Turkey - Public Finance Management Project

Document of The World Bank Report No: 25572 IMPLEMENTATION COMPLETION REPORT (SCL-39420; PPFB-P2730) ON A LOAN IN THE AMOUNT OF US$62 MILLION TO THE REPUBLIC OF TURKEY FOR A PUBLIC FINANCE MANAGEMENT PROJECT June 6, 2003  CURRENCY EQUIVALENTS (Exchange Rate Effective ) Currency Unit = FISCAL YEAR ABBREVIATIONS AND ACRONYMS ALMIS Assets and Liabilities Management Information System BYES A computer based budget preparation system BILGE A computer based customs administration system CY Calendar Year CAS Country Assistance Strategy CoA Chart of Accounts EU European Union FAD Fiscal Affairs Department FLS Financial Ledger System FY Fiscal Year GDBFC General Directorate of Budget and Fiscal Control GFMIS Government Financial Management Information Systems GFS Government Finance Statistics GDR General Directorate of Revenues GDPA General Directorate of Public Accounts GDPF General Directorate of Public Finance HR Human Resources IMF International Monetary Fund IT Information Technology IRS Internal Revenue Service IRU International Road Transport Union LTU Large Tax Payers Unit MOF Ministry of Finance OCR Optical Character Reader PSAL Public Sector Adjustment Loan PTL Program Team Leader PFMP Public Finance Management Project QAE Quality at Entry QAG Quality Assurance Group say 2000i A computer based system for budget execution SPO State Planning Organization SPP State Personnel Presidency TDSP Treasury Data Systems Project TCA Turkish Court of Accounts TIR Transport Internationaux Routiers US-IRS United States- Internal Revenue Service VAT Value Added Tax  Vice President: Johannes F. Linn Country Director: Ajay Chhibber Sector Manager: Helga Muller Task Team Leaders: Ali Hashim, Carlos Ferreira  TURKEY Public Finance Management Project CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome 17 6. Sustainability 19 7. Bank and Borrower Performance 19 8. Lessons Learned 21 9. Partner Comments 22 10. Additional Information 22 Annex 1. Key Performance Indicators/Log Frame Matrix 24 Annex 2. Project Costs and Financing 26 Annex 3. Economic Costs and Benefits 28 Annex 4. Bank Inputs 29 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 31 Annex 6. Ratings of Bank and Borrower Performance 32 Annex 7. List of Supporting Documents 33  Project ID: P035759 Project Name: Public Finance Management Project Team Leader: Ali Hashim TL Unit: ECSPE ICR Type: Core ICR Report Date: June 6, 2003 1. Project Data Name: Public Finance Management Project L/C/TF Number: SCL-39420; PPFB-P2730 Country/Department: TURKEY Region: Europe and Central Asia Region Sector/subsector: Central government administration (100%) Theme: Tax policy and administration (P); Public expenditure, financial management and procurement (P); Administrative and civil service reform (P); Law reform (S) KEY DATES Original Revised/Actual PCD: 06/17/1994 Effective: 11/15/1995 05/01/1996 Appraisal: 04/10/1995 MTR: 12/15/1998 12/15/1998 Approval: 09/21/1995 Closing: 06/30/2000 12/31/2002 Borrower/Implementing Agency: GOVERNMENT OF TURKEY/MOF & UNDERSECRETARIATS OF CUSTOMS AND TREASURY Other Partners: STAFF Current At Appraisal Vice President: Johannes F. Linn Wilfried Thalwitz Country Director: Ajay Chhibber Rachel Lomax Sector Manager: Helga Muller Christiaan J. Poortman Team Leader at ICR: Ali Hashim Samuel J. Otoo ICR Primary Author(s): Ali Hashim; Carlos D. C. Ferreira 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome:S Sustainability:L Institutional Development Impact:SU Bank Performance:S Borrower Performance:S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The specific objectives pursued in the three components of the PFMP are summarized below. (a) The Tax Administration component was directed at modernizing the organization, systems and procedures of tax administration in Turkey, with a particular focus on strengthening the compliance, enforcement and policy formulation capabilities of the tax authorities, and improving progressively the conditions for tax payers who comply. The underlying goal was to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. (b) The Expenditure and Personnel Management component attempted to enhance the government budget's usefulness as a fiscal policy instrument and as a tool for managing public finances by reducing the number of sources of government spending that operated outside budgetary channels, and by introducing budgeting of public administration positions and payroll. It also aimed to modernize the complex and outdated budgetary accounting procedures and systems that impede effective and efficient control over government finances. (c) The Customs Modernization component was directed at: (i) shifting the Custom Administration's policy from its costly and inefficient ex-ante, full coverage, sanctioning approach to a more ex-post and efficiency seeking stance, still capable of gathering appropriate revenues and enforcing relevant national and international laws; and (ii) at advancing the changes in the national customs organization required for Turkey to be able to enter into a customs union with the European Union (EU). Context. The primary economic challenges facing Turkey in 1994-5 were to establish the foundations for a sustainable fiscal adjustment and to bring about a rapid and durable reduction in inflation. The policy reforms required for this needed to be complemented by a variety of institutional