007 and an Annual Program for 2008. Program for Harmonization with EU Aquis: This is a detailed plan outlining the specific actions needed to be implemented to hlfill the 35 chapters for EU accession.
18. The Government’s Ninth Development Plan for 2007-13 sets out a vision of Turkey with stable growth, a more equitable income distribution, and increased global competitiveness, as the country transforms into an information society and completes EU harmonization. The development priorities embedded in the Plan are clustered around improved competitiveness and employment, equitable human and social development, and efficient provision of high-quality public services, with emphasis on the reduction of regional differences. The agenda for EU accession is a major cross-cutting theme. The following is a selection of Government action areas that are particularly relevant to the cooperation with the WBG.
A. Improved Competitiveness and Employment Opportunities
19. Government policies aim to achieve sustained rapid growth and improved living standards through increased competitiveness and the creation of employment opportunities. Maintaining sound macroeconomic policies, improving the investment climate, enhancing the flexibility of the labor market, upgrading the skills of the labor force, increasing access to investment capital, promoting the generation of knowledge and innovation, modernizing Turkey’s infiastructure and developing conditions for non-
6 agricultural rural activities are critical ingredients ofthe Government’s multi-year reform program.
20. Creating jobs is a central priority. Despite strong growth, the employment rate is low, especially among women, and unemployment is high, especially among youth. In 2006, only 48 percent of the working age population had a job or were looking for a job; 26.1 percent of Turkish women were employed (EU averages were 64 percent and 56 percent, respectively). Current youth unemployment is 18.7 percent, almost twice as high as the overall unemployment rate of about 10 percent.” International experience has shown that the most important element to reduce poverty on a sustainable basis is the creation of good jobs that is productive jobs in safe environments that generate sufficient income to raise a family.
21. Creation of more and better jobs in Turkey is closely related to continued private sector growth. Strong private sector growth in Turkey in turn depends on: (i) an improved investment climate; (ii)a better functioning labor market and improved skills; (iii)enhanced financial stability and access to finance; and (iv) improved firms’ technological progress and increased use of quality standards; and (v) adequate and affordable electricity supply.
22. Reduced informality, lowered barriers to entry, operation and exit of firms, and continued strong privatization are key ingredients of a better investment climate. In order to streamline the legal, regulatory and administrative framework of the investment climate in Turkey “Reform Program for the Improvement of the Investment Climate ofTurkey” is underway. Recently, Turkey has attracted record levels of foreign direct investment which is a sign of the improving investment climate in the country. However, there are continuing problems that should be resolved during the upcoming period. A large portion of GNP (with estimates varying between 35 to 55 percent) is produced by the informal sector, and social security contributions are only paid by about 47 percent of the active labor force. Taxation is the main driver of informality, which decreases productivity, growth and employment. The Government recently reduced the corporate income tax from 30 to 20 percent and implemented tax reforms to improve collection efficiency and reduce firms’ compliance costs. Further reforms are needed to spread the tax burden to all firms, reduce compliance costs and minimize labor tax rates. While starting a new business does not take much time, its cost is high. Obtaining a license also takes longer than in comparator countries, and the fees are also high. Finally, exiting the market takes longer and yields lower recovery rates than in comparator countries. Continued strong privatization will also support a better investment environment. lo Available regional data reveal no particular difference in terms of change in employment and unemployment across regions. It is also not clear that lagging regions have higher unemployment rates. For example, unemployment is significantly above the country average in Istanbul despite the low participation rate, while unemployment is almost half the average in the less developed regions of the Black Sea and North-East Anatolia. Employment rates are higher in lagging regions probably because of informal employment in agriculture.
7 23. Reforming the labor market and improving the quality of labor skills are essential for job-creating growth. Turkish labor regulations are inflexible. Payroll taxes and compulsory non-wage costs are high, and the employment protection legislation is restrictive. Key measures to reform the labor market include increasing the flexibility of labor regulations, extending unemployment insurance coverage, easing restrictive employment protection rules, and reducing payroll taxes and other labor- related costs. Improving labor skills is also essential and the Government’s Development Plan includes a number of programs and policies which would link skill-building activities, including vocational and technical training, to the development of core, demand-determined competencies. Despite successful results of recent education reforms, challenges remain, including low enrollment in secondary and tertiary education, low students’ proficiency in problem solving (math, reading and science) and limited training provided by Turkish firms. Raising educational achievement, aligning the contents of education with the needs of the labor market, and increasing training provided to workers by firms are all critical for improving the skills ofthe labor force.
24. Strengthening financial sector stability and improving access to finance are needed for private sector growth. The financial system has substantially recovered from the 2001 crisis. Credit has grown rapidly, numerous foreign banks have entered through acquisitions or partnerships, Initial Public Offerings (IPOs) for two large state banks have been successful, and a new Banking Law in 2005 is facilitating strengthened regulation and supervision. Strengthening the supervisory framework and completing the privatization of the three large state banks remains a key medium-term goal. Enhancing access to medium and long term finance for firms and individuals remains an important priority for strengthening private sector competitiveness and growth. Financial intermediaries in Turkey are constrained in their access to medium term funds, and are mostly funded by deposits and up to 1 or 2 year borrowing. In order to manage the liquidity and interest rate risks associated with medium and long term lending, financial intermediaries (banks and leasing companies in particular) need better access to medium term funding, for instance as provided by medium and long term credit lines. Complementary reforms to strengthen the underpinnings of the credit market include improving the movable collateral regime, the collection and sharing of firms’ credit information, enforcing the bankruptcy law, improving the quality of accounting and auditing among firms, and strengthening corporate governance. Streamlining the taxation regime to level the playing field between financial intermediaries could help improve efficiency in the Turkish financial sector.
25. Technological progress and the increased use of the Internet and quality standards enhance firms’ competitiveness. Turkey almost doubled R&D expenditures in the past decade, but R&D, financed by private firms and productive innovation are still limited. The level of technology absorption is moderate. Increasing productive innovation and technology adoption at the firm level requires reviewing the existing legislation, improving protection of intellectual property rights, reviewing fiscal incentives for R&D and assessing the results of existing innovation and technology adoption programs. Increasing firms’ access to-and productive use of-the Internet
8 requires continuing liberalization of the telecom sector, improving telecom regulation, implementing universal access fund schemes, improving IT skills of the labor force and use of the internet by Government agencies. As for the use of quality standards, increasing the number of certified firms requires improving the National Quality System, including standardization, accreditation services and metrology, as well as providing training, consultancy services and matching grants for quality certifications to firms.
26. Continued restructuring of agriculture and off-farm rural development are necessary for improving competitiveness and creating jobs in rural areas. Agriculture accounts for 9.2 percent of GNP and 27.3 percent of employment. While employment in agriculture is still high, it has been declining during the last two decades with the resultant rural-urban migration. A particular challenge in the years ahead will be to balance agricultural and rural development and the respective policies and institutional and implementation arrangements against the backdrop of on-going changes in the Common Agricultural Policy (CAP). Support to entrepreneurial activities in the services and industry sectors will continue gaining in importance, with priority on financing of essential institutional and infrastructure investments rather than income support as such. To take maximum advantage of EU pre-accession funds for agriculture and rural development, several complementary actions are underway. A Rural Development Strategy has been prepared, and an Instrument for Pre-Accession for Rural Development (IPARD) plan is in preparation, which, among other things outlines the establishment of a Rural Development Paying Agency, and which proposes to strengthen participatory management processes
27. Infrastructure services are an important driver of growth. The importance of these services reflects both internal demand and Turkey’s geopolitical position - as a link between Europe, Asia and the Middle East. Although Turkey is relatively well-endowed with infrastructure compared to other emerging economies, it falls short of OECD and EU standards. Businesses are burdened by costly backbone infi-astructure services of insufficient quality. The dominant transport mode - road -- suffers from localized congestion and deteriorating road quality. While daunting, this combination suggests that much can be gained through more efficient, user-financed, operations. The largest transformational challenge is moving from monopolistic state entities providing services toward the mix ofprivate and state that characterizes efficient higher income economies. In key infrastructure service areas, Turkey has already introduced or made substantial progress in designing the changes to legal and regulatory structures needed to meet EU acquis requirements.
28. Energy supply security is a crucial concern for Turkey. As a result ofrapidly growing demand generated by strong growth and rising social standards, electricity supply shortages have begun to emerge and Turkey faces a potentially serious supply crisis that could have significant macroeconomic implications. Efforts to improve efficiency and improve demand management are yet to have a significant impact and need to be enhanced. Levels of private sector investments have not been sufficient to ensure that supply keeps pace with demand growth, and options for significant imports being available are also limited in the near term. There is thus a need for increasing investments in domestic generation and transmission capacity. This will entail a range of
9 measures to encourage greater private sector investment in additional generation capacity. Public sector investments will be required to augment transmission capacity and, at least in the short-term, also in generation to meet the shortfall between the required level of investments and the investment expected to be realized from the private sector.
29. The Government is updating its national energy strategy, with a view to meeting Turkey’s growing energy demand in an efficient and sustainable manner. The strategy will be consistent with the Ninth Development Plan’s objective of ensuring security of energy supply while keeping adverse environmental effects at a minimum level. While Turkey’s carbon emissions are still below those of several comparable countries, especially on a per capita basis, emissions have been increasing substantially, along with high economic growth over the last decade. The energy sector has contributed most to this increase in emissions, and as Turkey’s energy demand and energy use are expected to continue growing rapidly, energy efficiency and environmental and climate change considerations will be of increasing importance. The strategy will likely include a wide range of measures to: increase energy efficiency and improve demand management; revise end-user tariffs, reduce electricity losses, improve collections (particularly from municipalities) and resolve inter-enterprise arrears to improve the financial viability of the sector and thereby improve the incentives for private investment; emphasize renewable energy development; increase the reliability and efficiency of existing generation through investments in rehabilitation (including environmental upgrades); privatize the distribution network and selected existing generation plants; improve the functioning of the wholesale market; and introduce a capacity mechanism. Similarly, continued investments would be required in the gas sector to ensure the adequate gas supply to meet residential, industrial and power generation needs.
B. Equitable Human and Social Development
30. Human and social development constitutes a key objective of the Government’s program. Turkey has successfully reduced poverty and inequality in the past years but social indicators lag behind comparator countries. The Government plans call for the implementation of social security reform, including the introduction of universal health insurance, modernization of the education system to improve its quality and relevance, the restructuring of the health sector and a reduction in social disparities, all leading to reduced poverty rates and inequality levels.
31. Improving income inequality and promoting social inclusion is core to Turkey’s social policy plans. Turkey’s income inequality is comparable to other middle income countries but it remains well above levels in the EU. Turkey’s income concentration had a Gini coefficient (measuring inequality) of 38 in 2005, compared with 25-30 for most EU countries. Nonetheless, inequality has been reduced considerably since 1994 (see Table 3 below). The Government’s Development Plan specifically calls for improving the income distribution over the next years.
10 32. Poverty has also declined and extreme poverty is low. Poverty declined from 28 percent in 1994 to 17.81 percent in 2006, and extreme poverty was reduced to below 1 percent, according to Turkish statistics' ', Important regional difference in welfare and poverty do persist, however. In 2001, the highest provincial GDP per capita was almost 11 times the lowest GDP per capita, reflecting substantial differences in income and in economic growth across provinces. In Turkey, there is a high degree of social solidarity such that poor people share resources with poorer neighbors, reducing the extent of extreme poverty. This informal coping mechanism, strongest in rural areas, was under considerable stress after the crisis of 2001 but appears to be working still, as qualitative fieldwork suggests.
Table 3: Poverty and Inequality, 1994-2005
Sources 1994 & 2002, World Bank poverty assessments 2003-2005, Turkstat.
33. As an important poverty reduction measure, Turkey introduced, with Bank support, a conditional cash transfer (CCT) program in 2001. Today, the program reaches 2.6 million children in poor households in a, by international standards, well- targeted manner. An impact evaluation has shown that the CCT program has improved nutrition and school attendance ofbeneficiary children, with important positive spill-over benefits in health, education, improved frequency of treatment for diarrhea, improved vaccination compliance and registration of marriages and births. Further, qualitative data suggests that the program has contributed to the empowerment ofwomen who receive the CCT payments for their children.
34. Implementation of the social security reform remains a key priority. In 2006, Parliament passed a landmark reform, including parametric and institutional changes in the pension system and the introduction of universal health insurance. The pension reform is important for fiscal sustainability, the health reform is important for access, and both are important for equity. In December 2006, the Constitutional Court ruled that some ofthe provisions ofthe law should not be implemented, mostly those affecting civil servants and that such provisions be revised in accordance with the particular status of civil servants in the Constitution. In view ofthe Court decision, the Government decided to postpone the implementation of the law. The Government has confirmed its strong support for the reform and submitted revised legislation to Parliament in November 2007. The implementation is not expected to begin until July 2008, leaving time for any further
~ II Poverty is defined in the 2005 Joint Poverty Assessment as the consumption level required to meet necessary food and non-food needs. Reflecting local conditions and a local line, extreme poverty is measured by consumption below the cost of food. Other poverty estimates such as US$l per day poverty depend on the purchasing power parity used, but are also low.
11 constitutional challenges to be resolved. While the long term financial balance will be unaffected, the short and medium term deficits are expected to rise somewhat due to the revision required by the Constitutional Court. Nevertheless, savings from the reform are expected to be substantial.
35. Low levels of education translate into a workforce with skill deficiencies and present significant constraints on operations and job growth in the private sector. The Turkish workforce has lower levels ofeducation than nearly all comparator countries (such as Bulgaria, Chile or Poland with approximately similar income levels). Almost 60 percent of the Turkish workforce has less than ten years of education. In addition, and as the Government spells out in its Development Plan, no system currently exists that would offer new labor market entrants and current workers to build their job-relevant competencies in a flexible, modular manner.
36. Enhanced quality and relevance of education are critical for Turkey’s future. While enrollment in basic education has increased by almost 1.8 million since 1997 reform, the gross enrollment rate for 2005/2006 stood at 96.34 percent with the net enrolment rate likely to be lower due to repetition and coverage, showing that still an important fraction of school-age children remain outside the primary school system, many of them girls, or live in rural areas and/or are poor. In addition, the availability of early childhood development and preschool programs are quite limited in Turkey. Secondary education attainment is low by international standards. Figure 1 below shows that in Turkey, the learning proficiency level (‘1’ being the lowest proficiency, ‘6’ being the highest) of 15 year olds is significantly below the levels of the OECD and the new member states of the EU). The Assessment Programme for International Student Assessment (PISA) results in 2006 show the same results (as well as the same average ranking for Turkey, being second-to-last among all OECD member countries). In 2006, 44.7 percent of Turkish youth between the ages of 20 and 24 had a secondary diploma compared with 74.8 percent for the EU15 countries. For girls the comparable rate in Turkey stands at 38.9 percent. The rates also vary significantly by geographic region, with much lower rates of enrollment and attainment in the eastern provinces. Even if students have secondary education, skill levels are low by international standards, as illustrated in the graph below.
37. Higher education reform is a high priority. The gross higher education enrollment rate in Turkey was 30 percent in 2004 compared with an average of 70 percent in Western Europe and North America. The current entrance examination system diverts resources from more productive learning, and increases inequality between the rich and poor.
12 Figure 1: Distribution of 15 Yr. Old Students by Proficiency Level, Turkey, EU & OECD I 301 I
25
g 20 U0 * $ 15
nf 10 WTurkey ONew Members OMem bers ,5
Learning Proficency Scale Source: Program of International Student Assessment-PISA 2004
38. Significant improvement in health outcomes has been achieved over the past years. The Government has a strong vision and commitment to health sector modernization, and a well-formulated health reform strategy. The focus of the Government's strategy is on improving health outcomes while simultaneously controlling rising health expenditures. Implementation is a challenge with reforms taking years to implement, particularly with respect to passing laws. Despite these challenges, much has been achieved in expanding health services, especially for rural and vulnerable populations (e.g., rapid expansion of family medicine, mobile health teams in rural areas and coverage of outpatient services and pharmaceuticals for low-income families). For example, the infant mortality rate dropped from 53/1000 in 1989-1993 to 29/1000 live births for 1999-2003 period and is expected to have further declined. Similarly, the under five mortality rate declined from 52/1000 live births (1994-1 998) to 3711 000 live births in 1999-2003 .I'
39. Further improvement in aggregate health outcomes will involve addressing geographic, urbanhural and income-based disparities. Currently, significant geographic, urbadrural and income disparities in health outcomes driven by access barriers for the poor and vulnerable and lower levels of knowledge about seeking care exist. For example, the maternal mortality rate stood at 28.5 per hundred thousand live births in 2005, varying from a low 7.4 in western Anatolia to 68.3 at the East Black Sea and North East Anatolia. Also, despite the notable improvements, infant- and under-five mortality rates targeted by the fourth and fifth MDGs, respectively, are high in Turkey compared to other MICs and they are among the highest in Europe. Life expectancy at birth in 2006 was 69.1 years for males and 74.0 years for females, still about seven years below the OECD average. With the population pyramid changing in the coming decades, so will the burden of disease, placing added importance on reforming the health care delivery model which would need to include a review ofboth quantity and specialization of health personnel. Also, there is a need to continue focusing on the equity of spending by better targeting public spending on poor and vulnerable and with more resources on
13 preventive and primary health care services and making sure poor are covered for life- threatening illnesses.
Figure 2: Changes in Infant Mortality Rates in Turkey Between 1970 and 2007
Q) 140 -
-.--"Q 100- gc 80- & 60- Q E' 40- -$ 20 - 01 1971 1973 1975 1977 1979 1983 1988 1993 1998 2003 2004 2005 2006 2007 Years
Source: * Trends in Fertility and Mortality in Turkey US-NRC and SPO Five Years Development Plan Estimations 1983 Turkish Population and Health Survey 1979-1982 period estimation. 1988 Turkish Population and Health Survey 1993, 1998,2003 Turkish Population and Health Survey 2004,2005,2006,2007 TUFXSTAT estimations
40. Promoting social inclusion is a major element of meeting the Copenhagen criteria and thus for the EU accession negotiation process. Turkey has made notable progress in strengthening the social safety-net towards the disadvantaged and vulnerable, primarily through the introduction of a conditional cash transfer program that effectively - and with notable impact - reaches 2.6 million children in poor households. Main priorities in the years ahead would include: (i)building on the conditional cash transfer program, further strengthening of social safety net; (ii)rethinking the income support strategy for the poor and vulnerable in the context of providing a springboard for gainful employment; (iii)taking initiatives aiming at youth inclusion; and (iv) providing continuous support to female employment, reducing the pay gap and in general integrating women as full equal partners in society; (v) improving the monitoring and evaluation of social services and then expanding cost-effective services to underserved population groups.
C. Efficient Provision of High Quality Public Services
41. The Government's program puts great emphasis on improving the efficiency and quality of public services. Improving the quality and management of public expenditures, strengthening public sector governance, putting into practice the e- government, reducing regional disparities, improving local delivery of public services, and strengthening environmental protection, and emergency preparedness and disaster risk mitigation are among the key priorities. Strengthening regulation and pricing public services in accordance with economic criteria will be important to achieve these objectives.
14 42. Continuing improvements in the composition and quality of public spending will greatly help Turkey meet its development challenges and foster sustained growth. Fiscal consolidation so far has relied heavily on revenues. Future efforts on the expenditure side will be important to increase the sustainability of fiscal adjustment and help support economic growth in particular by containing current expenditures so that sufficient fiscal room is left for financing productive public investments. Sustained investments will be needed in education, in infrastructure for less-developed regions, in the energy sector, in areas where alignment with the EU acquis entails a cost (e.g., environment), and where significant co-financing is needed for absorbing pre-accession funds (e.g., rural development). Moreover, a high level of public sector primary budget surplus will need to be maintained in order to accelerate the reduction of public debt in proportion to GDP and forestall pressures on the external current account. To this end, reducing state aid and implementing the social security reform will be important. Although short-term fiscal gains from the social security reform are not expected to be large, creating fiscal room in the medium-term, especially for lowering high payroll taxes, as well as sustainability of fiscal balances will heavily depend on its implementation.
43. Trade-offs in expenditure allocations will be important as will expenditure reforms aimed at efficiency gains. Increased fiscal space could be sought possibly by reducing spending in functional areas where it appears to be oversized in international comparison and by implementing reforms that improve efficiency and help contain costs in areas where expenditure pressures are being felt-such as health care and pensions. Horizontal reforms, focused on the modernization of civil service pay and employment and the careful formulation ofthe investment program, would also help contain pressures on the wage bill and investment spending across functional areas. The Government recognizes the importance of ensuring appropriate allocations for operation and maintenance of public capital on accelerated decay of capital goods may unduly burden the investment program in the future. A framework conducive to a greater role of the private sector in the financing, development and operation of infrastructure should be created-requiring a predictable policy and regulatory environment, together with careful design of Government commitments to private operators to minimize the risk of contingent liabilities.
44. Addressing the unfinished agenda in public financial management reform represents a major challenge. Far-reaching public financial management reforms have improved budget coverage, formulation, execution, accounting, auditing, and procurement, providing a new legal fiamework for modem public expenditure management and accountability. The main challenge ahead is the implementation of the reform agenda throughout the entire general Government, including extra budgetary funds and revolving funds. The key areas that require further attention are: (i)enabling a fully functioning internal audit structure; (ii)enactment of the Turkish Court ofAccounts legislation, and (iii)bringing the remaining extra budgetary funds and revolving funds under the public financial management and control structures. l2 Effective leadership and
l2The Government is expected to restructure the revolving funds by mid 2008 as envisaged in the Public Financial Management and Control Law (PFMC), seems challenging. The Government has initiated a draft
15 coordination among agencies would be required for the effective implementation of the overall public financial management reform agenda.
45. Continued improvement in governance remains a priority. Recent governance indicators reflect improving trends, including reduced corruption. Surveys of firms and households suggest that corruption levels in Turkey are not unlike those in many EU countries. Reforms undertaken to meet the EU’s political criteria (democratic institutions, rule of law) for accession talks are starting to have an impact. The legal fiamework against corruption has been strengthened with specific provisions in the new Criminal Code, new legislation on public procurement and civil service ethics, and the ratification of major international convention^'^. New legislation on access to information and on the press has helped increase transparency. More streamlined procedures for tax administration, customs and business licensing have also reduced opportunities for corruption. As a result, between 2002 and 2005, Turkey’s performance improved according to several surveys of the business community. The European Bank for Reconstruction and Development (EBRD)-World Bank Business Environment and Enterprise Performance Surveys (BEEPS)14 indicate improvements in many areas vulnerable to corruption (including business licensing, tax administration, customs and the courts) and reductions in overall bribe frequency and the perception of state capture” The BEEPS also show a higher level of confidence in the legal system in Turkey than in the EU8 countries. Doing Business ranks Turkey higher than the EU8 average in starting a business and registering property, but much worse in dealing with licenses, employing workers, and closing a business.
46. Public sector governance is a key priority for Turkey in the medium term. The Ninth Development Plan of the Government for the 2007-2013 period identified “increasing quality and effectiveness of public services” as one of the 5 development axes. Priorities under this axes include among others restructuring of the public administration, human resources management and judicial reform. The public sector governance and judicial reform agendas are of crucial importance for a strong investment climate conducive to growth and job creation, and thus for meeting Turkey’s long-term development challenges. Turkey would also benefit from a strong public administration that is more apt to implement the EU Acquis. Similarly the justice sector will play a critical role in adapting to EU requirements and standards. Improving public sector governance encompasses a broad agenda, underpinning many of the short-term and
restructuring plan for Ministry of Health revolving funds and announced in its Annual Program for 2008 that revolving funds would be restructured by mid-2008 I Depending on the restructuring alternative, bringing the revolving funds under the public financial management and control structure may not be necessary. l3 Turkey’s accession to the Council of Europe’s anti-corruption monitoring mechanism - the Group of States Against Corruption (GRECO) - and its peer review processes have strengthened governance and anti-corruption. l4\~~~~.worldbank.orriecairovernance has more information on the BEEPS. Is The World Economic Forum’s survey ofbusiness executives similarly finds reductions in the frequency ofbribery related to tax, exports-imports, courts, procurement, and the diversion of funds for personal use.
16 medium-term priorities in the Accession Partnership with Turkey adopted by the EU Council in January 2006. l6 Some key challenges, for example, include:
e Strengthening institutions implementing anti-corruption policy and coordination among them-a prerequisite for further improving the investment climate; e Promoting judicial reform-to ensure consistent interpretation of legal provisions and strengthen the efficiency ofprocedures; e Reforming public administration and civil service, to improve efficiency, accountability, and transparency-a key “horizontal” requirement for the effective implementation ofthe EU acquis; e Strengthening the independence and effective functioning of regulatory bodies-for example, in key network industries such as public procurement-and establishing new ones when needed (for example, for monitoring of state aid); and e Ensuring effective, transparent, and participatory local administration-a key for improving the quality of public services; for effective implementation of regional development policies and rural development and the absorption ofEU pre-accession finds.
Figure 3: Legal and Judicial Issues
I All Firms JUdlClaryas a problem doing business implementation of laws is consistent information on laws is easy to obtain confidence in the legal system able to enforce its decisions affordable quick honesthncorrupted fair and impartial percent of firms with overdue debts using courts to resolve percent of firms that have been to court
0 Yo 25% 75% 100%
Rl EU8-2005 0 Tur-2005
EU8 countries include Estonia, Latvia, Lithuania, Poland, Hungary, the Czech Republic, Slovakia and Slovenia (Source: BEEPS 2005)
47. The reduction of regional differences is also part of the Government’s medium-term agenda. Income disparity both across regions and provinces in Turkey is considerable. In order to support regional development and facilitate the use of EU finds for this purpose, the Government has begun to set up regional development agencies. These would play a planning and coordination role, supporting implementation of regional plans and programs. As of October 2007, only two regional development
16 2006135IEC: Council Decision of 23 January 2006 on the principles, priorities and conditions contained in the Accession Partnership with Turkey httu:/leuropa,eu.intIsmartapi/ce;i/sga doc?smartapi!celexapi!prod!CELEXnumdoc≤=en&numdoc=32006 DO03 5&model=guichett
17 agencies (RDAs) have been established in regions of Izmir and Adand Mersin. They are not functioning yet because the secondary legislation required is under formulation. The establishment of new RDAs needs a resolution of a Constitutional Court challenge. Other remaining challenges include: (i)designing and implementing a national strategy for regional development, (ii)managing the EU funds for regional development, and (iii) building capacity at the regional development agencies.
48. Advancing decentralization will have a major impact on the efficiency and quality of public services at the local level. Local governments account for only about 10 percent of government expenditures. The Government has embarked on a gradual process of decentralization. The authorities are aware of the importance of successful decentralization, of improvements in the technical capacity of local administrations and in local accountability, and of the matching of expenditure responsibilities and revenues. The targeting of intergovernmental transfers is also a key issue, given the wide disparities in tax bases among Turkey’s 3,225 municipalities and 81 provinces. Finally, the Government is concerned about the current mechanism used to finance capital investments in smaller municipalities.
49. The Government’s objective is to position administrations to deliver the public services for which they have comparative advantages and create the framework that will promote efficient and sustainable service delivery. To this end, the Government’s program includes: (i)improved system of intergovernmental transfers; and (ii)fundamental reforms in the legal and financial structure of Iller Bank, the public financial institution for financing municipal development. In addition, administrations would need to disengage from such activities that could be better provided by the private sector. In addition local administrations would focus on those core public services- water supply and wastewater, solid waste management, and land use planning and development-where the private sector is unlikely to engage, at least in the medium term. However, over time implementing pricing policies that will enable service providers to recover the full cost of regulated services will be likely to stimulate private sector interest but will require transparent procedures of contracting and regulating the services of private providers.
50. Developing municipal infrastructure is key to improved local service delivery. Infrastructure investment needs at the local level are significant for water supply, sanitation, air pollution reduction, solid waste management, secondary roads and other related municipal services. Migration from rural to urban areas has further increased the pressure on municipalities to provide safe and reliable municipal services. Migration has also created social, economic and environmental problems, and added to the complexity of urban planning in Turkey. Municipalities and their utilities have depended on the central government to subsidize sector investment and operations, but such subsidies must be linked to higher coverage and better quality of service. The poor credit record of municipalities and the lack of availability of long-term funds have prevented most municipalities to access private capital for investments, except for the largest metropolitan municipalities. Allocation of public and private funds for maintenance and new investments at the municipal level, greater use of public-private partnerships (PPPs) to operate publicly owned systems (with appropriate fiscal
18 monitoring and risk management) and improvement of governance at the municipal and central government levels are key objectives.
51. A particular challenge in the provision of public services is Turkey's vulnerability to natural disasters, especially earthquakes and wildfires due to severe droughts. After the devastating 1999 Marmara earthquake, consecutive governments have shifted attention from post-disaster recovery to hazard risk management. Some progress has been made through the introduction of a decentralized emergency management model and the establishment of a single central coordination agency (Turkish Emergency Management Agency (TEMAD)). However, institutional restructuring has been slow and incomplete. The difficulty of consolidating responsibilities for disaster risk management, currently fragmented and spread between a number of agencies, hampers progress in this area. While some progress has been made in strengthening the enforcement of building codes and adherence to seismically safe construction practices, this remain a long-term agenda which requires not only regulatory changes, but more importantly, good governance and better public awareness and determination of authorities to enforce better compliance with legal requirements and technical standards. There is also progress to be made in integrating disaster risk management in the overall development and planning agenda.
