Turkey - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 21408 TU MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ONA COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF TURKEY November 28, 2000 Turkey Country Department Europe and Central Asia Region International Finance Corporation Central and Southern Europe Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  The last Country Assistance Strategy for Turkey was discussed by the Executive Directors on September 6, 1997 (Report No. 16992-TU, dated August 6, 1997). CURRENCY AND EQUIVALENTS Currency Unit: Turkish Lira (TL) as of October 6, 2000 US$ 1 =TL672,268 WEIGHTS AND MEASURES FISCAL YEAR Metric System January 1 - December 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank JBIC Japan Bank for Intemational Cooperation APL Adaptable Program Loans LIBOR London Interbank Offer Rate ARIP Agricultural Reform and Investment Project MEER Marmara Earthquake Emergency Reconstruction Project ASCU Agriculture Sales Cooperative Union MIGA Multilateral Investment Guarantee Association BHSM Basic Health Statistics Module MOH Ministry of Health BRSA Banking Regulation and Supervision Agency NBFR Non Bank Financial Institution Review CAS Country Assistance Strategy NEAP National Environmental Action Plan CEM Country Economic Memorandum NGO Non-Govemmental Organization CHRMS Core Health Resource Management System OECD Organization of Economic Cooperation Development DIS Direct Income Support PAYG Pay-as-you-go pension system EBRD European Bank for Reconstruction and Development PEIR Public Expenditure and Institutional Review EDB European Development Bank PSBR Public Sector Borrowing Requirement EERL Emergency Earthquake Recovery Loan PSS Private Sector Strategy EIB European Investment Bank PSSP Privatization Social Support Project EMAT Emergency Management Agency of Turkey QAG Quality Assurance Group ERL Economic Reform Loan SDIF Savings Deposit Insurance Fund EU European Union SME Small & Medium Enterprises FAO Food and Agriculture Organization SRS Sustained Reformn Scenario FDI Foreign Direct Investment TCIP Turkish Catastrophic Insurance Pool FIAS Foreign Investment Advisory Service TESEV Turkish Economic & Social Studies Foundation FSAL Financial Sector Adjustment Loan TICA Turkish Intemational Cooperation Agency FY Fiscal Year TRS Truncated Refonn Scenario GEF Global Environment Facility TUSIAD Turkish Businessmen Association IBRD Intemational Bank for Reconstruction and Development UNDP United Nations Development Program IFI Intemational Financial Institute UNFPA United Nations Population Fund IFC Intemational Finance Corporation UNICEF United Nations Children Fund ILO Intemational Labor Organization WHO World Health Organization IMF Intemational Monetary Fund WTO World Trade Organization WB Managers and Staff Responsible for this CAS Vice President Mr. Johannes Linn Country Director Mr. Ajay Chhibber Responsible Staff Ms. Sally Zeijlon Mr. James Parks IFC Manamers and Staff Responsible for this CAS Vice President Mr. Assaad J. Jabre Director Mr. Khosrow Zamani Responsible Staff Mr. Antonio David Mr. George Konda  FOR OFFICIAL USE ONLY TABLE OF CONTENTS EXECUTIVE SUMMARY . ............................................................ ........ 1. OVERVIEW ....................................................................1 II. TURKEY'S DEVELOPMENT AGENDA ....................................................................2 ECONOMIC CONTEXT AND SOCIAL OUTCOMES ..........................3.................... . ...................3 GOALS OF THE CURRENT REFORM PROGRAM ....................................................................6 RECENT ECONOMIC DEVELOPMENTS AND REFORM SCORECARD ............................................................8 REFORM PRIORITIES ................................................................... 10 III. MEDIUM-TERM PROSPECTS, EXTERNAL ENVIRONMENT AND EXTERNAL FINANCING ....................................................................11 IV. BANK GROUP TRACK RECORD ................................................................... 15 THE FY98-00 CAS AND ITS IMPLEMENTATION ................................................................... 15 STATUS OF THE PORTFOLIO ................................................................... 1 8 V. BANK GROUP STRATEGY ................................................................... 20 IMPLEMENT REFORMS FOR GROWTH AND EMPLOYMENT GENERATION ................................................ 2 1 IMPROVE PUBLIC MANAGEMENT AND ACCOUNTABILITY ................................................................... 24 EXPAND SOCIAL SERVICES AND SOCIAL PROTECTION ................................................................... 25 STRENGTHEN DISASTER MITIGATION AND ENVIRONMENTAL MANAGEMENT ................ ....................... 27 ACCELERATE CONNECTIVITY AND TECHNOLOGICAL CAPABILITIES ..................................................... 28 BENCHMARKING SUCCESS ................................................................... 29 SELECTIVITY AND PARTNERSHIPS ................................................................... 29 VI. LENDING SCENARIOS ................................................................... 31 VII. MANAGING THE RISKS AND IBRD EXPOSURE ................................................................... 33 MANAGING THE RISKS ................................................................... 33 IBRD EXPOSURE ................................................................... 35 VIII. CONCLUDING REMARKS ................................................................... 36 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.  BOXES, TABLES, AND FIGURES Box I Poverty and Vulnerability in Turkey ................................................ 3 Box 2 The Health Care System in Turkey ................................................ 5 Box 3 Turkey's Eight Five Year Development Plan .......................................... 6 Box 4 Bank Support for Basic Education Reform ............................................. 16 Box 5 Earthquake Response ................................................. 17 Box 6 CAS Consultations and Assessments ................................................ 21 Box 7 Work on Anti-Corruption and Governance ............................................ 24 Box 8 Selectivity ................................................ 30 Box 9 Triggers for the High Case ................................................ 32 Table I Selected Social Indicators - Country Comparison ..................................... 5 Table 2 Key Program Indicators ................................................ 8 Table 3 Sustained and Truncated Reform Scenarios ............................................ 12 Table 4 World Bank Commitments by Sector ........................... ..................... 18 Table 5 Turkey Portfolio Review ................................................ 19 Table 6 CAS Indicative Lending Program ................................................ 31 Table 7 Summary of Key Exposure Indicators in the High Case .............................. 35 Figure I Historical Growth and Inflation Rates ................................................ 4 Figure 2 GNP and Per Capita Rates in Emerging Economies (1965-1998) ................... 4 Figure 3 Comparison of Growth and Inflation Under Sustained and Truncated Reform Scenarios .13 Figure 4 External Debt and Current Account Under Sustained and Truncated Reform Scenarios .................... 14 Figure 5 IBRD Net Flows and Debt .................... 35 ANNEXES Annex AI Private Sector Strategy Annex A2 Country At a Glance Annex B2 Selected Indicators of Bank Portfolio Performance and Management Annex B3 Bank Group Program Summary Annex B3 Bank Group Fact Sheet - IFC and MIGA Program Annex B4 Summary of Nonlending Services Annex B5 Social Indicators Annex B6 Key Economic Indicators Annex B7 Key Exposure Indicators Annex B8 Status of Bank Group Operations (Operations Portfolio) Annex B8 Statement of IFC's Held and Disbursed Portfolio Annex B9 CAS Program Matrix Annex B 10 Summary of Development Priorities Annex B I I Actions for Second Tranche Release ERL and FSAL MAP IBRD No. 24110 | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  EXECUTIVE SUMMARY i. As Turkey enters the 21" century, it has embarked on fundamental changes in economic and social policies. Turkey is attempting to tame inflation and achieve high and stable growth, modernize the role of the state in the economy, and begin to address long neglected social and environmental problems. It is a huge and ambitious undertaking which if successful could transport Turkey to much higher levels of income, modernize its institutions and set the country on a path of sustained and steady economic development. It will enable Turkey to make progress in reducing the high incidence of economic vulnerability and eradicate the remaining pockets of poverty among its population. The objective of this Bank Group CAS is to support strongly this effort. A Time of Opportunity ii. The conjunction of three factors in 1999 reshaped Turkey's economic and social agendas, and led to this opportunity for constructive change. * First, Prime Minister Ecevit and the three-party coalition that took office in the spring of 1999 have shown consistent determination to carry out urgently needed economic reforms, and launched an extensive program to defeat an entrenched pattern of high inflation and restore stable growth. * Second, the country was hit with two large earthquakes in the second half of the year, which caused over 17,000 deaths and heavy losses of property and livelihoods, and strengthened the demand for renewal and reform. - Third, in December 1999, Turkey was admitted to pre-candidacy status for the European Union; this status is providing an additional motivation for economic and social transformation. iii. The Government's agenda includes a three-year economic reform program, longer-term social programs and disaster prevention, as well as measures to move towards EU accession. Structural transformation of social security, agriculture, banking, and the infrastructure sectors, initiated by legislative action, is now being implemented on the ground. The landmark basic education reform introduced in 1997 is making excellent progress in expanding provision of compulsory education to eighth grade (from fifth grade) for all girls and boys. The Government is taking steps to build consensus on broader reforms in public administration, municipal finance, and local administration to modernize its public institutions. Turkey is within sight of removing the last vestiges of state ownership in the industrial sector through the privatization program underway, and the Government wants to encourage further private entry into energy, telecommunications and other infrastructure. Concern over the possible social impact of reform is leading to the introduction of new specific support programs, as well as efforts to target better social assistance in general. Turkey has not undertaken such intense reforms since the early 1 980s, when it opened its economy to the rest of the world. iv. The Government's reform effort in the first year of this program has indeed been impressive-although much remains to be done. Inflation has dropped to the lowest level in the  ii_ Executive Summarv last two decades and interest rates have fallen sharply. The economy has revived, led by a strong private sector response to the disinflation program. The budget balances have shown striking improvements and the public debt stock has stabilized. The Government has prepared an ambitious macro-framework and budget for 2001 designed to further the disinflation program, contain the growing current account deficit and strengthen the foundations for sustained economic recovery. Building upon the progress on structural reform and privatization achieved in 2000, the Government intends to deepen these reforms in 2001. While the recent turbulence in Turkey's financial markets shows that the program faces significant risks a if the reforms aretackled with steadiness and determination Turkey could emerge with a much stronger economy that would be better able to handle internal development challenges and external shocks. Addressing Poverty and Economic Vulnerability v. The key objective of the CAS is to assist Turkey to lay the basis for reducing economic vulnerability. The design of the CAS program is driven by recent careful analysis of economic reforms, living standards, and social welfare which shows that while absolute poverty is low, the bottom third of the population is unable to purchase the basic needs basket. Unemployment and lack of education are important factors in explaining vulnerability and poverty in Turkey. For Turkey to reduce economic vulnerability and poverty, it must focus on restoring stable and higher growth, creating employment, reducing inflation, improving public management and accountability, and expanding social services and social protection. The Government's current priorities reflect these strategic elements. In particular the emphasis on achieving stable growth, generating productive investment, and providing education is aimed at addressing fundamental causes of economic vulnerability. The Bank's support for Turkey centers around these objectives through a balanced combination of adjustment and investment lending, as well as non- lending services, designed to produce maximum leverage, in close coordination with our partners. vi. As was demonstrated in the last CAS period, Turkey's vulnerabilities are not only economic, but also stem from natural factors, in particular seismic risk. Hence the Bank Group's efforts to support Turkey's disaster prevention and broaden the environmental agenda must continue. Finally, the Bank Group hopes to use selective catalytic interventions to help ensure that Turkey can exploit rapid global technological changes and reap their benefits for education, public management, and growth. vii. In line with Turkey's current and upcoming priorities, the CAS will focus the Bank Group's FYO1-03 program on five broad themes: a) implement reforms for growth and employment generation; b) improve public management and accountability; c) expand social services and social protection; d) strengthen environmental management and disaster mitigation; and e) accelerate connectivity and technological capabilities.  iii Executive Summary Stepping Up Bank Group Support viii. Just as the World Bank was asked to step in with extensive technical and financial help to support the trade and financial sector liberalization of the 1980s, so too has the Bank been requested by the current Government to provide large scale assistance to help carry out the ambitious reforms currently underway. The previous CAS anticipated the possibility of such reforms and the Bank's technical assistance helped Turkey prepare its economic program- especially on structural and social aspects. The Bank triggered the high case of that CAS on the basis of almost one year of implementation of strong up-front reforms, and approved the Economic Reform Loan of US$760 million in May 2000. In FY00, the Bank provided almost US$1.8 billion to support Turkey. The IFC program has also remained at a high level. ix. This CAS continues with a high case program of up to US$5 billion which includes US$2.4 billion of additional adjustment lending to help complete the reforms. The CAS period FYOI-03 coincides with Turkey's ambitious economic reform program and which justifies significant assistance from the Bank Group, especially in the design of the structural reforms and mitigating any negative social impact of the overall reform. The proposed FSAL I and the Privatization Social Support project presented to the Board with this CAS match the latter aims and form part of the high case. The support is triggered by a series of carefully specified actions, spelled out in the CAS document. The high-case program, along with the IMF's Stand-By of US$4 billion (initiated in December 1999), will assist Turkey's economic reforms and help catalyze the substantial private inflows needed during 2000-2003 to meet Turkey's sizeable external financing needs-around US$100 billion gross. The IFC and MIGA programs also will have a catalytic effect by demonstration, provision of guarantees, and attracting other investors to transactions. x. Turkey's previous reform attempts in the 1990s weakened rapidly once the economy recovered. Turkey's current reform has lasted much longer than previous ones-and the reform momentum remains strong-but if the reforms were to slow down, the Bank would reduce its lending level to a base case that would focus on selected investments in support of Turkey's longer term development needs. This assistance would be focussed on rural development, and education and other social interventions, if sectoral policies and the institutional framework permit the operations to have a lasting impact on vulnerable populations. The lending envelope for the base case would be up to US$1 billion. Given its large external financing needs, if market sentiment were to turn against Turkey while commitment to reform remained strong, the Bank, although remaining within the CAS high case envelope, would review the high-case program in close concert with the IMF to reflect the changed macroeconomic circumstances. xi. IFC will continue to play an important role in Turkey to assist the private sector to take advantage of widening opportunities. Its work will cut across several CAS themes and IFC will accompany its investment with targeted provision of technical assistance. IFC will improve access to long-term financing for companies in selected cases which demonstrate the tangible benefits of reform. With a view to promoting Turkey as a technological hub for the region, IFC will assist Turkish companies to increase their technological competitiveness and invest in the CIS and the Balkans. In financial markets, IFC will focus on developing domestic long-term  iv Executive Summary contractual savings institutions. IFC's investments in infrastructure, along with those financed by the Bank, are intended to improve Turkey's prospects for sustained growth and meeting EU infrastructure standards. xii. MIGA is also very active in Turkey, both in terms of guarantees and capacity building for foreign investment promotion. While MIGA's portfolio in Turkey has until now been concentrated in the financial sector, other sectors are expected to grow in its portfolio- particularly infrastructure investments. MIGA's Investment Marketing Service will continue to be an active supporter of the Center for Private Sector Development in Istanbul, which is a joint undertaking of the OECD and the Turkish Development Agency (TICA), to catalyze and support the transfer of expertise and experience related to private sector development to economies in the region. xiii. The Bank Group's decision to decentralize management of the program has played a key role in the successful implementation of the previous CAS and will be critical to ensuring that the Bank Group responds quickly and effectively to emerging issues. The Bank Country Director moved to Turkey in 1998 and the IFC Regional Director will be relocated to Turkey by the end of 2000. Working With Our Partners xiv. The Bank Group works closely with a range of international and domestic partners in assisting Turkey. Bank teams have worked closely with IMF colleagues in assisting Turkey to design its economic program; the Bank has concentrated especially on structural and social issues, while the IMF has focused on macroeconomic issues. Closer dialogue is developing between the Bank and the EU, as Turkey and the EU gradually establish the mechanisms for candidacy discussions. The Bank expects to work in coordination with UN organizations, bilateral partners, the European Investment Bank (EIB), the Islamic Development Bank and other financial organizations. The Bank, IFC and MIGA collaborate with a range of private sector and financial organizations, while the Bank country team is expanding outreach and consultative activities with NGOs in Turkey. The active involvement of other organizations allows the Bank to be selective during this CAS period; for example, the Bank will reduce or eliminate financing for infrastructure, conventional power generation and distribution, and irrigation, since these areas are attracting funding from other organizations or from the private sector. Managing the Risks xv. The Government of Turkey is taking actions to manage the risks inherent in this reform program, and the Bank's program will assist in this process. The main risk factors include political pressures, economic considerations, administrative constraints, and the possibility of another large natural disaster. On the political side, the coalition has demonstrated its resilience by meeting tough challenges over the past 18 months, including the election by Parliament of a new president in May 2000. Nevertheless, as in any coalition, risks do remain. A second political risk is the possibility of social backlash from tough reform measures. To address this,  v Executive Summarv the Government is ensuring adequate funding of existing safety net provision, including severance payments and other programs for workers displaced by privatization, and is moving to introduce additional social programs, including unemployment insurance and direct income support for farmers. Three of the Bank's proposed operations are being designed to support these aspects of the safety net. xvi. The Government's reform program takes into account some of the key economic and financial sector risks confronting Turkey; in fact the program itself is a direct response to the risks posed by the large macroeconomic imbalances that had accumulated over a decade of inaction and partial reforms. The Government's response has been appropriate, but should the program fail, the downside scenario would be worse than the pre-reform position, with enduring effects from the loss of credibility. The Government placed great emphasis on up-front fiscal measures in designing the program, and is using further targeted fiscal actions in the 2001 budget to address the risks emerging from the private-sector led surge in demand and resulting widening current account deficit (and is aware that it could need to take further measures in future). These measures and the cushion provided by the level of international reserves reduce the risk stemming from the external imbalance. In late November, Turkey experienced significant turbulence in the financial markets to which the Government responded with temporary liquidity injections and accelerated announcement of its macroeconomic policy package for 2001. A legacy of weaknesses in the financial sector, which will be exposed further during the macroeconomic stabilization, is a source of concern. Management of these vulnerabilities is a core element of reform, in which respect there have been significant accomplishments, as the FSAL documents presented with this CAS explain. A continuing risk for Turkey as a major emerging market with substantial external borrowing needs is its vulnerability to contagion from adverse developments in international financial markets. The Government has demonstrated its ability to respond to such shocks with appropriate fiscal and monetary policies. A core reform objective is to reduce Turkey's external vulnerability, which will result in a gradual decline in the risk of contagion. Minimizing the risks stemming from institutional weaknesses is also a part of the Government and Bank programs, examples are the design of investment loans in concert with adjustment lending to support implementation of reform, and actions to improve public expenditure management, promote transparency and fight corruption. Finally, Turkey is conscious of the risk of a large natural disaster and the Bank continues to support rapid strengthening of emergency response and disaster prevention measures to mitigate this risk. Turkey's Success Will Have Regional Implications xvii. The Bank Group's ability to assist Turkey has vital consequences within its borders as it tries to implement changes to improve the living standards of its population. But given Turkey's size, regional importance and its inherent dynamism, its success will have a major impact well beyond its borders. Turkey is re-emerging as a strategic hub in the region; its economic success will benefit its major trading partners, and the broader regional economy of which it is an important part. The confluence of internal political alignments that has emerged to shape Turkey's ambitious economic and social transformation may not coalesce again so fortuitously and should be encouraged with the Bank Group's vigorous support.  