Report No. 6603-TU Turkey: Adjusting Public Investment (In Two Volumes) Volume II: Main Report and Statistical Annex March 30,1987 Europe, Middle East and North Africa Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This report has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TURKEY ADJUSTING PUBLIC MSTMNT VOLUME I CURRENCY EQUIVALENTS Currency Unit Turkish Lira (TL) US$1 TL 652 TL 1 US$ 0.0015 Currency equivalents are those effective April 1986, unless otherwise indicated. ABBREVIATIONS BOAT - Build-Operate-and-Turnover DSF - Development Support Fund DYB - State Investment Bank IAF - Investment Acceleration Fund MHF - Mass Housing Fund PCF - Petroleum Consumption Fund PPF - Public Participation Fund PTT - Posts and Telecommunications RUSF - Resource Utilization and Support Fund SEE - State Economic Enterprize SPO - State Planning Organization TEK - Turkish Electricity Authority TKF - Public Participation and Mass Housing Administration TKI - Turkish Coal Enterprise FOR OMCIL Use ONLY TURKEY ADJUTING PUBLIC IEMENT TABLE OF CONTENTS VOLUME II Page No. MAIN REPORT AND STATISTICAL ANNEX CHAPTER I. INTRODUCTION . . . . . . .... . . . . 1 The Agenda . . . . . . . * .. . 1 , CHAPTER II. THE PUBLIC INVESTMENT FRAMEWORK: ADJUSTING THE VISIONS AND GOALS . . . . . . . . . . . . .. ... .a. ... . . . 3 Major Economic Priorities and Constraints . . . . . . 3 The Economic Policy Framework . . . . . . . . . . 4 Progress in Investment Rationalization . . . . * . . . 6 Medium-Term Economic Prospects . . . . . . . . . . . . 7 Financing Public Investment . . . . . . . . . . . . . 9 (a) Central Government . . . . . . . . . . . . . .. 9 (b) Extra-budgetary Funds . . . . . . . . . . . . . . 9 (c) Local governments . . . . . . . . . . . . . . . . 14 (d) State Economic Enterprises (SEEs) . . . . . . . . 14 (e) Cost Recovery and Private Sector Mobilization . . 15 Public Investment Allocations . . . . . . . . . . . . 17 CHAPTER III. PUBLIC SECTOR INVESTMENT MANAGEMENT: ADJUSTING THE MEANS 20 Managing the Size and Composition of Public Investment 20 Overprogramming . . . . . . . . . . , . . . . . . . . 24 Mobilizing Private Initiative . . . . . . . . . . . . 27 Decentralization . . . . . . . . . . . . . . . .... 29 CIHAPTEFi IV. INSTITUTIONAL REFORM: ADJUSTING THE SYSTEM . . . . . 30 Perspective and Strategic Planning Studies . . . . . . 30 Project Design, Assessment and Monitoring . . . . . . 32 Medium-term Planning .................... 35 Budgeting and Monitoring. I 38 Policy Analysis and Coordination . . . . . . . . . . . 40 Management of State Economic Enterprises . . . . . . 41 This document has a ratricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank autherization. - il - TABLE OF CONTENTS (continued) VOLUME II Pate No. MAIN REPORT AND STATISTICAL ANNEX (continued) V. ADJUSTING PUBLIC INVESTMENT: AN ACTION PROGRAM . . . 43 Public Investment Size and Content . . . . . . . . . . 44 Public Investment Management: Finance . . . . . . . .. 44 Public Investment Management: Programming, Budgeting . and Monitoring. . . . . . . . . . . . . . . . . . . 45 Strategic Planning . . g. . ... . .. .. . .. .. . 47 Decentralization................... 48 Management of SEEs . . .. ....... 48 ANNEXES: SECTOR SUMMARIES A=NEX I: AGRICULTURE . . . . . . . . . . . . . . . . . . . . . .. 50-68 ANNEX II: MANUFACTURING . . . . . . . .. . . . . . . . . . . . . . 69-73 ANNEX III: TRANSPORT . . . . . . . . . . . . . . . . . . . . . .. 74-75 ANNEX IV: ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . 76-79 ANNEX V: EDUCATION AND TRAINING........... .. 80-83 ANNEX VI: POPULATION, HEALTH AND NUTRITION. . . . . . . . . . . .. 84-88 ANNEX VII: URBAN. . . . . . . . . . . . . . . . . . . . . . . . . . 89-97 ANNEX VIII: TOURISM. . . . . . . . . . . . . . . . . . . . . . . . . 98-100 STATISTICAL APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . - iii - TABLE OF CONTENTS (continued) VOLUME II Page No. LIST OF TEXT TABLES 1. Growth in Public Fixed Investment Program Targets and Realizations . . . . . . . . . . . . . . . . . . . . . 6 2. Comparison of Actual Investment Expenditure with Annual Program Allocation by Sector, 1980-85 . . . . . 7 3. Projections of Selected Economic Indicators, 1984-89 . 8 4. Sources of Finance for Public Fixed Investment, 1980-1986 10 5. Contribution to Difference Between Actual and Programmed Public Fixed Investment by Source 1980-85 . . . . . . . . 11 6. Public Fixed Investmenta Financed by Extra Budgetary Funds 12 7. Sectoral Composition of Public Fixied Investment, 1984-89 . 18 8. Foreign Exchange Intensity of the Public Fixed Investment Program . . .a. . . . . . .. .. . . . . .. .. . . .4 . . .. 22 9. 1986 Public Investment Program by Sector and Source of Financing . . ... . ...... .. . . .. ....... . . . . .. . .. 23 10. Alternative Schemes for Government Control of SEEs . . . . 43 VOLUME I TURKEY ADJUSTING PUBLIC INVESTMENT I. INTRODUCTION The Agenda 1.01 The economic reform program introduced by the Government of Turkey in 1980 aimed initially at resolving the financial crisis which had developed during the late 1970s, and consequently emphasised trade and financial stabilization, especially fiscal and monetary restraint. The restraint of public investment, which had grown rapidly in the mid-1970s, was an important element in this program; a 1981 World Bank report on public investment ' proposed major cuts in the investment program to bring it into line with available resources while keeping the program consistent with national priorities, increasingly oriented to infrastructure investments and away from manufacturing. In addition, export incentives, import liberalization and a realistic exchange rate policy for the Turkish lira set the environment for renewed growth based on exports, implying an increased role for the private sector in trade and manufacturing. Consequently, all industries were opened to private, including foreign investors, while reforms of the State Economic Enterprises (SEEs), which carried out about half the total public investment program, were introduced to reduce government protection and enable them to function on a more competitive basis. 1.02 These reforms, which were supported by debt rescheduling, a series of IMF stand-by programs and by five World Bank structural adjustment loans, were largely successful in achieving their main objectives. However, a review of the Fifth Five-Year Plan, covering 1985-89, revealed that the Plan's overall growth assumptions were too optimistic, and that the Government's public investment targets were too high when viewed against the resources likely to be available. In addition, studies of the agricultural, energy and transport sectors by the Bank in the recent past have suggested areas of improvement in government policy, including public investment. 1.03 The Bank and the Government therefore agreed to carry out a second public investment review, with the following objectives: (a) to review the progress in investment rationalization; (b) to make recommendations for further rationalization in the light of a continuing constrained resource environment, and of the rapid evolution of government policy towards greater involvement of the private sector, and (c) to help establish the framework for future World Bank assistance to Turkey. ' Turkey: Public Sector Investment Review, December 7, 1981, Report No. 3472-TU. -2- 1.04 This review of public investment forms part of setaral economic and sector studies designed to assist and further Turkey's structural adjustment process. The Fifth Plan Review, completed in June 1985, established the macroeconomic framework for Bank assistance to Turkey, and outlined the broad strategy for the key economic sectors: agriculture, energy, industry and transport. A spries of collaborative studies, financed under a technical assistance loan, is examining the scope and strategy for the restructuring of key industrial subsectors and the privatization of key SEEs in manufacturing. Recent studies of agriculture and the financial sector have led to the adoption by the Government of important sectoral reform programs, which are being supported by the World Bank. Studies of power investment, transport, telecommunications, engineering industries, housing finance, health and education have either been completed or are ongoing, and have contributed importantly to this report. Two closely-related World Bank studies are the fiscal policy and tax reform study and the study of private sector adjustment to liberalization. The importance of both themes is strongly supported by this report, which again draws attention to the uncertainty surrounding the resources likely to be available to the public sector in the coming years, and to the need for more attention to the policies and institutions which can realize the Government's aim to base growth increasingly on the private sector. 1.05 The first important message of this review is that with certain excepcions, the excision of low-quality projects proposed by the Bank's 1981 review has largely taken place. What remains is a problem of overprogramming--a need to establish clearer priorities and firmer schedules on a more selective basis, given the resources likely to be available and the Government's increasingly demanding tests for public sector activities. In several sectors, the limited knowledge and data base relating to public investments means that strategic studies and portfolio reviews are needed to permit a more thorough prioritization of expenditures to take place. 1.06 The second message is that the major adjustments now needed are institutional; the need is to reform and strengthen the system for managing public investment, to better integrate decision-making and monitoring of elosely-related policies in relation to public and private investment. 1.07 The third message is that the system needed to manage public investment must be flexible, while at the same time responding to national aims and objectives The report argues for a system that leaves the Government with adequate room for manoeuvre, in the face of fast-changing international economic conditions as well as the continuing flow of new information about Turkey's own investment potential and requirements. 1.08 Since the main part of the analysis for this report was conducted, international oil prices have dropped. This has had a favorable net impact on Turkey's balance of payments. The direct savings from petroleum imports alone were about $1.3 billion in 1986. However, the outlook is characterized by considerable uncertainty, given the variety of longer term oil contracts and bilateral payments arrangements which have been or are being negotiated with major suppliers. And exports to oil-exporting countries in the Middle East, which now account for about 40X of the total, have been affected adversely. -3- This was a main cause of the decline in exports in 1986. Moreover, energy conservation is still an important priority, and the extent and timing of the benefits to Turkey of lower oil prices and possible faster OECD growth are still uncertain. "Core programs" of high-priority investments, which this report proposes, could be accelerated if the Government succeeds in capturing the oil price windfall. As concerns project selection under the impact of lower oil prices, it does not at this point appear that longer term prospects, (for the 1990s) have changed greatly; for most of the major energy-related investments, this is the relevant time frame. II. THE PUBLIC INVESTMENT FRAMEWORK: ADJUSTING THE VISIONS AND THE GOALS Major Economic Priorities and Constraints 2.01 Turkey's natural resource base, including hydropower, lignite and other minerals, and its agricultural and tourist potential are considerable; its location astride the trade routes of Southeastern Europe and the Middle East is favorable, and its basic infrastructure already well developed. Its population is enterprising and hardworking; the major constraint is probably lack of technology and skills: with an adult literacy rate of 832 and a 381 middle secondary school enrollment level and thus a limited base for tertiary education. Health and population indicators also lag, population growth of about 2.22 annually is comparatively high and makes it more difficult to attain the per capita income levels and demographic characteristics to which Turkey aspires, as it attempts to break into the ranks of the developed countries by the beginning of the next century. 2.02 The present Government sees Turkey's long-term development as based on a competitive trading economy, backed up by an efficient, restrained public sector. With growth based on such a system, Turkey can reduce income inequalities and provide employment opportunities in its rapidly growing cities and less developed regions. With almost half its population now in cities, Turkey cannot ignore the efficiency of its urban economy. Similarly, infrastructure development for the poorer eastern parts of the country at acceptable cost must remain an important objective. 2.03 The achievement of this vision depends on the articulation of explicit strategies to achieve them, on consistent economic policies and effective program implementation. This means strategic planning accompanied by effective development budgeting. An industrial and trade strategy must be developed to assess where the markets for Turkey's products and services will be in the next two decades; what preparation is needed to penetrate them; which products should be emphasized; how the private and public sectors should cooperate to identify the potential and to marshall resources; and how Turkey can develop the technological base and the fast-responding service sector that characterize the dynamic economies. These questions require a public policy response, even as the private sector plays the lead role in implementation. And the eventual scale of public investment in such areas as research and development, university and polytechnic education, and trade-related investments implied by those strategies is significant. -4- 2.04 Several other long-term strategic issues also have a bearing on investment policy, and especially public investment. These include the effects of demographic change on employment patterns and the need for services; the spatial aspects of poverty and regional inequity; the income distribution implications of policy options and feasible investment patterns; plans for energy, transport and other sectors with long investment lead times; environmental issues, urbanization, scientific and technological development, and long range financial planning, to determine, for example, the balance between domestic resource mobilization and external capital, and the funding of the social security system. The scale and focus of direct foreign investment is of particular importance. These strategic considerations should provide the basic guide to public investment, as well as to the range of complementary policy tools available to help shape Turkey's future. 2.05 Alongside these visions of the future should be placed the realities of today. In the following section, the analysis of the resources for public investment is presented. Here, four major points should be noted. First, real wages for some categories have been declining for more than six years. The economic reforms must be made to impact upon real living standards, with their ultimately beneficial impact disseminated throughout the population to make sure no group is left behind. Secondly, the overall productivity of investment remains low (ICOR of 4.5-5.0) and has not improved significantly since the late 1970s. Thirdly, private investment has yet to develop significant momentum, especially in manufacturing. Finally, despite its efforts, the State remains the predominant actor in investment and trade policy. Indeed, if allowance is made for the large public expenditures that support private investment, well over 60% of investment expenditure would be on account of the public sector. If anything, this ratio increased further in 1985-86. 2.06 The implications for public investment policy are not that investment should be scaled back (though analysis below suggests that its growth should be more strictly constrained), but that: (a) it should become more efficient; (b) it should be made more consistent with already articulated strategic objectives; and (c) it should be conceived, planned and implemented in more conscious consonance with the private sector. The Economic Policy Framework 2.07 Turkey's growth, which averaged a high 7.7% per year in 1973-76, was financed by drawing down its reserves and heavy short-term borrowing. The resulting external debt burden led to an abrupt halt to growth in mid-1977, with a sharp deterioration in credit-worthiness, severe shortages of imports, disruptions in industrial production and a consequent rise in urban unemployment. GNP growth steadily declined from 4.0% in 1977 and turned negative in 1979, whereas domestic inflation accelerated from 242 in 1977 to 64% in 1979 (as measured by the wholesale price index). In these circumstances, the January 1980 reform measures were adopted. -5- 2.08 The adjustment program introduced in January 1980 included wide ranging policy reforms aimed at stabilizing the economy while encouraging export promotion, an enhanced role for the private sector, especially in manufacturing, and increased reliance on market forces. The main instruments were devaluation and a realistic exchange rate policy, accompanied by import liberalization, export promotion, public sector reforms, financial sector reforms, and monetary and fiscal policies. These measures succeeded in restoring economic growth in 1081-83 in conjunction with external sector improvement. In 1983, however, monetary and fiscal policy were somewhat less restrained and inflation accelerated. In 1984-85, therefore, the reform program was intensified, with greater emphasis on real devaluation, rapid import liberalization, the improvement of domestic resource utilization through SEE price increases, subsidy reduction and the introduction of new taxes like VAT in January 1985. Direct export subsidies gradually gave way to a more aggressive exchange rate Folicy. Following these measures, overall economic performance continued to be satisfactory: growth of GNP and exports was maintained in 1984 and 1985; the current account deficit narrowed to $1 billion in 1985; budgetary performance improved, and the inflation rate decreased. Some of these trends were however reversed in 1986. Whereas growth accelerated and the rate of inflation slowed, both the public sector deficit and the current account deficit widened, the latter to an estimated $1.3 billion. 2.09 The Government's public investment policy changed sigxnificantly under the reform program, from one of leading economic growth to one of (a) limiting the size and rate of growth of public investment despite the relapse in 1985-86; (b) cutting out large, low priority investments; (c) focussing public investment on essential infrastructure, while curtailing it in such areas as manufacturing, where private investment is expected to play the dominant role, and (d) improving the efficiency of public investment. The Government has started to implement an ambitious program to privatize SEEs and is also pursuing several options for involving the private sector in infrastructure. A master plan for privatization has been prepared and detailed studies launched of the textile, cement, fertilizer, paper and pulp and engineering sub-sectors. Most of these studies were completed by end-1986. 2.10 The reforms introduced in 1984 go well beyond previous initiatives in assigning a leading role to the private sector. In addition to maintaining the major macroeconomic policy adjustments of the 1980 program, (the exchange and trade regime, investment incentives, taxation and prices) major new initiatives were also launched to reform SEEs (including restructuring and privatization) and to stimulate private involvement in infrastructure through the BOAT model, (see para. 3.16 below). To succeed in promoting growth and greater efficiency, these initiatives also require public sector support, focused on three main elements: (a) the continuous monitoring and adjustment of the policy framework; (b) restraint in the commitment of public resources; and (c) the preparation of specific short and long-term sector and sub-sector strategies and restructuring/development plans. -6- Progress in Investment Rationalization 2.11 Considerable progress has been made in rationalizing public investment along the lines of the new policy. In 1982-84, the Government succeeded in containing the growth of public investment (Table 1) and in shifting its composition in the desired direction, albeit not as much as was planned (Table 2). The Bank's 1981 review focussed essentially on large projects in the program, which account for a substantial proportion of total investment in such sectors as pcwer, mining, manufacturing and transport but not in others, such as agriculture and water supply/sewerage. Thirty-two projects, which were considered doubtful during that review were dropped or suspended from the program, and progress was made in priority ranking of the large project portfolio. Project completion rates improved ir. 1982-84 for irrigation and energy. However, comprehensive data on project completion are not available, and several sector analyses suggest that available resources continue to be spread thinly over many ongoing projects. Table 1: Growth in Public Fixed Investment /a -- Program Targets and Realizations, 1981-86 (Percent) 1981 1982 1983 1984 1985 1986 Estimate Program over estimate /b 11.6 6.0 5.2 5.8 5.8 3.5 Program over program /c -3.7 5.7 10.9 2.3 -3.1 10.1 Actual over actual 9.4 2.2 1.9 1.8 13.3 10.2 /a Includes exchange rate losses (1981-82) and interest costs of foreign debt related to ongoing projects (1981-86). /b Programmed level compared with previous year's mid-year estimate (on which the next year's program is based). /c Programmed level compared with previous year's program. Source: SPO, Bank estimates. Moreover, during 1985, and in the 1986 program, spending pressure has mounted, and there are indications that earlier progress in investment rationalization is being reversed. In 1985 the actual outcome revealed a rate of growth in public investment more than twice as high as what had been programmed. The slippage in investment rationalizaton was to a large extent resulting from the fragmentation of public sector resource management caused by the growing number of extra-budgetary funds and the increase in resources made available to municipalities with a backlog of investment needs. In 1986 the actual outcome again exceeded significantly what had been programmed. Table 2: Comparison of Actual Investment Expenditure with Annual Program Allocation by Sector, 1980-85 (Differences as percentage of allocation) Average 1980 1981 1982 1983 1984 1985 1980-85 Agriculture -28.9 -11.0 4.4 -20.9 -22.8 -23.4 -17.1 Mining -30.4 16.5 -11.5 -9.0 -14.1 1.6 -7.8 Manufacturing 30.4 28.6 12.4 20.2 27.6 37.9 26.2 Energy 13.5 17.7 17.0 9.1 6.6 2.7 11.1 Transportation -6.7 8.4 17.1 11.0 7.9 33.0 11.8 Tourism -41.7 -18.4 -41.0 -32.4 -15.2 -18.9 -27.9 Housing -8.1 40.8 -20.9 -34.8 2.8 -7.0 -4.5 Education -39.6 -10.5 20.1 -13.5 -19.9 -6.3 -11.6 Health -38.8 -3.5 4.7 -25.1 -30.1 -19.2 -18.7 Other Services -13.5 3.1 -9.7 -20.2 -31.7 -31.9 -17.3 TOTAL -2.1 12.1 8.3 0.2 -1.8 6.3 3.9 Source: SPO, Bank estimates. Medium Term Economic ProsDects 2.12 Following the mixed economic performance in 1986, there is a need for caution regarding medium term economic prospects, especially in three areas: (a) private savings and investment growth; both of which have grown less rapidly than expected in the Plan. Although private investment grew by an estimated 13.5% in 1986, this was largely on account of housing construction sponsored by the public sector, whereas manufacturing investment did not recover much from its depression; (b) controlling inflation, which was about 26S by November, 1986 (based on wholesale prices), close to the programmed level of 252, and less than the 1985 rate of 43.22; (c) more effective domestic resource mobilization, especially in the public sector. The 1986 budget deficit is now estimated at 2.32 of GNP in 1986, compared with 2.2X in 1985. Expenditure control was more slack in 1986, due to increased transfers and tax rebates, but the growth in revenue was rapid largely due to the tax measures introduced in 1985, in particular the value added tax. -8- 2.13 The projections on which the analysis of this report is based, (Table 3) are accordingly conservative. GDP is expected to grow by 5.72 per annum average during 1985-89, with total fixed investment projected at 6.32 (almost 262 lower than the Plan levels). Inflation targets are also more modest, implying a fall from about 271 in 1986 to 201 in 1989, compared with 102 in the Plan. The projections imply a narrowing of the current account deficit, even though the implicit import elasticity, at 1.3, is fairly high. Debt service obligations are likely to be high over the coming years on account of the repayment of debt consolidated in 1978-80, the expiration of grace periods on OECD special action loans, and increased borrowing from commercial sources. The debt burden should remain manageable, however, with the debt service ratio declining gradually after peaking in 1987 at 34X, provided that current policies are successfully implemented, that the export drive is vigorously resumed after the temporary set-back in 1986, and Turkey continues to receive further support from international commercial and official sources. Table 3: Projections of Selected Economic Indicators, 1984-89 Actual Actual Estd. Annual Avgs. Plan 1984 1985 1986 1987 1988 1989 84-89 85-89 Tgt. Annual Real Growth Rate GDP/l 5.9 5.1 7.0 5.0 5.8 6.2 5.8 5.8 6.3 Of which: Agriculture 3.5 2.4 7.0 2.5 3.0 3.3 3.6 3.6 3.6 Industry 10.1 6.3 9.2 6.4 7.6 7.9 7.9 7.5 7.5 Services 5.8 4.0 6.2 4.3 5.6 6.0 5.3 5.2 6.5 Fixed Investment 4.7 10.9 11.2 6.9 6.7 6.9 7.9 8.5 8.5 Public 1.8 13.3 10.0 6.4 4.0 4.0 6.6 7.5 6.8 Private 8.8 7.8 13.0 7.7 10.4 10.6 9.7 9.9 10.9 Consumption 5.3 3.5 8.7 3.4 5.5 6.1 5.4 5.4 5.5 Merchandise Exports 26.2 10.1 -1.8 6.1 8.1 8.3 9.5 6.2 10.6 Merchandise Imports 18.3 7.2 7.7 4.3 7.0 7.8 8.7 6.8 8.2 Current $ Billion Current Account Balance -1.4 -1.0 -1.3 1.0 -0.6 -0.8 -1.4 Total Debt Outstanding and Disbursed /2 22.3 26.1 28.8 30.5 31.8 33.1 Debt Service Ratio /3 23.3 30.8 32.6 34.3 33.3 31.7 16.3 Source: SPC, Bank estimates /1 At market prices. Components are at factor cost. /2 Includes IMF. /3 Total debt service (excluding short-term)/exports of goods and NFS plus workers' remittances. -9- 2.14 Total public fixed investment growth is projected at 7.5% p.a. on average through 1989. The projection assumes not only that investment growth picks up in the private sector in 1988-89, but that privatization of SEEs starts to take effect during 1987. Given the overprogramming still evident in the present investment program, upward pressure on public investment levels must be expected to remain strong, and should, in part, be controlled by setting conservative limits for investment growth, especially after the unsustainably high rates registered in 1985-86. In any event, these public investment growth projections should be considered ceilings and a sustained effort is needed to adhere to them. Financing Public Investment 2.15 Both the size and composition of public investment in Turkey have depended to a significant extent on the sources of investment finance (see Chapter III, para 3.03). The likely evolution of these sources is examined below. Of particular importance has been the degree of government control over the sources of finance, and the relative autonomy of the agencies (especially the SEEs) carrying out the program. (a) Central government 2.16 The central government consolidated budget has accounted for between one third and 40% of public investment in the 1980s (Table 4). In 1985, despite improved revenue performance, the consolidated budget accounted for less than one third of public investment, with the SEEs accounting for more than half the program and the extra-budgetary funds having grown to 5.4% of the total. The contribution of budget financing to public investment has tended to fall short of expectations (Table 5). The past shortfalls have sometimes caused the level and composition of investments to diverge from plans, because some sectors are primarily dependent on budget financing. Public