52. Enhancing environmental standards and compliance mechanisms is part of Turkey's program to meet EU Accession criteria. The EU is taking the lead in supporting this effort. Complying with the EU environmental directives will be a major challenge for Turkey, and will require significant investments over a long period in water treatment, solid and hazardous waste management, industrial pollution control, nature protection, and water resources management. The environmental acquis provides an opportunity for greater public participation in environmental assessment and for transparency regarding environmental information and decision making. The process of planning for the EU negotiations are expected to give Government and the business community an opportunity to work together to identify and address the main barriers to adopting cleaner technologies. Finally, appropriate management of the environment is also fundamental to the Government's poverty reduction efforts, as it helps break a vicious circle of poverty, environmental degradation, and rural to urban migration. In some rural areas, over-use and degradation of natural resources appears to be the only way for the poor to survive. Around 65 percent of Turkey's agricultural land is suffering from 'severe' or 'very severe' erosion, covering around 45 million ha. In many of these areas, rural poverty and a degraded environment forces people to migrate to urban areas, further stressing urban physical and environmental infrastructure. In poor urban areas a degraded environment contributes to ill health and social exclusion.
19 1II.TURKEY-WORLD BANK GROUP PARTNERSHIP
A. Past Bank Group Assistance
53. Turkey is the largest borrower in the Europe and Central Asia Region and it has been the third largest World Bank borrower in terms of new commitments of over US$1.5 billion during the last three years. The original, FY04-06 CAS envisaged a low-case scenario with a lending volume of up to US$1.3 billion and a high-case scenario with a lending program of US$4.5 billion. Under the CAS Progress Report at the end of 2005, an additional year was added to the program and the overall envelope was increased to US$6.6 billion for the four-year period. The solid lending program has been supported by an active AAA program which has responded to the Government’s needs for knowledge and technical assistance and included flagship reports on EU accession, labor markets, education, and significant advisory work by a panel of experts in the energy sector. A focused World Bank Institute (WBI) program, aligned with the Country Assistance Strategy (CAS), has complemented the Bank’s Analytical and Advisory Activities (AAA) work. The quality of the portfolio has been good, with performance indicators which are generally in line with or better than regional and Bank- wide averages, with one area requiring sustained attention is the disbursement ratio (see chart below).
Figure 4: Turkey Portfolio Indicators vs. Bank and ECA (FY07) I
100 96 loo
Disbursement Pro-activity % Realism % O/O Problem O/O Projects at Ratio % Projects Risk
1 rn Bank ECA Turkey 1
54. A strong International Finance Corporation (IFC) program contributed to the achievement of the CAS objectives. During FY05-06, IFC has committed over US917 million for its own account and mobilized US$329 million through syndicated banks, compared to US$443 million and US$112 respectively during FYO1-FY03. During FY07 only, IFC has committed US$551 million for its own account and mobilized US$413 million through syndicated banks, the highest IFC financing ever in Turkey. IFC’s investments have been well diversified across sectors with projects in manufacturing, the financial sector, information technology, oil and gas, health and education, and infrastructure. IFC has increasingly supported Turkish companies to become more competitive, diversify risk through increased exports and outward
20 investments, and to develop into regional players. During FY04-07, IFC has financed about US$200 million with Turkish companies engaging in south-south investments, including in Bosnia and Herzegovina, Bulgaria, Egypt, Georgia and Russia.
55. Finally, the Multilateral Investment Guarantee Agency (MIGA) has also been active in Turkey. It has provided guarantees both for investments in Turkey and to Turkish investors investing abroad, including under the newly established Small Investment Program. MIGA has one outstanding guarantee for infrastructure projects (US$135 million total gross exposure) and has issued guarantees to Turkish investors abroad.
56. The expected FY04-07 CAS outcomes and WBG benchmarks have been largely achieved, as shown in Table 4 below. A detailed assessment of CAS implementation and lessons learned is included in the attached CAS Completion Report (CAS CR).
B. Lessons Learned
57. Three main lessons emerge from the draft CAS CR, prepared in close collaboration with the authorities, and the Independent Evaluation Group (IEG’s) Country Assistance Evaluation (CAE) ,covering the 1993-2004 period:
The programmatic approach to development policy lending has proven useful in light of the (longer term and institutional) nature of the reforms supported by the Development Policy Loans (DPLs) and the fact that the authorities are keen to maintain full ownership of these reforms. The program perhaps could have had fewer DPLs but larger individual loan amounts.
High quality analytical work has been critical for helping the policy dialogue in-country on such key issues as education, energy and labor market reforms and for assisting the authorities to prioritize the economic agenda for Turkey’s EU accession. Collaborative preparation of economic and sector work, wide and participatory dissemination and engagement with country counterparts on the findings, and workshops of international practitioners, supported by WBI, have proven particularly effective.
Looking ahead, ownership and flexibility will be essential for the effectiveness of the new CPS: (i)rely on the leadership of the authorities in defining the program, while seeking to enhance civil society engagement in the consultation process; (ii)allow increased flexibility in terms of lending levels and instruments, content to respond to emerging priorities, and portfolio implementation; (iii) envisage greater support for private sector development to help create jobs and alleviate poverty; and (iv) aim at deepening the engagement in environment Drotection.
21 Table 4: Strategic Goals and FY04-06 CAS Framework
Turkey’s Long-term Strategic Goals A. Transform B. Raise level of health and C. Strengthen scientific and D. Protect the environment I economic and education, improve income technological capacity, social structure distribution enhance infrastructure
a. Sound b. Equitable Human and Social c. Attractive Business d. Strong Environmental Macroeconomics Development Climate and Knowledge Management and Disaster and Governance Prevention
Stabilization of Low extreme poverty (1.8%) Exports growth rate Significant convergence with EU public maintained and vulnerability reduced exceeds GNP growth rate environmental standards creditworthiness from 15% in 200 1 to 12% in 2006 FDI reaches US$1.5 billion Disaster prevention and indicators at Net enrollment rate in basic on average during the CAS management system improved sustainable levels education maintained at not less than period Less volatile 99%; girls’ enrollment increased, Stability of financial economic growth especially in secondary education: markets improved in the range of5% maleifemale ratio improved from Single digit 1.20 to 1.15 by 2006 inflation Child mortality reduced and maternal health improved
Satisfactory Public expenditure on health, Increase in export capacity Environmental sector priorities macroeconomic education and social protection of enterprises updated in the EU context and fiscal sustained at pre-crisis levels Impro\.ements in the overall Introduction ofmandatory framework Implementation of (i)the CCT investment climate, insurance cover ofprivate consistent with the program to benefit over 1 million implementation ofthe new housing units; creation ofa strict key outcomes children, and (ii)at least 1,500 local FDI law, establishment of and enforced construction code Implementation of initiative (LI) projects to support an Investment Promotion enforcement system, and public sector vulnerable people Agency (IPA) strengthening of emergency reforms Renovation and modernization of Continued independence of preparedness schools financial markets regulatory Improvements in access and quality agencies ofbasic health provision Completion ofprivatization of state banks; passage of new Bankruptcy Law and Commercial Code; implementation ofnon- bank financial institutions reform
Achieved Achieved Largely Achieved Partially Achieved
22 C. Strategic Objectives and Results Framework of the New Country Partnership Strategy (CPS)
58. The goal of the CPS is to help unlock Turkey’s potential for fast and sustained growth while establishing equal opportunity and allowing more citizens to share in the benefits of growth, through reforms that also facilitate Turkey’s EU accession. This overarching goal is fully in line with the Government’s priorities as expressed in various Government programs, and in particular in the Ninth Development Plan. In order to support the achievement ofthis goal, the new Bank Group program will aim at contributing to the three identified pillars: improved competitiveness and employment, equitable human and social development, and efficient provision of high- quality public services, with emphasis on the reduction of regional differences. The EU accession agenda will remain a cross-cutting theme in the design and implementation of the WBG program. The track record of the authorities during the past five years and the much improved economic fundamentals bode well for the continuation of a successful program.
59. The results framework for the CPS is shaped by Turkey’s own development goals and country indicators (see Annex Al). The framework ‘uxtaposes key objectives set out in Turkey’s Ninth Development Plan and the 60ti government’s program and the indicative program ofactivities on which the WBG will collaborate with Turkey as a partner in helping achieve these objectives. Naturally, many of the objectives to which the CPS aims to contribute have a longer time horizon than the CPS and depend on other factors in addition to those to which the CPS contributes.
60. In several areas, the sound implementation of the portfolio, rather than new activities, is expected to contribute to the achievement of key milestones. Effective monitoring and evaluation of portfolio implementation and of the achievement of the objectives of ongoing projects and programs will therefore be critical. The Government has requested the Bank’s support in strengthening its capacity in monitoring and evaluation. The authorities and the Bank have agreed to conduct periodic joint high-level reviews of portfolio implementation and country program performance, and to focus on the outcome and impacts of projects and programs in those reviews. The reviews will build on the successful Joint Portfolio Performance Review in 2007 (see Box 2).
61. The results framework for the CPS is adapted to the nature of the WBG engagement with Turkey, which for calls for greater flexibility. First, there is a trade- off between pre-defined outcomes and the required flexibility of WBG engagement. Turkey is an advanced MIC that is fully integrated in the global economy, and flexibility in adapting targets, milestones, policies and programs to evolving country and global conditions is essential for success. The results framework will be adjusted as the CPS program evolves and the CAS Progress Report will reflect these adjustments. Second, the CPS is a strategy ofpartnership where the WBG engagement represents a small share of Turkey’s public external financing, public expenditures, private sector financing and overall economic agenda. To illustrate, the International Bank for Reconstruction and
23 Development (IBRD) financing accounted for about 10 percent of public external financing in 2006, and the share of IBRD investment financing in total public sector investment was 2.2 percent in the same period. Consequently, the CPS program will be one of many factors that will be contributing to development results in Turkey, as such, its contributions, while being important, will be limited.
62. Turkey's statistical system generally provides reliable and timely data for policy making. The country subscribes to the Special Data Dissemination Standard (SDDS), and data collection and dissemination of core economic and monetary statistics are being carried out according to established international standards and methodology. TURKSTAT has been receiving significant support from Eurostat and EU member countries. The current statistical capacity allows for effective monitoring and evaluation of most development priorities, and in areas where further capacity building is needed, the Bank stands ready to collaborate with the authorities and other development partners to establish such a capacity.
Box 2: Joint Portfolio Performance Review (JPPR) Lessons Learned
Overall assessment: The JPPR confirmed the strong Government/World Bank partnership at the highest levels, and a joint determination to strengthen it further. Key issues highlighted and proposed actions are summarized as follows: Ownership: The success of projectsiprograms depends on "ownership." Ownership starts with project proposals prepared by the line agencies, based on their own assessment ofpriorities and issues and through the participation of all stakeholders. Simplification: Choosing the simplest possible project design is critical. This is a challenge for the line agencies, Treasury, the State Planning Organization, and the Bank alike. In this regard, the Turkish authorities' experience has been that sector-focused programs can successfully realize ultimate project objectives with a sustained impact more often than ambitious projects involving many agencies. Flexibility: Flexibility in designing and implementing programsiprojects is key. This will entail: - Limiting linkages between investment operations and legislative reforms, with the latter preferably supported through dialogue, AAA, or development lending . Using innovative financial and operational instruments . Reviewingiharmonizing Government and Bank requirements (such as feasibility studies) to speed up preparation and limit bottlenecks Capacity building: Development ofinstitutional capacity in line agencies is an important shared goal. Full integration of project implementation by Government employees within line agencies will contribute to achieving this goal. The use ofconsultants in Project Implementation Units (PIUs) will ideally be minimal. Monitoring & Evaluation (M&E): Line agencies will strive to strengthen capacity in M&E and focus on outcomes, not inputs. The Bank has M&E expertise and is ready to provide support in this regard. Implementation arrangements: Realistic project implementation timeframes and assessment of local capacity will help reduce the need for project restructurings, extensions and amendments.
24 D. Overall Approach
63. The emphasis will be on partnership with the Government to help address complex development challenges. In doing so, the WBG will seek to mobilize the best available technical expertise, international experience, and a wide range of instruments that the Bank Group can deliver. WBG teams will work across sectors to develop integrated development solutions together with the authorities.
64. The design and implementation of the program will be flexible and demand- driven. In line with the Bank Group’s MIC agenda, the CPS provides flexibility to respond to evolving priorities in a timely fashion, with an appropriate mix of instruments. The Government’s priorities will drive the program, and the WBG’s engagement will focus on finding and supporting the best development solutions through dialogue, AAA and financing. The Bank offers Turkey a full menu of AAA and financing-including free-standing and programmatic economic and sector work, just-in-time TA and advice, WBI capacity building, investment and policy lending at the project, program, sector, local, and country level, contingent financing tools (such as for catastrophic risks) and banking advisory services. IFC also expects to provide a wide variety of products and services in Turkey-including loans, equity, quasi equity, and syndicated loans. Some of IFC’s long-term products such as equity and subordinated debt are not easily available from other commercial sources of financing. MIGA guarantees are available as well.
65. Development policy lending is expected to play an important role. The authorities expressed strong interest in DPLs to accompany and support Turkey’s ongoing reform agenda, primarily because ofthe Bank’s comparative advantage in policy advice and support linked to flexible budget financing.
66. Reflecting the authorities’ preferences, Bank investment financing under the CPS will focus on helping Turkey address complex development challenges, with a heightened emphasis on results. The authorities expressed their interest in exploring the design of investment lending operations that link the disbursement of Bank funds directly to performance or service delivery. Such programs could play an important role in supporting reforms, for example in the social sectors. The implementation of Bank financed projects is expected to continue relying largely on the capacity of line agencies and civil servants or regular staff from independent entities (such as Halkbank and TSKB)-thus helping ensure the sustainability ofproject outcomes over time.
67. A continued strong IFC engagement is planned for the next four years. IFC will continue focusing on helping Turkey become more competitive, improve its infrastructure, improve the quality of health and education and reduce regional development inequalities. During the FY08-11 CPS period, IFC anticipates to commit US$1.6-2.0 billion for its own account. Turkey is currently IFC’s fifth largest exposure after Russia, India, China and Brazil. As of September 2007, IFC’s committed portfolio totaled US$l.6 billion.
25 68. PPPs, such as in health, education, energy, and infrastructure, privatization in the energy sector, and financial sector development, including micro-finance are likely areas of IBRD-IFC complementarity in the CPS. The Bank’s analytical work and dialogue on the investment climate aims to contribute to an improved business environment, facilitating private investments, including, but not limited to, IFC. Work on the overall PPP framework, at the request of the authorities, is being closely coordinated within the WBG. Group work on PPPs is expected to help the authorities create a solid policy and institutional framework for PPPs, while offering a comprehensive set of instruments that the authorities may want to draw on in addressing the most pressing investment needs. For the Private Sector Development Strategy: see Annex 3.
E. Areas of Engagement
69. The envisaged WBG operational program is mapped into the three main development themes of the CPS, which reflect Turkey’s overarching development objectives and the Government’s program and action plan (see Tables 5 and 6 below). Naturally, several activities will contribute to the achievement ofmore than one development objective.
a) Improved Competitiveness and Employment Opportunities
70. Under this pillar, the key objectives are to:
e Maintain macroeconomic stability and sustain economic growth e Improve the investment climate and decrease the informality of the economy e Increase labor market flexibility and improve skills e Maintain soundness ofthe financial system, and improve access to finance e Enhance technology adoption and innovation e Meet Turkey’s growing demand in efficient and sustainable energy. e Promote off-farm employment creation and increase the competitiveness of farm and off-farm sectors
71. The backbone of this part of the WBG program will be the planned Programmatic Competitiveness and Employment Development Policy Loans (CEDPLs). The CEDPL series supports a sustained medium-term process of legal, institutional, and structural development that promotes growth and the creation of more and better jobs in Turkey by: (i)maintaining the enabling macroeconomic framework; (ii)improving the investment climate - including a vast program of privatization of state owned enterprises, (iii)increasing labor market flexibility, (iv) enhancing access to investment capital, and (v) promoting the generation of knowledge and innovation, the adoption of new technologies, and upgrading the skills ofthe labor force.
26 Table 5: Turkey’s Ninth Development Plan Shapes the World Bank Group CPS
Vision: Turkey, a County with an Information Society, Growing in Stability, Sharing More Equitably, Globally Competitive and Fully Compliant with the European Union
The Strategy of the Ninth Development Plan World Bank Group Country Partnership (2007-2013): Strategy (CPS): Five Economic and Social Development Axes Three Pillars 1) Increasing Competitiveness: o Making Macroeconomic Stability Permanent o Improving the Business Environment o Reducing the Informal Economy Pillar I: o Improving the Financial System Improved Competitiveness and Employment o Improving the Energy and Transportation Opportunities Infrastructure o Protecting the Environment and Improving the 1. Sustained Economic Stability and Sustained Urban Infrastructure Economic Growth o Improving R&D and Innovation 2. Increased Private Investment, Improved o Disseminating Information and Communications Financial Intermediation, Deeper and Broader Technologies Financial Sector o Improving Efficiency of the Agricultural Structure o Ensuring the Shift to High Value-Added Production 3. Increased Employment Structure in Industry and Services 4. Reliable and Efficient Energy Supply and 2) Increasing Employment: Improved Transportation Infrastructure o Improving the Labor Market o Increasing the Sensitivity of Education to Labor Demand o Developing Active Labor Policies Pillar 11: 3) Strengthening Human Development and Social Equitable Human and Social Development Solidarity: o Enhancing the Educational System 1. Increasing Effectiveness and Sustainability of o Making the Health System Effective the Social Security System o Improving Income Distribution, Social Inclusion and Fight against Poverty 2. Health Care System has Improved b Governance, Efficiency, User and Provider o Increasing Effectiveness of the Social Security System Satisfaction, and Long-Term Sustainability o Protecting and Improving Culture and 3. Enhancing the Educational System and Strengthening Social Dialogue Increasing the Sensitivity of Education to Labor Demand
4) Ensuring Regional Development: o Making Regional Development Policy Effective at the Central Level o Ensuring Development Based on local Dynamics and Internal Potential Pillar 111: o Increasing Institutional Capacity at the Local Level Efficient Provision of High Quality o Ensuring Development in Rural Areas Public Services 5) Increasing Quality and Effectiveness in Public Services: 1. Public Expenditures Rationalized and Well o Rationalizing powers and Responsibilities Between Structured Institutions o Increasing Policy Making and Implementation 2. Public Sector Governance Strengthened Capacity 3. Improved Local Service Delivery and Disaster o Developing Human Resources in the Public Sector Preparedness o Ensuring the Dissemination and Effectiveness of e- Government Applications o Improving the Justice System o Making Security Services Effective
27 n one or more of three areas-: 800 one or more of three areas: 900 Lendink in areas such 1400 P Programmatic Public Sector PPDPL series as competitiveness & Development (PPDPL *Competitiveness and employment, public series) Employment (CEDPL series) sector reform, human P Competitiveness and Energy capital development Employment (CEDPL & social protection, series) and environmental
b Energy protection
b Export Finance (additional 3oo- SME Productivity & credit line financing) Competitiveness 500 (credit line) *Private Sector Renewable Energy and Energy Efficiency (credit line) *Energy Investment Loan (incl. 700- Energy Efficienc yl transmission) 900 Supply Security *Energy Supply Security Sector Railways APL I1 Investment Program (incl. generation)
P Municipal Services I1 300 Municipal Infrastructure (additional financing) (Metropolitan Cities) Environment & Natural
D Cadastre Modernization Resources incl. GEF from Investment Fund for the 200 Mediterranean Sea Large Marine Ecosystem Partnership Irrigation S WAp *Health (UHI Implementation)” 2oo- Education ’’
*Health Reform and Social ?An Social Inclusion & I JUU Security (APL Phase 11) Employment Program Total l’ 1800 Total ’’ 1800 Total 2600 lrities and the World Bank have identified the following additional areas for possible World Bank financing during the CPS period: (i)natural disaster contingentlinsurance or prevention investment financing; (ii)combined private-public financing of skill training and employment; (iii)road maintenance; and (iv) judicial reform.
” The CPS envisages Bank financing equivalent to new commitments up to US$6.2 billion during FY08-11, with an expected share of around 50 percent in development policy lending (DPLs). Bank financing up to these levels-assuming Turkey’s historical disbursement and amortization schedules-is projected to increase the Bank’s exposure to Turkey between end- FY07 and FYI 1 by up to US$4.5 billion-reflecting both the demand of the Government of Turkey for Bank financing and IBRD financial considerations. The phasing of Bank financing and the mix of DPLs and investment financing will be flexible. Thus, Bank financing may be front-loaded, back-loaded, or evenly phased, and the share of DPLs may exceed or fall short of the expected 50 percent average, in any one year and over the 4-year CPS perioddepending on the economic circumstances in Turkey and the substantive content and pace of implementation of the Turkish authorities’ economic reform and investment programs. The total amounts of US$l.8 billion each in FY08 and FY09 and US$2.6 billion during FY 10-1 1 are indicative of the extent to which the Turkish authorities expect possible frontloading of IBRD financing during the CPS period.
”The planned health and education investment projects in FY09 and FY IO are expected to involve outpudperformance based disbursements to the extent possible. Their sequencing will depend on country and sector developments-either project might proceed in FY09 and the other in FYIO.
28 Table 6 (contd.): Turkey-Indicative CPS Program FY 08-11 FY10-11 Analytic Analytic and Advisory Services FY09 Analytic and Advisory FYOS and Advisory (completed or ongoing) Services Services
3 CEMII o World Water Forum 3 Country 3 Policy Notes o Country Economic Work Economic Work 3 CEM on selected growth issues, e.g., informality (selected issues) (selected issues) 3 Investment Climate Assessment (ICA) o Public Expenditure and 3 Financial Sector Assessment follow-up Finance Work 2 Programmatic 3 Youth Employment o Programmatic Welfare and Welfare and 3 Youth Policy Social Policy AAA (ctd.) Social Policy o Programmatic Social Insurance Non-Lending TA o Programmatic Energy (ctd.) AAA (ctd.) (social security modeling) o Judicial Reform AAA o Health Sector Integrated Fiduciary Assessment 3 Investment o Programmatic Welfare & Social Policy Climate Work o Programmatic Energy (incl. expert panel) o PPP Advisory Work + TA (consultant study) o ESMAP-supporting electricity market o Istanbul Municipal Development
o Technology adoption, research and development, and innovation: FY08-09 o Health Sector Assessment (joint with OECD): FY08-FY09. o Female Labor Force Participation: FY08-FY09 o Education quality: beginning FY08 o PPP- implementation of legislation: FY08-FY09 o Municipal Financing & Regional Development-Selected Issues: FY08-FY09
72. The CEDPL series is designed around five expected program areas in support of competitiveness and employment which will evolve and be elaborated or modified in line with country circumstances and priorities:
0 Maintenance of the macroeconomic framework which has underpinned Turkey’s recovery following the 2001 crisis as well as the ongoing sustained rapid economic growth that began in 2002.
0 Improving the investment climate to foster the investment and productivity growth necessary to maintain rapid economic growth and generate enough formal sector jobs to absorb the growing supply of labor arising from Turkey’s demographics and the transformation of agriculture.
0 Laying the foundation for overhauling labor market regulations so hiring formal sector workers becomes more attractive for the private sector and working in the formal sector also becomes more attractive for workers.
Consolidating the soundness of the financial sector and increasing access to investment credit and other forms ofinvestment capital.
29 0 Increasing private sector capacity to innovate, adopt new technologies and quality standards, as well as a diagnosis of the policies needed for endowing the labor force with better skills to enhance the competitiveness ofthe private sector.
73. The CEDPL series will be accompanied by investment operations and IFC investment financing. Building on the successful completion of the Industrial Technology Development Project, further IBRD investment financing is being considered-to support the sustained implementation of policy reforms launched under the CEDPLs, foster innovation and technology adoption, and help address existing regional productivity, growth and employment gaps. The CPS also envisages continued long-term financing to exporters and Small and Medium Enterprises (SMEs), such as through additional credit line financing or new Bank and/or IFC operations-reflecting lessons from the recent Investment Climate Assessment and contributing to increased competitiveness. Private sector credit line F financing is also being considered to help achieve objectives with public good elements, such as energy efficiency, pollution abatement, or food safety. Finally, an operation supporting the creation of job opportunities in poor rural upland communities is under consideration. IFC investments will focus on (i)local banks to broaden their reach and market penetration and to improve their financial products delivery to SMEs and microfinance, (ii)second tier Turkish companies to become more competitive through implementing modem technology to diversify risk through increased exports and to reach out to less privileged parts of the country, (iii)companies investing outside Turkey diversifying market risk and becoming competitive regional players, and (iv) rural employment generation mainly through support for the agribusiness sector like second-tier food processing companies with a potential of expanding exports.
74. The CEDPLs and accompanying investment operations will be underpinned by substantial analytical work and dialogue. These AAAs are expected to build on the recently completed Country Economic Memorandum (CEM) and CEM2 on sustaining rapid growth with equity, the investment climate assessment, and labor market and education studies. Issues of informality and youth and women’s employment will also be likely focus areas.
75. The Bank Group will continue its strong partnership with Turkey to support the development of a sustainable energy sector. The CPS envisages substantial Bank Group financing in the energy sector, with private sector development playing a central role. The emphasis on the energy sector reflects the importance of energy security and energy efficiency for the economy, as well as the priority the Government places on the energy sector and on continued substantial Bank Group engagement.
0 Dialogue and analytic and advisory work will continue on achieving an efficient, sustainable and secure supply of energy to meet Turkey’s growing energy demand, as well as strengthening the financial viability of the sector, improving the functioning of the electricity market, and mitigating adverse environmental and social effects.
0 Bank Group financed energy projects are under implementation in electricity generation, transmission and distribution, in the gas sector and in the area of renewable energy. New Bank Group financing is expected for investments in generation rehabilitation, energy efficiency improvements, renewable energy, and
30 in the electricity and gas transmission networks-through a mix of individual public and private investment projects.
IBRD financing, in addition to individual investment projects, may be in the form of adaptable program lending, a sector-wide approach (SWAP), and possible development policy lending to support critical sector reforms.
0 Privatization of distribution, further increase in private generation capacity, and privatization of existing generation (including financing environmental retrofits) could be supported through IFC investments and, depending on demand, possible IBRD partial risk and MIGA guarantees.
0 Specifically, IFC intends to support the power sector demonstrating that, properly structured, private generation projects can represent feasible and financially attractive investments for foreign investors in the recently restructured and competitive power sector. Depending on the Government’s evolving priorities as well as market appetite, IFC would also consider pre-privatization support through convertible loans or equity financing-with a view to increasing the valuation of assets by providing additional comfort to potential investors. Working directly with the private sector, IFC is prepared to take long-term merchant-risk in the electricity sector in selected cases.
76. Infrastructure, especially transport, is expected to be a priority area for IFC financing, while Bank support for the railway sector is expected to continue. IFC will work in tandem with the Bank as a partner with Turkey in moving toward an effective mix of private and state infrastructure services, as is characteristic of efficient higher income economies. Specifically, IFC will look for opportunities to support private sector investments in ports, airports and logistics facilities. IFC plans to make a number of investments to support private sector entry into the transport sector in Turkey during the CPS period. The Bank stands ready to provide continued support for the restructuring of the railway sector to help alleviate the fiscal burden of subsidies and reduce transport logistics costs to improve competitiveness. However, any such additional Bank support hinges on sufficient progress in the creation of a proper legislative framework for the railway sector and the company, and the implementation of initial restructuring actions as envisaged under the ongoing Railways Restructuring Project. In addition, IFC will seek opportunities for financing urban transport projects on a commercial project-finance basis at the sub-sovereign level through structures acceptable to the Government in the overall context of sub-sovereign borrowing.
b) Equitable Human and Social Development
77. The CPS aims to contribute to three key country development objectives under the Equitable Human and Social Development pillar:
Increasing the effectiveness ofthe social security system and making the health system more effective; 0 Enhancing the educational system and increasing the sensitivity ofeducation to labor demand; and Improving income distribution, social inclusion and fighting poverty.
31 78. Implementation of the social security reform and continued support for the Health Transformation Program will remain a key priority in the CPS period. Parametric and institutional changes in the pension system and the introduction of a fiscally sustainable universal health insurance system are expected to improve the long-term financial sustainability and equity of the social security system, and dramatically increase access to health services for the most vulnerable groups of the population. Bank support for implementation of key health services delivery and public health reforms, as well as monitoring and evaluation of these interventions, is expected to continue during the CPS period. These interventions aim to improve the cost-effectiveness of health services and make health services responsive to population needs (e.g., integration of health promotion and public health into primary health care). Implementation of the social security reforms, including health reforms, will continue to be supported in the context of development policy lending, complemented by a planned investment operation, possibly a SWAp, as a follow-up to the Health Transition Project. Continued TA in pensions, just-in-time policy notes on health sector reform (possibly including the evaluation of the impact of universal health insurance and the impact of health reforms on access to and equity, efficiency and quality of health services) and the continuation of WBI’s health reform flagship program will complement lending. IFC is expected to continue to contribute to increased private sector provision of health services. Based on its previous experience in the health sector, IFC will focus on supporting: (i)companies that plan to become national healthcare service providers or expand their domestic or foreign operations; (ii) companies seeking to establish specialized centers of excellence; (iii)smaller hospitals and clinics, through a wholesale approach in cooperation with domestic banks.
79. In view of the critical importance of skills to improve competitiveness and employment, and its role in reducing inequalities, education will be an important element of the CPS. The implementation of the Secondary Education Project is expected to contribute to the achievement of the Government’s strategic target of considerably increasing the net enrollment rate in secondary education and improving the quality of secondary education by updating curriculum, providing effective use of ICT and raising qualification of teachers. The Bank stands ready to provide on-demand technical assistance and advice to the Government, drawing on a significant body of recently completed analytical work, covering all levels of education. Planned new sector work will likely focus in areas such as early childhood development, equity in education, higher education financing, and vocational and technical higher education. In such sector work, the Bank plans to engage young people actively as key stakeholders. Links established through the JSDF grant for youth development and social inclusion (implemented through the Youth General Directorate in the Ministry of Labor) as well as the Youth Voices group (a group of youth supported by the Bank for three years) could be used as entries in for such engagement. Collaborative AAA, a deep engagement on the findings and conclusions of the analysis, and a broad dialogue on policy options will be particularly important in the education sector. Capacity constraints of implementation of both policies and investments, and the social sensitivities should not be underestimated. This is an area where the Bank consciously plans to take a relatively high risk because of the critical importance of education for Turkey’s future.