vi Executive Summarv Issues for Board Discussion xviii. The Executive Directors may wish to address the following issues for discussion: * Is the program adequately designed to support Turkey's comprehensive reform effort and substantial long-term development needs? * Is there adequate burden sharing among the Bank Group, other IFIs and the private sector? * Have the risks been appropriately identified and addressed?  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF TURKEY I. OVERVIEW 1. Turkey had long been identified as a country that defied economic rules. It managed to grow at a rate of around 4 percent through the 1990s despite high inflation. With the economy growing-even if below its potential-it was difficult to convince the politicians, or even much of the public, that Turkey needed tough reform measures; even high inflation was tolerated. But this challenge to economic orthodoxy had to end sooner or later. In 1999, the economy suffered a deep recession as domnestic interest rates topped 100 percent and public debt soared. Output fell over 6 percent and prices increased by some 70 percent. On top of this, two major earthquakes shattered people's lives and contributed to the recession. 2. Three events in 1999 dramatically changed Turkey's economic and social agenda and created an opportunity for the Bank Group to set up its support for the country's transformation into one of the world's leading emerging markets. The Bank Group's response to these events is changing our work in Turkey in a very significant way. i) The determination of Prime Minister Ecevit and the three-party coalition to carry out urgently needed economic reforms. The strong consensus of the governing coalition, installed after national elections in early 1999, on the importance and direction of economic reforms is providing Turkey with a golden opportunity to tackle inflation and long awaited structural reforms. Three out of the five parties represented in the Parliament participate in the coalition that controls 350 out of 544 parliamentary seats. The coalition has already weathered significant challenges to its unity, including the election of the new President in May 2000. Since the summer of 1999, the Government has carried out significant structural reforms in all areas discussed in the previous Country Assistance Strategy (CAS)'. The Bank's response to the Government's resolve has been to intensify greatly our economic dialogue, in coordination with the IMF, and 'Report No. 16992-TU dated August 6, 1997.  2 Turkey: Country Assistance Strategy FYOI-03 activate the high case program for Turkey. One adjustment operation-the Economic Reform Loan (ERL) for US$760 million-was approved by the Board on May 18, 2000. The proposed Financial Sector Adjustment Loan (FSAL I) for US$778 million along with the Privatization Social Support Project (PSSP) for US$250 million is presented for Board approval with this CAS. The IMF approved a US$4 billion three-year Stand-By Arrangement in December 1999. ii) The devastating earthquakes in Marmara and Duzce with over 17,000 dead and heavy loss of property and livelihood. The earthquake physically shook the Marmara region but psychologically shook the entire nation and moved Turkey's citizens closer together and the country closer to Europe. The Bank responded very rapidly with an Earthquake Assessment that helped catalyze foreign assistance to Turkey of roughly US$3 billion, of which the Bank Group provided about one third (Box 5). iii) Turkey's candidacy status with respect to the European Union, attained in December 1999. This provides a long-term goal for economic, social and political reforms. Turkey is now more likely to push beyond its economic program into reforn of public administration, judicial reform, and other broader governance issues. The Bank expects to work closely with the EU on these and other reform issues-such as municipal and local administration reform. 3. Using these new opportunities to shape support for Turkey and encourage reforms that will improve living standards and reduce vulnerability and poverty, the Bank Group remains focussed on Turkey's long-term development needs and specifically the need to improve social services-such as education and health. Conscious that Turkey's past growth and development strategy have shown some striking physical and economic vulnerabilities that must be addressed, the CAS includes selected interventions to help the Government address these issues as well. II. TURKEY'S DEVELOPMENT AGENDA 4. Turkey faces three major economic challenges. First, it must continue to improve macroeconomic fundamentals through durable fiscal adjustment aimed at taming chronic inflation and breaking the grip of high real interest rates that constrain growth. Second, it must raise productivity by eliminating costly incentive distortions and improving the quality of institutions and rules that govern markets in order to promote competition and encourage private investment in productive activities2. Third, it must address disparities in economic opportunity and the social issues critical to realizing its full development potential and ensuring that the benefits of economic growth are broadly distributed (Box 1). 2A full analysis of the macroeconomic and structural reforms needed to sustain high growth is available with the recent Turkey Country Economic Memorandum: Structural Reform for Sustainable Growth (September 15, 2000, No. 20657-TU)  3 Turkev: Country Assistance Strategy FY01-03 Box 1: Poverty and Vulnerability in Turkey The Bank report, Turkey: Economic Reforms, Living Standards and Social Welfare Study (No. 20029-TU, dated May 17, 2000), highlights the nation's high rate of economic vulnerability and large income inequalities. Absolute poverty is low, with only 2.5 percent of the population below the international one-dollar-a-day standard line and 7.3 percent of the population below the line defined by a local minimum food basket. But 36 percent of the population is economically vulnerable-unable to purchase the basic needs basket including non-food items. Inequalities are high: The Gini coefficients for per capita income and consumption using 1994 data were 0.45 and 0.41, respectively. The pattern of pre-transfer income inequality in Turkey is very similar to that in other OECD countries, with a Gini coefficient of about 0.4. But whereas most other OECD countries have progressive safety nets and redistributive taxes that reduce inequality, Turkey lacks such programs. As a result, among the OECD countries, only Mexico has a more unequal distribution of post-transfer income than Turkey. While extensive, Turkey's social protection system faces significant problems and it is not targeted to the most vulnerable. As a result, a large share of Turkey's population is vulnerable to falling into poverty through an event such as job loss or disability of the household's principal wage earner. A significant share of total inequality in Turkey is explained by differences in endowments, geography, and opportunities in the labor market. Education and employment status together explain almost half of the inequality, while rural/urban differences and regional factors explain 10 and 11 percent, respectively. It is important to note that regional differences are growing, but the provinces at the extremes of the distribution are by and large the same ones over the last twenty years: richer provinces (mainly in the Marmara area or around Mediterranean and Aegean port cities) are converging towards each other, but provinces that were poor in 1975 were further behind in 1995. Existing Sources of Information. The most comprehensive existing survey of poverty in Turkey is provided in the above mentioned report. Survey data from the 1994 Household Income and Consumption Expenditure Survey were the main source for this study, but these data were supplemented with more recent information from other sources-including the semiannual Household Labor-Force Surveys, the 1997 population enumeration, economic performance data series, service delivery data for social services, and case studies of poor communities. As part of the preparation of the Economic Reform Loan, the Bank carried out a preliminary study of the social impact of the reform program which looked at the effects on a range of vulnerable groups, and considered specific interventions to minimize adverse effects on these groups. Among the proposals outlined in this study was a life-line electricity tariff schedule to cushion the effects of reform-linked price increases for lower income groups, which the Government introduced in September 2000. Other safety-net measures proposed in the study are being implemented or are under consideration by the Government. Improving Monitoring. The Bank is working with various partners in Turkey to deepen our understanding of who the poor are, why they are poor, what can be done to improve their living standards and how to prevent others from falling into poverty. The Bank worked closely with the State Institute of Statistics to develop an improved, LSMS-based questionnaire for use in the 2001 Household Income and Consumption Expenditure Survey. The Privatization Social Support Project will monitor the social impact of the reform program. The Bank is supporting improved social data collection in education and health, including a major effort to collect improved data on the causes of mortality and morbidity throughout the country. Source: Bank Staff Economic Context and Social Outcomes 5. Despite the potential to be an emerging market leader, Turkey's economy has historically been plagued by persistent fiscal imbalances, chronically high inflation, and sharp swings in the business cycle. Over the past two decades, several attempts to stabilize the economy fell short, and high growth was never sustained for long. Inflation was higher and growth was lower on  4 Turkey: Countrv Assistance Strategy FYO0-03 average, in the 1990s than in the 1980s. Annual inflation averaged 44 percent in the 1980s before climbing to 76 percent in the 1990s (Figure 1). In parallel, annual growth fell from over 5 percent to just under 4 percent, while the volatility of growth doubled as the standard deviation increased from 2.7 percent to 5.5 Figure 1: Historical Growth & Inflation Rates percent. While 4 percent average growth is respectable, Turkey has Growth Inflation not achieved the high 7 performance of top middle- 60 -- = =. income countries (Figure 2). 0 Moreover, job creation has not 34 f 2 ~~~~~30 kept up with rapid expansion of 2 20 the labor force. The employment - - _0 I I !. rate fell from nearly 70 percent of - 1 - - 199!!99 the population in 1975 to only 50 _ _ _ _ _ 1990'99 19B__ 90 199__ 99 percent by 1997.3 6. Turkey is the world's 17th most industrialized nation, but it ranks 86th out of 180 countries as measured in the 1999 UNDP human development indicators, far behind most middle income countries (Table 1). Some of the factors contributing to this low ranking are the 17 percent adult illiteracy rate and poor health outcomes (Box 2). In particular, infant and adult mortality rates and life expectancy are all worse than in middle income economies in Latin America, Asia and Eastern Europe, which have comparable or higher levels of per capita income. Despite considerable progress in recent years, maternal and child health outcomes, Figure 2: GNP & Per Capita Growth Rates maternal and infant mortality rates, as well as in Emerging Economies (1965-1998) regional disparities, remain unacceptably high. lo The poor carry the highest burden of disease, 8- ___ _ premature death, and preventable disabilities. 6 a -L Infant mortality, at 38 per 1000 live births (in 2- 1998), is one of the most significant health _ _ _ _ _ problems in Turkey. Only 50 percent of Turkish l I children are immunized against polio, BCG, , le DTP, and measles in the first year of life. Fe5NP ' P,Capa. According to the World Health Report of 1999, maternal mortality per 100,000 was estimated at 180 in 1998. Preventable factors that increase the risk of maternal mortality are still prevalent. They include poor education, high fertility rates, poor birth spacing, early teenage and later age pregnancies, multiple deliveries (especially in eastern provinces), malnutrition, and inadequate access to appropriate health care for women. It is clear that improving educational opportunities for women can have a large impact on improving utilization of maternal health care services in the future. 3 While recorded unemployment remains moderate by OECD standards, urban unemployment rates are much higher and greater still if underemployment is included.  5 Turkey: Countra Assistance S rate.v FYO0-03 Table 1: Selected Social Indicators - Country Comparison Indicator T Chile Colombia Mexico Poland Hungary Malaysia Tunisia EU Population Growth (J) U 1.6 2.0 2.0 0.2 -0.3 2.8 2.0 N.A Life Expectancy at Birth F. 75.0 70.0 72.5 72.5 71 72.5 69.5 77.4 (years) Infant Mortality Rate (per 1,000 live births) 1 0 3 5 1 13 . Maternal Mortality 1: 65 100 110 19 30 34 170 N.A (per 100,00 live births)II Literacy Rate 94V 95 91 90 100 99 86 67 100 (% of adult population) I 100 Female Literacy Rate i5. . 95 91 88 100 99 81 56 100 GNP per Capita (US$) 2, 0. 4,810 2,600 3,970 3,900 4,510 3,600 2,050 N.A 1/1998 data Sources: World Development Indicators, 2000; WHO World Health Report 1999; Turkey Demographic and Health Survey, 1998 (Hacettepe University, Institute of Population Studies); Turkey Human Development Report, 1997 (UNDP). Box 2: The Health Care System in Turkey The overall utilization of health services in Turkey is relatively low compared to international standards. In 1998, the average bed occupancy was about 56 percent in hospitals. Hospital admissions per 10,000 population are less than 700, as compared with the OECD average of 1,639 admissions per 10,000. Average annual doctor contacts were 3.5, below the OECD average of 5.5 in 1995. This low utilization rate may be due to financial constraints of the population and low quality of services. Results from the Bank-financed Health Services Utilization Survey of 1994, indicated that utilization rates were higher among females and in urban areas. In addition, results indicated that the insured population is more likely to use health services than the uninsured, which in general, has much lower incomes than the insured. Inefficient use of limited resources and poor management of services have resulted in a largely run-down public provider system. Long waiting times and lack of drugs and qualified staff discourage people from seeking care even when covered by insurance. The health system in Turkey has been under-funded for a long time. Since 1963, total health care expenditure has accounted for between 3.0 percent and 4.3 percent of GDP. This is the lowest of any OECD country, where the average is 7.5 percent. Overall health expenditure also includes spending by social security organizations and university hospitals, as well as out-of-pocket payments. Social insurance funds account for only 17 percent of the total health expenditures equal to about I percent of GDP. Per capita health expenditures have been about US$100 p.a. over the past 2-3 years. In the 2001 budget, Turkey has decided to protect health expenditure as a share of GNP (3.6 percent of GNP allocated for 2001 compared to an estimated 3.5 percent in actual spending in 2000) despite tight constraints on total budgetary expenditure. Besides resource mobilization, there are also several resource allocation and utilization issues, particularly in the way that the state-run health system is financed and managed. There is widespread evidence of misallocation of public resources: public funds are spent on health interventions with low relative cost-effectiveness, while highly cost-effective-and more critical-interventions remain under-funded (preventive care and maternal and child health receive roughly 12 percent and 2 percent of the total MOH budget respectively). Overall, the general inefficiency and inequity in government expenditure on health raises concerns about the capability of Turkey's state- run system to continue to reduce premature mortality and disability rates, and respond to new emerging disease patterns. Source: Bank Staff  6 Turkey: Country Assistance Strategy FYOI-03 Goals of the Current Reform Program 7. The goals of Turkey's economic program are very clearly to reduce inflation and restore stable growth in order to improve living standards, generate employment at a faster pace, and reduce economic vulnerability. These goals are clearly articulated in the Eighth Five-Year Plan (Box 3). The stagflation of 1999 lowered living standards, and increased unemployment and economic vulnerability of the lower income population. A major reform program was needed to reverse these trends. Box 3: Turkey's Eighth Five Year Development Plan Turkey's Eighth Five Year Development Plan (2001-2005) provides the most recent and comprehensive statement of development policy. The Plat, was prepared by the Govemment and endorsed by the Parliament on June 26, 2000.' The main objectives are to improve living standards, achieve sustainable growth and accelerate the accession process into the European Union. The Plan clearly spells out the Government's determination to implement economic reforms to stabilize the economy, achieve a high level of suistainable growth and employment creation, reduce poverty and income inequality, and address corruption. Main Developnent Objectives: * achieve macro-economic stability * attain sustainable growth in a competitive environment * expand technological capacity * improve human resources * create employment, reduce poverty and improve income distribution + reduce the regional disparities * improve the social security system * prevent corruption + improve infrastructure Key Economic and Social Policies: * fiscal adjustment + public sector reforms including acceleration of the privatization program * structural changes in educationi and health services including efficiency improvements * development of high value added sectors in industry and services * improvement in knowledge and science + increase in R&D expenditures + additional support to small and medium scale industries + improvement in competitiveness * increase in FDI * creation of an efficient agricultural sector * creation of additional employmnent through productive investment ' The Plan was published in the Official Gazette on July 5, 2000. 8. The Government's economic program rests on three core elements: (i) a strong up-front fiscal adjustment to put public finances on a sustainable path; (ii) major second generation structural reforms in agriculture, pensions, banking, energy and telecommunications; and (iii) a pre-announced crawling peg for the exchange rate backed by tight incomes policies to break inflationary expectations. The program targets a drop in annual inflation to under 10 percent by the end of 2002. It also aims for a sustainable growth rate of 5-6 percent per annum in the medium term (Table 2). The ambitious privatization program aims to raise US$17-18 billion  7 Turkev: Country Assistance Strategv FYO1-03 over three years. Achieving a high level of sustainable growth is a key test for the program and central to the Government's strategy to improve living conditions and reduce poverty and economic vulnerability. Turkey can raise average growth to 5 percent or more per year without increasing investment (at 24-25 percent of GNP in the 1990s) by raising productivity and employment. In addition to macroeconomic stability, this will entail deep structural reforms to create an enabling environment for private investment and competition, together with measures to develop the enormous potential of Turkey's young and vibrant population. By emphasizing structural measures, the Government's program takes into account the lessons learned from previous aborted economic programs. 9. The key structural policies to achieve a high level of sustainable growth form a five point agenda for the Government: * Establish a stable, pro-growth macroeconomic environment based on strong fiscal adjustment designed to put public finances in order. Improve public expenditure management, deepen structural fiscal reforms and reorient public institutions in order to ensure the quality of the fiscal adjustment and protect public investments in human capital. * Strengthen the social protection system and provide more targeted support to vulnerable groups. Turkey has made good progress with a well-designed policy reform of the public pay-as-you-go (PAYG) pension system and the introduction of national unemployment insurance. The latter compliments active reinsertion methods for the unemployed in facilitating labor shedding and redeployment. Administrative reform of the social insurance system is being initiated to improve coverage and compliance, and a legal framework for voluntary funded private pensions has been prepared. The Government is ensuring full funding of existing social safety net programs such as severance payments for workers displaced by privatization and a broad consolidation of social assistance programs is under consideration. - Reform energy and telecommunication in line with international best practice and EU norms in order to avoid bottlenecks to growth and the fiscal pitfalls of growing contingent liabilities. This requires further structural measures to create an enabling legal and regulatory framework, restructure state monopolies, and accelerate privatization. Proper structural reform will pave the way for effective liberalization of the energy and telecommunications sectors to promote private investment and competition. * Carry through with the current ambitious agricultural reform agenda to modernize support polices and withdraw the state from a direct role in production and marketing. This program is based on the introduction of direct income support to farmers and privatization of state enterprises in agriculture. * Pursue financial sector reform to improve the efficiency of financial intermediation and promote macroeconomic stability. Consolidate the new legal and regulatory framework for bank supervision which is consistent with international and EU norms, oversee the adjustment of the private banking sector to the new incentive framework and regulatory environment, and privatize and restructure the state banks. 10. Investing in the educational development and physical well being of the population continues to be an important objective of the Government. Turkey is in the midst of a major basic education reform with the goal of expanding compulsory education from five years to eight  8 Turkey: Country Assistance Strategy FY01-03 and increasing girls' enrollment. The Government intends to expand and improve secondary education. A comprehensive health reform is needed as well. Reforms of public sector management, the judicial system, local government, and municipal finances are also medium- term goals of the Government. With more peaceful conditions in eastern Turkey, the Government intends to reinforce economic and social development efforts in that part of the country. Along with these major initiatives, Turkey is trying to upgrade environmental and natural resource management, and preserve its very rich cultural heritage. Table 2: Key Program Indicators Actual 1/ Pro ected 2/ 1998 1 1999 2000 2001 2002 2003 OUTPUT, INFLATION AND INTEREST RATES GNP Growth 3.9 (6.4) 7.0 4.0 5.0 5.5 CPI Inflation (Dec-Dec) 70 69 35 12 7-9 5-6 Unemployment rate 3/ 6.3 7.3 6.2 6.0 5.8 5.0 PUBLIC SECTOR BUDGET Primary Balance (%GNP) 1.1 (1.8) 3.0 5.0 5.0 4.0 Overall Deficit (%GNP) (15) (24) (18) (9) (6) (4) Net Public Debt (%GNP) 4/ 44 61 60 56 53 51 Privatization ($ bn) 2.2 0.1 3.5 6-7 4 4 EXTERNAL BALANCE Current account balance (%GNP) 0.9 (0.7) (6.0) (3.8) (2.7) (2.5) Extemal Debt/GNP 51 55 59 60 59 57 Foreign exchange reserves ($ bn) 20 23 26 29 30 30 I/Government figures as adjusted by IMF and WB estimates. 