investment has accounted for about 20% of consolidated budget expenditures and has tended to be the residual item in public expenditures. Revenue performance improved significantly in 1985, and most of the increase in revenue over what was programmed was allocated to investment. There appears to be little scope in the future for reductions in current expenditures. Personnel expenditures have been declining in real terms, while other current expenditures have barely grown, whereas most sector analyses suggest that current requirements are underfunded. Transfers rose considerably in 1985, largely due to increases in export tax and wage earner tax rebates, on which there might be scope for reduction in the future. Future public investment from the consolidated budget therefore depends on a strong resource mobilization effort and a reduction in subsidies and transfers. (b) Extra-budgetary funds 2.17 In 1985, extra-budgetary sources of finance accounted for 5.42 of public investment; they are expected to reach 9% in 1986. Several new extra-budgetary funds have been created since 1984. Three are of quantitative significance: the Public Participation Fund (PPF), the Mass Housing Fund (MHF) and the Petroleum Consumption Fund (PCF). Their contribution to investment program financing is shown in Table 6. Most of the MHF, however, is not included in the official investment program but counted against private investment. Table 4: Sources of Finance for Public Fixed Investment, 1981-87 /I (Percent) Extra- Consolidated Budgetary Revolving Local Budget Funds Funds Govertnents /k SEEs Total Program 47.7 - 1.8 3.7 46.8 100.0 Actual 39.8 - 1.1 6.3 52.8 100.0 Program 41.4 - 1.6 5.3 51.7 100.0 Actual 40.1 - 1.0 6.6 52.3 100.0 Program 44.1 - 1.6 5.2 49.1 100.0 Actual 39.5 - 1.3 9.3 49.9 100.0 Ii4 Program 43.0 - 2.0 4.6 50.4 100.0 Actual 37.7 0.2 1.6 7.6 52.9 100.0 ml- Program 40.2 2.0 2.1 4.9 50.8 100.0 Actual 31.8 5.4 1.4 9.4 52.0 100.0 Jim Program 32.2 10.2 2.4 10.S 44.7 100.0 Estimate 33.9 8.8 2.3 14.9 40.1 100.0 i7 Program 28.1 12.4 2.4 18.3 38.8 100.0 /I includes exchange rate losses in 1981-82. /k Includes Iller Bank. Source. SPO. (2681112) -11- 2.18 The PPF is intended to increase private involvement in the Government's investment program and to accelerate the completion of revenue- earning public investment projects. Created early in 1984, the PPF is one of three funds administered by the Public Participation and Mass Housing Fund Administration (TKF). It issues revenue-sharing bonds at attractive yields to the public and uses the proceeds to finance other projects with revenue- potential, so far primarily in energy (hydropower) and transport (toll roads and bridges). It thus acts much as a financial intermediary for public administrations unable to borrow long-term in the domestic market. The MHF, also created in early 1984 and administered by the TKF, channels public funds largely into private investments in housing. It is funded by a number of special earmarked taxes, including a share of the petroleum consumption tax. Its estimated 1985 income was TL 194 billion and its program is estimated at about TL 282 billion in 1986. The PCF, maintained at the Central Bank, receives the 48.25% (1986 share) of the petroleum consumption tax that is not earmarked for either the Treasury or the MHF. Receipts are then distributed according to an annually predetermined formula for various purposes, such as motorways. rural roads, education, investments by municipalities, etc. Table 5: Contribution to Difference between Actual and Programmed Public Fixed Investment by Source, 1981-86 /a (Percent) 1981 1982 1983 1984 1985 1986 Estimate Consolidated Budget -12.2 28.2 -115.5 -47.6 -2.0 41.1 Extra-budgetary Funds - - - 3.2 19.3 3.0 Revolving Funds -3.4 -5.0 -5.4 -5.1 -1.6 1.6 Local Governments /b 23.6 18.1 57.4 56.5 27.4 33.1 SEEs 92.0 58.7 -36.5 93.2 56.9 21.2 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 /a Includes exchange rate losses in 1981 and 1982. /b Includes Iller Bank. Source: SPO. . Table 6: Public Fixed Investment Financed by Extra-Budgetary Funds, 1984-87 (In TL billion of current prices) Other Funds Energy Transport Tourism Education Services /a Agriculture Total 1984 Actual Mass Housing - - 3.4 - _ - 3.4 Total 3.4 _ - 3.4 I1 Actual Mass Housing - - 0.6 - - - 0.6 Public Participation 82.6 11.8 - - 5.2 - 99.6 Development Support - - - 17.6 - - 17.6 Petroleum Consumption - 4S.6 - 4.1 - - 49.7 Total 8 5.4 Q. 21. 5.2 _ 167.5 1986 Estimate Mass Housing - - 3.5 - 1.0 - 4.S Public Participation 225.0 78.9 - - 47.0 - 350.9 Development Support - - - 8.3 - 8.3 Petroleum Consumption - 69.9 - 6.3 - - 76.2 Total 225.0 148.8 3. 14.6 439.9 1987 Proaraum N Mass Housing n.a. n.a. 3.0 n.a. n.a. n.a. 8.0 Public Participation n.a. n.a. - n.a. n.a. n.a. 726.9 /k Development Support - - - 6.0 6.0 Petroleum Consumption n.a. n.a. - n.a. n.a. n.a. 74.1 Total 156.4 430.1 3.0 25.5 MA 161.9 815.0 /a Other services include housing and health in 1987. lb Includes TL323 billion equivalent of external financing not previously shown under the budget. Source: SPO. (26811/4) -13- 2.19 Not included in the table is the Investment Acceleration Fund (IAF) which provides additional financing to accelerate completion of high priority projects, including local currency funds for projects that are not in the program but that attract foreign credits during the program period. It has grown rapidly from TL 13 billion in 1984 and TL 65 billion in 1985 to TL 190 billion in the 1986 budget. It is not, however, included in the official investment program and could be considered a contingency fund available for protecting high priority projects from shortfalls in budgetary resources for investment financing, were it not also used to finance new projects. Of the TL 65 billion spent in 1985, most appears to have been spent on infrastructure: notably roads, drinking water and village electrification. 2.20 Future resources from these funds are uncertain. While those that rely on levies or tax revenues are likely to continue to grow, the budgetary situation of the PPF, whose main source of income to date has been the sale of revenue-sharing bonds, is more uncertain. To be viable, the PPF's future revenue will depend increasingly on the operating incomes of the infra- structural facilities for which it has sold bonds to the public, and from the sale of operating rights or other SEE assets. This will depend in turn on the pursuit of appropriate cost-recovery policies in the operation of these facilities, as well as on the terms at which revenue bonds and other financing instruments used by the funds are issued to the public. 2.21 The basic intention of increasing extra-budgetary financing is to expedite project completions, and to ensure that priority projects are not adversely affected by general budgetary cuts.'/ However, the extra- budgetary funds have not always been used to finance declared priorities. In 1985, perhaps half of the total extra-budgetary investment financing was used for previously declared priorities: the majority of PPF financing, (estimated to be 56% of extra-budgetary investment financing), was for projects specified as priority,2/ while the bulk of PCF funds (another third of extra-budgetary investment financing) are being used to finance the construction of roads, the urgency of which is questionable, at least in some cases. Moreover, the priority of investments in the tourism and education sectors, being financed by the Mass Housing Fund (MHF) and Development Support Fund (DSF) respectively, also do not seem clearly established. Finally, the Government should decide first whether the funds are temporary expedients only, or whether they are to become permanent features of the financial system, in which cast their financing, operations, audit and relations with Government and with other intermediaries has to be determined. A detailed program for improving the coordination and management of the funds is needed. Secondly, since the need for the extra-budgetary funds arises out of deficiencies in the budgetary system that constrain the financing of priority investments, Government should consider changes in the budgeting system, (see Chapter IV). r' An article in the Budget law has been modified, enabling budget allocations of projects to be exceeded if financed by the PPF. 2/ Of the 10 dams being financed by the PPF, five are in the list of large projects Rs priority projects, two are in the same list but not specified as priority and the other three must be smaller projects for which the Government's priority ranking is not known. Of the three highways being financed by the PPF, two are in the large projects list as priorities in the 1986 Program (although one of these was not considered a priority in the 1985 Program), and the status of the third project is not known. -14- (c) Local governments. 2.22 Several measures have been taken since 1984 to improve the resource situation of local governments. These include: (i) an increase in the revenue share of central government tax collections (although for 1987 the 1986 share is being maintained and not increased as originally foreseen); (ii) the transfer of the assessment and collection of the property tax to local governments; and (iii) the creation of various extra-budgetary funds which would be used in part to finance municipal expenditures. 2.23 As a result, local governments are programmed to finance almost 152 of the overall investment in 1986 compared to 7.81 during 1981-85. In the past, taken together they have generated sufficient savings to meet their investment expenditures and more or less balance their budget, albeit at low levels of investment. In 1984 and 1985, it is estimated that local governments had an aggregate overall surplus. Municipal revenues were equivalent to as much as 14S of central government revenues in 1985, and possibly 16.5% in 1986. 2.24 Municipalities are becoming more important as users of investment funds and possibly in resource mobilization also. Not much more finance can reasonably be expected from central government, however, so that the pressing needs for higher operating and maintenance expenditures, as well as for much needed investments in urban infrastructure, will require a larger local resource mobilization effort. The Government should carry out an assessment of municipal needs and financing sources to determine appropriate means for mobilizing resources. (dl State Economic Enterprises (SEEs) 2.25 SEEs still account for more than half of public investment. In 1985, SEE profits (after taxes) amounted to 2% of GNP. As a result, SEEs were able to finance about 25% of their investment program out of their own resources, as compared with an average of 1.21 between 1980-83. Under the January 1980 program, price controls on SEE commodities and services were lifted (with a few exceptions), and SEEs have been required to cover their operating costs and generate funds for their investment programs through price changes and efficiency improvements. Simultaneously, their access to concessionary funds and budgetary transfers has been reduced with the ultimate aim of providing transfers solely for the few remaining subsidized activities, and, effective from January 1985, exemptions from various taxes were withdrawn. 2.26 The SEEs have also accounted for most of the divergence between programmed and actual investment expenditures (Table 5). This partly reflects their capacity to borrow externally. The improvement in SEE finances has also enabled them to press ahead with investments. This growing financial autonomy -15- i8 fully consistent with Government policy, but profitable and financially sound SEEs should also be required to observe maximum debt/equity ratios and foreign debt ceilings, and to distribute a part of their profits as dividends, rather than capitalising them as equity except as needed to improve their capital structure, (Chapter IV, paras. 4.39-4.45). 2.27 Some further improvements in cost recovery and subsidy removal are intended by the Government. These include a timetable for establishing cost-based tariffs for the railways and domestic aviation, and tariff increases for power and telecommunications. In addition, fertilizer subsidies are to be removed by the end of 1988. There is potential for full cost recovery in the Iskenderun iron and steelworks, TKI (the SEE in charge of lignite mining), the railways and the public bus companies in the three largest metropolitan areas, although in some of these cases modernization and retrenchment would be needed at the same time. Even if these are implemented, however, the growth in SEE savings will probably not be maintained at the 1985 rate, due to one-time effects such as debt consolidation and the conversion of some former, profitable, public administrations into SEEs. 2.28 Financial Sector Reform The interest of SEEs in borrowing abroad, and the growing activities of the extra-budgetary funds, also reflect deficiencies in the financial sector, notably the high cost of credit, the relative absence of instruments for both short-term working capital and long-term investment resources, and weaknesses in financial institutions. The Government's financial sector adjustment program aims at bringing Turkey's financial system more into line with such systems in other middle-income, modernizing and outward-oriented economies where there is more holding of financial assets, lower bank intermediation margins, more long-term financing and more use of capital markets (corporate bond and equity issues). These reforms are mainly targqted at mobilizing the resources for private investment and allocating them more efficiently. However, it should also be an aim to link these reforms to public investment by the SEEs. As SEEs become more viable and autonomous, they should be able to finance themselves increasingly from the domeitic financial system, rather than from budgetary sources and external financing. Finally, more dependence should be placed on the institutions responsible for long-term finance to the SEEs, most notably the State Investment Bank (DYB), which should develop a capacity to exercise "arm's length" appraisal and supervision of SEE investments. (e) Cost Recovery and Private Sector Mobilization 2.29 In addition to the removal of subsidies and raising of SEE prices, the Government has lifted many of the previous price controls on SEEs, but there appears to have been less comprehensive attention to cost recovery in water supply/sewerage, health, education, irrigation and housing finance. Better cost recovery is being pursued and progress has been made, for example, in irrigetion, but much remains to be done to reach the potential. Cost recovery is non-existent in most sewerage systems; in water supply, capital investments are highly subsidized and sometimes made on a grant basis, and tariffs are often insufficient to cover even operation and maintenance costs. -16- In parts of the health system, Turkey has a tradition of charging fees, but they have not kept pace with inflation and are often unrelated to the cost of the services rendered. Fees are also being levied in higher education, but they fall far short of even recovering the 201 of the cost that can be charged to users according to the constitution. The substantial revenue generation potential of telecommunications appears to have been largely neglected; willingness to pay higher prices seems to be well established here, and this could be used either to expand the system more rapidly or to increase budgetary revenues. 2.30 The higher the degree of cost recovery, the greater the potential to involve the private sector in providing the goods and services now financed from the public purse. In addition, for SEEs and other semi-autonomous bodies, improved cost recovery can make access to non-government sources of finance feasible. A higher degree of cost recovery would also help alleviate operations and maintenance funding problems, and finance service expansion on the municipal level. Higher tariff levels also restrain the growth of demand for power, water supply and irrigation. Pricing at long-run marginal cost thus reduces the need for investments in those sectors, as well as in consuming sectors. For example, the ferro-chrome project or electric arc steel-making might not have been undertaken, if electricity had been priced at full economic cost. Specific areas where cost recovery should be improved are: (a) irrigation, where enforcement of existing cost-recovery policies needs strengthening and more ambitious cost-recovery goals should be set for budgeting and probably equity reasons, even if demand management and more efficient water uses appear unlikely to result; (b) power and lignite mining, where further progress towards long-run marginal cost pricing should also be realized as soon as possible; present demand projections in power assume such action; (c) water supply, and sewerage, where better cost recovery can be promoted by making investments in these facilities contingent on both improved operation and maintainance and on the introduction of appropriate tariff levels and structures; (d) education, where fees at the university level should be raised over the near term to the present constitutienal limit of 201; (e) health, where fees levied in public hospitals should at least be raised in line with inflation and, probably be increased in real terms as well, while taking care that these services remain accessible to low-income groups. At the same time, fee structures should be revised to reflect the relative cost of the services provided; and (f) Telecommunications, for which appropriate cost recovery and financial policies are outlined in a separate Bank sector report. -17- Government should require these sector agencies to prepare action programs and timetables to improve cost recovery and link approval of the 1988 program to progress made in this area. Public Investment Allocations 2.31 Table 7 summarizes the report's recommendations regarding the broad composition of the public investment program assuming growth at 3.75% per annum 1986-89.1' Larger resources could justify public investment growth above this ceiling, provided they were allocated to high priority projects and were on financing terms consistent with the constraint on additional public borrowing. 2.32 The broad recommendations in Table 7 reflect the need to continue allocating resources for the rapid completion of ongoing projects, including those in sectors like manufacturing and mining where new public sector projects are not generally envisaged. Due to poor data, it has only been possible to make rough estimates of the cost and phasing of project completions in these sectors. The carryover of ongoing projects appears important in water supply and sewerage and justifies a substantially larger 1987 allocation. The allocations suggested for this sector through 1987 would only cover the core program. By 1988, there will be more room for manoeuvre, and the allocations to agriculture, energy, education and health can accordingly rise. In some sectors, (power, transport), specific projects and programs have been prioritized and are listed in Annex I. By contrast, there are small allocations to low priority new projects in, for example, irrigation that create the potential for expansion in the future, unless they are curtailed. In other sectors (irrigation, water supply, health and education), SP0 should initiate detailed reviews of the portfolio of ongoing projects against more stringent project or program selection criteria. 2.33 Following the Bank's 1981 investment review, public investment policy stressed irrigation, energy, transport and communications as priority areas, with allocations to these sectors accounting for 60-65X of the total public investment program. The sectoral reviews undertaken for this report suggest that the broad emphasis on physical infrastructure remains appropriate, but that the transport sector can adequately support likely trade flows and meet other priority needs, like rehabilitation, at somewhat lower investment levels than in recent years. There remains an inherent need for telecommunication services which justifies the maintainance of recent high investment levels, provided there is full cost recovery. 2.34 Allocations to the power sector should increase. Even if tariffs are raised, the power subsector program as it stands is insufficient to meet anticipated demand through the early 1990s. By the late 1980s, power shortages will constrain industrial growth if investment is not expanded now. 1/ The recommendations were made in June 1986 on the basis of preliminary data for 1985 and the 1986 program. They have not been revised to take account of the revised 1985 and 1986 outturns. Table 7: Sectoral Composition of Public Fixed Investment /a, 1984-89 (In billions of TL at 1985 prices and percent) Actual Actual Estimate Recommended /l Program Recommended /I Recomended /b 1984 198S 1986 1986 1987 1987 t9tt 1989 Amount Share Amount Share Amount Share Amount Share Amount Share Amount Share Amount Share Amount Share Agriculture 258 8.8 206 6.6 316 8.1 285 9.0 465 10.8 312 9.5 380 11.1 447 12.6 mining 251 8.6 278 8.9 244 6.2 224 7.1 298 6.9 222 6.8 179 5.3 lS 4.3 of which -- TKX (118) (4.0) n.a. n.a. n.a. n.a. (124) (3.9) n.a. n.a. (122) (3.7) (79) (2.3) (S1) (?.4) Other (133) (4.6) n.a. n.a. n.a. n.a. (100) (3.2) n.a. n.a. (100) (3.1) (100) (2.9) (100) (2.8) Manufacturing 545 18.7 372 12.0 325 8.3 287 9.6 331 7.7 287 8.8 230 6.8 183 5.2 Energy 752 25.8 735 23.6 872 22.2 832 26.3 697 16.2 927 28.3 932 27.4 1011 28.5 Transport 659 22.6 925 29.8 1301 33.2 894 28.3 1429 33.1 774 23.6 756 22.2 73S 20.8 of which - Rail, Roads, Ports, etc. (361) (12.4) n.a. n.a. n.a. n.a. (572) (18.1) n.a. n.a. (409) (12.5) (411) (12.1) (405) (11.4) Pipelines (110) (3.8) n.a. n.a. n.a. n.a. (72) (2.3) n.a. n.a. (95) (2.9) (75) (2.2) (40) (1.1) Telecom. (188) (6.4) n.a. n.a. n.a. n.a. (250) (7.9) n.a. n.a. (270) (8.2) (270) (7.9) (290) (8.2) Tourism 21 0.7 23 0.7 44 1.1 25 0.8 S2 1.2 26 0.8 27 0.8 32 0.9 lousing 67 2.3 70 2.3 71 1.8 44 1.4 61 1.4 46 1.4 S1 1.5 53 1.5 Education 95 3.3 124 4.0 155 4.0 134 4.2 191 4.4 144 4.4 200 5.9 230 6.5 Health 38 1.3 39 1.3 64 1.6 S0 1.6 83 1.9 SS 1.7 65 1.9 70 2.0 1 Other Services 230 7.9 336 10.8 531 13.5 340 10.7 199 4.6 456 13.9 490 14.4 490 13.8 co of which -- Water Supply, Sewerage n.a n.a. n.s. n.a. n.a. n.a. (240) (7.6) n.a. n.a. (356) (10.9) (390) (11.) (390) (11.0) Other n.a. n.a. n.a. n.a. n.a. n.a. (100) (3.1) n.a. n.a. (100) (3.0) (100) (2.9) (100) l2.8) Unallocated - - 34 1.1 S06 11.7 26 0.8 96 2.8 140 4.0 Total 2S16 Iloo lIf08 100.0 32 10. 0 3!164& 1094 AM 1094 1 lOL ifi 100 354 lOLl /a Following the SPO sectoral classification -- i.e. energy includes only power; transport includes telecommunications and pipelines; *other servicesb include water supply and sewerage. /j These recome ndations were made to the Government in June 1986 and have not been revised to take account of the final 198S and 1986 outcomes. NB: Discrepancies due to rounding. Source: SPO. Ban* estimates. (26811/6) -19- The main imponderable is the rate at which private sector power development can be expanded (through the BOAT schemes). But, based on experience to date, the public sector program should be advanced--and possibly held back again later when the private sector arrangements have been clarified. The impact of energy deficits in the late '80s and early '90s on industrial growth could, as the Bank's Plan Review suggested, be seriously inhibiting. 2.35 Allocations to agriculture should also increase, but not to new projects, especially in irrigation. Agriculture is a net exporter, and increased productivity in the sector will enhance Turkey's competitiveness in agro-industry. The program's emphasis, however, needs to be shifted towards eliminating the backlog in on-farm development and towards improving agricultural services, which will have the largest impact on sectoral productivity growth. Since the agricultural sector largely depends on government budgetary support, the "core" allocation to the sector should be given high priority. 2.36 In mining and manufacturing, on the other hand, the government is generally correct in strictly constraining public investment, pending SEE privatization and the take-up of private investment. Some public investment in rehabilitation, modernization and de-bottlenecking appears justified, and there may be scope for accelerating completion of projects within existing allocations. The decline in the oil price has reduced the attractiveness of some energy conservation-related investments and made lignite mining less competitive. These types of energy investments will have to be carefully reassessed. 2.37 The Government should, however, consider a selective increase in social sector investments. The case is particularly strong for education. Turkey's ability to compete in world markets and sustain its outward-oriented strategy beyond the 1980s will unquestionably depend on the availability of skilled manpower, and specifically a growing capacity to absorb and even originate new technology. Equity and employment considerations also play a role. With secondary enrollments at low levels for a country like Turkey, higher investment levels are needed both to extend the coverage of the system and provide for the growing student population. Somewhat similar considerations apply to water and wastewater development, where there are serious backlogs in service provision and where urban population growth will continue to generate higher requirements. 2.38 The preceding discussion of past and present investments suggests that, with greater attention to the stronger investment program management-notably the reduction of overprogramming and better tracking and monitoring of investments-these objectives could be achieved without having to increase investment expenditures faster than the 3.752 per annum suggested by macroeconomic considerations. In particular, there is as yet no need to lift the general moratorium on new projects. 2.39. The Government agrees on the whole with the preceding assessment of public investment allocations. The excessively rapid increase in public investment in 1985-86, in part an unforeseen consequence of far-reaching decentralization policies, will be cut back significantly in 1987. Further -20- cut-backs in the growth rate of public investment might be called for to avoid undue pressure on public finances and the balance of payments. The Government realizes that public investment will have to be brought under better control to preserve a sound macro-economic situation and stands ready to act to this effect. Regarding the total size of the public investment program, the Bank is recommending a program about 2-3 percent smaller than what the Government is projecting for 1987. There is a consensus that the general moratorium on new projects should continue through 1987. 2.40. Regarding the sectoral allocatior of public investment, the 1987 public investment program reflects broadly the sectoral priorities recommended in this report. Transport is first priority with 33 percent, in part however because of the motorway program. Energy is second with 16 percent because the planned BOAT schemes are expected to materialize in 1987. The Government agrees nonetheless that if the BOAT schemes do not materialize as foreseen, public investment would have to fill the gap and the share allocated to energy raised significantly in subsequent years. Agriculture is in third place with 11 percent, while the share of manufacturing has been reduced further to 8 percent. The Government agrees that increased public investment in the social sectors is overdue and has increased the share of the 1987 program allocated to these sectors. Nevertheless, reducing the rate of growth of public investment makes it harder to achieve the desired sectoral reallocations. III. PUBLIC INVESTMENT MANAGEMENT: ADJUSTING THE MEANS Managing the Size and Composition of Public Investment 3.01 Analysis of past public investment suggests that it has proved difficult to achieve the amounts and sectoral composition programmed. Agriculture, mining, tourism, housing, education, health and other services (mostly water supply and sewerage) have received lower shares of the total than programmed (Table 2). With the exception of mining, these are also the sectors in which investments require primarily local currency (see Table 8) which comes mostly from the budget. Investment finance from the consolidated budget has fallen short of plans in most recent years, and this is a major reason for the performance shortfall in these sectors. The remaining sectors, that is, manufacturing, energy, transport and communications have typically achieved a higher share than programmed. Historically, investments in these sectors have also been relatively foreign-exchange intensive, with between 40% and 60% of expenditures in foreign currency. These divergences appear general, systematic and greater than can be ascribed to a reasonable degree of flexibility in program inplementation. 