Turkey - Adjusting public investment (Vol. 1 of 2) : Overview of findings and recommendations

Repo" No. 6603-TU Turkey: Adjusting Public Investment (In Two Volumes) Voiume I: Overview of Findings and Recommendations March 30, 1987 Europe, Middle East and North Africa Projects Department FOR OFFICIAL USE ONLY H Document of the World Bank This report 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.  TURKEY ADJUSTING PUBLIC EMENT VOLUME I CURRENCY EQUIVALENTS Currency Unit Turkish Lira (TL) US$1 TL 652 TL 1 US$ 0.0015 Currency equivalents are those effective April 1986, unless otherwise indicated. ABBREVIATIONS BOAT - Build-Operate-and-Turnover IAF - Investment Acceleration Fund MHF - Mass Housing Fund PCF - Petroleum Consumption Fund PPF - Public Participation Fund SEE - State Economic Enterprize SPO - State Planning Organization  FOR OMCIAL USE ONLY TURKEY ADJUSTG PBUC TABLE OF CONTENTS VOLUME I Page No. OVERVIEW OF FINDINGS AND RECOMMENDATIONS I. Scope of Report . * .* * . . . . * . . . . . . . a . * 1 II. Government Objectives in Structural Reform . . . . . . 1 III. Public Investment Strategy . . . . . . . . . . . . . . 2 IV. Public Investment Management . . . . . . .. . . 7 V. Suimmary of Action Program to Strengthen Public. . . . Investment Management..... .......... 14 VOLUME II MAIN REPORT AND STATISTICAL ANNEX CHAPTER I. Introduction.. .... ............. 1 The Agenda . . . . . . . . . . . 1 . . . . . o . . 1 CHAPTER II. The Public Investment Framework: Adjusting the Visions and Goals . . . . . . . . . . . . a . . . . . . . . . 3 CHAPTER III. Public Sector Investment Management: Adjusting the Means 20 CHAPTER IV. Institutional Reform: Adjusting the System . . . . . 30 CHAPTER V. Adjusting Public Investment: An Action Program . . . 43 ANNBES: o . o. . .. ........ This document has a restricted distribution and may be used by recipients only in the perfomancce of their official duties. Its contents may not otherwise be disclosed without World Dank authorization.  This report is based on the findings of two main missions in February and November 1985 and on several sector studies carried out during 1985. The first mission comprised: Jayanta Roy (mission chief); Ian Johnson (deputy chief and energy); Branko Milanovic (macroeconomist); Ritu Anand (macroeconomist); Mabmud Tirmazi (irrigation); Robert Wildeman (housing/urban); Ajit Mosoomdar (public sector management); and William O'Neil (steel). The second mission comprised: Robert Liebenthal (mission chief); Friedrich Kahnert (deputy mission chief); Ritu Anand (macroeconomist); Shangshi Wu (general economist); Ian Johnson (energy); Joelle Manibog-Chassard (coal and lignite); P. T. Venugopal (pipelines); Kariyawasam Wijetilleke (refineries); Roy Knighton (transport); Linda Likar (forestry); David Gardner (forestry); Silvie Tillier (agriculture); William O'Neil (steel); Robert Wildeman (urban); Lars Rasmusson (water supply); David Davies (tourism); and Ajit Mozoomdar (public sector management). In addition, sector working papers were prepared by Bruno Laporte (education), Louis Vassiliou (health) and a number of other staff members. The report was discussed with the Government by Robert Picciotto and Robert Liebenthal in June 1986 and again in November 1986 by Robert Liebenthal, Friedrich Kahnert and Sven Kjellstrom.  VOLUMEEI TURKEY: ADJUSTING PUBLIC INVESTMENT Overview of Findings and Recommendations I. Scope of Report 1. The recent transformation of Turkey's economic policies from an inward-looking to an export-led strategy has far reaching implications for the economy and society. Greater decentralization of economic decision-making, greater accountability for effective use of resources through realistic, market-based pricing, greater confidence in the enterprise and innovation of private economic agents add up to a new concept of the role of the State. Accordingly, public investment and the institutions that manage it are being reoriented. However, the vision of a rapidly growing, competitive economy will only be realized if continuously translated into specific agendas of reform backed up by effective management of public resources. Hence, centralized planning must give way to strategic, indicative, flexible planning, combined with strict programming and budgeting of public resources. In this new context, the broad aim of this report is to help the government of Turkey design the needed restructuring of its public investment. 2. Two sets of issues involved in this restructuring are covered. The first concerns public investment strategy: its size, the sectoral priorities, the relationship with private investment, the impact of decentralization; in short, the policies underlying public investment. The second concerns public investment management, issues critical to the realization of the strategic shifts now underway. Within this framework, several topics are treated in some detail: the need to change the coverage of public investment analysis; managing the sources of financing for public investment; avoiding overprogramming; strengthening the data base; and better provision for operation and maintainance. Changes are recommended in the institutions and procedures for public investment planning, budgeting and policy formulation to facilitate the effective implementation of the economic reform agenda. Detailed recommendations on the design, implementacion and assessment of the pudlic investment program are contained in Volume II of the report. These recommendations are derived in part from an in-depth review of sectoral investment programs. II. Government Objectives in Structural Reform 3. In response to the financial crisis of the late 1970s, the Government of Turkey embarked upon a reform program with two major strategic objectives: (a) resume growth, following financial stabilization, by switching the orientation of the economy outward, that is, by adjusting it increasingly to international market signals;  -2- (b) change the role of the public sector from leading economic growth to supporting private sector development from both domestic and foreign sources. In addition to a major reorientation of macro-policies, the new economic strategy was implemented, starting in 1980, through measures to restrain the public sector's call on resources, to shift public investments and divest those state enterprises judged suitable for private involvement, and to improve the incentive framework for private sector activity. In particular, the Government has aimed at reducing the growth of public expenditures to avoid crowding out the private sector, and has given priority to infra- structure sectors (irrigation, energy, transport and communications) over manufacturing for public investment outlays. 4. The reforms were on the whole remarkably successful in improving the financial position of the country and in promoting structural adjustment. The process, however, is far from c,omplete. A number of macroeconomic problems persist. In particular, private investment has been sluggish due to inflation and high real interest rates. Crowding out has remained an issue because public investment expenditure grew faster than expected in 1985-86. Many of the institutional and procedural changes needed to anchor and support the reform program have yet to be implemented. The decentralization of public sector resource management that has occurred since 1984, by increasing the resources of municipalities and the rapidly growing number of extra-budgetary funds, has increased the need for institutional and procedural changes by highlighting the importance of coordination and planning. Economic decision-making, especially investment planning and budgeting and their linkage with private sector promotion policy requires strengthening. The responsibilities of the State Planning Organization (SPO) should over the next few years shift increasingly towards strategic indicative planning, and the design of policies to promote agriculture, industry, trade, communications, human resource development, urbanization, and environmental protection. There is also a need to develop short-term forecasting to reinforce the ability to manage public sector cash flows throughout the year and speedily make necessary adjustments. III. Public Investment Strategy (a) Size of the Public Investment Program 5. Macro-economic performance improved in 1985 but was m