2/ Projections for 2000-01 are based on updated Stand-By program figures; projections for 2002-03 are World Bank estimates. 3/ Projections for 2001-03 are from the 8th Five Year Plan, SPO. 4/ Includes the stock of duty loss claims of the state banks on the govemment as well as the US$6 billion in government securities issued in November 2000 to recapitalize the banks taken over by the BRSA. Source: Govemment, IMF and WB estimates. Recent Economic Developments and Reform Scorecard 11. Macroframework. The first year of reform witnessed impressive results. The economy has rebounded sharply, with GNP growth in the range of 7 percent now expected in 2000 (Table 2). In tandem, inflation has fallen and is expected to be in the 35 percent range (CPI) by the end of the year. While above the program target of 25 percent, inflation is at a 15 year low. Fiscal adjustment has been very strong with the primary surplus of the public sector (including the central and local governrnents, the central bank, the social security institutions and the state enterprises) exceeding the program target of 2000 by some 1 percent of GNP. In parallel, interest rates have fallen sharply with t-bill rates dropping to the 35 percent range from well over 100 percent in mid-1999. The overall public sector borrowing requirement is projected to fall to about 18 percent of GNP in 2000, a decline of some 6 percentage points relative to 1999. Together with privatization revenues of about 1.75 percent of GNP, lower public borrowing is projected to generate a reduction in the net public debt to GNP ratio of some 1 percentage point, reversing in part the rapid build up of 1999. Restored growth has already beneficially impacted  9 Turkey: Countrv Assistance Strategy FYO0-03 the labor market with the recorded unemployment rate dropping from 7.3 percent in 1999 to 6.2 percent by mid-2000. Boosted by lower interest rates, both private consumption and investment have boomed. Important factors contributing to the recovery include solid fiscal performance, the sharp drop in inflation and real interest rates, earthquake reconstruction activity and tourism. An expansion in credit from the banking sector has also played a key role, with credit to the private sector growing in real terms by about 23 percent during the first nine months of 2000. 12. Nevertheless, rapid economic recovery has brought additional challenges and risks. The recovery has created the risk of overheating and, along with higher oil prices and a weak Euro, has put pressure on external balances. The current account deficit has widened sharply, with import growth outpacing exports, and is now projected to reach up to 6 percent of GNP in 2000. Recognizing the need to cool off the economy and reduce the current account deficit, the Government introduced additional measures in September including an increase in the levy on consumer credit and in the VAT for luxury cars, as well as a 50 percent surcharge on electricity consumption over 150 kwh/month. In late November, the pressures spilled over into the financial markets leading to sharp increases in interest rates and a fall in the stock market. To strengthen the macroeconomic framework, the Government has prepared an exceptionally tight budget for 2001 which targets an increase in the primary surplus for the public sector from 3 percent of GNP in 2000 to 5 percent of GNP in 2001. The 2001 budget is underpinned by a tough fiscal package aimed at generating 3.2 percent of GNP in additional net revenue (in part to replace temporary earthquake taxes introduced last year) and another 1 percent of GNP in expenditure savings relative to 2000. Measures are also planned to shore up the balances of the state enterprise sector by some 0.5 percent of GNP including further cuts in agriculture support prices and higher electricity tariffs. The tight fiscal stance underpins an inflation target of 12 percent by the end of 2001, a further reduction in the public debt to 56 percent of GNP, and a drop in the current account deficit to some 3.8 percent of GNP in 2001 (with the latter figure dropping further in 2002). Growth is projected to ease to 4-4.5 percent in 2001 before increasing to 5-6 percent thereafter. 13. Structural Reform. Central to achieving the macroeconomic targets and sustained recovery will be an acceleration of structural reform. While the Government has already established an impressive track record in its first eighteen months, passage of some essential legislation has been delayed and a long road still lies ahead. Structural reform kicked off in earnest immediately after the Government was installed in mid-1999. A new banking law was adopted in June 1999 and further amended in December. Legislation underpinning the pension reform and introducing international arbitration for public concession contracts was enacted in August, only weeks after the Marmara earthquake. In January 1999, Parliament passed new telecoms legislation which created an independent regulatory authority and set the stage for opening the capital of Turk Telekom to private participation. This was followed in May by legislation giving autonomy to the Agriculture Sales Cooperative Unions. In parallel, the privatization program has made important strides with the sale of a majority stake in POAS, the state petroleum distribution company, a successful IPO for 27 percent of TUPRAS, the state refinery, and the sale of a third GSM license. All told, the Government now expects the privatization program to raise about US$3.5 billion in cash revenue in 2000;4 impressive, but still short of the original US$7.6 billion target, largely due to the delay in the sale of a sizeable stake 4An additional US$2 billion (excluding VAT) from the GSM license sale in 2000 will be paid in early 2001.  10 Turkey: Countrv Assistance Strategv FYO1-03 in Turk Telekom. In September 2000, Turkey established an independent banking authority which has already shown strong action on the problem banks. The state bank law finally passed in November 2000 clearing the way for Board presentation of FSAL I and setting the stage for further significant reforms in banking. Reforms in the areas of social security, agriculture, energy, telecommunications, public expenditure and privatization are being supported by the Economic Reform Loan. Reform Priorities 14. The Government has declared 2001 to be the year of structural reform. Key objectives include rollout of the agriculture direct income support program at the national level, initial restructuring of the state banks, and passage of the legal and regulatory framework for restructuring the energy sector. Privatization will remain a priority with the planned sale of the national airlines (THY) and state-owned electricity distribution and thermal power plants, together with renewal of the tender for a strategic investor in Turk Telekom. The privatization process for state enterprises in agriculture and the state banks is scheduled to start in 2001 and continue in 2002-03. Privatization is targeted to generate some US$6-7 billion in cash revenues in 200 1. 15. Agriculture. In a major effort to increase agriculture productivity and incomes, Turkey has announced its intention to shift away from the current commodity support system towards providing direct income support to farmers. Similar programs in other countries, such as Mexico's PROCAMPO program, have led to large scale transformation of the agricultural sector with important productivity increases and sustained improvements in the quality of life for farners. Despite Turkey's abundant land and water resources, agriculture remains a low productivity, backward sector and a major drain on the country's public finances. In recent years, the sector received roughly US$4-5 billion annually from the budget in the form of price supports and other indirect subsidies, and another US$6-1 0 billion from consumers through high prices due to tariff protection. But this largesse did not lead to increased productivity or higher incomes for most farmers. Agriculture has held back overall economic growth. With Bank support, Turkey implemented a pilot direct income support program and farmer registration system in 2000. The Government now plans to introduce this program at the national level in 2001. The shift to direct income support is being accompanied. by actions to eliminate credit subsidies, phase out fertilizer subsidies and support prices for major crops, and restructure and privatize state enterprises in the agriculture sector. Much of this reform program, including important legal changes and the complete elimination of the credit subsidy, has already been implemented. Under the Bank-supported Participatory Privatization of Irrigation Management and Investment Project (FY98), Turkey has initiated a scheme to transfer management of irrigation infrastructure to farmers organized in water user associations and encourage farmers to participate in the funding of irrigation investments. This scheme could be expanded in the future with World Bank assistance. 16. Banking and Finance. The Turkish authorities are pursuing a three-pronged approach to financial sector reformn involving strengthening the legal and regulatory framework, supporting restructuring and consolidation in the private banking sector, and taking steps to commercialize and restructure the state banks in preparation for their privatization. Turkey's banking and  I I Turkey: Country Assistance Strategy FYOI-03 finance sector has grown rapidly over the last two decades, but financial deepening has been held back by high inflation. With successful disinflation, the financial sector will be compelled to adjust. The overall objective of the regulatory reform effort has been to bring the supervisory regime for the Turkish banking sector up to the level of international best practice in line with Basle and EU standards. The new banking law and accompanying decrees for loan loss provisioning, capital adequacy, and foreign exchange exposure set very clear international standards. The independent Banking Regulation and Supervision Agency (BRSA) became operational in September 2000. The private banking sector will have to restructure as public borrowing declines. The Government launched a bank resolution operation involving the takeover of five insolvent private banks by the Savings Deposit Insurance Fund (SDIF) and the liquidation of one small investment bank at the end of 1999. Two more banks were taken over in October 2000, and an action plan has been announced for their resolution. Through this operation, the Government moved to correct weaknesses in the private banking system and send a clear signal that the new legal and regulatory framework will be vigorously enforced. State banks will be operationally restructured and their financial position strengthened in order to improve efficiency and put management on a commercial basis. The Government intends to privatize three of the four state banks by 2003, reduce disincentives to merger and consolidation, and further reform the deposit insurance system. 17. Energy. Turkey is making a difficult transition from the current centralized energy sector based on state monopolies and government-guaranteed contracts to a competitive market model anchored by transparent regulation consistent with EU directives. As part of the global trend, Turkey has turned increasingly towards the private sector to meet its energy needs. However, this program has generated mixed results given the lack of competition and regulation, and the continued predominant role of the state. Without deeper reform, energy problems could block economic growth through excessive tariffs, unmanageable contingent liabilities, and shortfalls in supply. By shifting to a market model, the Government intends to transfer over time the commercial risks inherent in electricity supply and distribution to the private sector and eliminate the need for government guarantees. The Government intends to separate TEAS, the state- owned electricity company, into legally distinct generation, transmission and electricity trading firms. A financial recovery plan, including tariff increases, to address the growing financial imbalances in TEAS has been prepared although implementation has been slow. An electricity markets law, prepared with technical assistance from the Bank, is scheduled for enactment in the coming months. The law will establish an independent regulatory agency and set the stage for full privatization of distribution companies and state-owned thermal power plants. Similar reforms are planned for the gas sector. III. MEDIUM-TERM PROSPECTS, EXTERNAL ENVIRONMENT AND EXTERNAL FINANCING 18. In order to illustrate a range of outcomes in Turkey over the medium term, two macroeconomic scenarios: a sustained reform scenario (SRS) and a truncated reform scenario (TRS) have been developed. The SRS assumes that the current pace of reform is maintained throughout the CAS period.5 If Turkey falls back to the "muddle through" approach 5 The policy framework underlying the SRS is presented in detail in the recent Turkey CEM.  12 Turkey: Country Assistance Strategy FYOI-03 that characterized policymaking throughout much of the past decade, with rapid erosion of the improvement in macro balances achieved since mid-1999, the TRS scenario describes the likely outcome (Table 3). 19. Under the SRS, sustained adjustment and structural reform is projected to engender a robust private sector response. The primary surplus would remain above the medium-term benchmark of 3 percent of GNP as per the fiscal sustainability analysis in the recent CEM. Deep structural reforms in line with the Government's program, including structural fiscal measures Table 3: Sustained and Truncated Reform Scenarios Sustained Reform Scenario Truncated Reform Scenario Actual Projected Projected 1999 2000 2001 2002 2003 20011 2002 2003 National Accounts (real annual change, %) GNP at market prices (6.4) 7.0 4.0 5.0 5.5 2.5 2.0 2.0 Exports (GNFS) (7.0) 10.5 8.8 6.2 5.4 3.0 2.9 2.9 Imports (GNFS) (3.7) 33.4 (1.1) 1.3 3.6 (6.6) (7.8) (3.9) CPI Inflation (Dec-Dec) 69 35 12 7 6 68 80 87 Extemal Financing Requirement (bn. $) 1/ 19.5 29.0 30.5 24.4 22.6 17.7 14.7 13.8 o/w Current account balance 1.4 12.3 7.9 6.2 6.0 5.3 3.4 0.7 (% of GNP) (0.7) (6.0) (3.8) (2.7) (2.5) (2.5) (1.6) (0.3) Extemal Financing Plan (bn. $) Foreign Direct Investment (net) 2/ 0.1 0.1 3.3 1.7 1.9 0.8 0.6 0.5 Mediumandlongternlending(gross) 14.1 23.7 25.4 19.1 17.0 17.5 13.7 13.6 o/w World Bank 0.4 0.8 1.6 1.7 1.7 0.6 0.5 0.6 Other capital flows (net) 5.3 5.2 1.8 3.6 3.7 (0.6) 0.4 (0.3) Foreign exchange reserves excl. gold, CB 5.1 4.5 4.9 4.8 4.5 3.7 3.4 3.3 only (months of GFS imports) 1/ Current account deficit plus MLT repayments and increase in international reserves. 2/ Direct investment only, includes projected revenues from block sales including Turk Telekom in 2001. 3/ Includes portfolio investment in securities and net short-term capital. Source: Govemment, IMF and WB estimates. (on the revenue side, but most importantly on the expenditure side), and further privatization, will be essential to underpin sustained fiscal adjustment. Under this scenario, the PSBR is projected to decline to 6 percent of GNP by 2002 and to 4 percent by 2003. Accordingly, the ratio of net public debt to GNP would continue to decline, falling close to the key 50 percent mark by 2003. This fiscal adjustment will accommodate the sizable transitional costs of restructuring (e.g., social safety net programs and resolution of problem banks). The dampening effect of tight fiscal and income policies on demand would be more than offset by a sustained decline in inflation and interest rates as well as accelerated foreign direct investment in response to disinflation and structural reform. Increased FDI will contribute to the creation of a virtuous circle by improving Turkey's competitiveness and promoting export-oriented production. The economy is expected to sustain its recovery under the SRS with growth of 4-4.5 percent projected for 2001 and in the 5-6 percent for 2002-03 (Figure 3). In parallel, inflation is projected to decline to single digits by 2002. Economic recovery would permit both rapid growth in private consumption as well as a higher saving rate ensuring that the current account  13 Turkev: Countrv Assistance Strategv FYO0-03 returns to sustainable levels. By the year 2003, per capita income in US dollar terms is projected to be about 20 percent higher than in 1999 in the SRS. 20. Under the TRS, the fiscal adjustment Figure 3: Comparison of Growth and Inflation initiated in 2000 would not be sustained. The Under Sustained and Truncated Reform PSBR would deteriorate and domestic interest rates Scenarios would rise sharply. The decline in the public sector 90 debt to GNP ratio would be reversed and progress 80 6 in taming inflation would unravel. Simply stated, 70 - without a large and manifestly sustainable fiscal - s0 25 adjustment, the conditions for permanent w 40 (2) disinflation will not materialize. Faced with an ' 4) acute trade-off between inflation and growth in a 20 _ _ 4) difficult macro environment, policies would likely 0 (E) favor the latter. However, difficulties with public 999 2000 2001 2002 2003 finance and the balance of payments are likely toth (SRS) Grth (TRS) -Iftion (SRS) _. arise, forcing the authorities to adopt stop-go policies. An accompanying slowdown in structural reform would hurt productivity growth and increase pressures on the budget. Capital inflows would dry up. The projected outcome would be lower growth, higher inflation and increased volatility. Annual GNP growth under the TRS is projected to fall to 2.5 percent in 2001 and 2 percent in 2002-03, not enough to prevent an increase in unemployment. 21. External Environment, External Balance and Financing. While Turkey is highly exposed to external shocks, it has proved its resilience time and again over the past decade. The economy faces numerous factors which increase its vulnerability to external shocks including: (i) macroeconomic imbalances, (ii) an open capital account and large external debt stock, (iii) limited FDI inflows, (iv) dependence on imported oil, (v) exposure to fluctuations in international exchange rates and interest rates, and (v) the importance of shuttle trade with the CIS countries. Despite this, Turkey has weathered many impacts over the past decade without a full blown crisis. An important "stress test" was the Russia crisis in 1998 when some US$6 billion left the country in a matter of months without creating noticeable external payment problems. An even tougher test came earlier in 1994 when the Lira was devalued sharply to avert an external payments crisis. Under the current program, Turkey has already withstood the sharp increase in world oil prices which has added about US$3 billion to the import bill in 2000, as well as the depreciation of the Euro vs. the US dollar and the shock of the 1999 earthquakes. The reform program should gradually reduce Turkey's vulnerability to external shocks, in particular by correcting macroeconomic imbalances and establishing a more attractive framework for foreign direct investment, currently less than US$1 billion per year. Structural reforms will also boost exports by encouraging more private investment in productive activities thereby allowing Turkey to benefit more fully from the trade liberalization undertaken in the 1980s. 22. The high level and short maturity of external debt represents an important source of risk for Turkey given its open capital account. Turkey's external debt stock at the end of 1999 was reported as US$102 billion (some 55 percent of GNP) of which about US$23 billion was short term. External debt service of US$20 billion is projected in 2000, equivalent to about 35 percent  14 Turkev: Country Assistance Strategy FYO1-03 of exports of goods and services. The non-financial private sector has also borrowed heavily overseas, often with guarantees from the domestic banking sector, creating an additional source of foreign exchange exposure for commercial banks. Turkey remains vulnerable to sudden reversals in capital flows and the country's access to international capital markets is constrained by its below investment grade sovereign rating. These risk factors are counterbalanced by Turkey's excellent track record of debt service and its demonstrated ability to withstand external shocks. 23. The medium term projections suggest that Turkey must manage large external debt Figure 4: External Debt and Current urkepaymusts, fanceathe incrgeasexinthemalrrebt Account under Sustained and Truncated repayments, finance the increase in the current Reform Scenarios account deficit generated by the disinflation program, and ensure adequate levels of 62 10 international reserves. Export growth in the SRS 60 X_ would be higher than in the TRS and there would 5 56 -. - _ 0) be a greater inflow of export-oriented FDI. - 56 Stronger export performance would sustain high 54 -0) import levels and output growth. The reforms 2 52 5*_ 0) would improve confidence and help ensure that so 1(60) external financing needs are met. As the boom in 48 (7.0) the private consumption and investment generated 1999 2000 2001 2002 2003 by falling interest rates eases, fiscal adjustment is I CA'D SRS) -CAD TRS) sustained and exports expand, the current account balance is projected to gradually improve over the medium term. By 2002, the current account deficit would be below the benchmark of 3 percent of GNP consistent with a declining ratio of external debt to GNP (Figure 4). Under the SRS, external debt is projected to fall from a peak of 60 percent of GNP in 2001 to 57 percent of GNP by 2003. In the TRS, the nominal exchange rate anchor would become nonviable as rapid real appreciation would cause export growth to decelerate sharply. The resulting loss of confidence would severely curtail Turkey's external borrowing capacity requiring a sharp correction in the current account with negative repercussions for growth. The risk of crisis would be substantial. Under any scenario, Turkey's medium-term gross external financing requirements will be very considerable. Under the SRS, the simulations call for gross capital inflows of about US$100 billion over the period 2000-03 and substantial fast-disbursing resources will be required from official sources. With official financing in place and structural reforms underway, commercial financing prospects are expected to improve rapidly. Foreign participation in the privatization process will be a key instrument- as shown by Latin America's recent example. FDI is expected to increase steadily as the structural reforms take hold. 24. Capital inflows are also needed to accommodate a shift to a more balanced mix of internal and external borrowing by the budget compared with the nearly exclusive reliance on domestic markets in recent years. The Stand-By program targets about US$15 billion in net external borrowing by the consolidated public sector over the 2000-02 period. Although the Government could receive US$4 billion from the IMF under the Stand-By and around US$3 billion in adjustment lending from the Bank, the lion's share of new money is expected to come from private creditors. The Treasury has already raised over US$7 billion in new bond issues in 2000. Over the past year, international credit rating agencies have upgraded Turkey, although it  15 Turkev. Country Assistance Strategy FY0-03 remains below investment grade. In late January 2000, the Treasury successfully issued a US$1.5 billion global bond with a 30-year maturity, a new milestone. The prospect (albeit long- term) of membership and better access to EU markets is an additional attraction for investors. IV. BANK GROUP TRACK RECORD The FY98-00 CAS and its Implementation 25. The central thrust of the last three years' work was to increase the development impact of the Bank Group's activities in the country, which had been lower than hoped during prior periods of instability and in light of weak institutional capacity. This implied four key elements: a) increasing the intensity of our work in social development and poverty alleviation, notably through shifting the focus of investment activities to poorer regions; b) strengthening institutions to reduce the likelihood of policy reversals, and improve implementation; c) increasing support for economic management through technical and advisory services, and working to improve the Government's own capacity to design and implement reforms; and d) making concentrated joint efforts with the Government to improve portfolio management. 