Document of The World Bank FOROFFICIAL USEONLY ReportNo: 31738-TU PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDLOAN INTHEAMOUNT OFEURO360MILLION(US$465.4MILLIONEQUIVALENT) TO THE REPUBLIC OF TURKEY FOR A SECOND PRIVATIZATION SOCIAL SUPPORT PROJECT May 10,2005 HumanDevelopmentSector Unit Turkey CountryUnit EuropeandCentralAsia Region This document has a restricted distribution and may be used by recipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective as o f April 8,2005) Currency Unit = N e w Turkish L i r a (TRY) TRY 1.745 = Euro 1 TRY 1.35 = US$1 US$O.78 = TRY 1 FISCALYEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment EKA General Directorate o fEconomic Research (Treasury) ES State Retirement Fund ETP Employment and Training Project EU EuropeanUnion F M S Financial Management System FOM FieldOperational Manual GDP Gross Domestic Product ISKUR TurkishEmployment Organization IMF InternationalMonetary Fund JLC Job Loss Compensation KOSGEB Small and MediumIndustryDevelopment Organization LAG Labor Adjustment Group LRS Labor Redeployment Services MME Management, Monitoring and Evaluation NGO Non-governmental Organization OECD Organization for Economic Cooperation and Development PA Privatization Administration PAD Project Appraisal Document PCU Project CoordinationUnit PFPSAL 3 ThirdProgrammatic Financialand Public Sector Adjustment Loan PIAL Privatization ImplementationAssistance and Social Safety Net Project PMR Project Management Report POM Project Operational Manual SA Special Account SOE State-Owned Enterprise PSSP Privatization Social Support Project PSSP2 Second Privatization Social Support Project TA Technical Assistance TAC Tripartite Advisory Committee Vice President: Shigeo Katsu CountryDirector: Andrew N.Vorkink Sector Director: Charles C. Griffin Sector Manager: Hermann A. von Gersdorff Task Team Leaders: John Innes and IbrahimAkcayoglu FOR OFFICIAL USEONLY TURKEY Privatization Social Support Project 2 CONTENTS Page A . STRATEGIC CONTEXTAND RATIONALE ................................................................. 1 1 Country andsector issues . ................................................................................................. 1 2 Rationale for Bank involvement ...................................................................................... 3 3.. Higher level objectives to which the project contributes .............................................. 5 B . PROJECT DESCRIPTION ................................................................................................. 6 1 Lendinginstrument 6 2 Project development objective and key indicators ........................................................ 6 3 Project components ........................................................................................................... 7 4 Lessons learned and reflectedin the project design .................................................... 10 5..... .......................................................................................................... Alternatives considered and reasons for rejection ....................................................... 11 C. IMPLEMENTATION ........................................................................................................ 12 1 Institutionaland implementation arrangements 12 2 14 3... ......................................................... Monitoring and evaluation of outcomes/results ........................................................... Sustainability ................................................................................................................... 14 4. Critical risks and possible controversial aspects .......................................................... 15 5. Loadcredit conditions and covenants ........................................................................... 15 D APPRAISAL SUMMARY . ................................................................................................. 16 1 Economicandfinancial analyses 16 2.. ................................................................................... Financial ........................................................................................................................... 17 3 Technical .......................................................................................................................... 18 4 Fiduciary .......................................................................................................................... 18 5 Social................................................................................................................................ 19 6.... Environment .................................................................................................................... 19 7 Safeguard Policies ........................................................................................................... 19 8.. Policy Exceptions and Readiness ................................................................................... 20 This document has a restricted distribution and may be used by recipients only in the performance of their official duties I t s contents may not be otherwise disclosed . without W o r l d Bank authorization. Annex 1:SocialSupport inthe Context of Privatization ........................................................ 22 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .................26 Annex 3: ResultsFrameworkandMonitoring ........................................................................ 27 Annex 4: DetailedProjectDescription ...................................................................................... 31 Annex 5: ProjectCosts............................................................................................................... 41 Annex 6: ImplementationArrangements ................................................................................. 42 Annex 7: FiqancialManagementandDisbursementArrangements ..................................... 45 Annex 8: ProcurementArrangements ...................................................................................... 53 Annex 9: EconomicandFinancialAnalysis ............................................................................. 59 Annex 10: SafeguardPolicyIssues ............................................................................................ 60 Annex 11: ProjectPreparationandSupervision ..................................................................... 61 Annex 12: Documentsinthe ProjectFile ................................................................................. 62 Annex 13: Statementof LoansandCredits .............................................................................. 63 Annex 14: Countryat a Glance ................................................................................................. 65 Map: IBRD 32947 TURKEY PRIVATIZATIONSOCIAL SUPPORT PROJECT 2 PROJECT APPRAISAL DOCUMENT EUROPEAND CENTRALASIA ECSHD Date: M a y 10,2005 Team Leader: John A. Innes / Ibrahim Akcayoglu Country Director: Andrew N.Vorkink Sectors: Compulsory pension and Sector ManagedDirector: Hermann A. von unemployment insurance (70%); Vocational Gersdorff training (20%); Micro- and SME finance (10%) Themes: Social safety nets (P); Social risk mitigation (S); Education for the knowledge economy (S); Small and mediumenterprise support (SI Project ID: PO94 67 Environmental screening category: Not Required LendingInstrument: Specific InvestmentLoan Safeguard screening category: Limited impact I Source Local Foreign Total BORROWER 90.00 0.00 90.00 IBRD 351.80 8.20 360.00 Total: 441.SO 8.20 450.00 Project Implementation Expected effectiveness date: Expected closing date: Period: September 15,2005 June 30,2009 4 years N N06 N O 7 N O S N O 9 Annual 60.00 90.00 100.00 110.00 Cumulative 60.00 150.00 250.00 360.00 Does the project depart from the CAS incontent or other significant respects? Re$ PAD A.2 [ ]Yes [XINO Does the project require any exceptions from Bank policies?Re$ PAD D.7 [XIYes [ ]No Have these been approvedby Bank management? [XIYes [ ] N o I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Re$ PAD C.5 [ ]Yes [XINO - ~ Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [XIYes [ ] N o Project development objective Re$ PAD B.2, TechnicalAnnex 3 The development objective o f the PSSP2 is to support the Government's privatizationprogram throughmitigating the negative social andeconomic impact o fthe privatization of state-owned enterprises (SOE). Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 The PSSP2 has three components namely: (a) JLC: The objective o f this component i s to ameliorate the temporary negative social and economic impact ofjob loss compensation for an estimated 29,000 workers displaced during privatization o f SOEs. (b) LRS: The objective ofthis component is to provide labor redeployment services to workers who have been displaced by the privatization o f SOEs, includingsecondary layoffs, to assist them inrapidly re-enteringthe labor market. (c) MME: The objective o f this component i s to monitor the social impact o fthe privatization program andmanage the PSSP effectively as a whole. Which safeguardpolicies are triggered, if any? Re$ PAD D.6, TechnicalAnnex 10None applicable. Significant, non-standard conditions, if any, for: Re$ PAD C.7 Board presentation: None. Loan effectiveness: Subsidiary Loan Agreement has been signed between the Undersecretariat o f Treasury and the PA as agreed with the Bank and related legal opinions have been receivedby the Bank. Covenant applicable to project implementation: Privatizationprogram implementedinaccordance with Government's policy letter on privatization. A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Turkey is confronted by major issues in enhancing its competitiveness to benefit from globalization and prepare for the progressive economic integration with the European Union (EU). The state-owned enterprises (SOEs) have been a major drain on the budget, and drag on the Turkish economy for years. To address these persistent financial imbalances, the SOE sector i s being privatized, but this runs against public perceptions in Turkey on privatization, which i s frequently negative. Addressing public perception and the real social costs o f workers made redundant as a result o f privatization are important elements in ensuring an effective and sustainable privatization program for Turkey. The Government and the Bank are in broad agreement on the diagnosis and strategies for economic adjustment and structural reform including the privatization or liquidation ofmost o fthe remaining SOEs. In addition to enhancing competitiveness, privatization of SOEs will make a sizeable contribution to both fiscal management and the reconfiguration o f the public sector. On fiscal management, loss-making enterprises will be closed or sold (the largest loss-making enterprise is Turkish Railways, currently losing some US$700 million a year, but as this can not be easily privatized it will be restructured under a separate proposedRailways RestructuringProject). The sale proceeds o f privatized enterprises will be used in the management o f Turkey's net public debt which currently amounts to 63.5% o f GNP. On the reconfiguration of the public sector, removing the state's role in the management o f large and strategic enterprises such as Turkish Airlines and Turk Telecom will enable the state to focus more on its core roles o f economic management, service delivery and appropriate market regulation. Economic Status: Due to its erratic growth pattem inthe past, Turkey could not achieve sustainable levels o f employment growth, and income inequality has remained consistently high. Average annual Gross Domestic Product (GDP) growth was 4 to 5 percent until the mid 1990's, followed by a sharp decline o f about 6 percent in 1999. The economy recovered slightly in 2000, before plunginginto a deep crisis in 2001. The economy recovered strongly in 2002 and GNP growth reached 8 percent in2002,6 percent in2003, and 9.9 percent in2004 with the GDP per capita reaching US$ 4,197. At the same time, inflation has been brought under control reaching single digits (9.3 percent) in2004, the lowest inTurkey for thirty years. This impressive macroeconomic performance has been achieved through a combination o f stabilization measures, with strong fiscal discipline at its core, allowing the maintenance of large primary surpluses o f the public sector on the order o f 6.5 percent o f GNP an ongoing structural reform agenda that was initiated by the previous Government, and followed by the current one, and political stability since the November 2002 elections. As a result Turkey's economy has become significantly more resilient to external shocks over the past two years. Nonetheless, risks do exist, such as if there were to be a sharp change in the global economic scene, a rise ininterest rates which might affect the Government's ability to roll over public debt, or possible reform fatigue inTurkey. The December 2004 EU decision on the opening o f accession negotiations in October 2005 has been an important signal for the financial markets and has created a firm anchor for Turkey's development in the years ahead. The process o f accession provides a strong incentive to continue with political, macroeconomic and structural reforms. Turkey's own pre-accession program sets out ambitious objectives including 5 percent growth and the reaching o f the Maastricht gross debt criteria o f 60 percent o f GNP in 3 years, with privatization revenues helping in this regard. The potential for significant foreign direct investment (including for privatized SOEs) could also be unlocked by the prospect o f EUmembership, although this will take time to buildup. This impressive macroeconomic performance has not been matched by formal sector employment creation. Thus whilst the economic situation, enhanced by a positive signal for EU accession negotiations provides a more favorable environment to privatize SOEs, the economy has not responded yet with significant employment creation, thus workers made redundant as a result of privatization need to be assisted to re-join the labor market. Income Inequality and Poverty: Turkey has high income inequality, close to the levels for Russia or Peru. The poorest 20 percent command less than 5.3 percent o f total income, whereas the wealthiest 20 percent have 50.1 percent o f total income. Differences in education account for as much as 22 percent o f total income inequality between households, revealing the existence o f entrenched inequities in access to education in Turkey. The average income o f adults with higher education i s almost six times that o f illiterate adults. Workers in SOEs are decidedly not amongst the poorest, but if not compensated for job loss or assisted in gaining alternative employment, they certainly wouldjoin the ranks o f the poor. Privatization Program and Labor Redundancies: The Privatization Administration (PA), is incharge o fthe Government's privatization portfolio, after a slow start, has made strong progress in privatization and i s committed to a robust future program. The Government's program emphasizes the critical role o f structural reforms in increasing the competitiveness o f the economy and thus furthering the objectives o f eventual EU accession. There is likely to be increased international and domestic private sector interest inthe SOEs to be privatized giventhe improved macroeconomic findamentals, possible EUaccession and that now it is largely profit- makingstrategic enterprises which will beprivatized. The privatization program and labor redundancies supported by the ongoing Privatization Social Support Project (PSSP) are shown in Table 1, whilst the future program to be supported by Second Privatization Social Support Project (PSSP2) is shown inTable 2. Number of SOEs 36 Number o f laid off workers 14,805 Job-loss compensation payments made Euro 133.35 million 2 Number of SOEs 21 NumberofWorkers laid off or to belaidoff 29,000 (a) Severance Payments Euro 356.06 million (b) Special Job Loss Compensation Euro 57.32 million (c) Retirement Social Assistance Euro 21.11million Total JLC Payments ((a)+(b)+(c)) Euro 425.49 million The 21 SOEs which are expected to be privatized and thus financed under PSSP2 have the following characteristics: A total o f about 29,000 employees are expected to be affected, representing about 27,200 workers (Le., unionized employees), and some 1,800 civil servants, based on an assumption that almost all the enterprises will be sold. It i s possible that some will not be sold, and that they will have to be liquidated, which would raise the number o f employees whose redundancymaybe financedby the loan. Classifiedby industrialsector, the number o f employees affected i s as follows: Petroleum and petrochemical (5%), agri-business (40%), services including electricity distribution and the telephone company (3 l%),manufacturing and extractive (4%), and light heavy manufacturing(11%). Forty one percent o f the employees anticipated to be affected work for SOEs which will shed less than 25% o f their pre-privatization labor force. Most (44%) are employed by enterprises which are expected to declare between 26% and 50% o f their employees redundant. The remainder, (15%) are currently working in enterprises where the redundancy rate is expected to be between51`YOand 100%. 2. Rationale for Bank involvement The Country Assistance Strategy (CAS) recognizes the fact that sustaining Turkey's economic recovery will hinge upon vigorous reform implementation as a pre-requisite for eventual EU Accession. Structural reform priorities include restructuring and/or privatizing of SOEs. Keypriorities for the medium term include inter-alia: (i) continuingthe restructuring and privatization of SOEs to enhance competitiveness and (ii) implementing the reform process inherent in the EU "Acquis Communuataire" including making the labor market more modern and effective. The Bank has a deep dialogue and practical experience in helping the PA and Turkey inthis area andhas the chance to respond to a strong request to continue to do so. The October 2, 2003 CAS for FY04-06 identified the themes for the IBRD program: sound macroeconomics and governance, equitable human and social development, attractive business climate and knowledge, and strong environmental management and disaster mitigation. The PSSP2 contributes significantly to the first three objectives. There are economic, social, and political objectives for providing social support packages to workers displaced by restructuring and privatization o f SOEs. From an economic standpoint, 3 the objectives are to reduce excess labor costs so enterprises can increase productivity and be competitive, and to facilitate the rapid retum o f workers to productive employment, thereby reducing the duration o f state-financed income support payments. From a social standpoint,the objectives are to provide transitional income support while displaced workers are finding alternate employment and, for those who have difficulty finding employment, providing extended income support to prevent these workers and their families from slipping into poverty. From a political standpoint, social support programs are intended to build public support for restructuring by signaling to citizens, communities, and labor representatives that those responsible for restructuring are attuned to the needs o f affected workers and that they are ready and willing to assist those who need and want help. Social support programs combine elements that encourage excess labor to leave over- staffed enterprises, while at the same time helping them to rejoin the labor market quickly. These measures should include both temporary income support and labor redeployment programs. To be effective, the measures must be carefully designed and targeted. Furthermore, there must be continuing monitoring o f the social impact on displaced workers and their families to ensure that the most vulnerable do not slip into poverty, the labor redeployment services are reachingthe poorest workers, and additional assistance i s provided, as needed. Financing o f Job Loss Compensation (JLC) needs to be carefully justified in the light o f the criteria for Bankfinancing o fseverance pay (JLC under the PSSP2) discussed below. 0 Macro-economic and sector policy framework: Recent strong growth, coupled with a positive macroeconomic framework going forward as anchored in the IMF standby- facility for 2005-2007, for which the letter o f intent has been signed by the Government and IMF approval is anticipated in May 2005. The favorable macroeconomic developments will be further buttressed by proposed development policy lending support from the Bank. Thus the macro-economic conditions are likely to remain favorable and present a positive environment for privatization andthe payment o f JLC to workers made redundant through the Government's Privatization Program supported under the PSSP2. 