Document of The World Bank Report No. ICR2344 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT IMPLEMENTATION COMPLETION AND RESULTS REPORT IBRD-73940, TF-54755; IBRD-75530; IBRD-78580; IBRD-80670 ON A SERIES OF FOUR LOANS IN THE AMOUNT OF USD 2,900 MILLION TO THE REPUBLIC OF TURKEY FOR FIRST AND SECOND PROGRAMMATIC PUBLIC SECTOR DEVELOPMENT POLICY LOANS (PPDPL AND PPDPL 2) AND FIRST AND SECOND RESTORING EQUITABLE GROWTH AND EMPLOYMENT DEVELOPMENT POLICY LOANS (REGE-DPL AND REGE-DPL 2) June 26, 2012 Poverty Reduction and Economic Management Turkey Unit Europe and Central Asia (ECA) TURKEY - GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of June 1, 2012) Currency Unit US$ 1.00 = TL 1.8679 EUR 1.00 = TL 2.3037 ABBREVIATIONS AND ACRONYMS AAA Analytic and Advisory Activities MoH Ministry of Health AK Justice and Development Party MTEF Medium Term Expenditure Framework CAD Current Account Deficit MTP Medium Term Program CBRT Central Bank of the Republic of Turkey NUTS Nomenclature of Units for Territorial Statistics Organization for Economic Cooperation and CC Commercial Code OECD Development DPL Development Policy Loan PDO Program Development Objectives Competitiveness and Employment CEDPL Development Policy Loan PFM Public Financial Management CPS Country Partnership Strategy PFMC Public Financial Management and Control DA Development Agency PL Policy Loan Programmatic Public Sector Development DPL Development Policy Loan PPDPL Policy Loan REGE- Restoring Equitable Growth and Employment ESW Economic and Sector Work DPL Programmatic Development Policy Loan EU European Union SBA Stand-By Arrangement (of the IMF) EUR Euro SME Small and Medium Enterprises GDP Gross Domestic Product SPA Special Provincial Administration State Planning Organization (now Ministry of ICR Implementation Completion Report SPO Development) IFRS International Financial Reporting Standards SSI Social Security Institution IMF International Monetary Fund TA Technical Assistance ISKUR Turkish Employment Agency TCA Turkish Court of Accounts IT Information Technology TL Turkish Lira KAYS Development Agencies Management System UHI Universal Health Insurance KGF Credit Guarantee Fund USD United States Dollar M&E Monitoring and Evaluation UYAP National Judiciary Network Project Vice President: Philippe H. Le Houérou Country Director: Martin Raiser Sector Director: Yvonne Tsikata Sector Manager: Satu Kahkonen Task Team Leader: Marina Wes ICR Team Leader: Marina Wes ICR Main Author: Dusan Vujovic and Simon Davies ii TURKEY FIRST AND SECOND PROGRAMMATIC PUBLIC SECTOR DEVELOPMENT POLICY LOANS (PPDPL AND PPDL 2) AND FIRST AND SECOND RESTORING EQUITABLE GROWTH AND EMPLOYMENT DEVELOPMENT POLICY LOANS (REGE-DPL AND REGE-DPL 2) IMPLEMENTATION COMPLETION REPORT Contents A. Basic information ...................................................................................................................................... i B. Key dates .................................................................................................................................................. ii C. Ratings summary ..................................................................................................................................... iii D. Sector and theme codes ............................................................................................................................ v E. Bank staff................................................................................................................................................ vii F. Results framework analysis ................................................................................................................... viii G. Ratings of program performance in ISRs ................................................................................................. x H. Restructuring (if any) .............................................................................................................................. xi 1 Background ........................................................................................................................................... 1 2 Program context, development objectives and design .......................................................................... 1 2.1 Context .......................................................................................................................................... 1 2.2 Original program development objectives (PDO) and key indicators (as approved) ................... 3 2.3 Revised PDO and key indicators, and reasons/justification .......................................................... 3 2.4 Original policy areas supported by the program (as approved):................................................... 5 2.5 Revised policy areas: .................................................................................................................... 6 2.6 Other significant changes .............................................................................................................. 6 3 Key factors affecting implementation and outcomes ............................................................................ 6 3.1 Program performance (supported by a table derived from a policy matrix) ................................. 6 3.2 Major factors affecting implementation ...................................................................................... 14 3.3 Monitoring and Evaluation (M&E) design, implementation and utilization .............................. 17 3.4 Expected next phase/follow-up operation ................................................................................... 17 4 Assessment of outcomes ..................................................................................................................... 17 4.1 Relevance of objectives, design and implementation (to current country and global priorities, and Bank assistance strategy) ................................................................................................................. 17 4.2 Achievement of program development objectives ...................................................................... 19 4.3 Justification of overall outcome rating........................................................................................ 26 4.4 Overarching themes, other outcomes and impacts ...................................................................... 27 4.5 Summary of findings of beneficiary survey and/or stakeholder workshops ............................... 28 5 Assessment of risk to development outcome ...................................................................................... 28 6 Assessment of Bank and Borrower performance ................................................................................ 29 6.1 Bank performance ....................................................................................................................... 29 7 Lessons learned ................................................................................................................................... 32 8 Comments on issues raised by Borrower ............................................................................................ 32 iii Annex 1: Bank lending and implementation support/supervision processes .............................................. 34 Annex 2: Beneficiary survey results ........................................................................................................... 37 Annex 3: List of people consulted during ICR preparation ........................................................................ 38 Annex 4: Summary of borrower‟s ICR and/or comments on draft ICR ..................................................... 40 Annex 5: Comments from cofinanciers and other partners/stakeholders ................................................... 48 Annex 6: List of supporting documents ...................................................................................................... 48 Annex 8: Map of Turkey............................................................................................................................. 49 iv A. Basic information Program 1 Programmatic Public Sector Country Turkey Program name Development Policy Loan (PPDPL) Program ID P071052 L/C/TF number(s) IBRD-73940 / TF-54755 ICR date 6/26/2012 ICR type Core ICR Lending instrument DPL Borrower Republic of Turkey Original total commitment USD 500.0m Disbursed amount USD 518.62m Implementing agencies Undersecretariat of Treasury Co-financiers and other external partners Program 2 Second Programmatic Public Country Turkey Program name Sector Development Policy Loan (PPDPL 2) Program ID P088837 L/C/TF number(s) IBRD-75530 ICR date 6/26/2012 ICR type Core ICR Lending instrument DPL Borrower Republic of Turkey Original total commitment USD 400.0m Disbursed amount USD 402.20m Implementing agencies Undersecretariat of Treasury Co-financiers and other external partners Program 3 Restoring Equitable Growth and Employment Programmatic Country Turkey Program name Development Policy Loan (REGE-DPL) Program ID P112495 L/C/TF number(s) IBRD-78580 ICR date 6/26/2012 ICR type Core ICR Lending instrument DPL Borrower Republic of Turkey Original total commitment USD 1,300.0m Disbursed amount USD 1,260.25m Implementing agencies Undersecretariat of Treasury Co-financiers and other external partners Program 4 Second Restoring Equitable Growth and Employment Country Turkey Program name Programmatic Development Policy Loan (REGE-DPL 2) Program ID P123073 L/C/TF number(s) IBRD-80670 ICR date 6/26/2012 ICR type Core ICR Lending instrument DPL Borrower Republic of Turkey Original total commitment USD 700.0m Disbursed amount USD 736.61m Implementing agencies Undersecretariat of Treasury Co-financiers and other external partners i B. Key dates Programmatic Public Sector Development Policy Loan (PPDPL) - P071052 Revised/Actual Process Date Process Original date date (s) Concept review: 9/14/2004 Effectiveness: 8/16/2006 8/16/2006 Appraisal: 5/26/2006 Restructing(s): Approval: 6/29/2006 Mid-term review: Closing: 9/30/2007 9/30/2007 Second Programmatic Public Sector Development Policy Loan (PPDPL 2) - P088837 Revised/Actual Process Date Process Original date date (s) Concept review: 1/30/2007 Effectiveness: 7/23/2008 7/23/2008 Appraisal: 4/25/2008 Restructing(s): Approval: 6/19/2008 Mid-term review: Closing: 6/30/2009 6/30/2009 Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL) - P112495 Revised/Actual Process Date Process Original date date (s) Concept review: 10/9/2009 Effectiveness: 4/9/2010 4/9/2010 Appraisal: 1/14/2010 Restructing(s): Approval: 3/23/2010 Mid-term review: Closing: 11/1/2010 11/1/2010 Second Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL 2) - P123073 Revised/Actual Process Date Process Original date date (s) Concept review: 2/4/2011 Effectiveness: 6/24/2011 6/24/2011 Appraisal: 3/7/2011 Restructing(s): Approval: 5/5/2011 Mid-term review: Closing: 12/31/2011 12/31/2011 ii C. Ratings summary C.1 Performance rating by ICR Overall program rating Outcomes Satisfactory Risk to development outcome Moderate Bank performance Satisfactory Borrower performance Satisfactory iii C.2 Detailed ratings of Bank and borrower performance (by ICR) Overall program rating Bank Ratings Borrower Ratings Quality at entry Satisfactory Government: Satisfactory Quality of supervision Satisfactory Implementing agency/agencies Satisfactory Overall Bank performance Satisfactory Overall borrower perfromance Satisfactory C.3 Quality at entry and implementation performance indicators Programmatic Public Sector Development Policy Loan (PPDPL) - P071052 Implementation performance Indicators QAG assessments (if any) Rating Potential problem program at any time (Yes/No): No Quality at Entry (QEA) Problem program at any time (Yes/No): No Quality of Supervision (QSA) DO rating before closing/inactive status Second Programmatic Public Sector Development Policy Loan (PPDPL 2) - P088837 Implementation performance Indicators QAG assessments (if any) Rating Potential problem program at any time (Yes/No): No Quality at Entry (QEA) Problem program at any time (Yes/No): No Quality of Supervision (QSA) DO rating before closing/inactive status Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL) - P112495 Implementation performance Indicators QAG assessments (if any) Rating Potential problem program at any time (Yes/No): No Quality at Entry (QEA) Problem program at any time (Yes/No): No Quality of Supervision (QSA) DO rating before closing/inactive status Second Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL 2) - P123073 Implementation performance Indicators QAG assessments (if any) Rating Potential problem program at any time (Yes/No): No Quality at Entry (QEA) Problem program at any time (Yes/No): No Quality of Supervision (QSA) DO rating before closing/inactive status iv D. Sector and theme codes Programmatic Public Sector Development Policy Loan (PPDPL) - P071052 Sector code (as percent of total Bank financing) Original Actual Central government administration 40 40 Compulsory pension and unemployment insurance 30 30 Sub-national government administration 15 15 Health 10 10 Compulsory health finance 5 5 Theme code (as percent of total Bank financing) Original Actual Public expenditure, financial management and procurement 25 25 Law reform 25 25 Social risk mitigation 24 24 Health system performance 13 13 Municipal finance 13 13 Second Programmatic Public Sector Development Policy Loan (PPDPL 2) - P088837 Sector code (as percent of total Bank financing) Original Actual Central government administration 35 35 Law and justice 25 25 Sub-national government administration 20 20 Health 10 10 Other social services 10 10 Theme code (as percent of total Bank financing) Original Actual Public expenditure, financial management and procurement 29 29 Judicial and other dispute resolution mechanisms 29 29 Other public sector governance 14 14 Social safety nets 14 14 Health system performance 14 14 Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL) - P112495 Sector code (as percent of total Bank financing) Original Actual General public administration sector 30 30 General education sector 20 20 Health 20 20 Other social services 20 20 Banking 10 10 Theme code (as percent of total Bank financing) Original Actual Debt management and fiscal sustainability 25 25 Health system performance 25 25 v Improving labor markets 24 24 Social safety nets 13 13 Education for all 13 13 Second Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL 2) - P123073 Sector code (as percent of total Bank financing) Original Actual General public administration sector 56 56 Other social services 22 22 General education sector 11 11 Health 11 11 Theme code (as percent of total Bank financing) Original Actual Debt management and fiscal sustainability 28 28 Other financial and private sector development 28 28 Social safety nets 22 22 Education for all 11 11 Health system performance 11 11 vi E. Bank staff Programmatic Public Sector Development Policy Loan (PPDPL) - P071052 Positions At ICR At Approval Vice President: Philippe H. Le Houérou Shigeo Katsu Country Director: Martin Raiser Andrew Vorkink Sector Director: Yvonne Tsikata Cheryl Gray - Charles Griffin Sector Manager: Satu Kahkonen Carlos Felipe Jaramillo, Arup Banerji Task Team Leader: Rodrigo A. Chaves, John Innes Rodrigo A. Chaves, John Innes ICR Team Leader: Marina Wes ICR Primary Author: Dusan Vujovic, Simon Davies Second Programmatic Public Sector Development Policy Loan (PPDPL 2) - P088837 Positions At ICR At Approval Vice President: Philippe H. Le Houérou Shigeo Katsu Country Director: Martin Raiser Ulrich Zachau Sector Director: Yvonne Tsikata Luca Barbone Sector Manager: Satu Kahkonen Bernard G. Funck Task Team Leader: Zafer Mustafaoglu Zafer Mustafaoglu ICR Team Leader: Marina Wes ICR Primary Author: Dusan Vujovic, Simon Davies Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL) - P112495 Positions At ICR At Approval Vice President: Philippe H. Le Houérou Philippe H. Le Houérou Country Director: Martin Raiser Ulrich Zachau Sector Director: Yvonne Tsikata Yvonne Tsikata Sector Manager: Satu Kahkonen Bernard G. Funck Task Team Leader: Mark Roland Thomas Mark Roland Thomas ICR Team Leader: Marina Wes ICR Primary Author: Dusan Vujovic, Simon Davies Second Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL 2) - P123073 Positions At ICR At Approval Vice President: Philippe H. Le Houérou Philippe H. Le Houérou Country Director: Martin Raiser Ulrich Zachau Sector Director: Yvonne Tsikata Yvonne Tsikata Sector Manager: Satu Kahkonen Satu Kahkonen Task Team Leader: Marina Wes Marina Wes ICR Team Leader: Marina Wes ICR Primary Author: Dusan Vujovic, Simon Davies vii F. Results framework analysis Program Development Objectives (from Program Document) The original Program Development Objective (PDO) was to support a sustained medium-term process of legal, institutional, and structural development that promotes growth and improves social conditions. The program aimed to support the government‟s reform and modernization efforts in four key areas: (i) Maintaining the enabling macroeconomic framework to ensure continued progress in the macroeconomic policies that had provided so much success in terms of the rapid growth Turkey benefitted from after the 2001 crisis1. (ii) Reforming substantially the country’s social protection system, which covers social security, universal health insurance and social assistance to address growing deficits in the social security system, to make structural and administrative improvements in the provision of social security benefits and social assistance, and to support universal access to health services while increasing the efficiency of their provision. (iii) Continuing the ongoing process of upgrading the financial controls and expenditure management of public resources to improve control of spending in the areas of pensions, social security benefits and social assistance. (iv) Improving the administration and governance of the public sector to reduce regional disparities, promote decentralization and combat corruption at all levels of the public sector. Revised Program Development Objectives (as approved by original approving authority) (a) PDO indicators Indicator inclusion Indicator values Baseline End of last PL Latest PPDPL 2 that included PPDPL REGE- REGE- DPL 2 indicator DPL Pillar 1: Macrostability and public sector reform Objective 1.a. Macrostability Sustainable macro: IMF Program Program program is on track success. success. 1 1 Yes concluded concluded Gross public debt to GDP 3 9 47.3 45 40.2 Objective 1.b. Public financial management Open Budget Index Score 41 57 (2011 index (0=least transparent to n.a.) 100=most transparent) 10 Implement Public Financial Management and Control (PFMC) law 3 5 No Partly Partly 1 These motivations are paraphrased from the original Program Document (PD). viii Improved PFM: Central and local financial statements on accrual basis 6 Yes Yes Yes Objective 1.c. Public Administration reform and governance Regional development: Satisfactory All DAs reduce income disparities; progress in established and strengthen finance of establishing 2 DAs operating at local administrations. 