26. The base case financing to support these basic thrusts was for up to US$1.5 billion in investment lending. The Bank also stood ready to provide up to an additional US$3 billion in high case adjustment financing over three years, if the Government adopted and implemented a comprehensive program of structural reforms, underpinned by a strong macroeconomic framework endorsed by the IMF-a 'strong adjustment' scenario. 27. CAS implementation has progressed well. Investment lending under the base case totaled US$1.38 billion, for basic education (Box 4), power transmission, water and sewerage, privatization of irrigation, commodities market development, industrial technology, export financial intermediation, and emergency flood and earthquake recovery (responding to natural disasters in 1998). In late 1999, authorization to move beyond the CAS envelope was approved in order to support the recovery from the Marmara earthquake. That support involved reallocation of portions of eight ongoing loans, totaling US$236.3 million, and new lending of US$758 million (Box 5). Turkey also met the triggers for the high case and an adjustment operation for US$760 million-the first of an envisioned series of four-was approved by the Board in May 2000. The Bank's lending to Turkey reached US$1.8 billion in FY00, up from US$20 million in FY97. The World Bank is once again viewed as a key partner with Turkey because our timely support has contributed to important reforms and innovative changes. 28. Major non-lending services have included the Economic Reforms, Living Standards and Social Welfare Study (see Box I above), an energy and environment review and workshop, an informal forestry sector review, and workshops on selected topics in agricultural support, stabilization, municipal finance, health insurance, and financial risk management. The CEM (on Structural Reform for Sustainable Growth) was sent to the Board in September 20006; it presents a comprehensive analytical framework for the Government's reform program. In general, the dialogue with the Government has strengthened enormously, particularly in light of three factors: 6 See footnote 2 above.  16 Turkey. Country Assistance Strategy FY01-03 the move of the Country Director to the field in 1998; recognition by the Government of the strong support the Bank provided following the Marmara earthquake and its catalytic effect on other sources of external support; and the shared views on the reform agenda ahead and the kind of support the Bank Group can offer for its implementation. Box 4: Bank Support for Basic Education Reform In August, 1997 the Government adopted a new Basic Education Law which extends the duration of compulsory education from five years to eight years, and launches a major expansion and upgrading of eight-year basic education schools. The Bank is supporting this US$ 18 billion initiative with a series of two Adaptable Program Loans (APLs) of US$300 million each. The program is also supporting the introduction of computer education and English language instruction in over 5,500 basic education schools throughout Turkey, and includes a number of targeted interventions to raise the educational performance of students in the poorest regions of the country. The program has brought about a sharp increase in basic education enrollments, which have grown by more than 900,000 since the start of the program. Enrollments in grade six, which became mandatory for the first time in the 1997-98 school year, increased over 30 percent from 866,000 in September 1997 to 1,127,000 in September 1998. In rural areas, the gains were dramatic: boys' enrollments in grade six increased by 62 percent; girls' enrollments increased by 162 percent. Overall, girls' enrollments are lower than boys' enrollments, but more rapid growth of girls' enrollments is narrowing this gap. The Bank will also continue support an innovative and successful collaboration between the Ministry of Education and an NGO in delivering pre-school and mothers' education. The 2001 budget allocation for education (4.0 percent of GNP, equal to the level of actual spending estimated for 2000) will sustain the resource base for the education reform. The Government has announced its intention to extend for two years the special education levy (Law 4306). PiodPgress Ui&rTurkeys Basic FiaicationPram Orjs' Erolmnrns amr Ning e (O.p'i'dth Bqs' f1rdinx,nts I 1t,W0- ,0 IQ5O,O00C- 9,50D,0OO , t 4,500,000 - - Efulllts 1-8 Fbpti,Lbon 7-1 Source: Official Data of Government of Turkey, including State Institute of Statistics, Ministry of National Education 29. Lessons. Although overall the last CAS period witnessed solid achievements in Turkey, some aspects yielded lessons for future improvement. The established wisdom that individual projects cannot fully succeed in a flawed policy environment was confirmed. For example, Turkey's own commitment to the large-scale expansion of basic education coverage is being effectively supported by the Bank, but without similar coherence in the country's health program, Bank-supported projects have not had such positive impacts and weak health indicators remain a serious concern (as indicated in Section II above). Another key factor in achieving  17 Turkey: Country Assistance Strategy FYOI-03 developmental impact has been choosing and building appropriate institutions. In some cases, this has required patient and intensive supervision; in others, pilots for shared learning have worked well. Three examples of pilots that are leading to solid results are in commodity markets, water user associations for irrigation, and the now expanding micro watershed management activities. On the other hand, the desired demonstration effects of private service provision and measures to raise efficiency in urban water supply have been slow in coming, thus contributing to the view that a broader reform of municipal management of infrastructure and service provision is needed. Another area of lessons was reiterated in a recent OED study of projects that had supported lines of credit for industrial and technological development in Turkey over more than a decade: in a distorted financial policy setting, these largely had an unsatisfactory impact. This latter message was well known by the beginning of the last CAS, and reflected in the design of the industrial technology and export finance operations, as well as more importantly in the future financial sector strategy outlined in Section V below. A further noteworthy lesson has also reconfirmed: sound analytical work done in conjunction with the Government is essential for laying a basis for constructive dialogue and contributing to consensus for change. The Bank's decision to do major sector work on health in FYOI-02 reflects this lesson. Finally, the importance of political conditions for the timing of the Bank's work was illustrated when the reform agenda was fully initiated only after elections and the formation of the coalition government. Box 5: Earthquake Response The swift response of the Bank Group to the earthquake earned the respect of the government and the international community. The World Bank emerged as the central external institution helping Turkey coordinate the response to the earthquake. The Bank's assistance of US$1 billion can be divided into four categories, each receiving about US$250 million: - Relief to families living in temporary facilities in the form of cash grants through the Social Solidarity Fund under the Emergency Earthquake Recovery Loan (US$253 million, of which all but US$30,000 for institutional strengthening has been disbursed). - New permanent housing-12,100 urban housing units to be completed by April 2001, and 2000 rural units by the summer of 2001 (under the Marmara Emergency Earthquake Reconstruction, or MEER, project). - Rehabilitation of schools, hospitals, health centers and other infrastructure as well as replacement of equipment in hospitals and health centers and social and trauma programs (most financed through reallocations of ongoing loans). - Institutional strengthening including compulsory housing insurance, establishment of the Emergency Management Agency of Turkey (EMAT) and improving land registration and building codes (under MEER). IFC established an Earthquake Region Development Facility to assist in the economic recovery of the earthquake-affected region. The Facility comprises individual lines of credit in the aggregate amount of up to US$50 million to be made available to existing bank clients of IFC in Turkey for reconstruction of physical facilities and working capital. 30. In summary, experience during the previous CAS has highlighted four significant lessons for the Bank: * the Bank was able to respond quickly and effectively to the Government's recent requests for support to the reforms because a solid series of economic and technical work had been completed prior to the initiation of the reforms;  18 Turkey. Country Assistance Strategy FYO0-03 * investment and technical assistance projects have failed in sectors where the commitment to reform was weak in the past, but where reform commitment has been strong, Bank projects are succeeding; * building stakeholder consensus is essential to project success even if this appears to slow down project implementation in the early phases; and * Turkey's vulnerability to natural disasters remains high, and can only be reduced by building institutional mechanisms to mitigate the impact of such events. 31. IFC. During FY98-00, IFC invested US$584 million in Turkey for its own account and over US$1 billion including syndication with other banks. IFC has been the only significant source of long-term project finance in Turkey, particularly for the medium-sized companies, since the international commercial banks have been focusing exclusively on top tier companies. Following FY98-00 CAS strategic priorities, IFC has invested in financial sector development, export-oriented companies, credit lines and technical assistance to SMEs, and in Turkish investments abroad. IFC has been pursuing a conscious strategy of scaling down its projects with larger conglomerates. Status of the Portfolio 32. The Bank's Turkey portfolio consists of 21 active IBRD financed projects, including one adjustment and one fast disbursing emergency operation. In addition, we manage one GEF and one Montreal Protocol project. Total net commitments for IBRD projects amount to US$3.8 billion, of which 60 percent (US$2.3 billion) remains undisbursed. The average age of loans has decreased from five years at the beginning of FY97 to under four years at present. This average will fuirther decline with the closure of three projects in December 2000. Over the past five years the emphasis in the portfolio of investment operations has gradually shifted away from large energy, infrastructure and rural credit projects towards higher commitments in the human development sectors, and special assistance for recent emergencies (Table 4). Table 4: World Bank Commitments by Sector _ _ _ __ _ JuY 1994 JulY 1997 October2000 US$m o oftotal US$ m % oftotal US$m % oftotal Emergency Assistance and Recovery 1/ 285 6 243 8 1,126 30 I Adjustment 0 0 0 0 760 20 Social Sectors 389 9 498 17 532 14 Infrastructure 1,217 28 1,075 36 473 12 Private Sector Development 504 11 605 20 408 11 Energy 1,042 24 305 10 298 8 Rural Development 963 22 177 6 150 4 Public Sector Management 9 0 71 2 57 1 TOTAL 4,409 100 2,973 99 3,804 100 Notes: 1/ Emergency Assistance and Recovery includes Emergency Earthquake Recovery Project, Marmara Emergency Reconstruction Project, TEFER project and Erzincan Earthquake Reconstruction Project.  19 Turkey: Country Assistance Strategy FY01-03 33. Portfolio Performance. The performance of the Turkey portfolio compares favorably to Bank-wide and ECA regional averages and remains significantly stronger than it was during the early and mid-1990s. As of October 2000, three out of 23 projects (13 percent) were at risk and posted unsatisfactory ratings for implementation performance, achievement of development objectives, or both. Currently 13 percent of commitments are at risk (compared to 23 percent in ECA and 15 percent Bank wide). The portfolio contains several projects that have achieved remarkable results and may serve as best practice for future operations, such as the Basic Education Project, the Eastern Anatolia Watershed Project, the Marmara Earthquake Emergency Recovery Project, and the Emergency Earthquake Recovery Loan. On the other hand, the mixed performance over time of the health and infrastructure portfolio will ultimately only be resolved in the context of sectoral strategies and clear priorities for implementing agencies. 34. The Turkey portfolio is performing substantially better than in the mid-1990s (Table 5). This is largely due to an increasingly strong working relationship between the Government and the Bank on the ground. Field posting of a portfolio manager, several program team leaders, and one procurement accredited specialist (PAS) substantially contributed to this. QAG has assigned a Realism Index and a Proactivity Index of 100 percent each to the Turkey portfolio; both compare favorably to the regional average. Table 5: Turkey - Portfolio Review FY95 FY96 FY97 FY98 FY99 FY00 FY01 Q1 Number Of Projects at FY end d/ 25 25 22 22 20 23 21 Net Commitments ($m) at FY end b/ 3,333 3,021 2,763 2,434 2,632 4,023 3,803 Undisbursed Balance at FY Start ($m) c/ 2,371 1,994 1,633 1,233 1,509 1,673 2,418 Gross Disbursements during FY ($m) 288 611 329 259 264 957 95 Disbursement Ratio Investment Projects (%) a/ 12 20 20 21 17 20 5 Disbursement Ratio incl. Fast Disb. Loans (%) a/ 12 31 20 21 17 57 5 Cancellations ($m) 338 63 86 53 104 41 5 New Commitments ($m) 250 312 20 603 528 1,770 0 Unsatisfactory Projects Number 8 5 1 3 4 4 3 Percent 32 20 5 14 20 17 14 Notes: a/ Disbursement ratio is disbursement during period as a % of outstanding balance at beginning of FY. Disbursement ratio including fast disbursing loans includes disbursements for Earthquake Emergency Recovery Loan and Economic Reform Loan in FY00, and disbursement from three credit lines in FY96. b/ Net Commitments = Original Loan Amount - Cancellations c/ Undisbursed balance on October 1, 2000 was US$2.3 billion. d/ Infornation includes only IBRD financed projects under implementation. Inclusion of GEF and Montreal Protocol Projects raises number of projects in FY01 to 23, lowers share of projects at risk to 13% and raises total net commitments to US$3.82 billion. 35. Implementation experience over the last CAS period has shown that several issues need to be addressed up front to assure effective project implementation and help prevent slow project start-up. These include: (i) the need to assure that new projects fit within each implementing agency's overall budget envelope and that agencies will be in a position to allocate sufficient funds from within agency's budget allocations for the projects it manages, throughout the  20 Turkey: Country Assistance Strategy FYOI-03 implementation period; (ii) the need to assure that implementing agencies receive necessary support from consultants and the Bank to proceed promptly with large procurements, particularly during the initial phase of project implementation; (iii) continuous close interaction between the implementing agency, including high level agency managers, and the Bank. The Joint Portfolio Performance Review which the Country Team completed with the Government in FY00 identified procurement delays, weak project management (partly due to frequent change of staff responsible for project management and implementation) and limited financial management capacity as problems which often contribute to slow project implementation. To help address these issues, the Ankara Office has strengthened its procurement unit (a second PAS was accredited in October 2000) and will shortly hire a financial management specialist. Most of the proposed operations in this CAS are closely linked to the implementation of the Government's reform program. They thus have a more narrow focus and a high degree of counterpart commitment to rapid implementation, which make them less susceptible to some of the implementation problems that have traditionally afflicted our investment projects. On the Bank's side more timely follow-up and streamlined procedures could also be helpful in speedier implementation, as would more intensive supervision during the start-up phase of any project involving an agency that is not familiar with project procedures. V. BANK GROUP STRATEGY 36. The primary objective of this CAS is to help Turkey meet its goals of improving living standards and reducing economic vulnerability and poverty. The Government's economic reform program aims to defeat inflation and restore the economy to high and sustainable growth in output and employment, in order to improve living standards and reduce poverty. This program needs and merits continuing support from the Bank under a high-case program. 37. In line with Turkey's current and upcoming priorities, the Bank Group would focus the FYO1-03 program on five broad themes: - implement reforms for growth and employment generation; * improve public sector management and accountability; * expand social services and social protection; * strengthen environmental management and disaster mitigation; and * accelerate connectivity and technological capabilities. The choice of these themes reflects Government priorities, as discussed in Section II above, continuation of valid priorities from the last CAS where success is being achieved on the ground, and reflections shared with the Bank Group through a variety of social assessment and consultative activities (Box 6).  21 Turkev: Country Assistance Strategy FYO0-03 Box 6: CAS Consultations and Assessments For this CAS, the Bank and IFC aimed to take into account the priorities of Turkey's society, and learn more about how those priorities are expressed by different social groups and organizations. In general, the informal consultations and working discussions on Turkey's needs and the Bank's program are continuous. Nevertheless for CAS preparation a specific consultation program was designed. Client survey. Early in 1999, the Bank did a client survey, with a respectable response rate. The survey included both the standard Bank-wide modules of questions, the special modules about the move of the country director to the field office, and a set of questions designed to compare the country team's views to those of the clients. This survey revealed that the expertise and dedication of Bank staff is valued in Turkey. The move of the Country Director to the field was praised. Areas where clients felt we were not placing high enough priority or not doing well were chiefly related to identifying and addressing poverty issues, working on governance, supporting reform, communicating widely enough, and working with NGOs. In each of these areas, we have in the past 18 months done much, as reflected in this CAS. Collecting our own learning. A consultant study drew together the results of the consultative activities, and social or beneficiary assessments done for specific tasks over the past three years. Collective learning is growing, and some projects are models of beneficiary and social assessment, as well as building stakeholder buy-in. Consultative sessions for the CAS. The Bank and IFC jointly had four formal consultative sessions for CAS preparation, and the Bank held one session with NGOs. A half a day meeting was arranged by TUSIAD in Istanbul, for "big business" interests, and a similar session was held in Izmir with representatives of smaller businesses with more local concerns. A session was organized in Istanbul with banking representatives. These groups shared views about Turkey's development priorities, in particular the effect of the reform program on the private and financial sectors. In Ankara, the Bank met with representatives of 23 NGOs, who expressed views on the nation's priorities and on the future of the NGO segment in the country, as well as how the Bank and the NGOs could interact in the future. Subsequently, another meeting with NGOs was held with Mr. Wolfensohn during his visit to Turkey, in which the potential role and effectiveness of NGOs and issues of organization amongst NGOs were discussed. The Bank Group hosted a one-day retreat outside Ankara with about 30 representatives of external partner agencies, which gave a rich exchange of knowledge and a commitment to build further our informal coordination through strengthened communication. Mr. Wolfensohn and the Bank team also met Parliamentarians, gleaning insights on the strength of the consensus for reform. Filling a gap in our knowledge about social inclusion. Early in the CAS process it became clear that the Bank's knowledge was not complete on issues of social inclusion and social groupings. An academic paper was commissioned from a local expert to review Turkish academic literature and analytical approaches on these issues. This paper has brought us several useful paradigms for understanding social groups in Turkey, their priorities, and their ability to attain these priorities, and offered explanations of the informal safety net and strong social cohesion in many segments of society in Turkey. This complements the work done in the Economic Reform, Living Standards and Welfare Study. A paper on the Political Economy of Reform in Turkey is currently under preparation. Implement Reforms for Growth and Employment Generation 38. The Government's proposed reforms to restore stable growth and employment will be supported through four adjustment operations, of which the first one, ERL, was approved on May 18, 2000 under the high case of the previous CAS, while the second, FSAL I, is presented with this CAS. This support is closely coordinated with the IMF's Stand-By Arrangement. The ERL has been the key instrument for Bank support to major reforms in agriculture, energy,  22 Turkey: Country Assistance Strategy FYO0-03 telecommunications, social security system and privatization. An innovative feature of this CAS is the design of investment projects to closely complement the adjustment loans. This support responds to the Government's wish to avoid implementation and institutional problems in key sectors. Three such investment projects are linked to the ERL program: * The Privatization Social Support project (PSSP) presented with this CAS focuses on strengthening social protection mechanisms for groups affected by the privatization undertaken within the reform program. * The Agricultural Reform and Investment Project (ARIP, FY01) will support conversion of the agriculture sales cooperative unions (ASCUs) into autonomous private cooperatives, introduction of the direct income support program for small farmers, transition of farmers out of low value-added cash crops, and privatization of large state-owned agribusiness companies. Turkey's plans to improve agricultural productivity and better target agriculture subsidies to small farmers through the switch to direct income support conmmand special attention because farmers make up a large share of the economically vulnerable population. The loan for the ARIP project will be a two-phase APL of US$600 million to allow phased support over the longer term, with the first phase supporting the reforms and the second phase supporting follow-on investments. The agriculture reforms under ARIP will be complemented by steps to improve land and forestry management. * An energy project (FY03) would support reforrn implementation in power with special emphasis on renewables. This project could include a guarantee component. Dialogue on reform of the gas sector (an area of possible future support) is ongoing. 