reforms to strengthen public financial management. The domestic tax system was characterized by a relatively narrow base. This situation was due in large part to deficiencies in tax administration systems that precluded a broadening of the income tax base, effective collection and compliance activities, and better taxpayer service. Expenditure management and control was severely hampered by a complex and outdated budgetary framework and systems, the plethora of agencies and funds that were effectively outside the budgetary process, and deficiencies in cash management and public sector accounting. As a result, general government expenditures exceeded targets by large margins in the early and mid nineties, and fiscal policy was driven by the short term financing needs of the government. Public administration was characterized by considerable overstaffing due to poor information and lack of controls over personnel expenditures. Finally the major liberalization of external trade achieved during the 1980's was not matched by corresponding changes in customs administration. The customs regime was costly and inefficient and detracted from the competitiveness of Turkish exports and the country's attractiveness as a site for investment. Another major impetus for change in this area stemmed from the requirements of Turkey's anticipated customs union with the EU. The proposed PFMP was to assist in addressing institutional and systemic problems in taxation, government spending and in related personnel management functions and customs administration. Assessment of Objectives. The objectives of this project reflected essential priorities for public finance management as identified by the Government and the Bank in 1995. They were consistent with the Government strategy for setting up institutions, systems and procedures necessary to enhance the Government's capacity to manage its financial resources. - 2 -  3.2 Revised Objective: At the project identification stage the Government was insistent on a very comprehensive reform program encompassing most elements of the public sector. However, the Bank realizing the difficulties of implementing such a program, agreed only to address a few key elements of the reform agenda in the first phase and convinced the Government that it would be more prudent to time slice the program. The PFMP was therefore designed to be a phased operation, with the current project envisaged as phase I and a follow-on PFMP II designed to cover remaining areas of reform. However, even the objectives set for Phase I proved to be very ambitious and complex to implement under the umbrella of a single project. Two years into project implementation, it was found that: (a) some Government agencies were willing to undertake quite extensive reform in their functional processes, organizational structures and associated systems and procedures, whilst others were not so forthcoming; and (b) it was easier to proceed with the reform agenda when the associated reform activities fell under the purview of specific agencies rather than being spread across multiple agencies. The Government and the Bank agreed to: (a) make adjustments to the project scope and settle for a more gradual pace of reform and more modest objectives for some components, making an effort to better match the scope to implementation capacity; (b) simplify implementation by restricting work on a given component to a specific agency instead of across multiple agencies; and (c) focusing on activities related to the design and implementation of information systems which would provide immediate and tangible benefits and improve the efficiency and effectiveness of the relevant agencies. This was achieved by a significant project re-structuring in 1998 and another set of adjustments in 2000. The formal project restructuring was approved by the Board on March 30, 1998. In the second set of adjustments, the Government proposed and the Bank approved the cancellation of one component and re-allocations for additional activities for some components within the overall scope of the project. These were approved by the Country Director and put into effect by an amendment to the Legal agreement in September 2000. After the two revisions objectives of the project components were as follows: (a) Tax Administration Component. The revised objective of this component was still directed at modernizing the organization and systems of the tax administration department and strengthening its policy formulation capabilities, but the scope of the component would be restricted to a few specific areas: (i) undertaking studies relating to the organizational and information technology needs of the General Directorate of Revenue (GDR); (ii) establishing a tax policy unit in the GDR; and (iii) paying increased attention to training activities under the component. (b) Expenditure and Personnel Management Component. The restructured component had a reduced set of objectives that sought to strengthen the budget preparation and execution processes by implementing a new budget classification structure and Chart of Accounts (CoA) compliant with GFS, and new automated systems for budget preparation and execution. (c) Customs Modernization Component. The goal of the Customs Modernization component remained effectively unchanged, and was directed at shifting customs from its original costly sanctioning approach to a