0 Economic analysis: The experience o f the ongoing PSSP has been highly favorable in that productivity has increased in the privatized SOEs or sectors where the SOEs are operating. The major loss-making SOEs, with the exception o f Turkish Railways, have beenliquidated or restructuredpendingprivatization. The SOE sector currently makes a positive net revenue contribution, thanks largely due to Turk Telecom and Turkish Airlines. The key objective o f the Government's privatization agenda now is to enhance productivity in the remaining SOEs through selling them to the private sector and using the sales proceeds for debt management. The reduced scope o f government responsibility will enable it to focus more intensively on its core functions o f stable macro-economic policy, good governance, appropriate market regulation and effective social services provision. 0 Sustainability of reforms: The Government has established a solid track record on privatization and i s committed to completing the program over the next four years. There 4 have been no issues raised regarding the reversal o f previous privatizations. The privatization process thus i s both sustainable and effectively irreversible. 0 Adverse Selection. One o f the benefits o f only reimbursingthe PA for JLC after the enterprise has been privatized or liquidated with a six month follow-up to determine that no workers have been re-engaged in the public sector is that it virtually eliminates adverse selection. Experience has shown that the most skilled workers are either retained inor re-hiredinto the privatized enterprises, thus becoming ineligible for JLC. In-depth enterprise assessments o f SOEs which have been privatized under the ongoing PSSP demonstrate no evidence whatsoever o fproblems o f adverse selection. 0 Over-payment: The robust verification system employed under the ongoing PSSP ensures that there is no over-payment o f JLC. Indeed this i s one o f the significant elements o f value-added o f Bank involvement in this process. The same robust system will be continued under the PSSP2 and the Bank closely verifies the eligibility o f all workers receivingJLC financed under the loan. 0 MoralHazard: Most o f the SOEs beingprivatized have hadhiringfreezes ineffect for a significant period o f time, thus no workers are being attracted in by the prospect o f receiving JLC. For most workers, JLC represents financial support for a limitedperiod o f time to help them adjust to new labor market opportunities and thus does not act as a strong incentive to leave the labor market. Although workers in their 50s often opt for retirement, or early retirement, follow-up qualitative studies show that many re-enter the labor market (formally or informally) or set up small businesses. 0 Legal aspects and political economy considerations: There is a solid legal foundation for privatization as discussed in Annex 1. The JLC and Labor Redeployment Services (LRS), as financed under the PSSP, have averted any political economy problems arising from redundancies under the privatization program. Labor unions are represented on the Tripartite Advisory Committee (TAC), and have come to see privatization as at least securing the long-term future o f some workers inmore productive enterprises. 0 Social Impact: The raison d 'etre o f the PSSP2 is to offset the negative social impact o f redundancies arising from the privatization process both through JLC and LRS. The social monitoring o f redundancies under the PSSP has shown that a combination o f pre- lay-off counseling, the availability and careful targeting of LRS, and JLC have significantly reduced the negative social impact o f privatization. The evaluation studies show that workers concerns are highest in the pre-lay-off period where there i s major uncertainty. Workers, even those laid-off, are much happier after the privatization as either (i) obtain employment ina more secure enterprise -no longer subject to major they uncertainty or (ii) theyreceive JLC andaccessto LRS. 3. Higher level objectivesto which the projectcontributes EU Accession and Competitiveness: The primary focus o f the proposed PSSP2 is to increase productivity o f former SOEs by facilitating shedding o f excess labor, and to cushion the 5 social impact o f labor displacement during privatization and economic reform. Enhancing the competitiveness o f the Turkish economy i s a pre-requisite for possible eventual EU accession. There is a need to ensure that there i s a social support program that is directly linked to, and will support the implementation o f the privatizationprogram. Turkey's social support systemwill be stressed by the layoffs o f personnel expected in SOEs under the portfolio at the PA, and to a lesser degree inthe electricity and telecommunications sectors. The proposed project would buttress the privatization strategy through mitigating the social costs of privatization, thereby also enhancing the social acceptability o f privatization. The current government i s stable politically, and committed to privatization o f SOEs to enhance economic competitiveness, reduce the fiscal burden o f SOEs, and concentrate the state on its core public administration role. Current strong economic growth facilitates this process through the creation o f alternative employment and providing a more attractive environment for the sale o f SOEs. The December 17, 2004 decision to open negotiations with Turkey on EU Accession in October 2005 should further enhance the attractiveness of to foreign investors of strategic SOEs being privatized. Privatization Program: The proposed PSSP2 supports the implementation o f the Government's privatization agenda. The Govemment is restoring the momentum o f Turkey's privatization program. Accelerating privatization is a key supply-side element in the effort to maintain strong growth. A new privatization program, which includes major companies of national importance, has been approved, and the Government indicates that this will be implemented with great vigor over the period 2006-2009. The Government has a robust privatization program, to be supported under the PSSP2. The Privatization Administration (PA) i s making progress inimplementing its program. Reducingthe Social Costs of EconomicReform: The continuing privatizationprogram i s expected to have long term positive impacts on people's lives. However, some groups in the society will face temporary difficulties as a result o f the economic reforms and the privatization o f SOEs. B. PROJECTDESCRIPTION 1. Lendinginstrument A Sector Investment Loan has been selected as the most appropriate means o fcontinuing the support of the Bank to both the financing o f the JLC and ensuring continued high technical quality and cost-effectiveness in the LRS. PSSP2 is thus a repeater project o f the successful PSSP. The loan proceeds will be on-lent by the Treasury to the PA under arrangements acceptable to the Bank. 2. Projectdevelopmentobjectiveand key indicators The development objective o f the proposed PSSP2 is to support the Government's privatization program through mitigating the negative social and economic impact o f the privatization o f SOEs. The objective o f the privatization program i s to enhance the efficiency 6 and competitiveness o f the Turkish economy and thereby help inmeeting the market demands of EUaccession. The PSSP2 will achieve this through three closely related components, namely: (i) JLC to assist workers made redundant as a result o f the privatization process; (ii)LRS to help affected workers find alternative employment; and (iii) Management, Monitoring and Evaluation (MME) to ensure effective implementation and assess the social impact o fprivatization. Key performance indicators are: (a) Job Loss Compensation(JLC): The productivity o f elements o f the industrial sector, comprising about 21 former SOEs, improves as a result o f labor shedding, workers displaced from SOEs. Workers receive severance payments, and poverty i s mitigated as indicatedthrough results o f social impact assessments. (b) Labor RedeploymentServices (LRS): LRS are delivered to bothworkers made redundant directly from within the SOEs and to workers suffering unemployment from the secondary employment effects. Job placement rates are equal to or better than similar programs inTurkey and the region. (c) Management, Monitoring and Evaluation (MME): The Government: evaluates the impact o f the privatization program and labor redeployment services, identifies policy alternatives. Evaluation studies are undertaken and project objectives are achieved, disbursements are on schedule, and annual project audits are satisfactory. 3. Projectcomponents The PSSP2 has three components reflecting the key components o f the present PSSP which is due to close on December 31,2005. The primary implementing agency i s the PA for all components, althoughpartner agencies are also identified below. (a) Job Loss Compensation: The objective o f this component is to ameliorate the temporary negative social and economic impact on workers displaced during privatization o f SOEs. This component will finance severance and related payments, as regulated by law, to workers displaced byjob loss due to the privatization o f SOEs. It i s expected that a total o f 29,000 workers will receive these benefits at a total cost o f Euro 420 million. The triggers for disbursement are as follows: (i) full privatization, at the conclusion o f the sale agreement; (ii) privatization through stock sales, with at partial least 51% o f the enterprise in the private sector, formal ordinance to that effect from the Privatization High Council; and (iii) liquidation, formal ordinance to that effect from the Privatization High Council. Very limited local technical assistance (TA) will be used to assist in the implementation o f JLC. Highly successful rigorous tracking and payment verification systems are in place within the PA, and will be continued under the PSSP2. These are explained inmore detail inAnnexes 4 and 8. 7 The ongoing PSSP, which was approved by the Bank's Board on December 21, 2000, included financing o f severance payments (JLC). These JLC consist o f three elements, namely Severance Payments, Special Job Loss Compensation, and Retirement Social Assistance. Inthe case o f the first PSSP these JLC amounted to US$203 million within the total loan amount o fUS$250 million. The PSSP2 will continue financing JLC under exactly the same parameters as the ongoing PSSP. A key feature o f the proposed operation i s that disbursement of the Bank Loan for JLC would be made only at the point of sale or liquidation of the enterprise. Since January 2003, some 19,500 workers have been laid off in 21 SOEs yet to be privatized, with the PA financing the severance payments from its own resources. The privatization o f these enterprises i s expected to take place during the life o f this operation and reimbursement o f expenditures for severance payments will be made as privatization proceeds. This means that disbursements for JLC classified as "retroactive" will in fact become eligible expenditures and reimbursed from the Loan proceeds during the entire implementation period of the Project from July 1, 2005 to June 30, 2009, unlike in other instances o f retroactive financing when the funds become available for disbursement at loan effectiveness. However, the majority o f such "retroactive" payments should take place during the first 18 months o f implementation o f the PSSP2. Thus a significant portion, 62 percent or Euro 210 million, o f the JLC (severance payments) will be paid retroactively going back to January 1,2003, at the point o fprivatization or liquidation. (b) Labor Redeployment Services: The objective of this component i s to provide labor redeployment services to workers who have been displaced by the privatization o f SOEs, including secondary layoffs, to assist them inrapidlyre-enteringthe labor market. The component will finance a variety o f LRS, includingjob counseling and placement services, retraining, and temporary community employment (managed by the Turkish Employment Organization - ISKUR), and small business assistance services, and small business incubators (managed by the Small and Medium Industry Development Agency (KOSGEB). LRS will be delivered to about 11,000 workers displaced in21 SOEs being privatized and those being affected by secondary unemployment through sub-contractors to ISKUR and KOSGEB. Small amounts of TA (including consultants and training and goods) will be provided to ISKUR and KOSGEB to assist in program implementation and buildup their capacity. (c) Management, Monitoring and Evaluation: The objective o f this component is to monitor the impact of LRS and manage the PSSP2 effectively as a whole. The component will finance: (i) surveys to evaluate the effectiveness o f the LRS inmitigating the social costs o f labor redundancies resulting from employment and privatization on selected communities; and (ii) undertake in-depth socio-economic analyses o f specific communities where privatization has taken place. The component will also finance limited TA and minor goods to: (i) coordinate project execution, and manage the resources o f the project; (ii)procure all Bank-financed goods and services for implementing agencies; (iii) operate the financial management system (FMS) according to the Bank's financial management requirements; (iv) act as liaison between the implementing agencies and the World Bank; (v) ensure that annual 8 audits are completed in keeping with Bank standards, and (vi) manage the MME studies with the technical support of the Directorate General of Economic Research (EKA) in Treasury. PSSP2 Project Costs Project Cost By Component Local Foreign Total Euro million Euromillion Euro million 1. JLC 420.1 0.0 420.1 2. LRS 21.1 6.1 27.2 3. MME (a) Monitoring and Evaluation 0.2 0.2 0.4 (b) Project Management 0.4 0.1 0.5 Total Project Costs 441.8 6.4 448.2 Front-end Fee 0.0 1.8 1.8 Total Financing Required 441.8 8.2 450.0 Allocation of Loan Proceeds Category Amount of the Loan YOof Expendituresto Allocated be Financed (1)JLC 338,000,000 81% (2) L R S 14,000,000 100% (3) Goods 400,000 100% (4) Consultants Services and Training 3,700,000 100% (5) Front EndFee (0.5%) 1,800,000 Amount due under Section 2.04 of the LoanAgreement (6) Unallocated 2,100,000 ~ TOTAL 360,000,000 9 4. Lessonslearnedand reflectedin the projectdesign The PSSP2 will be the Bank's fifth engagement inthe social protection sector in Turkey since the early 1990s. The previous Employment and Training Project (ETP) in 1993, PIAL in 1994 were investment and reform oriented projects designed to strengthen the delivery o f labor services and strengthen institutional capacity and also set the stage for the Government to downsize the SOE sector inthe longer-term. Whereas, the PSSP in2000 and the SRMP in2001 were designed to support the Government's effort to disengage from production activities and thus foster the continuing development o f the private sector, reduce the socio-economic impact o f privatization, and to mitigate the negative impact o f economic instability on poor households respectively. The Bank's past experience inthe social protection sector inTurkey, is rather checkered, with past macro-economic instability, uncertain political environment and limited absorptive capacity being the main reasons behind less than optimal project implementation. However, the presence o f a single party government with its large parliamentary majority may ease some of the problems that have been encountered in the past and thus expedite privatization. In fact the Government has announced bold and politically difficult measures to reduce public expenditures and raise revenues, and to improve overall efficiency. To help achieve the underlyingobjectives o f improved efficiency and sustained fiscal contraction, the Government is committed to accelerating the pace o f privatization. In this regard, the payments anticipated under the proposed project combine the severance payment as well as job loss compensation. It is anticipated that severance payment will be paid on lump sum basis, whereas, job loss compensation will be paid on a monthly basis. The duration o f JLC will vary according to the employment history o fthe beneficiary. With regardto labor redeployment services, there havebeenmany experiences inTurkey, both under the ETP, PIAL and PSSP. Experience in Turkey, and other countries indicates that these services are normally utilized by a small percentage and are relatively low cost as compared with income support payments. The main lessons leamt are: (i) Programs should be carefully designed and targeted to maximize optimum utility. For instance, temporary community employment programs should be carried out by private sector or NGOs, as an altemative to public agencies. This approach will improvejob placement and employment; and (ii) LRS should be sub-contracted on a competitive basis to local service providers, which will deliver services on performance contract basis. These contracts should include, pre-negotiated job placement rates, as appropriate with related financial incentives and payments should be made on agreed unit cost per trainee, and services should be made available for directly laid off workers, in addition to secondary lay offs. Monitoring will be carried out on displaced workers, so as to find out the socio- 10 economic impact o f privatization. Such monitoring has already been conducted in Turkey. 5. Alternatives considered and reasons for rejection Several alternative lendinginstrumentswere considered: (a) Supplemental Loan to the Ongoing PSSP: This was rejected as (i) required loan the amount was much larger than the original PSSP and (ii) there was a need to update the PSSP2 inline with revised Bank procedures and financing parameters. (b) Technical Assistance Loan: This was rejected as TA needs are relatively small compared to the large financial needs o fthe JLC and LRS. (c) Sector Wide Approach (SWAp): Inreality, the PSSP2 has many elements o f a SWAp, but presenting it formally as a SWAP would have caused delays in the very fast processing schedule; in addition, the country procurement system assessment and baseline indicators to apply country procurement procedures have not yet been initiated for Turkey. With regard to design and financing o f specific social support programs, it is recognized that Government resources are stretched. Several options have been considered by the Bank for social support, including: (a) targeting all social support resources to one activity (e.g., temporary income support or labor redeployment), although experience shows that a combined approach is much better; (b) looking for alternative resources from other bilateral or multilateral donors, but none has expressed interest in providing resources o f the nature proposed for the PSSP2; and (c) targeting the use o f available resources to specifically identified groups to maximize impact. Faced with fiscal restraints and broad program choices, the proposed operation will primarily finance two activities: (a) JLC payments to support privatization and labor shedding, by providing temporary income support (severance payments), and (b) LRS to provide labor services to assist displaced workers to returnrapidly to the labor market. With regard to the PSSP2JLCpayments, six alternatives were considered, o fwhich only three (*) are supported by the proposedPSSP2. 0 Unemployment Benefits: These payments cannot be financed by Bank investment projects. However, Turkey does have an emergency unemployment benefit which became effective in June 2000, and payments began for qualifying workers in March 2002. The fund i s financed by a 4% insurance premium paid by the state, government and employee, and benefits are 50% o f the average o f the last four months salary and for a maximumo f ten months. 0 Social Assistance: Social assistance payments act as a safety-net for those who do not qualify for, or who have exhausted, regular unemployment benefits. Social assistance payments are often means-tested, or are based on combined indicator targeting (proxy means-testing), are household based, and are linked to poverty lines. Turkey does not have an adequate social assistance system. However, instituting a poverty benefit is a 11 complex task. This i s being supported under the Social Risk Mitigation Project, approved by the Board on September 13,2001. 0 Individual Pension Accounts: These payments amount to a contribution defined pension or unemployment benefit system where each worker deposits a portion o f hidher salary inan interest bearing account, and inthe case o fjob loss or voluntary separation, he/she can withdraw fi-om the account. Such systems, which are sometimes found in Latin America, support labor mobility, and make workers directly aware o f the consequences o f poor job performance, but may not compensate workers adequately when job loss i s beyond their control. Turkey does not have such a system and the PSSP2 does not support suchpayments. 0 * Regular Severance: Turkey has had a system for some time whereby a worker gets one month o f severance pay for each year in service if he or she is displaced during privatization or retires. This becomes a liability o f the PA. The proposed PSSP2 will finance these payments to workers laid o f fby SOEprivatization. 