3.02 The PPF was introduced with the objective of channeling resources to high priority projects and programs with revenue-earning potential but constrained by shortages of local resources. Only education (Table 9) among the "underbudgeted" sectors receives significant amounts from the PCF. These funds have not, therefore, solved the problem for those sectors dependent on -21- local resources, but without revenue-earning potential. For these sectors, the identification of core investment programs and the protection of consolidated budget funding is especially important. 3.03 The divergences between plans and realizations largely reflect the influence of financing sources, especially foreign borrowing, over the composition of investment. SPO prepares a flow-of-funds account each year showing each SEE'S operational and investment requirements, including its proposed foreign borrowing. This is reviewed by SPO and Treasury$ submitted to the Higher Planning Council for approval and incorporated in the annual program decree. On this basis, Treasury establishes a foreign borrowing ceiling for each SEE which can only be changed with Treasury approval. The persistent divergence between programs and realizations suggest that this control is not functioning adequately. The Government should reexamine the mechanisms for programming and control of SEE foreign borrowing (as well as for foreign borrowing by the municipalities) to ensure that low-priority investments are not being implemented, and that project costs are adequately provided for in annual programs. Similar issues arise with respect to the use of SEE profits. As these improve, through better price and cost recovery, the issue arises whether they should be ploughed back into investments or declared as dividends to the Government. At present, they appear to be financing SEE investments to an extent which may not be justified by their quality and priority. As SEEs become more autonomous, the declaration of dividends by the Government should become general. Overall issues and recommendations concerning Government/SEE relations are addressed in Chapter IV. 3.04 The ability to manage the size and composition of the investment program is also being diluted by an inappropriate definition of public investment. Under present SPO practice, which follows the normal national accounts definition, public fixed investment includes the acquisition of fixed assets by central and local government and by those enterprises owned in majority by the Government that operate under the law governing SEEs. 3.05 This presents only a partial picture of public funds flowing into national fixed investments, because it excludes: (a) the cost of investment incentives; investment grants from the Resource Utilization and Support Fund (RUSF), which range from 7% nationwide to 20% for investments in the least developed regions, and the 10% of PPF funds that are earmarked for investments in less developed regions; these are not counted on the grounds that they are incentives, not investments; (b) investments made by enterprises majority-owned by the Government but operating under laws other than those governing SEEs; examples are the Erdemir Steel Company and the joint venture with General Dynamics to produce fighter aircraft; (c) funds flowing directly from the Government, from SEEs, or from municipalities into minority participations in private businesses. While this is not of great significance at the moment, it may become important in the future because of Government's policy of participating in up to 30% of the equity of any foreign investment venture that asks for it, including those under the BOAT scheme; Table 8 Foreian Exchanue Intensity of the Public fixed Investment Proaram (Percentage Breakdowns) Total 1986 Program 1986 Program Sector project cost LI Historical expenditure LI Without *funds La With *Funds LI Free Total Free Total Free Total Foreign Local Foreign foreign foreign Local Foreign foreign foreign Local Foreign foreign foreign Local Agric e exchae currengy bnrrowina exchanhe ahange currency borrow1na exch anah me currency eoxchEin 1 ne bE M currenD y Agricultwre 9.8 91.2 2.7 t.l 3.8 96.2 6.2 2.8 9.0 91.0 n.a n.a n.a. n.a. Mining 45.7 54.3 30.9 20.S 51.4 48.6 25.3 26.5 S1.8 48.2 n.a nf.a n.a. n.a. Manufacturing 49.1 S0.9 38.3 17.9 56.2 43.8 17.5 26.6 44.1 55.9 n.a n.a n.a. n.a. Power 49.0 S1.0 46.1 7.3 53.4 46.6 21.1 12.6 33.7 66.3 17.5 10.4 27.9 72.1 Transportation 43.7 56.3 27.5 13.6 41.1 58.9 41.5 13.5 5S.0 45.0 33.2 10.8 44.0 S6.0 Tourism 0.6 99.4 -- 0.3 0.3 99.7 -- 1.9 1.9 98.1 -- 1.8 1.0 98.2 Mousing 0.0 100.0 __-- -- 100.0 __ 0.1 0.1 99.9 n.a n.a n.a. n.a. Education 1.9 98.1 __ 0.3 0.3 "9.7 O.S 2.9 3.4 96.6 O.S 2.5 3.0 97.0 Health 4.8 95.2 __ 1.1 1.1 98.9 0.2 16.0 16.2 83.8 n.a n.a n.a. n.a. Other 4.3 9S.7 4.1 -- 4.1 9S.9 6.3 1.0 7.3 92.7 6.0 1.0 7.0 93.0 Services Total 33.9 66.1 31.2 10.5 41.7 58.3 21.5 12.5 34.0 66.0 19.2 11.1 30.3 69.7 a From 1986 progran as approved by Parliwant. This document excludes from its Sector totals all investments by local authorities and funding to be received from the Funds" *i.e., the TKF and the Petroleum Consumption Funds. a All funding from the *Funds" assumed to be in local currency. n.a.: not applicable because funds are not involved in these sectors. ScuMr: Based on SPO data. 535SK/8 Tahle 9: 1987 Public Xnvestment Program by Sector and Source of Financing (TL billion, 1987 prices) /a (1) (2) (3) (4) (S)=(1)+ (6) (7) (8) (9) Consolidated Revolving Provincial (2)+(3)+(4) Local Extra Bud. Grand Percent Budget Fund SEEs Bank Subtotal Govts. Funds Total Share Agriculture 403.8 61.8 S9.4 - 527.0 20.6 161.9 709.5 10.8 Mining 35.0 - 413.0 - 448.0 6.6 - 454.6 6.9 Manufacturing 2.3 6.3 456.6 1.8 467.0 38.8 - SO5.8 7.7 Energy 236.0 - 650.0 - 886.0 21.5 156.4 1063.9 16.2 Transport and Tele- coumunications 422.4 55.0 941.4 - 1418.8 331.9 430.1 2180.8 33.1 Tourism 17.5 6.0 6.5 1.8 31.8 44.6 3.0 79.4 1.2 Nousing 52.0 0.5 0.2 - 52.7 31.4 9.6 93.7 1.4 Education 222.5 12.7 0.8 - 236.0 29.7 25.5 291.2 4.4 Health 75.2 8.8 1.8 - 85.8 38.8 z.5 127.1 1.9 Other Services -- Economic 217.9 7.8 23.8 2.8 2S2.3 SO.0 1.7 304.0 4.6 Other Services -- Social 165.4 - - 212.0 377.4 370.1 24.2 771.7 11.7 Total 185.f0 16i0 2553.5 21a.4 4782.7 fA4A al0 6M.7 I.0 Percent Share 28.1 2.4 38.8 3.3 72.7 15.0 12.4 100.0 /a 1986 prices inflated by 20 percent (SPOs planning assumption) Sorze: SPO. (26811/5) -24- (d) the vast bulk of the public funds flowing into the MHF to finance private housing investment (but to be repaid over five years) are recorded as private housing investments and were primarily responsible for the buoyancy of private shelter investments in 1985; public equity injections into financial intermediaries, in general, are also not included in the investment program; and (e) budget lines earmarked for investments, primarily the IAF and similar funds such as the Local Administration Fund at the disposal of the Ministries of the Interior and Public Works. 3.06 Analysis and decisions on public investment need to take systematic account of these flows of funds. The official SPO investment program should therefore be accompanied by, and analyzed together with a comprehensive list of investment-related expenditures from public revenues. Overprogramming 3.07 Despite the progress made through 1985 in investment rationalization, overprogramming probably remains the most serious general problem in Turkey's public investment management. The concern is not that Turkey's public investment expenditure is being wasted on "bad projects". It is, however, being spread too thinly among a large number of projects. Given resource limitations, the policy of limiting public investment on strategic grounds and the simple need for better value for money, public investment management at the aggregate level should focus more systematically on the scheduling of investments. 3.08 There is a host of evidence for the continuing existence of overprogramming: at the aggregate level--and according to SPO data which are seriously deficient--the total multi-year investment program now under implementation would cost TL23,618 billion, (1985 prices), of which about TL18,000 billion remains to be spent. (Historical costs are underestimated since they are only available at current prices, but costs to complete are not systematically updated either, and are more likely under- than over- estimated). The 1986 program was to cover 162 of these expenditures, indicating an average project completion time of at least six years. This is not in itself too high, but the average completion time for multi-year projects is higher, because the overall average contains a significant proportion of small, new projects (30.1% of the 1986 program), many of which are to be completed within the year. 3.09 Long and lengthening implementation periods are evident in most sectors. In water supply and sewerage, for example, the investment program was related to the Water Decade and targets were set for 1990. Achievement dates have now been pushed back to 1993 for water supply and even further for sewerage. The sector has benefited from substantial increases in real resources (271 in 1985 and 56% in 1986 allocations), however, in order to adhere to the revised implementation schedules, sector investments would have to rise by another 752 in real terms in 1987 and remain at that level for several years thereafter. A similar bunching problem may arise in motorway -25- investments or in extra-large projects such as the Ataturk dam* Twelve percent of primary and lower secondary education schools take longer than 10 years to build and another 17 take between 5 and 10 years. Eight hospitals in the program have been under construction for 10 years or more, three of them since 1968. Average implementation periods of irrigation headworks projects improved from 25 years in the late 70's to 11 to 12 years in 1984, which was still about twice the original schedules. But the situation has deteriorated again with the increase in the number of ongoing irrigation and flood control projects, and delays in completing the on-farm development program. 3.10 The Government has tried to address overprogramming in several ways: (a) banning new projects in most sectors, recently in power and lignite mining; exceptions are granted for rehabilitation and modernisation projects; (b) providing full allocation, as requested by the implementing institutions, to projects to be completed within one year and substantial allocations for those scheduled for completion within two years thereafter. The efficiency of this tool is, however, reduced by the ability of implementing institutions to shift domestic resource allocations between projects; since the classifications used for budget control perforce do not always match the investment program and since the monitoring of expenditures according to program priorities is not systematic; and (c) creating the Public Participation Fund (PPF) and making substantial increases in allocations for the Investment Acceleration Fund (IAF) to speed up project completions. These measures have had an impact in the power sector, but it is not clear how well they have worked generally, and it is doubtful that the IAF is being used entirely for priority projects. 3.11 The ban on new projects was generally enforced but there have recently been some exceptions. For example, in irrigation and flood control, 142 projects were in the DSI portfolio in 1980. This had come down to 88 projects in 1984, but 23 new projects were introduced in 1985 and a further 36 were added to the 1986 program, lifting the portfolio well above the 1980 number. Similarly, the 1986 program allocation for motorways increased by TL 100 billion with the expressed intention of completing 1600 km of motorways by 1989. A further case of concern is the revival of the Sivas steel mill project. This project, which was suspended some years ago, is being revived as a simple rolling mill financed by the MHF, but plans are already being discussed for backward integration into steel-making. A backlog of projects has also built up, for example, in manufacturing and tourism, where feasibility studies have been or are being carried out. Continued enforcement of the moratorium on new projects remains essential. -26- '.12 The ban on new projects excludes some "program-type" projects that consist of a large number of small operations of the same type. Important examples exist in irrigation (low dams, flood control and completion works), rural road building, rural electrification and school-building. They are mostly justified on socio-political grounds, their economic priority is often doubtful, and some are growing rapidly. For example, the total cost to completion of the three such projects in irrigation has more than doubled between 1980 and 1985 to nearly TL 80 billion in (1985 prices). 3.13 Overprogramming is related to three further factors. One is the short-term nature of investment programming in Turkey: the programming horizon is basically one year; estimated expenditures for the next three years, which implementing institutions are required to report, remain essentially unused information. Expected expenditure profiles of projects are neither collected on a regular basis, nor combined for the purpose of anticipating bunching problems. The estimated remaining cost of completion of multiyear projects is not known on a routine basis. Second, only rudimentary financing data are collected by SPO, relating essentially to the foreign credit portion of estimated expenditures. This makes it impossible to integrate physical completion and financial programs effectively. Thirdly, expected financing has often failed to materialize, especially from the consolidated budget, necessitating substantial readjustments during the year. 3.14 To better control overprogramming, Government should: (a) program investments on a multi-year basis. This would permit more realistic phasing of project expenditures, and by giving agencies more assurance on funding availability over several years, reduce the incentive to crowd any one year's program with new starts; (b) develop "core programs" of high priority investments in each sector (or for each agency) for which resources would be ensured, especially for those sectors dependent on local finance from the consolidated budget. The core program should be based on a "low case" or "most conservative" projection of financial resources, with standby or advanceable projects identified in case resources turn out to be larger; (c) review the progress of the investment program more frequently (every quarter), especially the evolution of financial resources; (d) use price contingency funds to handle divergences between targetted and actual rates of inflation. The Investment Acceleration Fund (IAF) could be used for this purpose. It was budgeted at TLl90 billion in 1986, or 6.2% of the investment program, which was of the right order of magnitude to serve this purpose. The IAF is not, however, presently used in this way, and a specific decision would be needed to implement this recommendation. In 1987, a 202 inflation rate was incorporated in all appropriations. While this is more realistic than inflation allowances used in earlier years, inflation could turn out higher than this, in which case either a price contingency will be required or project execution will be slowed down. -27- Mobilizing Private Initiative 3.15 The policy to encourage the private sector is wide-ranging and includes at least four initiatives, aside from the enactment of general macroeconomic policies aimed at strengthening private incentives, including the financial sector reform program. These incentives and initiatives apply equally to domestic and foreign investment. The first initiative is a specific incentive system, to promote investments in otherwise unattractive locations, in keeping with the Government's regional development objective. The second is the privatization of SEEs. A privatization study for Turkish Airlines, a privatization master plan, and the sub-sector restructuring and privatization studies in textiles, fertilizers, cement, paper and pulp and engineering have now been either completed or are nearing completion. Funds directed to specific SEEs under Bank-assisted technical assistance in the sectors considered promising for privatization have been reevaluated in the light of these changing objectives. So far, sale or lease of public assets has been very small, but a new privatization council under a minister of state, and including the undersecretaries of Treasury and SPO, has been established to expedite implementation. 3.16 The third and perhaps most innovative initiative is the "Build, Operate and Turnover" (BOAT) scheme. Under these schemes, private investors would arrange financing, build and then operate a given facility for a certain period, after which it would be transferred to the Government. In power generation, where discussions of BOAT schemes are most advanced, this period is expected to be about 15 years, coinciding with the completion of all debt service obligations. Private investors would be responsible for putting the financing package together without a Government guarantee of loan repayment. The Government would, however, enter into a take-or-pay agreement for the output at agreed levels of plant availability and prices. It would also guarantee that payments will be made in the currencies required to service the debt and to provide a real return on equity. It would itself be prepared to take up to 30S of the equity. 3.17 Negotiations have been underway with four consortia, aiming at the construction of one nuclear and three coal-fired power stations, based on imported coal. Agreement was reportedly reached in late 1985 on the nuclear plant, but the necessary financing package has yet to be put together. A protocol was signed in early 1986 for one of the coal-fired plants with a .consortium led by Bechtel. The project, to be located in Tekirdag on the Marmara Sea in Thrace, is expected to cost about US$900 million with the foreign partners expected to hold 701 of the total equity of US$200 million. Here again, financing has yet to be arranged and the absence of a sovereign loan guarantee has delayed concluding a final agreement. Forty-eight applications for smaller BOAT power projects have also been received by the Ministry of Energy and Natural Resources; one is based on domestic lignite, the others are hydropower projects. 3.18 These projects, if implemented, can supplement and replace some of the public investments in the power sector, where Turkey has problems keeping up with demand. The cost to the economy and other consequences, however, have to be assessed carefully, an analysis that requires much more data than is now available. The balance of payments impact of these projects, how they fit -28- into a coherent least-cost policy for power, what risks the Government would face with respect to cost overruns and construction delays, how efficient operation can be ensured in what is essentially a cost-plus environment, and how these projects may affect the efficiency with which existing public power plants can be operated, are some of the questions. Long-term planning and project evaluation are therefore needed, even if the BOAT model is implemented. Furthermore, the Government has already decided to stop new project development in thermal power stations by TEK. This decision may have to be reconsidered if BOAT projects do not materialize at a rate in line with long-term power demand developments. Given the long lead times required for installing major generating plants, a hiatus in project development could easily lead to serious power shortages later. 3.19 Fourth, the Government also plans to mobilize more private involvement in other sectors. One important proposal is to build around 1,600 km of motorways using contractor financing, possibly on a turnkey basis. However, this is, with a few exceptions of stretches with high present or prospective traffic, a low priority, which should only receive public resources if justified by full-fledged and detailed feasibility studies, or if private interests are ready to take all commercial risks involved and execute the projects under the BOAT model. Only some 400 km appear likely to qualify on these grounds. A second proposal for private investment is a new container port on the Black Sea. Container handling capacity in publicly-owned ports in competing locations will, however, be twice the present traffic volume by the end of 1987 and a new port is not needed for some time to come. There are such privately-sponsored projects that, if implemented, would reduce the effectiveness with which public sector assets can be operated, or which may require unjustified levels of public resources. Private investment in tourism appears to be increasing. More than US$1 billion of investments are being made or in advanced planning stages, at least half of which are foreign-financed. More infrastructure may be required to support such investment, and subsidized credit could. also be causing some overinvestment. 3.20 These examples suggest that public and private investment need to be brought under a unified and more coherent conceptual and administrative framework in order to guide private investment and ensure that public commitments to supporting it are cost-effective. This is not to "plan" or "control" private investment, but to ensure that all relevant considerations are taken into account when public resources are directly or indirectly applied to private investment. To strengthen this aspect, the Government should: (a) introduce sectoral investment strategies and programs which determine the respective roles of public and private investment. This is especially important in the infrastructure sectors; (b) consult regularly with the private sector, to ensure that relevant policies and incentives to support private investment are in place and continue to be appropriate; and -29- (c) integrate all decisions on public funding of investment (including guarantees, minority participations and the like) into a coordinated framework. 3.21 In addition to ongoing initiatives in the context of the privatization master plan, privatization potential exists in several other sectors, and could be exploited in coordination with better cost-recovery policies (see also Chapter II). Examples include: (a) irrigation, where private investment is already significant, and should be fully taken into account when deciding on public investments; (b) forestry, where pilot schemes to test the feasibility of contracting out reforestation and harvesting are recommended; (c) power and lignite mining and possibly telecommunications, where, in addition to the BOAT schemes, there is more scope for private involvement through turnkey projects, management contracts and joint ventures; (d) the urban sector, where substantial opportunity exists for private investments or contractual arrangements in public transit, water and sanitation, solid waste removal, land and related infrastructure and housing; (e) tourism, where the 24 operational subsidiaries of the Tourism Bank could be privatized; and (f) more private provision of secondary and university level education. Decentralization 3.22 Municipal investments are rising rapidly and are likely to rise further, although at less rapid rates than in 1985-86, following a major shift in both responsibilities and resources to the municipalities from the Central Government. The ultimate aim is to make the municipalities responsible for their own investments in water, sanitation and other activities, and financially self-supporting and independent enough to eventually gain access to commercial financing. This will require adjustments in both local and central government institutions. 3.23 First, municipal finances must be strengthened, even though municipal revenues appear strong at present, given service backlogs and continued rapid population growth. Tax collection and cost recovery policies appear to be the main areas requiring attention. 3.24 Second, institutional strengthening of municipalities is needed in the areas of programming, budgeting and accounting; investment selection; operation and maintenance; and definition of policies for local resource generation. Improved staffing and training are critical in this context. -30- Municipalities should give adequate autonomy to entities with major responsibilities, as has been done in Istanbul with ISKI, the water and sewerage directorate. Finally, privatization of some activities or contracting out to private suppliers should be considered as a means of limiting the burden on municipal organizations, although this would not relieve local governments from their responsibilities to plan and regulate services. 3.25 Third, central agencies need to shift from executing local works to supporting municipal activities, and to assuring some functions that cannot be decentralized. The Central Government should monitor and adjust the financial framework within which local governments operate, especially their five-year investment programs and their likely resource basis. Central and local investment programs would also require better coordination, particularly in relation to agencies such as DSI and TEK. DSI should, however, retain responsibility for national and regional water resource management. Iller Bank should increasingly become a financial institution rather than an executing agency. Consideration should be given to placing these responsibilities in the hands of a single central ministry or agency. IV. INSTITUTIONAL REFORM: ADJUSTING THE SYSTEM 4.01 Several important recommendations in this report have implications for Turkey's system of planning and budgeting. The report has argued for more strategic planning at the macroeconomic and sectoral levels; for core investment programs; for multi-year investment programming; for machinery to better integrate public investment and the promotion of private investment, and for better data to carry all this out. In this chapter, some of the systemic implications are elaborated. 4.02 Turkey's comprehensive planning tradition has many great strengths, among them the availability and timeliness of certain data, and impressive analytical capability. Comprehensiveness is, however, clearly no longer a virtue in itself in an environment emphasizing private initiative and the reform of such tools of centralized planning as the SEEs. Other countries' experience suggests that, for such a market-oriented system to succeed, it is still necessary to plan--but plan differently. The approaches that appear effective embody elements already emphasized in this report-consultation, flexibility, selectivity in both goals and instruments, policy coordination, information and monitoring. Perspective and Strategic Planning Studies 4.03 The need and scope for strategic planning was suggested in Chapter I. Long-term planning should be seen not as building a single projection model for the economy as a whole, but as a set of interconnected studies designed to examine policy and investment issues which cannot be contained in a medium-term framework. In sectors and subsectors such as forestry, power and transport, the very length of implementation or gestation periods requires a long-run perspective. In transport, investments decided today can preempt or severely restrict locational choice for a long time to come. In such sectors -31- as iron and steel or refineries, it is necessary to develop a long-run view of Turkey's comparative advantage before embarking on large investments. The need for strategic thinking is in no way diminished, and may even be increased, in the infrastructure sectors where substantial future involvement of private investors is being promoted. 