9 DAs operational different levels Pillar 2: Inclusive social programs at sustainable cost Single administrative structure for all Structure Structure pensioners 2 No unified unified Social security administrative structure Structure Structure unified 10 No unified unified Fiscally sustainable social Law passed Enacted security reform in place but partially including including parametric cancelled by parametric pension reform Constitution reform in 2 al Court. pensions Effective financial No Universal Universal protection of the poor in health coverage health coverage health (UHI) 4 1 11 Short-Term Fiscal Sustainability: Comb Soc. Sec. deficit < 4.5% GDP /1 3 2 12 4.2 3.9 n/a Pillar 3: Employment and private sector led growth Objective 3.a. Employment and education ISKUR vocational training program reach in the two-year period 2009- over 200,000 10, number of now aim unemployed to received 300,000 per vocational training 5 6 60,000 200,000 year Placements per ISKUR registered workers (public and private providers), percent 7 7 7 9.8 13.3 (est.) Pre-school participation rate for 5 year olds in 32 provinces (MONE 1st stage) 9 71 93.1 n/a Pre-school enrolment rate 5-year olds in all provinces 5 61 67.3 n/a Unemployment rate, 14 8.6 8.6 (2011Q3) percent 3 Female labor force 24.5 32.3 32.3 (2011Q3) participation rate 4 ix Objective 3.b. Environment for private sector growth (including Investment climate) Average days to clear 15 15 15 customs 6 Strength of investor 5.7 5.7 5.7 protection index (0=lowest to 10=highest) 2 Value of insurance premia and leasing assets as % of GDP 8 3 2.8 3.1 Clearance rate: first instance civil, commercial and admin law cases. 8 96 98 n/a Fast, fair and reliable Regional operation of the judicial Courts of system Appeal 7 established Judicial intranet network Start for increased judicial implementat efficiency, faster judicial ion of All civil and process. Info sharing with National Satisfactory administrative other public institutions. judicial progress in on- judiciary are network line intranet connected to 8 project connectivity intranet Total credits to SMEs (TL 83.9 115.7 165 billion) 4 Credit to SMEs as % of 21 23.7 23-24 (end- total credit 1 2011) Memo: Total number of 3 9 10 12 indicators Note: Numbers in the table correspond to the indicator number presented in sections 2.2 and 2.3 1/ Combined social security deficit indicators not comparable due to differences in definition in different years. (b) Intermediate outcome indicators N/A G. Ratings of program performance in ISRs * Programmatic Public Sector Development Policy Loan (PPDPL) - P071052 * Second Programmatic Public Sector Development Policy Loan (PPDPL 2) - P088837 * Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL) - P112495 * Second Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL 2) - P123073 Actual disbursements No. Date ISR archived DO IP (USD millions) 1 29-Jun-07 Satisfactory Satisfactory 518.62 2 7-Nov-09 Satisfactory Satisfactory 402.2 3 24-Jan-11 Satisfactory Satisfactory 1260.25 4 30-Jun-11 Satisfactory Satisfactory 736.61 x H. Restructuring (if any) N/A xi 1 Background This ICR evaluates four predominantly macro-oriented development policy loans (DPL). The first two of these operations, entitled Programmatic Public Sector DPL (PPDPL), were part of a two-pronged approach which also included the Competitiveness and Employment DPL (CEDPL) series (evaluated in two separate ICRs)2. After two operations, the CEDPL series was formally closed in 2008 due to a change in the policy focus of the government following the onset of the 2008 global financial crisis. The third and fourth operations (renamed „Restoring Equitable Growth and Employment‟ or REGE-DPL series) continued the policy content of the PPDPL series and included additional elements to support the government‟s efforts to minimize the impact of the global financial crisis and also absorbed some policy elements of the CEDPL series. A parallel DLP series linked to the energy sector reform agenda and helping to contain large energy-related import costs has also helped to support the macro economy. This ICR evaluates the series of four operations termed PPDPL, PPDPL 2, REGE-DPL and REGE-DPL 2. For ease, we refer to these operations throughout the report as PL1, PL2, PL3 and PL4, respectively and the series is referred to as the Policy Loan (PL) series. 2 Program context, development objectives and design 2.1 Context This programmatic PL series covered 2006 to 2011, a period of significant change in both the global and domestic economic environment. The program began by supporting a set of long-run reforms linked to the government‟s modernization agenda stated in the Ninth Development Plan. By end-2008, the global financial crisis hit Turkey, demanding a shift in government policy towards short-run considerations. The program was adjusted to support measures related to mitigating the negative impacts of this external shock. As the country emerged from the crisis, the government showed renewed interest in longer-run reforms, again demanding flexibility from the PL team to support these modernization efforts. This PL series was prepared over a period of immense external economic fluctuation and corresponding changes in the focus of economic policy. In addition, as already mentioned, this PL series absorbed certain uncompleted measures from another, closed DPL series. This was therefore a relatively complex set of PLs which demanded a large amount of flexibility on the part of the implementing team. This section discusses the changing economic context of the PL series with brief discussion of the links to the measures each PL supported. Since the financial crisis of 2001, which resulted in a 5.7 percent decline in GDP, the Turkish economy has been performing well with strong GDP growth (averaging 7.3 percent between 2002 and 2005) and declining inflation (from nearly 30 percent in 2002 to under 8 percent in 2005). This strong performance was backed by a series of reforms including fiscal consolidation, economic liberalization and an inflation targeting regime under an independent Central Bank. Reforms were anchored in an IMF program and EU accession talks. Begun in 2006, this PL series was designed to support the program of sustained legal, institutional and structural reforms developed by the authorities with the aim of promoting growth and improving social conditions. 2 Report No. ICR1008, April 1, 2009 and Report No. ICR1443, April 29, 2010. 1 Against this backdrop, the first Programmatic Public Sector DPL (PPDPL, henceforth PL1) was approved in June 2006 in the amount of USD 500 million. It was designed to support policy actions in four areas connected to the government‟s reform and modernization agenda: (a) sustaining an enabling macroeconomic framework; (b) reforming the social protection system; (c) upgrading Public Financial Management (PFM), and budget reforms; and (d) improving administration and governance in the public sector. The PL2 was prepared amidst concerns over international financial markets triggered by the sub-prime mortgage crisis in the United States. Turkey was both a stable repository for liquid capital but also beholden to changes in sentiment amongst investors. These risks were moderated by reforms supported by the PL1 as well as continued strong growth, primary surpluses and reductions in public debt. A Stand- By Arrangement (SBA) with the IMF was successfully completed in May 2008. The second PPDPL (PPDPL 2, referred to hereafter as PL2) was approved in June 2008 in the amount of EUR 255.4 million (USD 400 million). The PL2 built on successes of the PL1 with prior actions focusing on: continued good macroeconomic policies; financial sector policies; investment climate reform; labor market functionality; social security; and improved efficiencies of public expenditures. The economic context of the third operation (PL3, REGE-DPL) was shaped by the economic crisis. GDP declined by 7.0 percent (Year-on-Year) in Q4 of 2008, and the Istanbul Stock Exchange lost about half its value in 2008. Turkey suffered a 4.8 percent fall in GDP in 2009 on the back of the global financial crisis. The Turkish banking sector entered a severe credit crunch and banks cut lending to all but the most creditworthy borrowers. The Turkish economy suffered from declining exports (which tended to be concentrated in pro-cyclical consumer durables) in 2009 as its trading partners contracted and their demand for imports declined. The authorities responded successfully with fiscal stimulus, measures to improve banking liquidity, employment, and social measures to boost the economy and protect the most vulnerable. The PL3 was approved by the board in March 2010 in the amount of EUR 931 (USD 1.3 billion). The PL3 absorbed certain elements from the Competitiveness and Employment DPL (CEDPL) series planned.3 The PL3 continued to support public sector reforms including in social security and PFM. In addition, it began to support transition to recovery and job creation through business climate reform. The PL4 (also known as the REGE-DPL2) was approved in May 2011 in the amount of EUR 506.1 mil (USD 700 million). It was prepared as Turkey exhibited a remarkable turnaround from the crisis. GDP growth reached 9.2 percent in 2010, surpassing pre-crisis GDP levels, and unemployment was falling. The recovery was being driven by domestic consumption and investment resulting from low interest rates and high credit disbursements, coming largely from short-term foreign inflows. The resumed economic growth and credit expansion resulted in increasing imports of consumables and investment goods causing a rising current account deficit (CAD) which posed a concern. The public sector primary balance decreased from a surplus of 1.6 percent of GDP in 2008 to a deficit of 1.0 percent in 2009. Most of this increase was explained by the contraction of GDP and use of automatic stabilizers (e.g. an increase worth around 1.8 percent of GDP in budgetary transfer to the Social Security Institution, SSI). The public sector primary balance improved to a surplus of 0.8 percent of GDP in 2010 thanks to improvements in revenues 3 The CEDPL series was closed after the successful completion of the first two operations. 2 and the expansion of GDP. Public debt also decreased in 2010 after an increase in 2009. In this context, the PL4 supported government led reforms in the labor market, private sector and social security amongst other measures. 2.2 Original program development objectives (PDO) and key indicators (as approved) The original PDO was to support a sustained medium-term process of legal, institutional, and structural development that promotes growth and improves social conditions. The program aimed to support the government‟s reform and modernization efforts in four key areas: (i) Maintaining the enabling macroeconomic framework to ensure continued progress in the macroeconomic policies that had provided so much success in terms of the rapid growth Turkey benefitted from after the2001 crisis 4. (ii) Reforming substantially the country’s social protection system, which covers social security, universal health insurance and social assistance to address growing deficits in the social security system, to make structural and administrative improvements in the provision of social security benefits and social assistance, and to support universal access to health services while increasing the efficiency of their provision. (iii) Continuing the ongoing process of upgrading the financial controls and expenditure management of public resources to improve control of spending in the areas of pensions, social security benefits and social assistance. (iv) Improving the administration and governance of the public sector to reduce regional disparities, promote decentralization and combat corruption at all levels of the public sector. The benefits from the original set of reforms supported by the PL series were not expected to materialize immediately. The impact of some reforms, such as the pension reform, would become evident only over years. The original Key Outcome Indicators were: (1) Sustainable macroeconomic framework has been maintained. (2) Fiscally sustainable social security reform was put in place. (3) Public Financial Management and Control (PFMC) law was implemented as legislated. 2.3 Revised PDO and key indicators, and reasons/justification PL2 revisions The PL2 continued to support largely the same PDO as the PL1. There were only minor revisions between the two operations although the indicators became more specific. Two additional prior actions related to legal reform were added. These were: (i) A law for the establishment of Regional Courts of Appeal has been enacted, and, (ii) Online connections among courts have been established. These were successfully achieved. The revised indicators for the PL2 were: (1) Sustainable macroeconomic framework has been maintained. (2) There is one single administrative structure for all pensioners. (3) Short term fiscal sustainability of the social security system is maintained. 4 These motivations are paraphrased from the original Program Document (PD). 3 (4) Improve social assistance for the poor. (5) Improve public expenditure management in all Government institutions. (6) Improve the government's ability to estimate and manage public finances lack of which contributed to the past crises. (7) Fast, fair and reliable operation of the judicial system. (8) Increased efficiency in judicial services and accelerated judicial process through transfer of services into electronic environment; sharing information among judicial and other public institutions. (9) Promote regional development to reduce regional income disparities through redefining the responsibilities and strengthening the financial position of local administrations. PL3 revisions The PL series was modified considerably between the PL2 and the PL3 and renamed from the PPDPL to the REGE-DPL. The objectives of the PL3 were to support the transition from managing the impact of the global crisis to fiscal adjustment and shared growth, by contributing to: (1) economic management; (2) public financial management: (3) affordable universal healthcare and improved educational access; (4) employment; (5) improved investment climate; and (6) increased financial intermediation, especially to SMEs. Indicators for long run reforms focusing on social security and health were maintained from the PPDPL series. Some indicators from the closed CEDPL series were also added. Finally, indicators linked to the government‟s efforts to mitigate the negative impact of the global financial crisis were added. The revised indicators from the PL3 were: (1) UHI coverage (2) Declining combined health and social security deficit as a percentage of GDP (3) Debt-to-GDP ratio (4) Total credits to SMEs (5) ISKUR vocational training program reach in the two-year period 2009-10 (6) Average days to clear customs (7) Ratio of placements per registered workers with ISKUR services (public and private providers) (8) Value of insurance premia and leasing assets as share of GDP (9) Participation in preschool for children 5 years of age in the 32 provinces selected by MONE for the first stage (10) Social security administrative structure unified. PL4 revisions Additional changes were made to the PL4 as the economy came out of recession and the government showed renewed interest in longer-term reform and modernization. The PL4 therefore included additional measures from the closed CEDPL series, particularly related to the business climate and private sector reform. These measures replaced those linked to managing the global financial crisis. The objective of the PL4 was to support equitable growth and job creation by advancing critical business climate and broader competitiveness reforms, while carrying forward Turkey’s public 4 expenditure reform agenda with a focus on the delivery of inclusive social programs at sustainable cost. The indicators for PL4 were: (1) Credit to small and medium-sized enterprises as a share of total credit (2) Strength of investor protection index (3) Unemployment rate (4) Female labor force participation rate (5) Pre-school enrolment rate of 5-year olds (6) Number of beneficiaries of ISKUR vocational training (7) Job placement rate of unemployed registered with ISKUR (8) Clearance rate of first instance civil, commercial and administrative law cases (resolved cases per incoming cases multiplied by 100) (9) Gross public debt to GDP (10) Open Budget Index Score (11) Universal Health Insurance Coverage (12) Combined health and social security deficit of the social security institutions 2.4 Original policy areas supported by the program (as approved): The original policy areas supported by the PL series were: (i) Sustaining an enabling macroeconomic framework The macroeconomic management post-2001 economic crisis saw significant improvement, including an implicit inflation-targeting policy, deficit reduction, and public debt reduction. Interest rates and inflation both came down and growth was high. Continued good management was an essential underpinning to other reforms and was therefore supported by the PL series. When the series began, the IMF had a program in Turkey which was successfully completed in May 2008. The views of the IMF on Turkey‟s macroeconomic management were taken into consideration in this policy area. (ii) Social security and social assistance reform Although Turkey had several social insurance programs, these suffered from disconnect in terms of lack of shared information and management systems. This attracted misuse and allowed individuals room to avoid making contributions to the social security system. In addition, deficits in some areas, notably pensions, risked widening fast to unsustainable levels without reform. Reform was necessary to ensure that social insurance was targeted to those in need while increasing contributions and reducing expenditures. In addition, the operation supported the Universal Health Insurance (UHI). (iii) Public financial and expenditure management reform As with macroeconomic management, revenue and expenditure management saw improvements post-2001 crisis, notably in areas of transparency and accountability. This contributed to falling deficits and declining public debt. However, further reforms were necessary as part of the overall modernization of public administration, notably additional 5 improvements in auditing standards and the use of the medium term framework for budgeting. (iv) Public administration and governance reform Turkey initiated a comprehensive public administration reform process in 2003 with the objective to establish a more participatory, transparent, and accountable public sector which respects human rights and freedoms, and provides high quality public services in a timely, efficient and equitable manner. The PL series supported this aim particularly decentralization efforts. 