0 * Special JLC: These payments are in addition to regular severance pay, and are designed to encourage workers to leave overstaffed SOEs. Payments range up to 8 months, depending on conditions and length o f service, and payments should bepaid on a lump sum basis to encourage investment and not consumption. Payments normally decline in size over time to increase initial impact. Turkey has used this instrument inthe past to support job loss compensation during privatization. It i s called the "Job Loss Compensation Payment", i s definedin the Privatization Law Number 4046, and provides up to eight months o fsalary payments based on years o f service. However, the payments were not made in a lump sum in the past, which discouraged investment and had the effect o f delaying worker re-entry to the workforce, since payments were stopped if a worker took employment. The proposedPSSP2 will finance these payments. 0 * Early Retirement: This instrument can have a negative effect on an already indebted social security system. Turkey i s inthe midst o f reforming the pension system to reduce options for early retirement and to increase the pension age. It should be noted that this option may also become more expensive than lump sum ifit is extended to many people, and as such should only be applied to workers very near retirement. An alternative is to provide "social assistancepayments" to workers who are near voluntary retirement age to encourage them to take retirement, as opposed to remaining in SOEs. Turkey has this program available for civil servants. The proposed PSSP2 will finance eligible workers and civil servants to help ensure that they leave the civil service when eligible and not just transfer to other SOEs or other government service. C. IMPLEMENTATION 1. Institutionalandimplementationarrangements The signatory to the Loan Agreement will be the Undersecretariat o f the Treasury. The primary implementing agency will be the PA under the Prime Minister's Office. Technical 12 implementation of the JLC and LRS components of the project will be managed by a technical Labor Adjustment Group (LAG) within the PA. EKA within Treasury will assist the P A in undertaking the program of evaluations and assessments under the MME component. Administrativeoperations will behandledby the existingPSSP Project Coordination Unit (PCU) with Financial and Procurement/Reporting functions within the PA. The LAG and PCU Departments will be headed by civil servants. The Financial Department Head at the PCU, who will serve as Coordinator of the PCU, will be the primary point of liaison with the Bank. The following summarizes implementation for each separate component. The legal structures o f the Privatization Administration (PA) and the privatization fund have been re-established with the Law No. 4046 enacted on 27 November 1994. The PA's duties, responsibilities, and rights, and the fund's resources and utilization fields o f such fund are determinedinthe provisions o f the related law and PA is designated to manage the privatization fund. According to the Article No.9 o f Law No. 4046, all proceeds obtained from the privatization process and all dividends obtained from the organizations transferred to the Administration as well as proceeds obtained from the sales o f securities and other negotiable instrumentsand documentation, income obtained from the funding suppliedto the organizations transferred to the Administration, and other resources andearnings allocatedby other legislation, are credited to the Privatization fund. With the amendments made to Law No. 4046 with Law No. 4971, the decision authority on PA's rights, receivables and liabilities is given to the Privatization HighCouncil (Article 3). According to Article 7 o f Law No. 4749, the Undersecreteriat o f Treasury may transfer the foreign financing facilities obtained from foreign financing sources to public institutions and organizations outside the context o f general and annexed budget and investment and developmentbanks through an on-lendingarrangement. Incase of on-lending o f foreign debt, an on-lending fee o f 0.5% is charged to the related institution. As PA is outside the context o f general and annex budgetthe proceeds of the PSSP2 loan is provided to PA through a subsidiary loan agreement. Law No: 4046 and Law No: 4971 do not have any provisions restricting the borrowing authority o fPA. JLC: The PA will identify SOEs qualifying for Bank financing o f JLC based on Investment Criteria agreed with the Bank (see Annex 6), and will notify the Bank concerning the name o f the enterprise and the number o f qualifying workers prior to making an application to the Bank for severance payments. The PA will verify that the SOEs involved meet the agreed criteria, and that agreed procedures have been followed in calculating the payments (additions and subtractions to the initially agreed list o f 21 SOEs are to be agreed with the Bank). LRS: This component will be coordinated by the LAG within the PA, in close cooperation with ISKUR and KOSGEB. The LAG will be responsible for: (i) developing and maintaining the administrative framework for the LRS; (ii) taking the lead role, in cooperation with representatives from two lead agencies, unions, SOE management, and community leaders to organize in-plant pre-layoff labor redeployment assessment and planning sessions for workers; 13 and (iii)providing ongoing monitoring of the delivery of labor redeployment services being administered by the two lead agencies. Actual delivery o f LRS i s to be contracted to local services providers in keeping with the Project Operational Manuel (POM) and LRS Field Operational Manual (FOM) as agreed with the Bank. Service Providers will invoice the local ISKURor KOSGEB office for services provided based on agreed contract. If Service Providers desire a mobilization payment they will provide an Advance Letter of Guarantee. ISKUR and KOSGEB local offices forward invoices on a monthly basis, or as needed, to the ISKUR and KOSGEB head office in Ankara. KOSGEB and ISKUR head offices review and forward invoices to the PNLAG Coordinator. The PNLAG Coordinator reviews and forwards invoices to the P N P C U for payment. The PA/PCU arranges payments to KOSGEB and ISKURHead Office accounts from the Special Account. The PCU will then prepare a Statement o f Expenditure and submit it to the World Bank for replenishment o f the Special Account as needed (replenishment will be at 100% o f the total amount o f LRS paidas defined inthe LoanAgreement). MME: The studies underthis component willbemanagedbythe EKAat Treasury. TA to implement the studies will be procuredfrom independent firms and/or consultants by the EKA at Treasury, with procurement support from the PCU. 2. Monitoring and evaluation of outcomes/results There will be three main inputs into the monitoring and evaluation of the PSSP2: 0 Management Information System (MIS): The PA has an ongoing M I S to track the results and costs o f the JLC and LRS programs. This was developed under the ongoing PSSP and will be continued and strengthened under the PSSP2. 0 Evaluation Studies: Under the MME component, three targeted cost-effectiveness evaluations on specific activities supported under the LRS components. The intention is that these would provide timely inputs on impact and cost-effectiveness so as to improvethese programs over time. Inaddition there will be in-depthsocio-economic analyses o f areas deeply affected by redundancies resulting from the privatization program, which will also aim to suggest local economic development strategies. 0 Bank Supervision and Mid-term Review: Regular Bank supervision missions will focus on monitoring and evaluation, particularly related to the results framework presented inAnnex 3. Inaddition, there will be a Mid-tenn Review o f the project to beheldbyJune 30,2007 whichwill undertake a full review o fthe PSSP2. 3. Sustainability The JLC and LRS components of the PSSP2 are not intended to be sustained over time, as they are one-time severance payments and LRS are intended to facilitate privatization o f SOEs. However, experience gained during operation o f these programs can assist the government to design and implement additional downstream SOE privatization and civil service reform programs. The LRS program i s modeled after experience gained in the ongoing PSSP, and similar programs inthe Eastern Europe, the EUandthe OECD, andwill provide institutional 14 experience which can be useful for strengthening similar programs for general unemployed after the PSSP2 is completed. Participation o f the PA, KOSGEB and ISKURinthe evaluation studies under the MME component is designed to enhance their long-term analytical and evaluation capacity. 4. Critical risks and possible controversial aspects There are four main types o frisk as follows: Risk Risk RiskMinimization Measure Rating Macroeconomic - If Turkey should M The Government has a sound macroeconomic policy experience another economic crisis, anchored in an IMF supported program to be signed in this would underminethe capacity for M a y 2005, and a structural reform program, supported by the P A to privatize SOEs readily and the PFPSAL I11 and the proposed PPDPL. Moreover also make the labor market much less Government commitment to EU accession acts as a strong effective for any displaced workers. anchor for economic policy. Economic growth has been impressive since 2002 and continues to be so in2005, Political - There are risks that the M The current government i s politically stable and enjoys a privatization program may move strong majority in the Parliament. The PSSP2 itself will ahead much slower than planned if mitigate and defuse social discontent amongst affected the Government falters in its political workers. commitment or comes under intense criticism from social partners such as the trade unions. Stakeholder Involvement - The M The PSSP2 will facilitate dialogue amongst social social partners, trade unions, partners, including them in the Tripartite Advisory employers, the public opinion and Committee (TAC) and financing public information media must be involved in the whole activities as needed. The PA has done a goodjob to date privatization process so that there is a in communicating with stakeholders on privatization deep understanding o f the benefits policy and allaying the fears o f workers. thereof. There is as risk that this mightfail and generate discontent. Institutional Coordination There i s - N The PCU in the PA has been remarkably adept at handline always the risk o f a lack o f effective this so far. Project protocolshave been signed betweenthc institutional coordination. PA and all implementingagencies. Overall RiskRating M The PSSP2 itself i s designedto mitigate some o f the main risks to the Government inthe privatization process. However, privatization can sometimes be controversial amongst the public inTurkey, althoughpublic opinion has ameliorated. The PA and the Government have become more adept at the whole process. 5. Loadcredit conditions and covenants By Board Presentation: None. 15 By Effectiveness: 0 Subsidiary Loan Agreement has been signed between the Undersecretariat of Treasury and the PA as agreed with the Bank and related legal opinions have beenreceivedby the Bank. Other: 0 Disbursements under the JLC and LRS are restrictedto operations meetingcriteria agreed with the Bank as defined in the POM and replacements or addition to the list o f agreed SOEs will be subject to Bank review and agreement prior to disbursement under the JLC component. 0 The Borrower shall, through the PA, ensure the effective implementation of its Privatization Program, including: (a) due diligence process, including fair and transparent market-based SOE tendering procedures, and (b) implementation o f the sale agreement of an SOEbetween the Government and investor. D. APPRAISAL SUMMARY 1. Economic and financial analyses The privatization program i s expected to have a positive impact on people's lives, but there will be some areas o f increased difficulty. One o f the main groups negatively affected by the reforms will be workers laid-off from privatization o f SOEs. Successful privatization in Turkey requires effective programs to ease the social costs o f large-scale layoffs. A review o f twelve case studies o f enterprise divestiture in Europe, Latin America, and Asia indicated that workers, as a whole, did not lose by divestiture, but that individual workers could be worse off, especially when layoffs or reduced hiringwere involved, as they will be in Turkey. The current retention o f excess labor lowers labor productivity, increases enterprise losses, impedes enterprise restructuring, delays the potential reallocation o f labor to productive alternative employment, and consumes state budget resources in the form o f direct or indirect subsidies. The total cost o f these subsidies, includingongoing salary payments, can exceed by a significant margin the one time cost o f JLS and LRS. JLC: The proposed PSSP2 is directly linkedwith the Government o f Turkey's overall economic reform program which will structurally transform the Turkish economy by reducing state involvement and advancing market reforms. Many SOEs are characterized by low productivity-low output per worker. The PSSP2 will continue to help improve the productivity of certain segments o f the Turkish industrial sector (in accordance with Bank Operational Memorandum (OP 6.00) on Financing Severance Pay in Public Enterprises Reform Operations, with memo updated February 7, 2005). The following criteria must be met prior to the investment o f severance being made: (a) that the payment o f severance results in a positive rate o f return(within a four year period) for a specific SOE or sector. This i s to say, the reduction in the number o f employees must result in a decrease in overall operating costs without a corresponding loss in production; (b) that the investment is in accordance with Turkey's 16 industrial strategy; and (c) that the investment will lead to an overall increase in either production, profits or exports. To gain a complete understanding o f post-privatization productivity gains, it is important to keep inmindthat many SOEs are losing significant amounts o f money. These losses are a drain on the economy as shown inthe public sector deficits. The result is higher inflation and higher interest rates, and in general, less private sector investment than there would be otherwise (crowding out). Less investment means a reduced growth in productivity. LRS: The basic economic rationale is that moving workers, via labor redeployment programs, from jobs where they are not productive and receive public subsidies to jobs where they are productive and do not receive public subsidies reduces public budget outlays and increases GDP. At the same time, GDP will increase to the extent that the jobs filled by redeployed workers are new jobs or higher productivity jobs than participants held previously. The sub-component finances specific services to: (a) improve labor mobility and address frictional unemployment; (b) enhance and change human capital, via retraining, to address structural unemployment and improve productivity; and (c) address the lack of demand for labor, including support to individuals to help them start and maintain micro and small businesses, and to communities to implement temporary community employment schemes. The Project provides for monitoring o f the status o f program participants relative to their post- program employment status, earnings, and receipt o f continued public income support payments. Specialized counseling, re-qualification training, and improvedjob placement services have been found to raise productivity by bringing about more efficient matching o fjob seekers and the skill requirements o f existingjobs. It i s anticipated that the gross impact o f the services will equal or exceed those found in the study: "Evaluating the Impact of Active Labor Programs: Results of Cross Country Studies in Europe and Central Asia" (World Bank Discussion Paper, June I999), and that post-program employment will be a minimum o f 10% after receipt o f employment services, an average o f 60% for participants inretraining programs, 20% for vocational training for those who wants to start their own business, 10% o f employment in temporary community employment programs, 10% o f those who make initial contact for assistance in starting small businesses will actually start businesses, and 90% o f those entering business incubators will continue to operate a small business at the end o f one year. 2. Financial The proposed loan o f Euro 360 million will cover 80% o f total project costs. The majority o f the Government contribution i s contained in the 19% co-financing requiredfor JLC compensation, the rest inpre lay-offjob counseling services provided by ISKUR. Financing for the JLC makes up 93.8% o f total project costs, LRS 6.0%, and the MME the remaining 0.2%. Additional co-financing is not anticipated. The project is expected to be completed and disbursedin four years. The PA has beenjudged to be a credit-worthy institution fully capable of repaying the on-lent funds under the PSSP2 to the Undersecretariat o f the Treasury. Fiscal Impact: The PSSP2 will have a large positive net fiscal benefit by supporting implementation o f the Government's privatization program which is a cornerstone of its disinflation strategy. The program i s targeted to generate significant privatization revenues in 2005 and a cumulative total of at least US$S billion over the 2005-2007 period (including telecommunications and energy). The Government intends to earmark the majority o f the 17 privatization revenues generated to pay down the stock o f public debt, in particular short-term debt (i.e., domestic government securities), which have highrates o f interest. The PA's privatization agenda is directly supported by the PSSP2. By helpingto ensure that the PA can deliver its full program, the expected fiscal benefit o f the PSSP2 will greatly surpass the level o f resources made available under the World Bank loan. 3. Technical The proposed PSSP2 builds on the ongoing PSSP inTurkey and successful experience in similar operations in neighboring countries (Macedonia Privatization Social Support Project, Romania Employment and Social Protection Project, Romania Social Sector Development Project, Poland Hard Coal Restructuring) and the costs and lessons learned in the previously mentioned Turkey PIAL and ETP projects. The two major components o f the project, JLC and LRS, have multiple internal categories o f expenditure that allow a flexible response to demand within the two funds, and if needed, adjustments can be made to change allocations between funds based on demand. Cost estimates for the two major components, JLC and LRS, are based on analysis o f displacement o f workers from individual SOEs, and actual costs o f these programs in the ongoing PSSP. These estimates have been carefully reviewed and agreed between the Government andthe Bank. 4. Fiduciary The task team in March 2005 conducted an assessment o f the adequacy o f the project financial management system at the PCU in the PA. The current financial management arrangements for the project are satisfactory to the Bank. There will be one special account for the project at the Central Bank o f Turkey and disbursements will be based on traditional disbursement methods. All payments to the contractors (except for LRS), suppliers and consultants will be made from the special account with the authorization o f the Vice President or the Project Coordinator o f the PCU. Payment orders will be preparedby the Financial Management sub unit o f the PCU upon receipt o f approval from the LAG within PA. LAG is a group formed o f designated individuals from implementing entities and they are responsible for the management o f the technical implementation o f JLC and LRS components. The LAG at PA will prepare reports for the PCUbased on information submittedto LAGby implementingagencies on the categories o f payments made under the JLC component o f the PSSP. Funds for JLC payments made will be transferred to PA's designated project bank account after verification of severance pay calculations by P A and receipt o f no objection from the Bank. The responsibility o f verifyingthe severance pay calculations lies with the committee established by PA, which will provide a certification before the release o f funds from the World Bank. A procurement assessment was carried out inApril 2005 and is summarized inAnnex 8. Procurement risks were rated as low. The PSSP2 will benefit from havinga soundly functioning 18 PCU which is overseeing the implementation o f the ongoing PSSP. Fiduciaryrisks are rated as low. 5. Social The general rationale and social objectives focus on mitigating the short term negative impact o f privatization of SOEs. The first issue i s to ensure that eligible displaced workers get the needed assistance, includingtemporary income support and labor services to help ensure that: (a) they do not fall into poverty, and (b) they rapidly rejoin the labor force. Detailed procedures have been defined and agreed with the Government to ensure that JLC and LRC are received by eligible workers. There is already considerable internal experience in making these payments and operating LRS. The second issue i s to identify sectors and communities negatively affected by the privatization program, as well as individual workers and families who may be experiencing special problems inre-enteringthe workforce and coping with economic and social problems caused by SOE privatization and the economic reform program. Inorder to identify these negative outcomes, a series o f focused assessments are currently underway under PSSP, and will continue to be financedby the PSSP2. Primary beneficiaries directly involved in the PSSP2 are (a) workers displaced from SOEs beingprivatized and their families; and (b) collateral worker displacement caused infirms associated with SOEs where downsizing occurs, in particular in mono-enterprise communities, andthe general economic reform program. The views o f these workers will be assessedthrough both informal monitoring andmore formal evaluation underthe MMEcomponent. 