more efficient and selective examination process and advancing the changes in Customs required to allow entry into the EU. (d) Debt Accounting and Cash Management Component. This new component added in 1998 focused on a reform program built on the work done under a previous Bank operation (the Treasury Data Systems Project -TDSP). The objective of this component was to modernize debt accounting procedures and practices. In September 2000, a sub-component focusing on the training of Treasury - 3 -  Controllers who are responsible for the audit of World Bank projects and of State Owned Enterprises, was added to improve the quality and timeliness of these audits. (e) Audit Modernization component. The objective of this new component added in 1998 was to improve the quality and relevance of the audits carried out by the Turkish Court of Accounts (TCA) and enable it to produce more meaningful reports for Parliament. This component was subsequently cancelled at the request of the Government in the project adjustments in September 2000. The revised objectives were more focused on addressing priority areas needing reform and much more in line with the implementation capacity of the counterpart agencies. 3.3 Original Components: The original components of the project were: (a) Tax Administration Component (Cost US$14.9 million, Bank Financing US$8.9 million). The Tax administration component was to: (i) restructure the management and administrative organization of the GDR so as to reduce fragmentation of managerial authority and achieve a more functional strategic orientation; (ii) introduce modern automated systems for core tax administration and management functions, to allow for an expansion of business and more effective and efficient operations; (iii) enhance the policy-making capability of the GDR, including the establishment of a permanent Policy Analysis Unit; and (iv) enhance GDR's compliance enforcement capability by developing and implementing a third party tax information system that would progressively permit the broadening of the tax base and the growth of revenues through improved audits and compliance checks. (b) Expenditure and Personnel Management Component (Cost US$11.06 million, Bank Financing, US$8.6 million). Activities under this component were targeted to: (i) strengthen budgetary systems control by reducing substantially the number of off-budget spending entities, tightening the relationship between the budgeting and the planning process, and improve the links between the current and the investment budgets; (ii) make spending agencies more accountable by rationalizing the budget and accounting systems, remove ex-ante controls while improving ex-post audit capabilities; and strengthen budget decision-making by introducing a more appropriate budget code structure for economic analysis; (iv) install streamlined procedures to govern commitment authorization and monitoring and a simplified model compatible with the proposed Financial Ledger System (FLS); (v) modernize budgeting and accounting functions, payment processes and treasury management; (vi) enhance the capabilities of the core agencies to fulfill their expenditure management responsibilities by upgrading information systems and staff skills, realigning the systems on a functional basis and creating an integrated financial management system for budget accounting and payroll management. (c) Customs Modernization Component (Cost: $68.3 million, Bank Financing US$44.4 million). Activities under this component aimed to: (i) rid customs procedures of their present duplication, excessive paper work and physical controls and replace them by self-assessment methods, selective physical inspections and document checks, stronger post release reviews and simpler import controls; (ii) upgrade present computerization to full automation of customs procedures and the capacity to enforce legislative and EU requirements; (iii) consolidate responsibilities for development and maintenance of automated information systems; (iv) restructure and downsize the customs organization in line with the new operational procedures; and (vii) support these changes with staff training, facility renovation, public information programs and pilot tests with brokers and other stakeholders. - 4 -  3.4 Revised Components: During project implementation, project activities envisaged as part of the Tax Administration and the Expenditure and Personnel Management Components were found to be too ambitious and exceeding the capacities of the implementing agencies. In the case of the Expenditure and Personnel Management component they also required close coordination and cooperation across multiple agencies, namely the Ministry of Finance (MOF), the Treasury, the State Planning Organization (SPO), the State Personnel Presidency (SPP) and the TCA. The initial enthusiasm shown by these agencies to participate in a collaborative reform effort, during project design, was found to be not sustainable as the reform program progressed. The Government therefore requested that: (a) activities under both these components be scaled back and restricted to priority elements more in line with the capacity of the implementing agencies; (b) in the case of the Personnel and Expenditure Management component, the scope be restricted to elements that would be carried out by the MOF and the reform agenda for some of the other implementing