2.5 Revised policy areas: The policy areas supported by the series were changed during the PL3 to support the government in its short term focus on mitigating the negative impacts of the crisis. The PL3 also absorbed some areas of the closed CEDPL series. The policy areas for the PL3 were: (i) Fiscal management a. Maintaining inclusive social programs at sustainable cost b. Public financial management (ii) Equitable growth and employment a. Employment and social protection during the crisis b. Private-sector led growth and job creation after the crisis With two operations successfully concluded, the PL3 continued to support some of the long term reforms, such as universal health insurance, social security modernization and public financial management (PFM), envisioned under the PL1 and PL2. However, the crisis demanded that the government focus on mitigating the negative effects of the crisis. Accordingly, the P3 supported measures to maintain employment and household incomes in the face of the crisis as well as measures to protect financial stability. Following improvement in the economic climate and the successful navigation through the crisis, the PL4 continued to support the long-term reforms envisioned from the PL1 including social security reform but dropped certain elements related to crisis response management. Additional long-run reforms related to the closed CEDPL series were also added including measures to improve the efficiency of the private sector, particularly the adoption of the Commercial Code. 2.6 Other significant changes None. 3 Key factors affecting implementation and outcomes 3.1 Program performance (supported by a table derived from a policy matrix) The PL series initially focused on supporting long-run modernization efforts by the Turkish government. This included a continuation of strong macroeconomic policies which had underpinned Turkish success after 2001. Additional improvements in public financial and expenditure management as well 6 decentralization efforts were also supported. Finally, measures strengthening social insurance administration were supported. This series supported key areas of the government‟s modernization program and was fully owned by the government. The PL1 and the PL2 were delivered in a timely fashion and in full coordination with the government. The Treasury coordinated the program with other relevant agencies to ensure progress on indicators and prior actions, and agreed on targets with the Bank team. In response to the global financial crisis, the government shifted its focus to short-term measures in 2008. In particular, it had to mitigate the impact of the crisis on the financial sector and vulnerable households. The team adjusted the program to respond in a timely and supportive manner to this change. There was a considerable change in the focus of the PL3. Some reforms supported by the PL1 and the PL2 were still included and new prior actions, focusing on the crisis response, were added. These included a „blind broker‟ function in which the Central Bank of the Republic of Turkey (CBRT) acts as the blind broker in liquidity provisions between private banks, guaranteeing short-term loans. This countered the mistrust between financial institutions which prevented them from lending to each other. The PL3 also supported vocational training measures, which aimed both to increase the skills of the unemployed and to provide a safety net by paying a small stipend for attendance. Given that unemployment and low labor market participation are long-term issues in Turkey, this program has since been expanded and is expected to be in place for the foreseeable future. An additional measure supported by the PL3 was that of increasing credit guarantees for SMEs. However, given the speed with which Turkey rebounded from the recession, the increase in available guarantees came too late to make the impact it could have otherwise had. When the PL4 was being prepared, Turkey was coming out of the recession caused by the global financial crisis. The government began to look again towards longer-run reforms, including measures related to health and social security modernization. In addition, the government showed a renewed interest in reforms related to improving the business climate linked to the closed CEDPL series. The task team responded by dropping temporary crisis measures from the program and adding reforms related to the private sector, notably the enactment of a new commercial code, which would align Turkish commercial law with the EU acquis. The team responded quickly and adequately to factors related to the economic environment and to demands from the client. As with previous changes, indicators and prior actions were amended accordingly. 7 First Development Policy Loan Status Pillar 1: Sustaining an enabling macroeconomic framework Pillar II: Social security and social assistance reform Satisfactory social security and UHI legislation with the following components Fulfilled has been adopted by the Parliament: (a) parametric reform for the pension system that will ensure the system‟s long term sustainability, (b) establishment of a UHI system which will provide access to health insurance for all citizens. A satisfactory law aimed at reforming the administrative dimensions of social Fulfilled security by unifying the existing three social security schemes has been enacted. Pillar III: Public financial and expenditure management reform A central government budget law consistent with the MTFP has been enacted Fulfilled and is being implemented satisfactorily. The PFMC law has been satisfactorily implemented in key areas including Fulfilled comprehensive budget coverage, abolishment of central ex-ante controls and accountability in PEM. Pillar IV: Public administration and governance reform Local administrations laws have been enacted, including: (a) Municipalities Fulfilled Law; (b) Metropolitan Municipalities Law; and (c) Special Provincial Administrations (SPAs) Law. A satisfactory draft law on the Revenues of Municipalities and SPAs has been Fulfilled prepared. Second Development Policy Loan Status Pillar 1: Sustaining an enabling macroeconomic framework Pillar II: Social security and social assistance reform Implementation of the Law reforming the administrative dimensions of social Fulfilled security by unifying the existing three social security schemes (Law No. 5502) is on track. In particular, satisfactory implementation of an agreed action plan resulted in (a) consolidated electronic records of the previous social security institutions and use of integrated identity number system, (b) personnel policies for the new social security institution and a core cadre of staff, (c) established financial management and claims adjustment systems, (d) unique positive drug lists for all participants in the new social security institution. An expenditure tracking system for pharmaceuticals has been established and is Fulfilled operational. Pillar III: Public financial and expenditure management reform All secondary legislation required for the PFMC Law has been published and Fulfilled has become effective. Strategy development units responsible for strategic planning, budgeting, Fulfilled accounting and internal control functions have become operational in all general government institutions. 8 Pillar IV: Public administration and governance reform A law for the establishment of Regional Courts of Appeal has been enacted and Fulfilled made effective, in order to ease the backlog of cases within the Court of Appeals. On-line connections among courts have been established through satisfactory Fulfilled implementation of the judicial network project (UYAP). At least two DAs have been established and are operational. Fulfilled Third Development Policy Loan Status Pillar 1: Fiscal management 1a: Maintaining inclusive social programs at sustainable cost Implementation of the Social Security and Universal Health Insurance Law, as Fulfilled enacted in June 2006 and amended in May 2008, including enactment of secondary legislation; and the merger of staff from the three prior systems (as stipulated by the Social Security Institution Law). Implementation of global budgets for MoH hospitals, the introduction of Fulfilled spending limits in university and private hospitals through the 2010 budget, and publication of an SSI budget circular stating pharmaceutical expenditure controls. 1b: Public financial management Revision of the Guidelines for performance based budgeting and preparation by Fulfilled at least 50 institutions of their performance budget. Pillar 2: Equitable growth and employment 2a: Employment and social protection during the crisis Implementation of the CBRT blind broker function. Fulfilled Increase in short-time employment compensation (by 50 percent) and its Fulfilled extension (from 3 to 6 months and then to 12 months) effective until end 2010 to reduce layoffs (part of the employment support packages)*. Amendment of the Public Finance and Debt Management Law to provide Fulfilled authority to expand guarantees to the CGF of TL 1 billion. Accelerated expansion of the coverage of ISKUR vocational training (and Fulfilled trainee stipends), reaching 150,000 people in 2009. 2b: Private-sector led growth and job creation after the crisis Amendment of the Customs Law to streamline customs procedures. Fulfilled Hiring of 15,000 new preschool teachers for the 2009-10 school year and Fulfilled issuance of the MONEY Circular launching universal preschool education for children 5 years of age in 32 provinces. Fourth Development Policy Loan Status Pillar 1: Equitable growth and employment Introduction of a system for evaluating providers of training on the basis of Fulfilled quality and has launched an evaluation of the effectiveness of ISKUR (Turkish Employment Agency) programs in the context of the expansion of training services. 9 Enactment of the new Commercial Code broadly aligned with the provisions of Fulfilled (law passed the EU acquis on commercial matters. and partial implementation expected in 2012, full implementation in 2013) Enactment of the new Code of Obligations governing the implementation and Fulfilled (law passed enforcement of private sector contractual obligations. and implementation expected during 2012) Enactment of the new Civil Procedure Code aiming to reduce court workloads Partially fulfilled (law and the corresponding burden on business. passed and currently in process of implementation) Expansion of preschool education to an additional 25 provinces and completion Fulfilled of progress reports on preschool education in the 32 pilot provinces. Pillar 2: Fiscal management Continued implementation of the Social Security Institutional Law, inter alia, Fulfilled by integrating data and information technology systems of the previous three social security systems of the previous three social security systems through the full operationalization of a database interface. Continued implementation of global budgets for the Ministry of Health Fulfilled hospitals, and spending limits in university and private hospitals through the 2011 budget. Enactment of the Turkish Court of Accounts Law supporting the accountability Fulfilled framework set out in the Public Financial Management and Control Law and redefining the audit scope, the types of audits mandated and the organizational structure of the Turkish Court of Accounts. Enactment of the Law on Monitoring and Supervision of State Aids regulating Fulfilled monitoring and supervision mechanisms for the design and implementation of state aid. * This was extended beyond 2010. 10 These prior actions are summarized by pillar and policy objective supported in the below table. PL1 PL2 PL3 PL4 Prior actions Prior actions Prior actions Prior actions Objective 1.a. Macroeconomic stability Objective 1.b. Public financial management The Public Financial All secondary Revisions of the Enactment of the Management and legislation required for Guidelines for Turkish Court of Control Law has been the Public Financial performance based Accounts Law implemented in key Management and budgeting and supporting the areas including Control Law has been preparation by at least accountability comprehensive budget published and has 50 institutions of their framework set out in coverage, abolishment become effective performance budget the Public Financial of central ex-ante Management and controls, and Control Law and accountability redefining the audit scope, the types of audits mandated and the organizational structure of the Turkish Court of Accounts. A central government Strategy development Enactment of the Law budget law consistent units responsible for of Monitoring and with the medium term strategic planning, Supervision of State framework has been budgeting, accounting Aids regulating enacted and is being and internal control monitoring and implemented functions have become supervision operational in all mechanisms for the general government design and institutions implementation of state aid. 2006 financial statements of central government institutions and local administrations have been prepared on an accrual basis 11 Objective 1.c. Public Administration reform and governance Local administration At least two DAs have laws have been enacted been established and and a draft law on are operational. Special Provincial Administration and Municipality Revenues has been prepared. Pillar 2: Inclusive social programs at sustainable cost Revised social security Implementation of the Implementation of the Continued and universal health Law reforming the Social Security and implementation of the insurance legislation administrative Universal Health Social Security including a parametric dimensions of social Insurance Law, as Institutional Law, inter reform of the pension security by unifying the enacted in June 2006 alia, by integrating data system existing three social and amended in May and information security schemes is on 2008, including technology systems of track enactment of secondary the previous three legislation and the social security systems merger of staff from the through the full three prior systems (as operationalization of a stipulated by the Social database interface Security Institution Law). The establishment of a An expenditure tracking Implementation of Continued Universal Health system for global budgets for MoH implementation of Insurance system which pharmaceuticals has hospitals, the global budgets for the will provide access to been established and is introduction of MoH hospitals, and health insurance for all operational spending limits for spending limits in citizens university and private university and private hospitals, and hospitals through the publication of an SSI 2011 budget budget circular stating pharmaceutical expenditure controls. Enactment of a law aimed at reforming the administrative dimensions of social security by unifying the existing three social security schemes has been enacted 12 Objective 3.a. Employment and education Accelerated expansion Introduction of a of the coverage of system for evaluating ISKUR vocational providers of training on training (and trainee the basis of quality and stipends), reaching has launched an 150,000 people in 2009 evaluation of the effectiveness of ISKUR (Turkish Employment Agency) programs in the context of the expansion of training services Hiring of 15,000 new Expansion of preschool preschool teachers from education to an the 2009-2010 school additional 25 provinces year and issuance of and completion of MONE Circular progress reports on launching universal preschool education in preschool education for 32 pilot provinces children 5 years of age in 32 provinces Increase in short-term employment compensation (by 50 percent) and its extension (from 3 to 6 months, and then to 12 months) effective until end 2010 to reduce layoffs (part of the employment support packages) Objective 3.b. Environment for private sector growth (including Investment climate) Amendment of the Enactment of the new Customs Law to Commercial Code streamline customs broadly aligned with procedures the provisions of the EU acquis on commercial matters 13 Enactment of the new Code of Obligations governing the implementation and enforcement of private sector contractual obligations A law for the Enactment of the new establishment of Civil Procedure Code Regional Courts of aiming to reduce court Appeal has been workloads and the enacted corresponding burden on business Online connections among courts have been established Amendment of the Public Finance and Debt Management Law to provide authority to expand guarantees to the Credit Guarantee Fund by TL 1 billion Establishment of the Central Bank (CBRT) blind broker function 3.2 Major factors affecting implementation Overall, the implementation of the program supported by the PL series went as planned. The shift of policy focus to short-term concerns caused by the global financial crisis was promptly reflected in the third operation to minimize the adverse impact on Turkey. Following robust post-crisis recovery, the task team again adjusted measures included in the series to support progress in achieving its longer-term reform objectives. The series content was based on solid analytical underpinnings, and the prevailing political environment was stable. There was also strong ownership of the program within the Treasury (the main counterpart for the Bank and a key policy coordinator on the government side). Macroeconomic environment: The macroeconomic environment played an important role in the implementation of the program. At the start of the PL1, Turkey was mid-way through an economic boom which increased real GDP by 50 percent between 2001 and 2008. The country had an IMF program during the first two PLs which supported a stable macroeconomic framework and acted as an anchor for fiscal discipline and needed structural reforms. The first two operations were therefore carried out under a 14 relatively benign and stable macroeconomic environment. The macroeconomic circumstances were considerably altered during the preparation of the PL3 however. The global financial crisis had hit Turkey resulting in a decline in GDP by 4.8 percent in 2009. A considerable change in the direction of government policy, tilting away from structural reforms and towards efforts to contain the impact of the crisis, was necessary. This change was reflected in the design of the PL3 which was tailored to meet demands imposed by the need to mitigate the impact of the crisis while continuing to support some long-run reforms. Measures included steps to support SMEs through credit guarantees, to safeguard liquid banks against loss of confidence, to support employment and training during the crisis period. The government welcomed the support provided by the Bank during this period, both in terms of meeting financing requirements (automatic stabilizers increased the budget deficit) and in terms of technical/analytical support in studying policy options during the crisis. The macroeconomic climate again changed in 2010 when Turkey returned to impressive growth (reaching 9 percent per annum). Unemployment began to fall significantly from its peak of over 16 percent in February 2009 reaching around 9 percent by the end of 2011, notwithstanding an increase in the labor market participation