Document of The World Bank Report No. 14656-TU STAFF APPRAISAL REPORT VOLUME 1 OF 3 REPUBLIC OF TURKEY PUBLIC FINANCIAL MANAGEMENT PROJECT MAIN REPORT AUGUST 29, 1995 Country Operations Division Country Department I Europe and Central Asia Regional Office CURRENCY EQUIVALENTS Currency Unit - Turkish Lira (TL) AVERAGE EXCHANGE RATES (Turkish Lira per US$) Currency Unit CY1990 CY1991 CY1992 CY1993 CY1994 CY1995 Jan-July US$1.00= TL 2,609 4,172 6,872 10,985 29,639 42,447 WEIGHTS AND MEASURES FISCAL YEAR Metric System January 1 - December 31 ABBREVIATIONS AND ACRONYMS AB - National Agricultural Bank (Ziraat) CAS - Country Assistance Strategy CBT - Central Bank of Turkey CCC - Customs Cooperation Council CCT - Common Customs Tariff CET - Common External Tariff CIT - Corporate Income Tax Customs - Undersecretariat of Customs EBF - Extra Budgetary Funds EDI - Electronic Data Interchange EDP - Electronic Data Processing EU - European Union FAD - Fiscal Affairs Department FIB - Finance Inspectors Board FLS - Financial Ledger System GATT - General Agreement on Trade and Tariffs GDBFC - General Directorate of Budget & Fiscal Control GDC - General Directorate of Citizens' Affairs GDPA - General Directorate of Public Accounts GDR - General Directorate of Revenies GFMIS - Government Financial Management Information System GFS - Government Financial Statistics GIBOS - Customs Administration Integrated Automated System ICB - International Competitive Bidding IMF - International Monetary Fund IT - Information Technology LFA - Legal Framework Agremnent MERNIS - Merkezi Nufus Idaresi Sistemi (Central Citizens Registry System) MOF - Ministry of Finance PFMP - Public Financial Management Project PIAL - Privatization Implementation & Social Safety Net Assistance Loan PIT - Personal Income Tax PMSS - Project Management Support Services PMU - Project Management Unit PSBR - Public Sector Borrowing Requirement PSAL - Public Sector Adjustment Loan RCs - Rcvenue Controllers SAR - Staff Appraisal Report SBA - Stand-By Arrangement SEE - State Economic Enterprises SOFIX - Systeme d'Ordinateurs de Fret International SPO - State Planning Organi7ation TAB - Tax Accountants Board TCA - Turkish Court of Accounts TIN - Taxpayer Identification Number TIR - International Transport Register Treasury - Undersecretariat of Treasury TL - Turkish Lira UIN - Unique Identity Number VAT - Value Added Tax REPUBLIC OF TURKEY PUBLIC FINANCIAL MANAGEMENT PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS LOAN AND PROJECT SUMMARY .................................... i I. INTRODUCTION ........................................... 1 II. CHALLENGES FOR PUBLIC FINANCIAL MANAGEMENT ............. 3 A. Tax Administration . ....................................... 3 B. Expenditure and Personnel Management .......................... 12 C. Customs Modernization .................................... 22 III. RELATIONSHIP TO BANK ASSISTANCE STRATEGY ..... .. .......... 31 A. Rationale for Bank Involvement ............................... 31 B. Lessons of Experience ..................................... 31 IV. THE PROJECT .................. .. ....................... 33 A. Objectives ............................................. 33 B. Description . ........................................... 34 C. Management and Implementation ............................... 40 D. Costs and Financing Plan ................................... 45 E. Procurement Arrangements .................................. 47 F. Disbursement Arrangements ................................. 51 G. Monitoring, Evaluation and Supervision .......................... 53 H. Accounting and Audit Plans .................................. 54 V. BENEFITS AND RISKS .................. .................... 57 A. Benefits ............................................... 57 B. Risks ................................................ 57 VI. AGREEMENTS REACHED AND RECOMMENDATION ...... .......... 59 A. Required Actions and Undertakings ............................. 59 B. Recommendation . ........................................ 61 Boxes 2.1. Structure and Performance of Taxation in Turkey .6 2.2. Directions for Future Change in Tax Policy .9 2.3. Turkey's Customs Union with the European Union .23 Charts 2.1. Accounts Arrangements at the Central Bank ........ . . . . . . . . . . . . . . . . 15 2.2. Government Financial Management Information System .21 4.1. Public Financial Management System Organization Structure .43 Tables 4.1. Summary of Costs .................... .... ... .... .... .... . 46 4.2. Financing Plan ........................ ..... ..... ..... .. . 47 4.3. Summary of Procurement Arrangements ........ . .. . . . . . . . . . . . . . . . 49 4.4. Procurement Implementation Plan .5.0....... .. . . . .. . . .. . . . .. . . . . . SO 4.5. Bank Financing Shares of Foreign Costs ........ . .. . . . . . . . . . . . . . . . 51 4.6. Estimated Bank Disbursements ........... .. . .. .. .. . .. .. . .. .. . . 52 4.7. Supervision and Reporting Schedule ......... .. . . .. . . .. . . .. . . . .. . 