39. The Bank also plans to carry out a series of economic and sector studies, both formal and informal, to continue to inform the debate on key reform issues. Currently underway is work on the livestock and forestry sectors, energy and the environment. In FY02, a note on the gas sector would be prepared, and throughout the CAS period, monitoring and focused assessment of related energy issues in Turkey and the neighboring region will continue. In FY03, the Bank would review the economic situation in the context of a CEM focusing on the path towards EU accession, and its implications for future change. 40. IFC is collaborating with the Bank on private-sector inputs for the structural reform program. Bank-supported improvements in the legal and regulatory framework for the telecommunications, energy and financial sectors are expected to increase opportunities for IFC investments in these areas. FIAS has reviewed the new draft investment law and will conduct an administrative barrier study. The complementary focus of the Bank and IFC in infrastructure and financial markets will enhance the quality of the Government's economic reform program and will contribute to strengthening the partnership between Turkey and the World Bank Group. In keeping with this complementary focus, key issues and ongoing dialogue between IFC and the Turkish authorities are as follows: * Encouraging regulatory reform to improve the climate for financing large infrastructure projects; * Developing additional means to assist SMEs, second tier and regional companies efficiently; and * Supporting privatizations in the banking, agribusiness, communications and energy sectors.  23 Turkev: Country Assistance Strategy FYO0-03 41. Support to the Financial Sector. Given its critical importance to the economic stabilization program, the financial sector will account for a significant part of the World Bank Group's program in Turkey, focussing on reducing systemic risks and vulnerabilities, while increasing the sophistication, productivity and competitiveness of the financial sector to bring it up to global standards. In response to request from the authorities, IBRD's planned assistance in the financial sector is built on four elements: * FSAL I (FYO), will focus on strengthening the legislative, regulatory and supervision infrastructure for banks through the establishment of the BRSA and the new Banking Law, updating bank prudential regulations to EU standards, strengthening problem banks, and initiating the restructuring/privatization of state-owned banks. * A formal Non-Bank Financial Institutions Review (NBFR) will be done during FYO, to analyze existing development issues and future priorities related to: (i) financial markets, including Government securities, money market, bond markets, equities, commodities and derivatives; and (ii) non bank financial intermediaries like securities firms, investment companies, contractual savings institutions such as insurance companies, mutual funds and pension funds, and the near-banks like leasing, factoring and consumer finance companies. * The State Bank Restructuring Project (FY02) would provide technical assistance and financing to prepare the state banks for viable privatization by placing them on sound financial footing and removing distortions in their lending practices. The Bank could also consider helping BRSA to access international lines of credit to recapitalize the SDIF through a guarantee operation, which would be within the overall CAS envelope. - The FSAL II (FY03), will build upon FSAL I and address the remaining reform agenda in the financial sector, especially issues related to: (i) the privatization and commercialization of state banks; (ii) further reform of the deposit insurance scheme; (iii) regulatory issues related to capital markets, insurance and other non-bank financial institutions like leasing, factoring, mutual funds and private pension funds; and (iv) creation of a consolidated supervision entity. 42. IFC will focus on institution-building and introduction of new products in financial markets-in particular, development of mortgage finance and long-term contractual savings institutions such as private pension funds and life insurance companies, development of venture capital/private equity funds, support for bank privatization, and technical assistance on securitizations. IFC will support SMEs by providing term-financing through lending to leasing companies and selected banks, and catalyzing creation of essential business infrastructure for SMEs, such as business and technical advisory facilities and internet-based access to international markets. IFC is working with a number of Turkish banks and leasing companies on joint investments in the region, leveraging the strong technical skills and sophistication of Turkish companies to partner for establishment of new financial intermediaries in Central Asia and also in Albania, Azerbaijan, Bosnia, FYR Macedonia, Moldova and Romania. Joint ventures of this kind in the region are expected to increase, as consolidation and competition within Turkey spurs financial intermediaries to seek opportunities abroad. IFC has also provided US$150 million in financing in support of Turkish investments in Central and Eastern Europe and Central Asia, and expects to continue pursuing this line of business. (See Annex 1.)  24 Turkey. Country Assistance Strategy FYO0-03 43. MIGA is also very active in l'urkey, both in terms of guarantees and capacity building for foreign investment promotion. While MIGA's portfolio in Turkey has until now been concentrated in the financial sector, other sectors are expected to grow in its portfolio- particularly in infrastructure investments. MIGA's Investment Marketing Service will continue to be an active supporter of the Center for Private Sector Development in Istanbul, which is a joint undertaking of the OECD and TICA, to catalyze and support the transfer of expertise and experience related to private sector development to economies in the region. Improve Public Management and Accountability 44. The Government is giving increased priority to governance issues ranging from high profile remarks by top leaders about improved administration, effectiveness, and transparency to plans for reform of public expenditure and related institutional mechanisms. The Bank is already working with the Government to improve enforcement of housing codes following the August 1999 earthquake. There is growing realization in the country that Turkey must modernize its public institutions in order to deliver better services to people, and help Turkey's private sector in a fast-paced global environment, and accelerate its prospects for EU entry. 45. The Govermnent aims at addressing governance and anti-corruption issues in four ways. First, it has begun a process of introducing more independent regulatory institutions to manage the interface between the public sector and the private sector and privatization. Second, recent measures in the financial sector are improving governance, regulatory and prudential guidelines, and enforcement. Third, explicit standards are being set for the public sector, and audited. Fourth, measures are being designed for improving and strengthening public institutions entrusted with enforcement of anti-corruption activities and the legal system more broadly. The Bank's planned assistance to Turkey in this area is presented in Box 7. Box 7: Work on Anti-Corruption and Governance The Bank's approach to the issues of governance and transparency under the CAS is three-fold: * Support establishment of independent regulatory bodies that manage the interface between the public and private sectors. The World Bank has helped Turkey establish the new independent banking authority and the telecommunications regulatory board, and is now working with the government to create regulatory bodies for electricity and gas. * Help Turkey improve public procurement, auditing, accounting and public management. Turkey has begun the process of eliminating budgetary and extra-budgetary funds. The Bank will complete a Public Expenditure and Institutional Review (PEIR), a Country Financial Accountability Assessment, and a Country Procurement Assessment Review in FYOI. These activities complement the Fiscal Transparency Review carried out with the IMF and published in July. The preparation for the PSAL (FY02) would include reaching agreement on the launch of key reforms in public management, including those that would improve public expenditure management and reduce off-budget expenditure. * Help public offices (such as the Prime Minister's Inspection Board) and civic organizations (such as Transparency International, TESEV and TUSIAD) highlight these issues more broadly in the country including through a WBI Governance Workshop in FY02. Bank support has been requested for an anti-corruption initiative.  25 Turkev: Countr Assistance Strategy FYOJ-03 The PSAL (FY02) would be a key instrument for reaching agreement with the Government on improvements in budgetary practices, ensuring improvements in auditing and procurement standards, ensuring appropriate budget allocation (including towards well targeted interventions to improve basic health outcomes) and beginning important reforms in public administration. 46. As Turkey's economic program progresses, it will need to start focussing on a wide- ranging set of issues related to decentralization. This would include a re-alignment of local administration and municipal finances. In developing these activities, there is close cooperation with Germany's Development Ministry and the EIB. The Government has requested Bank support to help establish a new funding mechanism for municipal projects and restructure Turkey's Iller Bank through an APL (Municipal Project, FY03), in support of an overall effort to improve municipal services for the rapidly growing urban population. The APL structure-of up to US$600 million, with two phases of US$300 million each-for this proposed operation is well suited to the long term nature of the municipal reform agenda. 47. Through advisory services for municipal agencies the IFC plans to support on-going Turkish Government efforts to decentralize financing responsibility for public services to municipalities and a growing demand for private sector participation in delivery of utilities and municipal services. The technical assistance under the Bank's Municipal Project (FY03) will complement IFC's activities on private sector participation. Expand Social Services and Social Protection 48. Social Services. While creating and sustaining growth will be a challenge for Turkey, growth alone will not suffice. Strengthening education, health and social assistance are other critical aspects of the strategy. The Bank will continue to support Turkey's successful basic education reforms which are leading to very substantial improvements in school enrollment- especially among girls (Box 4). The Bank's commitment to the series of adaptable program loans (APLs) in support of the Government's program for expanded coverage and improved quality of basic education up to grade eight remains strong, and Bank management expects to approve in FY01 the second phase APL, which will include support for pre-school education as well. In response to the Government's expressed willingness to address the reform agenda for secondary education, the Bank is preparing to support that segment with an investment project (FY02). 49. Bold reforms are similarly needed in health, but sufficient consensus for this effort does not yet exist. In recognition of this need, Bank strategy in the health sector aims to help Turkey build the necessary consensus through economic and sector work, and to ensure that sufficient funding is available for basic health services. The Government's current large-scale program to provide at least eight years of basic education for all children will make an important contribution to improved health status. So will the various economic measures to reduce regional income disparities, and improve municipal water supply and sanitation. But improving health status and delivering better health services in the areas with the greatest needs will also require fundamental, systemic changes of several kinds, including: a) providing better incentives for public health professionals to serve in areas where they are most needed; b) providing stronger incentives for hospitals and other health facilities to use inputs efficiently; c) diversifying financing of health services and drug provision; d) rationalizing the provision of  26 Turkey: Country Assistance Strategy EYOI-03 health care by developing family physicians as the initial care providers for most patients and by rationing access to specialized care; e) investing in vaccinations and vector control for communicable diseases; and f) promoting lifestyle changes to reduce smoking, accidents, and other health-degrading behavior. The Bank and the Government are working to remedy the poor implementation performance of our health projects. The recent restructuring of the two ongoing health projects should lead to better performance in achieving these projects' relatively limited objectives. Nevertheless, achieving significant improvements in health indicators-particularly in rural areas and urban slum areas (gecekondus)-will require much broader initiatives, and a concerted effort on the part of Government and other partners. 50. The ongoing PEIR is developing recommendations to address the needs in areas (a), (b), and (c), above. Together with UNICEF, WHO, UNFPA, and other partners, the Bank is addressing the other needs initially through the Health Sector Review (beginning in FY01, for completion in FY02). The review will analyze in detail the problems of the sector and provide recommendations on how to deal better with resource mobilization, resource allocation and utilization, low utilization rates, inefficient hospital financing, low coverage, declining health status, and deficient services. It will also address issues of evaluation, replication and policy formulation. This review will develop a prioritized action Program to improve health status, and options for institutional reform of MOH. Implementation of this Program is expected to require a large-scale, multi-year effort, involving financing from a variety of sources - including Government, the private sector, other donors, and the Bank. Our initial implementation support for this Program would be in the form of a Health Project (FY03) focussed on reducing disparities in access to quality health care services. 51. IFC's strategy in the social sectors complements the efforts of the World Bank to improve the quality and scope of the services in these sectors. IFC plans to invest in health and education to create models of high quality and efficient services in these sectors that are critical to the sustainability of economic growth and to alleviating the burden on public social systems. 52. Social Protection. A principal challenge for social protection policy in Turkey, as in other countries, is to balance protection and opportunity: to reduce the impact of poverty and protect against lifetime risks associated with drops in income, while promoting economic growth. This involves four elements: (a) social insurance that allows individuals to smooth consumption over lifetimes; (b) social assistance-including cash, in-kind benefits, services and subsidies-to provide an affordable standard of living for the poor; (c) labor market policies that reward labor productivity and allow labor to be allocated to its most efficient uses; and (d) mechanisms to mobilize community effort and promote asset creation among the poor. 53. The Government has taken actions that strengthen the pension system and mitigate the effects of unemployment (see para. 9). Greater emphasis is also being placed on social assistance, and in particular on approaches outside the cash transfer system, such as social services related to rural-urban migration, de-institutionalization of children and stronger community-based services, and on further exploring the positive role that NGOs can play in poverty alleviation. The Bank's recent studies and project work have enhanced the Government's understanding of vulnerable and needy population groups in the country and supported the four elements of social protection to some degree. Nevertheless, existing safety net mechanisms are still inadequate: coverage is limited, leakage is high, and access is  27 Turkev: Country Assistance Strategv FY01-03 particularly difficult for the poor. More needs to be done in order to support the establishment of a safety net that not only provides protection, but also offers a springboard out of poverty. 54. A social protection strategy for the reform and beyond will need to develop effective targeting procedures in the provision of social assistance, innovative approaches to community- based services (including developing partnerships with communities and NGOs), mechanisms that will improve access for the poor to asset development (for instance micro-credit facilities and incubator schemes), and improved family welfare. These aims would be reflected in a Local Initiatives and Social Assistance project (FY02), which will build upon the experience of the current pilot social development projects (funded by a Japan PHRD grant) and help expand and better target Turkey's social assistance program. The Bank will support building on the successful model of the micro-catchment component of the East Anatolia Watershed Project, to replicate the approach to improvement of community livelihoods. A special project, the Village and Township Services project (FY02), would aim to improve health and education services in remote village communities and improve the income earning opportunities there. The Bank will continue to encourage Turkey's social security reform, which would include the introduction of an optional private pension pillar and continuation of the institutional reform designed to harmonize and eventually unify the three public pension funds. On labor market issues, the Bank would be willing to participate with the Government and other partners in a policy dialogue, with the aim of fastering more competition. The PSSP (FY01), aims at facilitating enterprise privatization through its mitigating effects on the labor shedding process, as well as building on an earlier employment and training project by further developing the public institutions in labor market intermediation. Strengthen Disaster Mitigation and Environmental Management 55. Turkey has high seismic risk, and also a history of flooding. Occasionally, natural disasters cause extensive loss of human life as well as large economic costs. The Marmara quake of 1999 demonstrated the urgent need for much more comprehensive disaster preparedness, catastrophic insurance, sound governance of construction practices, and other risk minimization. The current portfolio includes the Marmara Emergency Earthquake Reconstruction Project (MEER, FY00), and the Emergency Earthquake Recovery Loan (EERL, FY00), as well as reallocated components of eight other projects, one of which supports reconstruction from floods and an earthquake in 1998. The most important work in this respect now is the strong joint effort with Government to ensure sound and timely implementation of these projects, which will build better institutions and mechanisms such as insurance systems, disaster response, and building codes to ensure that future losses are minimized and emergencies are handled effectively. The Bank has also supported early preparation for retrofitting public buildings for earthquake resistance in Istanbul and Izmir, in coordination with local agencies, and could finance a project to bolster the seismic risk mitigation capacity of Istanbul, in FY03. Under the ARIP, the Bank will support work to lay the foundation for the Government's program to put in place an official system of agricultural insurance to substitute for the current expensive and ineffective ad hoc disaster payments. 56. Turkey's efforts at environmental management have been spotty and sporadic. Environmental awareness is growing but institutional capacity to deal with it is weak. The prospect of joining the EU will encourage enforcement of European environmental standards.  28 Turkey: Country Assistance Strategy FY01-03 Implementation of the National Environmental Action Plan (NEAP), prepared with World Bank help, will be a key element of our effort to help Turkey in this area. The ongoing study series on energy and environment issues is engendering national awareness of areas and methods for improvement. Ongoing work in water and sewerage is expected to build a track record for some replicable municipal resource management. The Micro-Watershed Management Project (FY03) would build on the successful community-level experience of the East Anatolia Watershed Project. Also in FY01, dissemination of the Forestry Review (FY01) and Livestock Sector Note (FY01) should contribute to public debate and policy changes in support of sustainable livelihoods and resource use. The implementation of the GEF Biodiversity Project (FY00) will provide four examples of sound management of biodiversity in four different ecosystems within Turkey, all of which contain unique species of global importance, while another GEF project in FY03 will contribute to a regional effort to reduce chemical run-off into the Black Sea. The Natural and Cultural Heritage Project (FY02) would help restore one of Turkey's treasures (Pamukkale), as well as strengthening the institutional framework for managing and preserving other important historical sites. Accelerate Connectivity and Technological Capabilities 57. Turkey's ability to share in global prosperity will depend to a great extent on deepening connectivity and expanding technological capabilities, particularly information technology. Otherwise Turkey will lag behind in its quest to modernize the economy, and the economic reforms will only be partially successful in getting the economy to reach its potential. To help Turkey secure its future, the proposed strategy will encompass initial work in this area vital to strengthening the country's ability to benefit from globalization and the new information economy. Turkey is making impressive strides in technology development applications but lags behind East Asia in technological capabilities. Its industrial structure remains anchored in low technology industries. Computer literacy and connectivity are improving rapidly with the number of PCs increasing from 1.2 million in 1997 to 3 million in 2000 and the number of people with internet connections approaching 1.5 million. However, Turkey remains well below averages for the OECD, and must accelerate the pace of technological upgrading to catch up. 58. The Bank's support for technological upgrading of SMEs and key research centers through the Industrial Technology Project (FY99) will also strengthen the outreach of the Technology Development Foundation of Turkey. Technopark and cyber facilities are also planned under this project. The Basic Education Project's IT component is financing the largest upgrade of school computer and laboratories in the developing world and Turkey is participating in the World Links project. A major automation of the customs administration in line with the Customs Agreement with the EU is underway with support from the Public Financial Management Project (FY96). The Bank proposes to help expand significantly Turkey's distance learning capabilities by supporting under the second APL for Basic Education (FY 2001) the initial training of preschool teachers through distance learning techniques. Under the Computerized Management and Support System sub-component of the Health II Project, the Bank is financing two information systems initiatives-the Core Health Resource Management System7 (CHRMS) and the Hospital Information System-as well as related investments in training, technical assistance and operational improvements. A Country Gateway for Turkey is 7 This complements the Basic Health Statistics Module (BHSM) financed under Health 1.  