4.04 A number of such forward-looking studies are now under way. SPO has been updating the Transport Master Plan in 1986; an Investment Strategy Master Plan is under preparation in irrigation; a strategy for the telecommunications sector has been proposed in connection with Bank sector work; some strategic concerns are being addressed in the power sector by TEK; and there are the beginnings of a regional development policy. Studies of textiles, fertilizer, cement, paper and pulp and engineering have been carried out or are far advanced. In addition, studies aimed at articulating sectoral strategies are proposed in petroleum products, iron and steel production and forestry. 4.05 Planning capability-in agencies, ministries and SPO--is uneven. Even in subsectors served by adequate numbers of technically qualified personnel, there is usually need for improvement in the capacity for economic analysis of policy options, pricing issues and investment decisions. The Planning, Research and Coordination divisions of sector ministries are undermanned, and concerned mostly with the preparation of project lists and annual investment budgets. Within SPO, too, both in the Sector Planning and Coordination divisions, budgeting and expenditure control account for a disproportionate amount of staff time. Ministries often appear to lack the capacity, and SPO the manpower, to internalize the analysis of policy issues and investment options such as have been brought out in the Bank's sector reports. As a result, formulation of sectoral policies and programs, determination of priorities, examination of investment options, monitoring and evaluation of approved investments do not receive adequate attention. 4.06 Coordination problems also abound both within and between sectors. The need for intrasectoral coordination is particularly obvious in health and transport. In both cases, large numbers of institutions are involved. None of them is able to exercise full responsibility for sector planning, policy development and investment programming. Many public institutions are also active in the manufacturing sector but coordination problems there are mostly at the project level. In a number of sectors, a major coordination problem is also developing between central agencies and the municipalities, which are rapidly becoming more involved in such sectors as transport, water supply/sewerage, housing, tourism, health, and manufacturing. Also, there is no clearly established procedure whereby intersectoral linkage and phasing issues are addressed in a timely manner. Finally, there appears to be no regular dialogue about policies and programs between the public and the private sectors. 4.07 Reforms to address these problems are required both at the intersectoral level and within sectors. At the intersectoral level, we recommend: -32- (a) Creatinp a central institutional arrangement to identify linkage and sch4duling issues that transcend the boundaries of agency mandates, possibly through the High Planning Council with the close involvement of both SPO and the Treasury, and ensure they are reflected in project and program design; (b) SPO should reduce its involvement in budgeting and expenditure control for each individual project and redirect its staff resources to the tasks identified below; (c) SPO should take the lead, in cooperation with relevant institutions, in carrying out or sponsoring the strategic studies, then issue the resulting sectoral policy and planning guidelines; (d) SPO should organize, in cooperation with major sector institutions, periodic consultations with the private sector on public policy and investment programing issues; (e) SPO should institute a wonitoring system for investments by local authorities. Until a central agency is charged with this task, SPO should promote the coordination of relevant investment programs of central agencies with those of the municipalities other than the metropolitan areas. In the three major metropolitan areas, SPO should closely follow the experience with the Transport and Infrastructure Coordinating Committees in order the assess whether this arrangement could and should be replicated in other urban areas. 4.08 The sectoral investment reviews make a number of further recommendations: (a) Sector ministries should be generally in charge of developing sector strategies and policies under the overall guidance of SPO; this may require increasing and strengthening their planning, research and coordination capabilities. (b) SPO should continue to assume full responsibility for sector planning and policies in sectors where no single sectoral ministry is in full charge, such as manufacturing, water supply/sewerage, housing, and urban development. (c) An interministerial Higher Health Council should be created to overcome the coordination problem in this sector and to work out agreements on sectoral resource allocation and other issues. Project Design, Assessment and Monitoring 4.09 Despite generally good project selection and appraisal, this review suggests three areas where improvements in specific sectors are critical. -33- 4.10 First, alternatives to a given project must be analyzed. This applies not only to different investment options, but also to alternatives to investments, such as better operation and maintenance of existing assets. There are examples in the power and coal/lignite sectors, where the option of importing coal is often not considered in studying power stations or lignite mines. In the urban transport sector, investments in rail systems are on the drawing board in all three major metropolitan areas with only cursory attention being paid to alternatives in other modes. In health, the potential for improving the use of substantial existing hospital capacity has not been factored into decisions to build more hospitals. And in water supply, greater emphasis on loss reduction in some cases would enable postponement of more costly projects to increase water production. Technological alternatives do not receive sufficient attention either, sometimes because conceivably too generous standards remain unquestioned (for example in water supply/sewerage and hospital construction) and sometimes because the technologies being applied are out of date. 4.11 The reasons for this failure to consider expenditure options vary. In some cases, technical competence is lacking and could be overcome by hiring consultants. In others, prefeasibility or feasibility work has been underfunded or has been carried out as part of detailed engineering design. Once a substantial expenditure for engineering has been incurred, it is usually too late to consider options such as different location, technology, size or phasing. 4.12 The issue of adequate operation and maintenance deserves further special emphasis. Inadequate cost recovery is only one reason for the pervasive occurrence of sub-standard maintenance in Turkey. It occurs in sectors where cost recovery is not a major issue and where operational funding appears adequate, for example in maintenance of the road network. The huge backlog of rehabilitation needs in roads suggests, at least in part, inefficient management of the maintenance program. Similar backlogs of rehabilitation investments exist in almost every sector. Operating performance is also unsatisfactory in many revenue-earning activities. This may be compounded where the SEE in question has monopolistic power, as is the case for the railways and for TEK, which experienced outage rates worse than those in comparable systems, especially in transmission and distribution. 4.13 Future operating requirements for public investments in the program cannot at present be quantified. This will become a major expenditure, however, if completion of projects accelerates and the investment program concentrates more strongly on infrastructure investments that do not generate their own revenues. SPO does not collect this information. In some cases, accounting procedures preclude even a clear distinction between capital and recurrent expenditures, for example, in the budgets of the municipalities, agriculture, health and education. With few exceptions, professional estimates of adequate operating and maintenance allocations in Turkey are not available. 4.14 Second, full account is not being taken of project linkages and phasing issues within and between sectors. These problems have abated somewhat since the 1981 review, but still require attention. For example, -34- planning for a natural gas pipeline from the USSR via Bulgaria is ahead of substantial investments required for converting and expanding user installations, in particular in the town gas system in Ankara. A power plant based on this gas is, in turn, well ahead of the gas pipeline. A lignite mine intended to feed a power plant, completed in 1986, is four years behind schedule. Irrigation headworks investments are way ahead of on-farm works needed to reap the benefits of the headworks. 4.15 A third issue is the insufficient weight often given to economic, and sometimes financial, criteria in project appraisal and priority ranklng. Projects in which foreign assistance agencies are involved will usually be prepared by international consultants with established norms of analysis and subjected to extensive appraisal by the donor agency, while projects prepared by agencies like DSI, for hydro-power and water storage, are also subjected to analytical appraisal procedures. But in other sectors, such as railways or ports, new investments are subject to only conventional financial scrutiny, while those projects that consist of many small repetitive projects (such as rural electrification, rural roads, and irrigation investments in low dams, flood control and completion works) usually do not attract any such attention at all. 4.16 Preparation of sectoral core programs, as recommended in this report, requires priority ranking of the project portfolio. SP0 already does this for investment allocation purposes; key criteria have been availability of foreign credit, sunk costs (key parts of the project or 40-502 overall completed) and such project objectives as rehabilitation, modernization, removing bottlenecks to better capacity utilization, cost reduction energy conservation and location in less-developed regions. Sets of criteria have also been developed for some specific sectors, such as irrigation, transport, water supply and sewerage. Generally speaking, issues of longer-term significance, such as cost/benefit ratios, export promotion, import substitution, and particularly the impact of proper operation and maintenance on the budget do not receive adequate weight. SPO has recently been calling for information on many of these issues when projects are submitted for inclusion in the investment program. However, at present, it has only limited capability for economic analysis of investment proposals received from agencies, and only limited capacity for any technical or financial scrutiny. With typically one or two staff members per sector or subsector, it is clearly not possible for the organization to review this information in-depth for all projects, fill information gaps and come to solid, considered judgements. The situation is further complicated because even where proper analytic procedures are being used, underlying assumptions on parameters such as inflation, foreign exchange rates and the cost of capital have not always been corsistent from project to project. This greatly reduces the value of rates of return as a tool for priority-ranking; although a major improvement was made in the preparation of the 1987 public investment program when consistent inflation and exchange rate assumptions were applied for the first time. 4.17 Strengthening project evaluation, selection and approval is needed in a number of ministries and agencies. The key recommendations are: -35- (a) SPO should issue, on a regular basis, guidelines on parameters to be used in project evaluation, -- assumptions on foreign exchange rates, discount rates, wages and inflation rates - to apply to all projects, including those fully funded by SEEs or prepared under the BOAT initiative. (b) SPO should update and re-issue formats for feasibility studies. For larger projects, these should always include financial and economic rate of return calculations, sensitivity analysis, and explicit statements on the nature and phasing of other investments or policy actions that are required within this or other sectors for project benefits to be fully realized as scheduled. Consultants could be used more widely by implementing agencies, at least as a transitional measure, to carry out such studies. (c) SPO, in cooperation with relevant institutions, should develop planning and implementation methodologies for repetitive small projects. These should incorporate a minimum cost-benefit analysis and cost-minimizing implementation standards and procedures. (d) SPO, in cooperation with sector ministries, should develop criteria for core project identification and use them for developing core programs in all sectors that lack them. In addition to specific sector criteria, core program should take explicit account of intra- and intersectoral linkage and phasing requirements. (e) Identify, in all projects the future expenditures required for adequate operation and maintenance, particularly where the projects recurrent expenses have to be financed from the budget, and specify the norms on which such estimates are based. These should lead to specific sector and subsector norms for recurrent expenditure budgeting. (f) Include projects in the program only when their priority is confirmed. This decision should be subject to adequate resource availability for the estimated disbursement profile of the project and its subsequent operation. Medium-term Planning 4.18 Economic planning in Turkey at present comprises a Five-Year Development Plan and annual programs of public investment, both mandated by law and prepared by the SPO. The Plan is intended to be comprehensive, that is, to cover private as well as public sector activities. It is disaggregated into economic sectors, and the sectoral growth patterns are linked by a model. The Five-Year Plan projects only terminal year targets. It does not detail the investment projects in the public sector, which are determined through the annual programming exercise at the time of budget-making. Moreover, it does not distinguish clearly between forecasting (including -36- indicative investment and production targets for the private sector and autonomous elements in the public sector) and directives for public investment and expected output from the public sector. It also emphasizes public investment targets, rather than supporting policies. In short, the plan makes no contingency provisions and is not equipped to deal with unforeseen changes in the domestic or external environment. All these features marked the Turkish Fouith Plan, which ceased to be operational quite early. 4.19 The Fifth Five-Year Development Plan (1985-89) followed three years of strenuous effort by the Government to correct imbalances in the country's economy through major changes in directions of policy and significant curtailment of the overextended public investment program. Though the new plan is more realistic than its predecessor, its overall growth target and projections of sectoral investment and growth are still too high. It quickly became out of date and now provides only limited guidance to policy-makers. 4.20 The Government has indicated its intention of establishing a "Rolling Plan", to deal with these acknowledged deficiencies. SPO is now considering: (a) drawing up a ten-year perspective plan; (b) annually revising the approved Five-Year Plan and extending it by a year at the same time; and (c) continuing the annual programming of public investments as before. 4.21 With modifications, these proposals could achieve the results the Government hopes for. A comprehensive perspective plan would be less useful than the strategic planning focus already described. A full five-year planning exercise is very time-consuming and can hardly be repeated each year. However, selective updating of critical components should be undertaken, specifically: (a) macrocconomic projections, annually updated and extended; (b) medium-term financial planning; and (c) a rolling public investment program. 4.22 Macroeconomic Framework. The Fifth Plan sets out projections for 1985-89 for domestic and external resources available for investment, distribution of investment between the public and private sectors and by activity groups, the balance of payments magnitudes, sectoral growth of output and resultant overall growth of the economy. Their internal consistency is established through the macrobalances. Only these macroeconomic magnitudes should be re-estimated annually and estimates made for an additional year. The appropriate time for updating and extending the projections would be when the annual budget is being prepared, so that the first year's estimates can be used as the basis for determining the acceptable size of the budget. Thus, macroeconomic projections for 1988-92 might be prepared in the period -37- July-September 1987. There would generally be no need to revise the sectoral and subsectoral production targets for the terminal year, or the statements of central economic policy and sectoral policies, unless major changes in outlook have occurred. 4.23 Medium-term Financial Planning. Turkey, as most other developing countries, does not have any comprehensive and continuous planning of public sector finances. Resources are estimated and public expenditure planned from year to year, and the budgeting exercise has a very tenuous connection with the public finance assumptions and estimates in the Five-Year Plan. In the absence of financial planning, timely action is not taken to augment resource flows. Thus, in the periodic crises which result, essential current expenditure on the maintenance and operation of economic assets has to be curtailed, and the implementation of development projects suffers. The main advance in public finance management in Western Europe in recent years has been the establishment of multi-year budgeting. The planning periods vary from three to five years, but five years may be too long for effective foresight, whether for forecasting revenues in detail or for planning public expenditure. A three-year horizon may be more appropriate, with some attention also devoted to improving short-term financial management during the current year. However, if a five-year perspective is preferred in Turkey, in line with the system of macroeconomic projections, the financial estimates for the first three years could be prepared in greater detail, treating the outer year figures as more tentative. The three or five-year estimates would be revised and extended forward each year. 4.24 The methods now used by the General Directorate of Revenues to estimate revenues for annual budgets, and by the public finance unit of SPO to prepare the finarncing table in the plan document, will need to be supplemented to estab_ish an adequate base for forward estimates under different heads. Particular attention needs to be given to estimating tax buoyancy, SEE contributions to investable resources, current expenditures and financing requirements. The emphasis of the exercise should be to highlight policy decisions required to "balance out" the plan. 4.25 Public Investment Program. The essential advantage of a multi-year public investment program is that it enables the phasing of investments for? maximum economic benefits. Since there would be better matching of resources with the aggregate investment program, the chances of investment cuts (and resulting implementation delays) are reduced. Project starts could be phased in with due regard to prospective resource availability, reducing the chances that resources are overstretched in any one year. There would be better understanding of resource constraints throughout the Government, and pressure by agencies to include particular new projects in any one year--especially the first year of a new Five-Year Plan--would be reduced. For this to work effectively, a number of improvements are required in project preparation (by agencies) and in the allocation of investment funds: (a) Proposed projects should invariably provide an expenditure profile from the start until the date of completion. -38- (b) Alternative phasing possibilities should be presented for projects with divisible components (for example, expansion of telecommunications, air traffic control and highway construction). (c) Project lists must be internally consistent, (for example, matching generation with transmission in power and water projects, coordinating rail transport capacity with port development). (d) External and domestic resource constraints must be considered explicitly in phasing project outlays. Investments from non-fungible resources (such as aircraft purchases, projects for which the bulk of the expenditure is funded by tied aid) have to be phased separately. The repayment profile for aggregated external borrowing has to be considered explicitly. Budgeting and Monitoring 4.26 The annual budget is the source of about one third of the finance of the public investment program. The budget process and structure, which have remained essentially unchanged for decades, need to be made consistent with the reforms of public investment management proposed in this report. In general, the Turkish budget system fulfills accountability requirements, but from the point of view of macromanagement of the economy, it is deficient as an instrument of conscious resource allocation. 4.27 In the first place, the system is unduly complex and fragmented. Besides the general budget which itself is divided between investment, current expenditure and transfers, there are annexed budgets, autonomous budgets, the growing number of large extra budgetary funds, and over 1000 "revolving funds". The first objective of any budgetary reform must be to simplify and integrate these categories. 4.28 Second, there is a profusion of agencies with independent roles in budget-making: (a) the General Directorate of Revenue of the Ministry of Finance (revenue estimates); (b) the General Directorate of the Budget in the Ministry of Finance (estimates of current expenditure, some transfers and budget completion); (c) the Annual Programming and Finance and the Sector Planning Divisions of SPO, (estimates of public investment outlays); and (d) the Treasury, under the Prime Minister's office (transfers to and by SEEs, debt service payments, and foreign exchange inflows). -39- 4.29 Third, the division of the budget into three parts-current, investment and transfers-itself needs reconsideration, since transfers are either for current or investment use. This is further complicated by the division of budgeting functions so that revenue estimates are divided between two departments and expenditure estimates between three. As a result, investment costs of projects and provisions for their operation and maintenance are not coordinated; current and investment estimates of the same executing agency may overlap; completed projects may not be shifted from the investment to the current buLget; and foreign and domestic financing of projects are not linked. In this situation it is difficult for the General Directorate of the Budget to check the realism of expenditure estimates received from SPO or Treasury, or to make any judgment about resource estimates. Adequate funding of recurrent expenditures has already been discussed (para 4.11-4.12). Some reclassification of the budget, including the separate identification of larger projects and programs for recurrent funding purposes should be considered. 4.30 Fourth, post-budget expenditure control is also distributed among different agencies. Current expenditure is the responsibility of the Budget Division of the Ministry of Finance, while investment expenditure is controlled by SPO. Reallocations are only possible within these two budgets and not between them, which reduces flexibility. Further, since cash management is a Treasury responsibility, that department exercises an overriding control over the flow of public expenditure by regulating the release of funds to general agencies. In situations of acute financial stringency, the ability of agencies to execute projects or undertake operational expenditure depend on the extent and timing of releases rather than on budgetary provisions per se. 4.31 Several ways could be considered to unify the budget process and to ensure effective planning and monitoring of both revenue and expenditure. One possibility would be to bring the functions enumerated above under the purview of a single agency. Such a "Bureau of the Budget" would be responsible for medium-term financial planning, annual budgeting, and expenditure control, and might also have an advisory role in cash management. The Bureau would incorporate the present General Directorate of the Budget, the estimating and planning part of the General Directorate of Revenue (but not tax administration), and the financial control functions of SPO. A second possibility would be to move the General Directorate of the Budget to SPO, to at least ensure effective coordination of expenditure planning. A third possibility with the same more limited objective would be to shift annual investment programming from SPO to the Ministry of Finance. The Government should study alternatives for better coordinating these budgetary functions. 4.32 Finally, improvements in the investment data base are required. The project-specific data base presently collected by SP0 is neither appropriate for sectoral investment analysis nor for annual resource allocations and forward programming. In particular, expenditure data are accumulated from year to year in current prices. In an environment where prices have risen by over 4002 since 1980, and where it is common to find project implementation periods exceeding 10 years, these data cannot be used effectively. In the absence of regular monitoring of physical indicators of project completion, -40- SPO cannot gauge how much it will cost to complete any multi-year project in the program or how well implementation is proceeding. Moreover, some project-sponsoring institutions update estimated total cost each year, while others do not. Cost updating is done with varying degrees of care and often with different inflation rates. Finally, initial cost estimates are not always questioned, or project scopes may be expanded, thus potentially circumventing the ban on new projects. Total project costs are thus open to doubt just as much as historical expenditures, but SP0 seems to be using the difference between them when making "full" allocations to projects expected to be completed within the next year. The PPF has found that costs to complete the projects it is financing usually exceed the difference between historical expenditure and total project cost as carried on the books. 