6. Environment The ECA Environmental Unit has rated the project as "C". There are no significant environmental issues in this Project. However, in the case o f the small business incubators, the Bank, P A andKOSGEB have agreed that sound environmental and occupational health practices shall be fully integratedinto the supportprograms for small businesses. 7. Safeguard Policies Safeguard Policies Triggered by the Project Yes No ~ Environmental Assessment (OP/BP/GP 4.01) [I [XI Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, beingrevised as OP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OD 4.20, beingrevised as OP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety o fDams (OP/BP 4.37) [I [XI Projects inDisputedAreas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI * By supporting theproposed project, the Bank does not intend toprejudice thejnal determination of theparties' claims on the disputed areas 19 8. Policy Exceptions and Readiness As already discussed in Section B.3., the PSSP2 entails an exception to Bank policy in having a high level o f retroactive financing (Euro 210 million), although this is not retroactive financing in the normal sense. The PSSP2 i s a direct continuation and repeater project o f the ongoing PSSP (US$250 million, of which the entire amount has been committed, and will be disbursed by December 31, 2005, the closing date) and uses the same reimbursement mechanisms used in the ongoing PSSP. No further funds are available under PSSP for further JLC or severance, hence the need for PSSP2. The ongoing PSSP (Board date December 21, 2000; effectiveness date December 22, 2000) did include provision for retroactive financing in the amount o f US$24 million, overwhelmingly for JLC to cover the period between July 1, 2000 and effectiveness and which then became the benchmark starting date for the PSSP privatization program. The reason for the much larger retroactive payment provisions under the PSSP2 i s that the privatization program, begununder the ongoing PSSP, has been successful and has been expanded by the government to add additional SOEs being prepared for privatization or liquidation under the same criteria applied under the ongoing PSSP1. Under the program the reimbursement o f the JLC only happens once the trigger (sale o f at least 51% ownership to the private sector or in the case o f liquidation, liquidation ordinance by the Privatization HighBoard) i s reached. Once reached (as was the case under the ongoing PSSP and would be the case under PSSP2) the reimbursement covers the costs o f layoffs made prior to the trigger point to make the privatizing entity more attractive for privatization. Inthe case o f the ongoing PSSP this related to layoffs runningback to the beginningo f the program in2000, even ifthe privatization occurred in2000-2005. Inthe case o f PSSP2, the reimbursement would be made only after the same trigger point had been reached during the life o f PSSP2 relating to layoffs runningback to January 1, 2003. Thus over the period January 1, 2003 to December 31, 2004, for those 21 state-owned enterprises to be privatized or liquidated over the lifetime o f the PSSP2, some 19,619 workers have been laid-off with total JLC paid by the PA o f US$348.3 million (at the appraisal exchange rate, and with the proposed Bank disbursement at 81% this amounts to the Euro 210 million provided for in retroactive financing under the loan). Among these layoffs, only those where the privatization trigger point is reached under PSSP2 would be eligible for reimbursement, which could occur from effectiveness until the PSSP2 closing date o f June 30, 2009. It should be emphasized that this is not retroactive financing in the normal sense in that on effectiveness o f PSSP2, only a small amount, ifany, will be disbursedon effectiveness o f the loan for layoffs occurring prior to the effective date. Instead, as was the case o f the ongoing PSSP, the reimbursement only occurs ifandwhenanentityreaches theprivatizationtriggerpoint duringthe life ofPSSP2. The PSSP2 will use exactly the same triggers for the actual reimbursements o f JLC as the ongoing PSSP. Experience has shown these to be very effective as there (i) is a robust verification and checking system inplace, including tracking to ensure that such workers are not overpaid or re-engaged in the public sector and (ii) i s a strong incentive to consummate the privatization or liquidation. There have been no problems o f any kind under the ongoing PSSP, apart from a slow start in disbursements as the privatization process was affected by the 20 economic crisis in2001 followed by a period o f political uncertainty culminating inthe elections inNovember 3,2002. Payment of severance under the JLC component i s consistent with the Bank's policies on Bank Financing OP 6.00 and meets the eight-point test as discussed inSection A.2. Exactly the same procedures and rigorous verification will be applied as inthe ongoing PSSP (see Annexes 4 and 8). Experience under the PSSP has been excellent as there is a strong tracking system in place to ensure that only qualified, and truly redundant workers receive JLC. Project Readiness: Procedures for operation of the JLC and the LRS are already functioning fully under the PSSP and are contained in the updated POM and FOM agreed with the Bank. Terms o f Reference for TA are already drafted. Terms o f Reference for the evaluation studies and assessments have been drafted and will be further developed as needed during the course of project implementation. Project protocols, satisfactory to the Bank, have been signed between the P A and ISKUR, KOSGEB and EKA. The FMS on the PCU is fully functional. 21 Annex 1:Social Support in the Context of Privatization TURKEY: Privatization Social Support Project 2 Job Loss Compensation (JLC) Issues: Job loss income support programs that support economic restructuring normally combine the types o f programs that are available to the general unemployed, along with special programs that are designed to encourage excess labor to leave enterprises undergoing privatization, and provide temporary income support to these workers as they make the transition to alternate employment. While each situation i s unique, there are a range o f program choices. The final design depends on such factors as: general economic conditions, the general level o f unemployment, the demographics o f the workforce, the conditions o f remuneration o f the affected workers, the relationship between representatives o f labor, the state, and enterprise management, and the role o f the enterprise inthe country and community. Isolatedcommunities, where one employer dominates, are a particular problem. Income support programs can be quite costly in the short-run (e.g., in excess o f an average o f Euro 10,000 per worker); however, costs can be reduced significantly ifdisplaced workers are able to find alternative employment rapidly. Additionally, making one-time severance payments to workers to encourage them to leave an enterprise i s often less costly thancontinuing to employ them inloss-making enterprises. The alternatives for income support can include programs such as unemployment benefits, social assistance, individual pension accounts, regular severance, special job loss compensation, early retirement, and share distribution. The proposed PSSP2 will focus on regular severance, special JLC and retirement social assistance. 0 Regular Severance: The parameters for these payments are defined in Labor Law Number 4857 which kept in effect Article 14 o f the old labor law 1475. This article defines detailed eligibility for workers. The annual ceiling is adjusted, is currently about four times gross minimum wage, and on one month per year o f service. Workers with less than one year o f service are not eligible. 0 Special JLC: The parameters for these payments are defined in the Privatization Law Number 4046, Articles 21 and 22. Payments to workers may be made for up to eight months depending on length o f service, and are based on net daily pay o fthe employee as calculated inArticles 77 and 78, inthe Social Security Law Number 506. 0 Social Assistance (Civil Servants): The parameters for these payments are defined inthe Privatization Law Number 4046, Article 24. This Law provides a 30% retirement bonus, in addition to the payment normally made to retiring civil servants, to those who are within two months o f reaching the voluntary retirement age before or at the time o f privatization, in order to induce those employees who have sufficient years o f service to qualify for retirement, to actually do so. Employees are given two months from the date o f privatization to choose this option. Regular retirement bonuses, in general, are calculated on a worker's monthly wage times the number o f years o f service. 22 Labor Redeployment Services (LRS) Issues: Labor redeployment programs are designed to help displaced workers quickly re-enter the labor force, increase overall productivity, and decrease use o f state-financed income support payments. These services support, and need to be coordinated with, income support payments. These programs can have a significant positive impact ifappropriately targeted and well-run (e.g., services are demand-driven and delivered by service providers which have performance based contracts). Experience in Turkey and other countries indicates that these services are normally used by about one-third to one-half o f displaced workers and are relatively low cost (e.g., averaging Euro 600-750 per worker) as compared with income support payments. A variety o f services are needed to address three conditions commonly experienced by displaced workers who are trying to re-enter the labor market: 0 Frictional Unemployment i s experienced by displaced workers who have marketable skills for which there i s demand, but need intensive job placement assistance. These services can have a substantial positive impact on re-employment and have a low unit cost (e.g., Euro 15-30 per worker in Turkey). These services can include assistance for remotejob search and relocation. 0 Structural Unemployment is experienced by displacedworkers who lack skills, or whose skills are not indemand, andwho need some re-training to compete and re-enter the labor market. Different types o f retraining, including on-job-training and/or institutional training, are needed inthese circumstances and can help redeployment at a moderate cost perworker (e.g., Euro 250-400 inTurkey). 0 Lack of demandfor labor is a particular problem in areas o f highunemployment and in mono-enterprise communities which shed large amounts o f labor. Programs include small business consulting assistance, incubators, and micro-loans (although the latter may not be critical ifsubstantial severance payments are provided). These programs tend to be more expensive than other services (e.g., Euro 1,200-1,500 per job created), and attract a limitednumber o fparticipants from SOEs (ie., 5-6%), but can be quite effective. Temporary Community Employment Programs are also sometimes used. Although the social and infrastructure benefits of temporary community employment are recognized, these programs must be limited and carefully targeted to the vulnerable because o f the highunit costs (e.g., Euro 2,350) and considerable evidence that theyhave no impact, and often a negative impact, on post-program employment and wages. Finally, local economic development planning grants, particularly inmono-enterprise communities, can have a positive long term impact on job creation and have already been implemented successfully inTurkey. Specific labor redeployment programs to be supported by the proposed PSSP2 have both social and economic objectives, and are generally provided for in the Privatization Law 4046, Article 21. This Article provides a menu o f demand-driven services intended to assist displaced workers to re-enter the labor market. Services have included a range o f employment creation 23 programs such as small business assistance programs (excluding micro-credit because o f the severance payments already provided for), programs which address structural unemployment including various types of retraining, and programs which address frictional employment, including specialized job placement services. Unit costs, based on current experience, average about Euro 600-750, and participation o f displaced workers ranges from 33-45%. Such programs have already been implemented under the completed Bank-financed Privatization Implementation Assistance and Social Safety Net Project (PIAL) and the ongoing PSSP. These programs are continuing with financing from the PA. Evaluations conducted in Turkey and neighboring countries indicate that the programs can have a significant positive impact on employment and wages ifthey are well-targeted and designed. Social Support Services During Privatization: There are potentially two quite different approaches to provision o f social support, and in particular, severance type income support payments: (a) let the new investor deal with the issue, or (b) have the Government assist prior to sale o f the SOE. 0 Investor Driven Layoff: This approach is one inwhich the new investor will restructure the enterprise and address related labor requirements. This assumes that the Government will sell the enterprises at a discounted price, if necessary, and let the new owners deal with the restructuring and related layoffs. This is the preferred option, as the new investor is in the best position to know the labor requirements o f the enterprise which i s being purchased. With this option, there is no Government participation in the administration and financing o f temporary income support and related labor redeployment programs. Initial analyses undertakenby the Bank, incooperation with the Government, provide an approximation o f the costs that a buyer may encounter in reworking the labor force and laying o f f excess employees in specific SOEs. With this information "in-hand", the Government has an idea o f how much the price o f the SOE would need to be discounted to compensate investors for costs o f excess labor; and the investor would have to bear the cost o f minimum regular severance payments defined in the Labor Law 4857. Currently, about one-quarter o f privatization actions are being organized as "block sales" which include excess labor and discount the sale by a related amount. 0 Government Assisted Layoff: The above approach may make some SOEs very unattractive to buyers, particularly if the enterprises have large numbers o f excess workers, and the financial and social costs of layoff are high. Buyers have other investment alternatives and may not want to get involved in laying o f f large numbers of workers in a heavily unionized environment immediately after purchasing an SOE. In addition, the basic severance option under the Labor Law 4857 may not be viewed by unions as sufficient reimbursement for layoffs, or be sufficient to encourage and compensate workers to leave SOEs at a time when alternate employment i s not easily available. The Privatization Law 4046 addresses this issue by providing a framework for additional support and labor redeployment services to SOE employees displaced by restructuring. Ifthese programs are made available before and at point o f sale, increased amounts o f labor may leave voluntarily, the SOEs will be more salable, social issues will 24 be addressed by the Government to demonstrate its support to affected citizens, and the reaction o f organized labor to the privatization program may be less negative and strident. The Government may, in fact, be able to recapture rapidly the cost o f any social support programs provided prior to sale by gaining a higher cost from the sale. The choice used inthe PSSP2, with regardto job loss compensation and layoffs, will be a blend o f the two approaches, investor-driven and government-assisted, depending on the SOE involved. The proposed project will only finance government-assisted approaches. The Bank and Government have agreed on criteria for the use o f loan funds as follows: the payment o f severance at the point o f sale will result inproductivity increases due to savings on labor costs, and these savings are envisaged to be greater than the cost o f severance payments. 25 Project Amount and closing date OEDRating Sector IssuesAddressed Outcome Impact Industrial Training 1 1 USS25.6 million Satisfactory Modest Respond to industrial need 1213111990 for skilled labor. Industrial Schools I USS34.8 million Modest Moderately Improve supply o f technical 1213111994 Satisfactory labor for export industries. 1 Non Formal Vocational USS32.6 million Satisfactory Negligible Upgrade worker skills. Training 1213111995 Industrial Training 2 US$ll3.5 million Marginally Modest Improve supply o f 1213111999 Satisfactory technicians, teachers, and tourismworkers. I Privatization US$lOO.O million Unsatisfactory Modest Privatization and social safety Implementation 0613011999 Assistance and Social net Safety Net Employment and US$67.0 million Modest Satisfactory Improve employment Training 1213112000 services and absorb unemployed into labor market. Economic Reform Loan USS759.0 million Satisfactory Substantial Economic reform including 0913012001 privatization. Privatization Social US$250.0 million S S Mitigate social costs o f support 31l12l2005 privatization. ThirdProgrammatic US$l,OOO.O million S S Reform o f fiscal system and Financial and Public financial sector. Sector Adjustment Loan 0613012005 Social Risk Mitigation US$500.0 million S S Mitigate social costs o f 0613012006 poverty and economic crises. Secondary Education US$104.0 million Reform o f secondary (to be signed) 0311512005 education curriculum. Active Labor Programs 32.0 million Strengthen ISKUR. (Funded by EU) 1213112005 26 Annex 3: Results Framework and Monitoring TURKEY: Privatization Social Support Project 2 ResultsFramework Project Outcome Indicators Use of ProjectOutcomeInformation The development objective o f the Productivity of former SOEs will Productivity and economic analysis of PSSP2 is to support the Government's increase when privatized due to individual SOEs. privatization program through reduction in labor costs. Workers mitigating the negative social and displaced during privatization receive Social impact evaluations (financed economic impact of the privatizationof temporary income support (JLC) to under the MME component). SOEs. help prevent them from falling into poverty. Workers displaced by the privatization and economic reform program receive LRS to assist them in returningto the labor force. IntermediateOutcomes IntermediateOutcome Indicators Use of IntermediateOutcome Monitoring JLC: Former SOEs have improved Productivity of elements of industrial Documentation that: (i) productivity productivity due to labor market sector, containing about 21 former will be increased in former SOEs by restructuring, and severance payments SOEs, is calculated to improve as a labor shedding, and that investment in are madeto displacedworkers. result of labor shedding during severance will result in increased Privatization. production and profits; (ii)individuals are receiving severance; (iii) social About 29,000 workers displaced from impact is occurring and poverty is SOEs receive severance payments, and being mitigated among affected poverty has been mitigatedas indicated individuals and families. throughresults of social impact. LRS: Pre-layoff in-plant assessment and A range of services are delivered to Gross impact evaluation of services on planning services are provided to approximately 11,000 displaced workers employmentof displacedworkers. workers in 21 SOEs, and LRS are with job placementratesas follows: providedto displacedworkers. Job Counseling: 10%; On-JobTraining: 70%; Institutional Training: 50%; Vocational training for those who wants to set uptheir own business:20%; Temporary Community Employment 10%; Small Business Assistance 10% start- up; and Incubator 90% business survival rate over duration of contract. MME: The Government: evaluates the impact Results of social impact studies of: (a) Quantitative and qualitative of privatization on key affected groups (a) workers displaced by SOE evaluations are made of the LRS (including by sex, age, education level, privatization, andthe socio-economicimpact of region) and devises appropriate policy (b) families in communitiesaffectedby privatization in selected affected responses; designs criteria for LRS to privatization, and communities. focus on most effective services for (c) impact evaluationsof LRS. different client groups. (b) Quarterly Project Management Project objectives are achieved, and Project quarterlyreports. Reports and annualAudit Reports disbursementsare on schedule. are providedas agreed. Supervisionmissionreports. 