29 Turkey: Country Assistance Strate2V FYO0-03 being considered in the context of the Bank's Global Gateway initiative; this would be launched with collaboration between industry, Government and academia. The Municipal Project (FY03) could also help enhance computerization and electronic services at the local municipal level on a pilot basis, since such measures have led to improved transparency and better services elsewhere. Turkey also plans to computerize its social security and health institutions and has taken important steps to streamline and computerize its health insurance payment system. Further needs in the area will be determined on the basis of a Technology Assessment planned for completion in FY02. 59. With a view to promoting Turkey as a technological hub for the region, IFC will assist Turkish companies to increase their competitiveness and take advantage of trade opportunities created by the ongoing customs union with EU and future accession, by: (i) financing information technology related projects; (ii) emphasizing proper and transparent corporate governance among its clients; (iii) growing its equity and quasi-equity portfolio in Turkey in support of the above strategic focus; (iv) bringing major corporates to the international institutional investors market, using innovative IFC enhancement instruments; and (v) assisting second-tier, export-oriented industrial and agribusiness companies for projects which require innovative financial structuring or which meet specific country needs. IFC will also support Turkish outward investment in the Southern Europe and Central Asia region and promote Turkey as a regional financial and technology hub. (See also Annex 1.) Benchmarking Success 60. Detailed benchmarks for each strategic theme have been worked out with the country tearn and Government counterparts. In summary, the CAS for FY 2001-2003 will be judged by the following nine monitorable indicators: * taming inflation to single-digits; * achieving growth of 5 percent per annum on average over the period; * introduction of direct income support system in agriculture; * establishment of effective regulatory bodies in banking, power, telecommunication and gas; * restructuring and privatization of at least three state banks; * girls enrollments in basic education to reach at least 4.8 million in the 2002-3 school year, and total enrollments in basic education to increase by at least 100,000 over current levels; * increasing financing for primary health care; * establishment and effective functioning of Turkey's institutions for disaster management; and * establishment of more effective safety nets for people affected by reforms. Selectivity and Partnerships 61. The new CAS, while expanding Bank Group interventions, has been designed to maximize our partnership and is selective (Box 8) in light of the complementary or joint work of others in each strategic area. In general external assistance to Turkey is limited in view of its  30 Turkev. Country Assistance Strategy FY01-03 relatively high income level. Turkey does not currently have access to financing from the ADB and the EBRD because it is a donor country in those institutions and, therefore, relies more on World Bank assistance. A handful of countries and international institutions provide external credits and technical help. Coordination among these is relatively straightforward and does not require elaborate consultative mechanisms. Nevertheless, informal "friends of Turkey" meetings, organized by the Bank and used for CAS consultations, have been found to be very useful. In particular, the matrix in Annex B9 was worked on jointly with the external partners mentioned there. The Ankara Office also organizes economic briefings and special briefings on issues such as earthquake response. The Bank Group expects to continue these less formal consultation mechanisms. Bank staff are also in heavy demand from private capital markets and financiers for consultations regarding economic developments in Turkey. Box 8: Selectivity Selectivity is a major feature of Bank Group interventions. The primary objective of Bank assistance is to help catalyze, whenever feasible, private sector investment and initiative and to ensure that close collaboration and partnership is developed with other bilateral and international lenders. The Bank Group's work "crowds in" rather than "crowding out" others. In keeping with this objective the Bank will focus more on: * structural and social aspects of reforms, with increasing emphasis over time on Turkey's goals for EU entry; * education and health programs, in partnership with UNICEF, WHO and UNFPA; * rural development and resource management activities in collaboration with EU and FAO as well as local institutions; * governance and anti-corruption work in partnership with EU and local institutions; * municipal reform in partnership with the EU and selected European countries; * disaster management in partnership with EIB and UNDP; and * banking sector reform in collaboration with the IMF. During this CAS period, the Bank will not be heavily involved in infrastructure financing (which will rely more on bilaterals and private financing), judicial reform (EU will take the lead among donors), livestock (where the EU has expressed an strong interest), macroeconomic management (IMF), or power generation and distribution investments (bilaterals and private financing). As Turkey's macroeconomic and structural reforms are advanced, its access to extemal private financing (including direct foreign investment) is expected to improve. As this occurs, the Bank Group will evaluate implications for the IFC program and Bank financing related to infrastructure. 62. Bank teams work closely with the IMF on the reform program. With the addition of Turkey to the EU accession list, the EU is set to become an increasingly important partner for the country. The European Commission (EC) has launched a process of consultation with the Turkish authorities; during the second half of 2000, an accession partnership document will be drawn up and the EC will prepare its annual "regular report" by which it assesses all candidate countries' compliance with the Copenhagen criteria for EU membership. The EC has also expressed interest in close collaboration with the Bank, especially as regards its adjustment lending, so as to ensure that conditionalities are consistent with Turkey's acquis communautaire compliance requirements. The EC has approved the first of a series of parallel financing operations of the Bank's adjustment lending program under the existing Mediterranean Development Assistance program structural adjustment grant facility, although the amounts involved are limited (Euro 300-350 million in total). The Bank already enjoys good working relations with the EIB, the Japan Bank for International Cooperation, and the Islamic Development Bank, strengthened through our close joint work after the 1999 earthquakes.  31 Turkev: Country Assistance Strategy FYOJ-03 Table 6: CAS Indicative Lending Program (US$ million)* Year High Case Base Case FSAL I 778 Basic Education (APL II) 300 FYOI Privatization Social Support 250 Ag. Reform and Investment (APL 1) 400 Basic Education (APL 11) 300 Sub-total 1728 300 FY02 Local Initiatives and Social Assistance 112 Local Initiatives and Social Assistance 112 State Banks Restructuring 500 Natural and Cultural Heritage 50 PSAL 820 Village/Township Services 100 Natural and Cultural Heritage 50 Secondary Education 175 Village/Township Services 100 Secondary Education 175 Sub-total 1757 437 FY03 Municipal (APL I) 300 Municipal Services 48 FSAL II 800 Seismic Risk Mitigation 80 Energy 200 Health 100 Seismic Risk Mitigation 80 Micro Watershed 35 Health 100 Micro Watershed 35 Sub-total 1515 263 Total 5000 1000 * plus US$500 million for emergency lending. 63. Japan has also been a strong supporter of Turkey, following the earthquakes and in the dialogue about financial sector reform. The UN maintains an active multi-agency presence in Turkey, with notable programs in child health care, rural education, and strengthening urban civil society organizations, among others. The Bank is also increasing its work with NGOs, and will assist in the establishment of an NGO Resource Center, as well as continuing to bring informed and skilled NGOs into project design and implementation (the latter is already particularly strong in human and social development, and natural resource management). VI. LENDING SCENARIOS 64. Bank lending in FY00 to support the structural reforms through the Economic Reform Loan (ERL) was strongly linked to upfront actions. This linkage will continue in FYOI-FY03 and is well recognized by the Government. Bank operations are carefully followed by the markets as a signal of the strength of the Government's structural program. The proposed CAS incorporates high and base-case lending programs corresponding to the sustained and truncated reform scenarios (SRS and TRS) respectively. The key macro-economic, structural and social triggers based on actions that would be needed to meet the assumptions under the SRS are  32 Turkev: Country Assistance Strategy FYO1-03 outlined in Box 9-all of these triggers must be met to keep the program in the high case. Turkey is currently in the high case. Remaining in the high case will require that the Government sustain implementation of the ERL supported program, deliver on its commitments under the FSAL program, and maintain a strong macroeconomic framework conducive to disinflation and sustained growth. The key actions agreed under the ERL and FSAL I, which are expected in 2001, are outlined in Annex 11. Box 9: Triggers for the High Case The core policies underpinning the Sustained Reform Scenario (SRS) and the triggers for maintaining the high case are: * Sustained fiscal adjustment yielding a primary surplus of at least 3 percent of GNP; and * Sustained tight incomes policies and appropriate exchange rate policies to reduce inflation and maintain competitiveness over the medium term satisfactory to the Bank; and * External financing plan based on adequate burden sharing satisfactory to the Bank, and a sustainable current account deficit not to exceed 4 percent of GNP beyond 2000; and* * Rigorous implementation of structural reform programs in social security and agriculture sector as outlined in the Letter of Development Policy for the ERL; and * Sustained and transparent privatization effort in line with the Govemment's announced targets for 2000-02; and establishment of credible legal and regulatory frameworks to promote private investment in the energy and telecommunications sectors as outlined in the Letter of Development Policy for the ERL; and * Effective functioning of the banking supervisory authority, privatization and commercialization of three state banks and commercialization of Ziraat Bank by end 2003, and further strengthening of the prudential system and bank resolution mechanisms, as well as full implementation of banking reforms outlined in the Letter of Development Policy of FSAL I; and * Introduction of reforms in public sector management and public accountabililty, and maintenance of adequate expenditure allocations for health and education. * to be reviewed if there are extraordinary external shocks. 65. In 2001, after completion of the ERL and FSAL I, subsequent adjustment lending would take a more programmatic approach to reach agreements on a package of reforms under the proposed PSAL and FSAL II. The major focus under the PSAL would be twofold: a) to complete reform started under ERL; and b) to undertake reforms of public management and improve accountability. Under FSAL II, completion of privatization of state banks, reform of deposit insurance, and strengthening the non-bank financial system would be the principal focus. The high case also requires that the IMF Stand-By remain on track. The high-case lending program would be for a total of US$5.0 billion, of which US$2.4 billion would be in adjustment lending and US$2.6 billion in investment lending to support reform implementation, institution- building and other long-term goals. The base-case lending program would total US$1.0 billion8. for investment projects linked to the social services and environmental management thrusts of the CAS. The Bank expects to continue support to education and other aspects of the human and sustainable development agendas as long as institutional conditions and sectoral policies allow such projects to have a strong positive effect on beneficiary populations. Indicative high and 8 If the reform slows down after the FSAL has been approved by the Board, Bank exposure would be between the high and base case lending scenarios, as the first tranche of the FSAL I would have been disbursed.  33 Turkey: Country Assistance Strategy FYOJ-03 base case lending programs are presented in Table 6. In the event of a large scale natural disaster, if needed, the Bank would be ready to step in with additional financing of up to US$500 million. VII. MANAGING THE RISKS AND IBRD EXPOSURE Managing the Risks 66. The Government of Turkey is taking action to manage the diverse risks inherent in its ambitious reform program, and the CAS program supports important risk-mitigating measures. The main risk factors in Turkey include political pressures, economic considerations, administrative constraints, and the possibility of another large natural disaster. First and foremost are the political risks. The primary political risk is that the coalition could break apart. While this risk cannot be entirely discounted, the coalition has demonstrated its resilience by meeting tough challenges over the past 18 months, including the election of President Sezer last in May 2000. A second type of political risk is the possibility of a social backlash from tough reform measures. To address this, the Government is ensuring adequate funding of existing safety net measures, including severance payments and other programs for workers affected by privatization, and is moving to introduce additional social programs including unemployment insurance and direct income support for farmers. The proposed Privatization Social Support Project and Agricultural Reform and Investment Program support those programs. The continued success of the program is in itself an insurance against political instability, because any coalition partner threatening to bring down the Government would be blamed for the resulting economic disruptions. It should be noted that Turkey's recorded unemployment rate has declined by I percentage points since the start of the program. 67. The Government's reform program takes into account the key economic risks confronting Turkey. The program itself is a direct response to the risks posed by the very large macroeconomic imbalances that had accumulated over a decade of inaction and partial reforms. The Government's response has been appropriately bold, but should the program fail, the downside scenario would be worse than the pre-reform starting point, in part because the loss of credibility would have enduring effects. Given the central role of fiscal policy in determining the success of exchange rate based disinflation, the Government placed great emphasis on up-front fiscal measures in designing the program. However, the balance of economic risk has shifted in recent months from the fiscal adjustment to the external accounts. Through the first nine months of 2000, the current account deficit has exceeded projections due mainly to stronger than expected private-sector led import demand resulting from the economic recovery and higher oil prices, together with the negative impact on export receipts of the depreciation of the Euro vs. the US dollar. Exchange rate appreciation resulting from higher-than-expected inflation under the crawling peg (over 10 percent in CPI terms since the beginning of the year) has also played a role. The Government has taken additional measures to dampen demand. These measures will be complemented by the additional fiscal tightening under the 2001 budget in an effort to bring inflation down to targeted levels. The financial market turbulence which appeared in late November has posed a further challenge to macroeconomic policymakers. In response to the financial market pressures, the Government provided temporary liquidity injections and accelerated announcement of its new fiscal package and other policies underlying the 2001  34 Turkey. Country Assistance Strategy FY01-03 macroeconomic framework. Should the envisaged policies prove insufficient, the Government is committed to take further steps to ensure the viability of its macroeconomic framework. A continuing risk for Turkey as a major emerging market with substantial external borrowing needs is its vulnerability to contagion from adverse developments in international financial markets. The Government has demonstrated its ability to respond to such shocks with appropriate fiscal and monetary policies. As the reform progresses, Turkey's external vulnerability will be reduced and the risk of contagion will gradually decline. If market sentiment were to turn against Turkey while commitment to reform remained strong, the Bank, although remaining within the CAS high case envelope, would review the high-case program in close concert with the IMF to reflect the changed macroeconomic circumstances. 68. Managing the vulnerabilities of the financial system is an integral part of Turkey's reform. A legacy of weaknesses in the financial sector, which will be exposed further during the macroeconomic stabilization, is a source of concern. These risks emanate from a small segment of the banking system. Turkey's economic managers are well aware that these risks would spread if not handled well. Thus, management of these vulnerabilities is a core element of reform, in which respect there have been significant accomplishments, as the FSAL documents presented with this CAS explain. Turkey moved swiftly to take over five problem banks in December 1999 and two more in October 2000. It has consolidated and strengthened supervision under the BRSA. It is gradually moving the system toward international standards of auditing, loan-loss provisions and capital adequacy. Also, the Government is aware of the risks involved in the current foreign exchange exposures in the banking systems, and is strengthening the supervision and enforcement to ensure that these exposures are not excessive and any forward contracts used by the banks to hedge such risks are legitimate and creditworthy contractual arrangements. Action by the BRSA to strengthen enforcement of the new prudential regulations for banks will help reduce financial sector vulnerability and ease demand pressure by slowing credit expansion. This will also act as a safeguard against sudden reversals in short-term capital flows. The Government has also shown that it is ready to provide short-term liquidity if needed. Turkey is also beginning to tackle the issue of 100 percent deposit insurance, a root cause of poor incentives encouraging risky behavior. Support by the Bank and IMF for credible implementation of reforms will be critical to reducing the vulnerabilities of the financial system. 69. Learning from the past, the Government has explicitly recognized the need for institutional change as part of its overall reform program. Reforms on the scale envisaged for Turkey depend on strong and dynamic institutions in order to be effective and sustainable. Weak and bureaucratic institutions have at times impeded past reform efforts, and slowed implementation of investment programs. As part of a broader plan to alleviate the risk that administrative weaknesses could derail reform implementation, the Government has requested the Bank to prepare a package of investment loans in concert with the adjustment lending program to support implementation of key reform measures. Actions to improve public expenditure management, promote transparency and fight corruption are a second dimension of this plan where the Government has asked the Bank to provide support under the new CAS, starting with the Public Expenditure and Institutional Review and following up with the PSAL.  35 Turkev: Country Assistance Strategy FYOI-03 70. The Government is also keenly aware that Turkey continues to face the risk of a large natural disaster, which could bring about extensive human loss and disrupt the economic recovery. To mitigate this risk, the Government is strengthening Turkey's emergency response capabilities and compulsory natural disaster insurance was introduced in September 2000. The Government is looking to the Bank to continue to support these efforts under the new CAS through supervision of the ongoing emergency projects and additional support to help strengthen urban disaster management capabilities. It is our intention to provide additional financial support through reallocations and potential new lending, if needed following a major natural disaster, as well as to act as a catalyst for emergency support from the broader international community in the event we are asked to do so by the Government. IBRD Exposure 71. If Turkey undertakes the macroeconomic and structural reforms envisaged under the high Figure 5: IBRD Net Flows and Debt case, its overall creditworthiness should improve. This should improve Turkey's to access 10000 1600 international capital markets and lower its sooo _ _ _ =_ _ - 1100 7000 borrowing costs. Bank exposure to Turkey 60 - 60 declined steadily during the 1990s (Figure 5). As 5000 __ _ of October 2000, total IBRD debt outstanding and 1 disbursed was $3.2 billion, equivalent to 2.7 low . percent of the total IBRD portfolio. Under the o -900 high case lending program, IBRD debt 1990 1992 1994 1996 1998 2000 2002 outstanding and disbursed would increase to $6.6 |E-ODOD (1 -- FkEl billion or around 6 percent of the total IBRD portfolio (Table 7). Despite this rapid projected increase IBRD exposure, IBRD debt service as a share of exports of goods and non-factor services and as a share of total public debt service are projected to remain within IBRD's prudential guidelines. Preferred creditor debt service as a share of total public debt service is also projected to remain within IBRD's guidelines. Table 7: Summary of Key Exposure Indicators in the High Case |Actual |Projected 1999 2000 2001 2002 2003 IBRD DOD (million US$) 2,902 3,158 4,253 5,437 6,578 Share of IBRD Portfolio 2.4 2.6 3.5 4.6 5.9 IBRD Debt Service/ XGNFS 2.1 1.6 1.4 1.4 1.7 IBRD Debt Service/ Total Public Debt Service 7.7 4.8 3.2 3.8 4.7 Preferred Creditor DS/Total Public Debt Service 14.2 10.5 8.9 6.8 10.8 Memo Items, US$ millions IBRD Interest payments 345.0 245.8 296.7 373.1 460.6 IBRD principal repayments 616.0 540.0 465.0 470.0 592.2 Source: Staff Estimates  36 Turkev. Countrv Assistance Strategy FYO0-03 VIII. CONCLUDING REMARKS 72. Turkey is at a major turning point. It has a committed Government, a dynamic private sector and a young population striving to meet the challenges and grab the opportunities of globalization. It is trying to make a break from an inflationary past, restoring stable growth and reduce inequalities and social and economic vulnerabilities. International support, including from the World Bank Group is vital to make this journey successful. Turkey's success in this effort will contribute to stability and prosperity in the region. It is the time and the opportunity for the Bank Group to step up to the challenge. James D. Wolfensohn By: Sven Sandstrom Peter Woicke Washington DC. November 28, 2000  TURKEY: Private Sector Strategy Introduction 1. Sustained and stable economic growth is essential for reducing economic vulnerability in Turkey; the private sector is crucial in ensuring this growth. This Private Sector Strategy (PSS) is a central element in the Country Assistance Strategy (CAS) for the World Bank Group, since the country's development strategy hinges on creating enabling conditions for the private sector to reach its growth potential, create employment, and help the country to take advantage of its unique location at the geographic, economic, political and cultural confluence of Europe, Asia and the Middle East, and of its future accession into the European Union. 