rate. In addition, public finances returned to a primary surplus of 0.8 percent of GDP in 2010, and expected to rise further to 1.9 percent in 2011. This solid economic performance was achieved without the anchor of an IMF program. The speed of the rebound contained (and continues to contain) a number of underlying risks and concerns. With the economy rebounding so quickly, investment and consumer demand picked during both 2010 and 2011, while savings remained flat, resulting in a widening current account deficit (CAD). Whereas the pre-crisis CAD was financed largely by foreign direct investment (FDI) and medium to long-term inflows, over one third of the post-crisis CAD has been financed by short-term and portfolio capital inflows. The ongoing crisis in Europe means that it is difficult to predict the outcome, but both the authorities and Bank staff are aware of the risks posed by a „sudden stop‟ scenario. The CBRT has responded to this risk, in part, by using an interest rate corridor between overnight borrowing and lending rates, where the average cost of funding from the CBRT is determined on a daily basis inside the corridor depending on the changes in the market conditions. Adequacy of government’s commitment: Within the context of the PL series, the Bank had close interaction with the Treasury and the Ministry of Development, two institutions with overarching policy responsibilities, the latter of which produces annual targets for the Development Plan. Targets for indicators were discussed between the PL team and relevant line ministries to ensure their realism. Line ministries and other implementing agencies were fully engaged throughout the period of their inclusion in the PL series with Bank sector teams (often in the context of other ongoing Bank support) to ensure that targets and prior actions were relevant and achievable. Commitment to the PL series within the Treasury was high and commitment to progress in development within line ministries was high. Soundness of background analysis: The Bank has a highly active policy research analysis program in Turkey. The government places significant value on the AAA work undertaken by the Bank. The value placed on past work is confirmed by the fact that the government is considering engaging in cost-sharing for some work to be carried out in 2012, depending on the demand from the relevant public agencies. A wide range of analytical work was carried out in Turkey both prior to and during the PL series. This included, but was not limited to, CEMs (2000, 2003, 2006, 2008), Country Procurement Assessment 15 Report (2001), Country Financial Accountability Assessment (CFAA, 2001) and Public Expenditure and Institutional Review (PEIR, 2001), a Municipal Sector Review (2004), a PFMP benchmarking exercise (2010), an ICA (2010), a Financial Sector Assessment (2007) and its successor in 2011, Basic Education study (2011), a study on female labor market participation (2009), and a study on „Expanding Opportunities for the Next Generation‟ (2010) on inter-generational transfer of opportunities. Much of the AAA was undertaken jointly with government and relevant ministries and departments were fully consulted for all work to ensure buy-in and relevance. Operational design: The operational design of the PL series was relatively complex. The PL1 and PL2 were one half of a dual series in which the other half (CEDPL series) focused on competitiveness and employment. This split was largely due to internal Bank reasons. Some reforms supported by the CEDPL series lost their support from the government for political reasons and this series was closed. The PL3 absorbed some measures from the closed series, however. Thus, the PL3 was affected by a trio of pressures: first, the global financial crisis; second, the internal Bank motivations for a dual series disappeared; and third, the absorption of certain measures from the closed CEDPL series. The PL4 was designed to follow from the PL3 but improvement in the macro economy led to a reorientation of the design away from short-term crisis mitigation measures and back towards longer-term reforms. Risks identified: Risks were identified at each stage of the PL series. Financial risks were especially important at the start of the series. At the start of the series Turkey had a large stock of short-term debt. High interest rates in the US and Europe presented a risk to increases in the cost of servicing Turkish debt. In addition, large amounts of foreign financing were flowing into the country and a „sudden stop‟ in this financing would make it difficult for Turkey to fund its current account deficit. By the time of the PL2, financial issues linked to a loss of appetite for risk-taking (especially in emerging markets) due to developments in the US sub-prime mortgage market were identified. In addition, institutional inability to implement reforms was cited as a potential risk. Bank and Fund programs combined with strong institutional improvement and economic management reduced both financial and institutional risks during the PL1 and PL2. Financial risks were reduced thanks to a floating exchange rate and sufficient foreign reserves. Political risks included the potential for early elections making overall reform effort more difficult (PL1) and the risk that the Constitutional Court could call for the dissolution of the ruling Justice and Development Party (AKP) (PL2). Some of the risks identified in previous PLs were realized in the PL3. Of particular note was the global financial crisis, which hit Turkey through a loss of confidence in emerging markets and through lower exports. Risks identified in the PL3 were global economic risks; economic management risks; political risks; and social risks. The latter two were related to the social impacts of the crisis and the ability of the government to maintain a political consensus. Many areas supported by the PL3 helped to mitigate these risks. Economic management and to some degree financial risks were also reduced through measures supported by the PL3. Following recovery from the crisis, major concerns in the PL4 were again external – particularly, related to political developments in the Middle East and North Africa and the impact of oil prices and the knock- on effect on the CAD. Similar implementation risks as previously were also identified. Finally, there were concerns that an upcoming election could result in a slower pace of reforms or reduce their effectiveness. 16 3.3 Monitoring and Evaluation (M&E) design, implementation and utilization During the meetings held both with government officials and the Bank staff, it was not possible to detect a systematic monitoring of outcomes across a wide range of sectors. While there was a good awareness of where reforms were in terms of the stage of implementation, more needs to be done to monitor arrangements designed and implemented to measure the effects of reforms in terms of outputs and outcomes. Several sectors signified an interest in Bank assistance in monitoring specific outputs and outcomes, notably in labor, health, education and Development Agencies (DAs). A joint Bank and government initiative to set up (design and implement) a simple but reliable system to monitor outcomes across a full range of country‟s development priorities supported by Bank programs would be desirable. 3.4 Expected next phase/follow-up operation The government has continued engaging with the Bank, and the combination of Development Policy Lending and Analytical and Advisory work is strongly valued. At the time of writing the ICR, the scoping work for a possible new DPL series started. The new DPL series will be an integral part of the new Country Partnership Strategy (CPS), which covers 2012-2015. The focus of the new series has yet to be determined and will be done so jointly with the government. 4 Assessment of outcomes 4.1 Relevance of objectives, design and implementation (to current country and global priorities, and Bank assistance strategy) Rating: Satisfactory The PL1 was designed in early 2006 with an objective to support a sustained medium-term process of legal, institutional, and structural development that promotes growth and improves social conditions. The PL series was designed to be programmatic to ensure flexibility and congruence with the broad government reform agenda. As in other countries, engagement in Turkey requires consultation with and buy-in from a large number of stakeholders to build a consensus. Within this environment it can be difficult to predict when different reforms may come to the fore. Given this, a relatively broad and programmatic PL series proved useful in responding to both political economy demands as well as external shocks. This flexibility allowed the Bank to maintain dialogue on diverse topics as issues arose. The first operation was prepared concurrently with the finalization of the Ninth Development Plan 2007- 2013 and its objectives closely reflected the country‟s emerging priorities. The PL1 largely anticipated the ensuing changes in the Bank‟s program for Turkey,5 and created a reference reform framework for the forthcoming series of PL operations implemented through the end of 2011. As indicated in the table on development objectives and indicators in section F above, the key development objectives of the PL series can be grouped under three pillars which closely reflected the government‟s medium-term priorities: (1) securing macroeconomic stability and advancing public sector reforms; (2) completing social security reforms; and (3) creating an environment conducive to private sector growth and job creation. These priorities remain valid to this date, although the emphasis has 5 As stated in the CAS extension to FY2007 and the new Country Partnership Strategy 2008-2011 approved in January 2008. 17 shifted somewhat over time as some reforms had been completed, the political and social perceptions and support for reforms has evolved since 2006, and external environment has changed with the 2008 global crisis. In the first two operations (PPDPLs) the focus was rightly placed on consolidating and sustaining a stable macroeconomic environment, advancing public financial management reforms, as well as providing an impetus to continued broader public sector reforms (especially in advancing the decentralization agenda, initiating broader public administration reforms, and improving the overall quality of public sector governance). The fairly narrow program design employed in the first operation was focused on three outcomes (macro stability, social security reform, and the implementation of Public Financial Management and Control (PFMC) law) and it devoted much more attention to six conditions and four triggers than to the quality of the proposed results framework. The absence of a strong explicit results chain in the results matrix was compensated by the fact that macroeconomic performance was designed and monitored under a concurrent IMF program, while the social security reforms (parametric change in the pension system and steps to achieve universal health insurance) were detailed in respective sector reform documents. The PL2 expanded the scope of the program design as it additionally sought to deepen the PFM reform, promote regional development, advance judicial system reform, further enhance social security reforms (in health and pensions) and contain their fiscal impact. This change in the scope of the program design appears highly relevant as it captured some important intermediate outcomes and ensured fiscal sustainability. It also provided solid grounds for continued implementation of some reforms (e.g. judicial and decentralization) even though they were omitted from the subsequent development policy loans due to a changing political environment. The third operation departed from the original longer-term development orientation to help Turkey better respond to the immediate challenges of the 2008 global crisis. This was done primarily by emphasizing the short-term constraints (domestic fiscal and external debt sustainability) and providing immediate assistance (social assistance, retraining, and job placement) under existing objectives, by introducing new objectives (e.g. labor markets), and by pragmatically integrating and continuing structural reforms started under parallel private sector DPLs in the past. Although the choice of new objectives in the PL3 might appear somewhat opportunistic, the short-term response to the crisis was important and provided a strong rationale for this set of objectives and associated measures. As a consequence, the design of the PL3 intentionally interrupted the continuity of medium-term reforms and introduced temporary short-term interventions destined to be phased out in the aftermath of the global financial crisis. Finally, the PL4 retained the thematic coverage introduced in the previous operation and sought to re-establish the longer- run relevance of the expanded set of objectives. Overall, the relevance of objectives was high as they correctly reflected both the country‟s long-term development objectives and CPS objectives, and promptly reacted to the changing circumstances during and after the global crisis. With minor exceptions, the set of objectives that evolved during the PL series remains relevant to this date and can form a basis of a viable reform agenda for the future focused on generating inclusive growth, advancing fiscally sustainable social sector reforms, and embracing the next generation of public sector and governance reforms. 18 The relevance of design of the PLs varied across operations and components. In cases in which policies supported under PLs were preceded by substantial Economic and Sector Work (ESW) and investment activities, the design of reforms was clear and, combined with appropriate ownership and leadership on the client side, led to strong and effective implementation efforts (such as in health sector reforms). By contrast, in cases for which prior knowledge of the sector or reform issue was only partial, and the ownership of reforms was weak or unclear (such as in decentralization or public administration reform), the design was less adequate and the support was short-lived. Hence, on average the relevance of design was modest. 4.2 Achievement of program development objectives Overall achievement of objectives: Rating: Satisfactory PL1: Satisfactory PL2: Satisfactory PL3: Satisfactory PL4: Satisfactory The PL series started with an objective of supporting a sustained medium-term process of legal, institutional, and structural development that aimed to promote growth and improve social conditions in Turkey. The third operation added a short-term objective of seeking an effective response to the global financial crisis. From approval of the PL1 in June 2006 till the closing of the PL4 in December 2011, the PL series supported policies and reforms that enabled Turkey to: (a) sustain strong economic growth (with modest losses during the crisis and a quick recovery thereafter) and advance public sector reforms – i.e. satisfactory achievement of objectives under pillar 1; (b) make strides in improving the social security system (in health, pension, and administration) and securing its fiscal sustainability – i.e. satisfactory achievement of objectives under pillar 2; and (c) improve labor market operations and employment opportunities, as well as create a better legal and institutional environment for private sector development – i.e. on balance satisfactory achievement of objectives under pillar 3. Pillar 1: Macroeconomic stability and public sector reform Rating: Satisfactory Macroeconomic stability Rating: Satisfactory Stable and predictable macroeconomic management is a pre-requisite for sound and inclusive economic growth and broader success of reforms. Hence, maintaining a stable macroeconomic framework has been a core component of the PL series. An IMF program ran in tandem with the PL1 and PL2 and was successfully completed in May 2008, demonstrating success in this area. The macroeconomic management since the 2001 crisis enabled Turkey to reduce public debt from 79 percent of GDP in 2001 to 42 percent in 2007. The global financial crisis impacted Turkey through loss of confidence, which reduced domestic demand and capital inflows, as well as through reduced exports. Turkish growth slowed from 4.7 percent in 2007 19 to 0.7 percent in 2008 and then to -4.8 percent in 2009. Good macroeconomic management during the 2000s, combined with Bank support through the PL3 (and discussed below), meant that there was sufficient fiscal space to allow automatic stabilizers to work during the crisis and permitted some expansion of the fiscal deficit. Additional spending included some targeted policies aimed at combating vulnerable populations. The Turkish economy recovered quickly and returned to economic growth in 2010 at a rate of 9.2 percent. The strong recovery continued to hold up in 2011 with an annual growth rate of 8.5 percent, although this was slowing towards the end of the year under pressure from further economic downturn in Europe. Unemployment fell to under 10 percent, below pre-crisis levels and investment also continued its rebound to 23 percent of GDP in 2011, up from a low of 15.3 percent in 2009. However, at an estimated 13.3 percent of GDP, domestic savings remained low. Strong domestic demand kept inflation high – at 10.5 percent, its highest level since 2003 – and led also to deterioration in the current account deficit (CAD) from 6.4 percent of GDP in 2010 to 10.0 percent in 2011. This was largely financed by short-term external capital inflows. On the fiscal side, central government revenue increased in 2011 thanks to the good economic performance, while expenditures remained under control resulting in a positive primary balance of an estimated 1.9 percent of GDP. Selected Macroeconomic Indicators (2005-2011) 2005 2006 2007 2008 2009 2010 2011 GDP Growth (%) 8.4 6.9 4.7 0.7 -4.8 9.2 8.5 Investment (as % of GDP) 20.4 22.4 21.4 22.1 15.3 20.2 23.0 Domestic Savings (as % of GDP) 15.9 16.6 15.5 16.8 13.2 13.9 13.3 Unemployment Rate (%) 10.6 10.2 10.3 11.0 14.0 11.9 9.8 CPI Inflation (%) (end-of-period) 7.7 9.7 8.4 10.1 6.5 6.4 10.5 Public Sector Primary 4.8 4.5 3.2 1.6 -1.0 0.8 1.9* Balance/GDP, % Gross Public Debt/GDP1 54.1 48.2 42.2 42.9 48.9 45.2 42.2 Gross External Debt/GDP 35.4 39.6 38.6 37.9 43.7 39.9 39.7 CAD/GDP (%) 4.6 6.1 5.9 5.6 2.2 6.4 10.0 Reserves (billion US$) (including 50.2 60.7 74.7 72.9 74.8 86.0 88.2 gold) Source: Undersecretariat of Treasury, Ministry of Development, CBRT, TURKSTAT, Bank Estimates for selected 2011 variables. *provisional Overall, the PL series helped create and sustain a stable macroeconomic environment in Turkey. During 2006-2008 (i.e. under the PL1 and PL2) this was accomplished through close reliance on macro policies designed and supported under parallel IMF programs. After the outbreak of the global financial crisis, Bank development policy loans (especially the PL3) played an important role in elevating confidence in the design of macroeconomic policy responses of the CBRT and the Treasury. This role continued to be important in the PL4 as the