27 Arrangementsfor resultsmonitoring There will be three main inputs into the monitoring and evaluation o f the PSSP2: 0 Management Information System (MIS): The PA has an ongoing M I S to track the results and costs o f the JLC and LRS programs. This was developed under the ongoing PSSP and will be continued and strengthened under the PSSP2. 0 EvaluationStudies: Under the MMEcomponent a series o f targeted cost-effectiveness evaluations on specific activities supported under the LRS components. The intention is that these would provide timely inputs on impact and cost-effectiveness so as to improve these programs over time. In addition there will be in-depth socio-economic analyses o f areas deeply affected by redundancies resulting from the privatization program, which will also aim to suggest local economic development strategies. 0 Bank Supervision and mid-term review: Regular Bank supervision missions will focus on monitoring and evaluation, particularly related to the results framework presented in Annex 3. In addition, there will be a mid-term review o f the project to be held by June 30, 2007 which will undertake a full review o f the cost-effectiveness o f the PSSP2 and reach agreement upon any necessary modifications. Institutional issues: Monitoring and evaluation will complement project management by providing timely information on project progress and cost-effectiveness evaluations o f the JLC and LRS. This will enable expeditious adjustment o f operations to increase their impact and effectiveness. A net impact evaluation o f the LRS under the ongoing PSSP i s due in July 2005 and will help improve LRS operations and targeting. Data collection: The existing PSSP MIS is based on data drawn from ISKUR and KOSGEBandhas been found to be accurate. The PA maintains data on actual redundancies and JLC paid. Capacity: Strong capacity now exists in the PA, ISKUR and KOSGEB for regular monitoring having been built up by the ongoing PSSP. Evaluation capability i s more limited. Indeed, it is for this reason, and in order to avoid conflicts o f interest, that EKA has been designated to undertake the evaluation studies. However, the PA, KOSGEB and ISKUR will be involved directly inthese evaluations with the intention o f buildingup their long-term evaluation capability. 28 d 2 2E 5 5 2e! k d ge m E W a .I L c, 0 .I a 2 3 c, m m I 0 a2 s 0 L g L 2 + 8 ri B c, m g s 2 20 g g - r . a2 + W 0 2E a g s 2 g g + z 0 20 - b s 0 g g 0 s 2 + c? 3 - r . g 4F 0 dw 2 In In 0 Annex 4: DetailedProjectDescription TURKEY: PrivatizationSocial SupportProject2 COMPONENT 1: JLC (Euro 420.1 million, o fwhich Bank =Euro 340.3 million) OBJECTIVESAND ACTIVITIES The goal ofthis component is to improve the productivity o f certain elements o fTurkey's industrial and services sector (previously SOEs) and to ameliorate the temporary negative social and economic impact of job loss compensation on workers displaced during privatization of SOEs. Objective Activities 1. Severance Payments: to provide severance (i) Selection and verification of eligible SOEs based on and related payments, as regulated by law, to productivity criteria as previously agreed with the Bank. workers displaced due to privatization o f state- owned enterprises. (ii)Identification of eligible workers to receive severance, specialjob loss compensation and retirement social assistance. (iii)Calculation of payments and transfer of funds to SOEs, ISKURand Emekli Sandigi. (iv) Verification of payments to ensure that laid-off or retired employees were eligible and received the correct amount. JLC Investment Criteria: In order to fulfill the Investment Criteria, each of the following points must be met: (a) That thepayment of JLC results in a positive rate of return for a specific SOE or a sector. A positive rate o f return must be demonstrated within a four year period. This i s to say, the reduction in the number o f employees must result ina decrease in overall operating costs without a corresponding loss in production (e.g., if 50% o f workers are laid off, production must not decrease by an equal amount). The output per person must increase. This criterion can be applied at the firm or sector level where a sector is defined as a group of firms producing similar output, such as the petro-chemical industry. (b) That the investment is in accordance with Turkey's general economic development strategy. The Government o f Turkey i s pursuing an industrial strategy and five year plan focusing on modernization, increased use o f technology, and privatization. One example o f this is with respect to the Government's strategy to modernize the textile industry. The Ministry o f Industry has primary responsibility for outlining the Government's industrial strategy. The PA must remain current on what the Government strategies entail and must ensure, prior to making severance payments to particular SOEs, that this investmentis consistent with the Government strategy. 31 (c) That the investment will lead to an overall increase to either production, profits or exports at the enterprise or sector level. Point one above focuses on output per worker but in addition to this criterion, it is necessary that the enterprise provides a business plan that demonstrates that the investment in job loss compensation will lead to an increase inproduction, profits or exports. Inmany cases, the business plan proposed by the buyer and outlined inthe sale document will address all three points. It was also noted that consultant reports are commissioned prior to each sale to help determine the sale price and the future o f the SOE. These reports may also contain information to help verify this requirement.) Ifthe firm (or sector) can demonstrate a probable increase inany o f these three areas, it will point to a positive return on investment. If this i s not demonstrated, the payment o f job loss compensation cannot be financed by the PSSP2 2 loan. Making JLC Payments: The PA will provide financing to: (i)SOEs which will make regular severance payments; (ii) ISKURwhich will make specialjob loss compensation payments; and (iii) EmekliSandigi(ES-RetirementFund)whichwillmakeretirement socialassistance the payments according to procedures agreed with the Bank. Replenishment Applications from the PA: The LAG at PA will prepare reports for the PCU based on information submittedto LAGby the SOEs, ISKUR, and ES on the three categories o f payments made under the JLC component o f the PSSP2. Supporting documentation will include, at a minimum, the certification by the PA that: the Government certifies that the paymentsmeet the investment criteria for use o f BankProject funds; the three categories o f separation payments have been made in accordance with the documents originally submitted by the enterprise, and that in each case an audit has been done by the LAG, except for small enterprises (less than 100 workers), as agreed with the Bank; the calculations are consistent with entitlements as originally set out in the new Labor Law 4857 for severance payments; Privatization Law 4046, Articles 21 and 22 for special job loss compensation, and Privatization Law 4046, Article 24 for retirementsocial assistance; any JLC payments found through the audits and verifications conducted by the LAG which have been financed by the PSSP2 made to terminated workers who have beenre-employed by the privatized SOE, or who are employed as temporary workers by the government will be deducted from the reimbursement application made next following the date o f the audit; and the procedures established by the PA to ensure a transparent, arms length sale to one or more private sector purchasers have been adhered to with regard to the 32 qualifying SOE, and procedures defined in the Agreement o f Sale are being implemented. Key steps inthe process include: 0 Authorization o f the Privatization High Board to include a SOE in the portfolio o fthe PA; Collection and analysis o f data on the SOE by the PA; 0 Selection o f Advisors and preparation o f advisory analysis andreports; 0 Determination o f an appropriate privatization strategy for the SOE; 0 Approval of tender procedures, and closingthe sale transaction; Follow up as necessary by the PA; and 0 Implementation o f the environmental safeguards and levels o f employment definedinthe Agreement o f Sale. COMPONENT2: LRS(Euro 27.2 million, o fwhichBank =Euro 17.0 million) OBJECTIVESAND ACTIVITIES The goal o f this component i s to provide labor redeployment services to workers, who have been displaced by the privatization of SOEs, including secondary layoffs, and to assist them inrapidly re-enteringthe labor market. Objective Activities 1. Develop and Maintain Administrative (i) Administrative Arrangements: Orient ISKUR and Framework to develop and maintain KOSGEB staff, at the national and local levels, concerning the administrative procedures between PA and use o f the LRS FOM including: sub-contracting procedures, ISKUR, KOSGEB, and sub-contractors, to monitoring, and reporting. facilitate the delivery of LRS to the unemployed. (ii) Public Information: Update public information (e.g., print and non-print media) developed under PSSP on the LRS for use by ISKUR and KOSGEB, with SOEs, with unions, with service providers, with the unemployed, and with the general public. (iii) Monitoring and Evaluation: Maintain and operate a management information system (e.g., type of service contract, unit costs by budget category for each type o f contract, unit costs per client served, program job placement rates, unit costs per job placement) to monitor each labor redeployment program, and provide needed data to other technical assistance contractors with net impact evaluation o f programs. 2. Assess and Plan Demand for Labor (i) DevelopAssessment and PlanningProceduresand Redeployment Services: To organize and Materials: Review withrepresentatives from ISKUR, deliver labor redeployment assessment and KOSGEB, community, labor, SOE management the orientation planning services to workers in SOEs being and assessment procedures developed duringprevious projects, privatized to ensure these workers know what including PSSP, refine and finalize procedures, and train lead income support and labor redeployment services consultants and lead agency staff inuse o f the orientation and are available and to determine the demand for assessment procedures. these services in up to 21 SOEs and approximately 80 sites. (ii) Provide Pre-layoff in-plant Assessment and Planning services: Establish tripartite working committees (e.g., government, community, labor, management, lead agency) and 33 IObjective IActivities I organize in-plant public information and assessments sessions for workers to determine demand for labor redeployment services inapproximately 21 SOEs. 3. Deliver Labor Redeployment Services: To (i) ISKUR: Local labor offices sub-contract with service deliver labor redeployment services to providers to deliver: (a) in-depth j o b counseling, (b) temporary approximately 11,000 unemployed workers community employment, and (c) retraining programs to through sub-contractors to ISKUR, and unemployed workers following procedures in the FOM as KOSGEB. agreed with the Bank. (ii)KOSGEB: KOSGEB sub-contracts withserviceproviders to deliver: (a) small business assistance, and (b) incubator services to unemployed workers following procedures in the LRSFieldOperational Manual as agreed with the Bank. PRINCIPLES AND CRITERIA -L R S 1. General Criteria Availability of LRS Services to Communities: LRS funds will finance active labor programs in all provinces where privatization has occurred since January 2003, and where privatizationwill occur duringPSSP2. Availability of L R S Services to Individuals: LRS services will be provided to individual citizens through local service providers selected by public advertisement. LRS funds will finance active labor programs for displaced previously and/or to be displaced by SOE privatization in all provinces where privatization has occurred since January 1, 2003, and where privatization will occur during PSSP2, as well as secondary unemployed in provinces where privatization o f enterprises and factories, which had and have absorbing place in the economy o f provinces, have occurred and will occur. Provinces where LRS will be delivered shall be determinedby the PA. Priority will be given to workers to be displaced or displacedpreviously by SOE privatization. Allocation of LRS Services: The LRS i s demand-driven. However, the maximum amount o fthe LRS that can be used at the national level for Temporary CommunityEmployment Services i s 25%. Selection and Reimbursement to Service Providers: Public advertisement i s required to select service providers which propose programs, after public announcement o f the availability o f funds, and those that meet minimum evaluation criteria may be accepted for financing (detailed contracting procedures for procurement o f services are contained inAnnex I, Section 111, o f the POM. Reimbursement to service providers will be based on the contracted average unit cost per client (i.e. man-hour, man day, or manmonth) times the number o f units o f client services which are delivered. Service providers are eligible for limited mobilization payments to a maximum o f 20%, 30% for incubators, but will thereafter bill for services provided on a monthly or as neededbasis. 34 Duplication of Payments and Services: Individual clients can receive income support payments from the LRS even if they are receiving other types o f state-financed income support (e.g., unemployment benefits, job loss compensation payments). Individuals may not participate inboth training and temporary community employment programs financed under the LRS, and cannot participate inthese programs ifthey have participated insimilar programs financed by the EUinthe last 24 months. Evaluation of Services: The impact o f services is to be evaluated by all service providers as a condition of their contracts. Service providers must report on the status o f clients at the end o f each program and/or when a client terminates a program, and before final invoices are paid (e.g., did clients get jobs after services, did they start businesses, what i s their wage and/or income). Some service contracts (e.g., training, small business assistance, employment counseling) will have built-in incentives to improve labor market impact (e.g., negotiated levels of job placement and business start-up, with financial incentives to meet objectives, and disincentives ifobjectives are not met). Labor Mobility: Mobility i s to be encouraged by providing information, by the sharing of information on services being provided in different regions, by re-location grants that can be provided through employment service contracts, and by allowing qualified individuals from one region to participate inprograms beingprovided inother regions. 2. Specific Criteria by Program 2.1. Criteria for Employment Services (ISKUR) Eligible Services: Pre-counseling, job/vocational and social counseling, provision o f labor market information, aptitudehnterest assessment, and job searcwjob club programs, labor exchange andplacement services, relocation services. Eligible Service Providers: Non-government non-profit agencies (NGOs), private firms, labor organizations that demonstrate minimum capabilities to be service providers (e.g., staff qualifications, facilities, financial viability, and placement capability). No-fees are to be charged to clients. A negotiatedjob placement rate o f at least 10%i s to be included incontracts. Eligible Costs: Staff and administrative personnel, rent and utilities, consumable materials, non-durable goods, relocation costs up to Euro 375per family. If any contractor exceeded his contracted performance standard by 10% or more that a 10% incentive payment will be made. 2.2. Criteria for Retraining Services (ISKUR) Eligible services: Vocational, general education and literacy training, vocational training for self employment. Organizations proposing training programs must show evidence o f demand for trained workers (e.g., endorsed by existing local tripartite employment councils) and agree to a negotiated job placement rate o f 70% for on-job training, 50% for institutional training and 20% for vocational training for those who want to set up their own business, is to be included in all contracts. 35 Eligible Service Providers: Enterprises, NGO, private and public training institutions (if no similar programs are offered by private providers). Private training institutions must be licensed. Service providers for training show minimum capability for provision o f training services (e.g., staff qualifications, facilities, financial viability, and placement capability. A negotiated job placement rate o f 70% for on-job-training, 50% for institutional training, and 20 % for vocational training for those who wants to set up their own business is to be included in contracts. Eligible Costs: Maximum length o f training per client - 12 months, training and administrative personnel costs including fees, operating costs related to the training activity (including rent and utilities), consumable materials, non-durable goods, maximum depreciation of capital equipment - 20% per year, training wage up to 120% net minimum wage level Enterprises which are training clients for internal hiringwill only receive reimbursementfor 70% of total training costs, other contractors (e.g., training institutions) which are training for the general labor market will receive 100% reimbursement. Proposals that exceed the maximum daily unit cost (Euro 13 per day, per trainee) by 25% will be rejected. The daily unit cost for per trainee of the proposals that pass the technical evaluation can be negotiated based on average unit cost for per trainee from database. If any contractor exceeded his contracted performance standard by 10%or more that a 10%incentivepayment can be made. 2.3. Criteria for Temporary CommunityEmploymentServices (ISKUR) Eligible Services: Environmental cleanup, refurbishment o f public infrastructure, provision o f assistance and support to social agencies (e.g., schools, retirement homes, clinics). Organizations proposing programs must provide evidence that the program will not displace normal employment (e.g., evidenced by concurrence o f local union and employer representatives). (Note: maximum allowable expenditure on this program at the national level is 25 % of LRSfunds). Eligible Service Providers: Local government must concur and approve projects, but are excluded from implementing service contracts. Projects must be implemented by non- government or private contractors selected by public advertisement. Local government agency implementation i s acceptable only if the advertisement process does not identify qualified non- government contractors and as agreed with the Bank. Proposing organizations must provide evidence o f administrative and financial viability and agree to negotiatedjob placement rates of at least 10%at the end o fthe program. Eligible Costs: Supervisory personnel and fees (not more than 15% o f total contract), worker stipends (not more than 110% o f gross minimum wage), employer shares including all the insurance premiums o f gross minimum wage, related training costs, utilities, consumable materials and non-durable goods (limited to 20% o f total project costs), maximum length o f individual participation (6 months). If any contractor exceeded his contracted performance standard by 10%or more that a 10%incentive payment can be made. 36 2.4. Criteriafor SmallBusinessAssistance (KOSGEB) Eligible Services: Provision o f services including, but not limited to: initial assessment o f the aptitude and skills o f unemployed persons to start businesses, developing business plans, advising on accounting, financial, legal, marketing and sales services issues, assistance in the dialogue with local authorities, short-term training (e.g., 1-2 weeks) and other consulting services to unemployed clients who intend to start their businesses. Eligible Service Providers: Private agencies, autonomous govemment organizations, statutory occupational organizations, foundations and other associations. Service providers must agree to negotiated business start-up rates o f at least 10% o f clients participating, to be determined at a maximum o f 30 days after the end o f the contract (minimum 50% client's share ina start-up business). Eligible Costs: Personnel and administrative costs, transportation costs, rent and utilities, consumable materials and non-durable goods, maximum depreciation o f capital equipment - 30% per year. Maximum lengtho f initial contract i s 12 months, with extensions possible. Costs per client hour mustbe specified inall contracts. 