2. The PSS is organized in three sections: (i) a description of the private sector and an overview of the current business environment in Turkey; (ii) a summary of the Government strategy to promote the private sector; and (iii) an outline of the Bank Group's proposed support to Turkey's private sector development, in the context of the efforts of the Government, the private sector, and other agencies. Turkey's Private Sector 3. The potential for Turkey's private sector stems in large part from three factors: (i) the strategic location, between the former Soviet Union, the Balkans, Central Asia and the Middle East; (ii) a well developed entrepreneurial and mercantile culture (characterized by risk taking, motivation and dedication); and (iii) a large domestic market, well endowed with human resources. These factors have been enhanced by the opening of the economy-including a customs agreement with the EU. Nevertheless, Turkey's private sector has not reached its potential, and economic performance has remained below that of the fastest growing developing countries. Factors that have inhibited the sector's growth until recently have included: (i) macroeconomic volatility; (ii) large fiscal deficits leading to high public sector borrowing requirements and high real interest rates; (iii) a regulatory environment that was not conducive to private investments, particularly in infrastructure and energy; (iv) weaknesses in the financial sector; and (iv) weaknesses in corporate governance. Improvements are underway in each of these areas, heralding new prospects for private sector development. 4. The combination of uncertainties created by an unstable macro-economic environment and the limited availability of reasonably priced term credit financing to the private sector resulted in relatively low private investment rates in productive sectors over the 1990s. Gross fixed capital formation (GFCF) as a percent of GDP dropped sharply in the early 1980s and has since recovered very slowly. Public investment has steadily declined, and while overall private investments have accounted for about 20 percent of GDP since the mid-1990s', private investment outside of the housing sector has stagnated at only 10-12 percent of GDP. In particular, despite Turkey's export boom, private sector investment in manufacturing has remained very low compared to other upper middle income countries. While housing investments averaged 40 percent of total private sector investments between 1996-99, investments in industrial production (manufacturing and mining) averaged only 21 percent (Table 1). Private sector investments in infrastructure and energy have been well below their potential, as state ownership of infrastructure has prevented private investments in a number of critical infrastructure services and a regulatory framework conducive to private investments in these areas was lacking. Low investment rates in productive activities considerably slowed down economic growth over the past two decades. I Between 1996 and 1999. Turkey's private sector accounted for about 74 percent of industrial production, 76 percent of total gross fixed investment, and 82 percent of manufacturing employment.  Pake 2 Annex Al: Private Sector Strategv Therefore, raising investment rates in the productive sectors is essential for the generation of faster growth and employment opportunities over the medium term. Table 1: Relative Importance and Sectoral Distibution of Puivate Sector lnvestnents Pnvate Investment/Gross Domestic Fixed Investment Pnvate Sectoral Investmentliotal Pnvate Investment Agriculture 64% 56% 64% 53% 5% 4% 5% 4% Mining 74% 70% 73% 69% 1% 1% 1% 1% Manufacturing 96% 97% 96% 94% 26% 23% 22% 20% Energy 35% 52% 36% 33% 2% 4% 3% 2% Transport & Communications 66% 68% 64% 55% 17% 22% 20% 17% Tourism 86% 93% 96% 96% 2% 3% 4% 5% Housing 99% 99% 99% 97% 40% 36% 37% 42% Education 31% 23% 19% 25% 1% 1% 1% 2% Health 61% 66% 70% 67% 2% 3% 4% 3% Other services 44% 41% 39% 36% 4% 4% 4% 4% Total 79% 78% 75% 72% 5. Low foreign direct investment was a particular disappointment in the 1990s (see Table 2, below). Foreign direct investment (FDI) flows of less than US$1 billion per year (less than 0.5 percent of GDP) have been modest by Asian or Latin American standards. The prospects of membership and better access to EU markets is an additional attraction for investors, and has already improved Turkey's risk profile in financial markets. Increasing FDI will be an important ingredient to help modernize the productive sectors to compete with EU countries, and obtain sufficient private financing in energy and infrastructure to keep pace with the country's needs and meet the EU infrastructure standards in the coming years. Table 2: Private Sector Investments, Foreign Direct Investments and Credit to Private Sector rkey | ~~ ~ ~~ ~ ~~25 78 2 | 0.4 | 2 hailand | ~~ ~ ~~ ~~35 68 7 | 2A4 | 3 alaysi3 | ~~ ~ ~~ ~~23 73 1 2 | 52 | 16 Ne.ico 26 82 1 2 3.1 1 15 Br%ti| 21 89 11 1 2 4 31 Upper Middi iniome Contnes 23 83 11 1 3 39 High incone Conn(res 21 79 4 1.1 125 source WODI 2000 6. As discussed in the main CAS text, most of the 1 990s was characterized by high real interest rates and the virtual absence of long term credit for the private sector. As a result, the private sector had to shorten its planning horizon. and rely heavily on self-financing for investments. Financial intermediation is small compared with the size of economy. There is an unusually high degree of self-financing of business investment, and few homes are mortgage financed. Credit to the private sector, as a share of GDP is significantly lower in Turkey than in comparable countries (Table 2). 7. Economic agents adapted to high real interest rates and limited availability of credit financing by shortening the duration of their financial contracts, while banks focused on government securities, which provided a strong source of income. With the largest private banks belonging to powerful family conglomerates, private bank lending has typically been provided mainly to customers with known credit credentials. The small and medium scale enterprise sector (SME) has been particularly starved of credit. SMEs are often handicapped by lack of collateral and a low level of financial literacy, making financial institutions reluctant to lend to them. In addition, most banks use the same lending technologies for  Pa,e 3 Annex Al: Private Sector Strate0v SMEs as they do for large corporations. This is costly, making the risk-weighted return on SME lending low. As a result, financial intermediaries' outreach to SMEs is poor, and highly selective. 8. Turkey's banking and finance sector has grown rapidly over the last two decades, but financial deepening has been held back by high inflation. State-owned banks represent about 40 percent of banking system assets and deposits. Most private financial institutions are part of financial conglomerates, with the main group commercial banks at the center of such conglomerates, and other bank and non-bank financial institutions formed and managed as subsidiaries. Issues related to regulation and supervision, financial reporting and comprehensive risk management gain more relevance because of this group structure. As Turkey's public sector borrowing needs decline, restructuring in the private banking sector will become inevitable. The banking sector is likely to see a major expansion into a range of financial services, and consolidation. Entry of reputable foreign banks will also push this process further. Yet, lessons of experience from other countries show that the banking sector will continue to be reluctant to offer long-term financing throughout the reform implementation phase. The emphasis is expected to be on consolidation and strengthening of balance sheets, rather than credit expansion. In addition, although the situation has begun to improve, it is likely to be a while before Turkish banks will be able to access funding of significantly longer maturities. As a result, during the next two years of reform implementation, while it is likely that blue-chip Turkish companies may have better access to long- term financing, the rest of corporate sector and smaller firms will continue to lack access to long- term debt, even from the domestic market. 9. Non-bank financial services, which are critical for improving access of smaller firms to domestic financing in many countries, do not play a significant role in intermediating capital in Turkey. Although there are a limited number of sizeable leasing and factoring companies, the capital market lacks depth and much needs to be done to develop the corporate bond market, equity, and housing finance. A major development priority is institutional investors such as pension and mutual funds. The insurance industry is small and still in the process of development. Developing non-bank financial services is critical for improving access to domestic financing in Turkey, as they are expected to play an increasing role in improving domestic savings and providing long-term funds for smaller firms. 10. Turkey has a fairly open economy with the total of exports and imports exceeding 50 per cent of GDP. In order to take advantage of trade opportunities created by the custom union with the EU and respond effectively to greater competition in the domestic market, Turkish industry would need to upgrade from low-quality, labor-intensive products, which have limited growth prospects, towards the production of higher value-added goods and services, from low-skill goods to technology and skill intensive products at international standards. 11. Agribusiness is one of the strongest sectors in Turkey and the major exporter. It contributes around 15 per cent to GDP and accounts for around 42 per cent of all employment. The development of the sector has taken place in a context of high levels of protection and distortionary policies, with state-owned enterprises handling many marketing and processing functions, but the reform strategy aims to change this. The country has a dynamic market for processed foods with its large and young population. Rising income levels, urbanization, the influence of western life styles through travel, tourism and advertising are all causing radical change in the attitudes and consumption patterns of the population. Rapid urbanization and the growing number of working women are two social factors that are driving the increased demand for processed foods. Modernization of the food-processing sector is also accelerated by the rapid development of modem retailing formats. The share of hypermarkets in the overall retail market is still low, estimated at around 4 per cent, but rapidly growing since sales through super-and hypermarkets are increasing at an annual growth rate of 47 per cent. International retailers established in Turkey have been a driving force in the sector, demanding higher, EU-level quality standards from Turkish food manufacturers, which has led to investments and quality improvements. Local investors  Page 4 AnnexAl: PrivateSectorStrate_a established most of the industry, but foreign investment is increasing. In 1998, FDI in the food and beverage industries amounted to 8 per cent of all FDI in the country. Government Strateev for Private Sector Development 12. The Government recognizes that a stronger private sector will be key to restoring and maintaining economic growth and generating employment in Turkey. The Government's strategy to support private sector led growth is based on four pillars: (i) macro-economic stabilization, (ii) deregulation and privatization; (iii) improved efficiency and assured integrity of the financial sector and; (iv) improved delivery of social services to help strengthen the human resource base. The Government's reform strategy and the proposed IBRD approach to supporting it are given in some detail in the main CAS text. Here, particular emphasis is given to the opportunities created for private investment, and greater detail is provided on the IFC, MIGA and FIAS programs. 13. Energy. Demand for energy has grown at about 9 percent per year for the last ten years and is expected to grow at only slightly lower rates over the next decade (see Table 3 for comparison of energy supply with other countries). Private investments in energy sectors will be crucial to help supply adequate amounts of gas and electricity at affordable prices. The Government has therefore decided to restructure and deregulate the energy sector. The restructuring program centers on the introduction of a competitive regulated market model for electricity and gas to replace the current centralized model, which is dependent on government guarantees to privately owned plants. The reform will establish a transparent legal framework for regulated competition in line with EU norms. Under the new regulated market model, private suppliers will be able to sell directly to private distributors without government intermediaries. The competitive regulated markets model will provide investors with adequate legal and regulatory safeguards to ensure that their investments will earn a competitive rate of return without government take-or-pay guarantees. Based on experience elsewhere (most notably Latin America, where the competitive regulated markets model has been successfully introduced), private investors can be expected to make the necessary investments to adequately meet the growing demand for electricity once the new system is fully in place. Table 3: Turkey's Infrastructure Compared to Other Countries Electric Power Telephone Population Country Income (kwh/person) Mainlines (per with access to (per capita, 1 000 persons safe water Atlas) (% of total) Turkey 3,160 1,275 254 92 Brazil 4,630 1,743 121 92 Mexico 3,840 1,459 104 87 Middle Income countries 2,990 1,928 145 na Source: SIMA and WDR. 14. Information and Communication Technologies. Turkey has made significant progress in liberalizing the telecommunications sector, partly driven by the Government's need to generate cash for the budget. After awarding two cellular licenses to private operators in the early nineties, the Parliament passed legislation to reform the sector in January 2000, entailing: (i) the conversion of state-owned fixed- wireline operator, Turk Telekom, into a joint stock company, paving the way for its eventual privatization; (ii) the establishment of an independent regulatory body; and (iii) the liberalization of all value-added services. The Government has established the telecommunications regulatory agency. New  Paie 5 AnnexAl: PrivateSectorStrategy private entry is envisaged with the issuance of mobile licenses and the opening of the capital of Turk Telecom. Although in the early stages compared to many other OECD countries, Turkey has been at the forefront in the region in introducing information technologies, the Internet and e-commerce to the economy. The growth of Internet access as well as the integration of the Internet into the economy are crucial to bridge the digital gap to the industrialized countries and important for economic growth. 15. Physical Infrastructure. Turkey faces two key problems in ensuring adequate physical infrastructure to support private sector development and reduce poverty: (i) high cost logistics systems constraining the industrial sector; and (ii) rapidly growing demands on urban utilities. Inefficient gateway ports, cumbersome procedures and limited inland transport options limit cargo handling technologies available to Turkish exporters and importers. High logistics costs act like export or import taxes on economic activities, reducing output and job creation in industrial and commercial sectors. Turkey needs to support privatization and efficiency improvements in the transport sector. In particular, it will need to commercialize the provision of transport infrastructure and services and to introduce accountability and transparency. The prospects of Turkey's joining the EU raises transport sector reforms to the forefront, as EU requirements demand that the provision and financing of social services be clearly separated from that of commercial services. This requirement will have a particular impact on the operation and financing of Turkey's main ports and the railways systems. The two are currently operated by the same agency, with revenues from ports operation cross-subsidizing the loss making railways system, and the profitable freight sector subsidizing passenger transportation. During the 1 990s Turkey's urban population expanded by about 15 million people, straining cities' capacities to provide basic services like water and sanitation and expanding demands for environmentally friendly urban services like gas distribution and mass transit. Increased public and private investments in physical infrastructure and improved management of the infrastructure base are thus crucial to help support economic growth. The Government is taking the necessary steps to allow for increased private sector involvement in the provision, operation and maintenance of physical infrastructure. 16. Privatization Program. Accelerated implementation of the Government's privatization program is a top priority for strengthening the private sector and generating resources for the budget. The 2000 privatization program has three pillars: telecommunications, energy, and the program of the Privatization Administration (PA). The Government is also planning to privatize the state banks. Telecommunications privatization involves opening the capital of Turk Telekom and selling two additional GSM wireless licenses to private investors. Electricity sector privatization will proceed in two phases. The first phase in 2000 focuses on implementation of the transfer of operating rights program. For thermal generation and distribution companies remaining under state management, the Government will launch a new approach starting in 2001 based on full privatization of the underlying assets. The third pillar is the enterprise privatization program managed by the PA. The PA's program includes privatization of 28 large enterprises including many of Turkey's biggest public companies such as petroleum refineries, petroleum retail distribution network, petrochemicals, steel plants and the Turkish national airlines. A number of smaller but still important companies in the insurance and textile sectors are also slated for privatization. 17. In the context of broad-based agriculture sector reforms aimed at spurring agricultural growth, raising rural incomes and reducing the sector's burden on the budget, the Government is also initiating privatization of state enterprises engaged in agro-processing. State owned purchasing agents and agro- processors will be restructured and privatized and those not viable will be liquidated. Privatization of state controlled agricultural enterprises and cooperative unions is occurring in parallel to the phasing out of price supports and input and credit subsidies to the agricultural sector, which will be replaced with a system of direct income supports to farmers.  Page 6 AnnexAl: Private SectorSrateRv 18. Social Service Delivery. The quality of and access to social services have a direct impact on the labor force, which in turn is a crucial input to sustainable private sector led growth. Efforts to improve the population's educational standards will raise the educational qualifications of the labor force; improved provision of health services will lower morbidity in the labor force; and the recently initiated reforms of the social security system will support greater labor market flexibility. While provision of basic social services will remain a key responsibility of the public sector, the private sector is expected to get increasingly involved on several fronts, including growing investments in health care; increased engagement in the provision of job-specific vocational training and higher education; and, as the reforms of the social protection system proceed, in the establishment of private pension funds. Bank GrouD Strateev 19. The World Bank Group has provided considerable support to Turkey. IBRD has a current portfolio of active projects for which loan commitments total over US$3.8 billion. IFC's Turkey portfolio is presently the fourth largest in terms of exposure, accounting for about 5.4 percent of the total IFC portfolio (see Box I below). With a gross exposure of US$225 million, Turkey is the fourth largest country in MIGA's portfolio. Thus, the role of the World Bank Group has been especially important, as a leading multilateral source of long-term finance for the Government and the private sector. 20. The World Bank Group's strategy in support of private sector led growth in Turkey in FY01-03 will focus on supporting the Government's program to spur private sector development. IBRD will support the Government's economic reform program through adjustment lending and lending for investment projects in support of reforms in key areas, as detailed in the main CAS text. IFC will build on its established multi-prong strategy focussing on projects and activities with tangible benefits of growth and reform and on "frontier" projects which could also be replicated in the Balkans, Caucasus and Central Asia regions. MIGA will broaden its portfolio to include infrastructure investments in addition to the existing financial sector guarantees and continue its Investment Marketing Services' support to the Center for Private Sector Development in Istanbul. FIAS is working with the Government on a strategy and legal framework to attract more Foreign Direct Investments. 21. IFC's Comparative Advantage. As a significant source of long-term project finance, IFC has an important role to play in Turkey. IFC is able to support viable Turkish private enterprises and put together financing packages often with longer term than private enterprises are otherwise able to obtain. IFC also has growing experience in particularly difficult sectors, where fewer other institutions have developed experience. Notable examples would include housing finance, securitization, private pension funds, private health care and education, SME and micro-finance.. It's global experience and particularly its 35 years of experience in Turkey, enables IFC to judge the international competitiveness of Turkish enterprises in changing times. IFC prestige and worldwide credibility as a careful professional investor acts as a strong catalyst for attracting other long-term sources in Turkey. New lenders and investors often follow where IFC has led, coming aboard with IFC. In addition, IFC's catalytic role will be strengthening through a strategic focus on advisory activities, aimed expressly at improving the enabling environment and increasing long-term investment flows. IFC participation in a project means that the project is beneficial to the country, that it creates employment, improves the physical environment, and helps develop markets.  Page 7 Annex Al: Private Sector Stratefy Box 1: IFC Investments and Fund Mobilization Turkey is an important country for IFC, the fourth largest in terms of exposure after Argentina, Brazil and Mexico, accounting for 5.4 percent of the total IFC portfolio. The total own-account held portfolio in Turkey is US$693 million. In addition, IFC has mobilized US$479 million in B loans, and has invested over US$150 million with Turkish companies outside of Turkey. IFC has been the only significant source of long-term project finance in Turkey, particularly for the medium sized, "second tier" companies, since the international commercial banks have been focused primarily on top tier companies. Following FY98-00 CAS strategic priorities, IFC has invested in financial sector development, export-oriented companies, credit lines and technical assistance to SMEs, and Turkish investments abroad. IFC has been pursuing a conscious strategy of scaling down its projects with larger business groups. Financing. Approvals for IFC's own account, which averaged about US$170.0 million per year over the last few years, picked up to US$252.0 million in FY98 and were US$181 million for FY00. Given the shift in IFC's development strategy in Turkey to catalyze the private sector amidst the ongoing economic reform, its annual investment program is not expected to increase during this CAS period, but the composition of investment program would be different. IFC will focus on activities that demonstrate tangible benefits of growth and reform with emphasis on sector development work in the financial sector, SMEs, information technology, infrastructure and social sectors, and will actively promote Turkish outward investments. IFC expects its gross investments in Turkey, including syndication with other banks, to total approximately US$800 million to US$1 billion over the next three years. Given the market-driven nature of IFC's investments, overall volumes are difficult to forecast accurately. The indications provided here are subject to significant changes, particularly if the reform program were not implemented as it is presently anticipated. Advisory Program. The Turkish market for stand-alone advisory services is already very competitive and adequately served by a host of international investment banks and consulting groups. IFC's advisory program will focus mainly on financial sector, infrastructure privatization, micro-finance and SMEs, and improving business environment. 