country successfully weathered the crisis and moved on to boost economic growth relying increasingly on domestic sources of (consumer and investment) demand. The resulting increases in the size of external deficits and the worsening term structure of external financing in the last few years opened some risks and raised concerns both about the sustainability of these trends and vulnerabilities in case of new external shocks (now more obvious in light of a double-dip global recession). The IMF and some analysts also raised concerns regarding the recent use of unorthodox 20 measures to curb the high inflows of volatile short-term finance. Although the achievements in macroeconomic performance have been exemplary, there are growing risks associated with post-crisis measures. These risks are largely related to the CAD and the short-term and portfolio capital inflows which are financing it. At the moment, Bank dialogue with the authorities is aimed at assisting the authorities in reducing the CAD over the medium term. On balance, we rate the achievement of macroeconomic stability as satisfactory. Public financial management Rating: Satisfactory The main focus of public financial management reform in the PL1 and PL2 was centered on: (i) changes in budgeting and financial reporting; and (ii) the implementation of the Public Financial Management and Control law that was passed in 2003. Medium-term budgeting is now implemented through the production of Medium Term Plans. Annual plans based on the Medium Term Plans are drawn up by the Ministry of Development. Medium term budgeting appears to have been well implemented in the health sector. Medium-term budget ceilings have allowed the Ministry of Health and related agencies to implement far-reaching reforms under a predictable budget ceiling, and reduced the risk of over-budgeting. It should be noted, however, that the medium-term focus in health budgeting owes more to the reform program of the Ministry of Health and the Social Security Institution than to improvements in the global medium-term budgeting framework. There is some debate as to the degree to which medium term budgeting is actually implemented in practice. Nonetheless, the authorities credit World Bank technical assistance with contributing towards improvements in this area. One notable success is the transition to GFS 2001 and the transition to presentation of financial statements on an accrual basis. The use of a consistent format for financial reporting at all levels of government has made reports fully comparable. The implementation of the PFMC law was, and remains, a long-term effort. The implementation of a new financial control and internal audit structure has been a particular challenge since this transferred authority and accountability from central policy institutions to line agencies. It also required a change in the financial control culture as auditors were perceived less as classical „financial police‟ and more as „management consultants‟. Such reforms led to some resistance by both auditors and those being audited, but substantial progress has been made and full implementation is likely to take several years. World Bank technical assistance linked to these reforms was strongly appreciated by the authorities. Although the overall progress in achieving improved public financial management has been somewhat slower than anticipated under the PL1 and PL2, reform efforts continued beyond the first two operations (as reflected in the improved open budget index score6) and produced a satisfactory outcome. 6 The Open Budget Index, produced by the Open Budget Initiative, assigns a score to each country based on the information it makes available to the public throughout the budget process. The score ranges from zero (no information) to 100 (extensive information). The Open Budget Initiative is an expert civil society network and the only independent, comparative and regular measure of budget transparency and accountability around the world. Of the 94 countries evaluated in 2010, Turkey ranked in the top 30 percent. In 2006, Turkey was in the 58 percentile rank. 21 Public Administration reform and governance Rating: Moderately Satisfactory Decentralization entered the PL series in the PL2 and included measures related to the setting up of regional Development Agencies (DAs). However, legal challenges delayed the establishment of DAs and the measure was dropped from subsequent operations. Despite this, DAs have now been established and are staffed (each with between 30 and 50 employees) and operational in all 26 NUTS2 regions7 (each covering several provinces) in Turkey. DAs have access to legally guaranteed funding from the central government, municipalities, Special Provincial Administrations (SPAs) and local Chambers of Commerce and Industry totaling an estimated TL 600 million in 2012. DAs operate according to national guidelines, but each one is currently producing its own development plan which focuses on areas of particular interest to each region. DAs apply for resources for individual projects from the central government (using standard EU procedural guidelines) which form part of their development plans ( however, the DAs themselves do not implement the projects for which they request funding. DAs have been encouraged to begin with small projects and build expertise. Funding totaling around TL 100 million was distributed in 2011, less than the total available resources as DAs build their portfolios. At the time of writing, it is unclear how successful DAs will be. Indications are that those that were established earlier are more advanced in terms of their ability to implement projects and provide support to businesses. However, the degree of success can only be known in the long run. A Department of Monitoring, Evaluation and Analysis was established in 2004 but there are indications that it did not collect sufficient baseline data and there are concerns over its ability to recruit and retain sufficiently skilled staff. Efforts are being made to improve this situation. Notably, a web-based central monitoring program under the Development Agencies Management System (KAYS) is under construction and should be finalized at the end of 2012. A comprehensive education program is underway in order to increase evaluation capacity of DAs and the Ministry of Development. To try to combat the weaknesses of monitoring and evaluation of projects already begun, a draft Terms of Reference is currently being prepared in order to embark on ex-post evaluations and impact assessments of regional financial supports. While recognizing the efforts to improve the monitoring and evaluation capacity, in the absence of more robust evaluation today, the overall progress in achieving greater decentralization and improving public administration reform via the establishment of regional DAs is rated as moderately satisfactory. Pillar 2: Inclusive social programs at sustainable cost Rating: Satisfactory The health reform program has been a success in Turkey and dialogue between the Bank and the authorities appears to be strongly valued by both sides. The PL series supported the establishment of a Universal Health Insurance (UHI) system that covers all citizens. The universal health coverage has been achieved within the negotiated budget. Agreeing a fixed and predictable budget in the medium term has allowed the Ministry of Health to plan reforms with a guaranteed budget. Costs have been kept down 7 Nomenclature of territorial units for statistics (NUTS) is a hierarchical system for dividing up the European economic territory for, amongst other things, the collection, development and harmonization of European regional statistics. There are three levels: NUTS1 is the largest units and each contains several NUTS2 level regions; NUTS2 are smaller regions used for the application of regional policies (as in the case of the DAs), and NUTS3 are the smallest levels. More information is available at: http://epp.eurostat.ec.europa.eu/portal/page/portal/nuts_nomenclature/introduction 22 through improvements in efficiency, better expenditure tracking systems (supported by the PL2), and by renegotiating costs with pharmaceutical companies. The „quantity‟ of healthcare provided has increased by (a) linking doctor‟s benefits to the number of patients treated and (b) limiting opportunities to earn money in other ways, through tighter control of expenditure. Despite these notable successes the health reform process is not yet complete. Efforts continue to be made to increase the qualifications of family doctors, the number of which was expanded under the UHI, as well as to encourage patients to use their family doctor for referrals to specialists (which will help to keep costs under control). In the longer run, a greater number of doctors will be required to sustain the growing demand for health care. Steps have already been taken to address this issue and student intake into medical schools has reportedly increased significantly in recent years. The PL1 supported parametric reforms of the pension system and World Bank technical assistance helped the government consider various options and draw on other countries‟ experiences using the PROST model. The retirement age was raised and various other parameters altered to reduce the long-run costs associated with the pension system. Reforms intended to harmonize pension benefits and bring the management of all public pensions under the control of a single agency, but the civil service pension reform was dropped due to legal challenges to proposed changes. Demographically, Turkey is a young country and has acted early to reduce the fiscal burden associated with its pension system. Although pensions currently contribute around three quarters of the total social security deficit (see below), this will improve over time as the full benefits of the pension reform materialize. The social security administration was previously divided between three separate agencies and the PL series supported the government‟s plan to merge these into a single agency – the Social Security Institution (SSI). The change had cost and legal implications which resulted in some delays. The non- contributory Green Card health care scheme is only now being merged with the SSI as immediate integration would have led to a sudden increase in costs, while changes to the civil service package were legally challenged resulting in delays. Nonetheless, the merger has occurred and a single agency now controls social security. This has reduced opportunities to avoid paying contributions, making the scheme more affordable, and reduced administrative costs. The PL4 supported the integration of electronic systems to make cost savings and improve administrative capacity. A target of the PL series was to maintain the combined social security deficit at below 4.5 percent of GDP to ensure its long-run fiscal sustainability. The deficit was estimated at 4.2 percent at the start of the series and the latest available data (end-2010) puts it at 3.9 percent. Of this, Ministry of Development staff estimate that around two thirds (approx. TL 20 billion) results from pensions and the rest from healthcare. However, it is difficult to compare estimations due to changes in the definition of the social security deficit. Overall, the results in providing universal health insurance, approving parametric reforms of the pension system, unifying social security administration, and securing long-run fiscal sustainability supported by the PL series are impressive. The achievement of objectives grouped under the “inclusive social programs at sustainable cost� is satisfactory. Pillar 3: Employment and private sector led growth Rating: Satisfactory Employment and education Rating: Satisfactory 23 Vocational training became an important part of the PL3 as the government took measures to mitigate the impact of the crisis and to position the economy to take advantage of the eventual upturn. Vocational training increased from around 60,000 unemployed people per year to 200,000 per year. Small stipends were paid to those who attended courses. Despite a general decrease in unemployment and an increase in labor market participation (see below), it is difficult to evaluate the impact of any particular employment program due to the unpredictable economic climate. Nonetheless, the perceived success of the vocational training program has resulted in a plan to expand it further to 300,000 people per year, with the aim to increase labor market participation, reduce unemployment and ensure relevant skills for a dynamic economy. The National Employment Agency, ISKUR, has been conducting surveys on a provincial level to understand employers‟ needs and adjust training accordingly. The program will be expanded and an increased number of „job consultants‟ which will work with both employers and the unemployed to improve job matching and training outcomes. With Bank assistance, there are plans to compare the unemployed who went through ISKUR‟s vocational training with those who did not to assess the impact of the program. Turkish unemployment increased from around 10 percent during most of the 2000s prior to the crisis to 16 percent in early 2009, but has since come down to below pre-crisis levels (around 9 percent) despite an increase in the labor force participation rate (from around 50 percent pre-crisis to 54 percent by Q3 2011). Female labor market participation has in particular increased from around 25 percent in 2006 to over 30 percent in 20118. While this reflects the strong economic rebound, it may also be partly attributable to interventions described above. The Ministries of Education and Development consider pre-school education to be important to improve longer-term education and labor market outcomes. In addition, free pre-school education disproportionately improves the educational outcomes of the poor and contributes to breaking the intergenerational poverty trap. The PL4 therefore supported the government‟s program to achieve universal pre-school education for five year olds. Initially the program was rolled out to 32 provinces where coverage reached over 90 percent by end-2010 compared to the nationwide coverage of 67.3 percent. The program aims to reach universal coverage for five year olds by 2014. The coverage of 4 year olds reached 25 percent in pilot districts by end-2010. The outcome of the pre-school education program can only be evaluated in the medium to long run based on the analyses of test scores and labor market outcomes. However, simulations by the Bank9 estimate that if today‟s 20 to 39 year olds had attended pre- school, incomes would be 8 percent higher, the poverty rate 11 percent lower, and the female labor force participation rate 9 percent higher than today. Based on available information, the program has been successful in increasing pre-school enrollment. The indicator targets used in the PL4 appear to have been achieved with ease a year early. Overall, the use of vocational training programs to improve the efficiency of the labor market has been successful both in terms of reduced unemployment and increased participation rates. On that basis the achievement of employment and education objective is rated satisfactory. 8 Data on labor market participation are available from the Eurostat website. 9 “Turkey: Expanding Opportunities for the Next Generation – a Report on Life Chances�, World Bank Report No.48627-TR, February 2010. 24 Environment for private sector growth (including Investment climate) Rating: Satisfactory  Investment climate The PL4 supported the enactment of the new Commercial Code, the Code of Obligations and the Civil Procedure Code. These aimed to align commercial matters with the EU acquis, update the enforcement of private sector contractual obligations, and reduce court workload and the corresponding burden on business, respectively. The consultative processes for these laws lasted for several years. The Commercial Code (CC) in particular was an important element of Turkey‟s efforts to modernize outdated legislation (dating from 1956) and align this body of law with modern business practices. Provisions to improve financial transparency aimed to address the lack of access to finance by SMEs. The CC ensures that companies adhere to international standards and requires them to maintain a website on which information relevant to stakeholders (including shareholders, employees and creditors) is provided and routinely updated. These improvements in transparency and financial standards were intended to foster trust in companies‟ financial positions allowing them increased access to finance (credit and venture capital). The prior actions for the PL4 were fully met and full or partial implementation of the laws is expected to follow in 2012 or 2013. Consultation between the ICR team and various stakeholders helped to conclude that the CC is likely to fulfill its aim of increasing transparency among Turkish companies and improving accounting standards. SMEs that are able to meet IFRS (listed companies already comply with these standards) are likely to be able to access increased financing as a result. However, a number of risks to implementation were cited. First, the effective implementation of the CC would require a major upgrade in the capacity of both the auditing and legal profession to deal with enhanced requirements, and this may take several years to complete. This was also identified as a risk by the PL4 task team. Second, some SMEs may be unable to comply with the new reporting standards. The need to facilitate an orderly implementation of the CC has motivated a series of amendments which were in parliament at the time of finalization of the ICR.10 During the crisis the PL3 supported the introduction of a „blind broker‟ function by the CBRT. As part of this measure, all short-term lending between banks was conducted via the CBRT, which guaranteed the credit. This gave banks confidence to provide each other with overnight lending thereby reducing the risk that a solvent but illiquid bank would suffer bankruptcy. The Turkish banking sector survived the crisis and emerged in good health. Although it is not possible to know the counterfactual, given the high risks, it appears that this measure played a role in safeguarding the financial sector during a vulnerable period. Overall, progress in passing improved legislation was good and many of the desired outcomes are likely to be achieved. Hence, we rate the achievement of improved investment climate objective as satisfactory.  Judicial 10 The Team has not been able to undertake a thorough legal review and assessment of the implications of these amendments, but a preliminary review suggests that the amendments provide for transition periods to ease implementation as well as greater amount of discretion to the regulator and the government as to the coverage and scope of the application of the reporting standards as well as the disclosure requirements. At the time of writing, the full implication of these amendments was not clear. 