2.5 Criteria for SmallBusinessIncubators(KOSGEB) Eligible Services: Facilitiedpremises rental, small business consulting services for tenants, shared support services (e.g., accounting, security) and equipment for common use by incubator management and tenants (e.g., telephone, a service vehicle, office equipment). Eligible Service Providers: Private agencies, private and non-government associations and foundations. Applicants will be judged on availability o f facilities, qualifications o f management staff, linkages with existing small business organizations and financing institutions, financial and administrative capabilities, and experience with small business, and linkage with sources o f micro-small business finance. Services providers must agree to negotiate business survival rates o f at least 90% over the duration o f the contract. Eligible Costs: Facility refurbishment and/or rent but not land or new building construction, general support equipment; limited staff costs (e.g., manager, secretarial/accounting, security staff), administrative and auditing costs, consumable supplies and non-durable goods, and operating expenses. Up to Euro 50,000 for a revolving fund for short- term micro working capital loans to tenants - loans must be at positive interest rates. The business plan o f the service provider should reflect increasing capacity to cover costs from its own funds with a view to enable sustainability (Reimbursement o f operating costs to be phased out over three years maximum, and before project closure 4.e. full support for the first year, 2/3 support for the second year, and 1/3 support for the third year). Incubators funded for less than 36 months under the ongoing PSSP are eligible to receive continuing support for operating expenses ina similar manner. The cost per client per month mustbe specified in all contracts. 37 COMPONENT 3: MME (Euro 0.9 million, o fwhich Bank =Euro 0.9 million) COMPONENT3 (a) -Monitoringand Evaluation(EKA) (Euro 0.4 million, o fwhich Bank =Euro 0.4 million) OBJECTIVES AND ACTIVITIES The goal o f this component is to monitor the effectiveness o f the social impact o f the LRSo ftheproject. Objective Activities 1. Impact Analysis of LRS: To evaluate the (i)Design: Implementing quantitative andor qualitative surveys impact o f the LRS on target groups laid o f f to selected number of workers once a year to measure due to sell o f andor liquidated SOEs, and effectiveness o f these services and reporting o f survey results. develop institutional capability to analyze, Review similar studies, design interview guide, resolve sampling address and improve the efficiency o f the issues and train interviewers. Measuring the effectiveness o f following LRS: - micro-business incubator system in Turkey by comparing with Impact analysis o f the following other country examples. ISKUR services given to target groups: (ii)Pilot Test: Pilot test the quantitative and qualitative survey Employment guaranteed vocational guides for programparticipants and finalize them. training programs, (iii)Infrastructure: Define andprovide informationtechnology, Consultancy services, and training materials to enhance the analytical capabilities o f the temporary community employment EKA Working Group for policy formulation and monitoring and program assessment o fpolicy outcomes. (iv) Implement: (1) Data collection: interviews completed and - Impact analysis o f the following data collected and entered. Data cleaned and verified; data set KOSGEB services: constructed. (2) Data analysis: cross-tabulations and frequency 0 small business assistance services distributions for all variables; identify weaknesses and propose Incubator services remedies where applicable. Conduct workshops as required. (v) Replicate: Repeat study once a year, beginning the middle o f 2007 for a total of maximum3 rounds with a maximum o f 1,000 workers ineach round and all the incubators available. (vi) Policy Framework Design a framework to help ameliorate the negative social impact o f privatization program by improving effectiveness o f LRS, and review of international experience. (vii) Disseminate results: Prepare interim and final reports and disseminate including organizing a seminar for decision makers and the social partners. 2. Privatization Economic and Social Impact, (i)Design: Definethe focalpointsfor the studyandreview the Coping Strategies - todetermine the impact o f existing tools developed under PSSP and make necessary privatization on laid o f f workers, and their revisions inthe questionnaire and train interviewers. coping strategies, by using interviews and focus (ii)Select pilot group of displaced workers: Develop criteria groups, using procedures adapted from work and select pilot group representing o f those facing challenges due done under the PSSP. to privatization. Finalize the survey tools. (iii)Gather data using questionnaire and conduct focus groups: Interview a sample o f maximum 2,000 key informants and selected focus groups comparable with the PSSP. Collect and enter data, construct data set after cleaning and verifying the data. Analyze the data by cross tabulations and frequency distributions for all the variables. 38 Objective Activities (iv) Analyze: Assess and compare results from the current sample with the results obtained from the PSSP sample to understandthe changes and developments. (v) Disseminate: Prepare a final report discussing the comparison o f samples in the PSSP and PSSPZ and disseminate results, including implementing a seminar for decision makers and social partners. 3. Objective (a): Design a short term labor (i)Review methodology and results of similar surveys inother market survey (withinthree months o f contract countries (e.g. Sweden, Hungary) and make at least one site visit signing) to two countries. (ii)Developgeneralmethodologyfor regions surveysincluding: preparation o f the survey instrument, identifying the representative region and representative city(s) in that region, sampling techniques, technical procedures data collection, interviewer selection and training, data processing, data analysis, information presentation and dissemination. The survey should include, but not be limited to, capturing information on the following data items from firms: (i) Effects of anticipated enterprise investment decisions o n labor market demand: changes in capacity utilization, adding new capacity to the firm, cause for under-utilization, orders for goods and services, net sales, financial and property status, general opinions o n the state o f the economy inTurkey and a selected region. (ii) LaborMarket:labormarketmovementsbyfirm and branch o f the economy, supply and demand in the labor market. (iii) Firm human resources: characteristics o f changes in employment, status o f hiring special groups such as ex miners and school leavers, policy regarding making staff redundant, to analysis o f the employment process from employer-hiring, firing, sustaining- and employee-finding, leaving, sustaining- perspective.) (iii)Present methodology and survey instrument to a Technical Steering Committee. (i) asamplefromoneRegion. Draw (ii) interviewers Train (iii)Undertake survey (iv) Input and analyze data (v) Create report that the linkage between investment, labor demand, and general economic trends in the region, and identifies lack o f data where needed, andthat gives policy tools for labor market related institutions including KOSGEB and ISKUR, (vi) Present draft report to the Technical Steering Committee (vii) Adjust survey procedures based on results o f the pilot test and review o f the Technical Steering Committee. Objective (b): Complete pilot testing o f the (i)Identify resources (staffanddirect costs) that Regions would survey. need to replicate the surveys, including completing the analysis and publication o f information within two months o f completion 39 Objective I Activities o f the surveys (ii) Identify the staff and direct cost resources that a National Agency (e.g., ISKUR) would need to allocate each year to ensure Regions could undertake the surveys in a similar manner and Objective (c): Disseminate informationon the could be compiled at the national level into a national report. pilot and develop a plan for regular national (i) Develop a training manual to be used to train all managers replicationevery six months. and selected staff in regional labor offices so they can undertake the similar surveys every six months. (ii) Organize and implement a national seminar to introduce the survey concept to all Regions. (iii) Capacity building:prepare workshops and relatedtraining programmers necessary for EKA's capacity building. COMPONENT 3(b): PROJECT MANAGEMENT (Euro 0.5 million, of which Bank = Euro 0.5 million) OBJECTIVES AND ACTIVITIES The goal of this component is to ensure effective administration and coordination of the overall project program, financial accounts, and procurement. Objective Activities 1. PCU (i) Coordination: Help PA to coordinate project (a) Coordinate project execution, and manage the implementation through: (a) convening regular meetings o f the resources o f the project. technical coordinators to discuss common issues; (b) ensuring that the project is being implemented in accordance with legal agreements with the World Bank and; (c) assisting with project implementation as requested by the technical agencies involved. (b) Procure all Bank-financed goods and services (ii) Procurement: Assist P A in managing all procurement for implementing agencies. under the project, in cooperation with the technical agencies; specific responsibilities during the procurement process for equipment, technical assistance, and training. (c) Operate the financial management system (iii) FinancialManagement: Assist PA to set up and operate according to Bank requirements. an F M S based on technical agreements reached with the World Bank. (d) Act as liaison between the technical agencies (iv) World Bank Liaison: (a) Manage disbursement o f all and the World Bank. World Bank loan proceeds; (b) monitor availability o f Government's counterpart contribution to the project; (c) monitor implementation progress o f project components; and (d) work with implementing agencies to prepare quarterly progress reports in accordance with a project progress reporting format acceptable to the Bank. 2. Annual Project Audit (i) Audit Arrangements: Treasury to organize annual audits to be made by the Treasury Controller, according to Bank requirements and agreements with Government. (ii) Accounts Maintenance: Treasury to maintain project accounts, acceptable to the Bank. 40 Annex 5: Project Costs TURKEY: Privatization Social Support Project 2 Project Cost By Component Local Foreign Total Euro million Euro million Euro million 1. Job Loss Compensation 420.1 0.0 420.1 2. Labor Redeployment Services 21.1 6.1 27.2 3. Management, Monitoring and Evaluation a. Monitoring and Evaluation 0.2 0.2 0.4 b.Project Management 0.4 0.1 0.5 Total Project Costs 441.8 6.4 448.2 Front-end Fee 0.0 1.8 1.8 Total Financing Required 441.8 8.2 450.0 Project Financing by Sources Bank Government Total Euro million Euro million Euro million 1. Job Loss Compensation 340.3 79.8 420.1 2. Labor Redeployment Services 17.0 10.2 27.2 3. Management, Monitoring and Evaluation a. Monitoring and Evaluation 0.4 0.0 0.4 b.Project Management 0.5 0.0 0.5 Front-endFee 1.8 0.0 1.8 Total Financing Required 360.0 90.0 450.0 Project Cost by Fiscal Year (FY) (Euro million) FY 06 FY 07 FY08 FY 09 TOTAL 1,Job Loss Compensation 63.0 105.0 126.0 126.1 420.1 2. Labor Redeployment Services 4.4 56.9 8.1 7.8 27.2 3. Management, Monitoring and Evaluation a. Monitoring and Evaluation 0.1 0.1 0.1 0.1 0.4 b.Project Management 0.1 0.1 0.1 0.2 0.5 Front-end Fee 1.8 0.0 0.0 0.0 0.0 Total 69.4 112.1 134.3 134.2 450.0 41 Annex 6: ImplementationArrangements TURKEY: PrivatizationSocial SupportProject2 As notedpreviously, the proposedPSSP2builds on directly relatedexperience inTurkey. One of the key lessons learnedis that the overall management o f such projects is best handledby an agency that i s very close to the issues at hand, can use the operation to directly further its goals, i s flexible, and i s sufficiently broad in its charter to oversee the overall project. The P A has acted as the coordinating implementingagency for the PSSP, and will continue in this role for the proposed PSSP2. The PA has considerable current and past experience working with Bank-financed projects, as well as dealing with the type o f operations financed by the proposed PSSP2. ISKUR, KOSGEB and EKA have signed protocols with P A for the PSSP2. These agencies have day-to-day responsibility for sub-contracting and managing labor redeployment service providers: ISKUR for counseling, retraining, and temporary community employment services; and KOSGEB for small business assistance and incubators. These agencies are very familiar with these programs and are implementing them on an ongoing basis, both with Government and Bank financing. Social impact activities would be contracted directly by PA with independentthirdparty consultants underthe technical guidance ofEKA. Two small management groups have been established at PA for the PSSP, which will continue to administer the PSSP2: one for "back office" project fiscal, procurement, reporting, and liaison with the Bank (PCU), and the LAG which will handle technical monitoring and administration of the JLC and LRS components. A Tripartite Advisory Committee (TAC) has already been established to advise on overall policy related to project implementation. Executing Agencies: The PA i s the primary implementing agency for the project. Technical implementation o f JLC and LRS will be managed by the LAG o f the PA. The LAG will be comprised o ftechnical experts, and will closely coordinate the management o f LRS with ISKUR and KOSGEB. Administrative operations o f the project will be handled by the PCU with financial, procurement and communication units. The PCU will serve as the "business centre" o f the project and as the liaison for communication between the Bank and the PA, and between the P A and the other implementing agencies o f the project. The PCU as well as the LAGwill be headedby individuals who have a civil servant status. The PCU, together with the LAG, ISKUR,KOSGEB and EKAhave updatedthe POM, inagreement with the Bank. The PA will use this POMas the chief instrument to manage andmonitor project implementation. The following understandings were reached with respect to arrangements for project implementation, monitoring, and mid-term review. The P A would be responsible for the implementation o f the JLC component. The execution o f the LRS component will be carried out by ISKURand KOSGEB. Whereas, the MME component will be implementedby two entities: (a) the assessment and evaluation activities by EKA; and (b) project management by the PCU located at the PA. During implementation close coordination will be arranged amongst the line units.The Mid-termReview will be completed by June 30,2007. Project Management: The proposed PSSP2 will be managed by the PCU in the PA. The PA has the administrative and managerial experience in running intemationally funded projects. The current PCU established at the PA will have overall coordination responsibility for 42 the project and in this regard will work closely with the lead implementing agencies o f the project. The P C U will be headed by an individual who has a civil servant status and will be composed o f (i) financial officer, (ii)reporting and communication officer, and a (iii) team assistant. Since procurement will be of a very limitednature, this either will be handled by one of the above mentioned officers or by a short term consultant. The PCU will have translation and interpretation services as necessary. The project will finance project management training to assist with organization and hnctioning o f the PCU. The PCU will be responsible for monitoring implementation progress o f the project, and thus preparing quarterly project management reports. In addition, the PCU will be responsible for ensuring that financial statements, special account, and the SOEs are audited annually by auditor(s) acceptable to the Bank, and in accordance with auditing standards acceptable to the Bank. On-Lending Arrangements: The proceeds o f the loan will be on-lent to the P A by the Undersecretariat of the Treasury under the same terms and conditions as the loan providedby the Bank. Procurement issues: The JLC does not entail any procurement. LRS involves the competitive procurement o f services according to the procedures outlined in the POM. The small amounts o f office furniture, materials and equipment will be procured through National Shopping (NS) and International Shopping (IS). Consultants' services will be procuredthrough a combination o f local QCBS, Consultants Qualifications (CQ) and Individual Consultant (IC) procedures. Training will be procuredbased upon a comparison o f at least three quotes. Tripartite Advisory Committee: A Tripartite Advisory Committee (TAC) will be established to oversee the policy aspect o f the proposed project and thus ensure its alignment with the Government's privatization agenda. The TAC will comprise with representatives of the Treasury, PA, State Planning Organization, ISKUR, KOSGEB, State Institute o f Statistics, TOBB, TESK, Confederation o f Turkish Employer Association and Labor Unions. The TAC will meet at least once a year, and will report to the PA. 43 ^. ...... ........ Annex 7: Financial Management and Disbursement Arrangements TURKEY: Privatization Social Support Project 2 Summary of Financia1Management Arrangements The task team conducted an assessment o f the adequacy o f the project financial management system in March 2005 at the PCU in the PA. The current financial management arrangements for the project are satisfactory to the Bank. A summary of the conclusions for the project financial management purposes are as follows: RATING COMMENTS 1. Implementing Entity Satisfactory 2. Funds flow Satisfactory 3. Staffinn Satisfactorv 4.Accounting Policies and procedures Satisfactory 5. Internal Audit Not Applicable 6. External Audit Satisfactory 7. Reportingand Monitoring Satisfactory 8. Information systems Satisfactory OVERALL FMRATING Satisfactorv Country Issues A Country Financial Accountability Assessment (CFAA) for Turkey was carried out in 2001. The CFAA report identified major weaknesses in the Turkish financial accountability, in both the public and the private sector. Since 2001 the financial management environment has improved in Turkey. In December 2003, the Public Financial Management and Control Law (PFMC) which establishes the legal framework for harmonizing and modernizing budgetary practices across all government agencies is enacted in the Parliament. It reduces fragmentation and provides for a more comprehensive presentation o f the budget. The law also allows for future decentralization o f financial control to spending agencies. Originally PFMC was to become effective inJanuary 2005, but it i s now postponedto January 1,2006. The legal structures o f the Privatization Administration (PA) and the privatization fund have been re-established with the Law No. 4046 enacted on 27 November 1994. The PA's duties, responsibilities, and rights, and the fund's resources and utilization fields o f such fund are determined inthe provisions o f the related law and PA i s designated to manage the privatization fund. According to the Article No.9 o f Law No. 4046, all proceeds obtained from the privatization process and all dividends obtained from the organizations transferred to the Administration as well as proceeds obtained from the sales o f securities and other negotiable 45 instruments and documentation, income obtained from the funding supplied to the organizations transferred to the Administration, and other resources and earnings allocated by other legislation, are credited to the privatization fund. With the amendments made to Law No. 4046 with Law No. 4971, the decision authority on PA's rights, receivables and liabilities i s given to the Privatization HighCouncil (Article 3). According to Article 7 o f Law No. 4749, the Undersecreteriat of Treasury may transfer the foreign financing facilities obtained from foreign financing sources to public institutions and organizations outside the context o f general and annexed budget and investment and developmentbanks through an on-lending arrangement. Incase o f on-lending o f foreign debt, an on-lending fee o f 0.5% is charged to the related institution. As PA is outside the context o f general and annex budgetthe proceeds o f the PSSP2 loan i s providedto PA through a subsidiary loan agreement. Law No: 4046 and Law No: 4971 do not have any provisions restricting the borrowing authority o f PA. Risk Analysis A summary o fthe risk assessment for the projectis as follows Risk Comments INHERENT RISK 1. Country Financial Management Risk High Based on the C F A A report prepared in2001. 