80. The CPS envisages possible new Bank financing in education. Likely focus areas of such work include: (i)the improvement of the quality of primary education and human capital development of poor and vulnerable children, including before they start elementary school through pre-school and early childhood development; (ii)life skills and school-to-
32 work transition through upgrading secondary and technical education, promoting life skills and entrepreneurship amongst youth; and (iii)development of a competency-based skill- building system, based on actual demand, for new labor market entrants and today’s workers, especially the poor and unemployed. Financing instruments could vary from traditional investment lending through SWAps to a possible DPL. IFC expects to continue promoting high quality private education at the tertiary level, and it may support vocational and technical education that is better linked to the needs of the private sector. Accordingly, IFC will consider financing the establishment of private universities and the introduction of university student loans.
81. Reducing poverty and inequality and promoting social inclusion are explicit goals in the Government’s Development Plan. The Bank aims to accompany the Government in this endeavor through a major, programmatic AAA-in large part jointly with Government entities. In this work, the Government and the Bank will together aspire to develop policy options on social assistance and welfare policy, but also options for sharing the benefits of economic growth, that is, for making economic growth pro-poor and equitable. An important part of this programmatic work will likely be to explore options for active employment policies and for the inclusion of vulnerable groups in the Turkish society. This analytical work could lead to the preparation of a social protection project later in the CPS period, with a focus on labor market activation and on facilitating the full participation in the labor market of disadvantaged and vulnerable groups.
33 Box 3: WBI in Turkey: An Integrated Multi-Year Capacity-Building Program
WBI pursues a selective approach in Turkey, focusing on four areas that complement the Bank’s analytic and financing services in support of Turkeys’s development objectives. The Legal and Judicial Reform program supports the Government’s strategy to improve administrative governance in the public sector. Linked to the Bank’s Istanbul Seismic Risk Mitigation and Emergency Preparedness Project (ISMEP) and expected to support the Istanbul Municipal Infrastructure Project, WBI’s Disaster Risk Management (DRM) program contributes to strengthening the capacity of universities and municipalities to use customized DRM teaching materials and formulate comprehensive policies on DRM. The EU Accession Leadership Support program uses the power of peer to peer knowledge exchanges where WBI brings leaders and practitioners from other EU member countries to share their experience with designing and implementing reforms required for convergence with the EU. The Health Reform program has been responsible for the successful implementation of one of the components of the Bank’s Health Transition Project - “Strengthening the School of Public Health.” The aim is to support the school ofPublic Health to become a center of excellence for continuing education in health system development and advocacy. These multi-year capacity building programs have resulted in: (i)institutions that are strengthened to implement policy reforms, (ii)better trained practitioners, (iii)a larger cadre of trainers who ensure the sustainability of the capacity building efforts in Turkey, and (iv) peer to peer knowledge sharing between leaders of Turkey and other EU member states. WBI also enabled Turkey to share its experience with developing a National Development Plan to senior Government representatives from Bosnia and Herzegovina and facilitated other SoutWSouth knowledge exchanges where Turkey shared its experience on Migration with Russia and on disaster risk management with India. In FY09, WBI will transition to support the new areas of focus in the CPS. New programs include: (1) Education to support reforms in a knowledge-based economy necessary for improved employment generation; (2) PPP in support of knowledge transfer and hands-on technical assistance to PPP agencies to establish the enabling policy, regulatory and institutional environments required for PPP development in line with the Bank’s policy dialogue; and (3) Social Protection and Risk Management capacity building aimed at increasing security, reducing vulnerability and extreme poverty for improved regional development. WBI expects to continue its Judicial Reform and Disaster Risk management programs during the CPS period.
c) Efficient Provision of High Quality Public Services 82. Under this pillar, the key objectives are to:
e Improve the effectiveness ofpublic expenditures e Enhance the efficiency ofpublic expenditure management e Strengthen public sector governance e Reduce regional disparities e Putting into practice the e-Government e Improve local delivery ofpublic services 0 Strengthen environment protection, and emergency preparedness and disaster management
83. The Bank’s partnership with Turkey in support of continued public sector reforms is expected to constitute a key component of the CPS. Bank advice and financing for public sector reform under the CPS will aim to contribute to the achievement of Turkey’s objectives of strengthened public administration and governance and improved public service
34 delivery and social protection, with the ultimate goal of sustained economic growth. The CPS program envisages continued DPL financing under the Programmatic Public Sector Development Policy Loan (PPDPL) series. The PPDPL series supports the Government’s program to (i)improve the quality of fiscal expenditures, (ii)enhance the efficiency ofpublic expenditure management, including the public investment program (PIP) and alternative financing mechanisms for the PIP such as Public Private Partnerships; (iii)improve public sector governance, (iv) reduce regional disparities, and (v) improve the local delivery of public services. PPDPLs during the CPS period and will likely focus on:
0 Support to the macroeconomic-fiscal framework that has underpinned Turkey’s recovery and strong growth after the 2001 crisis, with an aim to ensure sustainability of growth and mitigate the risks arising from a complex and dynamic external environment.
Improvement of the quality of fiscal expenditures, through reduction of the deficit of the social security system, implementation of systemic reform for long-term fiscal sustainability and administrative reform to strengthen the capacity of the social security administration, and efficiency-increasing and cost-saving measures in the health system in order to contain pressures in health expenditures.
0 Support to the sustained implementation of the public financial management and control law that has underpinned the outstanding improvements in the public expenditure management system in Turkey.
0 Support for improvements in the administration and governance of the public sector through actions intended to reduce regional disparities, improve local administrations and the financing structure for municipalities through Iller Bank and improve the justice system.
84. Reform of Turkey’s cadastre and the judiciary system is an important priority. Bank financing is envisaged through investment lending for the automation of land administration to allow improved property valuation and taxation, and urban development. Possible financing support for judicial reform will be decided on the basis of analytic work planned for FY09. The AAA program underpinning and complementing lending in support of public sector reforms includes the recent PER and CEM with a special focus on public sector reform, IDF-grant supported TA and a WBI program for judicial reform, work on fiscal decentralization, and a JSDF grant to strengthen the role of Turkish civil society in local governance. The Grant is predicated on the belief that participatory decision making through greater transparency and accountability can lead to better access to and quality of locally provided public services. Additional AAA work is envisaged on regional development and fiscal decentralization, while a new PER could be undertaken in the second part ofthe CPS period.
35 85. The development of municipal infrastructure is necessary for improved competitiveness, better service delivery at the local level and environmental sustainability. The cluster of activities in this area will include hrther lending to metropolitan municipalities, as well as to small- and medium-sized municipalities that are financially less affluent. In the area of sub-national financing, IFC aims to support the Government in fostering increased participation of commercial lenders in municipal finance, to complement the limited pool of available concessional resources, to increase gradually access to credit for 2"d tier municipalities, and to build up local credit appraisal capacity, while contributing to the commercialization of public sector domestic banks which currently dominate the municipal finance market. The CPS also envisages further exploration of the possible use of the joint WB-IFC Sub-national Financing Facility, which provides financing to sub-sovereign public entities without sovereign guarantees and potential WBG support for PPPs. IFC will try to develop a wholesale approach to reach a wider market of creditworthy sub-national entities, in partnership with interested local financial institutions through risk sharing or other arrangements.
86. Finally, the CPS envisages continued Bank engagement in strengthening environment protection, and emergency preparedness and disaster management. Consistent with the CAE recommendations, the Bank is ready to intensify its engagement in environment protection-in a manner responsive to, and depending on, specific demand and interest by the authorities, and where complementary to assistance from other sources, especially the EC.
0 Turkey has completely phased out methyl bromide ahead of the 2010 target under the ODS Phase-Out 2 Project. Building on this success, Turkey and the Bank consider launching an ODS 3 project targeting the phase-out of hydrochlorofluorocarbons (HCFCs).
Ongoing and future planned municipal infrastructure investments are focusing on environmental improvements in water supply, wastewater and solid waste management, and operations supporting renewable energy investments.
The CPS envisages new Bank financing in the second half of the CPS period for an environment and natural resource management project which would provide support for improved rural service delivery to poor communities in upland catchments affected by serious problems of land degradation and soil erosion. The focus of these efforts would be to scale up to the basin level some of the lessons learned from earlier investments, by coupling income generating activities with land rehabilitation efforts in remote rural areas.
0 Additional sources of funding, for example from the GEF-financed Mediterranean Investment Fund, could complement these investments.
0 Provided funds are available and can be allocated from the GEF 4 Replenishment, Global Environment Facility (GEF) support will be sought to assist Turkey, once it has ratified the Stockholm Convention on Persistent Organic Pollutants (POPS), to manage and reduce its toxic POPs stockpiles.
36 Depending on Government demand, the Bank stands ready to offer new financing for emergency preparedness (e.g., the seismic retrofitting of buildings) and disaster management, including through innovative tools of contingenthnsurance catastrophe financing for public expenditures in case of a major natural disaster. Turkey is eligible for technical assistance from the Global Facility for Disaster Reduction and Recovery for sector work and project preparation for risk mitigation investments.
0 Finally, Turkey has the potential of becoming a regional leader in assisting other countries to build their disaster response and mitigation capacities as part of the South Eastern Europe Disaster Risk Reduction and Adaptation Program.
F. Working with Other Development Partners
87. Collaboration with the IMF will continue to focus on public sector and financial sector reforms, along with macroeconomic monitoring. The work on public sector management and governance has aimed at the strengthening of public expenditure management system while maintaining fiscal discipline. The Fund has taken the lead in the short-term measures needed for the fiscal adjustment such as incomes policy, urgent revenue and expenditure measures, and budget monitoring. The Bank has taken the lead in assisting the Government on the medium-term public expenditure management strategy, rationalization of the public investment program, public procurement reform, accounting reform, and public liability management. The collaboration has been especially strong in the area of social security reform, including the containment of health expenditures. As for the financial sector, both the Fund and the Bank have supported the strengthening of banking supervision and the privatization of public banks; a joint financial sector assessment (FSAP) has been recently completed. While it is expected that the collaboration with the Fund will continue in the area of public sector and financial sector reforms, the three-year Stand-by Arrangement of about US$10 billion will come to an end in the spring of 2008. The nature of Turkey’s hture relationship with the IMF is yet to be decided by the authorities.
88. The EU is a particularly important development partner of Turkey, because of the process of Turkey’s EU membership accession and the significant volume of EU financial assistance on grant terms as well as through EIB. The EU’s Instrument of Pre- Accession Assistance (IPA) is expected to amount to EUR 2.25 billion (US$ 3.31 billion) during 2007-2010. The EU will support (i)institution building and cross-border cooperation, (ii)regional development, (iii)human resources development, and (iv) rural development. Programming of Bank and EU assistance is coordinated on a regular basis, and strategic joint agendas include education, financial and public sector reforms, including governance. EIB has become a major source of long-term finance both for the public and private sectors, especially in transport, SME financing and energy. Co-financing opportunities are likely to emerge in municipal infrastructure, environment, seismic risk mitigation and social sectors. Continued dialogue with the Government and the EIB will be important to identify the two institutions’ respective comparative advantage and areas of complementarity, including specific opportunities ofco-financing.
89. The Bank has become more fully engaged with the members of the United Nations (UN) system. Partnership with the UN system has been particularly close in the social sectors (United Nations Children’s Fund UNICEF, World Health Organization
37 (WHO)) and in poverty alleviation and local development/participation (United Nations Development Programme (UNDP)). The Bank has chaired and will continue to play a leading role in the UN thematic group on youth, and the Bank and UN collaborate on gender issues. Further areas of possible operational collaboration are being explored, in particular with UNDP.
90. In addition to the European Union, UN agencies, IMF, and World Bank Group, the Islamic Development Bank and the Montreal Protocol provide significant development support to Turkey, as do a number of countries on a bilateral basis -- including France, Germany, Japan, Korea, the Netherlands, Spain, Switzerland, the United Arab Emirates, the United Kingdom, and the United States. Most such support focuses on infrastructure and on sustainable social and environmental development. Annex 2 provides an overview ofmajor development partners’ activities and support to Turkey.
A consultations event with civil society representatives on the new CPS took place in Istanbul. Main observations included requests for (i)stronger financial and institutional cooperation with civil society through direct support mechanisms to NGOs; (ii)more emphasis on capacity building measures strengthening Turkish NGOs; (iii)more Bank involvement in education, labor, gender, social work, youth, migration and transparency issues; (iv) more attention to special education needs, including education programs for the handicapped, early childhood development, gender equality and entrepreneurship programs for women and skills upgrading programs for youth, (v) advocacy for an increased role of civil society in social sectors and request for consultative role for NGOs in every stage of project implementation, and (vi) creating a support mechanism to the NGO community via a project or a newly created NGO consultative body.
G. Bank Financing
91. The CPS envisages Bank financing equivalent to new commitments up to US$ 6.2 billion during FY08-11, with an expected share of around fifty percent development policy lending (DPLs). Bank financing up to these levels-assuming Turkey’s historical disbursement and amortization schedules-is projected to increase the Bank’s exposure to Turkey between end-FY07 and end-FY 11 by up to US$4.5 billion-reflecting both the demand of the Government of Turkey for Bank financing and IBRD financial considerations.
92. The phasing of Bank financing and the mix of DPLs and investment financing will be flexible. Thus, Bank financing may be front-loaded, back-loaded, or evenly phased, and the share of DPLs may exceed or fall short of the expected fifty percent average in any one year and over the 4-year CPS period-depending on the economic circumstances in Turkey and the substantive content and pace of implementation of the Turkish authorities’ economic reform and investment programs. Recognizing the importance of continuity and predictability, the Bank will nonetheless aim, working with the authorities, to manage Bank financing in a way consistent with a broadly even distribution of
38 new commitments over the CPS period.17 The two main reasons for flexibility in the instrument mix and phasing of Bank financing, reflecting the Turkish authorities’ preference, are the intrinsic and persistent uncertainties and volatility in global financial markets and the rapid evolution of the Turkish economy. Such flexibility in instrument choice is also consistent with the implementation of the Bank Group’s MIC Strategy.’’
93. The scale of available Bank financing and its phasing over the CPS period will be regulated by the Bank’s review and approval of each new loan commitment. The Bank’s review will focus on the maintenance of sound macroeconomic management, financial sector stability, and progress in the three CPS development areas, namely (a) improved competitiveness and employment opportunities, (b) equitable human and social development, and (c) the efficient provision of high quality public services. Bank funds account for only a fraction ofTurkey’s budget and external financing, and the levels of actual Bank financing will depend substantially on other available financing, such as from the EIB, EU, and other development partners, and on the competitiveness of the Bank’s financial and non-financial terms of funding.
94. Specifically, the Bank will assess Turkey’s macroeconomic management and financial sector stability and performance in the three CPS development areas by considering public policy action triggering progress in the following six reform areas:
0 Continued good macroeconomic policies, through the implementation of a satisfactory macroeconomic framework broadly in line with the scenario presented in the CPS document.
0 Continued good financial sector policies, designed to enhance financial sector stability through improved efficiency of the financial sector, including public sector banks.
0 Improved investment climate and reduced informality through measures such as the enactment of the new commercial code, further simplificationheform of the income tax system, and development of a strategy for combating informality.
0 Improved functioning of the labor market including through the enactment of legislation aimed at increasing labor market flexibility and participation, especially for women and youth, reducing non-wage labor costs, and increasing the protection for workers relative to protection ofjobs.
0 Implementation of sustainable and more equitable social security through measures such as the enactment and initial implementation ofa revised social security and universal health insurance law that addresses the Constitutional Court decision while maintaining the twin objectives of long-term fiscal sustainability and
” At the outset of the CPS, the authorities envisage moderate frontloading of IBRD financing-with new commitments up to US$l.8 billion per year on average in FY08-09, and US$1.3 billion per year on average during FY 10- 1 1. IS Strengthening the World Bank’s engagement with IBRD partner countries (DC2006-0014), September 7, 2006 and Strengthening the World Bank’s engagement with IBRD partner Countries (DC2007-0022), October 9, 2007
39 equitability of the social security system, continuation of targeted benefits to poor families, and adoption of a new social assistance law.
0 Improved effectiveness of public expenditures, through measures such as the enactment of appropriate state aid legislation in conformity with EU directives, budget implementation consistent with the medium-term framework, continued implementation of the Public Financial Management and Control Law, and the adoption of a new law on the Turkish Court ofAccounts. 95. High levels of Bank financing would reflect both strong overall policy performance and progress in the six reform areas-although not necessarily even progress in all areas and over time-and continuing high demand for Bank financing. Levels of Bank financing close to or at the CPS ceiling assume, in particular, a sound macroeconomic framework commensurate with continued improvements in creditworthiness, as characterized by, inter alia, sustainable current account deficits, improvements in the structure ofpublic debt, and trends in public sector and external debt ratios.
96. The amount and phasing of development policy lending will likely be a key determinant of the level of total Bank financing in line with Turkey’s policies and reforms over the course of the CPS period. Consistent with Bank operational policy, an appropriate macroeconomic framework is a prerequisite for development policy lending. With overall strong policies and reforms, development policy lending is expected to play a significant role as an instrument of Bank financing, and Turkey will likely make substantial progress toward the desired country outcomes in this case. By contrast, a combination of inadequate macroeconomic management, backtracking on past reforms, and prolonged periods of political uncertainty over the time horizon of the CPS, by reducing domestic and international confidence, would likely result in stagnating progress toward Turkey’s own goals of rapid growth and income convergence with the European Union. In such a scenario, Bank financing would not include development policy lending and would be managed so that exposure at the end ofthe CPS period would not exceed the level that would result from new commitments averaging US$500 millionper year.
97. CPS Progress Report in FY10. A CPS Progress Report is envisaged to be submitted to the Board of Executive Directors in FY 10.
40 H. External Debt Sustainability and Bank Exposure
98. The external debt to GNP ratio declined from 77percent in 2001 to 52 percent in 2006. After falling to 47 percent in 2005, the external debt to GNP ratio rose to 52 percent in 2o06 and remained at this levelin I Figure 5: Gross External Debt to GNP Ratio the first half of 2007, - mostly due to increased corporate sector borrowing from foreign sources...... Private sector debt accounted for more than 60 percent of the total external debt stock as of June 2007, compared to less than 30 percent in mO-NO*mw- end-2001 (see Figure 5). mooooooo 01000000-NNNNNNzz
N0
0 private sector Ipublic sector and CBRT
Note: 2007HI figure is in terms of annualized GNP as of June, 2007. Source: Treasuiy, Turkey
99. With Turkey's current National Accounts and GDP methodology and statistics taken as a given, the external debt to GNP ratio is projected to be on an upward path in the period 2008-2011, reaching Figure 6: Gross External Debt to GNP Ratio almost 56 percent in 2011 (see Figure 6). This projected path in 80 7 part reflects the expected widening in the CAD in 2008 because of the evolution in domestic demand, slowing global growth, high oil prices, and the recent appreciation of the YTL. In addition, FDI g2sg2g&ggzz flows to Turkey may be adversely 00000000000 affected by a slowdown in global NNNNNNNNNNN growth and delays in the completion of privatizations in the Source: Staff Projections medium-term.
41 100. Similarly to recent years, private sector external borrowing is expected to be the main driver of the projected increase in Turkey’s gross external debt stock in the period 2008-2011. By contrast, the public sector is projected to make net external debt repayments in this period. The private sector Figure 7: Share of Short-term External Debt in has been behind the economic Total Private Sector External Debt Stock expansion of recent years, and this expansion has been associated 80 7 with a considerable increase in its 75 70 external borrowing. On the one h1 hand, the private sector’s reliance 65 60 on external borrowing has a8 - 55 increased its exposure to exchange 50 rate risks. On the other hand, the 45 surge in corporate sector’s OO~X~~S~~~Z-N 00000000000 FOREX denominated assets and NNNNNNNNNNN increasing export revenues have Source: Treasury, Turkey partly mitigated this risk. The share of short-term private sector external debt in total private sector debt has been decreasing since 2004 - increasing its resilience to shocks (see Figure 7). In addition, the maturity of almost the entire external debt stock of the public sector was medium or long term as ofJune 2007.
101, With high Bank financing, close to the CPS ceiling, Bank exposure might reach around US$11.4 billion. The strong Bank lending program during the past CAS period led to an increase in Turkey’s disbursed and outstanding debt (DOD) to IBRD from about US$5.4 to close to US$6.9 billion,’’ putting Turkey among IBRD’s largest borrowers by exposure.
IV. RISKS
102. Turkey’s economic program and its Bank Group support continues to entail non-negligible risks. Some risks can be reduced by sustained implementation of reforms and by managing Bank financing accordingly. Other risks are outside Turkey’s and the Bank’s control. The main risks factors include: (i)political economy risks, (ii)external vulnerabilities, (iii)risk ofnatural disasters, and (iv) implementation risks.
103. Political economy risks. After a victory of the governing Justice and Development Party in the twin Parliamentary and Presidential elections in the summer of 2007, risks of political uncertainty have declined substantially. The new Government received a strong mandate to continue reforms with vigor. The recent passage of the mortgage law and the continued efforts to pursue the social security reform show the authorities’ commitment to continued reforms. The most important remaining political risks relate to the process of constitutional reform and the border tensions with Iraq. One important factor mitigating political economy risks remains the EU accession anchor which, notwithstanding the ups and downs, has been and is expected to remain a major unifying force behind political and economic reforms. As for the Bank, the main mitigating factor will be the use of
l9 CY02 to CY06
42 programmatic series of typically single-tranche development policy loans which allow the Bank to support reform actions.
104. External vulnerabilities. The Turkish economy remains vulnerable to shifts in investor sentiment due to its large current account deficit (CAD) and reliance on volatile international capital inflows. High returns on Turkish assets have brought large international flows to the country. Large exposure of foreign investors in Turkish assets made the economy more vulnerable to changes in global risk appetite:
The Turkish economy has weathered a number of shocks since 2006, demonstrating improved resilience of the economy. Turkish markets’ relatively fast recovery from volatility in financial markets in May-June 2006, February 2007, and April 2007, as well as from the recent market volatility originating from US sub-prime mortgage losses, showed the economy’s improved resilience to such shocks. At the same time, the impact on domestic markets was not
negligible, indicating Turkey’s continued vulnerability to external shocks. , A change in global liquidity conditions and risk appetite for emerging markets remains an important external risk factor.
Key vulnerability indicators have improved substantially over the last five years, but Turkey’s still relatively high public debt stock and the recent slowdown in disinflation process highlight the importance of further improvement. As set out in Sections I.B, I.C, and III.H, (i)the cost of borrowing has declined, (ii)the annual inflation rate has declined sharply, (iii)the composition and maturity of public debt have improved, (iv) debt management practices have strengthened; and (v) the public debt-to-GNP ratios have declined noticeably.
Turkey’s substantial foreign exchange reserves and flexible exchange rate regime mitigate risks associated with capital reversals. FOREX reserves of the Central Bank increased from US$19.8 billion to US$75 billion as of November 2007. Reserves represented 55 percent of gross external financing requirements in 2006 and more than covered Turkey’s short-term external debt in the first half of 2007. Turkey’s flexible exchange rate regime has helped cushion outflows during periods ofvolatility.
Gross external financing requirements are projected to stay at similarly high levels during 2007-10 as in recent years - at about 20 percent ofGDP. Currently, the Turkish economy is not expected to face difficulty in meeting the external financing requirements, as foreign investors’ interest in Turkish assets remains strong. For instance, foreigners equity holdings increased by YTL 5.9 billion (US$3.6 billion) in the period August-December 2007, bringing their share in the stock market to 72.2 percent in December 2007. Foreign investors’ appetite for Turkish equities is expected to continue in the medium term, in part as a consequence of falling interest rates and an expected acceleration of economic growth in 2008. In addition, FDI inflows would remain strong in the medium- term, assuming continuation ofprivatization.
43 Q The external debt to GNP ratio, after declining from 77percent in 2001, is expected to increase from an estimated 50 percent in 2007 to 56 percent in 201 1, reflecting largely the high CAD in 2008. With export growth projected to be vibrant, the CAD is estimated to decline starting in 2009, and the external debt to GNP ratio is estimated to begin stabilizing at the end ofthe CPS period.
Maintaining satisfactory macroeconomic performance and continuation of structural reforms will be the key to mitigating external firtancing risks. They will signal to market participants that Turkish fundamentals are sound and thus mitigate the risks associated with large external financing needs. In its Action Plan dated January 10, 2008, the government reiterated its firm commitment to maintaining strong fiscal discipline, inflation targeting, flexible exchange rates, and overall macroeconomic stability, while deepening structural reforms, including implementation of the pending Social Security Reform. The Turkish authorities will continue managing macroeconomic developments, including public and external financing and debt, accordingly, with the Bank continuing monitoring these developments closely.
105. Risk of natural disasters. Turkey is one of the most vulnerable countries to natural disasters, especially earthquakes. More than 80 percent ofthe population lives in areas prone to natural disasters, such as earthquakes, floods and landslides. These areas also generate an estimated 83 percent of GDP. Between 1992 and present, Turkey experienced 130 earthquakes of 5.0 or above on the Richter scale. In total, these caused over 80,000 casualties and heavy damage to 450,000 buildings. The 1999 Marmara earthquake alone left 17,000 people dead, 200,000 homeless, and resulted in a fiscal cost of some US$2.2 billion. Strengthening the coordination of disaster preparedness and response at the national and local level, and the increased enforcement ofbuilding codes would go a long way in mitigating the impact ofnatural disasters.
106. Implementation risks. Social consensus on the reform program and sufficient institutional capacity are needed for the implementation of the CPS, which supports the Government’s Ninth Development Plan. The complexity and social impact of many elements of the reform program, for example, the reform of the social security system, governance, education and decentralization of service delivery, require consensus building among the social partners that takes time and inevitably results in compromises. However, implementation of reforms would face difficulties in the absence of this process. Bank supported project preparation activities and analytic work can provide a platform for dialogue and help promote consensus building on key reforms and sharing relevant international experience with the stakeholders. Strengthening institutional capacity to implement policies and projects, especially as Bank financed projects rely more on country systems, will also be necessary. Bank supported reforms in the public sector and the continued strengthening of country systems, including in governance, fiduciary assessments of institutions, technical assistance embedded in operations and IDF grants in select areas will help mitigate these risks.
44 V. CONCLUSION
107. Given its size and its role in the region, Turkey's economic development has global significance. ' Turkey has an impressive five-year track record of macroeconomic performance and reforms. However, significant challenges remain: maintaining macroeconomic stability, strengthening competitiveness, sustaining strong economic growth, creating more jobs, further developing human capital and reducing inequalities, and improving the provision ofpublic services. A substantial Bank Group program is planned for the next four years in partnership with the authorities in achieving their vision of a prosperous Turkey, with income convergence with the countries of the EU.
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Annex 2 Page 1 of 2
Multilateral Cooperation
Council of Europe Focus on strengthening social integration, managing the Approximately Euro 1.5 ' Education, social loans, Development Bank environment and developing human capital. billion for 2008-201 1 iealth, urban ievelopment, judicial ievelopment, ecological md natural disasters.
European Investment Bank Support for enterprise development, infrastructure At least Euro 2 billion per Energy, earthquake risk development, energy sector and work in partnership with annum between 2008-10 mitigation, support to local banks and financial institutions to increase the SMEs, transport and availability and diversity of financing and improve the Znvironment and investment climate. infrastructure.
European Union Ongoing support through MEDA and Pre-Accession Euro 1.759 billion for 2008 to Education, agriculture and Assistance for Turkey. New support through the 2010 expected. rural development, instruction for Pre-Accession. Focus on institution transport, financial and building, regional and cross border cooperation, regional public sector reforms, development (transport, environment, regional imgation, environment competitiveness), human resources development and Avian Flu (employment, education, social inclusion) and rural development.
IMF Fiscal adjustment, including incomes policy, urgent Three year stand by Social security reform, revenue and expenditure measures and budget monitoring arrangement between 2005- financial sector including 2008: US$IO billion strengthening of banking supervision and privatization of public banks. Islamic Development Bank Focuses on the economic development and social progress Targets a lending volume of Trade and Project Finance of its member countries and Muslim communities in non- US$150-200million member countries. annually.
Montreal Protocol Elimination of the production and consumption of ozone- US$4.4 million spent between World Bank-implemented depleting chemicals. The objective of the World Bank as an 2004-07 under the Ozone grant for phasing out of implementing agency is to help client countries accomplish Depleting Substances grant. ozone-depleting their ozone protection objectives through strategic substances. planning, policy formulation, and technical support in project identification, preparation and implementation.
OPEC Fund Infrastructureitransport Antalya Light Railways Disaster management, System and Samsun Light transport and Railways System projects in infrastructure. 2006 (US60 million). No available projections for 2009-10 (based on demand from Government).
UN Group Focuses on governance, poverty reduction, environment & UNDP: US$33 million Social sectors with focus sustainable development, capacity development for delivered between 2006 and on poverty reduction, democratic governance, gender & youth, private sector 2007, and estimated youth inclusion, and partnership and information technology. programmatic delivery of technical assistance at the US$75-90 million between local government level. 2008 and 2010.