22. IFC is collaborating with the Bank on private sector inputs for the structural reform program. Bank recommended improvements in the legal and regulatory framework for the telecommunications, energy and financial sectors are expected to increase opportunities for IFC investment in these areas. As appropriate, IFC and MIGA could play a catalytic role in the privatization of one of the state banks. The complementary focus of the Bank, IFC and MIGA in infrastructure and financial markets will enhance the quality of the economic reform being supported by the Bank Group, and will contribute to strengthening the partnership between Turkey and the World Bank Group. Box 2: IFC's Strategic Directions in Turkey While it takes time to restore confidence in the market and create positive long-term expectation among economic players, restoring growth is critical to maintaining support for reform. Turkey's dynamic private sector will play a key role in the restoration of growth and contribute more broadly to the success of the ongoing economic reform. IFC will have an important role to play during the reform implementation stage, improving access to investment financing for companies that will create growth and employment, and supporting activities which demonstrate tangible benefits to reform. IFC will attract long-term foreign capital, both equity capital by strategic investors and term debt. IFC's work will cut across several CAS themes and it will accompany its investment with targeted provision of technical assistance. With a view to promoting Turkey as a technological hub for the region, IFC will assist Turkish companies to increase their technological competitiveness and invest in CIS and the Balkans. In financial markets, IFC will focus on developing domestic long-term contractual savings institutions. By considering the geographic location of projects, assisting SMEs and establishing microfinance institutions particularly in disadvantaged regions, IFC will support poverty reduction and equitable growth. IFC's investments in infrastructure will improve Turkey's prospects for sustained growth and meeting EU infrastructure standards.  Page 8 Annex Al: Private Sector StrateL 23. The World Bank Group will help Turkey to attract more FDI into the country. FIAS is reviewing the new draft investment law, which is soon to be discussed in Parliament. Also, FIAS is in discussions with the Government about conducting an administrative barrier study to review and assess the administrative procedures that investors need to fulfill in order to establish and operate an enterprise in Turkey. As the complex bureaucratic machinery is often viewed as a major hurdle for private sector development in the country, this assistance should be particularly helpful in improving the business environment in Turkey. IFC is in the process of organizing a conference, expected to take place in 2001, the main objectives of which will be to promote FDI in Turkey, and to improve the internal business environment in Turkey. Using its guarantee program, MIGA's support for FDI is expected to increase particularly in the infrastructure and power sectors. IFC and MIGA will support Turkish outward investments in the region and promote Turkey as a regional financial and technology hub. 24. IFC's representative office is being converted into a regional hub and the Director for Southern Europe and Central Asia expects to relocate to Istanbul to provide a greater client focus in the region. This reflects a recognition of Turkey's role as a gateway to the entire region and its growing influence in the Balkans, the Caucasus and Central Asia. Financial Sector 25. Given its critical importance to the economic stabilization program, the financial sector will account for a significant part of the World Bank Group's program in Turkey, focussing on reducing systemic risks and vulnerabilities, while increasing the sophistication, productivity and competitiveness of the financial sector to bring it up to global standards. IBRD's planned assistance is explained in the main CAS text. 26. IFC will seek to assist Turkey in this key sector in areas where IFC's comparative advantage is important. IFC's role in the financial sector in Turkey has traditionally focussed on two areas: (i) institution-building, through the provision of technical assistance and the development and support of new financial intermediaries, often the first of their kind in the country; and (ii) through the provision of term funding for on-lending to support productive investments by SMEs. This role will continue in the future, even as it evolves. In the near term IFC will continue to play a role in providing term funding to SMEs through loans or credit enhancements to leasing companies and banks in Turkey. For instance, IFC will focus increasingly on innovative projects in the financial sector (housing/mortgage finance, pension reform, development of local currency debt market, etc.), in particular taking advantage of new opportunities related to the emergence of a lower-inflation economy, and the shift from state-provided to market-provided services in areas such as housing, pension, and infrastructure, to help Turkey introduce competition and "best practice" in these areas: (a) There is strong demand for housing mortgage products, which IFC could support, initially through the development of long-term local currency fund source, and subsequently through the development of secondary market institutions and products. IFC has considerable experience in this area through its work in other parts of the world, which can be applied in Turkey. (b) Reforming the social security system is essential to restore the system's solvency over the medium term and secure adequate and sustainable level of benefits. IFC is examining the feasibility of establishing private pension funds, which will go hand in hand with the reform of this sector. (c) In December 1999, IFC pioneered the first transaction in Turkey involving the securitization of onshore lease assets. IFC is prepared to provide technical assistance to the Government to further improve the securitization environment in Turkey and has been approached to do other projects of  Page 9 Annex Al: Private Sector Stratenv a similar structure, whereby IFC's involvement and structuring helps to boost the credit rating of the project, lowering funding costs. 27. IFC is working with a number of Turkish banks and leasing companies on joint investments in the region, leveraging the strong technical skills and sophistication of Turkish companies to partner for establishment of new financial intermediaries in Central Asia and also in Albania, Azerbaijan, Bosnia, Macedonia, Moldova and Romania. Joint ventures of this kind in the region are expected to increase, as consolidation and competition within Turkey spurs financial intermediaries to look for opportunities outside. Infrastructure 28. The introduction of constitutional amendments allowing international arbitration and improvements in the legal and regulatory framework for the telecommunications and energy sectors are expected to increase private sector participation in infrastructures. Thus, infrastructure is expected to account for a larger share of IFC activity in Turkey during the next CAS period. Also, the complementary focus of the Bank, IFC and MIGA in infrastructure will enhance the quality of the economic reform being supported by the World Bank Group. IFC, in conjunction with IBRD and MIGA, will use its advisory, structuring, and mobilization capacities to: (i) broaden the reform process, through supporting demonstration projects; (ii) complement the market; (iii) build domestic financing capabilities. IFC will seek to provide a demonstration effect through financing of pioneering transactions in infrastructure sectors where private financiers have not yet penetrated deeply, such as water distribution projects and transport facility projects. Helping demonstration projects to achieve financial closure will remain a core part of the IFC's work. Projects will be financed also by blending IFC's financing instruments with MIGA guarantees. One of the most important roles of IFC's private infrastructure promotion efforts will be helping Turkey to develop the capacity of domestic financial markets, through promoting long-term contractual savings institutions such as insurance companies and pension funds. 29. Physical Infrastructure. The Bank Group is actively supporting Turkey's efforts to overcome constraints in physical infrastructure. IBRD is doing so through its ongoing Road Improvement and Traffic Safety Project and ongoing water supply and sanitation projects, which aim at transferring the operation and maintenance of water supply systems to the private sector. These efforts will be complemented by the proposed FY03 Municipal Reform Project. The Turkish Government has listed several potential urban utility projects for the private sector but few have been realized. However, over the medium term we expect private investor interest to improve as ongoing private infrastructure projects in ports and power come to fruition. As investors for the urban utilities emerge, IFC will focus on choosing model projects that could serve as demonstrations for others. In this respect, IFC is planning to implement a marketing strategy focused on providing advisory services for the privatization of municipal infrastructure, especially the water and sanitation sector. IFC's efforts in this regard are aimed to complement the Bank's support for the urban centers under the above-mentioned Municipal Reform Project and will be built on the IFC's vast experience in the privatization of the water and sanitation sectors, especially that of advisory mandates for Manila and Bucharest. IFC's strategy to engage in municipal infrastructure is in line with on-going Turkish Government efforts to decentralize financing responsibility for public services to municipalities and a growing demand for private sector participation in delivery of utilities and municipal services. IFC has financed a private container terminal on the Marmara Sea and will continue to assist and finance other privately managed gateway and inland terminals facilitating intermodal movements. In the longer run, when the state railroad may be proposed for privatization, IFC would be prepared to consider financing for the successor private rail company or companies, to support investments if that would improve service to customers and further reduce inland goods movement costs.  Page 10 AnnexAl: PrivateSectorStrate_e 30. Information and Communication Technologies. The World Bank Group strategy will be to support the Government's efforts to liberalize the telecommunications sector, increase competition, and foster the integration of Internet in the Turkish economy. IFC's presence would help to mobilize commercial financing with longer tenors and mitigate commercial and political risk. Turkey is the leader in the region in expanding its Internet capabilities in preparation for an increasingly information-driven economy. IFC will seek to provide a demonstration effect through pioneering transactions to help introduce and integrate the Internet in the Turkish economy with a view to eventually transferring successful business models to the region. Given Turkey's role as an investment hub for the Southern Europe and Central Asia Region, IFC is exploring the possibility of supporting Turkey as a technology hub for the region. In addition, due to the country risk perception by commercial banks, IFC as well as MIGA might be needed to help finance the huge capital needs of the newly licensed cellular operators. 31. Power. The World Bank Group is assisting the Turkish authorities to restructure the power sector. The Bank is assisting the Government in reforms for establishing a competitive power market and regulatory commission (see main CAS text, section IV). This will result in a demonopolized power sector with growing private sector participation. The.Bank Group is also exploring ways to facilitate economically attractive investments in renewable energy. IFC strategy is to encourage privatization and private investment, and to pursue opportunities for competitively bid power projects. IFC's and MIGA's activities in the power sector will focus on generation and distribution. IFC and other financial institutions are awaiting confirmation that the constitutional amendment and new laws, allowing for international arbitration of concession contracts, will be applied retroactively to certain projects that have already signed concession agreements. To the extent the constitutional changes make it easier for sponsors to finance infrastructure projects, there can be an expected increase in demand for MIGA's Breach of contract coverage. Improving Efficiency and Competitiveness of SMEs 32. The WBG's overall strategy for assessing SME rests on four pillars: (i) capacity building; (ii) information and technology; (iii) access to capital; and (iv) policy and business environment. Whatever the World Bank Group does directly with SMEs will be small as measured against total needs. Therefore our program will be high quality and focused, and will provide good demonstration effects to encourage replication by others, and generate local capacity, for example, access to financial markets and products that are appropriate and accessible to SMEs. Developing more sustainable and better regulated financial systems, better information, improvements in collateral law, and better credit assessment systems will also help. IFC will continue to play a role in providing term financing for SMEs through loans to leasing companies and banks. IFC will catalyze creation of essential business infrastructure for SMEs, such as business and technical advisory facilities and internet-based access to international markets. SMEs, and especially micro-enterprises in less developed regions of Turkey, are a major focus of efforts for IFC and the WBG. Deficiencies in these areas have been the principal obstacle to private sector-led development in the region. IFC will endeavor to promote a micro-finance institution to support the development of commercially sustainable services for micro and small enterprises that have limited access to the formal financial system. Based on its experience in other countries IFC will implement appropriate models for delivering financial services to micro businesses and will use specialized financial and information technology. The joint World Bank/IFC department for SMEs is planning a mapping exercise for small enterprises in disadvantaged regions of Turkey, the results of which will allow consideration of a new facility in such areas.  Page 11 Annex Al: Private Sector Strateev Privatization 33. IBRD is supporting the Government's privatization program under the ongoing ERL and the proposed PSAL and FSALs, as well as proposed projects for privatization social support and state banks restructuring. IFC is supporting privatization in banking, communications, energy, infrastructure, and agribusiness through technical advice and possible provision of financing for key privatized enterprises. Agribusiness 34. IFC will support restructuring of the agribusiness sector through a variety of interventions including: (i) investments and technical assistance to support food processing enterprises, second tier companies and particularly SMEs, to improve their operational efficiencies and overall competitiveness of the food supply chain, with priority in the interior and eastern part of the country; (ii) support for the privatization of state-owned enterprises involved in farm production, food processing and marketing activities; and (iii) support for the development of private market infrastructure, particularly in sub-sectors (e.g. grains) where the State's omnipresence had previously crowded out the emergence of a genuine market. IFC will focus on projects which require innovative financial structure or which meet specific country needs. MIGA has been approached by agri-business companies for investments in Turkey and will make its guarantee program available for sound projects. Improving Social Service Delivery. 35. IBRD would assist the Government to upgrade the quality of the labor force through the proposed Secondary Education Project. The Economic Reform Loan is actively supporting reforms of the social security system and the proposed Privatization Social Support Project will help mitigate effects of enterprise restructuring and privatization. IFC's strategy in the social sectors complements the overall efforts of the World Bank to improve the quality and scope of the services in these key sectors. Higher incomes and growing dissatisfaction with the access to and quality of the public health care facilities have raised the demand for high quality private health services. There are therefore opportunities for IFC to invest in private health care, including direct medical and ancillary services. IFC and the Bank are also exploring possibilities of joint activities to support sustainable development of the private health insurance industry. IFC investments in education will help speed the diffusion of best practice to the public system. Given the relative paucity of tertiary education in Turkey, IFC is emphasizing investments at this level, trying to help deliver quality education in a cost efficient manner at this level. Projects in this area will also act as quality enhancing competition and at the same time free spots at the public universities. Supporting Foreign Investment Flows: MIGA and FIAS 36. Turkey has great potential to expand foreign investment flows-both as a significant source of private investment into neighboring countries and as a large recipient of foreign investment. As a result, MIGA is very active in Turkey. With a gross exposure of US$225 million Turkey is the fourth largest country in MIGA's portfolio. To date, the total amount of investments facilitated by MIGA in Turkey is approximately US$554 million. Turkish companies have also used MIGA's guarantee program for their investments in Russia and Central Asian countries. With a total gross exposure of US$116 million, Turkey is number 9 among all investor countries in MIGA's portfolio. 37. During two weeks in FY99, MIGA held a mobile office in Turkey and a follow-up mission in the fall of the same year. This attracted much news coverage and MIGA met with hundreds of private sector companies. MIGA also signed a Memorandum of Understanding (MOU) with Turkish Eximbank, which calls for additional cooperation between the two Agencies. The MOU is expected to lead to future  Page 12 Annex Al: Private Sector Stratefy coinsurance and reinsurance for Turkish overseas investments where the two agencies would like to leverage their respective guarantee portfolios. MIGA also co-signed an MOU for cooperation between IBRD, IFC and TUSIAD and Istanbul Chamber of Commerce. 38. MIGA continuous to receive strong interest in its program, both from foreign companies for their investments into Turkey and Turkish companies for their overseas investments, mainly in Eastern Europe and Central Asia. Due to the high exposure in the general banking sector in Turkey, the Agency will focus on diversifying its portfolio and will concentrate its efforts on financial sector projects, which have significant developmental effect. The need for MIGA's services in the general banking is expected to decline as a result of macroeconomic stabilization and recent strengthening of the banking regulations. 39. Instead, other sectors are expected to grow in MIGA's portfolio. Turkey's abundant need for infrastructure investments, especially in the power sector, is one example. Over the last few years, a great number of consortia have approached MIGA for over 30 power sector projects for billions of U.S. dollars in total investments. Recent constitutional amendments (so as to allow international arbitration) mean that many projects will reach financial closing after years of stalemate. MIGA's increased per-project limit of up to US$200 million, its ability to syndicate additional insurance in the public and private markets, as well as providing guarantees against Breach of Contract, position the Agency very well to facilitate infrastructure investments. A high demand is also expected for investments into the sectors listed in the privatization program. 40. Turkish investors also show continuous interest in MIGA's guarantee program. The Agency is currently underwriting Turkish investments in the telecom sector in several ECA-countries. MIGA also expects to see Turkish demand for investments in the manufacturing and retail service sectors, especially in Russia, Central Asia and the Balkan countries. 41. MIGA has been an active supporter of the Centre for Private Sector Development in Istanbul. The Centre is a joint undertaking of the OECD and TICA to support of private sector development expertise to transition economies in the region. It has been host to workshops related to investment promotion and information technology, especially in areas where MIGA has been particularly active. Over the past five years, MIGA has led the Centre's Expert Group on Investment Promotion and provided analytic guidance in policy discussions related to foreign direct investment. Workshops offered by MIGA have encompassed broad-based investment attraction strategies, as well as, the mining and tourism sectors. 42. FIAS is assisting the Govemment with the development of a strategy to strengthen foreign direct investment (FDI) and is collaborating with IFC in the design and development of a FDI initiative. This is expected to include a FDI conference organized in partnership with the Turkish Government and business community, including key private sector associations. FIAS has undertaken an initial diagnostic study to assess the issues and to delineate the objectives for the conference. The conference is currently planned in Istanbul for 2001. As part of this same effort, FIAS is reviewing the new draft investment law, which is soon to be discussed in Parliament, and may conduct an administrative barrier study to review and assess the administrative procedures which investors need to fulfill in order to establish and operate an enterprise in Turkey.  AnnexA2 Page 1 of 2 Turkey at a glance 8/31/00 Europe & Lower- POVERTY and SOCIAL Central midkk- Turkey Asia income Development diamond* 1999 Popitation, mid-year (mdl ions) 64.3 475 2,094 Life expectancy GNP per capitaAtfas method, US$) 2,900 2,150 1,200 GNP (Aflt$efod, USSbilions) 186,6 1,022 2,513 Averae annual fgrowth. 1993-99 Popation (%) 1.5 0 1 1.1 GNP Gross Labor force S) 2.6 0.8 1.2 per Gpnmary Most recent esntmalt (lates year avallable, 1993-99) capita \ enrollment Powty (' otpopiAW- bekwnabo,af pOvet iine) Urbn populaon (% of total poouleon) 74 67 43 Life expectancy at bith (yars) 69 69 69 Infent mortality (per 1000 live bidhs) 38 22 33 Chld malnutrlbon (% of Xchldwn er 5) 10 8 15 Access to safe water Acce to impoved water source (% of populafion) .. ,. 86 Illiteracy (% of populaion age 155+) 15 3 16 Gross primary enrollment (% of scto-age popu/etion) 107 100 114 Turkey Male 11t 101 114 Lower-middle-incone group Female 104 99 116 KEY ECONOMIC RATIOS and LONG-TERM TR