2. Project Financial Management Issues Moderate Overall Inherent Risk High 1.ImplementingEntity I Negligible 2. FundsFlow Negligible I 3. Staffing IINegligible 1 1 4. Accounting Policies and Procedures Negligible 5. Internal Audit NIA 6.External Audit Negligible 7. Reportingand Monitoring Negligible 8. Information Systems Negligible Overall Control Risk N eEligible Risk Mitigation Strategy Countryfinancial management risk: The CFAA has identified major weaknesses inthe Turkish financial accountability, in both the public, private and the banking sector. These risks together with the developments in the sector incurred after the preparation o f CFAA has been explained in detail in the "Country Issues" section. The project will be coordinated by the PCU that is established inPA and is currently coordinating the ongoing PSSP. 46 Financia1Management in Privatization Administration The privatization fund administered by PA uses the Uniform Chart o f Accounts as specified in the Ministry o f Finance's Communique No.1 on accounting procedures, dated 26 December 1992. The P A i s not a tax entity and therefore is not subject to the Law No. 5024 requiringincome tax and corporate tax payers to make inflation accounting adjustments to their financial statements thus the financial statements o f the fund are prepared on historical cost basis. The financial statements for the years ended December 31, 2002 and 2003 are reviewed by the Bank. The PA balance sheet as of December 31, 2003 shows 37.0% equity, 52.1% short term liabilities and 10.9% long term liabilities. Furthermore, 86.6% of assets are long-term assets, and 13.4% are current assets. The long-term assets are mainly share values of institutions transferred to the PA for privatization. A total o f 71.0% o f the long-term liabilities were payables to Treasury and these payables were fully paid back to Treasury as o f December 2004 as per Higher Audit Board report. The operational income of PA is generated from the sale of institutions inthe portfolio. The financial statements o f the fund and PA's activities are audited annually by the Higher Audit Board. The Higher Audit Boardreport prepared for the year ended December 31, 2003 has been reviewed by the Bank and there were no issues specified by the auditors relating to the financial management and controls. Implementing Entity The project will be implementedby the PA, ISKUR, KOSGEB and EKA. There is a PCU inthe PA led by a project coordinator who reports to the Vice President of PA. This PCU currently works as the coordinating unit of the ongoing PSSP and they will continue to be the PCU for PSSP2. The PCU will be responsible for overall project coordination, procurement, financial management, contract management, monitoring, and evaluation and reporting. Currently, the PCU includes, in addition to the Coordinator, a procurement department head, a financial management specialist, a reporting and communications specialist and an administrative assistant. The PCU intends to hire a short-term consultant to perform initial procurement duties for PSSP 2. The risk associated with the implementing entity is assessed as negligible. Funds Flow There will be one special account for the project at the Central Bank o f Turkey and disbursementswill bebased ontraditional disbursement methods. All payments to the contractors (except for LRS), suppliers and consultants will be made from the special account with the authorization o f the Vice President or the Project Coordinator o f the PCU. Payment orders will be prepared by the Financial Management sub unit o f the PCU 47 upon receipt o f approval from the LAG within PA. LAG i s a group formed up o f designated individuals from implementing entities and they are responsible for the management o f the technical implementation o f LRS component. The LAG at PA is also responsible for management o f JLC component of PSSP2. The LAG at PA will prepare reports for the PCU based on information submittedto them by implementing agencies on the categories o fpayments made under the JLC component o f the PSSP. The PA has established a committee for the verification o f severance pay calculations prepared by the SOEs. This committee provides a certification before the release o f funds from the World Bank to the PA. The committee also makes site visits to the SOEs to verify original personnel records and latest payroll statements, on a sample basis, to ensure completeness and correctness o f the severance pay calculation. The same committee will be responsible for the verification o f severance payments under PSSP 2. Funds for severance payments made, which is the major project component, will be transferred to PA's designated project bank account after verification o f severance pay calculations by PA and receipt o f no objection from the Bank. The responsibility o f verifying the severance pay calculations lies with the committee established by PA, which will provide a certification before the release o f funds from the World Bank. The PCU will have the overall responsibility for the management of the special account and will make the required payment from the special account as well as the required accounting entries into the financial management system. Therisk associated with theflow of funds is considered as negligible. Based on the discussion held with the officials o f the PA, it is confirmed that the current structure o f the ongoing PSSP will be retained for PSSP2, since the present PCU has been providing support successfully to all components of the ongoing PSSP. The present PCU consists o f a project coordinator (a civil servant) and three consultants covering the positions o f (i)Finance, (ii) Communication, (iii) assistant. In addition to these, the PCU intends to Team hire a short-term consultant to deal with initial procurement requirements o f the project as well as interpretation and translation services as necessary. Staff working in the Financial Management Department o fthe PCU are very experienced and have satisfactory qualifications. Therisk associated with StafJingis considered as negligible. Accounting Policies and Procedures The project accounting will be maintained separately within P C U and the project accountingwill be on a cash basis. The PCU has been using accounting sofiware for PSSP. PMRs were generated by the system and were received by the Bank on time. However, this system had some deficiencies 48 addressed by the auditors in their reports. Such deficiencies are (i) o f existence ofjoumals lack for transactions entered into the system, (ii) impossibilityo f displayingthe openingjournal ofthe year even when all closing entries are made properly. To respond to auditors' requests and for other practicalities, the PCU has purchased a new Financial Management System (FMS) for PSSP 11. The new FMS will be used for project accounting, monitoring and reporting. The project financial management specialist has developed the chart o f accounts and prepared the draft project financial managementmanual. Therisk associated with accountingpolicies andprocedures is considered as negligible. Internal Controlsfor the Job Loss Compensation The main component o f the project i s the JLC (Euro 420.1 million) in which P A will provide financing to: (i)SOEs which will make regular severance payments; (ii) ISKURwhich will make special JLC payments; and (iii) State Pension Administration (ES) which will the make retirement social assistance payments according to procedures agreed with the Bank and the Bank will reimburse 81 % o f such payments to P A following the below controls; The Labor Assistance Group (LAG) at PA will prepare reports for the PCU based on information submittedto LAGby the SOEs, ISKUR, and ES on the three categories o fpayments made under the JLC component o f the PSSP2. Supporting documentation will include, at a minimum, the certification bythe PA that: the Government certifies that the payments meet the investment criteria for use o f Bank Project funds; the three categories o f separation payments have been made in accordance with the documents originally submitted by the enterprise, and that in each case an audit has been done by the LAG, except for very small enterprises, (less than 100 workers) as agreed with the Bank; the calculations are consistent with entitlements as set out inthe Labor Law 4857 for severance payments; Privatization Law 4046, Articles 21 and 22 for special job loss compensation, and Privatization Law 4046, Article 24 for retirement social assistance; any JLC payments found through the audits and verifications conducted by the LAG which have been financed by the PSSP2 made to terminated workers who have been re-employed by the privatized SOE, or who are employed as temporary workers by the government will be deducted from the reimbursement application made next following the date o f the audit, and the procedures established by the PA to ensure a transparent, arms length sale to one or more private sector purchasers have been adhered to with regard to the qualifying SOE, and procedures defined in the agreement o f sale are being implemented. 49 Internal Audit Currently there i s not an internal audit unit at PA. The PFMC law requires the establishment o f internal audit unit at PA and the full implementation o f PFMC will start in 2006. Untilsuch structure is established no reliance will be placed on internal audit. Reporting and Monitoring The PCU will maintain records and will ensure appropriate accounting for the funds provided. Financial statements for the project will be prepared by the PCU. The FMR will be prepared quarterly and will be submitted to the Bank no later than 30 days after the end o f the quarterly period. The present PCU at PA had been submitting FMRs for PSSP in the agreed format, and those reports were satisfactory to the Bank. The formats and contents o f those FMRs will be retained for PSSP 11. The FMR for PSSP I1will also include financial reports, output monitoring reports and procurement reports. The financial management manual o f the project includes a section on the FMR.The FMS is capable o fproducing all these reports. Therisk associated with reporting and monitoring is assessed as negligible. Information Systems The PCU has purchased a new Oracle based FMS that will be used for project accounting, monitoring and reporting. The FMS is capable o f generating financial reports, procurement reports andwill also be used for contract management. The risk associated with information systems is assessed as negligible. Strengths and Weaknesses The significant strengths that provide the basis o f reliance on the project financial management system are: (a) centralization o f all project financial management functions at the PCU; and (b) experience o f the PCU with the ongoing PSSP. There are no significant weaknesses inthe project financial management system. Supervision Plan During project implementation, the Bank will supervise the project's financial management arrangements intwo main ways: (i) the project's quarterly FMR as well as review the bank and project's annual audited financial statements and auditor's management letter; and (ii)duringthe Bank's supervisionmissions, review the project's financial management and disbursement arrangements (including a review of a sample of Statements o f Expenditures and movements on the Special Account) to ensure compliance with the Bank's minimum 50 requirements. As required, a Bank-accredited Financial Management Specialist will assist inthe supervision process. External Audit: The audit o f the project financial statements will be carried by Treasury Controllers in accordance with International Standards on Auditing and under TOR that will be cleared by the Bank before negotiations. Treasury Controllers have submitted their latest audit report on the ongoing PSSP on M a y 31,2004 for the year-end December 31,2003. The auditors gave an unqualified opinion for PSSP project financial statements both for the year ended December 31 2003 and 2002. The issues underlined in their management letter refer mainly to problems related to the software used for accounting and reporting purposes. Those issues are expected to be eliminated with the purchase o fthe new software for PSSP2. The risk associated with external audit is assessed as negligible. Disbursement Arrangements: The project will be disbursing on the traditional disbursement techniques and will not be using FMRbased disbursement. The table below sets forth the Categories o f items to be financed out o f the proceeds o f the loan, the allocation o f amount o f loan to each category and the percentage of expenditures for items so to be financed ineach category. Allocation of LoanProceeds (Euro) Category YOof Expendituresto be Amount of the LoanAllocated Financed (1)Job Loss Compensation 338,000,000 81% (2) Labor RedeploymentServices 14,000,000 100% (3) Goods 400,000 100% (4) ConsultantsServices and Training 3,700,000 100% (5) Front-EndFee (0.5%) 1,800,000 Amount due under Section 2.04 of the LoanAgreement (6) Unallocated 2,100,000 TOTAL 360,000,000 51 Retroactive Financing: Retroactive financing for JLC for 20,000 workers laid-off since January 1, 2003, i s included in an amount of Euro 210 million. The special nature o f this retroactive financing i s discussed in Section B. 3 o fthe PAD. The triggers for disbursement are as follows: (i) privatization, at the conclusion of full the sale agreement; (ii)partial privatization through stock sales, with at least 51% o f the enterprise in the private sector, formal ordinance to that effect from the Privatization High Council; and (iii)liquidation, formal ordinance to that effect from the Privatization High Council. Use of Statementsof Expenditure: The Bank may require withdrawals from the Loan Account to be made on the basis of Statements o f Expenditure for expenditures for: (i) under contracts costing less than US$ goods, 100,000 (Euro 77,000) equivalent each; (ii) services of consulting firms under contracts costing less than US$ 200,000 (Euro 154,000) equivalent each; (iii) services o f individual consultants under contracts costing less than US$ 50,000 (Euro 39,000) equivalent each; (iv) job-loss compensation payments; and (v) labor redeployment services US$ 133,000 (Euro 100,000) equivalent each; and (vi) training. Full documentation in support of Statement o f Expenditures shall be retained by the PCU for at least one year after the Bank has received the audit report for the fiscal year inwhich the last withdrawal from the Loan Account was made. This information shall be made available for review during supervision by Bank staff and for annual audits which will be required to specifically comment on the propriety of Statements of Expenditure disbursementsandthe quality ofthe associated record-keeping. Special Account (SA) The PA will open and maintain a SA inEuro at the Central Bank of Turkey. The Special Account will be used following procedures agreed with the Bank, and will have an authorized allocation o f Euro 40.0 million, with an initial allocation o f Euro 20.0 million until disbursementsreach Euro 70.0 million. The PCU Coordinator and the PA Vice President will be authorized to sign the withdrawal applications, with two signatures required. The minimum application size for payments directly from the Loan Account and for issuance o f Special Commitments is 20 percent o fthe SA authorized allocation. Applications for replenishment o f the SA will be submitted to the Bank on a monthly basis, or when the balance o f the SA i s equal to about half o f the initial deposit or the authorized allocation, whichever comes first, and will include a reconciled bank statement as well as other appropriate supporting documents. 52 Annex 8: ProcurementArrangements TURKEY: PrivatizationSocial SupportProject2 A. General Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. B. Procurementof Goods Goods procured under this project would include several small packages o f shopping contracts comprising office equipment and supplies for the implementingagencies and the PCU with a total amount of Euro 313,000. C. Selectionof Consultants The Borrower will select and hire consultant firms for socio-economic evaluations o f JLC and LRS, Social Impact o f Economic Changes on Communities andManagement o f Consultants. The Borrower will also select and hire large number o f individual consultants to provide technical assistance to PNLAG, ISKUR, and KOSGEB on different TA tasks. Consultant services also comprise the TA to support implementation of the project by employingPCU staff. D. SpecialSelectionArrangements: Procurement for LRS with an aggregate amount o f Euro 14.00 million may be procured under contracts awarded inaccordance with the provisions o fparagraph 3.17 o fthe Procurement Guidelines, following criteria and procedures acceptable to the Bank as described in the POM and its Annex 1. E. Assessment of the agency's capacityto implementprocurement Procurement activities will be carried out by the existing PCU established in 2001 under the PA within the context o f ongoing PSSP. The PCU is composed o f a PCU Director, FMS Specialist, Reporting and Communication Specialist and a Team Assistant. The P C UDirector i s a public officer and the other PCU staffs are all consultants. An assessment o f the capacity o f 53 the PCU to implement procurement actions for the project was carried out by the Procurement Accredited Specialist in March 2005. The assessment reviewed the organizational structure for implementingthe project and found out that the size andcapacity o fthe current PCUrunningthe ongoing PSSP project i s adequately satisfactory to implement the PSSP2 project provided that a procurement specialist i s recruited. Due to the replication o f the ongoing PSSP project, it is recommended to implement the PSSP2 with the current PCU Director, FMS Specialist, Reporting and Communication Specialist and a Team Assistant in order to keep the institutional memory, experience and continuation o f the project. It i s recommended that the contracts o f the current PCU staff employed under the ongoing PSSP project will be renewed with the terms and conditions to be agreed for the PSSP2 project when expired in December 31, 2005 under the ongoing PSSP project. If a public officer in the capacity o f a procurement specialist will be assigned by the PA to the Project, in this case he/she would be sent for training organized preferably by ILO at TuridItaly, for further development o f procurement o f consulting services underthe Bank's procurementprocedures. The initial overall project risk for procurement i s rated low. The risk rating will be re- evaluated after one year o f Loan effectiveness and adjustment will be made accordingly. Duringthe project launchworkshop the Bank will organize a training program for the PA and PCU personnel who may be involved in the procurement activities to introduce the Bank's Guidelines and standard biddingdocuments to be used inthe implementation o fthe project. F. ProcurementPlan The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on April 4,2005 and i s attached to Appendix 8. There is no I C B Works and Goods Contracts in the procurement plan. Among the other minor procurement items, it consists o f Community DrivenDevelopment contacts amounting Euro 14.00 million and one QCBS consulting services contract estimated to cost Euro 916,000 and several individual consultant contracts amounting to Euro 2,342,000. The procurement plan will be updated in agreement with the Project Team bi-annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. G. Frequencyof ProcurementSupervision Contracts not subject to Bank's prior review will be post reviewed by Bank's supervision missions and/or during regular post-reviews by the Procurement Accredited Staff on sampling basis, i.e. one out o f every five contracts. The frequency o f procurement supervision should be every six months inthe first year o fthe project and once ina year inthe following years. H. Detailsof the ProcurementArrangementsInvolvingInternationalCompetition 1. Goods, Works, and NonConsultingServices (a) List o f contract packages to be procured following ICB and direct contracting: There i s no ICB contract envisaged inthe current project scope. 54 (b) All ICB contracts for Goods and first ShoppingContract and all direct contracting will be subject to prior review by the Bank. 2. ConsultingServices (a) List o f consulting assignments with short-list of international firms. Review Method by Bank Prior I Post Managementof Consultants Prior (b) Consultancy services by firms estimated to cost US$200,000 (Euro 154,000) or more per contract, individual consultant contracts estimated to cost US$50,000 (Euro 39,000) or more and single source selection o f consultants will be subject to prior review by the Bank. (c) Short lists composed entirely o f national consultants: Short lists of consultants for services estimated to cost less than US$200,000 (Euro 154,000) equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 o fthe Consultant Guidelines. The following table provides the details o f the agreedproject procurement plan. TURKEY: SECOND PRIVATIZATIONSOCIAL SUPPORT PROJECT PROCUREMENTPLANAS OFAPRIL 4,2005 I.General 1. ProjectInformation: Country:Turkey Borrower:Republic of Turkey ProjectName: SecondPrivatization Social Support Project LoanNo: .... ProjectImplementingAgency: PrimeMinistry, Privatization Administration 2. Bank's ApprovalDateof the ProcurementPlan Original:April 4,2005 3. Dateof GeneralProcurementNotice:July 1,2005 (planned) 4. PeriodCoveredby the Plan:4 years 55 11.Goods andWorks andNon-consulting(Technical)services 1. Prior Review Threshold:ProcurementDecisions subject to Prior Review byBank as stated inAppendix 1to the Guidelines for Procurement: Procurement Method Prior Review Threshold (Euro) Aggregate (Euro) 1 ICB 77,000 -goods andworks 0 2 Shopping First contract is subject to prior review 305,000 3 Direct Contracting All 0 4 Community Driven > 100,000 14,000,000 Development (CDD) 2. Pre-qualification:Not applicable 3. Referenceto Project OperationaVProcurementManual: The POMhas a procurement section describing the service delivery contracts to be procured within the context o f LRS. 4. ProcurementPackageswith Methodsand Time Schedule 1 2 3 4 5 6 7 8 9 Contract Number of Procure- Domestic Review Expected Expected Expected No (Description) Contracts ment Preference by Bank Bid- Contract Contract Method (yesho) (Prior/ Opening Signing Completion Post) Date 1 LAGOffice I I I I I I 2 b ~ ~ ~ ~ o f f i c e Equipment& Multiple Shopping No Post I Throughoutproject life Supplies. 