4.33 To improve project completion rates and make any forward planning and budgeting system workable, all proposals for new projects, along with all requests for annual expenditure authorizations and the projects' mid-year reallocations of such expenditures, starting with the 1988 program, should provide the following: (a) the degree of physical completion of ongoing multi-year projects and the increase in completion percentage expected from the allocation requested; (b) an up-to-date estimate of remaining costs to completion; (c) an up-dated disbursement profile year by year, showing foreign exchange and domestic currency expenditures separately; and (d) a detailed financing plan for remaining costs to completion. Policy Analysis and Coordination 4.34 The Government is fully aware of the crucial importance of sustaining sensible and coherent economic policies. These include: (a) central economic policies, such as monetary and fiscal policies, exchange and interest-rate policies, import and export policies, policies to promote domestic capital growth and foreign capital inflows; (b) sectoral policies, such as investment priorities, incentives, agricultural price supports, utility pricing, cost-recovery for services etc. 4.35 Policy analysis is distributed throughout the government structure according to departmental responsibilities and functional specialization. The main agencies concerned in Turkey are the Treasury, Ministry of Finance, the Central Bank, SP0, Department of Foreign Trade, Sectoral Ministries such as Agriculture, Industry and Energy, and some major SEEs. To ensure that policy options are adequately analyzed and consistent policies are adopted and -41- implemented all governments face a considerable organizational problem. Governments have usually found that the formal coordination of policy at the level of the Cabinet is inadequate to deal with the complexity of the issues involved, unless there is an adequately staffed Analysis and Coordination Unit at the Civil Service level, such as an office of Chief Economic Adviser. Some coordination of central economic policies has been achieved in Turkey by constituting the Undersecretariat of Treasury and Foreign Trade and the use of informal groups of senior officials to consider issues as they arise. A policy coordination unit, dealing primarily with in4astrial policy, has also been established recently in SPO. 4.36 The Government should review the machinery for policy coordination with particular attention to: (a) macroeconomic analysis for budget-formulation; (b) short-term economic forecasting, which is not attempted now; (c) analysis of monetary, fiscal, exchange-rate, interest-rate, trade and capital issues, on the basis of initial studies made by the Central Bank, Foreign Trade Department, Finance etc, but also some independent studies when needed; (d) review of pricing, subsidies, incentives and sectoral issues having economy-wide impact. The diffusion of responsibilities for these functions at present is among the factors limiting the effectiveness of some of the new initiatives to promote the private sector and achieve coherence in public expenditure policy. Management of State Economic Enterprises 4.37 Effective planning and control of public enterprise investments must be integrated with the Government's overall SEE reform program. The objectives of this program are to improve the efficiency of those SEEs that are not likely to be privatized by increasing the degree of competition whenever possible, and increasing their financial and managerial autonomy and accountability. The program comprises price liberalization; reduction of SEE monopoly powers; a reduction in the role of the SEEs relative to private companies; the halting of new public industrial investments; the reduction in government subsidies and financing of SEEs; and the introduction of contract employees to reduce the constraints arising from the civil service personnel regime. 4.38 Increasing autonomy requires three sets of institutional changes, all of which have implications for investment management. First, government controls should be replaced whenever possible by market controls. Second, detailed controls of inputs should give way to control of a limited number of broad indicators of viability, (see Table 10). Third, the organizational structure should become more decentralized. The Government should limit its role to ownership and decentralize the strategic and operational roles to a board of directors and to management. -42- 4.39 Some of the major actions in support of this program would be to reformulate existing legislation, notably SEE Decree Law 233, so as to organize SEEs as joint stock corporations regulated by the commercial code, to decentralize the power to take personnel policy decisions to the Board of Directors, and to introduce auditing practices for SEEs according to international practice. 4.40 A central government oversight agency should be established to execute the ownership role of Government. This agency should lead the reform process, develop and maintain a high quality board of directors, coordinate government decision-making, protect SEE boards from excessive government interference, and monitor SEE performance. The major responsibilities of this agency would include the development of proposals to establish and amend the charter of enterprises, appoint and dismiss the board of directors and auditors, approve annual accounts and dividend payments, and monitor overall financial performance. 4.41 Given these overarching responsibilities, the oversight agency would need an interministeral representation, and be attached to a central ministry with coordinating responsibility, such as the Prime Ministry or the Undersecretariat of Treasury or SPO. 4.42 Under these arrangements, sectoral ministries would concern themselves primarily with the analysis, formulation and implementation of sectoral policy matters. Operational ties with ownership and undue involvement in both business policies and day-to-day management should be avoided. The board of directors would then have the powers and responsibilities that such boards have in any regular commercial operation. 4.43 Investments that can be implemented without any government support, that do not have significant sectoral consequences and do not require a change in the charter of the enterprise, should normally require approval only by the SEE's board of directors. In cases where Government support, such as equity, debt-financing or Government guarantees are required, the investment decision should be evaluated by the oversight agency and final approval given by SPO or the sector ministry concerned. Similar government review and approval should be required when SEEs propose investments that go beyond the scope of their charters. When the investment decision has wider economic consequences, as frequently is the case for SEEs operating in sectors like railways, airlines, energy, post and telecommunications, approval should similarly be required at the government level. Large investments in SEEs operating as monopolies would normally fall into this latter category. 4.44 To enable government control of SEEs to shift from administrative methods to almost exclusive dependence on financial controls, it would be necessary to fix maximum debt/equity ratios and foreign debt ceilings, while regulatory bodies and rate-setting agencies should be considered for public entities. As suggested earlier (paras. 2.26 and 3.03), SEEs should generally be required to distribute dividends to the Government. The scheme is illustrated in Table 10. 4.45 While category .one represents the ideal, currently most SEEs fall into categories two and three, (financially independent SEEs in monopoly markets and SEEs dependent on government finance, respectively). Transitional -43- arrangements are therefore essential, at least for the next two to three years. During this period, most major SEE investment projects have to be reviewed and approved by the overseeing agency and its board, by the sectoral ministry as appropriate, and by SPO. Table 10: Alternative Schemes for Government Control of SEEs Financially Financially Independent SEEs Dependent Independent SEEs in Mono- on Government Financial & Managerial SEEs poly Markets Finance Control Tools (1) (2) (3) Strategic Plan * * * Annual Operating Budget * Capital Investment Plan * * Quarterly Financial Reports * Report on Capital Projects * Audited Financial Statements * * * Management Audits * Price/Tariff Assessments * * V. ADJUSTING PUBLIC INVESTMENT: AN ACTION PROGRAM 5.01 Turkey can and should move rapidly towards a more modern, flexible and strategically focused public expenditure management system. The various recommendations made in this report for adjusting the public investment system deserve a high priority in the Government's reform agenda. Several key objectives depend, in part, upon these reforms--notably achieving greater efficiency in public investment and adapting public investment and expenditure towards outward-orientation and longer-term needs, as well as stimulating the private sector over time as the engine of growth. The choice is not between "tplanning" and "public investment" on the one side, or "the market" and "private investment" on the other. The challenge is rather to ensure that, as in other successful outward-oriented economies, public expenditure and public policy are deployed in such a way as to stimulate and support the private sector and to create the competitive environment in which the private sector can best develop. 5.02 Public expenditure management has a critical role to play in reducing inflation and, through containing the growth of public sector borrowing, in reducing real interest rates-two of the key impediments to faster private investment and economic growth. But, more fundamentally, this report argues that without the capacity in the public sector to formulate and implement the range of policies and expenditures required to stimulate efficient private investment, Turkey's structural adjustment will remain incomplete and might -44- even backslide. The main recommendations of this report which are summarized below, thus constitute an action program aimed at strengthening public investment management. This program will probably require some strengthening of staff, particularly in SPO, and might benefit from selective external technical assistance, possibly from the World Bank. 5.03 Public Investment Size and Content (a) Keep the growth of public investment at around 42 through 1990, unless the macro-economic outlook improves unexpectedly and private investment fails to respond adequately to sustained efforts to attract it into the infrastructure sectors (para. 2.31). The Government should also give immediate attention to possible savings in public expenditures other than for public fixed investments, including those for investment and export incentives, for which the costs and benefits should be thoroughly reviewed. (b) During 1987-90, the share of public investment should be: i) increased for agriculture, power and the social sectors (water supply and sewerage, education, and health) (paras. 2.34 - 2.37); ii) reduced for transport, manufacturing and mining (paras. 2.32 and 2.36); (c) In preparation for the 1988 program, SPO should: i) develop more stringent sector-specific criteria for identification of high-priority projects and, in cooperation with sector agencies, use them for developing core programs in all sectors or agencies that lack them; these core programs should take explicit account of intra- and inter-sectoral linkage requirements and phasing options (para. 4.17); ii) carry out a detailed review of the portfolio of ongoing projects in irrigation, water supply, health and education against these more stringent project or program selection criteria (para. 2.32). (Detailed suggestions for the content of core programs in power, agriculture and transport are in Annex II. 5.04 Public Investment Management: Finance (a) From 1987 onward, Treasury should ensure that: (i) aggregate external borrowing limits consistent with macroeconomic constraints are established and monitored (para. 3.03); (ii) only high-priority projects approved by SPO receive external financing (para. 3.03); -45- (b) SPO should approve project starts and expenditure phasing taking explicit account of the implied repayment profile for external borrowing. Investments from nonfungible resources should be phased separately (para. 4.25). (c) Starting with the 1988 program, SPO and the Treasury should fully meet the funding requirements of core program investments in each sector (or each agency), especially those dependent on local finance from the consolidated budget (paras. 3.02 and 3.14); (d) The Government should require the relevant sector agencies to establish action programs and timetables to increase and regulate cost-recovery in irrigation, energy, telecommunications, water and sanitation, university education and public hospitals (para. 2.30). (e) To improve the coordination and management of public resources and minimize the danger of inconsistencies through earmarking substantial portions of public revenues, within the next two years, the Government should decide which extra-budgetary funds (EBFs), should be permanently retained, what their medium and long-term financial needs are and how their relations with Government, sector agencies and financial intermediaries should be structured (para. 2.21). 5.05 Public Investment Management: Programming, Budgeting and Monitoring Starting with the preparation of the 1988 program (i.e. during early 1987) SPO should: (a) Update selected components of the Five-Year Plan annually, specifically, a medium-term (three-year) financial plan based on macroeconomic projections, combined with a three-year rolling public investment program (para. 4.21); (b) Publish, together with its official investment program, a comprehensive list of investment-related expenditures from public revenues for joint analysis (paras. 3.06, 3.20) and review public funding of investment including export and incentive payments, guarantees, minority participations and the like within a coordinated framework (para. 3.20). (c) Program investments on a multi-year basis (para. 3.14); in order to do so, instructions for the 1988 program should ask sector agencies to provide: (i) An updated annual expenditure profile for proposed projects from the start, (or 1987, whichever is later), until the date of completion, showing foreign exchange and domestic currency expenditure separately. -46- (ii) Alternative phasing possibilities for projects with divisible components indicating benefits and costs of the alternatives presented; (iii) Project plans and phasing which have been coordinated within sectors, (e.g., TEK thermal power stations phased in coordination with TKI mining programs); (iv) The degree of physical completion and the increase in completion percentage expected from the allocation requested; (v) A detailed financing plan for the remaining costs until completion; (vi) Future expenditures required for adequate operation and maintenance, particularly where they have to be financed from the budget, and the norms on which such estimates are based. These norms should be used for future recurrent expenditure budgeting (paras. 4.17, 4.25 and para. 42 of Volume I). {d) Strengthen the Coordination Department's quarterly review of progress of the investment program to ensure that agency expenditure limits are being observed and to reallocate expenditures to the core programs if needed. Mid-year reallocation of funds (especially from external borrowing and the consolidated budget) should be accompanied by the same information as in (b) above (para. 3.14). Starting with the preparation of the 1988 programs SP0 should establish price contingency funds to handle divergences between targeted and actual rates of inflation. The Investment Acceleration Fund (IAF) should be used for this purpose (para. 3.14). Before the end of 1987, Government should: (e) Create a central institutional arrangement to identify linkage and scheduling issues that transcend the boundaries of agency mandates, possibly through the High Planning Council with the close involvement of both SP0 and the Treasury, and ensure that they are reflected in project and program design (para. 4.07). (f) Create a task force to study and make recommendations within 18 months on: modernizing budgetary procedures to ensure greater speed and flexibility in funding priority expenditures, thus obviating the need for large extra-budgetary funds; reclassifying the budget to achieve closer coordination between recurrent and capital expenditures, especially for recurrent funding of larger projects and programs (para. 4.29); -47- alternative arrangements for better coordinating budgetary functions (para. 4.31); 5.06 Strategic Planning Before the end of 1987, the Government should adopt policies and develop action programs as follows: (a) In relation to public investment, SPO's responsibility should be to carry out or sponsor strategic studies, in cooperation with sector agencies, then issue the resulting policy and planning guidelines and project selection criteria (para. 4.07); this should include the issue on a regular basis of SP0 guidelines on parameters to be used in project evaluation, applicable to all publicly funded projects (para. 4.17). In this context, SP0 should: (i) Update and reissue formats for feasibility studies; (ii) Encourage the wider use of consultants, at least as a transitional measure, to carry out such studies; (iii) Develop planning and monitoring methodologies for repetitive small projects in cooperation with relevant institutions (para. 4.17). (b) Sector agencies should be strengthened to carry out the functions presently performed by SP0 in budgeting and expenditure control. In particular, the planning, research and coordination capability of sector agencies should be strengthened (para. 4.08); (c) Articulate long-term strategies in energy, irrigation, transport, regional development and urbanization, (including housing), and carry out particular studies of petroleum product supply options, future iron and steel production, and forestry (para. 4.04). (d) SP0 should continue to be fully responsible for sector planning and policy development and implementation in those sectors without one ministry in full charge, such as manufacturing and urban development, including water supply/sewerage and housing (para. 4.08). (e) SP0 should organize, in cooperation with major sector institutions, periodic consultations with the private sector in order to: discuss public policy and investment programming issues (para. 4.07) ensure that relevant policies and incentives to support private investment are in place and continue to be appropriate (para. 3.20); explore privatization potential in all suitable areas (para. 3.21). -48- 5.07 Decentralization (a) During 1987, Government should establish a prog;am to: (i) strengthen municipalities in the areas of programming, budgeting and accounting, investment selection, operation and maintenance; (ii) assess their financing needs by monitoring and adjusting the financial framework within which local governments operate, especially their three-year investment programs and their likely resource basis; (iii) define policies for appropriate resource generation; (iv) shift the responsibilities of central agencies from executing local works to supporting municipal activities; (v) restructure Iller Bank into a financial institution and phase out its role as an executing agency within the next 12 to 18 months (para. 3.22-3.25). (b) The Government should establish a single central ministry or agency (para. 3.25) to carry out this program. At the same time, municipal entities with major responsibilities should be given adequate autonomy (para. 3.24); (c) Pending a decision to place the responsibility for municipal support and urban issues into another agency or ministry (see above, para. 5.07 b), SPO's staff capability in this area should be strengthened. (d) Before the end of 1987, SPO should: (i) institute monitoring system for investments by local authorities (para. 4.07); (ii) promote the coordination of investment programs of relevant central agencies with those of the municipalities other than the metropolitan areas (para. 4.07), in particular for agencies such as DSI and TEK, by funding only central agency projects that meet appropriate criteria. DSI should, however, retain responsibility for national and regional water resource management (para. 3.25); 5.08 Management of SEEs (a) The responsibility of SPO's Coordination Department as oversight agency for SEEs should be clarified (para. 4.40); -49- (b) Investment approval should be delegated to the SEE Boards of Directors, except when government financial support is required, or when SEEs propose investments that go beyond the scope of their charters, or when large investments are made by SEEs in infrastructural sectors. In these cases, approval by the oversight agency, or the sector ministry concerned should be required (para. 4.43); (c) In parallel with actions to increase autonomy, the Government should fix maximum debt/equity ratios and foreign debt ceilings for SEEs (para. 4.44) and require profitable and financially sound SEEs to distribute their profits as dividends (paras. 2.26, 3.03); (d) Financial institutions, like DYB, should be assigned a larger role in appraisal and supervision of SEE investments and their capacity to do so developed (para. 2.28). ANNEX I -50 - Page 1 AGRICULTURE 1. About 181 of GDP originates from the agricultural sector, a fourth of export earnings and about half of civilian employment. While its importance has been declining, nevertheless the sector will continue to play a critical role in sustaining the export drive, meeting domestic fool needs, supplying industrial raw materials, and generating employment. Agroindustrial exports have quadrupled from 1980-84 and have good potential for continued growth. 2. Prospects. The potential for Turkey's agricultural sector over the medium term was examined in the Bank's 1983 agricultural sector study,1' which was updated for the 1985 Agricultural Sector Adjustment Loan (ASAL).1 The report stated that the possibilities for growth through expansion of the cropped area or of livestock numbers under a system of extensive grazing, were largely exhausted by the mid-1970s. Growth must now come primarily from Increased productivity and a crop mix which better serves Turkey's comparative advantages. Increased productivity would require expansion in the irrigated area through completion of schemes with high incremental return and large sunk costs, improved efficiency of the works' agencies, more effective technical support services (particularly for extension and research), imports of improved seeds and farm equipment, and a more effective delivery system for institutional credit on terms and conditions which will encourage comnercial intermediaries to expand their agricultural portfolios. 3. The demands of an export-oriented approach have led to a change of emphasis in Government policy from food self-sufficiency to increased net agricultural contribution to the balance of trade. Thus imports of certain foods in which Turkey does not have a comparative advantage have been permitted. The expansion of agricultural exports ha required the freeing of producer prices, a simplification and continuous adjustment of the exchange rate regime to attain international parity, reduction of export regulations, and improved marketing. Other important initiatives (which require further gestation) include improved sectoral planning and performance monitoring, continued progress in the reduction of subsidies, more effective public investment and expenditure control and reform of agricultural SEEs and marketing agencies. In parallel, general economic stabilization must continue to provide a foundation for uninterrupted sectoral growth. With continued progress on these issues and adherence to policies designed to encourage exports, agricultural GDP is expected to achieve a growth'rate of about 3.01 annually during the remainder of the 1980s, with agricultural exports (excluding agroindustries) growing at 5-8S annually. 4. The broad strategy is one of stimulating more efficient production and investment incentives (reducing input subsidies, while maintaining production floor prices, the exchange rate and export incentives at competitive levels), and to emphasize a supportive public sector role: the development of irrigation infrastructure, i roving the efficiency of 1/ Turkey - Agricultural Development: Alternatives for Growth with Exports (Report No. 4204-TU), dated June 30, 1983. 21 Staff Appraisal Report - Turkey, Agricultural Sector Adjustment Loan (Report No. 5576-TU) dated May 22, 1985. ANNEX I -51 - Page 2 implementing agencies (including the SEEs), strengthening extension, research, the animal health and plant protection services, while privatizing some of the latter two in the more developed areas. In addition, improved incentives and reduced restrictions are leading to a substantially increased private sector role in the supply of seeds, agrochemicals and equipment, and a similar program is to be introduced shortly with regard to fertilizer. In recent years, private investment in agriculture (especially livestock production, orchard rehabilitation and fruit and vegetables) has picked up, and appears to be responding well to the stimuli of general economic liberalization. Private investment has since 1983 averaged about 502 of total investment in the sector. 5. The irrigation and drainage subsector has on average accounted for about 65-70S of sectoral public investment. Forestry is second in importance with close to 151 of public investment. Most of the rest is accounted for by extension, research, and other support services, with declining share (currently about 41) going to the agricultural SEEs. Since the introduction of the Government's reform program in 1980, agriculture's share of actual public investment increased from 71 in 1980 to about 101 in 1981 and 1982 and 91 in 1983 and 1984. However, agriculture's share declined to 7% in 1985. This appears to reflect mid-term budgetary cuts in agriculture made as a matter of convenience vis-a-vis other sectors, rather than a policy decision to reduce agriculture's share of investment."' The main reason appears to be that agriculture is financed primarily from budgetary sources and does not have access to the new off-budget "Funds" introduced, in 1984 which are administered somewhat independently of normal budgetary procedures, and are therefore not subject to the same degree of global monitoring and control. For 1986 agriculture's share of planned total investment is only 91, which is below the 101 target which the Government indicated in 1985 would be the minimum share for agriculture during the 1985-89 period. Continued funding at the level indicated would, in our view, lead to shortfalls in the Government's ability to meet priority objectives in the sector, particularly in irrigation and the provision of technical services. 6. Our latest information on the Government's intended agricultural investment program was conveyed to the Bank in January 1986. It shows investment funds available to agriculture increasing at a modestly accelerated rate in real terms as set forth below: Year 1 Increase 1986 3.5 1987 4.0 1988 4.5 1989 5.0 1990 5.5 1991 6.0 1/ Agriculture's actual expenditures in 1985 are estimated to be 89S of programed levels, whereas the total for all sectors was 1231 of the planned allocation. ANNEX I - 52 - Page 3 Over the period 1985 to 1989, agricultural investment would average 101 of estimated total public investment. Irrigation is projected to maintain an average of about 661 of the total agricultural investment. In order to correct the imbalance between irrigation works, and drainage and on-farm development (see para 11), the share of total irrigation development for the General Directorate of Rural Services (GDRS) is projected to increase from about 29% in 1986 to 342 in 1990 and 38.5% in 1993. The resulting sectoral investment program (in constant 1985 prices) is shown in Table 1. 7. Our recommended agricultural public investment program (shown in Table 2) is based upon allocations required to (a) more adequately meet the need to complete ongoing irrigation projects on appropriately cost-effective time-schedules; (b) enable DSI (the State Hydraulic Works Agency) and GDRS to narrow the gap between drainage and on-farm development and irrigation infrastructure works; (c) finance measures for more effective watershed protection on forest lands; (d) continue the redeployment and selected expansion of MAFRA's agricultural technical services (particularly extension and research) so as to accelerate the introduction of more modern agro- technological production methods, and (e) set in place actions which would lead to a workable balance between the requisites of commercial forestry and the needs of the 8-10 million people residing in forest areas. These recommendations assume that the 9Z share of total public investment for agriculture in 1986 is increased to 10.7% in 1987, 11.11 in 1988 and 12.61 in 1989 for an average of about 102 for the 1985-1989 period. They also assume that no growth will take place in public investment in the agricultural SEEs (with additional investment requirements for grain storage and perhaps wheat and barley seed production balanced by reductions in the other SEEs' investments or by transferring some of their activities to the private sector). 