55 THE REPUBLIC OF TURKEY PUBLIC FINANCIAL MANAGEMENT PROJECT STAFF APPRAISAL REPORT Loan and Project Summary Borrower: Republic of Turkey Beneficiaries: Ministry of Finance (MOF) and Undersecretariat of Customs (Customs) Loan Amount: US$62.0 million Terms: The loan is proposed to be a fixed rate single currency loan in U.S. dollars, with a maturity of up to fifteen years. Each semester's disbursements would have a maturity of nine years from the rate fixing date, including three years' grace. The interest payments' dates are March 15 and September 15, with the first expected rate fixing date on March 15, 1996. Project Objectives: The overarching objective of the Public Financial Management Project (PFMP) is to enhance the ongoing fiscal consolidation and reform efforts initiated by the Government of Turkey in 1994 by improving the efficiency and effectiveness of tax administration, expenditure and personnel management, and customs operations. The Tax Administration component would be directed at modernizing the organization and systems of the tax administration in Turkey, with a particular focus on strengthening the compliance enforcement and policy formulation capabilities of the tax authorities, and improving conditions progressively for taxpayers who comply. The underlying goal is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. The Expenditure and Personnel Management component would seek to enhance the government budget's usefulness as a fiscal policy instrument, and as the tool for managing public finances by reducing the number of sources of government spending that now operate outside budgetary channels, and by introducing budgeting of public administration positions and payroll. It also aims to modernize the complex and outdated budgetary and accounting control procedures and systems that impede effective and efficient control over government finances. The Customs Modernization component is directed at shifting the customs agency's policy from its present costly and inefficient ex ante, full coverage, sanctioning approach to a more ex post and efficiency- seeking stance, still capable of gathering appropriate revenues and enforcing relevant national and international laws, and at advancing the changes in the national customs organization required to enable Turkey to enter into a customs union with the European Union (EU) in 1996. - ii - Project Description: Project activities for the three components of the Public Financial Management Project can be grouped under five common heads: (a) studies to complete the details of the programs for reform and modernization; (b) advisory services and training in new procedures, organizational arrangements and analytical techniques; (c) design studies and modeling activities to determine the specifications of information technology investments; (d) pilot and nationwide information technology investments and associated training and civil works; and (e) project management support services. Due to the differences in the state of readiness of the various components for major investment expenditures, the time sensitivity of certain elements and the complexity of administrative arrangements, the authorities have adopted a time-slice approach to Bank financing of their public financial management reform program. Specifically, the PFMP would constitute the first of two proposed Bank loans in support of institutional strengthening of the Ministry of Finance (MOF) and other public agencies dealing with taxation and expenditure management and control. For these entities, the PFMP would involve advisory services, training, and information technology design studies and pilot activities. This would lay the foundations for a second phase of activity focusing on information technology investments and training. Due to the urgent requirements of the forthcoming customs union with the EU, and the relatively favorable sector policy environment and simple design issues involved, the PFMP would provide complete support to modernization program of the Undersecretariat of Customs, including information technology investments and training for its national office network. Benefits: The project's aim is to tackle some of the key institutional problems that have hindered past adjustment efforts in Turkey by addressing systemic deficiencies in taxation, government expenditures and customs, and in related personnel management functions. In these areas, the project would seek to restructure and otherwise rationalize the central agencies, upgrade their planning and controls, and modernize their processes and systems. The envisaged changes would help deepen the fiscal stabilization effort initiated in 1994 and facilitate Turkey's successful entry into a customs union with the European Union in 1996. Satisfactory progress with this project would lay a solid base for future investments to strengthen administrative capacity in the financial management agencies and for fundamental policy reforms, for which some thorough studies are needed. Turkey's foreign exchange receipts and non-debt capital inflows are denominated predominantly in U.S. dollars. Consequently, the Borrower anticipates that the U.S. dollar single currency loan will help improve its external portfolio management by creating a better balance in the currency composition of its external debt liabilities and foreign exchange inflows. - iii - Risks: The major risks relate to: (a) the large overall agenda for stabilization and reform facing the Government, which may lead implementation of institutional reforms to be given lower priority; (b) the institutional diversity and complexity of the project, which may strain the administrative capacity of the Government and lead to bottlenecks in implementation; and (c) failure of the technical assistance for any of a number of systemic reasons. Against these