3 KOSGEB Office Equipment & Multiple Shopping No Post I Throughoutproject life Supplies 4 ' ~ C ~ o f f i c e ripment I Multiple 1 Shopping I No I Post 1 Throughoutproject life Supplies I 5 EKAoffice equipment& Multiple Shopping NO Post Throughoutproject life 1The first contract is subject to prior review 56 111. Selectionof Consultants 1. Prior Review Threshold: Selection Decisions subject to Prior Review by Bank as stated inAppendix 1to the Guidelines Selection and Employmento f Consultants: Selection Method Prior Review Threshold (Euro) Aggregate (Euro) 1. CompetitiveMethods (Firms) > 154,000 1,2 16,000 2. Single Source (Firms) All 0 3 . IndividualConsultant >39.000 Euro 1.171.OOO 2. Short list comprising entirely of national consultants: Shortlist o f consultants for services, estimated to cost less than US$200,000 (Euro 154,000) equivalent per contract, may comprise entirely o f national consultants in accordance with provisions o f paragraph 2.7 o f the Consultant Guidelines. 3. Other SpecialSelectionArrangements: LRS Procurement for LRS (aggregate amount o f Euro 14.00 million) may be procured under contracts awarded in accordance with the provisions of paragraph 3.17 o f the Procurement Guidelines, following criteria and procedures acceptable to the Bank as described in the POM. These include, inter alia (i) type o f community services to be provided, (ii) agencies the the eligible to provide said services, and (iii)the eligible costs that will be reimbursed inthe service delivery contracts as described inAnnex 4 o f the PAD, and further defined and discussed inthe POM. Contracts for services such as employment counseling, retraining and small business assistance are generally not expected to exceed Euro 100,000 per contract. The Bank's prior review is required for contracts exceeding Euro 100,000. Procurement o f LRS will be carried out by ISKUR and KOSGEB and their local offices and generally be carried out on a service delivery contract basis. Service contracts for small business incubators are not expected to exceed Euro 700,000 per contract, and will be subject to ProcurementProcedures, as further describedinthe POM (withan aggregate value o fEuro 3.50 million). ISKURandKOSGEB local offices can execute contracts up to Euro 30,000 and contracts over this amount must be submitted to the lead agency head office for review and no-objection. ISKURand KOSGEB lead agencies can give no-objections for contracts up to Euro 50,000 and contracts over this amount must be submitted to the PA for review and no-objection. The PA can review and give no-objection to contracts up to Euro 100,000. All contracts over Euro 100,000 must be submittedto the Bank for prior review and no-objection. Inaddition, duringthe regular 6-month project supervisions, an ex-post review o f selected projects will be carried out bythe Bank. 57 4. ConsultancyAssignments with SelectionMethodsandTime Schedule 2 3 4 5 h 7 8 Number Selection Revie Expected Expected Expected Descriptionof of Method W Proposals Contract Contract Assignment Contracts by Submission Signing Completion Bank Date (Prior I I Post) Impact Analysis Post March 2006 June2006 June2009 o f LRS One CQ Economic and Post ' March 2006 June 2006 June 2009 Social Impact o f One CQ Privatization Labor Market Sep 2005 Survey Multiple CQ Post Management o f Sep 2005 Consultants 1 QCBS Prior I P A & ISKUR & Throughout the life o f the project KOSGEB Multiple I C Post Consultants Labor Market Throughout the life o f the project Specialist Multiple I C Prior (Intemational) PCU Staff (local) June 2009 1)Financial 2) Procurement 3) Reporting/ Multiple I C Prior :ommunications 4) Translator 5) Team Assistant ` T ontractis subject to PI r review. Individual consultants for PNLAG, ISKUR and KOSGEB shall be selected from a long list of consultants who expressed interest to a local advertisement to be issued bi-annually. Selection of consultants shall be based on their qualifications and experienceson the requiredtasks. IV. ImplementingAgency CapacityBuildingActivitieswith Time Schedule No. Expectedoutcome/ Estimated ActivityDescription Duration Comments 1 Procurement Training during 1day To be provided by Project Launch Workshop PAS 2 Training o f Procurement 2 weeks Specialists (Civil Servants) to be assigned by the P A on Banks' Procurement Procedures 58 Annex 9: Economic and FinancialAnalysis TURKEY: Privatization Social Support Project 2 The PSSP2 i s directly linked with the Government o f Turkey's overall economic reform program which will structurally transfonn the Turkish economy by reducing state involvement and advancing market reforms. Many state-owned enterprises are characterized by low productivity-low output per worker. This key benefit o f the PSSP2 is to help improve the productivity o f certain segments o f the Turkish industrial sector (in accordance with paragraph 3 o f the OM on Financing Severance Pay in Public Enterprises Reform Operations, updated February 7, 2005, which states that "severance pay should be an integral part of the project aimed to make an enterprise or sector more productive"). Only those SOEs that can demonstrate: (a) an expected positive rate o f retumon the investment o f severance within a four year period (i.e., the reduction in the number o f employees must result in a decrease in overall operating costs without a corresponding loss o f production; (b) that the investment is in accordance with Turkey's industrial strategy; and (c) that the investment will lead to an overall increase to either production, profits or exports at the enterprise or sector level. Moving workers via severance payments and from jobs where they are not productive and receive public subsidies to jobs where they are productive and do not receive public subsidies reduces public budget outlays and increases GDP. The overall efficiency o f the economy will be enhanced helping Turkey to complete globally and also to meet the market economy tests for EU accession. Public budget outlays will decline to the extent that redundant workers who are to be redeployed to new jobs now receive indirect or direct government subsidies. Evenifdisplaced workers are not successful infindingproductivejobs, public budget outlays will decline if, as expected, the costs o f labor redeployment measures, including temporary income support, are less than the cost o f the subsidiesto keep workers inunproductive jobs. At the same time, GDP will increase to the extent that the jobs filled by redeployed workers are new jobs or higher productivity jobs than they would otherwise have been. Specialized counseling, re-qualification training, and improvedjob placement services have been found to raise productivity by bringingabout more efficient matching o fjob seekers andthe skill requirements o f existingjobs. Main Assumptions: JLC: production from privatized enterprises will be maintained at levels that are equal, or are sufficiently high, to offset the costs o f severance payments to reduce labor costs. LRS: investment in labor redeployment programs results in a net positive impact on job placement. Cost-effectiveness indicators: JLC: The reduction in the number of employees, must show an expected positive rate o f return on the investment o f severance within a four year period, and must result in a decrease in overall operating costs without a corresponding loss o f production. LRS: the job placement rate for workers participating in labor redeployment programs will be equal to or betterthan those insimilar programs inTurkey andthe region. 59 Annex 10: Safeguard Policy Issues TURKEY: Privatization Social Support Project 2 No safeguard policy issues are involved. However, in the case o f the small business incubators under the LRS, environmental and occupational health and safety international best practices will be included inthe support and training givento enterprises. The PSSP2 is in compliance with the Bank's policy on tobacco in OP 4.76, first the PSSP2 provides no direct funding to the tobacco sector. Second, there is no reason to believe that the privatization o f the state tobacco monopoly will lead indirectly to increased production, although this can not entirely be ruled out. Moreover, under the Agricultural Reform Implementation Project, the Bank i s supporting crop diversification for tobacco farmers and tobacco production has been declining. The support provided to workers made redundant in the tobacco sector as a result o f privatization i s an inseparable part o f the overall privatization program and the Bank's support to mitigate the social costs thereof. Moreover, such workers can benefit from training and other labor redeployment services to help them find sustainable employment outside o f the tobacco sector. 60 Annex 11:Project Preparation and Supervision TURKEY: Privatization Social Support Project 2 Planned Actual PCNreview 02/28/2005 02/17/2005 Initial PID to PIC 03/04/2005 02/22/2005 Initial ISDS to PIC 03/08/2005 02/22/2005 Appraisal 04/12/2005 04/08/2005 Negotiations 04/28/2005 04/28/2005 Board/ approval 06/14/2005 Planneddate o f effectiveness 09/15/2005 Planneddate o fmid-termreview 06/30/2007 Plannedclosing date 06/30/2009 Key institutions responsible for the preparation ofthe project: PA with support of ISKUR, KOSGEB and EKA. Bank staff and consultantswho worked on the project included: Name Title Unit John Innes Task Team Leader ECSHD IbrahimAkcayoglu Co-Task Team Leader ECSHD Robert Gourley Consultant (JLC) DavidFretwell Consultant (LRS) Ibrahim Sirer Procurement Specialist ECSPS Seda Aroymak Financial Management Specialist ECSPS SanjayN.Vani Senior Financial Management Specialist ECSPS DilekBarlas Senior Counsel LEGEC Hannah Koilpilai Senior DisbursementOfficer LOAGl ElifYukseker Program Assistant ECCU6 Jennifer Manghinang Program Assistant ECSHD Bank funds expendedto date on project preparation: 1. Bank resources: US$ 50,860 2. Trust funds: 0 3. Total: US$50,860 Estimated Approval and Supervision costs: 1. Remainingcosts to approval: US$30,000 2. Estimated annual supervision cost: US$90,000 61 Annex 12: Documentsinthe ProjectFile TURKEY: PrivatizationSocial SupportProject2 A. ProjectOperationalManual(POM) The POM has been prepared together with the Borrower and the Bank. The POM contains for each component, the objectives, activities, implementation procedures, performance and outcome indicators, implementation schedules, terms o f reference for TA, detailed budgets and procurement arrangements. The P O M also contains a detailed FOM for the operation o f the LRS. B. . Bank StaffAssessments .... The Financial, Project Management andProcurementAssessment have beencompleted duringthe appraisal, bythe FMS andPAS staff and are on file. Concept Review Package, February 7,2005 Back to Office Reports, Aide Memoires and Follow-up letters to the Government Country Assistance Strategy (CAS) (Report N o # 26756-TU, October 3,2003) Turkey:Joint PovertyAssessment Report, (Report No # 29619) Turkey: Greater Prosperity with Social Justice, (Policy Notes), 2002 ..... C. Other State Planning Organization: 8fhFive Year Development Plan (2001-2009, Ankara, 2001 Government of Turkey: Urgent Action Plan, Ankara, 2002 State PlanningOrganization: Pre-Accession Economic Programme, Ankara, 2004 McKinsey Global Institute: Turkey Making the Productivity and Growth Breakthrough, 2003 TurkishEmployment Agency: Employment Assessment Report, Ankara, 2004 62 Annex 13: Statement of Loans and Credits TURKEY: Privatization Social Support Project 2 Differencebetween expectedand actual Original Amount inUSSMillions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Ong. Frm.Rev'd PO94176 2005 ECSEE APL #2 (TURKEY) (CRL) 66.00 0.00 0.00 0.00 0.00 65.29 0.00 0.00 PO66149 2005 SEC EDUC 104.00 0.00 0.00 0.00 0.00 107.30 0.00 0.00 PO70950 2004 ANATOLIA WATERSHED REHAB 20.00 0.00 0.00 0.00 0.10 19.55 -0.15 0.00 PO72480 2004 RENEW EYERGY 202.03 0.00 0.00 0.00 1.01 198.01 -3.01 0.00 PO74053 2004 HEALTH TRANSIT (APL #I) 60.61 0.00 0.00 0.00 0.30 62.52 2.47 0.00 PO75094 2004 WATERSHED REHAB (GEF) 0.00 0.00 0.00 7.00 0.00 6.75 0.10 0.00 PO82801 2004 EFIL2 303.10 0.00 0.00 0.00 0.00 92.61 -152.49 0.00 PO82996 2004 PFPSAL 3 1,000.00 0.00 0.00 0.00 0.00 500.00 -500.00 0.00 PO59872 2003 BASIC ED 2 (APL #2) 300.00 0.00 0.00 0.00 0.00 291.46 265.01 38.96 PO74408 2002 SRMP 500.00 0.00 0.00 0.00 0.00 259.67 224.31 -17.53 PO70286 2002 ARIP 600.00 0.00 0.00 0.00 0.00 273.71 263.71 40.21 PO69894 2001 PRIV SOC SUPPRT 250.00 0.00 0.00 0.00 0.00 7.21 7.21 -46.79 PO68368 2000 MARMARA EARTHQUAKE EMG RECON 505.00 0.00 0.00 0.00 0.00 284.36 284.36 20.14 PO44175 2000 BIODIViNTRL RES MGMT (GEF) 0.00 0.00 0.00 8.19 0.00 4.39 3.59 0.15 PO09073 1999 INDUSTRIALTECH 155.00 0.00 0.00 0.00 0.00 20.90 20.90 0.00 PO48852 1998 NAT'L TFCVSMGRID 270.00 0.00 0.00 0.00 27.79 129.40 157.19 49.87 Total: 4,335.74 0.00 0.00 15.19 29.20 2,323.13 573.20 85.01 TURKEY STATEMENT OF IFC's Heldand DisbursedPortfolio InMillionsofUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 Acibadem 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Altematif Bank 0.50 0.00 0.00 0.00 0.50 0.00 0.00 0.00 1996101103 Arcelik 19.90 0.00 0.00 0.00 19.90 0.00 0.00 0.00 2000 Arcelik LG Klima 11.17 0.00 0.00 0.00 11.17 0.00 0.00 0.00 2002 Assan 22.50 0.00 0.00 0.00 22.50 0.00 0.00 0.00 2002 Atilim 6.50 0.00 0.00 0.00 6.50 0.00 0.00 0.00 2000 Banvit 10.00 5.00 0.00 0.00 10.00 5.00 0.00 0.00 Bayindirbank A.S 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 2002 Beko 33.62 0.00 0.00 28.82 33.62 0.00 0.00 28.82 2001 Bilgi 9.00 0.00 0.00 0.00 9.00 0.00 0.00 0.00 1994196197 Borcelik 9.09 3.21 0.00 0.00 9.09 3.21 0.00 0.00 2004 BorusanHolding 30.00 0.00 10.00 0.00 30.00 0.00 10.00 0.00 1994 CBS Holding 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 I990102 Conrad 3.15 0.00 0.00 0.00 3.15 0.00 0.00 0.00 2002 EKS 11.25 0.00 0.00 0.00 11.25 0.00 0.00 0.00 2004 Ege 10.00 0.00 0.00 8.00 10.00 0.00 0.00 8.00 1995 Entek 19.00 0.00 0.00 9.94 19.00 0.00 0.00 9.94 1999 Finansbank 3.33 0.00 0.00 0.00 3.33 0.00 0.00 0.00 2004 Garanti Leasing 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1999 GumussuyuKap 4.00 0.00 3.76 0.00 4.00 0.00 3.76 0.00 63 2001 Gunkol 6.20 0.00 6.25 0.00 6.20 0.00 6.25 0.00 1998 Indorama Iplik 4.38 0.00 0.00 0.00 4.38 0.00 0.00 0.00 1998100102 Ipek Paper 11.14 0.00 0.00 0.00 11.14 0.00 0.00 0.00 1990 Kepez Elekmk 2.43 0.00 0.00 0.00 2.43 0.00 0.00 0.00 1988190 Kiris 11.66 0.00 0.00 0.00 11.66 0.00 0.00 0.00 2004 Koclease 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1991 Kula 5.26 0.00 0.00 0.00 5.26 0.00 0.00 0.00 2003 MESA Group 11.00 0.00 0.00 0.00 11.oo 0.00 0.00 0.00 2004 Meteksan Sistem 0.00 0.00 8.50 0.00 0.00 0.00 8.50 0.00 2002 MilliRe 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998102 Modem Karton 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1991 NASCO 10.18 0.00 0.00 3.55 10.18 0.00 0.00 3.55 2004 OPET 25.00 0.00 0.00 40.00 8.33 0.00 0.00 25.00 2004 Oyak Bank 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 2002 Pasabahce 3.75 0.00 0.00 0.00 3.75 0.00 0.00 0.00 1998 Pinar ET 3.93 0.00 0.00 0.00 3.93 0.00 0.00 0.00 2000 Pinar SUT 13.08 0.00 0.00 0.00 9.30 0.00 0.00 0.00 1999 SAKoSa 16.96 0.00 0.00 6.82 16.96 0.00 0.00 6.82 1990 Silkar Turizm 2.01 0.00 0.00 2.28 2.01 0.00 0.00 2.28 2002103 Sise ve Cam 69.64 0.00 0.00 43.52 69.64 0.00 0.00 43.52 2002 Soktas 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 1999 TEB Finansal 0.56 0.00 0.00 0.00 0.56 0.00 0.00 0.00 2005 TSKB 0.00 0.00 50.00 0.00 0.00 0.00 50.00 0.00 19'82183189191\96/99 Trakya Cam 0.00 0.54 0.00 0.00 0.00 0.54 0.00 0.00 1999102 Turk Ekon Bank 13.33 0.00 15.00 0.00 13.33 0.00 15.00 0.00 2001 Turkish PEF 0.00 10.00 0.00 0.00 0.00 2.52 0.00 0.00 1999 Unye Cement 8.44 0.00 0.00 0.00 8.44 0.00 0.00 0.00 1999 Uzel 8.40 0.00 0.00 4.95 8.40 0.00 0.00 4.95 1998 Vikine 8.33 0.00 0.00 0.00 8.33 0.00 0.00 0.00 Total oortfolio: 617.19 18.75 93.51 147.88 526.74 11.27 93.51 132.88 ~~~ ~ Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. ~~ ~ 2001 Akbank 0.03 0.00 0.00 0.00 2004 Akbank BLoan Inc 0.00 0.00 0.00 0.02 2005 Arcelik-Reg. Exp 0.1 1 0.00 0.00 0.11 2005 Avea 0.12 0.00 0.00 0.30 2005 Bandinna Dogalga 0.00 0.00 0.00 0.00 2005 Gemlik Dogalgaz 0.00 0.00 0.00 0.00 2005 Intercity 0.02 0.00 0.00 0.03 2002 MilliReaswans 0.00 0.01 0.00 0.00 2005 PALEN 0.00 0.00 0.00 0.00 2005 Palgaz 0.01 0.00 0.00 0.00 2005 Sivas Dogalgaz 0.00 0.00 0.00 0.00 2002 TEB 111 0.00 0.00 0.00 0.05 Total pendingcommitment: 0.29 0.01 0.00 0.51 64 Annex 14: Country at a Glance TURKEY: Privatization Social Support Project 2 Europe & Lower- POVERTY and SOCIAL Central middle- Turkey Asia income Development diamond* ~ 2003 Population.mid-year(millions) 70.7 473 2,655 Lifeexpectancy GNi percapita (Atlas method, US$) 2,800 2,570 1,480 , GNI (Atlasmethod, US$ billions) 87.6 1277 3,934 Average annual growth, 1997-03 Population (%) 17 0.o 0.9 Labor force (%) 2.3 0.2 1.2 Gross M o s t recent estimate (latest year available, 1997-03) primary capita nrollment Poverty (% of population belownationalPOvertyline) Urban population (%of totalpopulation) 66 63 50 Life expectancyat birth (years) 70 69 69 - Infantmortality(per1OOOlivebirths) 35 31 32 Child malnutrition (%ofchildrenunder5) 8 n Access to improved water source Access to an improved watersource (%ofpopulation) 82 91 81 Illiteracy(% of populationage S+) 14 3 D Gross primaryenrollment (%ofschool-age population) 94 a 3 112 , ----Turkey Male 98 D4 l l 3 ~- omegroup Lower-middle-inc Female 91 a 2 111 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 Economic ratios' GDP (US$ billions) 61.5 79.4 183.9 240.4 Gross domestic InvestmentlGDP 6.3 27.6 213 22.8 Exports of goods andServicesIGDP 12.5 t3.7 29.2 27.4 Trade Gross domestic savingsIGDP 12.2 219 8.8 8.5 Gross nationalsavingslGDP 6.3 24.8 20.8 8.5 Current account balance1GDP -3.1 -3.6 -0.8 -2.8 Interestpayments1GDP 2.9 2.2 3.8 3.2 Total debtlGDP 33.0 38.2 713 61.2 Total debt servicelexports 39.2 316 50.7 40.3 Present value of debtlGDP 73.1 Present value of debtlexports 234.2 Indebtedness 1983-93 1993-03 2002 2003 2003-07 (averageannualgrowth) GDP 5.0 2.7 7.9 5.8 5.6 -Turkey GDP oercaoita 2.8 0.9 6.2 4.2 4.1 Lower-middle-income group ~ 7 . - . , I STRUCTURE o f the ECONOMY lsg3 Growth of investment and GDP (Yo) (%of GDP) Agriculture 214 6 2 8 0 Industry 250 298 23 7 Manufacturing 6 8 183 140 Services 536 540 633 647 Private consumption 784 650 662 669 Generalgovernment consumption 9 4 t30 140 Imports of goods and services 6 6 8 3 307 307 198343 1993-03 2o02 (averageannualgrowth) Growth of exports and imports (Yo) Agriculture 1.5 10 7.4 -2.4 40 - I Industry 67 2 2 5 6 5 0 20 Manufacturing 6 9 3 0 8 2 8 4 Services 4 3 3 0 7 3 64 Privateconsumption 4 7 19 2 2 6 7 -20 - - Generalgovernment consumption 4 0 3 9 5 4 -24 -40 - Gross domestic investment 7 7 10 359 204 Imports of goods and services 114 7 8 6 8 27 1 -Exports -Inports + 65 Turkey ~~ PRICES and G O V E R N M E N T FINANCE 1983 1993 2002 2003 D o m e s t i c prices Inflation (Oh) I [%change) 4 Consumer prices 31.4 66.4 44.8 25.2 Le- Implicit GDP deflator 26.3 67.8 44.1 22.5 Government finance 25 - [%of GDP,includes current grants) Current revenue 19.O 31.2 30.4 98 99 D O O f 02 Current budget balance -3.1 -5.1 -5.3 Overall surplusldeficit -t?.O -11.9 -0.1 .---GDPdeflator -CPI T R A D E I 1983 1993 2002 2003 (US$ millions) Export and import levels (US$ mill.) Totaleworts (fob) 5,905 25,345 40,P4 51,206 80.000 Agricultural and livestock 1,032 1,044 2,089 2,545 Mining and quarry products 188 233 387 543 Manufactures 4.685 14,068 33,565 43.912 Total Imports (cif) 9,235 29,428 51,554 69,340 Food 123 969 1,245 2,006 Fueland energy 3,851 3,903 9,192 11,568 Capital goods 2,311 7,499 9,03 11,792 I Export price index(?395=aO) 89 92 75 82 97 98 99 00 01 02 03 I Import price index[?395=MO) 0 0 85 73 83 Exports Imports Terms of trade (?395=100) 89 0 9 0 2 99 B A L A N C E o f P A Y M E N T S 1983 1993 2002 2003 (US$ millions) Current account balance t o G D P (%) Eqorts of goods and services 7.865 26,264 54,907 70,231 4 - Imports of goods and services 0,118 33,721 55,365 73,760 I Resource balance -2,253 -7,457 -458 -3,529 Net income -1,430 -2,744 -4,554 -5,427 Net current transfers 1,760 3,768 3,490 2,06 Current account balance -1,923 -6,433 -1,522 -6,850 Financing items (net) 2,075 6,741 7,675 0.897 Changes in net reserves -252 -308 -6,253 -4,047 M e m o : Reserves including gold (US$ millions) 2,253 T1,762 38,051 44,957 Conversion rate (DEC, local/US$) 226.0 11,046.7 1,509,471 1,496,668 EXTERNAL D E B T and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) C o m p o s i t i o n of 2003 debt (US$ mlll.; Total debt outstanding and disbursed 20,324 68,605 x31.058 147.035 IBRD 2,336 5,285 5,367 5,214 A 5,2# IDA 184 142 89 83 1 G 2 3 0 0 B 83 Total debt service 3,08 8,664 29,092 29,T12 IBRD 274 1,183 708 728 IDA 4 7 7 7 Compositionof net resourceflows Official grants 98 403 Official creditors 327 -740 224 -1,2TI Private creditors 139 6,04 6,901 -511 Foreign direct investment 46 622 863 1,063 Portfolio equity 0 189 -1,183 2,250 F World Bank program 86 624 Commitments 675 207 1,650 0 A IBRD - E- Bilateral Disbursements 486 354 1,031 276 D OthH multilate-al - F Private - Principal repayments I25 753 443 502 G- Short-term 66 MAP SECTION
Группа Всемирного банка · Project Appraisal Document
Turkey - Second Privatization Social Support Project
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