agencies, such as that for the Treasury and the TCA, be packaged into separate components. For example, in the earlier design an overall Government Financial Management Information System (GFMIS) had been envisaged, which would cover the requirements of the MOF, the Treasury, the SPO and TCA. In the revised design the MOF systems would concentrate on budget preparation and budget execution and work related to Debt Accounting systems was split off into a separate component. As mentioned above, this was accomplished by a formal re-structuring of the PFMP in March 1998 and subsequent adjustments in 2000. The final scope of the revised components is: (a) Tax Administration Component (Cost US$2.35 million; Bank financing US$2.02 million). Activities under this component were restricted to: (i) Studies relating to the organizational and information technology needs of the GDR; (ii) a program to establish a tax policy unit in the GDR; and (iii) training activities. (b) Expenditure and Personnel Management Component (Cost US$1.8 million; Bank Financing US$ 1.6 million). The scope of this component was restricted to: (i) finalization and implementation of a new GFS compliant budget classification structure; (ii) implementation of a Financial Ledger System (FLS) to enable the MOF to monitor the execution of the budget; (iii) design of a financial reporting system to provide the MOF with timely and accurate information; and (iv) design of information systems to support these activities and their implementation at a set of pilot sites. In a further adjustment of this component, put into effect in 2000, the Government decided that it would use Bank financing only for consulting work related to: (i) studies carried out under the consulting contract with the IMF's Fiscal Affairs Department on the reform of the public finance management system; (ii) consulting assignments to support the design and implementation of the new budget execution system, say 2000i; and (iii) training activities for MOF staff. Expenditure on hardware and software and further design work on the new budget preparation system would be met from the Government's own resources. (c) Customs Modernization Component (Cost US$68.4 million; Bank Financing US$48.44 million). The Government requested and the Bank agreed in September 2000 to an increase in scope of this component to cover further modernization of the Ipsala, Kapikule and Derekoy border posts in addition to the existing activities described above. (d) Debt Accounting and Cash Management Component (Cost US$5.07 million; Bank Financing US $4.7 million). This component aimed to modernize debt accounting procedures and practices and design and implement an automated accounting system for state debt and guarantees. The component - 5 -  also included improvements in cash management by automation of the internal payments accounts office in Treasury. The additional sub-component added in 2000 aimed to provide the Board of Treasury Controllers with tailored training to further develop their skills in areas critical to the performance of their duties, including accounting and auditing. The program also included the procurement of office equipment needed to improve their efficiency and effectiveness. The program was to be implemented through three sets of activities: (i) English language training; (ii) training abroad in accounting and financial reporting, private and public sector auditing, and analysis of financial statements; and (iii) procurement of office equipment. (e) Audit Modernization Component (Cost US$10.91 million; Bank Financing US$4.85 million). This component focused on the TCA and had four sub components: (i) strengthening the audit process by improvements in audit management and planning, external reporting, and audit methodology and standards; (ii) provision of modern information technology to support TCA's work; and (iii) organizational development activities including a review of the organization of TCA, creation of new administrative structures and relationships for auditing, developing new policies and procedures for HR management and training, and enhancing training opportunities. The Government subsequently requested a cancellation of this component, in September 2000. 3.5 Quality at Entry: QAE was not formally assessed by QAG for this project. The original project components were identified and their scope determined with participation of the Government and were consistent with reform priorities determined by the Government and the Bank. The design of the Customs and Expenditure and Personnel Management components was carried out in close collaboration with the IMF and that of the Tax component with the US IRS, and were based on international best practice. The bulk of Bank project financing was allocated to the customs modernization component (US$48 million out of a total of US$57 million) which was largely implemented as originally designed. However, the other components were found to be too complex and ambitious in scope in view of the involvement of multiple agencies. The project underestimated the resistance to change, particularly as it related to a revision of the roles and responsibilities of the main economic management agencies. Implementation capacity was also found not to be commensurate with requirements in some of the implementation agencies and the scope of the corresponding components had to be scaled back to bring it in line with the implementation capacity of the relevant agencies. However, since the bulk of the operation dealt with the customs component, which proceeded according to design, and since the revised components were able to achieve most of the expected outputs, QAE is assessed as satisfactory. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Most of the revised objectives of the project have been accomplished and the achievement of the objectives can therefore be rated as satisfactory. Under the Tax Administration component, the project has enhanced the capacity of the General Directorate of Revenues (GDR) for tax policy analysis. Under the Personnel and Expenditure Management, the Customs Modernization and the Debt Accounting and Cash Management components, the Government has been able to put in place state of the art processes, procedures, and information systems to assist budget execution, customs administration and debt accounting. These systems implementations have been accompanied by a restructuring of key functional processes and organizational structures to bring them in - 6 -  line with international best practices. They have been successful in increasing the efficiency and effectiveness of the relevant departments and made their functioning more transparent. Under the Personnel and Expenditure management component implementation of the say 2000i system enables the MOF to obtain accurate and timely information on the status of budget execution and helps the Treasury in better cash management. Efficiencies in budget execution achieved by the system have assisted the Government in managing its financial obligations within the stipulated contractual time limits. As part of the Customs modernization effort, extensive changes have been made in the underlying legal framework to make it compatible with the EU, a major organizational re-structuring has been carried out to make the Customs organization more efficient and has resulted in the closure of 120 branch offices. The new customs system implemented though out the country has resulted in increased efficiencies in the customs clearance process and made it more transparent. Systems implementation has enabled customs to be more selective in its ex-ante examination processes, while retaining the ability for enforcement of relevant regulations and increasing the level of revenue collections. The new Treasury Debt Accounting system helps the Treasury to better manage its extensive debt portfolio and improve its accounting procedures. Implementation of the say 2000i system at the Treasury accountancies can also give Government a better idea of the total cash resources available to it at a given point in time and thereby enable it to improve its borrowing strategy. The improved analytical and information systems capacity at the MOF, the Customs administration and the Treasury have also made a significant contribution to the reliability and relevance of financial information available to the Government, thereby assisting in decision making. Finally, ready availability of quality information has also enhanced overall transparency of the management of budget, debt and fiscal risks in Turkey. The specific outputs of each project component are described below. 4.2 Outputs by components: (a) Tax Administration Component This component was implemented by the General Directorate of Revenues (GDR) of the MOF. The component was reduced in scope as part of the project restructuring carried out in 1998 and limited to a few key activities. As a result, Bank financed costs were reduced from US$8.9 million to US$2.02 million. Most of the activities envisaged under the revised scope of the tax administration component have been completed, though results are mixed. Implementation of the component was supported by an US Internal Revenue Service (IRS) in-house adviser and by short-term consultants who assisted with five working groups on a broad range of modernization activities described below. On balance, the implementation progress of the component is rated satisfactory because it carried out the planned activities, but its contribution to the project's development objectives is unsatisfactory because many recommendations of the working groups were not implemented by the MOF. (i) Automation Working Group. GDR elected to carry out most of the activities to automate the tax collection operations outside the context of the project under Government budget financing. To that effect, it developed, tested, and made operational the automated tax office (VEDOP) system, which automated the tax offices according to the business procedures and organizational arrangements defined in the tax law. The system supported the introduction of electronic filing in Turkey. The - 7 -  project, through IRS consultants, provided planning and technical assistance to the effort. GDR deployed the VEDOP system to 155 of its tax offices throughout the country. (ii) Collections Working Group. The main activity of this group was to study on the collection of taxes through the banking system. A short term IRS advisor provided assistance to the group. As a result, the number of banks selected for revenue collections was increased from 17 to 25, as originally targeted by the project, with about 50% of tax revenues collected by GDR being now collected through the banking system. (iii) Organization Working Group. This group