UNHCR: Gross ODA (2004- 05) average of US$6 million. Annex 2 Page 2 of2
Bilateral Cooperation France Focus on three pillars: (i) SME support promoting . Euro 550 million committed between 2005- Energy, support to SMEs and sub- (Agence Franqaise de socially and environmentally sound practices, (ii) 2007, including Euro 151 million from national lending. Developpement -AFD) environment (sustainable energy and industrial PROPACO (AFD’s subsidiary focused on pollution) and (iii) regional development through private sector support). AFD started its supporting decentralization, including at municipal activities in Turkey in 2004. level financing (Kayseri, Bursa and Istanbul). Germany Through KfW: Water sector and financial sector . Commitments for 2007 are Euro 4.5 million KfW: Cooperation in the areas of (Kreditanstalt fuer development and for 2008 are Euro 4 million. infrastructureand environment. Wiederautbau (KfW) . Financial Assistance disbursed through KfW of and Gesellschaft fuer Through GTZ: Technical assistance on around US$57.25 million in 2008. GTZ: environment and
Technische environmental protection; SMEs, support for local 9 Technical Assistance disbursed through GTZ infrastructure Zusammenarbeit government capacity building. of around Euro 1 million between 2008-10. (GTZ))
Japan Priority areas are environment infrastructure Total ofJPY101.5 billion -for yen loans, grant Environmentalprotection, (mainly Japan Bank for improvement, solid waste management, energy and technical assistance (2004 - 2005). environnental infrastructure,
International efficiency, disaster prevention and recovery 1 Including: Bosporus Rail Tube Crossing disaster management. Cooperation, Japan measures, traffic management, reduction of Project JPY 98 billion in 2005 (about US$936 Governance and decentralization in International disparities, human resource development and million). the context of the large grant to Cooperation Agency) technicaVenvironmentaVsectorspecialized training Turkish Economic and Social programs for government officials. Studies Foundation (TESEV)
Korea 32 Set Electric Suburban Train Project. 1 US$50 million in 2006 (Export-lmport Bank of Korea - KEXIM)
Spain Priority areas are light raiVtransport, energy and 1 JPY 24 billion for Fast Train Project in 2006 waste water. (Instituto de Credito Oficial).
1 US$87 million targeted for 2008 (Instituto de Credito Oficial).
Switzerland Mostly through the UNDP as implementing agency. About CHF 6 million allocated for ongoing Focus on social sectors such as post-disaster activities between 2004 and 2005. humanitarian assistance, development of women and CHF 1 million committed for 2008-09, under a children in the East and South East, and on Youth Youth project implemented through UNDP. initiatives.
The Netherlands Light rail, environment, agriculture, industry, 1 About Euro 23 million allocated to projects Railways and PPP environment, telecommunication, human rights and initiated between 2004 and 2007, half of which SMEs. financed through the Netherlands’ Program for Cooperation with Emerging Markets (PSOM). . United Arab Emirates Municipal infrastructureand disaster management. - Municipal infrastructure projects (estimated lnfrastructure with Iller Bank and (Abu Dhabi around US$5 million). disaster management. BanWFoundation)
United Kingdom EU accession support, including capacity building 1 About E680,000 spent between 2004 and 2005 for individual ministries and judicial reform. They 1 About L1.5 million per year targeted for 2008- also have initiatives in the area of climate change. 10.
United States Education, health, poverty. 1 About US10 million between 2005 and 2007. Conditional Cash Transfers under (USAID) World Bank supported Social Risk Mitigation project. (USAID contribution of US$8.82 million). World BanWUSAlD co-financing of Avian Influenza project (USAID contribution of US$I million) Annex 3 Page 1 of7
Annex 3: World Bank Group Private Sector Strategy (FY08-11)
Introduction
1. Turkey’s private sector will have a critical role in shaping the country’s economic future. Turkey’s development plan is grounded in a vision of Turkey, whose economy grows rapidly and equitably, as the country pursues harmonization with the EU, The private sector will be the primary source of the productivity gains and innovations required to sustain economic growth, generate employment opportunities and bring living standards closer to European levels. The government has endorsed the importance of private sector development frequently, including in the Ninth Development Plan, which set out a strategy for raising the international competitiveness ofthe Turkish economy.
2. This note presents the WBG’s (IBRD, IFC and MIGA) strategy for supporting Turkey’s private sector development for FY08-11. The entire menu of WBG products will be available to support private sector development in Turkey. The division of labor among WBG institutions will draw on each institution’s comparative advantage, and joint work will draw complementary strengths. The next section lays out the main challenges for private sector development in Turkey and the main government policies. The final section presents details ofthe strategy.
Private Sector: Status, Issues, and Government Strategy
3. Turkey has a large, dynamic and diversified private sector, characterized by an entrepreneurial spirit and risk taking. With the end of the 2001 financial crisis, macroeconomic stabilization and the expansion of the world economy, the conditions for private sector development in Turkey were once again favorable. Since then, Turkish corporations are beginning to make a mark in international markets, occasionally becoming global players in the process. High value added goods, such as cars (7 percent); TV receivers (5 percent) and trucks (4 percent) are among the top 5 export products, surpassing traditional goods such as clothing and textile. Foreign direct investments reached US$20.2 billion in 2006, a tenfold increase from only three years before. In addition, private investments in infrastructure sectors totaled US$32 billion in approximately 36 projects.
4. Medium sized enterprises have been the most dynamic component of the Turkish business sector. These firms operate in all manufacturing and services activities, in particular in the tradable sectors such as textiles, clothing, metal working and machinery. They have grown in the traditional industrial centers of the country (Istanbul, Bursa and Izmir) as well as in many Anatolian towns that benefited from infrastructure development (the “Organized Industrial Zones”). These companies began adapting commercially successful international designs at a much lower cost. Many of them now consider internet- enabled access to any domestic and international market as an opportunity for doing business and developing their own know-how. Their strengths are based on good engineering and technical capabilities and in their capacity to avoid the burdens of formality. However, Annex 3 Page 2 of 7 limited access to state of the art technical and managerial knowledge and financial capital constrains their growth possibilities.’
5. Despite this dynamism, new enterprises do not survive for long in Turkey and those that survive do not grow much. The survival rate of firms in Turkey after two and four years, for example, is low vis-&vis comparator countries such as Mexico, Chile and Romania. While surviving firms in Mexico increase the number of employees by 30 percent on average between the second and the fourth years of operation, Turkish firms increase employment by less than 10 percent. Quite surprisingly for its high levels of enterprise entry and exit, the more productive firms are not necessarily the larger ones, suggesting that Turkey’s harsh market selection process may be partially inefficient. Turkey therefore has substantial potential for productivity growth by enabling more productive firms to expand and by ensuring that the poor performers either shrink or exit. By removing obstacles to growth of the surviving incumbent enterprises and adjusting the competitive environment to improve the market selection mechanism, Turkey could further develop its private sector.2
6. The World Bank’s 2007 Investment Climate Assessment (ICA) identified four main obstacles to the growth of the business sector in Turkey. The first is the level of informality, which remains widespread in Turkey: at least one-third of Turkish firms, across all sizes and sectors, indicated that they competed with informal firms which have the advantage of not paying VAT or being subject to rigid labor regulations. More than 55 percent of the firms considered informality a “major” or “very severe” obstacle for their expansion. A second obstacle for sustained expansion is labor regulation: more than two- thirds of the Turkish firms believe they would expand the number of regularly employed workers if labor regulations were more flexible, helping in adjustments to business cycles. In Turkey, 46 percent of the firms consider labor regulations to be a “major” or “very severe” obstacle to their growth, a level close to Brazil (57 percent) but much higher than Bulgaria (20 percent) or Chile (26 percent). Labor skills and access to updated knowledge are the other two main obstacles according to the 2007 Turkey ICA. Labor skills are identified as a key factor affecting the export competitiveness of Turkish firms and an important attribute when attracting FDI. Despite skill deficiencies, few firms in Turkey provide formal training to their workers. Turkish firms make limited use of quality certification, essential to export growth and a vehicle for knowledge absorption: while use of quality standards is quite widespread in manufacturing, it is still very limited in the service industries and among SMEs. Smaller firms also have lower access to information and communications technologies.
7. Access and cost of credit are also important obstacles to the growth of the private sector in Turkey. According to the ICA, the banking sector is still the largest and most important part of the Turkish financial system. By international comparison, the banking system performs well against non-Asian emerging markets in terms of mobilizing deposits, but credit generation to the private sector remains problematic. More than 40 percent of the firms do not have access to loans, compared to less than 25 percent in Brazil, a situation that is accentuated for small firms and those outside the major urban areas. Although Turkey’s financial sector has efficiently mobilized savings, it has not been
’ Goneng, Rauf, Leibfritz, W. Yilmaz, G. (2007): Enhancing Turkey’s Growth Prospects by Improving the Formal Sector Business Conditions. Economics Department Working Paper. OECD Paris ECO/WKP(2007)2. * World Bank (2007) .Turkey Investment Climate Assessment, 2007. Report No.41611-TR. Annex 3 Page 3 of 7 supportive of private sector investments, being relatively more invested in Government securities. For instance, banking credit to the private sector in Chile (as a share of GDP) is twice larger than in Turkey. Not surprisingly, firms face shorter loan maturity than in comparator countries (for example, on average one third the maturity of the loans in Bulgaria).
8. The ICA also identifies certain aspects of infrastructure that significantly affect the performance of Turkish firms-including an unreliable electricity supply. Although Turkey is relatively well-endowed with infrastructure compared to other emerging economies, it falls short of OECD and EU standards. In particular, the reliability of the electricity system is low with frequent outages affecting a large number of firms: outages in Turkey are more frequent (on average 25 per year in 2005) and affect a large share of firms (80 percent), as compared for example with Poland (less than 3 per year affecting less than 30 percent of the enterprises). The prices of electricity in Turkey are higher than those for comparator countries and Turkey risks facing power generation shortages starting in 2009 (and possibly even in 2008). More private investment in generation will be crucial for meeting Turkey’s growing electricity consumption demand.
Box 1: Support for a Better Business Environment
Corporate tax rates were reduced from 30 to 20 percent 50 state owned enterprises were privatized in the years 2005 and 2006 with total privatization revenues amounting to US$15.6 billion The 2003 “FDI Law” assisted in increasing flows by, among other things, streamlining investment procedures, enhancing rights of foreign investors (previously weaker than those of their domestic counterparts) and eliminating minimum capital requirements. The creation of the Investment Support and Promotion Agency of Turkey (ISPAT) will further contribute to sustain the inflow offoreign capital Simplification in business registration reduced the time to open a b of the lowest times in the world, according to 2008 Doing Business Report The Government has embarked upon a co rm and restructuring program of the electricity sector, increased private sector participation. geographically, an independent regulatory framework has been established, and a competitive electricity market is under implementation Innovation and technology adoption (particularly ICT use) is another priority of the gth Development Plan. Public expenditures in R&D increased to approximately US$ 1 billion in 2006.
9. The Turkish Government has undertaken a series of reforms to improve the country’s investment climate for the private sector. Reforms have focused particularly on areas such as tax policies, privatization, FDI promotion, access to credit, ease of entry and exit of firms, the modernization of Turkey’s infrastructure, R&D and innovation, steps toward labor market reform, and education reforms (such as modernizing curricula) to upgrade the skills ofthe labor force (see Box 1). Annex 3 Page 4 of 7
The WBG’s Private Sector Strategy
10. The backbone of the Bank Group’s program in support of the Government’s private sector strategy is the planned Programmatic Competitiveness and Employment Generation Development Policy Loans (CEDPL). The CEDPL series supports a sustained medium-term process of legal, institutional, and structural development that promotes growth and the creation of more and better jobs in Turkey by: (i)maintaining the current enabling macroeconomic framework; (ii)improving the investment climate to foster higher levels of investments and productivity gains, (iii)laying the foundations for overhauling labor market regulations so that hiring formal sector workers becomes more attractive for the private sector and working in the formal sector becomes more attractive for workers, (iv) consolidating the soundness of the financial sector and enhancing access to investment credit and other forms of investment capital, and (v) increasing private sector capacity to innovate, adopting new technologies and quality standards, and improving labor skills.
1 1, The CEDPL series is expected to be accompanied by investment operations and IFC investment financing. Building on the successful completion of the Industrial Technology Development projects, further IBRD investment financing is being considered to support the sustained implementation of policy reforms launched under the CEDPLs, to foster innovation and technology adoption, and to help address existing regional productivity, growth and employment gaps. The CPS also envisages continued long-term financing to exporters and SMEs, including through additional credit line financing or new Bank or IFC operations-reflecting lessons from the recent Investment Climate Assessment and contributing to increased competitiveness. Private sector credit line financing is also being considered to help achieve objectives with public good elements such as energy efficiency, pollution abatement, or food safety. IFC investments will focus on (i)helping local banks to broaden their reach and market penetration and to improve their financial products delivery to SMEs and microfinance, (ii)supporting second tier Turkish companies to become more competitive through implementing modern technology and helping them to diversify risk through increased exports, and (iii)promoting rural employment generation mainly through support for the agribusiness sector like second-tier food processing companies with a potential for expanding exports.
12. The CEDPL series and the accompanying investment operations will be underpinned by analytical work and dialogue, including on growth constraints. This analytic and advisory work is expected to build on the recently completed CEM on EU accession, the labor market report and the education sector study, by helping the authorities in finding the best solutions for implementing the recommendations. Analytical work and technical assistance in the fields of trade facilitation; technology adoption and innovation as well as regional development will continue to support Government reforms. This cluster of AAA could also cover issues of informality, including the role of labor taxes, youth employment, as well as follow-up on the recently completed ICA, including a series of dissemination events through WBI, and perhaps a review of Turkey’s innovation policy and institutions. Continued post-FSAP technical assistance will be also performed in coordination with the Government.
13. The Bank Group will continue its strong support for the development of a sustainable energy sector. The emphasis on the energy sector reflects the importance of energy security and energy efficiency for the whole economy, as well as the priority the Annex 3 Page 5 of 7 Government places on the energy sector and in continued substantial Bank engagement. Bank financed energy projects are under implementation or are planned in electricity generation, transmission and distribution, in the gas sector and in the area of renewable energy and in the electricity and gas transmission networks-through a mix of individual investment projects, adaptable program lending, a sector-wide approach (SWAP), and possible development policy lending to support critical sector reforms. Privatization of distribution, further increase in private generation capacity, and privatization of existing generation (including financing environmental retrofits) could be supported through IFC investments and possible IBRD partial risk and MIGA guarantees. Specifically, IFC intends to support the power sector demonstrating that, properly structured, private generation projects can represent feasible and financially attractive investments for foreign investors in the restructured and competitive power sector. Depending on the Government’s evolving priorities and approach as well as market appetite, IFC would also consider pre-privatization support through convertible loans or equity financing-with a view to increasing the valuation of assets by providing additional comfort to potential investors. Dialogue and analytic and advisory work will focus on achieving an efficient, sustainable and secure supply of energy to meet Turkey’s growing energy demand, as well as strengthening the financial viability of the sector, enhancing the role of the private sector, improving the functioning ofthe electricity market, and mitigating adverse environmental and social effects.
14. Infrastructure, especially transport, is expected to be a priority area for IFC financing, while IBRD support for the railway sector is expected to continue. IFC will work in tandem with the Bank as a partner with Turkey in moving toward an effective mix of private and state infrastructure services. Specifically, IFC will look for opportunities to support private sector investments in ports, airports and logistics facilities. IFC plans to make a number of investments to support private sector entry into the transport sector. The Bank will provide continued support for the restructuring of the railway sector to help alleviate the fiscal burden of subsidies and reduce transport logistics costs to improve competitiveness. However, such additional Bank support hinges on the creation of a proper legislative framework for the railway sector, and the implementation of initial restructuring actions as envisaged under the ongoing Railways Restructuring Project. In addition, IFC will seek opportunities for financing urban transport projects on a commercial project-finance basis at the sub-sovereign level through structures acceptable to the Government in the overall context of sub-sovereign borrowing. In addition to financing, IFC will offer decision- makers its expertise in infrastructure privatization and road sector concession transactions.
15. IFC will continue its focus on supporting credit-worthy second tier Turkish companies to become more competitive through implementing modern technology, helping them to diversify risk through increased exports. In the past, IFC has supported restructuring and re-capitalization of Turkish companies through periods of severe economic volatility. Now private Turkish companies are quickly facing up to new challenges, including rising competition from the global economy. IFC will continue to support Turkish companies to invest outside Turkey. IFC will continue to target new clients in a proactive way to expand the network of its existing clients with emerging good second tier companies and to reach out to less privileged parts of the country. IFC will target equity investments, especially in creditworthy second tier companies, to leverage its role in helping the companies improve corporate governance and social and environmental standards. In addition, IFC will explore co-investments with private equity funds. Annex 3 Page 6 of 7
16. IFC is currently active in working with various financial intermediaries to strengthen their funding capacity and ability to channel credit to the private sector. IFC has been instrumental in institution building and support for activities such as leasing, SME and housing finance. During FY08-11, IFC’s strategy is to contribute to sustainable growth supporting financial institutions whose specific strengths are on the critical path of Turkey’s economic development agenda such as SME lending, housing finance and financial intermediation in underserved regions of the country. IFC will look for opportunities to entering Turkey’s housing sector by offering its support to primary mortgage market through long-term financing to banks. In the area of sub-sovereign financing, IFC will look for opportunities to support the government in fostering increased participation of commercial lenders in municipal finance, to complement the limited pool of available concessional resources, to increase access to credit for 2nd tier municipalities especially in Central and Eastern Turkey, and to build up local credit appraisal capacity, while contributing to the commercialization of public sector domestic banks which currently dominate the municipal finance market. Bank financing will also be mobilized in the case of sub-sovereign entities that continue to depend upon the guarantee provided by central government to access the international financial markets.
17. IFC will continue to support local banks to broaden their reach and market penetration and to improve their financial products delivery in particular to SMEs, microfinance enterprises and low income household, while addressing regional inequalities. To this end, a crucial part of IFC’s strategy is to work with banks that have clear reach into these underserved market segments. There are significant opportunities for IFC to increase its contribution in the microfinance sector if a proper legal framework is put in place. To start addressing the paucity of finance for micro enterprises in Turkey, IFC supported a local bank to expand its lending operations to microfinance borrowers. IFC will also focus on improving environmental and social sustainability in Turkey with programs delivered through the financial sector that improve energy efficiency, reduce pollution and provide greater access to education, especially for women. Improving the social safety net through programs focused on the insurance and pension industries will be another IFC priority in the financial markets.
18. IFC is keen to continue supporting private provision of traditionally public services such as in health and education in order to reduce the Government’s budgetary pressures, to improve the quality and access to services, and to generate greater employment opportunities in the services sector. Based on its previous experience in the health sector, IFC will focus on supporting: (i)companies that plan to become national healthcare service providers or expand their domestic or foreign operations; (ii)companies seeking to establish specialized centers of excellence; (iii)smaller hospitals and clinics, through a wholesale approach in cooperation with domestic banks. IFC expects to continue promoting high quality private education at the tertiary level, and it may support vocational and technical education that is better linked to the needs of the private sector. Accordingly, IFC will consider financing the establishment of private universities and the introduction of university student loans. Annex 3 Page 7 of 7
19. In addition to the Bank and IFC, MIGA also envisages continued support of Turkey’s private sector development. Since 2000, MIGA has provided guarantees to several Turkish investors and facilitated investment into neighboring countries (Azerbaijan Iran, Turkmenistan and Kazakhstan,) in the agribusiness and manufacturing sectors. MIGA’s presence has been considered essential for both the equity investors and the banks providing cross- border loans. Over the coming four years, MIGA is well positioned to support foreign investment into key infrastructure sectors that the Government continues to privatize; and where assistance to the energy sector will be ofparticular interest. As noted above, MIGA will coordinate its involvement in the energy sector with IBRD and IFC. MIGA is interested in offering support to investments that will strengthen and deepen the critically important financial sector in Turkey, consistent with country priorities as outlined in Section I1 of the CPS. MIGA also recognizes the growing importance of Turkish companies in the region and in other regions, and is interested in continuing to support Turkish investors, both large and small investors that are looking to invest abroad, Finally, MIGA is interested in exploring investment opportunities in the agribusiness, manufacturing and services sectors that will promote the development of SMEs.
Annex 4 Page 1 of 59
Annex 4: TURKEY COUNTRY ASSISTANCE STRATEGY FY04-07
Completion Report
Ankara, January 10,2008 Annex 4 Page 2 of 59
ABBREVIATIONS AND ACRONYMS
AAA Analytical and Advisory Activities ARIP Agriculture Reform Implementation Project BEEPS Business Environment and Enterprise Survey BRSA Banking Regulation and Supervision Agency CAE Country Assistance Evaluation CAS Country Assistance Strategy CASCR Country Assistance Strategy Completion Report CCT Conditional Cash Transfer CEDPL Competitiveness and Employment Development Policy Loan CEM Country Economic Memorandum CIR Country Impact Review CIT Corporate Income Tax CPS Country Partnership Strategy DIS Direct Income Support DPL Development Policy Loan ECA Europe and Central Asia EFIL Export Finance Intermediary Loan EGDPL Employment Generation Development Policy Loan ERL Economic Reform Loan ESS Education Sector Study EU European Union FDI Foreign Direct Investment FX Foreign Exchange FY Fiscal Year GDP Gross Domestic Product GEF Global Environment Facility GFS Government Financial Statistics GNP Gross National Product . HTP Health Transition Project IAC Investment Advisory Council ICA Investment Climate Assessment ICT Information and Communication Technology IDF Institutional Development Fund IEG Independent Evaluation Group IFC International Finance Corporation IMF International Monetary Fund IPA Investment Promotion Agency JPPR Joint Portfolio Performance Review LI Local Initiatives MEER Marmara Earthquake Emergency and Reconstruction MIGA Multilateral Investment Guarantee Agency MOH Ministry ofHealth OECD Organization for Economic Cooperation and Development PEM Public Expenditure Management PFMC Public Financial Management and Control PFPSAL Programmatic Financial and Public Sector Adjustment Loan PIT Personal Income Tax PPDPL Programmatic Public Sector Development Policy Loan Annex 4 Page 3 of 59 R&D Research and Development SDIF Savings Deposit Insurance Fund SEE State Economic Enterprise SME Small and Medium Size Enterprise SOE State Owned Enterprise SPO State Planning Organization TEMAD Turkish Emergency Management Agency UN United Nations UNDP United Nations Development Program UNICEF United Nations Children’s Fund WBI World Bank Institute WHO World Health Organization Annex 4 Page 4 of 59
TABLE OF CONTENTS
1. Objectives and Methodology ...... 5 2 . Turkey’s Long-term Strategic Goals ...... 6 3 . Progress and CAS Results ...... 9 4 . Bank Performance during the CAS Period...... 24 5 . Key Considerations for the New CPS ...... 29
Table 1: Turkey’s Strategic Goals and CAS Framework ...... 8 Table 2: Sound Macroeconomics and Governance - Key Expected Outcomes and World Bank Benchmarks ...... 9 Table 3: Equitable Human and Social Development - Key Expected Outcomes and World Bank Benchmarks ...... 15 Table 4: Attractive Business Climate and Knowledge- Key Expected Outcomes and World Bank Benchmarks ...... 18 Table 5: Environmental Management and Disaster Prevention - Key Expected Outcomes and World Bank Benchmarks ...... 22 Table 6: Turkey Portfolio Overview, FY04-06 ...... 25
Figure A: FY06 Turkey Portfolio Performance Indicators vs . World Bank and ECA ...... 26
ANNEX 1: Key Outcomes and Bank Group Benchmarks ...... 31 ANNEX 2: Turkey .Country Assistance Strategy Matrix ...... 35 ANNEX 3: Original, Revised and Actual CAS Lending Program ...... 49 ANNEX 4: Original, Revised and Actual Non-lending Program...... 50 ANNEX 5: IFC in Turkey FY04-06...... 51 ANNEX 6: Developments in FY07 ...... 58 Annex 4 Page 5 of59
1. Objectives and Methodology
1-1.The Country Assistance Strategy Completion Report (CASCR) assesses the effectiveness of the FY04-07 Country Assistance Strategy for Turkey. It measures the achievement of the expected results, and highlights key lessons learned. The assessment focuses on the FY04-06 period, even though the original CAS was extended to include FY07 in order to bring the Turkey CAS in line with the other CASs covering four years. This was driven by the need to utilize the CAS CR findings as inputs for the new Country Partnership Strategy (CPS), whose preparation began in early FY07. Key developments that occurred during the last year ofthe CAS are summarized in Annex 6.
1-2.While the CAS itself was not formally results-based, it was centered on two results matrices. One includes the key outcomes and World Bank benchmarks (see Annex l),while the other, more detailed matrix, contains country performance indicators and more comprehensive Bank Group benchmarks (see Annex 2). Outcomes refer to broader achievements at the country level, while benchmarks refer to more specific areas of contribution from the World Bank. Overall, both outcomes and benchmarks have been relevant in capturing the key strategic objectives of the country and the ways in which the World Bank could contribute towards them.'
1.3. The preparation of the CASCR benefited from a broad range of resources, including:
0 Inputs from World Bank teams, including periodic updates ofthe CAS results matrices;
0 Inputs from main counterparts, particularly the Undersecretariat of the Treasury and State Planning Organization (SPO), in addition to relevant line ministries; The annual Joint Portfolio Performance Review (JPPR), which in Turkey has taken on an increasingly strategic focus, moving into the assessment of CAS results in addition to the coverage of portfolio performance indicators. The JPPR itself is the result of a joint cooperation with the Treasury, the SPO, and all the line ministries and implementing agencies involved in Bank-financed projects and analytical work; and A Country Assistance Evaluation (CAE)2 and a Country Impact Review (CIR)3, prepared by the Independent Evaluation Group (IEG), assessing the effectiveness of the Bank and the International Finance Corporation (IFC) assistance programs, respectively, during the FY 1994-2004 period. These reports, completed and made available to -the Board in October 2005, provided useful insights on the initial implementation of the current CAS.
' The results framework for this CAS was designed at a time when results-based CASs were in a pilot stage. Therefore, this results framework is not entirely consistent with the guidelines which currently govern results-based CASs. 2 The World Bank in Turkey, 1993-2004, Country Assistance Evaluation, Independent Evaluation Group, December 20,2005, Report No. 34783. Turkey: IFC Country Impact Review, IEG Findings No.4, Independent Evaluation Group, January 1, 2006, Report No. 35307. Annex 4 Page 6 of59 1.4. Criteria used to assess the progress and results of the CAS include:
0 Relevance of the CAS main development objectives in the context of Turkey’s development agenda; 0 Relevance ofthe CAS key outcomes and World Bank benchmarks; 0 Extent to which the CAS key outcomes and World Bank benchmarks have been achieved; 0 Impact of World Bank lending and analytical instruments on the achievement of key benchmarks; and 0 Bank performance and other relevant factors contributing to, or influencing the achievement ofkey outcomes and benchmarks.
2. Turkey’s Long-term Strategic Goals
2.1. Turkey’s long-term agenda has been articulated in the 23-year National Development Plan (2001-23). In addition, priorities of the Government, which took office following the 2002 elections, have been spelled out in its program presented to Parliament and in the Urgent Action Plan4 The long-term development goals, as defined in these documents, include:
0 Transforming the country’s economic and social structure in order to become an influential regional power; 0 Raising the level ofhealth and education in the society;
0 Improving the income distribution; 0 Strengthening scientific and technological capacity; 0 Enhancing effectiveness in infrastructure services;
0 Protecting the environment.
2.2. The vision that Turkey has for itself is of a modern and secular participatory democracy, fully integrated in the European community, playing a critical role in its region, with an export-oriented, technology-intensive production structure. Turkey sees the EU accession process as an important opportunity for harmonization with international norms and standards. Also, Turkey’s geo-strategic position offers a unique opportunity to reach its true economic growth potential.
2.3. Consistent with its long term goals, Turkey’s development agenda has been centered around four major themes: (a) sound macroeconomics and governance; (b) equitable human and social development; (c) attractive business climate and knowledge; and (d) strong environmental management and disaster prevention. These themes, albeit to varying degrees depending on the Bank’s comparative advantage and the role of other development partners, have also been the areas of focus for the CAS (see Table 1).