25 Judicial reforms were supported by the PL2 only. The aim was to improve the speed and functioning of the judicial system. The operation supported increased online connectivity of courts and other judicial bodies. They are now connected through a single intranet system which allows for e-filing of documents and the submission of legal documents using e-signatures. It also distributes cases to judges and provides updates on legal changes, including rulings by the European Court of Justice. The PL2 also supported the establishment of the Regional Courts of Appeal with the aim of reducing the burden on central courts. A law governing this became effective in 2005. Despite this success, judicial reforms were dropped from the programmatic series as government‟s focus shifted in light of the crisis. The team found it difficult to obtain more detailed information on the impacts of these reforms and on the benefits of Bank support through the PL2. Enhanced monitoring of reforms and their impacts would have improved the situation. On the basis of the limited information obtained, the overall progress in achieving a more transparent and efficient judicial system is rated as satisfactory. However, increased availability of information from both Bank and government sources would give us increased confidence in this rating.  SME credit Prior to the crisis, the Credit Guarantee Fund (KGF) provided guarantees for SMEs to borrow from commercial banks. Due to the uncertain economic environment caused by the global financial crisis, banks significantly reduced credit, and SMEs were particularly hard hit, starting in the fourth quarter of 2008. Supported by the PL3. The Treasury provided TL 1 billion of additional backing to be administered by the KGF with an intended leverage ratio of ten. This was not realized, however, and the value of guaranteed loans was only around TL 2.9 billion at end-2011. The funds were available only at the start of 2010 but by this time, Turkey was already seeing a strong turnaround from the crisis and many SMEs were able to access credit without the aid of the KGF. Despite this the growth of the fund can be seen as a success and further expansion of guarantees using the same capital is planned, with particular emphasis being put on assisting SMEs in the recent earthquake zone. The major concern is that badly performing SMEs with negative prospects are able obtain credit using KGF guarantees while those with good prospects do not require the KGF. Overall, guarantees for SME credit was a good initiative but provided too late. It should be kept alive in case of future shocks or disasters (e.g. earthquake). The achievement of the stated objective under PL series is rated as moderately satisfactory but may prove to be highly satisfactory in the future. 4.3 Justification of overall outcome rating Ratings: PL1: Satisfactory PL2: Satisfactory PL3:Satisfactory PL4: Satisfactory The PL1 included the first pillar (with macroeconomic stability and PFM objectives both rated satisfactory) and the second pillar (rated satisfactory). Hence the overall rating is also satisfactory. The PL2 included the first pillar (with macroeconomic stability and PFM objectives rated satisfactory, and public administration reform rated moderately satisfactory) and the second pillar (rated satisfactory). Given the high importance of objectives rated satisfactory, the overall rating is also satisfactory. 26 The PL3 included the first pillar (with macroeconomic stability objective rated satisfactory), the second pillar (rated satisfactory), and the third pillar (with employment objective rated satisfactory and PSD environment rated satisfactory). Hence, the overall rating is also satisfactory. The PL4 included the first pillar (with macroeconomic stability and PFM objective both rated satisfactory), the second pillar (rated satisfactory), and the third pillar (with the employment objective and PSD environment rated satisfactory). The overall rating is therefore satisfactory. 4.4 Overarching themes, other outcomes and impacts (a) Poverty impacts, gender aspects, and social development Poverty levels in Turkey declined from 28.1 percent in 2003 to 17.1 percent in 2008 (using the national poverty line), but poverty remained unchanged in rural areas. Extreme poverty has virtually disappeared. The international global crisis hit households through the labor market and unemployment rose from around 10 percent to 16 percent by February 2009. It led to a one percentage point increase in the poverty rate in 2009 according to official estimates. Given the improvements in the labor markets since the crisis (unemployment is now below pre-crisis levels and labor market participation has increased), poverty is likely to have reduced, although updated data are not currently available to confirm this. The PL series supported various measures which contributed to minimizing the impact of the crisis on the economy. This included the „blind broker‟ function, which helped to stabilize the financial sector, employment protection measures and vocational training measures which served as a safety net for the unemployed and may have contributed to the rebound in employment following the crisis. An indicator was included to monitor progress of female labor market participation, which is the lowest in the OECD and lower than in many Middle East and North African countries. This rose from 22.6 percent at the start of 2006 to 32.3 percent by Q3 2011 according to standardized Eurostat labor force survey data. The general trend is upwards and measures supported by the PL series, such as pre-school enrollment and vocational training, may have contributed to it. The PL series supported the introduction of the Universal Health Insurance which has contributed greatly to the provision of health care in the country. The health status of the Turkish people has improved, particularly that of women. Maternal mortality fell from 29 deaths per 100,000 live births in 2005 to 16.4 deaths in 2010, while infant mortality fell from 25 deaths in 2005 to 10.1 deaths in 2010, meeting the MDG targets for maternal and infant mortality. (b) Institutional change/strengthening (particularly with reference to impacts on longer-term capacity and institutional development) This programmatic PL series covered the period 2006 to 2011 which saw a number of significant institutional changes. Of particular relevance to the PL series were the as yet unfinished PFM reforms, including the medium-term budgeting and auditing process; and the consolidation of institutions governing health and social security. Both the implementation of PFM reforms and the reform of the pension system benefitted from technical assistance from the World Bank, and the capacity of relevant agencies has significantly improved. (c) Other unintended outcomes and impacts (positive or negative) 27 During the course of the PL series, the IMF program was successfully completed and the global financial crisis hit Turkey. Through the ongoing dialogue facilitated by the operations as well as the technical and financial support provided, the relationship between the government and the Bank deepened. This has helped to lay the groundwork for a new DPL series for which there is considerable demand from the government side. The focus of the new series is yet to be determined. 4.5 Summary of findings of beneficiary survey and/or stakeholder workshops Not applicable 5 Assessment of risk to development outcome Ratings: PL1: Moderate PL2: Moderate PL3: Significant PL4: Significant Different risks were identified throughout the PL series. - Financial/banking risks: PL1: Moderate PL2: Moderate PL3: Significant PL4: Significant - Political risks: PL1: Low PL2: Moderate PL3: Moderate PL4: Low - Economic risks : PL1: Low PL2: Low PL3: Significant PL4: Significant - Implementation risks: PL1: Significant PL2: Significant PL3: Moderate PL4: Significant Financial/banking sector risks: During the PL1 financial and banking sector risks were particularly related to the 2001 crisis and the potential for a „sudden stop‟ scenario for external financing. Risks were moderated by a floating exchange rate, an independent central bank with an inflation targeting policy and a reform process anchored in an IMF program and EU accession talks. During the PL2, international financial markets suffered from reduced risk appetite following the sub-prime mortgage collapse in the US. The risk of contagion from the US sub-prime mortgage collapse was identified. The Turkish banking sector‟s exposure to foreign capital added to this. Risks were mitigated by a build-up of foreign reserves by the Central Bank and a strengthening of banking regulation. The global financial crisis and an uncertain international financial environment presented considerable risks to the PL3. Indeed, the PL3 was designed to support crisis mitigation measures, including the „blind broker‟ function of the Central Bank as well as employment measures. Although the Turkish economy had begun an impressive recovery by the time the PL4 was being prepared, uncertainties in the global financial environment presented significant risks. A particular risk was presented by the widening current account deficit whose financing had shifted away from FDI and long-term inflows towards short-term inflows. As a result a „sudden stop‟ or even withdrawal of funds from emerging markets emerged as a concern. This remains a risk today and the Bank‟s dialogue with the authorities continues to focus on the efforts to reduce this risk over the medium term. Political risks: Identified political risks during the PL1 were concerned with possible early elections and potential populist policies. This risk was mitigated by the ongoing IMF program and EU accession talks. 28 In the run-up to the PL2, a case had been filed with the Constitutional Court calling for the dissolution of the ruling AK Party. Some tensions on the border with Iraq added to the political risks. By the PL3, the impact of the crisis presented the risk of declining social support for the reform agenda as well as a change in the focus of government towards short-term coping strategies. Political risks identified in the PL4 stemmed from an upcoming election which could reduce reform appetite. Economic risks: During the PL1 and PL2, economic risks were mainly linked to financial risks, although fast economic growth fueling a growing current account deficit was noted in the PL2. By the PL3, the global financial crisis had begun to affect Turkey, and resulted in the triple reduction of credit availability, consumer and investor confidence, and exports. This hit domestic demand and caused a 4.8 percent reduction in economic output during 2009. The global economic environment was uncertain during the preparation of the PL3 and events impacting Turkey lay largely outside of government‟s control. Although the Turkish economy recovered impressively from the crisis, it remained at considerable risk from sudden changes in the external environment, which were difficult to foresee. An additional economic risk stemmed from events in North Africa which could have an impact on fuel prices and prejudice the Turkish economic recovery. Implementation risks: The main implementation risks during the PL1 and PL2 were related to the Public Financial Management and Control (PFMC) law. The breadth of its reach (all central government agencies, 81 provinces, over 3200 municipalities11) and the changes required would make it difficult to implement. Technical assistance was received from the Bank, the EU and several EU countries with experience implementing similar changes. Maintaining a consensus for the social security reforms was also a risk. Implementation risks for the PL3 were reduced as the focus of the program shifted to supporting short-term measures designed to reduce risks associated with the global financial crisis. However, there remained some risk that new measures would be introduced at high cost and low effectiveness. As the economy came out of recession, the focus again pointed towards more complicated longer run reforms with associated implementation risks. 6 Assessment of Bank and Borrower performance 6.1 Bank performance (a) Bank performance in ensuring quality at entry Rating: PL1: Satisfactory PL2: Satisfactory PL3: Satisfactory PL4: Satisfactory Policy lending in Turkey was a part of a long standing relationship between the Government and the Bank based on knowledge sharing, policy dialogue, and development financing. In knowledge sharing the Bank successfully channeled worldwide experience through sector analytical work customized to the country‟s needs. Policy dialogue was shaped by the fact that Turkey is a large, sophisticated middle-income country with a broad-based policy agenda and complex political economy. In those circumstances, successful design and structuring of institutional reforms must be tailored to specific Turkey needs and agreed with a number of stakeholders through a complex consultation and buy-in process. 11 At the time the law was passed there were around 3200 municipalities. This number has since been reduced. 29 In addition, it is clear that in Turkey the preparation of reforms does not lead to immediate implementation since it is difficult to predict when the demand for specific reforms might come to the fore. A key to success of a programmatic development policy loan in such an environment is to build a pipeline of reform ideas on a broad reform front and allow flexibility in combining feasible reforms into meaningful packages that can be supported by a series of PLs depending on country needs, domestic political economy issues, and international circumstances. Hence, a broad programmatic PL series with thematic flexibility and shifting areas of dialogue in line with changing needs appears to be a good match. There is scope to further improve the use of DPLs by the Turkish government to design, structure, sequence, and time future reforms. The financing did not appear to be important prior to the crisis but became important later on as an insurance policy and contribution to strengthening the public sector‟s long-term sources of financing. In short, the PL series was based on longer-term policy dialogue and was selectively underpinned by strong analytical work and technical support. The preparatory work was well-coordinated within the Bank‟s multi-sector team, and the program design was sufficiently flexible to include country development priorities and accommodate changes in economic, social, and political circumstances. The timing of individual operations in the PL series was good: the first operation was in sync with the approval of the Ninth Development Plan, the third enabled timely response to the global crisis, and the fourth allowed a smooth transition from short-term crisis response back to longer-term structural reforms. The broad agenda of the PL series was suited to an environment in which it was difficult to assess when different reforms would rise to the fore. However, going forward, in the absence of programmatic DPLs, more focused support by the Bank on specific policy areas might be warranted in the future, but may require more upfront investment to be able to predict the salience and timing of reform measures. (b) Quality of supervision Rating: PL1: Satisfactory PL2: Satisfactory PL3: Satisfactory PL4: Satisfactory In the case of the PL1, the brunt of the substantive supervision effort was embedded in the preparation of the loan. For all subsequent loans, the ongoing supervision served as a major input into the preparation of the next operation. Most notably, the supervision capacity established under the first two operations served as a basis which enabled a quick and effective shift to short-term policy responses to the global crisis addressed in the third the PL, and a return to longer-run structural reform issues in the PL4. The supervision effort was anchored in a strong field-based country team which maintained a continuous policy dialogue on reforms supported by the PL series, monitored the agreed outcome indicators, and prepared a broader list of indicators aligned with the changing policy scope of the series. This effort was often closely related to ongoing ESW and other project work which provided a broader reform context and enabled a greater depth of the monitoring work. In its supervision activities the country team engaged with the Treasury (formal policy counterpart), Ministry of Development, Ministry of Finance and a wide range of line ministries responsible for the substantive reforms supported under the PL series. Overall, the supervision arrangement created an almost seamless integration between supervision and preparation of downstream operations in line with the intended design of programmatic loan series. 30 (c) Justification of rating for overall Bank performance Rating: PL1: Satisfactory PL2: Satisfactory PL3: Satisfactory PL4: Satisfactory Bank performance both at entry and during supervision benefitted from the long-term relationship and close dialogue with the Government on reforms, as well as ongoing ESW and other project work. This improved the choice, content, and coherence of reforms and paved the way for good performance in some otherwise difficult areas (such as health and pension reform). (a) Government performance Rating: PL1: Satisfactory PL2: Satisfactory PL3: Satisfactory PL4: Satisfactory This series was a continuation of development policy loans started in the aftermath of the 2001 crisis. Turkey greatly valued long-term collaboration with the Bank in acquiring access to global knowledge on policy and institutional issues, developing country specific diagnostics, maintaining policy dialogue and shaping specific sector reforms, as well as obtaining long-term budget support financing under favorable terms. The Deputy Prime Minister for Economic and Financial Affairs had the leading role in the design of macroeconomic policy and institutional reforms were coordinated within the Economic Council which additionally included core economic ministers and relevant line ministries. The new institutional set-up strengthened the ownership and commitment to the government reform program, and facilitated policy dialogue on the choice of viable reforms in the context of Turkey. It helped to navigate the broad-based policy agenda and address complex political economy issues to arrive at institutional reforms tailored to country circumstances. (b) Implementing agency or agencies performance Rating: PL1: Satisfactory PL2: Satisfactory PL3: Satisfactory PL4: Satisfactory As the implementing agency, Treasury played an effective role in monitoring progress on agreed policy areas and maintaining frequent contacts with the Bank‟s core supervision team. Treasury also maintained a separate line of communication with the Ministry of Finance, Ministry of Development and many participating line ministries. The Treasury also used its position to solicit ideas and proposals from participating ministries and facilitate the preparation of new operations in the series. However, although implementing agencies tended to be aware of the policies supported by the DPL, they were not always aware of the DPL itself. This style of policy, reform and implementation coordination based on one-way bilateral communication between the Treasury and participating agencies produced solid results during this PL series. Going forward, Treasury might be able to use its convening power and the policy content of future DPL series to strengthen inter-ministerial coordination, bring together participating line agencies and promote peer learning or cross-fertilization on reform implementation experiences. Overall the performance of the implementing agency is rated satisfactory. 