was to carry out a major organization study of the Tax Administration and to prepare a recommendation for management consideration. A number of IRS short-term consultants assisted the working group, who also carried out two study tours to review organizational arrangements and observe modern tax administration business processes. A master plan for reorganization of the GDR was developed by the IRS and formally accepted in March 2000. The study was completed and recommended to Ministry management the implementation of a three-tier organizational structure with national, regional, and local levels. MOF management decided not to implement the organizational recommendations made by the Group based on the IRS study. Instead, management has opted for marginal improvements on as needed basis. For example, the concept of Large Taxpayer Units (LTU's) recommended in the study has been partially adopted. Nevertheless, the reorganization of the Tax Administration continues to be recommended by international organizations, including the Bank and IMF. The study financed by the project continues to be used as an important source of information as the MOF considers the future of the entity. (iv) Tax Policy Working Group. Harvard University provided a three-week seminar on tax policy analysis to about 30 senior tax officials in Ankara. Unit staff were trained in statistical and mathematical software (GAMS) and in the design of tax policy models. The tax policy analysis unit became operational after the first group of staff returned after completion of GAMS training in 1998, however the unit's establishment was never formalized because of the MOF's inertia on reorganization matters described in the paragraph above. The group was assisted by tax policy advisers and modeling specialists on the design and construction of a general equilibrium based indirect tax model. Two short-term consultants from the US Treasury provided technical assistance on Corporate Tax and Personal Income Tax models. The working group encountered serious difficulties in establishing the analytical foundation intended by the project because of unreliable historical data. Moreover, to improve the quality of future data it would be necessary to seriously redesign tax forms. A review by the US Treasury pointed out that, in addition to the previously known problems with data quality, the data being captured from returns are insufficient to permit good quality economic modeling. At the end of the project GDR, also considering its difficulties in retaining stable staffing for the Unit, was studying how to best put in place the type of analytical capacity envisaged by the project. (v) Third Party Information Working Group. This working group studied improvements in GDR's ability to obtain so-called "third-party information" to validate the liability declaration of taxpayers. The group provided recommendations to the MOF and Government for the improvement in the tax legislation to create a legal base for collection of such data, which were incorporated in the recent Tax Reform. IRS short-term consultants provided technical assistance and training to the working group.The GDR has also completed an organizational study under a contract with the US IRS and has had an extended dialogue with the IMF on organizational and other matters related to tax administration. However, only a few of the recommendations made by this study, such as those related - 8 -  to the concept of Large Taxpayer Units (LTU's), have been implemented. (b) Public Expenditure Management (PEM) Component The General Directorate of Budget and Fiscal Control (GDBFC) and the General Directorate of Public Accounting (GDPA) of the MOF were the implementing agencies for this component. This component was also considerably reduced in scope during the 1998 and the 2000 project restructuring whose main thrust was to restrict component activities to those activities that fall under the purview of the MOF. Project related financing for this component was reduced from around US$8.6 million to US$1.6 million as the MOF expressed its ability and desire to meet all costs for hardware and software acquisition related to the systems implementation from its own resources and to restrict Bank financing to cover consulting services and expenses related to training. Most of the outputs envisaged under the revised scope of this component have been completed and this component is rated satisfactory. (i) The say 2000i system Under this component the GDPA has successfully designed and deployed a state of the art modern budget execution system, the say 2000i system, which embodies the functionality of a Financial Ledger System and has the reporting capabilities and capacity to provide the MOF with accurate and timely information on the status of budget execution. Say 2000i functionality: The say 2000i system has been implemented at some 1450 accountancies across the country. The accountancies are units of the MOF-GDPA located with line agencies and are responsible for budget execution and accounting activities. The GDPA accountancies located with spending agencies, record data on budget appropriations and budget releases sent directly to them by the budget office. After funds have been released, spending agencies make a request to their budget office/accountancy to make payments related to specific contracts and incur other expenditure by generating a