risks must be set the fact that the key economic agencies that would be affected, the Ministry of Finance and Undersecretariat of Customs, are firmly committed to the project. In large measure, this reflects the fact that the project deals with issues for which there is widespread support in Turkey--a more equitable tax burden, improved management and control over the Government's finances and closer economic ties with Europe. The Government's commitment is reflected in the considerable time, resources and high-level participation that it is investing in the project, as well as in a variety of upfront actions. These have served to promote ownership at both the managerial and technical levels. Government officials have worked intensively with Bank staff and consultants to prepare detailed programs for reform in all three component areas. A number of studies have already been completed and follow-up action taken, including important changes in tax legislation and customs regulations. Implementation risks will be mitigated by the assignment of permanent technical advisors and professional project management experts to the beneficiary agencies. Finally, in keeping with the lessons of past Bank technical assistance lending in the area of public sector management, the supervision arrangements provide for frequent and intensive supervision, including a major review of implementation progress in each of the first three years of project execution. - iv - Estimated Proiect Costs: Foreign Local Total --------------- US$ million ------------------- Tax Administration 12.3 1.9 14.2 Expenditure and Personnel 8.1 2.3 10.4 Customs Modemization 45.2 17.2 62.4 Total Base Cost 65.6 21.4 87.0 Physical Contingencies 2.4 0.8 3.2 Price Contingencies 3.1 0.9 4.0 Total Project Cost 71.1 23.1 94.2 Financin2 Plan: Foreign Local Total - ---------------USmillion- Government 9.2 23.0 32.2 IBRD' 61.9 0.1 62.0 Total Financing 71.1 23.1 94.2 i' Excludes taxes and duties Estimated Disbursements: Bank Fiscal Year FY1996 FY1997 FY1998 FY1999 FY2000 ---------------------------- US$ million ------------------------- Annual 2.1b 7.0 18.8 18.1 16.0 Cumulative 2. 1" 9.1 27.9 46.0 62.0 Includes repayment of US$2.0 million advance from World Bank Project Preparation Facility. Net of duties and taxes. Differences due to rounding. Economic Rate of Return: Not applicable. Map: IBRD No. 24903R 1. INTRODUCTION 1.1 During the last few years, there has been a resurgence of high fiscal deficits and inflation in Turkey that has overshadowed the gains attained through the broad-based liberalization of the economy in the 1980s. In 1993 the internal imbalances spilled over into the external accounts, culminating in a severe currency crisis during the early months of 1994. There were successive downgradings of Turkey's credit rating by the international rating agencies, and access to external financing virtually severed. 1.2 The growing macroeconomic imbalances led the Government to adopt some reform initiatives in late 1993, notably in the area of tax. However, an overall approach to the country's economic problems was not defined until April 1994 when the Government initiated a comprehensive program of stabilization and reform measures. The main objectives of the April 5 Program are to: (a) achieve a substantial and durable reduction in the fiscal deficit and inflation; (b) reduce the external payments deficit and restore foreign exchange reserves; and (c) establish a structural framework for more sustainable rapid growth, chiefly through a considerably reduced role of government in economic activities. The Program is being supported by a fourteen-month IMF Stand-By Arrangement (SBA) for SDR 509.3 million (approximately US$715 million) approved in July 1994. In April 1995, the IMF Board approved a 6 month extension of the SBA to March 1996, and enhanced Turkey's access to IMF resources under the SBA by SDR 75 million (approximately US$110 million). 1.3 Some of the initial results of the April 5 Program have been very encouraging. The budget deficit was reduced substantially in 1994, largely through a number of special taxes and real cuts in spending on personnel costs and subsidies. As a result, the overall public sector borrowing requirement fell from 12.6 percent of GNP in 1993 to 8 percent in 1994. The external current account registered a sizable surplus of about US$3 billion in 1994 and foreign currency reserves are now well in excess of the levels prevailing before the crisis. Despite these achievements, there has been slow and uneven progress in implementing the structural reforms that would provide the basis for a durable adjustment. While important steps have been taken to strengthen tax policies, and some areas of government spending, progress with reform in the rest of the public sector is lagging. Access to external credit remains constrained. Inflation is still running at an annual rate of over 100 percent and real interest rates remain very high. Recovery from the deep economic recession in 1994--real GNP declined by an estimated 6 percent--is apparently underway, but its sustainability is uncertain. The situation is complicated further by persistent political uncertainty and difficult national security issues. 