31 (c) Justification of rating for overall Borrower performance Rating: PL1: Satisfactory PL2: Satisfactory PL3: Satisfactory PL4: Satisfactory Throughout this PL series the Borrower worked closely with Bank in designing and implementing policy reforms aligned with the country‟s medium-term development plan and immediate needs in responding to external shocks. The Deputy Prime Minister for Economic and Financial Affairs and the Treasury had the lead role in shaping the policy content of the operations, overseeing progress and adjusting the priorities in line with evolving policy and reform agenda in the country. This helped maintain relevance and promote the achievement of results envisaged under individual operations and the series overall. 7 Lessons learned 1. The flexibility of the PL series was very important in order to adapt to both external and internal political economy factors. This enabled the Bank to remain relevant and continue dialogue with government as the reform agenda adapted. A programmatic approach is best suited to this requirement for flexibility. Going forward, and given that exposure constraints limit the scope for a multi-year programmatic DPL engagement in Turkey, a more focused approach may be warranted, which in turn would need to be supported by more upfront investment and high level dialogue by the Bank to remain responsive to the government‟s needs and mitigate the risk associated with a narrower policy focus. 2. The authorities value greatly the analytical work and technical assistance which includes a mix of local knowledge and international experience from the Bank. PLs based on this mix of support are likely to yield the strongest results through the ongoing dialogue. 3. The benefits of supporting reforms on an opportunistic basis, without parallel technical assistance or analytical work are not clear. In such cases, monitoring and evaluation arrangements appear to be somewhat weak. There may be advantages to supporting such reforms as Bank backing can act as a signaling device. However, in such cases, improvements in monitoring and evaluation could be made. Closer coordination with relevant ministries on monitoring the indicators may help this process. 4. A more focused PL series may improve monitoring and evaluation and enable communication among different stakeholders. However, a degree of the flexibility afforded by the broader approach may also be lost. 5. Going forward, Treasury might be able to do more to use its convening power and the policy content of future DPLs to strengthen inter-ministerial coordination, bring together participating line agencies and promote peer learning or cross-fertilization on reform implementation experiences. 8 Comments on issues raised by Borrower (a) Borrower/Implementing agencies N/A. (b) Cofinanciers 32 N/A (c) Other partners and stakeholders N/A 33 Annex 1: Bank lending and implementation support/supervision processes (a) Task team members Programmatic Public Sector Development Policy Loan (PPDPL, PL1) - P071052 Name Title Unit Responsibility/specialty Amitabha Lead Public Sector Mukherjee Specialist ECSP4 Anand Rajaram Sector Manager AFTPR Andrina A. Ambrose-Gardiner Senior Operations Officer ECSS3 Anita M. Schwarz Lead Economist ECSH3 Ayse Seda Sr Financial Management Aroymak Specialist ECSO3 Devesh Chandra Mishra Manager ECSO2 Dilek Barlas Deputy Executive Secretary IPN Enis Baris Sector Manager MNSHD Gary J. Reid Consultant AFTP2 Jeanine Braithwaite Consultant AFTSP John A. Innes Consultant Kamer Karakurum- Ozdemir Senior Economist ECSP2 Mathew A. Verghis Lead Economist EASPR Mediha Agar Senior Economist ECSP2 Mukesh Chawla Head HDNOP Peter A. Dewees Lead Specialist ARD Pinar Baydar Senior Program Assistant ECCU6 Rodrigo A. Chaves TTL, Sector Director ECSP2 Lead Financial Sanjay N. Vani Management Specialist OPCFM Lead Economist and Sector Zafer Mustafaoglu Leader, PREM LCSPR Second Programmatic Public Sector Development Policy Loan (PPDPL 2, PL2) - P088837 Name Title Unit Responsibility/specialty Anita M. Schwarz Lead Economist ECSH3 Aristomene Varoudakis Adviser IEGCC Ayse Seda Sr Financial Management Aroymak Specialist ECSO3 Banu Demir Consultant David S. Bernstein Senior Operations Officer INTSC Dilek Barlas Deputy Executive Secretary IPN Hannah M. Koilpillai Senior Finance Officer Senior Governance James Anderson Specialist EASPR Jeanine Braithwaite Consultant AFTSP Jesko S. Hentschel Sector Manager DECWD John A. Innes Consultant 34 Kamer Karakurum- Ozdemir Senior Economist ECSP2 Mark Roland Thomas Lead Economist ECSP2 Mediha Agar TTL, Senior Economist ECSP2 Pinar Baydar Senior Program Assistant ECCU6 Raif Can E T Consultant Rodrigo A. Chaves Sector Director ECSP2 Lead Financial Sanjay N. Vani Management Specialist OPCFM Sarbani Chakraborty Senior Health Specialist EASHH Seema Manghee Sr Water & Sanitation Spec. TWIWA William R. Lead Public Sector Dillinger Management Specialist ECSP4 Sr Financial Management Zeynep Lalik Specialist ECSO3 Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL, PL3) - P112495 Name Title Unit Responsibility/specialty Adriana Jordanova Lead Environmental Damianova Specialist ECSS3 Angela G. Armstrong Senior Operations Officer ECSS3 Sr Social Protection Asta Zviniene Specialist ECSH3 Ayse Seda Sr Financial Management Aroymak Specialist ECSO3 Carlos Pinerua Country Sector Coordinator ECSF1 Cihan Yalcin Senior Economist ECSP2 Cristobal Ridao- Cano Country Sector Coordinator ECSH4 David S. Bernstein Senior Operations Officer INTSC Diego Angel- Urdinola Senior Economist MNSSP Jesko S. Hentschel Sector Manager DECWD Juan Diego Alonso Education Economist LCSHE Kamer Karakurum- Ozdemir Senior Economist ECSP2 Margaret Png Lead Counsel LEGEM Mark Roland Thomas TTL, Lead Economist AFTP4 Mediha Agar Senior Economist ECSP2 Muammer Komurcuoglu Consultant ECSP2 Pinar Baydar Senior Program Assistant ECCU6 Rekha Menon Senior Economist ECSH1 Sarbani Chakraborty Senior Health Specialist EASHH Sebastian Albert Martin Trenner Consultant ECSPF 35 Tunya Celasin Sr External Affairs Off. ECCU6 Sr Financial Management Zeynep Lalik Specialist ECSO3 Second Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL 2, PL4) - P123073 Name Title Unit Responsibility/specialty Carlos Pinerua Country Sector Coordinator ECSF1 Cristobal Ridao- Cano Country Sector Coordinator ECSH4 Kamer Karakurum- Ozdemir Senior Economist ECSP2 Margaret Png Lead Counsel LEGEM Marina Wes Lead Economist ECSP2 Mark Roland Thomas Lead Economist AFTP4 Mediha Agar Senior Economist ECSP2 Nicholay Chistyakov Senior Finance Officer CTRLN Pinar Baydar Senior Program Assistant ECCU6 36 (b) Staff time and cost Programmatic Public Sector Development Policy Loan (PPDPL, PL1) - P071052 Staff time and cost (Bank budget only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending 62.31 254.0 Supervision 0 0 Second Programmatic Public Sector Development Policy Loan (PPDPL 2, PL2) - P088837 Staff time and cost (Bank budget only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending 141.72 674.5 Supervision 0 0 Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL, PL3) - P112495 Staff time and cost (Bank budget only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending 124.79 576.5 Supervision 0 0 Second Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL 2, PL4) - P123073 Staff time and cost (Bank budget only) Stage USD Thousands (including No. of staff weeks travel and consultant costs) Lending 54.78 287.1 Supervision 1.8 39.7 Annex 2: Beneficiary survey results N/A 37 Annex 3: List of people consulted during ICR preparation (a) Bank staff Name Position Unit Martin Raiser Country Director, Turkey ECCU6 Ulrich Zachau former Country Director, Turkey ECCU6 Ina-Marlene E. Ruthenberg Country Program Coordinator Turkey ECCU6 Benjamin Edward Welch JPA, Turkey ECCU6 Marina Wes Lead Economist, Turkey ECSP2 Kamer Karakurum-Ozdemir Senior Economist, Turkey ECSP2 Mediha Agar Senior Economist, Turkey ECSP2 Cevdet Cagdas Unal Research Analyst, Turkey ECSP2 Mark Thomas former Lead Economist, Turkey ECSP2 Carlos Pinerua Country Sector Coordinator, Turkey ECSF1 Cristobal Ridao-Cano Country Sector Coordinator, Turkey ECSH4 Sarbani Chakraborty Senior Health Specialist ECSH4 Rekha Menon Senior Economist (health) ECSH1 Klaus Decker Public Sector Specialist (legal) ECSP4 Rodrigo Chaves former Lead Economist, Turkey ECSP2 Anita Schwarz Lead Economist ECSH3 38 (b) Non-Bank staff Name Position and Affiliation Treasury Fırat Yılmaz Former Treasury Expert Korhan Erdoğan Deputy Director General for SOEs Elvan Ongun Acting Deputy Director General for Foreign Economic Relations Ministry of Development Ahmet Alper Ege Head of Department, Social Sectors-Education, Ministry of Development Gökhan Güder Social Sectors-Labor, Ministry of Development Ahmet Oğuz Sarıca Head of Social Security Finance, Ministry of Development Fatih Türkmen Health and Social Security Department, Ministry of Development Cihan Yalçın Research and Monetary Policy Department, Central Bank Murat Kara Regional Strategy Development, Ministry of Development Social sectors (outside of Ministry of Development) Ahmet Açıkgöz Strategy Development Department, Social Security Institute Namık Ata Undersecretary, Ministry of Labor and Social Security Ministry of Finance Hakan Ay Head of Department, Budget Department, Ministry of Finance Ahmet Kesik Strategy Development, Ministry of Finance Ertan Erüz Deputy General Director, Budget Department, Ministry of Finace External Ahmet Başpınar Independent auditor (formerly Ministry of Finance) Tuncay Teksöz TEPAV (formerly Health) Emin Dedeoğlu TEPAV (governance) Mark Lewis IMF Resident Representative Eray Akdağ TUSIAD Hikmet Kurnaz Credit Guarantee Fund 39 Annex 4: Summary of borrower’s ICR and/or comments on draft ICR 1) Introduction Programmatic Public Sector Development Policy Loan (PPDPL I) is the first in a series of programmatic loans in support of the Government‟s comprehensive reform of the public sector. PPDPL I supported a sustained medium term process of legal, institutional and structural development that promotes growth and improves social conditions by (a) maintaining an enabling macroeconomic framework, (b) reforming substantially the country‟s social protection system, which covers social security, universal health insurance and social assistance, (c) upgrading the public financial controls and expenditure management and (d) improving administration and governance in the public sector. Second Programmatic Public Sector Development Policy Loan (PPDPL II) was based on PPDPL 1 and was designed around the same four areas. Restoring Equitable Growth and Employment Development Policy Loan (REGE DPL I) continued to support Turkey‟s public reform agenda under the PPDPL series. The REGE DPL I also focused on managing the impact of the global crisis and transition to recovery as well as job creation through business climate reforms previously supported under the Competitiveness and Employment Development Policy Loan (CEDPL) series. The main areas supported under REGE DPL I are (a) maintaining inclusive social programs at sustainable cost, (b) enhanced public financial management, (c) employment and social protection during the crisis and (d) private sector led growth and job creation after the crisis. Second Restoring Equitable Growth and Employment Development Policy Loan (REGE DPL II) is the final loan in the series of four DPLs. It builds on the reform program defined in the REGE DPL I. Our comments about the implementation of the structural reform program supported by PPDPL I, PPDPL II, REGE DPL I, REGE DPL II are as follows: 2) Macroeconomy Thanks to comprehensive structural reforms that have been implemented since 2002 and effective macroeconomic management, the Government was able to maintain a satisfactory macroeconomic framework throughout the period covered under the PPDPL and REGE DPL series. The Government‟s current medium-term macroeconomic framework encompasses policies to increase employment, maintain fiscal discipline, expand domestic savings, and reduce current account deficit. These policies are targeted to achieve sustainable growth while rising prosperity of Turkish citizens. Turkey‟s economy was impacted by the global financial crisis as economy contracted by 4.8 percent 2009, but recovered quickly as a result of proactive measures taken by the Government. Turkey has become one of the fastest recovering economies in the world with its impressive growth rates of 9.2 percent in 2010 and 8.5 percent in 2011. In parallel to this development, there was a significant decline in the unemployment rate despite an increase in the labor market participation rate. Seasonally adjusted unemployment rate fell from 14.0 percent in 2009 to 9.8 percent in 2011. 40 The Government has maintained fiscal discipline as evidenced by the debt ratios. The gross public debt as a percentage of GDP which fell from 74 percent in 2002 to 39.9 percent in 2007 declined further to 39.4 percent in 2011 after a temporary rise in 2008-2009 due to the golobal crisis. In addition to prudent fiscal policies, Turkey‟s strong banking sector was an important underlying factor in maintaining a healthy fiscal position. Although many countries had intervened in and supported their respective banking sector with government financing during the global crisis and afterwards, there was no need to take any such measures in Turkey due to the timely implementation of prudent banking regulations since 2002. High and persistent inflation rates have become history for Turkey owing to to the structural reforms started in early 2000s. The CPI inflation declined to single digits in 2004 for the first time in decades and remained below 10 percent afterwards except for some short periods of rise. More recently, the 12-month CPI inflation increased from 6.4 percent in December 2010 to 10.45 percent in December 2011. The rise in import prices, exchange rate developments, and the increase in the prices of unprocessed food and tobacco products were the main factors driving the increase in CPI inflation in 2011. The Central Bank of the Republic of Turkey (CBRT) responded this increase in the CPI by strongly tightening the monetary policy. CBRT expects the CPI to gradually decline in the forthcoming period and reach the 5 percent target by mid-2013. Looking at the most recent inflation figures, a downward move has been observed as the CPI inflation realized as 8.28 percent in May 2012. As the growth rate picked up and oil prices rose, current account deficit widened both in 2010 and 2011. In this period, capital inflows to Turkey increased as a result of a rise in portfolio investment and external borrowing by banks as well as a moderate rise in the FDI. Macro-prudential measures and monetary policy aiming to reduce current account deficit via curbing credit growth have been taken by CBRT and Banking Regulation and Supervision Agency (BRSA) since end 2010. Continuation of prudent fiscal policy has also supported these efforts. These measures have paid off as the current account balance improved remarkably starting from the last quarter of 2011. The Government is committed to address the structural factors driving the current account deficit over the medium term. To this end, the Government will continue efforts to follow prudent fiscal discipline, to diversify export markets, to encourage the private pension system, to enhance labor market flexibility while protecting workers, to improve investment climate, to shift towards renewable energy, and to promote energy efficiency projects. In addition to these, comprehensive policies for increasing domestic savings will be implemented. 3) Public Financial Management The enactment of the Public Financial Management and Control (PFMC) Law No. 5018 in 2003 has provided a new legal framework for modern public expenditure management and accountability. The government is committed to satisfactory implementation of this landmark Law. The underlying objectives of the PFMC Law are to improve the quality of the public service delivery, enhance the functioning of the government, and increase accountability and transparency in the public sector. With this Law, the government introduced strategic management concept through linking plans and policies with the budgets, initiating institutional strategic plans and performance budgets, and introducing medium term fiscal framework in the budgeting process. 41 Reforms introduced by the PFMC Law are ongoing in line with the Government‟s timetable. The government has issued all required secondary legislations for the implementation of the PFMC Law. Among these, the critical ones are; (a) rules and procedures of strategic planning in the public administrations, (b) rules and procedures of internal control, (c) public sector internal control standards, (d) financial services experts regulation, (e) rules and working principles of the strategy development units, (f) rules and working principles of internal auditors, and (g) internal audit strategy paper. With the enactment of PFMC Law, budget preparation process was strengthened; a transition was made to multi-year budgeting; implementation of preparing accountability reports by public administrations was started to increase fiscal transparency and accountability; and unity was achieved in budget classification and accounting system of public sector. Multi-year budgeting implementation which started in 2006 has made great contributions to increase foreseeability and strengthen transparency in public financial management. Efficiency of multi-year budgeting system has increased with the completion of transition to strategic planning and performance based budgeting by administrations. Within the framework of multi-year budgeting system, the process of preparing a multi-year budget commences with the approval of Medium Term Program which includes basic policy priorities and basic economic figures. The second important document directing budget preparation process and multi-year budgeting approach is Medium Term Fiscal Plan which has to be in compliance with Medium Term Program. This plan includes total revenue and expenditure estimations pertaining to following three years, targeted deficit and borrowing status and appropriation proposal ceilings of public administrations. For the successful implementation of the PFMC Law, strategy development units were established. These units which are fully operational in all general government institutions are responsible for the financial management and control functions. More specifically, they cover strategic planning, performance based budget preparation and its execution, internal control, and accounting and reporting. In addition to strategy development units, introduction of accrual basis accounting for the public institutions is an important part of PFMC Law. Accrual basis accounting started for the central government institutions (general budget, special budget and regulatory and supervisory agencies) in 2006. After the issuance of detailed accounting plans for local administrations which are consistent with the general government accounting regulation, Ministry of Finance started collecting the local administrations‟ financial data on an accrual basis consistent with the rest of the general government and incorporated electronically quarterly trial balance of the local administrations into the accounting system. Through this development, the consolidated local administrations balance sheet started to be generated by the Ministry of Finance on an accrual basis beginning from 2006. The Ministry of Finance revised Performance Program (previously called Performance Budgeting) Guidelines in July 2009 and issued legislation on the performance program in the same month. To support institutions in the preparation of performance programs in line with their strategic plans, the Ministry of Finance provided training to the representatives of 172 public institutions. 