payment order and sending it to the accountancy for payment. The say 2000i system records these transactions as they are sent to the accountancy by the spending agencies, checks for the availability of funds and then generates a payment due to the creditor. After the expenditure has taken place the say 2000i system makes this information available to the GDBFC for it to compare budget appropriations with actual expenditures. The say 2000i system has the capability to provide a full suite of budget execution reports. In addition to the core accounting functions described above, the say 2000i system also has a payroll module that enables it to check the payroll calculations made by spending units. The responsibility for calculating the payroll rests with the spending unit, but the GDPA accountancies are responsible for checking these calculations prior to releasing payment. Operation of this module has enabled GDPA to develop a personnel and salary database for all civil servants. Currently the system is used by a number of accountancies covering the payroll calculations for 1.8 million out of a total of 2 million civil servants. The say 2000i system also has a module that enables it to check health service related payments. These two modules allow the say 2000i system to covers all functions performed by the accountancies. The say 2000i system has been implemented in about 1450 accountancies across the country. A help desk with 20 operators continues to be fully operational and is being used by end users, country wide to resolve technical and other problems with the use of the system. A country-wide - 9 -  network of 350 trainers and 88 coordinators has been set up, with each trainer being responsible for three to four accountancies. Over 15,000 staff have already been trained out of whom about 10,000 use the system for their operational day to day accounting work and are judged to be proficient in system use. (ii) New Budget Classification and Chart of Accounts The MOF has designed a new budget classification structure and Chart of Accounts (CoA), conforming to the GFS, with IMF-FAD consulting assistance financed through this project. The MOF has successfully piloted the new budget classification structure and CoA at six budget offices and 49 associated accountancies. It plans to expand implementation of these elements, after an evaluation in 2003, to the consolidated budget agencies from January 2004 and to the Local Government and Extra Budgetary funds, such as the Social security fund, starting January 2005. Thus the necessary budgetary classification framework has been completed and tested under this project, and can be applied across Government. However, the Government will probably require additional technical assistance to complete the roll-out which could be provided as part of a separate operation. (iii) Budget Preparation System As part of the adjustment in scope carried out in September 2000, the MOF decided to finance this activity from its own resources. The General Directorate of Budget and Fiscal Control (GDBFC) in the MOF has completed a new computer based system to assist in the budget preparation process (BYES) that will enable it to prepare the budget according to the new classification structure and CoA and to monitor its execution using this system along with the say 2000i system mentioned above.This system was completed in CY 2002 and is being progressively implemented at the central accountancies, budget departments in line agencies. BYES has been used in the budget preparation process during the FY 2003 budget cycle. (iv) Links of the say 2000i system with other MOF systems The say 2000i system is a key system whose effectiveness in providing accurate and up to date information to the MOF will be greatly enhanced as interfaces are implemented with some other Government systems. These are: l Link with Revenue systems: This will enable the say 2000i system to obtain revenue data from the Tax Administration's VEDOP system to give MOF information on total revenues collected. The interface will also enable information on revenues collected via the say 2000i system at 155 tax accountancies and 20 customs accountancies to be transferred to the GDR thereby also giving the GDR a complete picture of total revenues. This interface has been completed and daily updates from GDR systems are being sent to the GDPA and information on revenue collections at the accountancies that operate the say 2000i is now being transferred to the GDR. l Interfaces with the GDBFC systems: At present, the say 2000i system operates on the basis of budget release transactions sent to accountancies in hard copy format. After the expenditure has taken place, the say 2000i system makes information on actual expenditures available to the GDBFC for it to be able to compare actual expenditures with budget appropriations. After the new GDBFC systems become operational the say 2000i - 10 -  system should be able to pick up budget release transactions electronically from these systems. Network connections between GDPA and GDBFC have been set up to enable fast data transfer. GDPA has also developed the software that will be required to access data on budget appropriations and funds releases from GDBFC systems. However, this interface is dependent on the completion of the GDBFC systems and the operationalization of the interface arrangements. The Bank team has