2.4. The long-term goals, described above, have not changed during the CAS period and the four clusters of development themes have remained relevant. Changes in emphasis, however, have occurred. First, the EU’s decision to open accession negotiations with Turkey has increased the priority of reforms necessary for EU accession. This resulted in an
A new strategic document, the 7-year 9’ Development Plan was approved by Parliament in June 2006, and the priorities defined in this plan will be reflected in the new CPS. Annex 4 Page 7 of 59 however, have occurred. First, the EU’s decision to open accession negotiations with Turkey has increased the priority of reforms necessary for EU accession. This resulted in an adjustment of the Bank Group program, in the context of the CAS Progress Report of late 2005, to align it with Turkey’s EU accession agenda. Second, employment creation has become a higher priority during the course of the CAS period. Despite sustainable strong economic growth, low labor participation and high levels of unemployment, in part due to labor shedding in agriculture, continue to constitute a key economic and social issue. The Bank has responded to this emerging priority by producing some critical analytical work, including the investment climate assessment, the labor market report and the education sector study, as well as by designing with the authorities a set of development policy loans (DPLs) which have been added to the program under the CAS Progress Report. Annex 4 Page 8 of 59 Table 1: Turkey’s Strategic Goals and CAS Framework
social structure
and Governance Social Development Climate and Knowledge Management and Disaster Prevention
0 Stabilization ofpublic 0 Low extreme poverty Exports growth rate 0 Significant convergence creditworthiness indicators ( 1 .8%) maintained and exceeds GNP growth rate with EU environmental
at sustainable levels vulnerability reduced from 0 Foreign Direct Investment standards
Less volatile economic 15% in 2001 to 12% in reaches USSl.5 billion on 0 Disaster prevention and growth in the range of5% 2006 average during the CAS management system
0 Single digit inflation 0 Net enrollment rate in period improved
basic education maintained 0 Stability offinancial at not less than 99%; girls’ markets improved enrollment increased, especially in secondary education: male/female ratio improved from 1.20 to 1.15 by 2006
0 Child mortality reduced and maternal health improved A Achieved I Partially Achieved
0 Satisfactory 0 Public expenditure on 0 Increase in export capacity 1 0 Environmental sector macroeconomic and fiscal health, education and ofenterprises priorities updated in the
framework consistent with social protection sustained 0 Improvements in the EU context
the key outcomes at pre-crisis levels overall investment climate, 0 Introduction ofmandatory
0 Implementation ofpublic 0 Implementation of(i) the implementation ofthe new insurance cover ofprivate sector reforms Conditional Cash Transfer FDI law, establishment of housing units; creation of a (CCT) program to benefit an Investment Promotion strict and enforced over 1 million children, Agency (PA) construction code
and (ii)at least 1,500 local 0 Continued independence of enforcement system, and initiative (LI) projects to financial markets strengthening of support vulnerable people regulatory agencies emergency preparedness
0 Renovation and 0 Completion of modernization of schools privatization of state
0 Improvements in access banks; passage of new and quality ofbasic health Bankruptcy Law and provision Commercial Code; implementation ofnon- nancial institutions Annex 4 Page 9 of 59
3. Progress and CAS Results
3.1. Important progress towards achieving Turkey’s long-term goals has been made during the CAS period. This CAS was designed at the beginning ofTurkey’s recovery from the 2001 crisis. This was no longer a crisis-management program but one which focused on consolidating the results of crisis management and on laying the foundation for sustainable high economic growth to help Turkey meet its long-term goals. Turkey’s economy has produced a spectacular turn-around during the CAS period. Macroeconomic stability has improved greatly since 2001, while per capita GNP increased from about US$2,900 in 2000 to about US$5,500 by 2006. There has also been progress in social development, although somewhat less than expected. On the positive side, extreme poverty remained almost negligible and poverty, more broadly defined, has declined considerably. However, still about one out of five Turkish citizens would be considered poor. In health and education, access has improved. However, limited access to higher education remains a problem, and the quality and cost-effectiveness of education and health services require hrther improvements.
3.2. Following is a summary of Turkey’s progress and Bank actions. Key outcomes and World Bank benchmarks, derived from the program results matrices (see Annex 1, 2) are grouped into the four development themes ofthe CAS. a. Sound Macroeconomics and Governance
Table 2: Sound Macroeconomics and Governance - Key Expected Outcomes and World Bank Benchmarks
0 Stabilization ofpublic Achieved Satisfactory Achieved creditworthiness macroeconomic and fiscal indicators at sustainable framework consistent with levels Achieved the key outcomes
0 Less volatile economic 0 Implementation ofpublic Achieved growth in the range of 5% Achieved sector reforms, focusing on: (i)the tax system; (ii) 0 Single digit inflation public expenditure management; (iii)the social security system; (iv) the civil service; (v) local government; and (vi) anti- corruption. Annex 4 Page 10 of59 Outcomes
3.3. The consequences of Turkey’s economic crisis of 2001 were devastating: depreciation of the currency by some 50%, a jump in nominal interest rates to loo%, the virtual collapse of the banking system and the bankruptcy of scores of enterprises. At the end of 2001, Turkey registered a 10% decline in GNP, inflation was on the order of 70%, and the net public debt to GNP ratio exceeded 90%. Five years later, following a remarkable economic recovery, the picture looks quite different. Economic growth has been strong, with average GNP growth close to 8% between 2003-05, and inflation was brought down to single digits by 2004, the first time for more than thirty years. In 2006, economic growth, while decelerated, continued to be robust at 6 percent. While high oil prices and the consequences of fluctuations in emerging markets in the summer of 2006 have reversed the declining trend of inflation, the Central Bank and the Government were able to keep it to single digit this year. Turkey’s debt situation has improved substantially over time, as the net public debt to GNP ratio was reduced from over 90% in 2001 to 45% in 2006. Nevertheless, and despite growing exports, the current account deficit reached 6.4% of GNP in 2005 and 8.2% in 2006. External factors, such as the regional political context and potential political difficulties in the EU accession process, add uncertainty as to Turkey’s ability to continue such a generally strong economic performance.
Status of Kev Benchmarks
3.4. Satisfactory macroeconomic and fiscal framework consistent with key outcomes: Turkey’s remarkable macroeconomic performance has been due to several factors, including a solid agenda of structural reforms and strong fiscal discipline. The fiscal policy targeted the achievement of large primary surpluses of the public sector on the order of 6.6% to enable a reduction of the public debt burden. The Government’s macroeconomic and fiscal framework has been supported by the International Monetary Fund (IMF) through consecutive stand-by arrangements and significant Bank adjustment lending.
3.5. Strong fiscal performance has been the cornerstone of Turkey’s economic program, with an overarching aim of achieving sustainable fiscal balances, while improving stability, transparency and equity of the tax system. The Government’s focus on fiscal adjustment, however, has been more on revenue-increasing rather than expenditure-controlling measures. Social spending has been kept well above the agreed benchmark of 14.5% ofGNP. However, concerns remain over the social security deficit, which is to be capped at 4.5% of GDP in 2006 and 2007. A major positive step has been the approval, in May 2006, of a landmark social security and universal health insurance legislation, which aimed at the creation of an institutionally unified, fiscally more sustainable system with a universal coverage of health insurance.’ In addition, an agriculture framework law6 was approved in April 2006, and the follow-up regulation institutionalized the non-distortionary Direct Income Support (DIS) for farmers.
3.6. The US$l billion Programmatic Financial and Public Sector Adjustment Loan (PFPSAL) 111, the third in a series of programmatic loans, supported the Government’s comprehensive reform of the financial and public sectors. The Health Transition Project
However, in December 2006, the Constitutional Court invalidated several provisions of the Law and the Government decided to postpone its implementation while it is trying to address the Court’s concerns. 6 Agriculture Law No. 5488 Annex 4 Page 11 of59 (HTP) has supported broad reforms of the health system, including the introduction of a unified health insurance system. Finally, the Agricultural Reform Implementation Project (ARIP) assisted the Government in reducing agricultural subsidies which ultimately declined by 70% (excluding direct income support) between 2001 and 2005.
3.7. On the non-lending front, the program was supported by two Country Economic Memoranda (CEM) on Macroeconomic Stability and EU Accession, delivered in FY03 and FY06, respectively. Fiscal reforms towards increased tax efficiency, expanded employment and higher labor productivity, expenditure rationalization, more favorable market environment, financial sector reform, industrial innovation, and promotion of social policies were some areas of focus. Additionally, the analytical work on policy and investment priorities for agricultural and rural development took stock of recent policies and investment patterns in the agricultural and wider rural sector in Turkey, helping to form the basis for the Agriculture Framework Law. Finally, a Public Expenditure Review (PER) focusing on quality ofpublic expenditures was delivered in December 2006.
3.8. Implementation of public sector reforms, focusing on: (i) the tax system; (ii) public expenditure management; (iii) the social security system; (iv) the civil service; (v) local government; and (vi) anti-corruption.
3.9. (i) Tax system: A medium-term strategy for improving the tax system in Turkey has been in place since 2000, based on a review carried out jointly with the World Bank. The overarching objective of the strategy is to improve the stability, transparency and equity of the tax system through measures to minimize tax distortions, broaden the tax base and improve the efficiency of tax administration. Implementation of the tax strategy has progressed reasonably well. In 2003, a legislative package was enacted under the direct tax reform designed to simplify and consolidate the direct tax regime, in line with the Organization for Economic Cooperation and Development (OECD) standards and international best practice. A second package was enacted in 2004 to minimize geographical, sectoral and other reinvestment incentives, including rationalizing the benefits in Free Trade Zones. The first stage of personal income tax (PIT) reform has been implemented by the enactment of the law reducing the number of brackets and unifying the wage schedules in March 2006. Turkey has also initiated reforms for simplifying the corporate income tax (CIT) as well as reducing its rates. The CIT rate was reduced from 33% to 30% for corporate income earned in 2005 and further to 20% in 2006 with a competitiveness consideration consistent with the developments and the trends in the European Union and OECD countries. In addition, the Revenue Administration Law, which established a semi-autonomous revenue administration within the Ministry of Finance, was enacted in 2005. A new unit responsible for determining the Government revenue policy under the Ministry of Finance was established in 2006.
3.10. The PFPSAL I11 supported the design and implementation of the Government’s tax strategy as part of the broad public sector reform program implemented in the context of this adjustment operation.
3.1 1. (ii)Public Expenditure Management (PEM): Improved PEM is a crucial element of Turkey’s broader public sector reform strategy. It focuses, inter alia, on improved budget preparation and execution, the operational performance of public agencies, and upgrading public accounting, procurement, and audit standards. The PFPSAL TI1 assessed the Annex 4 Page 12 of59 underlying problems of Turkey’s PEM, pointing to a lack of modernization in the procedures and institutions governing decision-making and resource allocation. In this context, the passage of the Public Financial Management and Control (PFMC) Law, enacted by the
Parliament in December 2003, represents an important step. ’ The law constitutes the cornerstone of the legal framework for modem PEM in Turkey. It introduced modern public management principles by clarifying accountability of public officials, by delegating managerial responsibility, and by putting in place an internal control and audit framework that is compatible with EU and international practice. Budget transparency increased through the application of Government Financial Statistics (GFS)-consistent budget classifications, allowing a comprehensive and consistent presentation of the budget across all general Government agencies with a complete functional breakdown of expenditure. Through the 2006 budget, the PFMC law has been implemented in key areas including: (a) improving budget formulation processes to enable a medium-term fiscal strategy to guide fiscal aggregates and enable sector budgets to be linked to policy priorities; (b) expanding budget coverage to all central Government entities; (c) expanding the GFS-consistent economic and functional budget classification to the entire central budget entities and social security institutions; (d) delegating more responsibility (with related accountability) to spending agencies through reforming the internal control regime and abolishing central-level ex-ante control; and (e) improving accounting through implementation of accrual-based accounting for the entire general Government.
3.12. Under the PEM umbrella, the enactment of a new Public Procurement Law was a condition for continuous Bank support. A new Public Procurement Law, effective since 2003, has subsequently been amended for increased consistency with EU requirements. However, other laws have brought several other amendments to the Public Procurement Law, mainly to provide exemptions to various agencies and to exclude procurement of certain services from the scope of the law. Later, it was decided to hold all amendments to the law until after the Procurement Screening Process with the EU is complete.
3.13. The lending program, through the PFPSAL 111, was complemented by an Institutional Development Fund (IDF) grant on public liability management. The grant assists the Government in adopting best international practices and technical tools in public liability management, including financial and fiscal risk management. Another IDF grant supported the introduction ofthe new Public Procurement Law.
3.14. (iii)Social Security system: Strong fiscal performance has been the cornerstone ofthe economic program since 2001. The public sector primary surplus exceeded 6% of GNP in the last three years. In addition, the overall budget deficit came down to below 1% of GNP by 2005 and is estimated to have stayed around 1% in 2006. The transfers from the budget to cover the deficit of the social security institutions (pensions and health services) were, however, equivalent to 4.8% of GDP in 2005 and such deficit would have increased rapidly in the absence of reform. Therefore, continued fiscal adjustment clearly requires action to address the structural imbalances in the social security system which currently originates largely from (a) deficits in the pay-as-you-go pension system, (b) deficits in the provision of publicly financed health services, and (c) unexploited efficiency gains in the operation ofthe social security institutions. In response, the Parliament passed a social security and universal health insurance law with the following components: (a) parametric reform for the pension system that will ensure the system’s long term sustainability, (b) establishment of a universal health insurance system which will provide access to health insurance for all citizens. In Annex 4 Page 13 of59
addition, a law aimed at reforming the administrative dimensions of social ’ security by unifying the existing three social security schemes was enacted in May 2006. However, implementation of the social security reform has been delayed due to a Constitutional Court decision in December 2006.
3.15. In addition to the PFPSAL 111, which included important measures to support Turkey’s fiscal adjustment, the Programmatic Public Sector Development Policy Loan (PPDPL) and the accompanying Health Transition Project have supported the reform of the social security system. One key objective ofthe HTP is the fiscal sustainability ofthe healthcare system, by supporting the implementation of systemic health reforms aimed at increasing efficiency in production and delivery of health services. These include the establishment of a single health insurance fund by consolidating the five existing health insurance schemes, including the Green Card system, the introduction of family medicine as an organizational model for the provision of outpatient or primary health care services, and the development of an effective patient referral system. In addition, with the support of the Bank-financed Privatization Social Support Projects, labor redeployment and job placement services are being provided to workers who have lost their jobs as a consequence of State-Owned Enterprises (SOE) privatizations.
3.16. (iv) Local government: Financial autonomy of Turkish municipalities is extremely limited. On average about 60% of municipal revenue is derived from intergovernmental fiscal transfers, while another 20% are derived from own-source taxes and fees. Profits of municipal commercial enterprises, rental income from municipally owned real estate, and various types of fines provide for the remaining 20% of revenue. Almost all tax rates are set by the Government and municipalities have little ability to improve their income or reduce their dependence on fiscal transfers as the main source of revenue. Capital investments represent on average about 30% of municipal expenditure. Improvements in the delivery of local services have begun but progress has been uneven. With 70% ofthe Turkish population living in urban areas, the need for core municipal services, such as water, wastewater, solid waste management and urban transport, is an increasing priority. One of the medium-term challenges will be the ability to meet the high costs of service provision in the context ofhigh urbanization and EU environmental directives, especially as municipalities suffer from inadequate resources and financial management at the local level, and from an underdeveloped municipal debt market that does not allow them to access long-term credit. The approval of several laws on local government paved the way to more efficient resource and financial management at the local level, but many of these are not yet effective. The Government also committed to reform Iller Bank, a Government agency which operates as a conduit for inter-governmental fiscal transfers and a financier and an implementing agency for infrastructure investments, into a more effective and financially sound institution. This is relevant to Turkey’s broader EU agenda, as Iller Bank is expected to be a key player in the implementation of upcoming EU projects. The World Bank Institute (WBI) provided extensive capacity-building support to Government officials on intergovernmental fiscal transfer designs as part of its multi-year Capacity-Building Program for responsive and accountable local governance.
3.17. The Municipal Services Project supports the Government’s plans to provide technical assistance to municipalities on financial and institutional strengthening and to reach financial viability and target investments for water supply, sanitation and solid waste management. As the implementing agency of the project, Iller Bank’s capacity to assess sub-projects is also Annex 4 Page 14 of59 being strengthened. The Bank’s contribution to improvements in local service delivery also came from a program of analytical work and capacity building activities, supported by the WBI. The Municipal Sector Report provided key suggestions for municipal sector improvements, which have been taken into account in the formulation of the draft Public Administration Law and amendments to the Iller Bank Law. The Water and Wastewater Report assisted the Government in improving governance at the municipal and central Government levels, improving the efficiency of water supply and wastewater investments, and increasing the operating efficiency of the water sector. Finally, the IDF grant on the Development of Performance Monitoring Systems supported the Government’s efforts to strengthen the public oversight of the public funds allocated to Turkey’s local government sector, improve the public accountability of the local authorities, and improve the sector’s public expenditure management.
3.18. (v) Civil service and anti-corruption: Public sector governance has been improving. Among a comprehensive set of substantive actions was the enactment of the Law on “Freedom of Information for Citizens” in October 2003 and the issuance of the follow-up regulation on the implementation of the law in April 2004. The law provides an important basis for enabling citizens to monitor the performance of the public sector. In this context, public agencies have provided an opportunity to citizens to request information on-line, through their websites. A law on the establishment of an Ethics Board for civil servants was enacted in June 2004. Subsequently, in September 2004, the Ethics Board was established and in April 2005 the regulation on the Code of Conduct for civil servants was issued. Further, the new Penal Code contains provisions concerning bribery, trading in influence, abuse of power and embezzlement and punishes corruption-related crimes more ~eriously.~ The Code also introduces the concept of liability of legal persons in cases of corruption and contains provisions concerning corruption in public procurement. The authorities have drafted a civil servants law, to replace the existing one. The draft law seeks to address several major objectives including: (i)improving efficiency; (ii)eliminating discrepancies in remuneration across similar positions within the public sector; (iii)making it easier to ensure a fiscally sound wage bill; and (iv) providing competitive opportunities for entry into the public administration. According to international indicators, Turkey’s ranking has improved in terms of the level of corruption. The World Bank recently launched its new report, entitled “Governance Matters VI: Governance Indicators for 1996-2006” which contains an updated and expanded set of worldwide indicators for 212 countries on governance issues. The data related to Turkey in the report show that the country’s performance over time has significantly improved in most indicators, including “control of corruption”. These improvements are indicated by higher percentile ranks for Turkey on most of the selected governance indicators. On “government effectiveness”, Turkey’s estimated percentile rank has improved significantly since the mid and late nineties, and particularly since 1998. In terms of “regulatory quality”, Turkey’s estimated percentile rank has slightly improved since 2002, although values for this indicator were stronger in the late nineties. Finally, after a noticeable decline in 2000/2002, Turkey’s percentile rank for “control of corruption’’ has significantly improved, with the estimated percentile rank going from 40% in 2002 to 58.7% in 2006. Transparency International’s Corruption Perception Index also ranks Turkey as 64th (out of a total of 180 countries) in the 2007 edition, compared to the rank of 77‘h (out of a total of 145) in 2004. In addition, the Business Environment and Enterprise Survey (BEEPS) jointly conducted by the World Bank and the European Bank for Reconstruction and
7 2005 European Commission Progress Report on Turkey. Annex 4 Page 15 of59 Development*, provide information about the views of entrepreneurs and business executives about taxes, macroeconomic and Government policies, corruption, anticompetitive practices and financing costs. Comparing the results with those of the 2002 survey, Turkey has significantly improved in many aspects, such as reducing red tape, improving its business environment and reducing corruption. However, the surveys also show that there is room for improvement in areas such as customs, business permits and taxes. b. Eguitable Human and Social Develoument
Table 3: Equitable Human and Social Development - Key Expected Outcomes and World Bank Benchmarks
Low extreme poverty (1 -8%) Partially Public expenditure on health, education Achieved maintained and vulnerability achieved and social protection are sustained at reduced from 15% in 2001 to pre-crisis levels. The benchmarks as 12% in 2006 shares ofGNP are: (i)education: Net enrollment rate in basic Largely 4.25%; (ii)health: 3.25%, and (iii) education maintained at not achieved social protection: 7.00% less than 99%; girls’ Implementation of(i) the Conditional Achieved enrollment increased, Cash Transfer (CCT) program to especially in secondary benefit over 1 million children, and (ii) education: male/female ratio at least 1,500 local initiative (LI) improved from 1.20 to 1.15 projects to support vulnerable people by 2006 Renovation and modernization of Partially Child mortality reduced and Largely schools, including in disadvantaged achieved maternal health improved to achieved areas, and implementation ofreforms make progress towards the in secondary education MDGs Improvements in access and quality of Partially basic health Drovision achieved
Outcomes
3.19. The CAS period saw a reduction of extreme poverty to a negligible level of 0.01% in 2005, but one fifth of the population in Turkey remained poor by the end of 2005, when measured by the food and non-food poverty concept.’ While regional disparities persist in terms of access to good quality education, there are encouraging signs of improvements in the reduction of gender inequalities: girls’ secondary net enrollment increased from 42% in 2001/02 to 51% in 2005/06, while the male to female enrollment ratio decreased from 1.33 to 1.27 from 2003/04 to 2005/06. Net enrollment rate in basic education remained at around
* The BEEPS covers all countries ofCentral and Eastern Europe, the former Soviet Union and Turkey. The objective of the survey is to evaluate the constraints on investment and private sector growth. 9 The availability of new, more reliable data as a result of the recent poverty assessment and the education sector work has necessitated the resetting of the baseline information in some instances. The Joint Poverty Assessment has redefined the poverty line and dropped the concept ofvulnerability used in the CAS. Thus the vulnerability and poverty data are not comparable. In education, it appears that the situation at the time of the CAS was actually less favorable in terms of net enrollment in basic education and the female/male ratio in secondary education. Annex 4 Page 16 of 59 90% during the CAS period”, while the gross enrollment rate for secondary education increased from 68% in 2001/02 to 85% in 2005/06. Important achievements in the health sector include a significant reduction in infant mortality from 43 per 1000 live birth in 1998 to 24 per 1000 live birth in 2005. Nonetheless, Turkey ranks 105th on the World Health Organization (WHO) list of 192 countries with its current level of infant mortality, an unacceptable level for a middle income country aspiring for EU accession.
Status of Kev Benchmarks
3.20. Public expenditure on health, education and social protection are sustained at pre- crisis levels. The benchmarks as shares of GNP are: (i)education: 4.25%; (ii)health: 3.25% and (iii) social protection: 7.00%: Since 2001, social expenditure targets have been broadly met, with a slight under-run in education in 2004-05. In 2006, however, education spending was 4.33% of GNP, health expenditures 5.31% of GNP and social protection expenditures 9.68% of GNP. On the one hand, this shows the Government’s commitment to maintainindexpanding social programs targeted to the poor to keep the levels at least at the pre-crisis averages, while on the other it points to the increased amounts of social security expenditures that have led to continued social security deficits. Going forward, the Bank’s program in this area could be improved by refining the coverage of “social expenditures” and disaggregating the broad categories with a view to look into the quality ofthe expenditures in addition to the amount.
3.21. Implementation of (i) the Conditional Cash Transfer (CCT) program to benefit over 1 million children, and (ii) at least 1,500 local initiative (LI) projects to support vulnerable people: The US$500 million Social Risk Mitigation Project aimed at alleviating the impact of the 2001 economic crisis on poor households, and at improving their capacity to withstand such risks in the future. The CCT component of this loan, which provides incentives for positive family behavioral change with respect to education and health, has benefited 2.6 million of Turkey’s poorest children in poor households in Turkey, vs. a benchmark of 1 million. Under the same project, the Local Initiatives component has financed 7,500 sub-projects, vs. a benchmark of 1,500. These sub-projects are proposed by the provinces and local communities, to enhance employment opportunities aimed at poverty reduction. Key pieces of analytical work, including a labor market study and poverty-focused reports provided a broad assessment of poverty-related issues, and important policy indications, particularly in the area of labor market reform.
3.22. Renovation and modernization of schools, including in disadvantaged areas, and implementation of reforms in secondary education. Human capital is and will continue to be a key factor in allowing Turkey to meet its ambitions of becoming a modem economy, fully integrated in the EU. In this respect, access to high quality education is a critical issue.
3.23. A series of education projects have promoted improved access to quality education, with special focus on vulnerable groups such as girls and disadvantaged children. However, implementation of these operations has been slow due to lack of counterpart funds allocation in 2003, several personnel changes in the Ministry of National Education, and implementation capacity problems. Construction and renovation works are underway in more than 300 school sites and a significant increase in civil works is being undertaken. Reforms in secondary education have begun with an EU-financed project, while the Bank-
10 The assessment of the achievement of expected outcomes was based on reset baseline indicators. Annex 4 Page 17 of59 financed project to support secondary education became effective in the spring of 2006, but implementation has been limited. IFC has also provided financing for investments in the education sector for the establishment of a business school, including the distance learning for adult education through satellite learning centers across the country, as well as supporting the expansion of a pioneer vocational training school in the area of IT training and software systems.
3.24. The Education projects have been supported by an Education Sector Study (ESS), which contributed to the dialogue among policymakers, researchers, and other stakeholders regarding the development of a coherent, sector-wide strategy for improving Turkey’s pre- university education system. The studies commissioned under the ESS address a range of educational challenges, from access to pre-school to the equity implications of the existing high school entrance examination.
3.25. Improvements in access and quality of basic health provision: While Turkey has made considerable progress in improving key health indicators and in expanding access to health care services with the introduction of a universal health insurance, it continues to rank far behind most middle-income and EU accession countries in terms of health status and access to healthcare. Some of the issues still facing the Turkish healthcare system include inequalities in the access to health services, inefficiencies in resource allocation, and inadequate governance. There has been, however, some progress on building MOH’s and relevant institutions’ capacity in regulatory functions such as monitoring the quality of care in public hospitals and the collection and analysis of health sector data for evidence-based policy-making. New departments (Performance Assessment in the health sector and Monitoring and Evaluation) have also been established. Finally, high levels of health public spending remains an issue, and requires further and more comprehensive steps by the Government, focused, inter alia, on hospital reform (reorganization of hospital network, autonomy from the Ministry of Health), strengthening the referral system, pharmaceuticals cost containment, and expansion ofthe family medicine model.
3.26. Although with mixed results, the Health I1 and Health Transition Projects have supported the health sector in Turkey. While both the Bank-financed projects and the overall health system would benefit from strengthened capacity of the Ministry ofHealth (MOH), its institutional reform, particularly with regards to the reorganization and autonomization of public hospitals, has been limited. On a positive note, the important burden of disease study was completed, national health accounts were established to track expenditures, patient- record keeping was established, and a comprehensive health reform effort is underway, to achieve increased efficiency and financial soundness. IFC’s financing ofprivate health care, and WBI’s flagship program on health sector reform, have been an integral part of the Bank Group’s assistance to the sector. Senior health systems managers and key public and private sector stakeholders benefited from a series of WBI-sponsored capacity building events on health systems organizations and decentralization intended for them to better assess the strengths and weaknesses ofTurkey’s health systems. Annex 4 Page 18 of 59
c. Attractive Business Climate and Knowledge
Table 4: Attractive Business Climate and Knowledge- Key Expected Outcomes and World Bank Benchmarks
0 Exports growth rate Achieved 0 Increase in export capacity 4 chieved exceeds GNP growth rate of enterprises financed Foreign Direct Investment Achieved through lines ofcredit reaches US$1.5 billion on provided by the World Bank average during the CAS Group Achieved
period 0 Improvements in the overall Stability offinancial Achieved investment climate, markets improved implementation of the new FDI law, and establishment ofan Investment Promotion Agency (IPA)
0 Continued independence of Achievei financial markets regulatory agencies
0 Completion ofprivatization Partially of state banks; passage of Achieved new Bankruptcy Law and Commercial Code, and implementation ofnon-bank financial institutions reform
Outcomes
3.27. The outcomes related to the overall improvement of Turkey's business climate have over-performed the CAS' original targets. In 2003, 2004, 2005 and 2006 real GNP grew by 5.9, 9.9, 7.6% and 6%, respectively, while real export growth was as high as 16.0% in 2003, 12.5% in 2004, and 8.5% in both 2005 and 2006."
3.28. Increased confidence level, mostly due to continued macroeconomic stability and the official start of membership negotiations with the EU in October 2005, improved the structure of capital flows towards more long-term financing, including Foreign Direct Investment (FDI). A fter remaining low at US$1.3 billion in 2003 and US$1.9 billion in 2004, net FDI inflows into Turkey increased to a historical high ofUS$19 billion in 2006. On a commitment basis, FDI is projected at US$22.5 billion in 2007.
3.29. Finally, the stability of the financial sector has substantially improved. The open foreign exchange (FX) position of the Turkish banking system decreased after the volatility of May-June 2006, and the sector had a long FX position of US$184 million in end-2006. In addition, Turkish households had small FX-linked liabilities. All Turkish banks continued to
II Data from Turkstat's National Accounts Database. Annex 4 Page 19 of 59 protect themselves by proper provisioning against their problem loans, with the system in total having loan loss reserves equaling 91% of their non-performing loans. Capitalization of most banks has been sound, although it has declined as banks have grown their balance sheets. The capitalization as measured by the capital adequacy ratio fell to 22.4% in December 2006 from 24% in December 2005 for the banking system. Capital adequacy has been trending downwards for a few years as banks have shifted assets from non-risk weighted Government bonds to loans to the private sector and as the stabilizing economic conditions gave banks comfort to operate with greater leverage. On the policy front, reform ofregulation and supervision ofthe banking sector has continued.
Status of Key Benchmarks
3.30. Increase in export capacity of enterprises financed through lines of credit provided by the World Bank Group. The second and third in a series of Export Finance Intermediary Loans (EFILs), worth around US$600 million, have provided medium and long-term working capital and investment finance to private exporters, and contributed to further facilitating export growth in Turkey. The Export Finance Intermediary Loan (EFIL) I1 reached over 230 exporters representing a wide spectrum of firm sizes, industrial sectors, and geographical regions. Their exports grew by an impressive 28% in US$ terms between 2004 and 2006. The repeater EFIL I11 became effective in FY06, but already disbursed almost one quarter of its hnds by the end of the fiscal year, signaling a strong demand for continued export support. A recently approved project will focus on providing increased access to finance, specifically to small and medium size enterprises (SMEs) throughout the country, including regions with low access to credit (Le., the East and South East).
3.3 1. Improvements in the overall investment climate, implementation of the new FDI law, and establishment of an Investment Promotion Agency (IPA): Key investment climate reforms implemented during the CAS period include: a) reduction of administrative barriers to business entry and operation; b) improvement of market contestability; c) improvement of corporate governance; d) increased public investments in research and development (R&D) and ongoing review of Intellectual Property Rights legislation to ensure consistency with EU requirements; e) increased harmonization of quality standards and regulations with EU requirements; f) improvement in infrastructure; g) acceleration of privatization; and h) increased focus on SMEs. Additional reforms are needed in all of these areas to further increase investment and productivity levels. They should be complemented by microeconomic reforms aimed at reducing tax evasion and informality, improving labor market flexibility, increasing firms’ (particularly SMEs’) access to finance, increasing private investment in R&D and firms’ adoption of quality standards and technology (including Information and Communication Technology), and better aligning the skills ofthe labor force with the needs of the private sector.