42 With PFMC Law, the Turkish public financial management and control system has changed and new assignments have been given to the Turkish Court of Accounts (TCA). Within this framework a new TCA Law No.6085 was enacted in December 2010. It modernizes the external audit and introduces financial audit to complement the previously undertaken compliance and performance audits. The enactment of this Law grants the TCA the authority to conduct financial audits on the financial statements of public administrations. Furthermore, the Law brings the auditing practices conducted in Turkey closer to the international standards. The new TCA Law aims at supporting the objective of the Government to establish a performance based budgeting and management system that ensures accountability, transparency, and effectiveness and efficiency in collection and utilization of public resources. The Government enacted the State Aid Law No. 6015 in October 2010 to bring the Turkish legislation in line with EU Acquis. The implementation of the law, which will begin by 2013, will improve the fiscal transparency and the effectiveness of public expenditures by regulating monitoring and supervision mechanisms for the state aid. Turkey has made a comprehensive local administration reform to achieve a more evenly distributed growth at local level and improve service delivery. Through the enactment following five laws a new and modern legal framework for local administrations has been established: (i) Metropolitan Municipalities Law (Law No.5216, enacted in July 2004), (ii) Special Provincial Administrations Law (Law No. 5302, enacted in March 2005), (iii) Local Administration Unions Law (Law No.5355, enacted in May 2005), (iv) Municipalities Law (Law No. 5393 adopted in July 2005), and (v) the Law on special provincial administration and municipality revenues (Law No. 5779 adopted in July 2008). While the laws provide more flexible and effective human resource policies, they also impose greater discipline on municipal personnel expenditures and borrowing. The Municipalities Law has modernized the organizational structures, duties and authorities, working and service methods, human resource management and fiscal structures of municipalities. The law attempts to strengthen municipal effectiveness in service provision, including greater authority on urban development and planning. Parallel changes have also been made to the legal framework for Metropolitan Municipalities. The new system introduced by these laws, involves delegation of a number of responsibilities to the local authorities. In order to ensure consistency between the cost of delivering the services and revenue assignments, the revenue structures of local administrations have also been changed with the Law No. 5779 on special provincial administration and municipal revenues. The law aims at increasing transparency, reducing unpredictability and arbitrariness, diminishing central control over local governments, ensuring minimum levels of service provision, and encouraging the effective use of resources. In addition to actions under the local administration reform discussed above, a significant step in addressing regional development issues was the enactment of Law No. 5449 on the establishment of Development Agencies (DAs) in January 2006. The law provides the framework for establishing development agencies charged with assisting sustainable regional development as means to reduce regional disparities and contribute to overall national development. Their functions include (a) strengthening cooperation between the public and private sectors, including NGOs; (b) ensuring efficient and appropriate use of resources allocated to local development; (c) triggering local economic potential, and (d) stimulate investment through financial and other support services -with these functions being 43 conducted in a manner consistent with national development policies and priorities. One key positive aspect of the law is that it provides transparency and accountability in the functioning of the DAs. 26 DAs have been established and become fully operational. Currently 930 experts and supporting staff are working in DAs. A National Strategy for Regional Development is under preparation. Subsequent to the preparation of this central level strategy, each region will then prepare a second round of regional plans. 4) Inclusive Social Programs at Sustainable Cost As an important part of the fiscal management reform, Government introduced a serious reform of social security and universal health insurance. In order to ensure long term fiscal sustainability and equity in the social security system, one of the most prominent actions taken was the implementation of the Social Security and Universal Health Insurance Law No. 5510, which was enacted in June 2006 and amended in May 2008. Universal Health Insurance was introduced with the objective of enhancing efficiency and quality of the health system. The Universal Health Insurance reform being implemented in Turkey today is a fundamental structural reform, matched in importance and size by few other countries in the world. As of February 2012, universal health insurance coverage rate has reached to 95.6 percent. Universal health insurance scheme and family medicine system are important parts of Health Transformation Program in Turkey. By the end of 2010, the expansion of family medicine to all 81 provinces was completed. Gains in access and quality of health services have translated into significant improvements in health outcomes. Turkey has already met the Millennium Development Goals for maternal and infant mortality. In order to ensure the efficiency of health services and expenditures several measures have been taken. In line with Law No. 5510, Social Security Institution (SSI) has been implementing global budget for state hospitals together with Ministry of Health (MoH) since 2007. In addition, in 2010, global budget implementation for pharmaceutical expenditures together with the drug industry, expenditure caps for university and private hospitals, and co-payments for out-patient visits have already been introduced. Regarding the administrative dimension of the reform, the Social Security Institution Law No. 5502 was enacted in May 2006, which unifies three separate social security systems under the single umbrella of the SSI. This reform provided Turkey with an administratively unified pension system. Significant progress has been made so far including the integration of the staff and merger of departments with parallel functions. Moreover, databases and IT systems of the previous three social security systems have been merged and there are ongoing projects to further improve the system. 44 5) Employment and Education In line with its private sector led growth strategy, the Government gives utmost importance to improve the climate for business growth and competitiveness in order to ensure equitable growth and provide more and better jobs to Turkish people. Government has taken important step towards modernizing the regulatory framework for businesses and improving investment climate. In this respect, a New Commercial Code No.6102 was enacted in February 2011. The new Commercial Code brings a more transparent financial reporting, which is particularly important for firms‟ access to finance and equity capital; strengthens shareholders‟ rights; enhances accountability of companies‟ management boards; and introduces modern financial instruments and business practices. The Government is currently working on some revisions to Commercial Code with an aim to alleviate its potential burden especially on small and medium size businesses. Those revisions are expected to be completed before the effectiveness date of the Law. In parallel to the Commercial Code, government also adopted the new Code of Obligations in January 2011, which among other improvements governs the implementation and enforcement of private sector contractual obligations. Another action taken which complements the new Commercial Code is the recent enactment of Civil Procedural Code, which reduces court workloads and the related burdens on businesses. The enactment of the law for the establishment of Regional Courts of Appeals which became effective in 2005 was another important step aiming at improving the justice system and easing the backlog of cases. The Regional Courts of Appeals are expected to be fully operational in 2012. Formation of online connections among courts through satisfactory implementation of the National Judicial Network Project (UYAP) has also helped expediting the judiciary process. Currently, almost 100 percent of courthouses are connected to the system. The Coordination Council for the Improvement of the Investment Environment (YOIKK) plays the central role in improving business climate. The Council conducts its agenda with the help of 12 Technical Committees working on specific issues with participation of both public and private institutions. YOIKK approved an action plan in 2007 including reforms in key policy areas and updated it in 2008 and 2009. Among others, an amendment in the Customs Law in 2009 which aimed at streamlining customs procedures and reducing costs was one of the significant achievements of the YOIKK Action Plan. The Government continues its efforts to improve access and quality in the education system. To further improve the quality of education, curriculum reforms in primary, secondary and vocational education are being implemented. Moreover, given the importance of early childhood development in improving the quality and equity of learning outcomes, the Ministry of National Education is working to increase preschool enrollment with the goal of universal preschool education for 5 year-olds by 2014. The implementation of universal preschool education was started in 32 provinces for the 2009-2010 school year and 15,500 new preschool teachers were hired to satisfy the needs. Its coverage was expanded to 25 additional provinces for the 2010-2011 school year and to another 14 provinces for the 2011-2012 school year. 45 Employment and labor market reforms have been a top priority for the Government. The Government‟s labor reform agenda is framed in the 9th Development Plan and covers three main policy areas; namely, reducing non-wage labor costs, raising skills, and making the labor market more flexible while improving worker protection. Global crisis‟s main negative effect was seen in rising unemployment rates. In order to alleviate the effects of global crisis on labor markets, the Government introduced several measures. In this regard, across the board 5 percent reduction of employers‟ social security contributions, a time bound reduction of employers‟ social security contributions for the young and women, increase in short-time employment compensation and extension of its implementation and expansion in the Active Labor Market Programs (ALMPs) were some of the major measures introduced in response to the global crisis. ALMPs serve the objective of strengthening the education – employment link and decreasing the adverse social effects of the unemployment. The Government has continued to increase the coverage of ALMPs and improve their quality and effectiveness, with a focus on vocational training. The number of beneficiaries increased to 250.016 in 2011 from just over 17.000 in 2006. The Omnibus Law No.6111 which was enacted in February 2011 reduced disincentives to part time work and extended the program of subsidies to new employees, particularly women and youth. The Government is preparing a comprehensive national employment strategy in which making labor markets more flexible while increasing the protection of workers is among the main focus areas. SMEs provide almost 80 percent of employment in Turkey. The government has taken necessary steps to reactivate and expand credit activity in the banking sector in order to keep the credit channels open, mainly for the SMEs. One of the most important measures in this context is the enhancement of the existing Credit Guarantee Fund (CGF). To that aim, the Public Finance and Debt Management Law was amended to provide authority for issuing an additional TL 1 billion for the CGF to help expanding credit channels for SMEs by meeting their collateral needs. In 2010, the total amount of the CGF guarantee for SMEs under Treasury support stated as TL 139.9 million which resulted in a loan size of TL 217.7 million. In 2011, the loan size reached to TL 482.3 million with a rise by 122 percent and Treasury supported guarantee amount raised to TL 317.6 million. Therefore, after the introduction of Treasury support scheme, from the end of 2009 to the end of 2011, with TL 457.5 million CGF guarantee, total loan size was reached to TL 700 million. To respond to the crisis the Central Bank of Turkey (CBT) has also taken several measures. In this respect, CBT implemented “blind broker� facility through which effectively provided insurance covering foreign exchange risk defaults. 6) General Comments The program areas of PPDPL – REGE DPL series were well identified and their complementary nature was well established. PPDPL – REGE DPL series were closely related with Turkey‟s 9th Development Plan. Their programmatic design proved to be effective in the supporting the public sector legal and institutional reforms. REGE DPL series were very well in line with the Government‟s program on macroeconomic stability and medium term structural reforms to support economic growth and job creation. 46 The Bank‟s support to Turkey‟s reform program through PPDPL – REGE DPL series is highly appreciated. Furthermore, we commend the Bank for its approach in terms of customization and alignment of the structure of DPLs with our country‟s own priorities, which are prerequisites for ensuring country ownership. Successful implementation of the reform programs supported by PPDPL – REGE DPL series demonstrates a strong country ownership. We would like to underline that there was always a close dialogue between the Bank and the Government on policy issues and design of the DPLs. Analytical and advisory work of the Bank which significantly contributed to the policy dialogue in several reform areas supported by the PPDPL – REGE DPL series is also highly appreciated. Strong links between analytical studies and Bank lending provided the foundation for a well-designed development policy operation. With respect to the design and structure of the PPDPL – REGE DPL series, in total, there were thirty-two prior actions for four DPLs, which are considered to be the most critical policies to achieve the Government‟s reform objectives. Therefore, we would like to express our satisfaction with the increase in the quality and relevance of prior actions as well as the decrease in their number compared to previous operations. These features in new DPLs are considered to be highly influential for an effective implementation. Although some DPLs included measures in diverse areas this was mainly due to the need for responding to the necessities of global crisis while simultaneously continuing to address the longer term reform issues rather than a loss of focus. It is worth mentioning that none of the major risks mentioned in the program documents of DPL series have realized. Turkey has a stable government since 2002 and was able to weather the global financial crisis thanks to its strong financial sector and healthy fiscal stance. Having a constant policy dialogue based on our country‟s needs and priorities helps designing right reform programs. In this respect, we would like to have the continued support of the Bank in our ongoing reform agenda by new Development Policy Loans. 47 Annex 5: Comments from cofinanciers and other partners/stakeholders N/A Annex 6: List of supporting documents 1. Program documents: Report No. 36274 – TR, Report No. 43473-TR, Report No. 51062-TR, Report No. 59629-TR 2. Turkey: Country Partnership Strategy 2012-15, Report No. 66656-TR 3. Turkey: Country Partnership Strategy 2008-11 Progress Report, Report No. 51689-TR 4. Turkey: Country Partnership Strategy 2008-11, Report No. 42026-TR 5. ICR for Competitiveness and Employment DPL, Report No. ICR00001008 6. ICR for Programmatic Financial and Public Sector DPL, Report No. ICR0000542 7. IMF Article IV Consultation, January 2012, IMF Country Report No. 12/16 8. EC Turkey Progress Report 2011, SEC(2011) 1201 final 48 TU R K E Y 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. 26°E 28°E 30°E 32°E 34°E 36°E 38°E F E DE R US S I AN FE D E R AT ION I ON B U L G ARIA UL ULG A R IA Blac k Sea 0 50 100 150 200 Kilometers To To Burgas 42°N Kurdzhali 0 50 100 150 Miles GE GE OR GI A 42°N Edirne Sinop Kirklareli To Istanbul Strait Bartin Batumi (Bosphorus) Zonguldak Ku zey CE a Tekirdag Samsun Artvin Kur Istanbul Kastamonou Ana To EE To Komatini Sea of Kocaeli (Izmit) Düzce Karabük Devr ez dolu Dag Ordu Trabzon Ardahan Kirovakan AZER- GR lari Rize Marmara Yalova Sakarya Giresun BAIJAN Bolu il ruh Kars (Adapazari) Çankiri Kiz Amasya Ço AR MENIA ARMENIA Çorum Kelki 40°N Çanakkale Bilecik t Gümüshane 40°N Çanakkale Bursa Tokat Bayburt Ara s Agri Dagi Strait Sakar ya (5166 m) (Dardanelles) erek Igdir Balikesir Eskisehir Cek Agri ANKARA Erzincan Erzurum Kirikkale Yozgat Sivas t Kütahya Fira To Maku AZER. zil Ki Kirsehir Tunceli Afyon Bingöl Mus Izmir Manisa Usak Tuz Gölü Nevsehir Elazig Mu ra t Lake Van Van To Salmas ISLAMIC Aksehir 38°N Gölü Aksaray Kayseri Bitlis REP. OF Malatya Aydin Hoyran Gölü Nigde Diyarbakir Siirt IRAN Denizli Batman To Baysehir Konya Adiyaman Oroumieh Burdur Gölü Kahraman Tigris Hakkari Isparta Maras Sirnak an yh n Mugla Ce ates Mardin yha r Euph To Se Dahuk GR Gö Karaman Osmaniye Gaziantep Sanliurfa To Damir Antalya ks Kabu To ri EE u Adana E Gulf of g la Icel Kilis Al Hasakah C IBRD 33501R2 Antalya s Da (Mersin) I R AQ o To r 36°N To Hatay (Antakya) Aleppo SY RIA N A R AB JULY 2008 Mediterranean Sea 28°E 30°E 32°E 34°E To Ladhiqiyah REPUBL I C REPUB LI 42°E 44°E