8. The Government's ability to increase the allocation for agriculture in the investment budget will be facilitated by actions to reduce the burden of agricultural subsidies on the recurrent budget. Fertilizer subsidies (which in 1985 amounted to more than 1% of GDP) are expected to be phased out by the end of 1988. Significant progress has already been made in reducing fertilizer subsidies through a combination of price increases and reductions in world fertilizer prices. The Government has also announced that a substantial liberalization in fertilizer distribution would take place in July 1986 by allowing fertilizer manufacturers and private sector retailers and wholesalers to import and distribute fertilizers. Furthermore, the Government has initiated studies of the possibility of privatization of SEEs including several in the agricultural sector. These measures will help to free resources which can be more effectively employed in increasing agricultural production through increased agricultural investment and technical services. Programming and Monitoring 9. In 1985, the Government confirmed its intention to strengthen its capacity for planning and monitoring agricultural performance and its incentives/development policies and public expenditures. In parallel, the Government assigned broad responsibility to the Ministry of Agriculture, Forestry and Rural Affairs' (MAFRA) Bureau of Planning, Research and ANNEX I - 53 - Page 4 Coordination (APK) to carry out performance and expenditure monitoring. APf was subsequently reorganized, a few of its senior staff received overseas training, and a limited technical assistance from FAO was initiated. However APK is still not able to effectively serve as a sector programming and monitoring unit. While APK's weaknesses are generally recognized by Government, the pace of improvement remains untenably slow in view of the importance of APK's tasks and the acknowledged need to improve the coordination and management of agricultural policies. A two phased program for institutional development is therefore recommended, beginning with: (a) steps to rapidly improve the capabilities of APK's Department of Planning and Multipurpose Projects to carry out sector analysis in areas such as land use and production policies, technology policies, foreign and domestic marketing, producer price - policies, inputs and investment incentives policies, public investment policies, etc.; (b) expansion of the work program of the Department of Program and Budget of MAFRA's APK to include the conjoint programming, recording and monitoring of all MAFRA's expenditures in the various subsectors. Gradually, rolling multi-year expenditure plans should be introduced; (c) consolidation, by the Department of Coordination and Evaluation of MAFRA's APK, of a data base on its ongoing projects and programs in agriculture, irrigatior. and infrastructure, with streams of budgeted and actual expenditures, and physical targets and achievements; and (d) preparation of project profiles for all irrigation investments so as to improve the monitoring of their execution and the selection of priority projects for funding, with due consideration for multi-year expenditure schedules. Technical assistance and training in the above areas is available under the ASAL. However, a serious effort should be made to augment and train staff for this work and to accelerate the selection of consultants. 10. The arrangements for performance and expenditure monitoring described above are a start in the right direction though limited to MAFRA and agricultural expenditures within its purview. Notably missing are the large allocations for DSI's irrigation program, amounting to more than 40% of the total agricultural investment program, a tracking of the resource yield expected from improved cost recovery (para 22), the savings of off-budgetary resources associated with Government's program to phase out the fertilizer subsidy, and with related actions to improve the efficiency of the fertilizer distribution system and thereby reduce DONATIM's operating subsidies. During a second phase, it is therefore recommended that either the mandate of APK be broadened to permit unified budgetary monitoring for the sector under one institutional umbrella, or (i) strengthen SPO's irrigation sector and its functional links with APK, and (ii) Treasury's functional links with APK in respect to monitoring resource yields. ANNEX I - 54 - Page 5 Irrisation 11. While about 18% of Turkey's arable land is irrigated, roughly 402 of all crop output and about 252 of agricultural exports are grown under irrigation. In many respects, however, irrigated agriculture has performed considerably below its potential. Newly developed irrigation projects have often failed to produce expected benefits due to (i) lack of adequate drainage works leading to waterlogging and salinity; (ii) delays in completing on-farm development works which are required for optimum utilization of the water supplied; (iii) inadequate maintenance of some completed works; and (iv) lack of adequate extension services and cropping systems research. The increase in irrigated crop areas has, therefore, lagged significantly behind the expansion of irrigation infrastructure. The underutilization of this infrastructure, built at comparatively high cost, results in a large losa to the economy. 12. Two public agencies are responsible for the construction of irrigation facilities. DSI, within the Ministry of Energy and Natural Resources, is responsible for the construction of the basic irrigation infrastructure for large-scale projects. GDRS within MAFRA is responsible for the construction of on-farm development works on large-scale irrigation projects and the development of small-scale projects. These agencies have not been able to contribute fully to agricultural productivity increases because of the thin spread of scarce budget resources over too many projects, excessive reliance upon force account work, and inadequate coordination between the two agencies in project design and implementation resulting in slow project completion. Poor technical support services in irrigated areas have resulted in limited agricultural benefits. 13. Investment selection. A major problem has been the attempt to include too many projects in the investment prbgram, beyond what could be financed by available investment resources and also beyond the implementation capacity of the agencies concerned. As a result, resources have been spread thinly over too many projects, construction periods were extended unduly, economic benefits have been deferred, and projects have failed to demonstrate ex post their estimated economic rates of return. A broad brush approach to this issue took place during the period 1980-84, which reduced some of the waste associated with slow completion of headworks. Beginning in 1980, the revised investment strategy for DSI shifted to (a) providing full funding for projects scheduled for completion in one year, (b) giving priority to ongoing projects scheduled for completion within two years or receiving external financing, and (c) for the remainder of DSI's ongoing projects, providing funds for all components under construction. From 1980 to 1984 new projects were embargoed and the number of projects under implementation was reduced from 142 to 88. As a result 47 of DSI's projects were completed during this period and the new irrigation area put into operation each year by DSI increased from 18,000 ha in 1981 to 86,000 ha in 1984. 14. However, serious backsliding on this issue has taken place recently. In 1985, 23 new projects were started, and in 1986, an additional 36 new projects have been approved, albeit with only nominal allocations. This increase in the number of projects under implementation is a serious problem ANNEX I ~ 55 - Page 6 because, once in the public investment portfolio, it is politically difficult to have them removed. Annual allocations per project are not sufficient to allow for completion within planned construction periods. However, even in the unlikely event that no additional DSI projects are added through 1993, our estimates show that the total cost of completing all ongoing projects and the 63 new projects in the 1986 program under the planned implementation schedule would exceed TL 2,000 billion (in 1986 constant prices) compared with the TL 1,467.5 billion proposed government allocation for 1986-93 in accordance with the projections described in para 6. While a case may be made for increasing these allocations somewhat, it is doubtful, even in the absence of financial constraints, that DSI's capacity could be built up sufficiently to be able to implement a program of the size programned. The criteria for admitting new projects and fund:ng existing ones need to be more stringently applied taking account of realistic estimates of Government financing availability and of implementation capacities. Without greater selectivity, excessive implementation periods will result in drastic reductions in project economic viability as has been the pattern in the past. 15. Selection of investments from DSI's proposals is currently carried out by SP0 on the basis of eight criteria, among which the internal economic rate of return and location in less developed areas are given the greatest weight. These criteria have been reviewed by the Bank and are considered satisfactory. However, the decision to add 63 new projects to the DSI investment program in 1985 was taken at the Cabinet level, overruling SPO's recommendations. Only 23 out of the 36 projects added in 1986 had rates of return exceeding 15S, and even for these projects the projected rates of return assume project completion schedules that will be difficult to achieve unless work on other ongoing projects is deferred. 16. Completion works. Better progress has been achieved on a second issue which has reduced the effectiveness of past irrigation investments. About two-thirds of past investment allocations for irrigation and drainage have gone to DSI for the development of new large-scale irrigation infrastructure, while the remainder has gone to GDRS to complete on-farm development works and for small-scale irrigation projects. The new area placed under command each year by DSI increased from 18,000 ha in 1981 to 86,000 ha in 1984, reflecting the improved performance referred to in para 13 above. However, GDRS has been able to complete between 12,000 to 18,000 ha per year of on-farm development (excluding land levelling). By the end of 1980, in consequence, a large backlog of on-farm development had emerged, which has increased further as a result of DSI's accelerated completions between 1981-84. This has resulted inter alia in problems of water logging and salinity which have reduced the yields of ongoing irrigation operations. In these circumstances, high priority should be given to investments to provide the necessary drainage and on-farm development work in areas where the headworks have been completed or are close to completion. Such investments would be quick-yielding and would generally have high economic returns. 17. During 1985, a Core Program for drainage and on-farm development investments was developed by SP0, DSI and GDRS, to bring about adequate draia"ge in the command area of DSI's ongoing and completed projects, the ANNEX I - 56 - Page 7 completion of highest priority on-farm works, and the provision of adequate maintenance to insure the optimum utilization of the command area. The Government also indicated its intention to increase the share of its investment allocations for this type of investment. Specific works to be completed under this program will be selected in accordance with criteria which give priority to economic and technical considerations. The Government indicated its intent to maintain funding levels beginning in 1986 to permit GDRS to complete 100,000 ha/year of on-farm works. The acceleration of progress in implementation would be facilitated by increased reliance on contract construction work and by the use of consultants to assist in design and supervision of construction. In January 1986, the Core Program was refined and enlarged and its implementation period was extended from 1989 to 1993. The Government's financial plan for irrigation development (see para 6) provides for a phased increase in the proportion of irrigation investment allocated for drainage and on-farm development (Table 3). This plan provides an average allocation for the Core Program of 222 of the total irrigation subsector investment program over the years 1986-1993, which is sufficient to permit completion of the enlarged Core Program by 1993. While this schedule would accomplish the task, our recommended investment program (see para 7 and Table 2) would better address the urgency for improved agricultural performance and the benefits from intensification associated with accelerated irrigation completions. This program would allocate about 7.5S more to irrigation investment over the period 1986-89 to (i) further accelerate progress in reducing the backlog between completed headworks and drainage and on-farm development, and (ii) reduce the period required to complete priority headworks development projects. 18. Even if the Government agrees to allocate the increased amounts recommended by the Bank for irrigation, drainage and on-farm development, it is clear (see para 13) that the timely completion of the projects in the current investment program would require substantially more funds than can be made available. Ongoing projects continue to slip behind schedule with only 56 of DSI's 94 projects scheduled for completion in 1980-85 actually being completed. In the circumstances, high priority should be given to screening all ongoing projects to eliminate financing of any which (even taking account of sunk costs) are no longer economically viable. Furthermore, a set of projects with highest priority should be selected to receive sufficient funds to permit completion and the realization of economic benefits as soon as possible, with the consequent deferral of expenditure on projects of lower priority. 19. A related factor is the need to build up GDRS' implementation capability (primarily through use of contractors), and to redeploy its present construction force from its large number of small dams and independent irrigation projects to the drainage and on-farm development work within DSI's service areas. For this purpose, Government indicated that completion of GDRS' independent works was accelerated in 1985 and 1986, which could permit a substantial redeployment and concentration of GDRS' efforts on the on-farm development backlog beginning 1987. The Government's revised expenditure estimates for the Core Program (Table 3) reflects this intention. Given the ANNEX I - 57 - Page 8 importance of the Core Program, a firm counitment will be required when preparing GDRS' 1987 investment program to avoid further slippage, since GDRS independent works have high political visibility. 20. The Government has indicated that it also intends to review during 1986 all ongoing DSI projects in accordance with the current criteria for screening new projects, based upon economic and technical viability. The Government also is finalizing the selection of consultants to prepare an irrigation development master plan (1986-1995). The master plan is to be based on a detailed project-by-project inventory and an assessment of existing and projected irrigation and on-farm development investments and financial and implementation constraints. The master plan would also include development of realistic targets as to what can be accomplished during the period and establish priorities among the current and proposed investments within the financial resources expected to be available. Pending completion of the master plan, it is strongly recommended that additional new irrigation projects should not be initiated. 21. Institutional problems. A third set of issues is institutional. These include excessive reliance on force account work by GDRS, inadequate coordination between DSI and GDRS in project design and implementation, and inadequate provision of extension advice and cropping systems research. Furthermore, in recent years, the growth of the private sector and constraints on government conditions of service have reduced the supply of quality technical personnel available in the public sector. Ae a result, management weaknesses have become severe, and will necessitate greater use of private contractors and consultants and a comprehensive program to address these staffing shortages. Operation and maintenance of DSI schemes have also been inadequate, in large part due to its obsolete and run-down equipment (which is now being remedied through ASAL procurements) and inadequate planning of future maintenance requirements. Maintenance of GDRS schemes is the responsibility of farmers' water user associations. In some areas GDRS assistance to farmers in setting up water users associations has been inadequate and should be strengthened. DSI's O&M expenditures should increase at about 4-5% per year in real terms until they reach levels which can fully fund O&M expenses and offset a reasonable share of capital costs (about 502 higher than current levels). Both agencies' programs also take insufficient account of private sector plans; part of the reason why on-farm development lags is that farmers' interests are not taken into account early enough in project planning and implementation. Effective demonstration programs to convince the farmers of the benefits to be gained from irrigation would increase farmer receptivity. 22. Cost recovery. Significant progress has been made to overcome problems in irrigation cost recovery. The Government has (i) adjusted DSI capital recovery charges under existing legislation to include interest; (ii) progressively increased DSI assessments for operation and maintenance (O&M) to achieve 100% recovery for 1986; and (iii) increased penalties for overdue payments. As a result, DSI's O&M assessments have been increased by 2542 in real terms in 1984 over 1978 levels. These assessments were increased further in 1985 to cover 715 of the prior year's costs, and are scheduled to reach ANNEX I - 58 - Page 9 1001 this year. In 1983, the Government increased the penalties for late payment so that if payment is late by one year, a total penalty is levied equal to 54% of the initial assessment as compared to 10 previously. This penalty was increased to 752 in 1985. The Government has also enacted legislation which permits GDRS for the first time to collect water charges to recover capital costs on its irrigation investments. Draft implementing regulations have been prepared anld are being reviewed by the concerned ministries. These improvements in cost recovery should facilitate Government's ability to increase allocations for irrigation investment, operations and maintenance. Technical Services 23. About 122 of public investment in agriculture goes for technical support and related services under MAFRA. A detailed examination of these expenditures in 1984 indicated that over half of the investment budget consisted of O+M and other expenditures which could also be classified as current, albeit of high priority. For investment programming purposes, these expenditures have been grouped into 90 "projects" for the 1986 program (down from 200 in 1985). Defining them as "projects" appears to help defend the expenditures concerned from cuts in the recurrent budget, though many - at best -- are allocated to finance the routine operations of the provincial extension, veterinary and plant protection services and of the regional research complex. The overall availability of budgetary resources for the technical support slrvices appears to be less of a problem, however, than MAFIA's absorptive capacity and ability to program and monitor expenditures effectively.-* 24. The main issues concern (i) the lack of proper definition in many of the investments financed which continues to result in waste and a duplication of effort (items financed are often common to several technical service programs), (ii) an unclear relationship between budget categories for the technical services and other priority subsectors (e.g. irrigation), which results in underbudgeted and poorly coordinated expenditures, and (iii) imbalances both among the technical services and with respect to regional priorities in the expenditures on staff and training, materials and equipment and operating costs. (Only the building construction allocations appear to bear some relationship to priorities for program development). Worse, a close monitoring of investment expenditures, with links to program objectives, is rendered nearly impossible by the flexible definitions employed for budgeting and the extreme fungibility between line items in the recurrent budget and the investment budget allocations. 1/ SPO delegates to MAFRA the investment budget allocation decisions for these services, within defined priorities and expenditure ceilings. These guidelines, however, which give priority to ongoing projects, less developed provinces and so on are not relevant to a situation where, as in 1986, allocations were only 451 of MARA's request and where, as indicated above, resources are fungible between investment and recurrent items and among "projects". ANNEX I - 59 - Page 10 25. The Gnvernment is currently attempting to improve both the efficiency of investment in its technical services, and the coordination of investment. With assistance from the Bank, MAFRA is implementing a time slice of a program to strengthen the extension services nationwide, reorient research programs, foster better links with extension, and combine aspects of crop culture and animal husbandry in the operations of these services to better service the mixed farming conditions that prevail in Turkey. To improve the responsiveness of its technical services to local conditions as well as the coordination of field operations, MAFRA decentralized itself in 1984 and formed unified provincial services out of its centrally controlled arms for extension, veterinary service and plant protection. Plans are currently being prepared to reorganize the research complex and its programs (which are still heavily oriented towards commodity based research), strengthen animal husbandry research, and better integrate "operational" (or applied) research with the activities of the provincial technical support services. It is also recommended that programs for privatizing routine veterinary and plant protection work be devised and implemented. To improve the global programming and coordination of investment allocations, a new General Directorate of Project and Implementation (GDPI) has been set up in Ankara. (In parallel, numerous special purpose general directorates were abolished, their investment program functions transferred to GDPI and much of their line authority transferred to the provincial services). Responsibility for programming recurrent budgets remains diffused among central and provincial agencies within MAFRA, while the monitoring function -- which is technically attached to MAFRA's Minister through its Department of Program and Budget -- is not operational. 26. To improve the efficiency of expenditures for the technical services, MAFRA, the SPO and the Ministry of Finance and Customs should first and foremost establish and apply clear cut criteria for the inclusion of funding proposals under the investment budget. A simplified and consistent definition of an investment project will be neededL' for the technical services. Once that has been established, all related capital expenditures as well as staffing and "operating" costs for such projects should be financed only through the investment budget. 27. To facilitate monitoring, and the consolidation of provincial and regional requests within MAFRA's investment priorities, it will also be necessary to improve transparency in the General Budget. Currently, this ,budget presents all investment and recurrent expenditures as line items, broken down by budgeted agency. But it is nearly impossible to correlate allocations and expenditures within these categories with the technical l/ A functional distinction among the services could prove useful here. Research and extension, by definition, are "investments" in agricultural technology and its diffusion. On the other hand, veterinary and plant protection services essentially operate to maintain the productivity of currently applied technologies. Perhaps all research and extension expenditures (except housekeeping, "policing" and administrative functions) should be budgeted under the annual investment programs, while operations of the protection and control staff and the administrative functions of the research and extension staff should be financed through the recurrent budget. ANNEX I - 60 - Page 11 services' projects under the investment budget. The ex-post balancing of allocations and expenditures is necessarily an ad hoc one, and sheds little light on whether investment expenditures have in fact been truly allocated according to MAFRA's planning data. Lastly, MAFRA's staff in the Department of Programs and Budget must be augmented, and its internal information system improved to permit useful monitoring. 28. Government intends to assign qualified staff for the programming, coordination, monitoring and evaluation of its medium-term agricultural program, which should be carried out under well-defined work programs (para 9). These work programs should be designed to help MAFRA improve the budgeting of investment and recurrent expenditures for its technical services, to make the link between MAFRA's investment and general budget allocations more transparent and operationally useful, to improve MAFRA's internal information system and data bank for current and programmed projects, and to systematically undertake mid-term reviews and post-project evaluations as a tool for monitoring. To date, however, very little progress has been made in these areas, although MAFRA recognizes these to be essential for developing its ability to manage the newly decentralized technical services. Forestry 29. The administration of Turkey's forests is carried out exclusively by the General Directorate of Forestry (OGM) within MAFRA, which is a large (some 40,000 employees), disciplined, tradition-bound organization dating from the Osmanli period. The public investment program, which is managed by OGM, accounts for 152 of the agricultural sector investment program (and only 1S of total public investment). It has remained constant in real terms since 1981. Public investment in forestry is financed by a revolving fund consisting of revenues from the sale of forest products. A small part of the total investment budget (82) is earmarked for state related afforestation and beautification of lands outside the forest area. 30. Turkey has an extensive land area (20.2 million ha -- 262 of the total country area) well suited for sustained forest production for industrial use and fuelwood. However, the forest areas also provide habitation for large human and livestock populations. For many of the areas, especially in northern and eastern Turkey, the place of the forest areas in a delicate ecological, sociological (anS political) balance makes the authorities cautious about commercial solutions. 31. In the past, Turkey's forest resource has been overly exploited without due consideration for its reestablishment and maintenance. To redress this situation, the forestry investment program in recent years has embarked on an aggressive program to rehabilitate degraded areas. As a result, 652 of the investment budget in 1986 is for reforestation, while the areas targeted for reforestation have grown from 44,600 ha in 1980 to 140,000 ha in 1986. OGM's eventual goal is to reforest 300,000 ha annually by 1990, but OGM's present capability is for 180,000 to 200,000 ha annually. But even these efforts are likely to fall short of meeting expected domestic requirements!' and may not allow Turkey to take advantage of export possibilities. 1/ OGM projections appear to be overestimating supply and underestimating demand -- particularly for fuelwood. ANNEX I - 61 - Page 12 32. OGM's investment decisions are based in part on criteria for income maximization and cost minimization. But social and political considerations also weigh heavily in the decision-making process, since encroachment is near universal. Between 8-10 million people (about 20X of Turkey's total population), herding some 30 million head of livestock, now reside within public foxrest areas. As a result, fuelwood consumption accounts for about 702 of annual wood production, of which one-third is from illegal cuttings. The Government is understandably loathe to consider resettlement programs aiming to facilitate more effective forest management because of the huge social, budgetary and financial costs such programs would impose. As a result (i) Western management techniques are presently inappropriate in many parts of Turkey's productive forest areas, (ii) only limited mechanization is entertained (it would displace a well organized system for employing forest area residents in OGM'S operations), while there are ({ii) uncertainties about the extent of the forest resource, and (iv) technical problems that would have to be overcome through research and experimentation before Western forest management techniques (e.g. clear felling and artificial regeneration) could be practiced on a large scale in those areas of Turkey's forests where such may be appropriate. Furthermorie, in the absence of an appropriate legal framework for OGM to monitor and control forest activities (as a regulatory authority), and the current inability of OGM to perform this role even if it wanted to, there is an understandable reluctance to allow private commercial exploitation on a large scale for fear that it could not be effectively monitored. 