3.32. The new FDI law, passed by the Government in 2003, established a more liberal FDI environment, although implementation in some areas is pending. Key features ofthe new law include: a) more flexibility for investors, by dropping all former FDI-related screening, approval, share transfer and minimum capital requirements; b) reassurance of existing guarantees to foreign investors of their rights in one transparent and stable document; c) upgrading, to accepted international standards, definitions of“foreign investor” (broadened to include Turkish national residents abroad and international organizations) and “foreign direct investment” (broadened to include all possible types of assets); and d) a policy shift from ex- Annex 4 Page 20 of59 ante control to a promotion and facilitation approach with minimal ex-post monitoring to continuously improve an investor-friendly climate for growth and development. The law for the establishment ofthe Turkish Investment Promotion Agency was enacted in July 2006.
3 -33. The Bank-financed Industrial Technology Project contributed to improving productivity by assisting the Government in the harmonization of Turkish technology infrastructure with European Customs Union standards, and assisting firms in upgrading their technological capabilities. The Bank also played an important role in encouraging SOE privatizations, particularly through the Economic Reform Loan (ERL). In the broad context of creating a more attractive business climate, the Bank has assisted the authorities, through technical assistance and significant new lending, in the formulation and implementation of energy policy reforms that focus on reducing Government liabilities, achieving private ownership, and utilizing natural resources in a more sustainable manner. Infrastructure improvement is also being supported through a Railways Restructuring Project aiming at increasing efficiency of the transport sector, and through several energy loans aimed at rehabilitating and expanding the electricity transmission system. A key project in the natural gas sector is financing underground storage, which is essential to improve security and reliability ofnatural gas supply, especially in peak winter months.
3.34. In terms of Analytical and Advisory Activities (AAA), the Bank carried out an assessment of progress-to-date and actions to improve Turkey’s business environment in the most recent Country Economic Memorandum. A more in-depth analysis is included in the FY07 Investment Climate Assessment (ICA). As part of the preparation process of the ICA, the Bank has also delivered a note on the Movable Asset Regime in Turkey and its relevance to improve access to finance. An IDF grant has also been provided to the Ministry of Justice for strengthening caseload management and the court administration system, and for providing implementation measures for the Execution and Bankruptcy Law. The Bank has been a driving force, together with the authorities, in preparing annual meetings of a high level international advisory group, the Investment Advisory Council (IAC), which is chaired by the Prime Minister and includes key members ofthe Cabinet, CEOs of a select number of international companies with an interest in Turkey, the Turkish business associations, and senior representatives of international financial institutions. The IAC takes stock of improvements in the business climate on an annual basis and provides advice to the Government on future priorities for reform. The Bank also conducted a Knowledge Economy Assessment in preparation for an investment project aimed at improving firms’ use of knowledge and ICT. Ultimately, the project was dropped because the Government preferred to carry out the activities proposed under the project through its own resources and private external partners. The energy projects have also been complemented by extensive analytical work, including the provision of advice on the renewable energy law, approved in 2005. Additionally, an international panel of experts, financed by the Bank, regularly advises the Government on the introduction of competition and increased private participation in the electricity sector.
3.35. Continued independence of financial markets regulatory agencies: A set of comprehensive amendments to the legal framework for banking regulations are being implemented after the new Banking Act was enacted in late 2005. The new Banking Act substantially broadened and clarified the Banking Regulation and Supervision Agency’s (BRSA) scope of responsibilities including various of its core competencies, such as: (a) licensing banks; (b) defining related parties; (c) establishing new limits on the credit Annex 4 Page 21 of59 exposure of related parties; (d) specifying corrective measures to be taken against bank owners and directors; (e) establishing explicit legal protection for BRSA staff in the performance of their duties; and (0 expanding the legal basis of BRSA staff to examine banks. The World Bank and other international financial institutions (IFIs) provided significant comments and technical assistance throughout the drafting of the Banking Act. Implementation ofthe new Banking Act is underway, and BRSA has adopted, published, and is implementing 24 of the required regulations. Effective implementation will enable BRSA to better fulfill its responsibilities as a modern financial supervisory authority. The BRSA, the SDIF and the Capital Market Board remain independent entities, while the insurance sector is supervised by the Treasury.
3.36. Under its financial sector umbrella, the PFPSAL I11 focused specifically on banking reform. Key priorities included strengthening the regulatory framework for banking and building institutional capacity at the BRSA and SDIF.
3.37. Completion of privatization of state banks; passage of new Bankruptcy Law and Commercial Code, and implementation of non-bank financial institutions reform: State banks have been restructured, and their privatization process, albeit after some delay, has begun. A minority stake in Vakif Bank was successfully floated in an Initial Public Offering in November 2005, and the Government has engaged a financial advisor to sell Halk Bank. The Execution and Bankruptcy Law has been amended, and supporting regulations were issued and published in April 2004. The Commercial Code has been amended to facilitate the setting up of new companies, and a new Commercial Code has been drafted and submitted to Parliament.
3.38. The PFPSAL I11 supported the restructuring and privatization of state banks, and improving the corporate insolvency regime. Non-bank financial institution reforms will be addressed through an upcoming series ofDPLs.
3.39. In support of Turkey’s efforts to create an attractive business climate and strengthen its financial and enterprise sectors, a comprehensive IFC program has been implemented in coordination with the Bank. In the financial sector, IFC has been working with mid-sized banks to strengthen their capital structure and balance sheets. Also, IFC has been supporting institution building, banking sector consolidation, and introduction ofnew products including development of the leasing, reinsurance sector, mortgage finance, and local currency finance. In the manufacturing sector, IFC has been supporting restructurings and re-capitalization of its portfolio companies, has increasingly supported Turkish companies to become more competitive and diversify risk through increased exports and outward investments, and to develop into regional players
3.40. In infrastructure, IFC has supported post-privatization ofa cruise ship terminal assisting in the upgrading of Turkey’s tourism sector, and provided financing for gas distribution investments to help bring lower energy costs to consumers and industry and reduce environmental emissions by displacing more polluting fuels. Finally, in information and technology, IFC supported a mobile company to promote greater competition and make cellular communications more affordable and available to larger segments of the population. In addition, IFC supported expansion of IT solutions for Government agencies and private sector corporations. Annex 4 Page 22 of59 3.41. In the past, IFC’s investments by volume have been seen to have concentrated on Turkey’s large companies. This was mostly a response to market demand and the investment climate at the time. IFC provided financing to companies, which, even if in first tier, did not have access to long term funding. It was also at a time when Turkey was faced with a chronic low level of FDI. IFC’s support was important to help the vanguards of the Turkish industry and financial sector through periods of severe economic volatility. They have emerged successfully to help Turkey recover from the crises. Also, IFC financing has supported their expansion, especially in a number of cases outside Turkey, therefore putting them (and Turkey) on the map as significant economic players in the wider region. The Turkish business community recognizes IFC’s important role during the crises in light of the fact that IFC was the only institution which did not abandon Turkish businesses at the times of severe difficulty. It is nevertheless recognized that IFC needed to diversify its client base and reach out to more sectors and avail its products (including equity) to a wider group of clients. With the improved macro conditions and more long term financing availability in the market, during the last one to two years IFC has been diversifying its sector and client base in a proactive way, including targeting emerging good second tier companies, reaching to more underprivileged parts of Turkey. The improved economic climate and further maturing of the domestic private sector has provided more opportunity for IFC to offer alternative financing instruments and direct shareholding through equity investments as well as help Turkish companies implement best corporate governance and business practices. Such efforts are showing promise through for example important investments in the southeast of the country, in equity of new players in leasing and auto parts as well as in new funding for emerging clients in private health, education and telecom sectors. d. Stronp Environmental Manapement and Disaster Prevention
Table 5: Environmental Management and Disaster Prevention - Key Expected Outcomes and World Bank Benchmarks
0 Significant convergence Partially 0 Environmental sector Partially with EU environmental achieved priorities updated in the EU achieved standards context
0 Disaster prevention and Partially Introduction ofmandatory Partially management system achieved insurance cover ofprivate achieved improved housing units; creation of a strict and enforced construction code enforcement system, and strengthening ofemergency preparedness ,
Outcomes
3.42. In terms ofenvironmental management, some progress has been made towards meeting specific EU directives, primarily the Nitrates, Birds, and Habitats Directive, as well as Directives on Environmental Assessment, Waste Management, and Large Combustion Plants. More specifically, draft legislation on nature protection has been prepared to bring Turkey into closer conformity with requirements of the EU Birds and Habitats Directives, Annex 4 Page 23 of 59 while an amendment to the Environmental Law has been adopted by Parliament to introduce stricter sanctions for violations of environmental regulations.
3.43, Progress towards disaster prevention and management has been mixed, particularly in relation to insurance coverage and strengthening national and local institutions responsible for disaster preparedness and response.
Status of Key Benchmarks
3.44. Environmental sector priorities updated in the EU context. The dialogue with the authorities in this area did not materialize at the beginning of the CAS period, but has improved over time. In this context, ongoing cooperation with the EU in the environment sector includes a dialogue in the context of the Global Environment Facility (GEF)-funded Biodiversity and Natural Resource Management Project, as well as work on nitrate management which is being pioneered in Turkey under the Anatolia Watershed Project. These are areas where the Bank could further strengthen its assistance, specifically in relation to nitrates management and nature protection, as well as pollution control.
3.45. Ongoing environment operations include the Anatolia Watershed Rehabilitation Project, and one Montreal Protocol and one GEF grant, supporting the phase-out of ozone- depleting substances and preservation of Turkey’s biodiversity, respectively. As a result of increased sector synergies, and consistent with IEG’s recommendations, the Bank has recently approved other operations with an environmental focus, including the Municipal Services and the Renewable Energy Projects. Under the Anatolia Watershed Rehabilitation Project, community-based soil and water management activities are being implemented in 28 microcatchments, with the multiple objectives of raising incomes amongst poor households in upland catchments, rehabilitating degraded soils, forests and rangelands, and putting in place measures to control agricultural pollution (particularly nitrate pollution associated with livestock production). The Government intends eventually to scale up these activities to achieve more extensive impacts.
3.46. On the non-lending front, the Bank conducted analytical work on the forestry sector and industrial pollution, as well as a cost-assessment of environmental compliance with EU requirements.
3.47. Introduction of mandatory insurance cover of private housing units; creation of a strict and enforced construction code enforcement system, and strengthening of emergency preparedness. Progress towards these benchmarks has been limited. The law on mandatory insurance has not been passed, while the Turkish Disaster Insurance Pool is fully operational and thus far has sold about 2.5 million policies, however fewer than expected. Advancements in the enforcement of building codes have also been uneven. Some progress has been achieved in strengthening national and local Government institutions responsible for disaster preparedness and response, but the Turkish Emergency Management Agency (TEMAD) continues to lack a full mandate to coordinate disaster response in case of a major catastrophe. On a positive note, TEMAD’s new headquarters were completed, and systems for emergency information management and emergency communications were designed and implemented in 2006.
3.48. Both the Marmara Earthquake Emergency Reconstruction (MEER) loan and the Istanbul Seismic Risk Mitigation and Emergency Preparedness Project (ISMEP) advance the Annex 4 Page 24 of 59
agenda of enforcement ofbuilding codes and land use plans. The latter also finances seismic risk mitigation in Istanbul’s critical public facilities, through retrofitting of hospitals, schools and other priority public facilities. In terms of disaster response, the MEER Project financed the construction of 12,000 housing units, along with supporting school and healthcare facilities, for the communities affected by the 1999 Marmara earthquake. Finally, WBI provided broad base capacity building support to national and local institutions in disaster management throughout Turkey, in particular targeting central and local government officials, businesses, industries, NGOs and community leaders in specific aspects of hazard risk management.
4. Bank Performance during the CAS Period
a. Prowam Overview
4.1. The original, FY03-06 CAS envisaged a low-case scenario with a lending volume of up to US$1.3 billion and a high-case scenario with a lending program of US$4.5 billion. Having met the relevant macroeconomic, structural and social triggers, Turkey has consistently stayed in the high case lending program. Under the CAS Progress Report, at the end of 2005, an additional year was added to the program and the overall envelope was increased to US$6.6 billion for the four-year period (see Annex 3). The robust lending program has been supported by an active AAA program which has responded to the Government’s needs for knowledge and technical assistance. A t the end of FY06, 18 AAA activities were delivered under the current CAS. Six more were completed in FY07.
4.2. In order to support the achievement of the CAS objectives, a strong IFC program has been designed and implemented. During FY04-06, IFC has committed over US$917 million for its own account and mobilized US$405 million through syndicated banks, compared to US$443 million and US$112 million during FYO1-FY03 respectively. IFC’s investments have been well diversified across sectors with projects in manufacturing, the financial sector, information technology, oil and gas, health and education, and infrastructure. IFC has increasingly supported Turkish companies to become more competitive, diversify risk through increased exports and outward investments, and to develop into regional players. During FY04-06, IFC has financed about US$150 million with Turkish companies engaging in south-south investments, including in Bosnia and Herzegovina, Bulgaria, Egypt, Georgia and Russia. Annex 5 provides a detailed overview of IFC’s program in Turkey
4.3. Finally, the Multilateral Investment Guarantee Agency (MIGA) has also been active in Turkey. It has provided guarantees both for investments in Turkey and to Turkish investors investing abroad, including under the newly established Small Investment Program. At end-FY06, MIGA’s portfolio in Turkey consisted of one project in infrastructure, with a gross and net exposure ofUS$135 million and US$68 million, respectively. Annex 4 Page 25 of 59
6. Portfolio Performance
4.4. Largest active portfolio in Turkey’s history: At end-FY06, the Turkey portfolio consisted of 24 active projects, with total commitments of over US$6 billion.I2 The Turkey portfolio accounts for approximately 37% of the Europe and Central Asia (ECA) region and 6% of World Bank total active lending.
4.5. Portfolio management has been a priority throughout the CAS period. The annual JPPR has become a key instrument for cooperation with the Government and implementing agencies on all aspects of portfolio management. The JPPR, drafted in conjunction with the periodic CAS assessments, has been looking at the program’s overall development impact and contribution to CAS outcomes and benchmarks, in addition to the portfolio performance indicators. This approach has strengthened the Government’s and the Bank’s focus on results in portfolio reviews.
Table 6: Turkey Portfolio Overview, FY04-0613 i FY04 FY05 FY06 I Number of Active Projects 16 21 24 Net Commitments (US$ml) 4,307 5,965 6,057 Undisbursed Balance at FY start (US$ml) 2,552 3,126 3,836 Approved during FY (US$ml) 1,593 1,800 1,526 Disbursed during FY(US$ml) 854 1,034 1,060 Disbursement Ratio (investment) 18% 25% 17% Cancellations during PI (US$ml) 169 10 28 Proactivity Index 0% 100% 100% Realism Index 100% 100% 100% Projects at Risk 25% 5% 4% Problem Projects 0 Yo 0% 4%
4.6. Portfolio performance during the CAS period has been strong, and consistently better than, or in line with, that of ECA and the Bank as a whole. The disbursement ratio has been, on average, higher than during the previous CAS period, with a peak of 25% in FY05. In FY06, the ratio decreased to 17%, largely due to new projects entering the portfolio in FY05 but only becoming effective in the second half of FY06. In terms of proactivity, Turkey has consistently performed better than ECA and the Bank as a whole (see Table 6, Figure A), except for FY04, when efforts to improve the performance of Basic Education I1 were ongoing, but no formal action could yet be taken to reverse its proactivity rate. Following intense efforts to improve portfolio quality, the ratio ofproblem projects decreased substantially since FY04, when several older projects suffered from implementation issues.
l2 These include a $500 million DPL and two grants. The GEF Watershed Rehabilitation grant is not considered a project per se, because it is an integral part of the Anatolia Watershed Rehabilitation Project. The portfolio composition, for the purpose of the annual portfolio review, does not include any loans that closed during FY06. As a result, PFPSAL I11 is not part ofthe 24 active projects. l3The portfolio composition, for the purpose ofthe annual portfolio review, does not include any loans that closed during FY06. As a result, PFPSAL I11 is not part of the 24 active projects .GEF and Montreal Protocol grants are included. Annex 4 Page 26 of 59 The indicator measuring the realism of projects’ risks assessment has consistently been loo%, while there was no net disconnect with IEG’s project ratings in both FY04 and FY05.l4
4.7. Between FY04 and FY06, eight investment and two development policy loans exited the Turkey portfolio. Of the nine projects evaluated by IEG so farI5, 78% received satisfactory outcome ratingsI6, while sustainability was rated likely in 88% of the projects for which this indicator has been assessed.” Both Bank and Borrower performance were also rated satisfactory in 78% of the evaluated projects.”
Figure A: FY06 Turkey Portfolio Performance Indicators vs. World Bank and ECA
%
4.8. The Turkey program, overall, has been a cost-effective operation. Turkey has been the third largest borrower after India and China, measured by net commitments, since the end of FY04, and it was, on average, the second largest borrower with over US$I.6 billion in new commitments between FY04-06. Nonetheless, the Turkey country budget available for work program agreements was smaller than several large country programs Bank-wide in the past two fiscal years. This was in part possible because of the large average size of the operations, a deliberate strategic choice to respond to the budget limitations, which resulted in relatively low average preparation and supervision cost per dollar lent.
c. Countrv Dialogue 4.9.In the summer of 2002, when the CAS was already in an advanced stage of preparation, early elections were called. In view of this situation, it made sense to wait for the input of the new Government before the CAS was finalized. Understandably, it took several months before the new Government could begin to focus on the collaboration with the Bank. Given the Bank’s strong involvement in supporting the previous Government to manage the 2001 crisis, the Bank’s image was also associated with measures that were not
j4 IEG evaluation results for PFPSAL I11 are not yet available. l5Through IEG Project Evaluations. 16 The Cesme Water Supply and Sewerage and the Industrial Technology projects were rated Moderately Satisfactory. 17 The percentage ofprojects for which Sustainability was rated Likely refers to a sample ofeight projects. For the Industrial Technology Project IEG did not rate sustainability, but a “risk to development objective”, as Moderate.’ ’* Moderately Satisfactory for Industrial Technology. Annex 4 Page 27 of59 popular. Thus there were some initial questions about the social impact of the Bank’s involvement as well as the applicability of its advice in Turkey. The new Government was also very keen on demonstrating that any reform actions taken by the Government are “home-grown” and not dictated by international financial institutions, a clear sign of ownership ofreforms.
4.10. Under these circumstances, the Bank had to rise to the challenge. It had to prove its usefulness by responding to the emerging priorities as defined by the new Government, producing the best possible analytical work based on relevant international experience, and in general, engage the Turkish counterparts fully in every step of the Bank’s operational work. During the CAS period, the confidence in the Bank as a trusted development partner has grown rapidly and consequently a dialogue has opened up on some politically sensitive issues, such as education and labor market reforms. The current close collaboration bodes well for a fully participatory preparation ofthe new CPS.
4.11. The Country Office, which has strong sectoral representation and a full complement of fiduciary staff, has played a major role in furthering the policy dialogue and ensuring the effectiveness of the implementation of the assistance program. The three major policy-based operations, the PFPSAL 111, the PPDPL and the Competitiveness and Employment DPL (CEDPL), have been task managed by staff in the Ankara office, ensuring full continuity of the dialogue. Supervision of the majority of the operations has been delegated, and the Ankara-based portfolio team has managed an essentially rolling process of joint portfolio reviews. Finally, the procurement, financial management and disbursement staff have provided continuity and prompt service to the clients and the Bank’s task teams.
4.12. Consultations with non-governmental organizations on the CAS program during the CAS period were limited. While there was extensive dialogue with the authorities during the preparation of the CAS and there were consultations with other stakeholders, including with civil society representatives at the design stage of the program, these latter consultations did not continue on a systematic basis during the implementation of the CAS. The preparation of this completion report and the new CPS provides a good opportunity to renew the dialogue with the non-governmental stakeholders on the Bank’s overall program. d. Workinn With Other Develoument Partners 4.13. The Bank has been working very closely with the IMF, particularly in the areas of public sector and financial sector reforms. The work on public sector management and governance has focused on strengthening the public expenditure management system while maintaining fiscal discipline. The Fund has taken the lead in the short-term measures needed for the fiscal adjustment such as incomes policy, urgent revenue and expenditure measures, and budget monitoring. T he Bank has taken the lead in assisting the Government on the medium-term public expenditure management strategy, rationalization of the public investment program, public procurement reform, accounting reform, and public liability management. In the financial sector, the collaboration focused on assisting the Government to address the consequences of the banking crisis and putting in place an appropriate legal and regulatory framework that would minimize the risk of future crises. The Bank has taken the lead in assisting the reform of the legal framework and regulations for bank supervision, institutional development of BRSA and SDIF, and the structural reforms required to guide the restructuring and eventual privatization of state banks. The Fund has taken the lead in Annex 4 Page 28 of59 assessing the soundness of the banking system and where there was an immediate fiscal impact. On the state banks agenda and resolution of private banks, the Fund and the Bank have worked closely as a team.
4.14. The Bank has also established close collaboration with the EU and has become more fully engaged with the members of the United Nations (UN) system. The role of the EU in Turkey is particularly important because of Turkey’s accession aspiration and because of its significant financial assistance on grant terms. Collaboration between the Bank and the EU has been strong, and the Bank has adjusted its assistance program, in coordination with the European Commission, to respond to Turkey’s accession priorities. The most recent CEM focused on Turkey’s EU accession priorities and it was complemented by a series of leadership seminars on specific aspects of the accession process, supported and organized by WBI using a peer-to-peer format with senior government officials and EU negotiators from various European countries. Programming of Bank and EU assistance is coordinated on a regular basis, and strategic joint agendas include environment, education, financial and public sector reforms, including governance and anti-corruption. Partnership with the UN system has been particularly close in the social sectors (UNICEF, WHO) and in poverty alleviation and local development/participation (UNDP). The Bank has been a regular participant in the UN thematic groups, including gender issues and youth.
4.15. Consultations with the European Investment Bank and bilateral donor agencies, such as the French Development Agency, KfW, the Japan International Cooperation Agency and USAID, have been frequent. These consultations aimed at exploring opportunities of collaboration or co-financing and ensuring the synergy of externally financed assistance programs. The Avian Influenza and Human Pandemic Preparedness and Response Project, resulting from a coordinated effort between the Bank, the EU, and USAID, is a concrete example of close cooperation within the international donor community. Finally, the Turkey program has received significant support from the Japanese Government, through several trust funds administered by the Bank, in the areas of enhancing Turkey’s capacity for development operations financed by the Bank, testing new approaches in the social sectors, and supporting business innovation. e. Bank Performance
4.16. There appear to be four key factors contributing to satisfactory Bank performance during the CAS period. First, a close collaboration with the authorities, based on mutual trust, has developed over time. Second, the timeliness, quality and proper dissemination of some flagship analytical work have been much appreciated by our counterparts. Third, the Bank’s readiness to adjust the CAS program and respond flexibly to newly emerging priorities in the context of the CAS Progress Report has demonstrated the Bank’s responsiveness. Even more flexibility in terms of the lending volume and the use of country systems, though, would have been appreciated by the authorities. Finally, strong field presence and a generally strong country team have enabled the Bank to deliver the CAS program largely as planned.
4.17. The section below summarizes the key considerations for the next CPS based on the lessons learned during the CAS period. As mentioned earlier, this CAS formally was not a results-based CAS but it did include a fairly detailed results matrix, key outcome indicators and benchmarks. While the choice of result indicators and more broadly the results framework appear to have been appropriate, some of the baseline data have turned out to be Annex 4 Page 29 of 59 unreliable. In designing the results framework for the new CPS, the team will assess which elements of the current framework should be retained, consistent with the main objectives of the new CPS, and how to ensure that the baseline data are accurate and the progress is monitorable.
5. Key Considerations for the New CPS
5.1. The new CPS should further strengthen the ownership of the authorities in defining the CAS program and should allow sufficient flexibility both in terms of lending levels and content to respond to emerging priorities. The current CAS program went through a rather thorough vetting by the authorities, but because the Government was new when the CAS was finalized, it took some time to build full ownership of the program. With the deepening of the collaboration with the Government during the CAS period and the adjustments made to the program in the context of the CAS Progress Report, there is a good basis for a truly collaborative formulation of the new CPS which would be guided by the recently adopted gth Development Plan. It will be also important to enhance the civil society’s engagement in the consultation process.
5.2. The Bank Group’s future assistance program should envisage greater support for private sector development to help create jobs and alleviate poverty. Consistent with the recommendations of the recent CAE, such a program should be designed in close collaboration within the World Bank Group. The extensive analytical work on the investment climate, on the labor market as well as on education, and inclusion of the Programmatic Employment Generation Development Policy Loans in the CAS program in the second part of the CAS period have already paved the way for a more intensified support in this area.
5.3. The new CPS should also try to deepen the Bank’s engagement in environment protection. This is an important issue for sustainable development and one which requires significant investments to meet the EU requirements. The ongoing analytical work on industrial pollution and the dialogue in the context of the GEF-fbnded Biodiversity and Natural Resource Management Project provide an entry point to an enhanced level of collaboration.
5.4. The programmatic approach to development policy lending has proven useful in light of the (longer term and institutional) nature of the reforms supported by the DPLs and the fact that the authorities are keen to maintain full ownership of these reforms. Perhaps the CAS program was too ambitious expecting four DPLs (two tranches each of the two DPL series) in the last two years of the CAS period but this decision reflected the ambitions of the authorities at the time to move ahead simultaneously with the fundamental social security reform and reforms supporting employment generation, especially in the labor markets. In retrospective, this has turned out to be overly ambitious. Because ofthe number of DPLs in the program and the overall limitation on the amount of development policy lending within the CAS envelope, the average size of the DPLs envisaged in the CAS was smaller than it could have been if fewer DPLs had been planned for. This was somewhat corrected in FY06 by the increase in the size of the PPDPL given the strength of the reform program supported by the operation and the slippage of the CEDPL to the following fiscal year. Annex 4 Page 30 of 59
5.5. Finally, high quality analytical work has been critical for helping the policy dialogue in-country on such key issues as education and labor market reforms and for assisting the authorities to prioritize the economic agenda for Turkey’s EU accession. Of course, this analytical work also provides the basis for Bank support. Collaborative preparation of economic and sector work, wide and participatory dissemination of findings, as well as the combination of the dissemination of analytical work with workshops of international practitioners, supported by WBI, have proven particularly effective. Annex 4 Page 31 of 59 ANNEX 1: Key Outcomes and Bank Group Benchmarks
Status of Key Outcomes and Bank Grow Benchmarks Key Outcomes Bank Group Benchmarks
Stabilization of public creditworthiness indicators Satisfactory macroeconomic and fiscal framework Macroeconomics at sustainable levels. The net public debt to GNP zonsistent with the key outcomes. A satisfactory and Governance ratio has declined from about 79% in 2002 to macroeconomic and fiscal framework has been about 45% in 2006. maintained, supported by consecutive Fund urograms and Bank adjustment lending. The primary Less volatile economic growth in the range of 5%. surplus of the consolidated public sector reached GNPgrowth has been strong, 5.9% in 2003, 9.9% 6.2%, 7.2%, 6.8% and 6.6% of GNP in 2003, 2004, in 2004, 7.6% in 2005 and 6% in 2006. 2005 and 2006, respectively.