informed the MOF of the criticality of this interface. As stated in the borrower comments, the budget preparation system is now operational and the interface between BYES and say 2000i has improved significantly. l Link with Treasury systems: The State Debt Accountancy uses the accounting system developed under the Treasury Debt Accounting component (see below) to generate payments related to the domestic and external debt. The Treasury is supposed to send a copy of these transactions in electronic form to the say 2000i system so that the latter can update its databases and present a complete picture of Government debt related payments. Conversely, the Treasury requires data on actual expenditures and revenues collected by say 2000i for cash management purposes. Thus it is clear that these systems need to interface with each other. At present Treasury forwards aggregated data on debt related payments in the form of a set of tables to a mailbox on the say 2000i system in pdf format which cannot be used to update the say 2000i data bases. The internal and external payments accountancies in Treasury are using the say 2000i system for generating payments, however, they cannot as yet use the data on expenditures and revenues gathered by the say 2000i system for cash management purposes and continue to collect this data independently. The Bank team has strongly advised the MOF and the Treasury to agree and implement efficient data sharing arrangements that would enable both to get a complete picture of government expenditures and receipts. Overall assessment: Implementation of the say 2000i system has laid the basic technical infrastructure of a system that could eventually evolve into the Government's Integrated Financial Management System (GFMIS) as envisaged in the original scope of the PFMP. The system has the type of information that would be required by all the primary players in economic management, namely the MOF, the Treasury, the TCA, the SPO and the SPP. Experience in trying to develop interfaces between the various MOF and Treasury systems has shown that implementation of an integrated schema is extremely difficult and will require vision, attention and monitoring at the highest levels of Government to ensure cooperation between all agencies. With a Government based on a single political party now in power in Turkey, this may be easier to achieve. However, this issue will need to be addressed within the context of the Bank's overall dialogue with the country. (c) Customs Modernization Component This component covers the bulk of the financial outlays envisaged under this project (US$48.4 million out of a total Loan amount of US$57 million). The Customs Under-Secretariat has been responsible for implementing the reform program agreed under this component. All activities envisaged under the component have been completed and the component is rated satisfactory. The major reasons for successful implementation of the component were (i) project ownership, commitment, support, and involvement of Customs management at the highest levels; (ii) continuity of project management; and (iii) technical - 11 -  assistance contract with the IMF during the early phase of implementation. The prospect of EU accession was also a major driver of change. Work under this component was organized under four sets of activities as follows: (i) Improvements in Customs Legislation Procedures. Turkey's decision to enter into a Customs Union with the EU had a major impetus for this component. A new Customs Law was prepared to bring the entire Customs regulations in line with EU requirements. The law was passed by Parliament on October 27, 1999. Following passage of the new law, the Customs Undersecretariat prepared the regulatory framework consisting of about 900 articles. The new law and regulations went into effect on February 5, 2000. The new Customs Law and associated regulatory environment provided the needed legal basis for the simplification of Customs procedures to a level approaching that adopted in the European Union, a key objective of the project. Simplification was achieved in consultation with trading community. Extensive training was provided to traders. The new operational environment is based on the following principles: (i) business procedures, organization, and physical layout of facilities have been re-engineered to create an efficient environment for computerized clearance; (ii) Customs and public areas were refurbished to avoid contact between inspectors and the public; (iii) responsibility for electronic entry of declarations was assigned to traders who may enter declarations on Customs kiosk facilities, directly through dedicated or dial-up communication lines, or through the Internet; (iv) declaration processing is now randomly allocated to inspectors through an automatic ticket system; (v) a multichannel system was introduced with declarations selected by the computer system for green (release), blue (post-clearance review), yellow (documentary checks), or red (physical examination) channels, according to risk profiles maintained by Customs headquarters. The project was able to reduce physical examinations from 100% to less than 20% for imports and about 10% for exports by late 2002, with the progress in adoption of improved procedures reflected on the table below. Red Channel Transaction 2002 Q1 2002 Q2 2002 Q3 Type (Ataturk Airport) Import 22