33. Innovative solutions to problems of land use and forest management therefore need to be devised which take into account the country's social, political, ecological and industrial needs with respect to forestry operations. OGM's current policies and expenditure programs simply do not address the crux of the problem, which is to strike a reasonable balance between the conflicting objectives of forest management within OGM, between 0GM and the villagers, and between OGM and MAFRA's provincial agricultural services. Until a workable balance can be found that simultaneously satisfies the political/social aspects of forest management, and Turkey's commercial and environmental needs -- a balance which must be reflected in the annual investment and recurrent expenditure programs - the present danger will not be addressed. Which is the very real possibility that Turkey's remaining forest resources will degenerate by the turn of the century to a point where they are effectively destroyed. 34. At the programming stage, conflicting objectives show up in the absence of both village inputs and forest service concerns, and commercial/ economic concerns, in OGM's annual investment and expenditure approvals. A rational choice of regional and local contractors, and channels for the marketing and disposal of commercial removals also is frequently absent. For, ANNEX I -62 - Page 13 in practice, the approvals frequently serve the provincial mandates that its senior officials at national and regional levels were appointed to protect.-' 35. Although it will take considerable time to develop workable solutions, there is an overriding need for a long-term strategy for the forestry subsector, the urgency for which is underscored by the failure of the present setup to reverse the degradation of Turkey's forest resource. The strategy should be inclusive of institutional roles, which aim to accelerate co mercial forestry where the benefits outweigh the social costs, and otherwise to promote social forestry. In conjunction with the wood industry, the private sector should be encouraged to operate those areas which are amenable to commercial forestry. Degraded areas should be handed over to village authorities for fuelwood production and grazing. In areas which r min productive but have large resident populations, a social forestry strategy will have to be devised to simultaneously serve the commercial and social forestry objectives of the subsector. Implementation of this approach will require the progressive downgrading of OGM's role in managing production and reforestation, and a transformation of OGM to a regulatory and monitoring agency, with its forest service providing technical advice, local coordination of commercial and social forestry interests, and the prevention of improper or careless management practices. 36. To prepare the requisites for implementation, four areas require imediate attention by Government: (a) OGM should be empowered to act, de facto, as the protector of Turkey's forests. Its current de lure responsibilities require elaboration through a recasting of OGM's legal framework to enable it to act effectively as a regulatory authority, while reducing its direct responsibility1t' for forestry investment and related resource allocation decisions. This will necessitate 1/ Further, the various agricultural services for forest village farmers are still poorly articulated. The forestry service, the forest village fund (ORKOY) and MAFRA's provincial agricultural services at the field level all have partial responsibilities. though recent reforms have led to a clearer demarcation of areal responsibilities (forest village residents are the responsibility of OGM and ORKOY while, at the ministerial level, the assistant undersecretaries for forestry and for crop and livestock programs are now in a better position to respond to operational problems as a result of the June 1984 reorganization of MAFRA). Still, forest villagers constitute about 302 of Turkey's livestock farmers. Having traditional feeding systems, their animals frequently spill over to non-forest grazing areas during the summer months. This is a particular problem in the two-thirds of Turkey east of Ankara, where traditional animal management prevails. Thus neither the villagers' nor Government's longer-term pasture management and rehabilitation objectives are adequately served by this legalistic and somewhat artificial bifurcation of animal husbandry services within MAFRA. 2A As well as the responsibility of the public sector at large. ANNEX I -63 - Page 14 organizational changes within OGM, considerable retraining and ultimately -- a reorganization and probable reduction of the Forestry Revolving Fund, the need for which could gradually be supplemented by private sector resources. (b)l A managerial and technical "audit" of OGM should be carried out by expatriates or independent Turkish experts to identify firm action programs for reorganising OGM and increasing its staff capabilities.1" These action programs should be tailored both to (i) requirements of OGM during its transition from production manager to regulator,y agency, and (ii) its longer-term needs to effectively coordinate and monitor the activities of forest contractors, the wood industry and the village-based programs. (c) The preparation qf an overall development strategy for the forestry subsector must also include a comprehensive assessment of industrial roundwood, pulpwood, and fuelwood demand (in addition to OGM's ongoing forest inventory analysis which estimates present and projected supplies), as well as a review of energy alternatives to fuelwood consumption and wood pricing policies. (d) Lastly, pilot schemes should be introduced by OGM to test different forest management concepts such as handing over degraded forest land to village authorities for fuelwood production and grazing, or promoting the establishment and operation of forestry contracting companies to carry out reforestation and harvesting activities on a larger scale, and intensifying research on the establishment of fast growing exotic species particularly for fuelwood production. 1/ It is doubtful that an objective management audit could be carried out by OGM because of vested interests and past practices. Therefore consultants familiar with Turkish or similar type conditions are suggested. ANNEX I -64 - Page 15 IMF PJLiC IUVITSMI REvlw IfYMI SummarX of Rc_mndations - Agricultural Sector I* Sector Prggraina and VtwU.r.n Problu Area Act1in UnderaW Action RRetg edO Total public investment for agriculture Increase agricultural share in 1987-89 in 1985 and 1986 program below programs to 9.5X. 11.1% and 12.6X Government's 10 target for 198S-89. respectively, to achieve an average of at least 10% for entire 198S-09 period. Weak arrangements for sector performance Broad responsibility assigned and expenditure monitoring. to MAFRA's APK in June 1984. Policy announced in 1985 to assign Proposed work programs and APK the eventual goal would be to implement qualified staff tor sector programsirg. staffing discussed with Govern- a two-phased program. first phase, coordination. monitoring and evaluation ment May 1985 for improved moni- implement May 1985 recommendations for be carried out through acceptable toring of sector performace. APK (cf. para. 9). Ouring second phase. work programs, hire consultants to MAFRA's budget. fertiliter the Government should either broaden the assist with aspects of performnce distribution and consuption. mandate of MAFRA's APK to have unified monitoring, design HIS for MAFRA. and for post-evaluation. budgetary monitoring for sector under No action: staff and work one umbrella. or (i) strengthen SPO's programs. irrigation proram section and links with APK. and 0ii) Treasury's links Consultants TOt agreed (June with APK vis-a-vis resource yields. In 1985). MARA issued invita- the meantime. APK can advise OS: on tions to consultants for all project priorittes from the point of three studies in December 1986. view of agricultural demands and crop priorities. further need to broaden agricultural No action. sector budgetary projections and monitoring beyond programs within MAFRA's imdisate purview to include: -DSI's irrigation expenditures, -resource yield from cost recovery. -resource yield from reduced fertilizer subsidies. -resource yield from reduced fertilizer distribution operating costs. ANNEX I - 65- Page 16 It. trrialtain Suksact Probles Arua Aet ion uA rway Act in Rgemmiended A. BOmch The overall Irrigation program requires: Government announced Intention SPO should establish an irrigation (i) realistic planning and programuing. to prepare len-year Irrigation investment planning. monitoring and 0ii) concentration of funds to overcome Subsector Naster Plan; consul- evaluation unit to function according on-farm development backlog on OSS tantsa invitations currently to work program and 10R discussed schemes and finance only high prtority being prepared. during ASAL preparation (proposal was irrigation infrastructure having hi pML accepted during loan negotiations). economic benetits, such funding to be Services ot a specialized firm for consistent with the global availability computerization and in-house training of public Investment financing* should be engaged. (iit) 1iproved coordination at the planning level and monitoring of In conjunction with public expenditure implemwntation. planning reforms. SP0 and MAFRA's APK (iv) strengthening of the works should review OSt and GORSI expenditure agencies' UN programs and capabilities, requirements. program annually and and (v) inproved staffing capabilities conjointly for both investment and of the works agencies and SP0. recurrent expenditures commencing 1987, and ensure Inclusion of budget aloca- tions for completed OSt/CDRS projects in the recurrent budget. Preparation of irrigation master plan should begin as soon as possible, based upon detailed project screening and realistic assessment of resource avail- able and Implementation capacity. Increase total allocation to irrigation and drainage subsector by 1989 to about 9.3% of Government's investment program. S. InvestM tSelectian Annual investment program spread thinly New OSI projects eFbargoed Review all large ouAina OSt projects. over too many projects, delayed project 1980-1984. 0$I completions eginning 1987. continue to allocate completion, delayed economic benefits. substantially accelerated. funds only to those with ERR greater Forty-seven projects completed. than 12%. Substantial backsliding 1985. 1986 through addition of 86 new OSI projects. Review smaller gngasg OSI projects with respect to on-farm development program. GovernAent intends to review Assign priorities beginning 1986 to all of OSt's ongoing invest- these and subsequent ongoing OSI schemes ment projects and exchange on basis of realistic completion views with *ank regarding schedules and minimum ERR of IS% on the proposod OSI budgetary remaining works. Assign first priority allocations for Irrigation to copletion of OSt works for projects subsector for 1967. h1ich are due for completion in one year and are to be included in core drainage & on-farm development program. Second. priority to those utich can be completed within three years. Review 86 new OSI projects approved for 198S and 1986 simultaneously with the ongoing projects under second priority to select projects of outstanding merit. Thirdly, new as well as the smaller ongoing projects with serious technical constraints and/or ERR less than 15% should be indefinitely postponed. ANNEX I - 66 - Page!1 Irr1ialion SubsectAr (cont'd) C. cmlmtian Uorks Consistently inadequate allocations for Government decided in 19N5 to Seginning 1987, allonations for Core on-faro development on OSt projects and ti) give priority to Core Program should be increased AL isis! maintenance of existing channls. Program for Orainage and On- to levels Indicated In Government's Reliance on foree account works by CRS, farm Oevelopment coipletions indicative program (Table 3) and which gives phasis to nunerous small on OSt schms, (1i) allocate preferably to levels suggested in dams and irrigation works (any having an average of 35S p.a. of the Table 2. dubious economic merit), to detriment Irrigation subsector investment of its comeletion works in OSI service progrm to the Core Program Expedite use of investment criteria areas. between 1966-199. and (iii) based upon economic and technical select Core Program works for considerations. inclusion In annual 1nvest- ment programs according to txpedite hiring of consultants to agreed economic and technical assist with design work for the criteria. The Core Program Core Program. was madif ed and expanded in January 196. and its con- struction period extended to 1993. lplemetation capacity for the Core Program to be aug- mented through increased use of contractors. and the hiring of ongineering and reviewing con- sultants for the duration of the iaolementation period. with respect to GORS. Gov't also indicated Its intention to (0) increase the use of construction contractors, and (ii) reduce CORS' allocations to its indep ndent irrigation developments beginning 1988 (after current portfolio completed) in order to concentrate 6015 resources on the Core Program. 0. Institutional AIsue= Inadequate coordination between OSt Proosed ctions under Part IIA above. and GOMS in project planning. design and Govt.' s work program for Core and implementation. Program and engineering consultants will requre and should result in improved coordination. Need to improve maintenance of OST procuring drainage and On a priority basis, Government should existing projects. maintenance equipment. devise detailed program for cowleting rehabilitation, minteance and repairs on OSI operated surface drains. OSS nnual allocations for OAK should be increased to a level about SX hibher than current allocations in real terms and to augment same thereafter to acco_date OU of future project covletions. Assistance and training by GORS to farmrs setting up water users associations should be Intensified. NIed to stimulate farmer cooperation Need for more systematic involvement and willingness to permit on-tarm of farwmrs in project planning. development on their fields. supplemented by Irrigation and drainage deostration programs. Supply of quality technical personnel OSt/GDRS recruiting consultants Goverunt shold review coditions of to OSI/GORS severely constrained by to assist with Core Program service (especially salary and benefits) growth of private sector contractors GORS will augment use of in conjunction with a manpower needs and government conditions of service. contractors. assessment tor OSt and GORS. which should also be performed in light of changing prorm focus and availability of experienced ng1iners. ANNE I - 67 - Page 18 ut'"tio subsoctor (cont'd) tnadequste provision of research and see Technical Support Services Pririty attention needed by NAFRA to extension services in irrigated ares. section. (1) accelerate spread of T4V extension system in irrigated areas. (ii) Improve irrigated cropping systems research. C. cost Rbonrw Still inadeduate, though progress Government has (i) implemnted Increased efforts needed to improve being mude. a phased program to increase actual collections. OSI's am assessments to 1OOS of the prior year's maintenance Implementing regulations for CDRS costs by 1906; (ii) increased cost recovery should be issued. penalties for overdue payments; (ii) increased 05 car:tal cost recovery charges to include interest; and (iv) pissed leg1s- lation to permit GCNS for the first time to assess water charges for capital cost recovery. and drafted Implementing regulations. 111. Technical Supoort Servieni Prabc Area Action Underway Action Recmgmnde Poor extension progra focus and UAFRA reorganized in June 1984. Augment APK s staff to improve central definition, still weak links with Unified provincial services for level coordination. facilitate research, waste and duplication of extension, veterinary and plant monitoring. Appoint national research effort between extension, veterinary protection services formed. and extension coordinators. and plant protection services. Joint use of facilities and inadequate feedback ot animl husbandry/ equipment required. Plans Review conditions of service. carry out breeding/nsimal disease control and under preparation to reorganmie comprehensive skills needs assessment. plant protection research results to research complex and programs provide necessary staff incentives to extension agents. strengthen links with provin- facilitate redeployment of provincial dcil services. staff in line with regional priorities. Imbalances of technical support Provincial inventories of Carry out review of ongoing research staff with respect to regional NAFA' s support service staff. program and develop revised research priorities. facilities and equipment strategy. developed 1962-84. Reassign- ment and consolidation plans Expand modified T&V system notionwide now being Implemented. though as experience, availability of tech- planning data still weak in nology and budgets permit. respect of manpower skills assessments. links to future technical support program re- quirements, and materiel needs. first phose of program to strengthen agricultural extension and applied research services underway in 16 of the most productive provinces. supported by Agricultural Extension and Applied Research Project. Number ot technical suppW.t service projects" in 1986 public investment portfolio reduced from 200 (1985) to 90. AP staff being trained in project evaluation techniques. -68 -ANNEX I Page 19 IV. Forg2try Lubsector Probla Area Action Underwav Action IcaSo.m Competition for use of existing forest None Prepre long-term strategy to areas. almost universal encroachment. (1) foster private managemnt ot New strategy required to reverse commercial forestry degradation of productive forests. (ii) transfer degraded areas to met fuelvood needs. vtllages for fuelood production, (Mii) develop social forestry approach mnere comrcial forestry possible but large resident populatians exist, and (iv) gradually transform CON from pro- duction mnager to regulatory agency. OGH s weaknesses as regulatory and None Recast OGNs legal frameork. monitoring authority. Ensge tndependent consultants to carry out manageent and technical *audit" ot OCG to define action progrms. Reorganiz OGG as necessary and retrain headquarters staff and forest service to meet new roles and functions. Reorganize and reduce Forestry Revolving Fund after private sector resources bec available. Lack of experience with alternative Testing begun on 2,000 ha Introduce/broaden pilot schems to forest management concepts necessary for comuercialization of (i) proote establishment and expand to impleent proposed strategy. harvesting/plantation, operations of forestry contracting companies. Discussions underway in OGM/ (ii) prmote village management of Parliament to permit village degraded lands for village needs. management of designated areas. (iit) establish fast growing exotic species for fuelwood production. Inadequate planning data for overall Forest resource inventory Carry out comprehensive and method- program development, analysis ongoing within OG19. ologically satisfactory assesswnt of industrial roundwood. pulpwood and fuelwood demnd. Improve the coverage of OGl's inventory analysis and realism of supply projections. Review enrgy alternatives to fuelwood consumption. Iprove wood pricing policies to realistically reflect dmnd (par- ticularly by the wood industry and for exports), and resource costs. 4360Z ANNEX II - 69 - Page 1 MANUFACTURING 1. Manufacturing has a critical role both in the Government's adjustment strategy and in the redirection of the public investment program. One of the lynchpins of the adjustment effort started in 1980 was to reorient manufacturing from a protected, inward-oriented path towards international competitiveness and export promotion. Manufacturing responded well with its exports growing by an average 502 from 1981 to 1984, thus becoming the major foreign exchange earner for the economy. 2. It is Government policy to reduce direct public investment in manufacturing. To this end, private investments in all manufacturing branches are encouraged, public investments in the sector are being reduced and the public sector intends to divest itself of many of its manufacturing operations. Indeed, the declared aim of the Government to redirect its investments towards investments supportive of the private sector, i.e., infrastructure, was to be achieved essentially by reducing public investments in manufacturing. 3. As a result, the share of manufacturing in total public fixed investments declined by about half between 1980 and 1985. In each year, the share of actual public investments in the sector was, however, well above what was programmed. This was due to persistent overspending of program allocations by a number of SEEs, with marked concentration of overspending in three industrial sub-sectors. This frustrated the Government's intentions with respect to the level of its investments and, even more, their subsectoral composition. In addition, much of the overspending was financed by borrowings, mostly foreign or short-term. As a result, a number of SEEs have difficulties servicing their debts and their ability to spend more than their program allocations has to be reigned in. This is particularly important also for their foreign borrowing, because of evidence that the foreign debt contracted for the investment program may be higher than strictly necessary on project-specific grounds. 4. Total involvement of the public sector in manufacturing operations is well above what is reflected in the public investment program as put together by SPO. This program does not cover some very large manufacturing enterprises where public shares in the equity exceed 50Z, nor does it cover minority participations. The latter are likely to increase significantly as private investors avail themselves of the Government's offer to take minority shareholdings in new private ventures. Data on all public funds flowing into manufacturing investment should be consolidated into one program. Unless this is done, the Government will not be able to monitor whether its objectives for reduced involvement in the sector are being met. 70 - ~~~~~~~ANNEX II - 70- _Page 2 5. Within the public investment program as defined by SPO, significant progress has been made in identifying priority projects and concentrating program allocations on these, scaling down others and deleting or suspending lower priority projects, including some in industries considered good candidates for privatisation. A moratorium on new projects has also been in effect for some time, with exceptions being allowed only if the main purpose is rehabilitation or modernisation of factories. The criteria applied in this effort have been reasonable. 6. Further progress is required, however. Slippages in completion schedules are still frequent and only a few of them appear unavoidable; cases of inadequate initial project appraisal and cost estimation are discovered during implementation; allocations supposedly sufficient to complete projects turn out to be inadequate; projects that are apparently deleted, reappear; projects which are suspended or for which priority has yet to be confirmed are carried in the program, and so on. This suggests that the general moratorium on new projects is not being applied strictly enough and should be strengthened, with exceptions subject to exceptionally stringent criteria. Starting with the 1987 investment program, requests for new projects as well as annual program allocation (and mid-term revisions of these allocations) should require information on the degree of physical completion of the project, up-to-date estimates of remaining costs to completion, disbursement profiles showing annual foreign exchange and local currency expenditures separately, and a detailed financing plan that conforms to debt/equity ratios and borrowing ceilings to be established by Government; and projects should enter the program only when their priority and general resource availability are confirmed. Such a system should remain in effect at least until the Government has decided how to institutionalize fully its intent of increasing the managerial and financial autonomy and the accountability of SEEs; specific proposals to this effect may be developed through future Bank work on Industrial Restructuring. 7. Several reasons suggests this is an opportune moment for the Government to review its manufacturing investments comprehensively. One is that part of the program in the forthcoming years is unidentified, not least because some large projects are nearing completion and the moratorium on new projects is, to some extent, biting. Other projects in the programs are in the "priority to be confirmed" category, some of which may well be deleted and others reduced in scale. What is more, as divestiture proceeds, some projects now in the program will be carried out by the private sector. The actual investments could thus be lower even then now anticipated. All this indicates there is room for three alternatives or any combination of them, i.e., to accelerate completion of ongoing projects if possible, to phase in new projects, or to reduce public investment targets for the sector further and use the "savings" for other purposes. SPO should carry out such a review in advance of the formulation of the 1987 investment program. 8. Another reason that militates for an in-depth look at public investments in manufacturing is the mounting uncertainty over these investments, which is an inevitable by-product of the Government's policy to ANNEX II - 71 - Page 3 leave investments in the sector largely to priva'te investors. Both the buoyancy of private investments in general and the scope and speed of privatisation are highly uncertain. Given the importance of manufacturing in overall economic development of the country in its export drive in particular, it is imperative that the Government be prepared for the contingency that both may fall short of expectations. Hence, we recommend that Government continue to keep in close touch with private investors to identify what further changes in the policy environment may be needed to facilitate private investments in an economically efficient manner. A World Bank study is also focussing on this issue. 9. In addition, Government should prepare for the contingency that privatisation may not materialize along the time path nor be as complete as now anticipated. The criteria presently applied by SPO to determine priority project selection in manufacturing are largely appropriate and, together with improvements suggested below in the planning and implementation process, will result in a core program. This would consist of those projects that should go ahead either because privatisation is presently not a realistic alternative nor being specifically promoted by Government. On a case by case basis, it may also include investments required for successful divestiture, although the overall policy should be that such investments are to be carried out by the new owners. A specific case arises, however, with industries where public investments are already being curtailed (e.g., in textiles and engineering) or will be curtailed in the future, as restructuring studies are carried out. Some of the plants in these industries may be uneconomic to the point where they cannot be privatised, and the obvious alternative, closure, may not be politically feasible. In that case, public investments may become necessary and justified to reduce operating costs of such factories. 