Single digit inflation. End-year CPI was reduced Implementation of public sector reforms, focusing on: to 9.3% in 2004, reaching single digits the first (i)the tax system; (ii)public expenditure management; time for more than 30 years. In 2005, inflation (iii)the social security system; (iv) the civil service; further declined to 7.7% but it accelerated again (v) local government; and (vi) anti-corruption. in 2006 due to higher oil prices and emerging Implementation of public sector reforms has been on markets volatility. track, including: (9 tax policy reforms and a new revenue administration law; (io enactment and implementation of the Public Finance Management and Control Law; (iii) enactment of the social security administrative law, and of the social security and universal health insurance legislation (execution of the social security and universal health insurance law was suspended at the end of 2006, as Turkey's Constitutional Court ruled that some of its provisions were unconstitutional; the Government submitted a revised law to Parliament in November 2007); (iv) drafting of a new law on civil service; (v) enactment and implementation of local government laws, including the Local Government Associations Law and the Municipality Law, and preparation of a fiscal decentralization law; and (vi) enactment of laws on freedom of information and code of conduct for civil servants; and establishment of the ethics board. Equitable Human Low extreme poverty (1.8%) maintained and Public expenditure on health, education and social and Social vulnerability reduced from 15% in 2001 to 12% in protection are sustained at pre-crisis levels. The Development 2006. Extreme poverty has declined to a benchmarks as shares of GNF' are: (i)education: negligible level of 0.01% in 2005. The concept oj 4.25%; (ii)health: 3.25%, and (iii)social protection: vulnerability has changed; the poverty rate oj 7.00%. Aggregate social expenditures reached agreed 27% in 2002 declined to 20.5% in 2005. targets with a slight underage in education in 2004- 05. In 2006, the education expenditure as was 4.33% Net enrollment rate in basic education maintained of GNP, health expenditure 5.31% of GNP, and at not less than 99%; girls' enrollment increased, social protection expenditure 9.68% of GNP. One key especially in' secondary education: maleifemale issue in health is to contain costs and derive better ratio improved from 1.20 to 1.15 by 2006. Due to health outcomes for expenditures. In social more accurate data, the baseline and the expected protection the issue is to curtail the pension deficit outcomes have been reset. Net enrollment in over the medium to long-term. The combined social basic education remained about 90% during the security deficit (health and pensions) has been CAS period. Girls' secondary net enrollment rate capped at 4.5% of GDP over theperiod 2006-07. increased from 42% in 2001/2002 to 51% in 2005/2006, and the male/female ratio in Implementation of (i)the Conditional Cash Transfer secondary education decreased from 1.33 in (CCT) program to benefit over 1 million children, and 2003-04 to 1.27 in 2005-06. (ii) at least 1,500 local initiative (LI) projects tc Annex 4 Page 32 of 59
Development Key Outcomes Bank Group Benchmarks Themes support vulnerable people. CCT reached 2.6 million Child mortality reduced and maternal health children, representing the poorest 6%, and 7,500 LZ improved to make progress towards the MDGs. sub-projects were completed at end-FYO6. There has been signijicant reduction in infant mortality from 43 in 1998 to 24 per 1,000 live Renovation and modernization of schools, including in births in 2005. . At the moment, there are data disadvantaged areas, and implementation of reforms in limitations to assess change in maternal health. secondary education. Implementation of the Bank- financed basic education projects has been slow due to lack of counterpart funds allocation in 2003, several personnel changes in the Ministry of National Education, and implementation capacity problems. Reforms in secondary education have begun with an EU-financed project. The Bank- financed project to support secondary education became effective in spring 2006.
and universal health insurance legislation was enacted. The legislation introduced a universal health insurance program which will dramatically increase access while unifying and rationalizing health financing, albeit with considerable increase in public outlays if necessary efficiency measures are not taken. (Execution of the social security and universal health insurance law was suspended at the end of 2006, as Turkey's Constitutional Court ruled that some of its provisions were unconstitutional; the Government submitted a revised law to Parliament in November 2007). Attractive Exports growth rate exceeds GNP growth rate. In Increase in export capacity of enterprises financed Business Climate 2003, 2004, 2005 and 2006, real GNP grew by through lines of credit provided by the World Bank and Knowledge 5.9%, 9.9%, 7.6% and 6%, respectively, while real Group. EFIL IZ has disbursed around 95% of its exports growth averaged 11% over the same USS300 million credit line to exporters, strongly period. ahead of the original disbursement forecasts. Zt has reached over 230 exporters of different firm sizes and Foreign Direct Investment reaches US$1.5 billion from a variety of industrial sectors and geographic on average during the CAS period. After regions. The repeater EFZL ZIZ has started remaining low at USS1.3 billion in 2003 and disbursing in 2006. Zt mostly has leasing companies USS1.9 billion in 2004, net FDI inflows into as financial intermediaries which will allow the Turkey increased to USS8.6 billion in 2005 and project to broaden the universe of participating USSI9 billion in 2006. exporters. A recently approved operation will provide increased access to finance specifically for SMEs. Stability of financial markets improved. The financial sector has substantially stabilized, Improvements in the overall investment climate, although the recent turbulence has created losses implementation ofthe new FDI law, and establishment in banks. CapitaVrisk weighted assets ratio for of an Investment Promotion Agency (IPA). private deposit banks was Z4.0% in June 2006 Substantialprogress has been made in simplijication (18.6% for the system) and has been trending of business registration. Firms' start-up time has downwards as banks have shifted assets from decreased significantly but registration cost is high. non-risk weighted Government bonds to loans to Procedures related to business closing are sill Annex 4 Page 33 of 59
Development Key Outcomes Bank Group Benchmarks Themes the private sector. A new banking law was passed cumbersome. A new FDI law and related legislation in late 2005, and supporting regulations and a have been enacted. The law for the establishment of revision of supervisory processes are underway. the IPA was enacted in July 2006. In addition to Implementation of the new banking law started reducing administrative barriers to business entry as of December 2006. A minority stake in and operation, other key investment climate reforms VakiJbank was successfully floated in an IPO in implemented during the CAS period include: November 2005, and the Government has taken improvement of market contestability; improvement initial steps to privatize Halk Bank through a of corporate governance; increased public block sale on the recommendation of the investments in research anbl development (R&D) and investment banks engaged to bring the bank to ongoing review of Intellectual Property Rights the market. legislation to ensure consistency with EU requirements; increased harmonization of quality standards and regulations with EU requirements; improvement in infrastructure; acceleration of privatization; and h) increased focus on SMEs. These areas should be complemented by microeconomic reforms aimed at reducing tax evasion and informality, improving labor market flexibility, increasing firms’ (particularly SMEs ’) access to finance, increasing private investment in R&D and firms’ adoption of quality standards and technology (including ICT), and better aligning the skills of the labor force with the needs of the private sector.
Continued independence of financial markets regulatory agencies. BRSA and CMB remain independent entities, while the insurance sector is supervised by the Treasury.
Completion of privatization of state banks; passage of new Bankruptcy Law and Commercial Code, and implementation of non-bank financial institutions reform. VakiJbank successfully completed an IPO for 22% of its equity in late 2005. In preparation for their privatization, both Halk Bank and Ziraat Bank have restructured their staffing and branch networks and they have been given separate boards. The Government engaged Goldman Sachs and a local investment bank, CAIB-Is Yatirim, to bring Halk Bank to the market. On the recommendation of the investment banks, the Government has taken initial steps towards a block sale of the bank. The execution and bankruptcy law has been amended; supporting regulations were issued and published in April 2004. The Commercial Code has been amended to simplifi procedures for setting up a company; a new Commercial Code has been drafted. Non-bank financial institution reforms will be addressed through an upcoming series of development policy loans (Employment Generation DPLs). Reforms will be related to insurance supervision, credit infrastructure and access to finance. Annex 4 Page 34 of 59
Development Key Outcomes Bank Group Benchmarks Themes Strong Significant convergence with EU environmental Environmental sector priorities updated in the EU Environmental standards. Progress has been made in specific context. In coordination with significant EU Management and directives, primarily the Nitrates, Birds, and assistance in environment, the Bank has been Disaster Habitats Directive, as well as the Directives on conducting ESW focused on industrial pollution Prevention Environmental Assessment, Waste Management, control. Several Bank-financed projects with and Large Combustion Plants. An amendment to environmental focus have been approved, including the Environmental Law has been adopted by the the Municipal Services Project and the Renewable Parliament to introduce stricter sanctions for Energy Project. violations of environmental regulations. Introduction of mandatory insurance cover of private Disaster prevention and management system housing units; creation of a strict and enforced improved. The Turkish Emergency Management construction code enforcement system, and Agency (TEMAD) does not yet practically have a strengthening of emergency preparedness. The full mandate to coordinate disaster response in Turkish Disaster Insurance Pool is fully operational case of a major catastrophe butprogress is being and thus far has sold about 2.5 million policies made in the integration of disaster related @ewer than expected) but the law on mandatory services. insurance has not been passed. In addition to the MEER, the Istanbul Seismic Risk Mitigation and Emergency Preparedness Project (ISMEP) will advance the agenda of enforcement of building codes and land useplans. Someprogress has been achieved in strengthening national and local Government institutions responsible for disaster preparedness and response. TEMAD’s new headquarters were completed, and systems for emergency information management and emergency communications were designed and implemented in 2006.
i n
I
I Ir. I- I I
u- i OECJ Annex 4 Page 49 of 59
ANNEX 3: Original, Revised and Actual CAS Lending Program
900 PFPSAL 111 1000 PFPSAL I11 1000 300 EFIL I1 303 EFIL I1 303 Health Transition 200 Health Transition 61 Health Transition 61 Renewable Energy 202 Renewable Energy 202 Renewable Energy 202 Micro Watershed 37 Anatolia Watershed 20 Anatolia Watershed 20
1650 Total 1586 Total 1586 200 Municipal Services 275 Municipal Services 275 Railway Restructuring 200 Railway Restructuring 185 Railway Restructuring 185 Seismic Risk Mitigation 400 Istanbul Seismic Risk 400 Istanbul Seismic Risk 400 Secondary Education 200 Mitigation 104 Mitigation 104 PPSAL (moved to FY06 and 500 Secondary Education 305 Secondary Education 305 renamed PPDPL I) 100 EFIL I11 465 EFIL I11 465 Knowledge Economy (dropped) PSSP I1 66 PSSP I1 66 ECSEE APL I1 ECSEE APL I1 1600 1800 1800 Total Total Total PPSAL I1 (moved to FY07. 400 PPDP.L I 400 PPDPL I 5 00 renamed PPDPL 11) 400 PEGDPL (renamed 400 Access to Finance for 180 PFSAL (moved to FY07, renamed 100 CEDPL) 150 SMEs 336 PEGDPL) 100 SME Development 200 Electricity Generation 325 SME Finance 250 Energy Liberalization 325 Rehabilitation 150 Energy Gas Sector Development 125 Gas Sector 34 Rural Development ECSEE APL I11 Development 1250 1600 ECSEE APL I11 1525 Total Avian Influenza and Human Pandemic
Total PPDPL I1 400 CEDPL 500 PEGDPL I1 (renamed 400 Access to Finance for 67 CEDPL 11) 3 00 SMES~~ 269 Electricity Distribution 250 Electricity 3 22 Infrastructure (tbd) 250 Distribution 23 Social Dev. & Empl. Istanbul Municipal Promotion 1600 Infrastructure 23 1158
l9 High-case scenario. 2o Revised as part of CAS Progress Report, November 2005. With the inclusion of a US$7 million GEF grant in support of the Anatolia Watershed Project, the total delivered amount in FY04 was US$1,593 million. 22 Additional financing of €50 million, following a loan amendment approved in FY07. 23 Loan has not been signed yet Annex 4 Page 50 of 59
ANNEX 4: Original, Revised and Actual Non-lending Program
CAS CAS Impact of Agriculture Sector Impact of Agriculture Sector Reforms Reforms Knowledge Economy Assessment Knowledge Economy Assessment Gas Sector Note Gas Sector Note Caspian Oil and Gas Dialogue Caspian Oil and Gas Dialogue NGO Outreach NGO Outreach Forestry
Modeling RealiFinancial Sector Modeling Reaminancia1 Sector Interaction Interaction Poverty Assessment Poverty Assessment Rural Sector Study Rural Sector Study Education Sector Study Education Sector Study Energy Environment/Forestry Labor Market Study Energy Labor Market Study CAS Progress Report CAS Progress Report PER CEM CEM Rural Finance Study Investment Climate Assessment Public Administration (background note) Regional Poverty Update Accounting and Auditing ROSC Rural Finance Study Tertiary Education Review Accounting and Auditing ROSC CAS Investment Climate Assessment Financial Sector Assessment PER Private Sector Development Irrigation and Water Resources EnvironmentAndustrial Pollution Environmental Management (Industrial Irrigation Sector Review Pollution) CEM Follow-up Higher Education Policy Study Fiduciary Assessment Environmental Aspects in the Privatization of Electricity I Total I 21 28
24 Revised as part of CAS Progress Report, November 2005 Annex 4 Page 51 of 59
ANNEX 5: IFC in Turkey FY04-06
During FY04-06, IFC has committed over US$917 million for its own account and mobilized US$405 million through syndicated banks, compared to US$443 million and US$ll2 million during FYOl -FY03 respectively. Also, IFC financed US$150million with Turkish companies outside Turkey. Annex 4 Page 52 of 59
Development Themes and IFC's Cross-cutting Objectives Objectives Completion pitable Human and Social Development hpport social sectors
Support expansion ofhigher educational 1 IFC expanded its support for private sector health and education services; projects. IFC assisted with financing to improve access to high quality Increasingly take an active role in the services through modernization and expansion programs. health sector and support provision ofhigh- Extended first Turlush lira loan to Yuce, a K-12 school and IT training quality health services. institute in Ankara, to help it meet the growing demand for vocational training in the IT sector. Committed a loan for the lira equivalent ofUS40 million to the Acibadem Healthcare group to expand in Istanbul and into smaller cities in Turkey, where high-quality health care is less readily available dtractive Business Climate andKnowledPe Support the reform of thefinancial sector; Committed over US$330 million (US$275 million expected in FY07) Working with mid-sized banks to in the financial sector. strengthen their balance sheets and to use them as a platform in the consolidation Provide term funding to Turkish banks at a time when term funding process was particularly scarce. Continuing with efforts aimed at institution Supported development ofleasing industry through several transaction building and expand the range offinancial Supported development ofreinsurance industry through the first intermediation in Turkey (e.g. insurance facility for earthquake risk; sector; mortgage finance; contractual savings institutions; private equity) Supported SMEs through lending to the local banks; IFC was unable to invest in pension funds due to a weak regulatory Supporting the privatization ofstate owned framework. banks that had been taken over by SDIF, With the delayed passing ofthe mortgage law there was a limited and in the sale oftheir NPLs. opportunity for IFC to expand its activities in mortgage finance. In 2007 the Parliament expects to approve the mortgage law. Going forward IFC expects mortgage finance to be one ofkey areas for growth. There has been limited progress with the privatization ofthe state owned banks. A sale ofa block ofshares ofHalkbank (rather than an outright sale to a strategic investor) is expected in 2007. The Government is expected to accelerate the process after the 2007 elections. IFC expects to support Turkey's first private equity fund and will alsc support, through an equity investment, the acquisition ofFinansbank by the National Bank ofGreece in FY07 Most ofthe banks taken over by the SDIF are not resold but rather merged into another failed bank that still remains under the control of SDIF. Although IFC approached and offered support to the Koc Financial Services (jointly owned by Unicredit ofItaly and Koc Group of Turkey), the sale ofYapi Kredi by the SDIF went through without IFC. Although IFC offered its support to all bidders participating to the NPL auctions, this resource was not tapped by the winners. SDIF has sold most ofthe NPLs held by it. Annex 4 Page 53 of 59
!. Support Infrastructure as the privatization process gains momentum Provide advisory and direct lending in the Financed post privatization support ofKusadasi Port as well as two gas transactions in the infrastructure sector. distribution project with substantial environmental benefits. * Financed the construction ofBTC oil pipeline. Considering the financing of the Baku- Tbilisi-Ceyhan (BTC) Pipeline. Supported an IT company focused on IT solutions for Government agencies, state-owned enterprises, and large and medium-sized private Stimulate foreign investor interest in the sector corporations. privatization of some of the most visible projects in infrastructure. * Supported the network capacity growth and coverage expansion of a telecommunication company to promote greater competition and make cellular communications more affordable and available to larger segments ofthe population. IFC supported the privatization ofa cement plant. However, given limited progress with the privatization of strategic sectors, IFC 1. couldn’t play its role in supporting flagship privatization, attracting foreign interest and stimulating the flow offoreign direct investments in privatization deals.
1. Support Corporate SectorBMEs Continue to pursue new investments of Supported the expansion and modernization programs ofTurkish projects with strong operating intrinsic as companies in manufacturing sectors such as steel, white goods, well as on highly visible interventions with aluminum processing, auto parts, cement, paper packaging products, strong demonstration effects and positive textile, and garment industry. impact on market psychology. Supported second tier companies through debt financing. Address the scarcity ofequity financing Supported SMEs through developing ofleasing industry (eg. TLF and the lack of access to capital markets by Garanti, Turkish Leasing, Intercity, Finans Lease). developing model transactions. Invested equity in 2 second tier companies as well as in a private Support Turkish projects in Central and equity fund. Also, IFC made a substantial equity in vestment of Eastern Europe and Central Asia. US$275 million in a bank. Widened its client base by investing in a number of good second tier companies. During FY04-06, more than 213 ofIFC’s operations in the real sector in Turkey were with second-tier companies. Developed and provided appropriate financing instruments, such as local currency funds, in supporting creditworthy second-tier companies. Offered long-term local currency loans and disbursed its first Turkish lira loan to a second tier client in the education sector (YUCE). Continued to support Turkish companies engaging in south-south investments including in Bosnia and Herzegovina, Bulgaria, Egypt, Georgia and Russia. During FY04-07 has financed about US$200 million with Turkish companies outside Turkey. Annex 4 Page 54 of 59
IFC’s Committed Projects in Turkey, FY04-07 (US%million)
FY Project Approved IFC Project Description Original Commit
Turkey 2004 2 1665 - Turkish Leasing 30 Support the leasing companies emerging from the consequences ofthe 200 1 financial crises 2004 209 1 1 - Oyak Bank I1 50 Lengthen the average maturity ofBank’s liabilities and strengthen its balance sheet enabling it to fund longer term assets, at a time when long term funding is not available locally. 2005 21759-TSKB Sub Loan 50 Expand TSKB’s financial capacity and thereby enhance the availability oflong term credit to Turlush enterprises. Suppc TSKB’s efforts to diversify its funding base to a broader rani commercial fund uroviders. assist TSKB to develop best pral with regard to en;ironmental management policies. 2005 23285- Intercity 20.0 Support a leading fleet management and vehicle leasing 2006 24974- Intercity I1 44.7 company in Turkey, to fund its rapidly expanding business actiGities. 2005 24 109-TEB IV Sub Loan 50.0 Provide capital to the Turkish banking sector; help TEB provide much needed financing to Turkish companies. 2006 24475-Finans Lease AS 25.5 Expand its leasing operations to the Turkish private sector, particularly Small and Medium Enterprises that often face more difficulties in accessing term finance. 2006 24299-Milli Re I11 50.0 Support the growth ofa leading Turkish reinsurance company by increasing its capacity to underwrite more earthquake risk and hence meet the growing domestic demand. 25504 -Turkish PEF I1 Private equity fund which will make equity and equity hi related investments in companies located primarily in Turkey and in neighboring countries of Southeastern Europe and Central Asia 2007 25000 - NBGiFinansbank 275.0 Support through an equity investment the acquisition of Finansbank by the National Bank ofGreece, one ofthe largest ever transactions involving Greek and Turkish interest. GENERAL MANUFACTURING 2005 23 858-Arcelik-Reg . Exp 103.4 Support ofArcelik’s investment program that includes modernization and capacity increases, investments in research and development and product development, and thc construction ofa greenfield washing machine plant in Russia. Help the expansion and modernization program ofan 2005 23 182-Assan IV 30.0 aluminum processing plant as well as refinancing of short- term debt ofthe company-- with medium- and long-term loan and cash injection. 2006 24079-Eren Expansion 40.0 Support the company to produce containerboard at lower costs than imports utilizing locally available wastepaper, competitive wages, economies ofscale, modem technology and strategic location. 2006 24454-TDD-Expansion 29.8 Help TDD meet the increasing demand for panel radiators and combination boilers in Turkish and European markets. The Project will also support the development ofTurkey’s small and medium enterprise (SME) sector by fostering indirect employment, through forward and backward linkages related to outsourced components, transport, installation and after-sales service activities. Annex 4 Page 55 of 59
2006 24940-Standard Profil 22.7 Support a local market leader in the Turkish auto parts indus growing into a leading player in the European market expanc its product range and enhancing its already competitive posit in the European auto parts sector. 24757-Sanko Cement Finance a new cement capacity with a state-of-the-art technology. In embracing leadership in environmental and social policies the Group is acting as a role model for others to implement. The greenfield project will create new jobs in one ofTurkey’s least developed regions. :2007 25946 - K.C. Textiles 10.0 Support the company to set up an operation in Egypt, which is in line with IFC’s South-to-South strategy. The investment will reduce the overall manufacturing cost and improve its access to traditional markets. 2007 25832 - Unitim 30.0 Garment industry. Help the company diversify its business model and revenue streams through new technologies, brands and marketing techniques to the marketplace. The Project will allow Unitim to set up an operation in Egypt. 25740- Sarten Support a family-owned company specialized in the manufacture oftin cans. The Project is expected to improve the competitiveness ofan established supplier to the food sector, and an important Turkish exporter. 26098-Standard Profile I1 Support ofthe Turkish auto parts sector and South-South investment through the Company’s new Bulgarian facilities well as potential future investments in Russia and Iran. 2007 257 1 1 - Banvit I1 35.0 To expand and modernize company’s existing broiler and feed milling operations, and construct a hatchery in Romania. The project is expected to generate about 270 nea direct employments at the Company, ofwhich 45 will be in
EALTH AND EDUCATION 20.0 Increase access to high quality medical care through supporting expansion ofAcibadem Healthcare Group, a leading healthcare provider, in Istanbul and other parts of Turkey. The Project includes the construction ofan 80-bed specialty (oncology and neurosurgery) hospital located in Istanbul and a 200-bed general hospital to be located in Bursa.
122-YUCE 4.5 Support YUCE to expand its campus capacity by 40 percent, participate in a growing vocational training market and penetrate the software educational segment. r2005 220-Bilgi I1 15.0 Support the company to increase its student capacity by 36 percent and consolidate its successful e-learning platform.
10.0 Finance post privatization support ofKusadasi Port to attract additional cruise lines and make Kusadasi their port ofchoice. Furthermore, the project would ensure that the port is operated in an environmentally sound manner. 2005 23 785-PALEN 2.0 Support a gas distribution project with substantial environmental benefits through the substitution ofmore efficient and cleaner-burning natural gas for other fuels such as oil and lignite. 2005 22608-Palgaz 10.0 Implement natural gas distribution projects with substantial environmental benefits through the substitution ofmore efficient and cleaner-burning natural gas for other fuels such as oil and lignite.
2004 20468-Meteksan 8.5 Support company’s business expansion, financial restructuring, and strengthening its corporate governance practices. The Company’s focus is to provide turnkey IT solutions for Government agencies, state-owned enterprises, and large and medium-sized private sector corporations. 2006107 11726-Avea 120.0 Support the Company’s network capacity growth and coverage expansion. Promote greater competition and make cellular communications more affordable and available to larger segments of the population. OIL AND GAS 2006 BTC 76.0 Support construction ofa dedicated crude oil pipeline system, which will extend from the ACG field through ’ Azerbaijan and Georgia to a terminal at Ceyhan on the Mediterranean coast ofTurkey. IFC’s investment in the BTC pipeline consists ofa loan up to US$125 million (US$76 million in Turkey).
IFC has supported one ofits client companies, Modern Karton, to set up a collection system to tap households and small shops and possl:bly extend the system beyond greater Istanbul by introducing a more formal collection system and raising the awareness ofwaste generators. The project helped to grow employment opportunities by increasing the flow ofrecycled waste paper, formalizing the role ofinformal sector participants and integrating them into the recycling supply chain, and creating an environment for growth ofSMEs in the waste paper recycling industry. In addition, the project helped to bring waste collection practices and standards in Turkey in line with European Union norms.
IFC conducted a market study ofTurkey’s electricity sector. The objective was to better understand the potential ofTurkey’s electricity wholesale market and ultimately to support the entry of foreign and domestic privates investors into a currently government dominated sector.
FIAS has supported the Government ofTurkey with a competition policy study on how to attract FDI and strengthen the competitiveness ofprivate sector as the primary engine for sustainable private sector led economic growth. The objective ofthe project was to identify institutional bottlenecks and discussed with the authorities necessary measures to strengthen institutional capacity to further develop and implement a comprehensive competition policy based on international best practices. Annex 4 Page 57 of 59
ANNEX 6: Developments in FY07
The CAS Completion Report is based on a detailed results framework covering the FYO4-06 period, even though the original CAS was extended to include FY07 as well. The FY04-06 coverage ofthe CAS CR was driven by the need to utilize its findings as inputs in the formulation of the new Country Partnership Strategy (CPS), whose preparation began in early FY07. The following sections summarize the key developments that occurred during FY07.
Good overall economic performance continued in FY07. Economic performance continued to be strong despite the political uncertainty caused by twin elections. In 2006, economic growth, while decelerated, continued to be robust at 6 percent. Annual growth reached 5.2 percent in the first half of 2007, compared to 7.5 percent in the corresponding period of 2006. This slow down was mainly due to deceleration of private consumption caused by the monetary policy tightening in the summer of 2006. Inflation remained in single digits at 9.7 percent in end-2006 but exceeded the original 5 percent target by a significant margin. Annual CPI inflation at 8.6 percent as of June, 2007 was higher than the year-end target of4 percent. The primary surplus ofthe public sector reached 6.6 percent of GNP, resulting in a further decline in the net public debt to GNP ratio to about 45 percent in 2006. Nevertheless, the fiscal outlook deteriorated in the second half of FY07 as the cumulative primary surplus of the central government budget reflected almost 50 percent decrease on an annual basis in this period. This fiscal underperformance was in part because of policies and expenditures that were perceived to be associated with the general election. In addition, slowing economic activity and declining domestic sales placed significant pressure on tax revenues.
The high current account deficit continues to be a concern-although its growth slowed in the second half of FY07 after reaching 8.2 percent of GNP in 2006 and there has been a significant improvement in the quality of its financing. The share of non-debt creating inflows (FDI plus net errors and omissions) increased to 64 percent as of August, 2007 from 49 percent in end-2005. In particular, 12-month rolling net FDI inflows reached a record high of $20.2 billion in June 2007, corresponding to almost 5 percent of annualized GNP and covering 61 percent ofthe current account deficit.
The Government’s commitment to continue with its structural reforms agenda led to further improvements in many areas although legal challenges and the upcoming elections have slowed down the process. Key developments are summarized below:
0 In late 2006, the Constitutional Court declared some of the key provisions of the Social Security and Universal Health Insurance (UHI) Reform Law unconstitutional, especially those that relate to civil servants. Following the Court’s ruling, the Government decided to postpone the effectiveness of the Law to allow time for addressing the Court’s concerns through amendments to the legislation. The Government also confirmed its commitment to the implementation of the reform through the publication of a White Paper in May 2007. The White Paper provides options to address the Court’s decision while preserving the fiscal improvements of the system. The administrative aspect ofthe reform, i.e. the unification of the three social security institutions, is under implementation. Databases have been merged, software has been adopted, and all staff has been placed under common management. The Annex 4 Page 58 of 59 Government reiterated its commitment to implementing the Social Security Reform in its Urgent Action Plan published in October 2007, and the revised reform law was submitted to the Parliament in November 2007. Full execution ofthis law is expected to start in July 2008.
Reform of the tax system continued through the adoption of new laws on the corporate income tax and the personal income tax with the overarching objectives ofbroadening the tax base, simplifying the tax structure and strengthening enforcement. The Government’s recent announcement of VAT tax cuts in the tourism and food sectors raises some concerns although the authorities have confirmed publicly their intention to meet the 2007 fiscal target. Reform of the tax administration was deepened by the completion of the functional restructuring of the Revenue Administration and finalization of the establishment of a Large Taxpayers Unit within the Revenue Administration.
Implementation of the enterprise privatization program continued, resulting in US$8.1 billion in revenues in 2006. Combined privatization revenues in 2005-06 (exceeding US$17 billion) were almost twice as high as those collected in the previous 18 years. Over the course of FY07, the Government became more selective in pursuing the privatization program, proceeding with transactions that enjoyed broad political economy support, while postponing others until after the elections.
There was also progress in the privatization of state banks. Halk Bank completed an Initial Public Offering for 25 percent of its shares in May 2007 which was heavily oversubscribed.
The Banking Regulatory and Supervisory Agency (BRSA) adopted and started the application of 24 of the regulations required for the effective implementation of the Banking Law.
A landmark Mortgage Law was approved by Parliament in early 2007. The law established a legal framework for an efficient and financially stable mortgage lending system, including the emergence of mortgage finance institutions, securitization of housing loans, and the introduction ofvariable mortgage rates.
Twin elections were held. The outcome of the general elections in July was in line with the expectations. The ruling party AKP took 341 out of 550 seats in Parliament. The AKP formed the new government and the new Cabinet won a vote of confidence in Parliament. The new government is expected ensure the continuation of most of its policies, particularly Turkey’s EU membership bid and economic reform. In August, Mr. Abdullah Gul, former Minister ofForeign Affairs, was elected as Turkey’s 1 1th President.
The political developments had a relatively limited impact on the delivery of the Bank Group’s FY07 program. Three of the five planned new operations under the high case scenario (Electricity Distribution and Rehabilitation Project, Competitiveness and Employment Development Policy Loan, and the Istanbul Municipal Infrastructure Project) moved forward. Following delays in the implementation of the social security reform as noted above, the second phase of the program supported by the Public Sector Development Policy Loan series has been moved to FY08. The planned Social Development Project (SEDP), a follow-up operation to the successful Social Risk Mitigation Project, did not materialize in FY07, as domestic resources were available for the continuation of the Annex 4 Page 59 of59 conditional cash transfer program--the key component of the proposed SDEP. In sum, including a €50 million increase in the loan amount for the already approved SME Development Project, total new commitments in FY07 amounted to about US$l.16 billion. Several key AAA products were delivered, including a Public Expenditure Review, an Investment Climate Assessment, a Higher Education Policy study and other pieces of economic and sector work, including on industrial pollution and irrigation. Performance of the Bank’s portfolio remained sound, with most ofthe performance indicators in line with, or better than those in the region and the Bank as a whole. During FY07 only, IFC has committed US$55l million for its own account and has mobilized US$413 million through syndicated banks, the highest IFC financing ever in Turkey. In addition, in FY07, IFC has financed about US$50 million with Turkish companies outside Turkey.