10. As a result of Government policy, the bulk of public manufacturing investments are financed by own and borrowed funds of SEEs. Now that contributions from the consolidated budget (and other sources) are negligible, Government should develop a policy requiring SEEs to pay dividends. This proposal is further developed in the summary volume of this report, since it should apply also to non-manufacturing SEEs. Manufacturing investments from budgets of local authorities, however, while still relatively modest, appear to be growing rapidly. Very little is known about them and a reporting requirement for such investments should be established. Over time, the Government may also wish to consider issuing guidelines for them. 11. Finally, a more detailed sub-sectoral analysis of investments in the iron and steel industry, which is one of the industries that contribute substantially to exports, leads to the following sub-sector specific recommendations: (a) the development of an investment strategy for this industry, including an analysis of its competitive position in the international market; ANNEX II - 72 - Page 4 (b) the formulation of a medium-term investment plan to 1990 on the basis of this strategy, which might cover modernisation of the Iskenderun steel plant and intermediate expansion and modernisation of the Erdemir steelworks; (c) a thorough review of the Sivas steel project, in particular its technical and economic justification, in the light of the strategic considerations developed under a) above; (d) a review of certain small investments in Karabuk, intended to use relatively new and untried processes, and a review of the completion of the ferro-chrome project, which is particularly sensitive to the economic cost of power. (e) strengthening the ability of the major steel producing companies to carry out, with the assistance of qualified consultants, the in-depth review of the technical and economic justification of steel investment projects which is needed for sound decision-making, with SPO concentrating its limited resources for the sector on overall guidance, policy coordination and possibly quality control of such studies and reports. 12. The PIR was not able to go into similar detail in other industrial sectors. From the examples given in the body of this report it seems clear, however, that strengthening the project appraisal and evaluation capability of implementing institutions, under the overall guidance of SP0, would be beneficial for the investments of many other SEE's as well. SUMMARY OF ACTIONS RECOMENODED Problem area Action underway Action Recommended General Overspending of investment -- Apply financial controls allocations by SEEs. to SEEs, especially on foreign borrowing. Incomplete coverage of SPO's Consolidate all public public investment program in -- funds flowing into manu- manufacturing. facturing investments into a comprehensive program. More progress required in Moratorium on new Apply moratorium more program rationalisation. projects in place; strictly; make criteria exceptions allowed for exceptions more for specific purposes. stringent. - 73 - ANNEX II Pa~ge5 General (cont.) SPO project information -- SP0 to request different not adequate for rational project information management of the portfolio starting with the 1987 program, including data on physical progress in implementation, remaining costs to completion, disbursement profiles, financing plans etc. Uncertainty over future Public investments in a)Review public invest- public and private invest- some industries (e.g. ments in manufacturing ments in manufacturing and textiles and engineering) comprehensively and over the conditions and suspended pending decide on policy in pace of privatisation. privatisation. advance of 1987 program. b)Keep policy environment for private investors under review. c)Apply policy that investments in plants to be privatised shuuld be made by the new owners, not in advance of privatisation. Specific Inadequate knowledge of -- Institute reporting rapidly growing manufac- requirement for such turing investments by investments and consider local authorities. issuing guidelines for them. Uncertainty over Substantial investment Analyse Turkey's inter- comparative advantage of projects are being national competitive iron and steel production formulated for the position in iron and id Turkey and absence of Iskenderun and steel and develop a long- a long term strategy for Erdemir steel works. term investment strategy the industry. in advance of approving any major investment project. Reactivation of the Sivas MHF is financing a Thorough review of tech- steel project, judged to rolling mill for nical and economic justi- be uneconomic by SP0. this project. fication in the light of long-term investment strategy. Doubts about viability Continuing investments Review of the viability of the ferro-chrome in the project. of the project iu the project. light of long-run power costs. - 4 - ~~~~Annex III - 74 - Page 1 TRANSPORT 1. Turkey's transportation system is already fairly developed, with an extensive road and rail network, several major ports, civil and military pipelines and a large air carrier. With some exceptions, major extensions to the existing network are, therefore, not needed. Instead, the main priorities are: (a) to modernize and rehabilitate the system, especially ,those main trunk highways that have severely deteriorated; (b) improve the operating efficiency of the railways, which have become a serious bottleneck to those sectors dependent on bulk transportation; (c) bolster maintenance capabilities of all transport agencies; and (d) meet the needs arising from the development of Middle Eastern trade, the growth of container cargo and transit traffic and the emergence of new requirements for transportation of bulk commodities like coal and iron ore. The sector also offers scope for privatizations private profit sharing bonds are being used for financing the construction of a second Bosphorous Bridge, and arrangements are under consideration for privatization of the Turkish Airlines and manufacturing facilities (locomotives and cars) of the Turkish Railways. 2. Responsibility for transport sector planning, policy development and investment is divided among a large number of key ministries and agencies. This leads to an uncoordinated approach to investment and policy formulation in the sector. In addition, planning departments at modal level lack qualified staff. As a result, proposals for aew infrastructure are not well prepared and fit badly with the needs of operating agencies. There was, for example, underinvestment in highways during 1980-84, especially rehabilitation. In addition to measures designed to strengthen sub-sectoral planning capability, the government has recently started to emphasise the roles of MOT and SPO in coordination. However, SPO is overburdened and under staff. A more definite institutional reform is needed to oversee coordination in transport sector, particularly in analyzing and approving annual programs and detailed budget estimates. This, however, neids to be complemented by a stronger capacity to determine sector strategy, and to apply economic criteria to investment approval. During 1986, the SPO plans to update the National Transport Master Plan to provide general guidelines for the longer term development of the sector, but guidance on medium term strategic choices and investment selection still requires attention. 3. Given that transport inftastructure is fairly well developed; that traffic flows will probably become less predictable in the context of a more outward-oriented trade environment; and that a higher premium must be placed on the efficient operation of existing assets, sigh priority should be given to investments which would enable transport to respond effectively to shifts and growth in demand, particularly investments designed to utilize the existing system more intensively or which are designed to remove bottlenecks. Similarly, the selective modernization of equipment and workshop facilities aimed at increasing efficient operation should be emphasised. At this stage, major large investments for such purposes as railway electrification and inter-city passenger traffic on railways are low priority; postponement of such investments would save about 100 billion TL (in 1985 prices) for 1985-89 period. - 75 - ~~~~Annex III Page 2 4. The government's proposals for highways investment generally provide an appropriate balance between rehabilitation of the existing network, upgrading selected high-priority sections of trunk roads to motorway standards, improved maintenance and extension of the rural roads network. Improved selection and evaluation methodologies for rural roads would, however, greatly improve the impact of that part of the program. Moreover, a serious 1ssue is that the Government now wishes to expand motorway construction from about 300km in 1985-89 to 1,600km, on the assumption that financing could be provided by export credits and the PPF, and that toll revenues would cover operating costs and debt servicing. This is unlikely to be a commercial proposition; except for some heavily trafficked sections in and around Istanbul, toll revenues would probably not cover the cost of construction and operation. Furthermore, the use of contractor financing, as envisaged by the government, may not be competitive. The program should only proceed if justified on the basis of detailed feasibility studies as well as financial analyses of toll financing systems. If the program is implemented, the financial risks should be assumed by a private contractor/operator, as under the BOAT model. 5. The railways program emphasises improvements in the availability of locomotives and rolling stock through better maintenance and rehabilitation of track and improvement of signalling on those sections of the main lines which have a large potential for raising operational performance and the quality of services. The railways program is being limited to completing construction of high priority ongoing projects, including only ongoing contracts on the Arifiye-Sincan high speed line. Government policy also emphasises the gradual reduction of subsidies to TCDD through improved operational efficiency, increased traffic and tariff adjustments. 6. For ports and shipping, the strategy is to improve container handling facilities in selected ports, to selectively increase the share of Turkey's maritime lines in country related trade, and to place greater emphasis on market studies and personnel management. Proposed projects to develop additional cargo facilities in the eastern Black Sea, should be avoided - specifically the proposal to develop a new port in the Marmara region. The scope for privatization of selected aspects of ports operation similar to the proposed new bulk cargo facilities at Yumurtalik which will be developed with private capital should be considered. 7. To meet the investment backlog, particularly for rehabilitation, the Government is planning an investment program of TL2,600 billion (1985 prices) for 1985-89. The core program we recommend of TL2,300 billion would be sufficient to remove critical bottlenecks in the system, complete priority ongoing projects, rehabilitate existing infrastructure and support foreign exchange earning activities. The lower priorities are clearly railway electrification and motorways; in addition, small adjustments in port construction equipment, shipping and civil aviation could be made to accommodate lower levels of resources. Expenditures in 1985 and the 1986 program are generally consistent with the program, except for motorway construction. ANNEX IV - 76 - Pagel ENERGY Introduction 1. This overview paper draws upon the more detailed subsectoral working papers (3 (a), 3 (b), 3 (c), 3 (d)) prepared for the Public Investment Rpview. Its focus is easentially energy policy and the need for a new institutional, planning and investment framework to support Government's far reaching policies to transform the energy sector. l 2. The last 15 years have seen a transformation in Turkey's energy production. In the early 1970s, most energy consumption was based on imported oil, which as a result of consumption growth and the two oil shocks, was valued at 124% of export earnings by 1980. In response, the Government embarked upon a program of indigenous resource development, especially lignite and hydropower, and, by 1984, public investment in energy- 'had reached 40b of total public investment. Oil imports meanwhile fell to 51% of exports. 3. The government's broad objectives and strategy for the energy sector continue to give priority to domestic sources of energy provided they are economically justified. In particular, the economic case for projects based on imported energy sources, especially gas and coal, ought to be implemented. Furthermore, renewable and nonconventional resources such as geothermal, solar and biogas would be supported. Particular emphasis is now being placed on the mobilization of private resources for energy development. Conservation would be supported through indirect (pricing) as well as direct (non-pricing) measures. SEE's would be given greater financial autonomy especially in setting output prices. Power 4. Since 1975, the share of electricity investment in total public investment has expanded in response to the large and growing share of energy imports and Turkey's potential for both thermal and hydro generation at lower cost. For the future, even assuming that the government pursues an active program in demand management and conservation, annual additions to capacity of between 700MW and 1,OOOMW will be required. When this is compared with the existing (1986-95) investment program, consisting only of ongoing projects, deficits in capacity and in energy will appear between 1990 and 1995, even after taking into account likely imports. Since industry accounts for 1/ Including power, lignite, oil, gas, geothermal production, pipelines and refineries. ANNEX IV - 77 - Page 2 70-75S of electricity sales, these deficits could have significant effects on economic growth in the longer term. 5. This expansion in investment is to be accomplished, according to present government intentions, by the introduction of substantial private sector financing. In addition, more private investment would, it is hoped, reduce the burden on public sector resources and improve operating efficiency. Some 52 private sector applications to build and operate power plants have been received by SPO/MENR, of which three large imported coal fired steam plants appear most advanced. This initiative raises issues relating to the appropriate roles of the key institutions, the planning and coordination of the sector, the management of the integrated power system, and the setting of prices through a regulatory framework, rather than the present system of administered prices. 6. To achieve this expansion, and at the same time mobilize the private investment the government is seeking requires first and foremost a change in the way planning and policy-making for the sector is undertaken. An action program is underway to correct deficiencies in such areas as load analysis, cost data, construction scheduling, hydropower data and the evaluation of alternative options for meeting demand. However, this is internal to TEK and does not go far enough. What is needed is a comprehensive sectoral program, comprising consistent policies on pricing, demand management; a. indicative sectoral investment program, based on least cost, to provide a framework for both private and public investment; and a regulatory framework to encourage private investment, especially in the areas of licensing, operating modalities and pricing policy. Sectoral planning and policy guidelines should be laid down by SP0. Within thi6 framework, which should be administered by a strengthened MENR, investment approval procedures should be strengthened; more use should be made of investment and feasibility studies to examine strategic and project options; and there should be more discipline in adhering to investment plans. 7. Project execution By TEK and DSI has improved and efforts to rationalize the investment program have been made since 1980. However, there remains room for further improvement through better coordination among executing agencies, especially TKI and TEK, action to improve recruitment and retention of qualified staff, greater autonomy to field staff, and better management of contractors. In particular, there could be scope for more private investment through more use of turnkey projects, management contracts and joint ventures. Intermediate solutions between traditional public sector projects and purely private schemes should be considered (e.g. leasing). 8. The expansion of electricity investment will also require additional finance. Part of this could be met by increasing tariffs closer to long-run marginal cost. (The demand projections assume in fact that this is done shortly to help contain demand growth). But an increase in both external borrowing and government budget allocations, (probably in the form of an equity contribution, and assuming that there are no local sources of long-term finance), would also be required. I - 78 - ANKE IV Page 3 9. Within the subsector, priority should be given to generation projects at a relatively advanced stage of completion; to transmission projects which, if delayed, would prevent timely utilization of the output from high priority generation projects; to the rehabilitation and expansion of urban distribution networks, eapecially Ankara, Istanbul and Ismir, and to those lignite mining projects needed to supply the fuel requirements of high priority thermal power projects. Coal and Lianite 10. To reduce Turkey's dependence on imported energy, government decided during the 1970s to develop a relatively large number of new lignite mines, mainly to feed new power stations. By contrast, coal production has remained stationary and imports have increased. Moreover, lignite accounts for about 852 of total public investment in the subsector. Urgently needed investment in the rehabilitation of existing mines, equipment renewal and spare parts purchase has however been significantly underfunded, with an adverse impact on production costs. I1. Implementation of public investments in the subsector has been fraught with major delays, especially for large projects like Afsin-Elbistan. While not all the difficulties have been within TKI's control, and TKI's project implementation record has improved, project implementation capacity and management skills are not sufficient to permit simultaneous, successful and timely execution of projects presently in the program. Cost overruns appear to have been significant also. TKI should strengthen its contingency planning, decentralize more authority to the project enterprise level; and use more private firms to develop and operate new mines under contract. Government pressure to phase out budgetary support for TRI (starting in 1986) while allowing more autonomy on pricing decisions should increase the pressure on TKI to improve its performance. 12. Lignite prices have been raised to levels which will enable TKI to become self-financing, but are still below the cost of imported competing fuels. Lignite prices should be based on the cheapest competing import - at present coal rather than fuel oil. This would also rule out some higher cost projects in the investment program. Oil and Gas 13. Consumption of petroleum products in Turkey was 16.4 mmT in 1985, with fuel oil (7.1 mmi), diesel/gas oil (5.6 mmT) and gasoline (2.4 mmT) as the main components. All but 12% of this consumption is imported, and domestic production is declining since few new discoveries have been made. Demand increased by slightly over six percent in 1980485, but is expected to slow down slightly in future. Natural gas imports from the USSR are expected to start in 1988 and are likely to have a major impact in due course on industries and power plants now using more expensive fuel oil. As much as 5 mmT of fuel oil could eventually be replaced by natural gas. ANNEX IV - 79 - Page 4 14. Turkey can at present compete successfully on international markets in gasoline and kerosene, due to the favorable position of the Izmir refinery. Turkey's refineries have at present only limited secondary conversion facilities to convert fuel oil to distillate products. Therefore, the country imports diesel/gas oil to meet requirements while exporting surplus fuel oil. This imbalance is expected to grow. Fuel oil however, has often had to be sold at a discount on crude oil prices. 15. Under the circumstances, and particularly in the light of recent changes in the oil price outlook,g' the strategy for refinery investments requires examination. Three options should be considered: (a) undertaking no further investments and meeting imbalances by trade. Even at lower crude oil prices, this may not be attractive because of the fuel oil discount; (b) increasing refinery throughputs based on present construction; (c) installation of secondary conversion/facilities, in particular a mild hydrocracker at the Mid Anatolu refinery. 16. A preliminary analysis suggests that option (c) has merit, and should be considered further together with several other downstream, debottlenecking and energy conservation investments (mostly minor), Ruch as expansion of Izmir jetty facilities. The justification for crude distillation capacity expansion is less clear, and should depend on further review of inland storage and distribution of petroleum products. 17. Two oil pipelines are currently under construction. One would connect the Mediterranean with the recently completed refinery at Kirikkale. A second crude oil transit pipeline from Iraq is also under construction and is likely to be beneficial. In general, better coordination is needed between the refinery, pipeline and marketing and distribution companies. 18. The major new project is the Thrace Gas Pipeline which will transfer gas from the USSR to the Istanbul area by 1987 and to Ankara by 1989. There appears to be qtrong justification for constructing the pipeline up to Gemlik, because of be potential for industrial use, and it is possible that the need to limit air pollution in Ankara would justify the extension. However, the investment program makes no allowance for likely substantial downstream investments to utilise natural gas. Given the present schedule for pipeline construction and the deferral of benefits which will result if downstream investments are not carried out as soon as possible after pipeline completion, these studies should be undertaken urgently. 1/ The viability of the refinery investments to be examined depends, however, on the margin between product and crude oil prices, not the level. -80 - ANNEX V Page 1 EDUCATION AND TRAINING Despite a reasonably well developed and modern education and training system, Turkey's population is relatively poorly educated for an economy whose future development depends critically on ipproved productivity and manufactured exports. In particular, the proportion of professional, especially science-based occupations in the workforce is strikingly small, and skilled manpower shortages coexist with comparatively high levels of unemployment. The Government's development policy, especially its emphasis on growth of manufactured exports, requires an adequate supply of appropriately trained manpower. Accordingly, the current five-year plan sets appropriately ambitious targets for the expansion of middle school (to expand the education base) and vocational training (to improve the supply of skilled workers). The targetted expansion of middle school education to reach 75S of the eligible age group by 1989 is a particularly appropriate priority. In addition the Council for Higher Education (YoK) should award the highest priority to the rapid development of technician training. Other targets, in particular those for the expansion of pre-school education and the reduction of double shifts in primary schools, are of lower priority, given the continuing squeeze on Government resources allocated to education and training. Despite attempts to mobilize non-Government finance, which have met with some success, resources allocated to the sector have declined during the early part of the last decade and have declined sharply (over 10 annually) over the period 1983-85. During the last decade, enrollments in primary education have increased, first to reach full enrollment, and more recently to keep pace with population growth. Enrollments in post-primary education have increased rapidly, particularly at tertiary level. The steep decline in per capita expenditure, particularly over the last three years, is inevitably leading to a decline in the quality of education. Teacher salaries are low and this affects recruitment, particularly of specialized technical teachers. In addition, funds attributed to the education sector by SPO not only include some expenses on sport and culture, but also contain significant amounts of maintenance expenditures which should properly be included in recurrent budgets. The investment program itself has, in the recent past, consisted of large numbers of small projects (3ome 1,200 in the 1985 program), characterized by very long implementation periods. Close to 302 of primary and secondary schools have taken 5 or more years to build, with many taking 10 years or longer. These delays are the result of an excessively lengthy spread of budget resources. The SPO has altered its policy in this regard and all new projecta are now being allocated their entire estimated budgetary cost in their start-up year. This step should serve to reduce the length of imple entation period of projects in the education sector significantly. However, tendering procedures need simplification to speed up construction and procurement. - 81 - ANNEXv Page 2 The bulk of investments (and other expenditures) in the sector is made by the Ministry of Education (MOE) and by rdK, which is responsible for all post secondary education. Several other ministries have minor roles in vocational training. There are no serious problems of coordination, except in teacber training where consultation between the universities and the MOE needs improvement. A process of consultation on matters pertaining to teacher training has been set up and is in operation. Improvement is also needed in the NOE's planning process (to relate better its policies to the country's needs for educated and skilled manpower) and budgeting process, (which at present is more of an accounting exercise than a vital organ of a large spending ministry). The Government should consider: upgrading the staffing and equipment of the MOE planning and budgeting department; introducing the regular collection of cost data on a provincial level if not at a school level; and setting up financial monitoring processes to permit a greater degree of discretion in the way resources are used. 0 - 82 - ANNEX V Page 3 SUMMLARY OF RECOMMENDED ACTIONS Problem Area Action Underway Action Recommended GENERAL Sub-Sectoral Targets Detailed review as part of Follow-up agreed Education Sector Survey during discussion on Sector Survey - Dec. 1986. Level of Investment Government to consider Budget. Investment raising share of budget TL211 Bn in investments in educa- 1976 (1985 prices) tion sector to 6.5S by and TL105 Bn in 1984 1989. (1985 prices). Annual rate of decline of 71. Lack of non-budgetary - Encouragement of PTA's Maintain action on resources. - Raise university fees each item - Review of tax laws for investment in education - Extend revolving fund law to include greater variety of training institutions. SPECIFIC Inclusion of "recurrent" - Re-define items to be items in investment included in recurrent budget. & capital budgets. Long implementation SP0 allocates total require- Simplify tendering period of projects. m.nt within each year. procedures. MOE Budget Process Review: (a) objectives (b) mechanisms; (c) criteria; (d) monitoring of budget process. 0,00 intis 0299 00-00 040 01 SOC , O"I W30L L6,UI t~OU6 ki itII Mott *W6 On,"t '3I1,~A9U JSeI OA4 tI MMO 1( )ao oo toi ooloo ol: o:u osW.: ow,: L1wIsrJe (tot) ***,UI oSog: *ggejg *5*0g9 @0g': o**n*
Группа Всемирного банка · Pre-2003 Economic or Sector Report
Turkey - Adjusting public investment (Vol. 2 of 2) : Main report and statistical annex
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Pre-2003 Economic or Sector Report
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