Page 1of 3
Turkey at a glance 9/28/07
Europe 8 Upper Key Development Indicators Central middle Age distribution, Turkey Asia income 2006 (2006) Male Female
Population, mid-year (millions) 72.9 460 810 70-74 Surface area (thousand sq. kin) 784 24,114 41,460 60-64 Population growth (%) 1.2 0.0 0.7 50-54 Urban population (% of total population) 68 64 75 40-44 GNI (Atlas method, US$ billions) 393.9 2,206 4,790 30-34 GNI per capita (Atlas method, US$) 5,400 4,796 5,913 20-24 GNI per capita (PPP, international $) 9,060 9,662 10,817 10-14 c-4 GDP growth (%) 6.1 6.8 5.6 15 10 5 0 5 10 15 GDP per capita growth (%) 4.8 6.8 4.9 I percent (most recent estimate, 2000-2006)
Poverty headcount ratio at $1 a day (PPP, %) 3 1 Under-5 mortality rate (per Poverty headcount ratio at $2 a day (PPP, %) 19 10 1,000) Life expectancy at birth (years) 71 69 70 Infant mortality (per 1,000 live births) 26 28 26 Child malnutrition (% of children under 5) 4 5
Adult literacy, male (% of ages 15 and older) 95 99 94 Adult literacy, female (% of ages 15 and older) 60 96 92 Gross primary enrollment, male (% of age group) 96 103 106 Gross primary enrollment, female (% of age group) 91 100 104
Access to an improved water source (% of population) 96 92 93 2000 Access to improved sanitation facilities (% of population) 88 85 81 1900 1995 2005
DTurkey OEurope 8 Central Asia
Net Aid Flows 1980 1990 2000 2006 a
(US$ millions) Net ODA and official aid 953 1,202 327 464 Growth of GDP and GDP per capita (%) Top 3 donors (in 2005): France 33 65 8 115 Austria 27 8 11 22 l5T SDain 0 4 12 10 5 Ald (Yo of GNI) 1.3 0.8 0.2 0.1 0 Aid per capita (US$) 21 21 5 6 5
Long-Term Economic Trends -10 90 95 00 05 Consumer prices (annual % change) 60.3 54.9 9.6 GDP implicit deflator (annual % change) 88.1 56.3 49.9 11.5 +GDP -GDP per capita Exchange rate (annual average, local per US$) 73.8 2,608.9 623,700 1,431,110 Terms of trade index (2000 = 100) 63 93 100 92 1980-90 1990-2000 2000-06 (average annual growth %) Population, mid-year (millions) 44.5 56.2 67.4 72.9 2.3 1.8 1.3 GDP (US$ millions) 70,903 150,661 199,749 402,710 5.3 3.8 5.6 (% of GDP) Agriculture 26.5 18.1 14.7 9.7 1.2 1.3 1.6 Industry 19.6 26.4 24.3 26.8 7.2 4.6 6.4 Manufacturing 17.3 22.7 20.0 22.2 7.3 4.7 6.7 Services 53.9 55.5 61 .O 63.5 5.4 3.9 5.2 Household final consumption expenditure 77.0 68.7 68.9 70.7 3.4 4.9 General gov't final consumption expenditure 11.6 11.0 14.1 13.1 4.9 1.o Gross capital formation 18.2 24.5 24.5 23.9 5.0 11.8
Exports of goods and services 5.2 13.4 24.0 28.2 11.6 11.3 Imports of goods and services 11.9 17.6 31.5 35.9 11.o 12.9 Gross savings 16.1 24.3 20.2 16.5
Note: Figures in italics are for years other than those specified. 2006 data are preliminary, .. indicates data are not available, a. Aid data are for 2005.
Development Economics, Development Data Group (DECDG). Page 2 of 3
Turkey
Balance of Payments and Trade 2000 2006 Governance Indicators, 2000 and 2006 (US$ millions) Total merchandise exports (fob) 30,721 91,937 Total merchandise imports (cif) 54,398 138,973 Voice and accountability Net trade in goods and services -10,585 -27,877 Political stability Workers' remittances and compensation of employees (receipts) 4,560 a51 Regulatory quality
Current account balance -9,823 -32,774 Rule of law as a %of GDP -4.9 -8.1 Control of corruption Reserves, including gold 26,106 60,705 0 25 50 75 1w 2006 Central Government Finance Country's percentile rank (0.100) 0 2000 higher values imp/y better ratings (% of GDP) Current revenue (including grants) 27.3 27.9 1 Source. Kaufmann-Kraay-Mastruui, World Bank Tax revenue 24.4 24.3 Current expenditure 42.7 37.7 Technology and Infrastructure 2000 2005 Overaii surplusldeficit -1 1.7 0.0 Paved roads (% of total) 35.3 Highest marginal tax rate (YO) Fixed line and mobile phone Individual 35 subscribers (per 1,000 people) 512 868 Corporate 30 30 High technology exports (% of manufactured exports) 4.8 1.5 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed ii7,ioa 171,059 Agricultural land (% of land area) 53 54 Total debt service 20,731 41,920 Forest area (% of land area) 13.1 13.2 Debt relief (HIPC, MDRI) Nationally protected areas (% of land area) 2.6
Total debt (% of GDP) 58.6 47.1 Freshwater resources per capita (cu. meters) 3,150 Total debt service (YOof exports) 39.1 39.1 Freshwater withdrawal (% of internal resources) 16.5
Foreign direct investment (net inflows) 902 9,805 CO2 emissions per capita (mt) 3.3 3.1 Portfolio equity (net inflows) 409 5,669 GDP per unit of energy use (2000 PPP $ per kg of oil equivalent) 5.7 6.1 Composition of total external debt, 2005 Energy use per capita (kg of oil equivalent) 1,142 IDA. 71 186 1,151 IBRD, 5828487- 1 IMF' 14E46208
Short-term Other multi- 38218
4824 638
v105732.375Pnvate, US$ millions
Private Sector Development 2000 2006
Time required to start a business (days) - 6 Cost to start a business (% of GNI per capita) - 26.5 Time required to register property (days) - 6
Ranked as a major constraint to business (% of managers surveyed who agreed) Tax rates .. 37.6
Economic and regulatory policy uncertainty I. 31.1
Stock market capitalization (% of GDP) 34.9 40.3 Bank capital to asset ratio (%) 6.1 13.5
Note: Figures in italics are for years other than those specified. 2006 data are preiiminary. .. indicates data are not available. -indicates observation is not applicable.
Development Economics, Development Data Group (DECDG). Page 3 of 3
M i II en n i u m Develop ment Goa Is Turkey
With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years)
Education indicators (%) Measles immunization (% of I-year olds) ICT indicators (per 1,000 people)
100
750 75 i 50 - i 5w 25 i 250 0- 0- 2000 2002 2005 0 1990 1995 2000 2W5 2000 2002 2005 +Primary net enrollment ratio OFixed +mobile subscribers +Ratio of girls to in primary & boys OTurkey 0 Europe 8 Central Asia Internet users secondary education 0
Note: Figures in italics are for years other than those specified. .. indicates data are not available. 9/28/07
Development Economics, Development Data Group (DECDG). CAS Annex B2 - Selected Indicators* of Bank Portfolio Performance and Management As Of Date 0110812008
Indicator 2005 2006 2007 2008 Portfolio Assessment Number of Projects Under Implementation a 21 24 24 20 Average Implementation Period (years) 2.7 2.7 3.2 3.2 Percent of Problem Projects by Number a,c 4.8 4.2 8.3 15.0 Percent of Problem Projects by Amount a, 5.0 1 .o 7.6 12.7 Percent of Projects at Risk by Number a,d 4.8 4.2 8.3 20.0 Percent of Projects at Risk by Amount 5.0 1.o 7.6 13.4 Disbursement Ratio (YO)e 24.8 11.8 19.7 9.1 Portfolio Management CPPR during the year (yeslno) Yes Yes Yes Yes Supervision Resources (total US$) 2093 2453 2624 2125 Average Supervision (US$/project) 100 102 109 106
Memorandum Item Since FY 80 Last Five FYs Proj Eva1 by IEG by Number 112 10 Proj Eva1 by IEG by Amt (US$ millions) 13,506.9 2,370.7 YO of IEG Projects Rated U, MU or HU by Numbc 28.2 20.0 YO of IEG Projects Rated U, MU or HU by Amt 27.9 16.8 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U, MU or HU on development objectives (DO) andlor implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. Annex 83
IBRDllDA Program Summary As Of Date 0110812008
Proposed IBRD Lending Program a
Strategic Rewards b Implementation b Fiscal year Proj ID US$(M) (H/M/L) Risks (H/M/L)
1) Programmatic Public Sector H H Development (PPDPL2) 2) Competitiveness and Employment (CEDPLP) b 500 - 800 H H 3) Energy H H
1) Programmatic Public Dev. Series H H 2) Competitiveness and Employment (CEDPL) b 600 - 900 H H 3) Energy H H
Private Sector Renewable Energy Eff. M M Energy Investment Loan b 700-900 M M Energy Supply Security Sector Investment M M
Health (UHI Implementation) M M Health Reform and Social Security b 200-300 H H
FY 1011 1 DPL in areas such as public sector reform competitiveness and employment b 1000-1400 human capital dev. & social protection and environmental protection
SME Productivity & Competitiveness (credit line) Environment & Natural Resources Energy Efficiency/Supply Security Railways APL II Municipal Infrastructure: Metropolitan Cities Irrigation SWAP Education Social Inclusion & Employment Program Result 2,600.0
Overall Result 6,200.0
a/ This table presents the proposed program for the next four fiscal years. a. This table presents the proposed program for the next three fiscal years. b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L).
Template created on 01/31/2008. Annex 83
Turkey: IFC Investment Operations Program 2005 2006 2007 2008* **Commitments [US$m) Gross 290 463 551 292 Net 290 462 538 298
Net Commitment by Investment Instrument (%) Equity 2 Yo 1Yo 56% 0Yo Loan*** 98% 99% 44% 100% Total Commitment 100% 100% 100% 100%
Net Commitment by Industry (%)
Agriculture 0 Yo 0Yo 6 Yo 0 Yo Funds 0 Yo 0 Yo 6% 0 Yo Financial Markets 41 yo 26% 50% 52% General Manufacturing 46% 36% 16% 17% Health & Education 8 Yo 12% 0Yo 0Yo Infrastructure 4% 0 Yo 0 Yo 15% IT and Telecom 0% 26% 22% 0% Oil, Gas, Mining & Chemicals 0% 0% 0 Yo 15% Total 100% 100% 100% 100%
Note: *2008 is as of December 2007 **Commitment from IFC’s own account *** Loan includes quasi equity and quasi loan
MlGA Guarantees MlGA Outstanding Exposure (Gross Exposure, $ milllion)
As of end of fiscal year FY2005 FY2006 FY2007 FY2008 as of 12/31/2007
Sectoral Distribution Finance 0 0 0 0 Infrastructure 135 135 135 135 Mining 0 0 0 0 Oil & Gas 0 0 0 0 Agri business/Manufacturing/Services/Tourism 0 0 0 0 Total 135 135 135 135 MIGAs Risk Profile Transfer Restriction 135 135 135 135 Expropriation 135 135 135 135 War & Civil Disturbance 135 135 135 135 Breach of Contract 135 135 135 135
MIGAs Gross Exposure in Country 135 135 135 135 YO Share of MIGAs Gross Exposure 2.60% 2.50% 2.50% 2.30% MlGA Net Exposure in Country 67.5 67.5 67.5 67.5 YO Share of MIGAs Net Exposure 2.20% 2.00% 2.1 0% 2.00% Annex 64 Turkey Summary of Nonlending Services
Product ComDletion FY cost (US$OOOl Audience a/ Obiective b/ Recent Completions CAS PR FY06 150 GDPB KG CEM EU Accession I FY06 740 GDPB KG,PD,PS Regional Poverty Update (TA) FY06 100 GDPB KG,PD,PS Rural Finance Study FY06 190 GPB KG, PS PSD Policy Dialogue and Capacity Building (TA) FY06 100 GDPB KG, PD,PS Infrastructure - Invst. & Fin. FY06 50 GB KG,PS Public Administration Reform FY06 130 GPB PD,PS Pension and Health (TA) FY06 100 GB KG,PD,PS
Public Expenditure Review FY07 460 GDPB KG,PD,PS Investment Climate Assessment (ICA) FY07 680 GB KG,PS Financial Sector Assessment TA FY07 370 GB KG,PS Environmentlindustriai Pollution FY07 190 GDPB KG,PD,PS Environmental Aspects in Privitization of Electricity FY07 30 GB KG,PS irrigation Sector Review FY07 380 GB KG,PS Higher Education Review FY07 450 GPB KG, PD, PS Energy Policy (TA) FY07 80 GPB KG, PD, PS Report on Observances of Standards & Codes (ROSC) Follow-up TA FY07 20 GB PS Policy Dialogue with new Government FY08 50 GB PS Country Economic Memorandum (CEM) Ii FY08 450 GDPB KG,PD,PS
Underway/Ongoing CEM iI FY08 525 GDBP KG,PD,PS CEM on selected growth issues (eg., informality) FY08 308 GDBP KG,PD,PS investment Climate Assessment (iCA) follow-up FYOB 62 GDBP KG,PD, PS Youth Policy FY08 103 GDBP KG,PD,PS Health Sector Integrated Fidicuary Assessment FY08 105 GB KG,PS Youth Employment (JOBS) FY08 187 GDBP KG, PD, PS Programatic Social Insurance (TA) FY08 82 GB KG, PD,PS PPP Advisory Work + TA FYO8 130 GB KG,PS ESMAP supporting electricity market FY 08 Trust Fund GDBP KG, PS Istanbul Municipal Development FY 08 350 GDBP KG, PS Programmatic Energy Sector Work (incl. expert panel) FY08 256 GB KG,PD,PS Financial Sector Assessment Follow up (TA) FYOB 51 GB KG,PS Policy Notes FY 08 46 GB KG,PS
Planned Technology adoption, research development, and innovation FY 08/09 tbd Country Economic Work selected issues FY 09/10/11 tbd Programmatic Welfare 8 Social Policy FY08109110 tbd Female Labor Force Participation FY 06/09 tbd Health Sector Assessment (joint with OECD) FY06/09 tbd Education Quality FYOB tbd PPP implementation of legislation FY 06/09 tbd Municipal Financing & Regional Development-Selected issues FY 08/09 tbd Natural disaster risk assessment FY 09 or FYI0 tbd World Water Forum FY 09 tbd Public Expenditure FYO9 tbd Programmatic Energy Sector Work (ctd.) FY 09 tbd Judicial Reform AAA FY 09 tbd a/ Government, Donor, Bank, Public dissemination. bl Knowledge generation, public debate, problem-solving. Annex B5
Turkey Social Indicators
Latest single year Same regionlincome group Europe & Upper- Central middle- 1980-85 1990-95 1999-2005 Asia income POPULATION Total population, mid-year (millions) 50.3 61.7 72.1 471.8 599.8 Growth rate (Oh annual average for period) 2.5 1.9 1.4 -0.1 0.6 Urban population (% of population) 52.4 62.1 67.3 63.7 72.0 Total fertility rate (births per woman) 3.8 2.8 2.2 1.6 1.9 POVERTY (% ofpopulation) National headcount index 28.3 27.0 Urban headcount index 22.0 Rural headcount index 34.5
INCOME GNI per capita (US$) 1,320 2,750 4,750 4,143 5,634 Consumer price index (2000=100) 0 6 329 127 116 Food price index (2000=100) 0 6 336
INCOMElCONSlJMPTlON DISTRIBUTION Gini index 41.5 43.6 Lowest quintile (YOof income or consumption) 5.8 5.3 Highest quintile (% of income or consumption) 47.7 49.7 SOCIAL INDICATORS Public expenditure Health (% of GDP) 5.2 4.5 3.8 Education (Oh of GDP) 2.4 4.0 4.4 4.6 Net primary school enrollment rate (% of age group) Total 89 89 91 94 Male 93 92 92 94 Female 85 87 90 94 Access to an Improved water source (% of population) Total 85 96 92 94 Urban 92 98 99 98 Rural 74 93 80 82 Immunization rate (% of children ages 12-23 months) Measles 61 65 91 96 93 DPT 55 67 90 95 94
Child malnutrition (O/O under 5 years) 10 4 5 Llfe expectancy at birth (years) Total 63 68 71 69 70 Male 61 66 69 65 66 Female 66 70 74 74 74 Mortality Infant (per 1,000 live births) 83 52 26 27 22 Under 5 (per 1,000) 105 63 29 32 27 Adult (15-59) Male (per 1,000 population) 186 320 289 Female (per 1,000 population) 115 136 159 Maternal (modeled, per 100,000 live births) 70 58 91 Births attended by skilled health staff (%) 76 83 94 92
Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey. World Development Indicators database, World Bank - 27 April 2007. Annex B6
Turkey - Key Economic Indicators
Actual Estimate Projected Indicator 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 National accounts (as % of GDP) Gross domestic producta 100 100 100 100 100 100 100 100 100 100 100 Agriculture 12 12 12 11 10 9 9 9 9 8 8 Industry 26 26 26 27 27 27 27 27 27 27 27 Services 62 62 62 63 63 64 64 64 65 65 65
Total Consumption 80 80 19 81 80 79 78 77 76 75 74 Gross domestic fixed investment 17 15 18 20 21 21 22 22 22 22 22 Government investment 5 4 4 4 4 4 4 4 4 5 5 Private investment 11 11 14 15 17 17 17 17 17 17 17
EX~O~~S(GNFS)~ 29 21 29 27 28 28 29 29 29 30 31 Imports (GNFS) 31 31 35 34 36 34 34 33 33 33 33
Gross domestic savings 20 20 21 19 20 21 22 23 24 25 26 Gross national savingsC 20 19 21 20 21 21 22 23 24 25 26
Memorandum items Gross domestic product 184,332 240,955 302,678 363,370 400,046 490,646 564,380 606,547 651,123 698,730 749,818 (US$ million at current prices) GNI per capita (US$,Atlas method) 2,520 2,820 3,790 4,750 5,350 5,860 6,280 6,630 6,900 7,260 7,620
Real annual growth rates (?A,calculated from 87 prices) Gross domestic product at market prices 7.9 5.8 8.9 7.4 6.1 5.0 5.5 5.5 5.0 5.0 5.0 Gross Domestic Income 4.7 6.2 10.2 7.1 4.3 6.7 5.8 5.1 5.0 5.0 5.2
Real annual per capita growth rates (%, calculated from 87 prices) Gross domestic product at market prices 6.5 4.4 7.5 6.0 4.8 3.7 4.7 3.8 3.8 3.9 3.9 Total consumption 1.1 4.2 7.6 6.8 4.3 2.2 3.2 3.0 2.6 2.6 2.7 Private consumption 0.7 5.2 8.6 7.4 3.9 2.1 3.1 3.0 2.7 2.7 2.8
Balance of Payments (US%) EXPOITS (GNFS)~ 54,155 69,158 89,988 103,589 116,427 130,625 144,253 158,203 173,800 191,552 211,110 Merchandise FOB 40, I24 5 1,206 67,047 76,949 91,937 104,235 1 15,474 127,499 141,059 156,579 173,751 Imports (GNFS)~ 53,553 72,657 101,069 12 1,847 144,304 156,810 171,556 184,547 198,607 214,825 232,819 Merchandise FOB 47,407 65,216 90,925 1 10,479 133,175 145,605 159,642 172,164 185,572 201,067 218,28 1 Resource balance 602 -3,499 -11,081 -18,258 -27,877 -26,185 -27,304 -26,343 -24,807 -23,272 -21,709 Net current transfers 2,433 1,020 1,117 1,454 1,687 1,820 2,050 1,917 1,915 1,917 1,917 Current account balance -1,521 -8,036 -1 5,60 1 -22,603 -32,774 -36,000 -43,800 -4 1,600 -41,885 -42,186 -42,803 Net private foreibm direct investment 962 1,253 2,024 8,725 19,136 16,000 16,500 13,319 13,380 14,627 16,131 Long-term loans (net) 6,622 -1,277 8,570 17,590 33,870 24,101 23,392 18,507 18,338 18,868 17,270 Official 226 -1,210 510 -980 710 584 285 -349 -733 -969 -1,107 Private 6,397 -67 8,060 18,570 33,159 23,517 23,108 18,856 19,071 19,837 18,377 Other capital (net, incl. mors & ommissiom) 90 12,107 5,831 14,135 -163 12 1,197 11,757 15,254 15,324 16,789 19,622 Change in reservesd -6,153 -4,047 -824 -17,847 -3,720 -5,298 -7,849 -5,481 -5,157 -8,099 -10,220
Memorandum items 0 0 0 0 0 0 0 Resource balance (% of GDP) 0.3 -1.5 -3.7 -5.0 -6.9 -5.9 -5.9 -5.3 -4.7 -4.2 -3.7 Real annual growth rates ( YR87 prices) Merchandise exports (FOB) 18.9 13.3 12.6 8.6 15.0 9.3 10.1 10.2 9.9 9.7 9.5 Merchandise imports (CIQ 26.2 22.4 19.0 11.2 10.0 6.2 8.2 7.9 7.6 7.7 7.6 Annex 86
Turkey - Key Economic Indicators (Continued)
Actual Estimate Projected Indicator 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Public finance (as YOof GDP at market prices)' Current revenues 28.9 28.2 25.8 28.5 29.9 29.2 Current expenditures 39.6 36.3 32.4 29.5 27.2 28.2 Current account surplus (+) or deficit (-) -10.7 -8.1 -6.6 -1.1 2.7 1 .O Capital expenditure 3.5 2.9 2.8 3.2 3.5 3.0 Foreign financing 4.3 -1.3 2.4 -0.3 -1.5 -0.9
Monetary Indicators M2iGDP 49.7 43.9 44.8 54.8 57.0 58.2 Growth of M2 (%) 29.0 14.6 22. I 38.5 23.0 14.8 Private sector credit growth / 10.3 56.1 71.5 73.7 115.8 59.8 total credit growth (%)
Price Indices( YR87 =loo) Merchandise export price index 89.1 100.5 116.8 123.4 128.3 133.0 133.8 134.1 135.0 136.6 138.4 Merchandise import price index 86.4 97.4 112.1 120.0 130.6 134.9 136.7 136.6 136.9 137.8 139.1 Merchandise terms of trade index 103.2 103.1 104.2 102.8 98.2 98.6 97.9 98.1 98.6 99. I 99.5 Real exchange rate (US$ILcU)' 137.7 151.7 162.1 179.6 179.8 177.9 169.7 168.3 165.8 163.3 160.8
Real interest rates Consumer price index (% change) 45.0 25.3 8.6 8.2 9.6 8.4 5.2 4.0 4.0 4.0 4.0 GDP deflator (% change) 44.1 22.5 9.9 5.4 11.5 7.0 5.5 4.5 4.0 4.0 4.0
a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCUdenotes appreciation. Annex 87
Turkey - Key Exposure Indicators
Actual Estimate Projected Indicator CY 2003 2004 2005 2006 2007 2008 2009 2010
Total debt'outstanding and 144,399 160,974 169,239 207,764 245,146 297,010 331,590 360,335 disbursed (TDO) (US$m)a
Net disbursements (US$m)a -545 7,448 17,185 32,055 17,662 23,071 17,814 18,757
Total debt service (TDS) 27,492 30,593 36,397 37,774 46,748 40,945 48,345 54,094 (US$m)'
Debt and debt service indicators ("/) TDO~XGS~ 200.2 172.3 156.5 169.8 168.7 159.3 155.2 150.3 TDOiGDP 59.9 53.2 46.6 51.4 51.7 52.3 52.0 52.1 TDSiXGS 38.1 32.7 33.7 31.0 34.1 27.0 29.1 29.7
IBRD exposure indicators (%) c IBRD DSipublic DS 4.9 4.4 4.7 3 .O 2.4 2.5 2.3 2.3 Preferred creditor DSipublic d 22.3 37.2 47.0 51.6 40.9 26.6 28.8 20.2 IBRD DSiXGS 1.o 0.8 0.9 0.9 0.8 0.6 0.6 0.6 IBRD TDO (US$m)e 5,214 6,153 5,830 6,854 7,392 9,280 10,159 11,240 Share of IBRD portfolio (%) 4.5 5.5 5.6 6.9 7.4 9.3 10.2 11.0 IDA TDO (US$m)e 82 77 70 65 73 82 89 93
a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Exposure projections assume Bank financing equivalent to new commitments up to US$ 6.2 billion during FY08-11, with an expected share of around half in development policy lending (DPLs). d. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. e. Figures in Table are on calender-year basis. IBRD TDO at end FY07 (beginning of CPS period) was US$ 6,874 million. IBRD TDO at end FY11 (end of CPS period) is projected to be US$ 11,388 million. Annex 88 (IFC) Turkey Committed and Outstanding Portfolio As of 12/30/2007 (In USD Millions)
20051 2006 Acibadem 60 00 0 00 0 00 60 00 0 00 60 00 0 00 0 00 60 00 0 00 2008 Arkas Group 45.00 0.00 0.00 45.00 0.00 45.00 0.00 0.00 45.00 0.00 19951 19971 19981 Assan 30.00 0.00 10.00 40.00 30.00 30.00 0.00 10.00 40.00 30.00 20021 20051 2006 2008 Atateks 25.00 0.00 0.00 25.00 0.00 25.00 0.00 0.00 25.00 0.00 2002 Atilim 1.69 0.00 0.00 1.69 0.00 1.69 0.00 0.00 1.69 0.00 20061 2007 Avea 120.00 0.00 0.00 120.00 300.00 115.96 0.00 0.00 115.96 289 90 20011 2007 Banvit 35.00 0.00 0.00 35.00 0.00 25.00 0.00 0.00 25.00 0.00 20011 2006 Bilgl 3.00 0.00 0.00 3.00 0.00 3.00 0.00 0.00 3.00 0.00 19951 19961 1998 Borcelik 3.64 0.00 0.00 3.64 0.00 3.64 0.00 0.00 3.64 0.00 19901 19941 2002 Conrad 1.05 0.00 0.00 1.05 0.00 1.05 0.00 0.00 1.05 0.00 2008 Delta Petroleum 45.00 0.00 0.00 45.00 0.00 22.50 0.00 0.00 22.50 0.00 2002 EKS 4.61 0.00 0.00 4.61 0.00 4.61 0.00 0.00 4.61 0.00 19971 19981 2006 Finans Leasing 29.02 0.00 0.00 29.02 0.00 29.02 0.00 0.00 29.02 0.00 2007 Finansbank A S 0.00 275.00 0.00 275.00 0.00 0.00 259.19 0.00 259.19 0.00 2002 Gunkol 5.08 0.00 0.00 5.08 0.00 5.08 0.00 0.00 5.08 0.00 1999 lndorama lplik 3.13 0.00 0.00 3.13 0.00 3.13 0.00 0.00 3.13 0.00 20051 20061 2007 Intercity 50.79 5.00 0.00 55.79 14.51 50.79 5.00 0.00 55.79 14.51 2007 Kucukcalik 10.37 0.00 0.00 10.37 0.00 10.37 0.00 0.00 10.37 0.00 19911 19981 2006 Kula 5.50 0.00 0.00 5.50 0.00 5.50 0.00 0.00 5.50 0.00 19931 1996 Medya 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Meteksan Sistem 0.00 0.00 2.10 2.10 0.00 0.00 0.00 2.10 2.10 0.00 20021 2006 Milli Re 100.00 0.00 0.00 100.00 0.00 0.00 0.00 0.00 0.00 0.00 1998120021 2006 Modern Karion 40.00 0.00 0.00 40.00 20.00 40.00 0.00 0.00 40.00 20.00 1992 NASCO 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 199812004 Oyak Bank 22.22 0.00 0.00 22.22 0.00 22.22 0.00 0.00 22.22 0.00 2005 PALEN 0.30 0.00 0.00 0.30 0.00 0.30 0.00 0.00 0.30 0.00 2005 PALGAZ 9.34 0.00 0.00 9.34 0.00 4.34 0.00 0.00 4.34 0.00 19941 2000 Pinar SUT 1.88 0.00 0.00 1.88 0.00 1.88 0.00 0.00 1.88 0.00 199912000 SAKoSa 0.00 0.00 7.42 7.42 0.00 0.00 0.00 7.42 7.42 0.00 20061 2007 Sanko Group 75.00 0.00 0.00 75.00 100.00 51.43 0.00 0.00 51.43 68.57 2007 Sarten 20.00 0.00 0.00 20.00 0.00 20.00 0.00 0.00 20.00 0.00 2008 Seker Bank 52.24 0.00 0.00 52.24 0.00 52.24 0.00 0.00 52.24 0.00 19931 19971 2002/ 2003 Sise ve Cam 24.67 0.00 9.09 33.76 6.62 24.67 0.00 9.09 33.76 6.62
1998120021 2008 Soktas 25.05 0.00 0.00 25.05 0.00 15.08 0.00 0.00 15.08 0.00 20061 2007 Standard Profil 53.33 3.82 0.00 57.15 0.00 21.77 3.82 0.00 25.59 0.00 199612006 TDD 36.28 0.00 0.00 36.28 0.00 36.28 0.00 0.00 36.28 0.00 19641 19671 19691 TSKB 0.00 0.00 50.00 50.00 0.00 0.00 0.00 50.00 50 00 0.00 19721 19751 19771 19801 19831 19901 199312005 19791 19831 19841 Trakya Cam 0.00 0.00 -0.00 -0.00 0.00 0.00 0.00 0.00 0.00 0.00 19891 19901 19911 19931 19961 19991 2005
19951 19991 20031 Turk Ekon Bank 0.00 0.00 165.00 165.00 0.00 0.00 0 00 165.00 165.00 0.00 20051 2008 2002 Turkish PEF 0.00 8.45 0.00 8.45 0.00 0.00 6.27 0.00 6.27 0.00 2007 Turkish PEF II 0.00 36.18 0.00 36.18 0.00 0.00 3.47 0.00 3.47 0.00 2007 Unitim 18.00 0.00 12.00 30.00 0.00 * 17.00 0.00 12.00 29.00 0.00 199912000 Uzel 4.58 0.00 0.00 4.58 2.20 4.58 0.00 0.00 4.58 2.20 19701 19711 1982' Viking 2.32 0.00 0.00 2.32 0.00 2.32 0.00 0.00 2.32 0.00 19831 19901 19931 1998
2005 YUCE 4.66 0.00 0.00 4.66 0.00 4.66 0.00 0.00 4.66 0.00 1997/ 1998 YaDi Kredi Lease 18.75 0.00 0.00 18.75 0.00 18.75 0.00 0.00 18.75 0.00 0 5
3 L a a E 6 w a * 2
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TURKEY
PROVINCE CAPITALS* NATIONAL CAPITAL
RIVERS TURKEY MAIN ROADS RAILROADS PROVINCE BOUNDARIES* This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information INTERNATIONAL BOUNDARIES shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. *Province names are the same as their capitals.
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