1.4 The primary economic challenges facing Turkey at this juncture are to establish the foundations for a sustainable fiscal adjustment and to bring about a rapid and durable reduction in inflation. Fundamental reforms of the public sector are needed, including: (a) privatization or closure of state economic enterprises (SEEs); (b) a substantial rationalization of the public administration; (c) reductions in the costly government interventions in investment, production and marketing decisions; and (d) action to stem the financial losses of the main pension funds, followed by comprehensive medium-term reforms of health and social security financing. 1.5 These policy reforms need to be complemented by a variety of institutional reforms to strengthen public financial management. The domestic tax system remains characterized by a -2- relatively narrow base. This situation is due in large part to deficiencies in the tax administration that preclude a broadening of the income tax base, as well as effective collections and compliance activities, and better taxpayer service. Notable among these shortcomings is the authorities' limited ability to identify potential areas of non-compliance through cross-checks of information relating to financial transactions and asset holdings. Expenditure management and control is severely hampered by the complex and outdated budgetary framework and systems, the plethora of agencies and funds that are effectively outside the budgetary process, and deficiencies in cash management and public sector accounting. As a result, general government expenditures have exceeded targets by large margins in recent years, and fiscal policy has been driven by the short-term financing needs of the government. The management of personnel expenditures presents a particular problem. The public administration in Turkey is characterized by considerable over-staffing due to poor information on and controls over personnel expenditures. There are also serious problems of staff quality and performance due to the inadequate wage structure, weak career incentives and inefficient procedures. Finally, the major liberalization of external trade achieved during the 1980s has not been matched by corresponding changes in customs administration. The present regime is costly and inefficient and detracts from the competitiveness of Turkish exports and the country's attractiveness as a site for investment. A major impetus for change in this area stems from the requirements of the customs union with the European Union (EU) that is expected to take effect from the beginning of 1996. i.6 The proposed Public Financial Management Project (PFMP) would assist in addressing institutional and systemic problems in taxation, government spending and customs administration, and in related personnel management functions. In these areas, the PFMP would seek to restructure and otherwise rationalize the central agencies, upgrade their planning and controls, and modernize their processes. The envisaged changes would help deepen and enhance the sustainability of the fiscal stabilization initiated in 1994 and facilitate Turkey's successful entry into the customs union with the EU. Satisfactory progress in these areas would help lay a solid base for future fundamental policy reforms, for which some thorough studies are needed. Such advances would complement the public administration strengthening measures of the Privatization Implementation Assistance and Social Safety Net Loan (PIAL), Ln. 3728-TU. In considering the Government's request, another important factor has been the fact that past adjustment efforts in Turkey have foundered because of failures to tackle key structural problems at the roots of institutional and other frameworks. On these accounts, the Bank began to help the authorities organize the proposed project in February 1994, which task was completed in April 1995. The proposed Bank loan would provide support for the first of two phases of the Government's medium term financial management reform program. The Government has requested Bank support for the latter phase through a follow-up loan. II. CHALLENGES FOR PUBLIC FINANCIAL MANAGEMENT A. TAX ADMINISTRATION 1. Background 2.1 Overall, Turkey's tax effort appears reasonable for its level of development and economic structure (see Box 2.1). Nevertheless, there are important deficiencies in both the policy and administrative frameworks for taxation. The most important issue is the coverage, and consequently the equity, of the income tax system. Withholding applies to 5.5 million wage earners and no return is filed by these individuals. There are two million registered taxpayers, 85 percent of whom are assessed under the minimum living standard system. In addition, there are approximately 1 million taxpayers who are subject to "lumpsum" (presumptive) assessment. Based on the number of registered voters in the country (35 million), there are at least 10 million potential taxpayers that are currently not covered by the income tax system. There are no effective tools being used today to increase compliance from the excluded groups of taxpayers. 2.2 Policy Framework. The tax base has been heavily eroded by the complex system of incentives granted through special rates and exemptions to the corporate income tax (CIT), combined with uneven adjustments for the persistent high inflation. Practically nothing is known about the impact of the tax incentives on the size or composition of economic activity and whether or not they are achieving their objectives. To the extent that such incentives succeed in directing resource flows, it is unclear whether resource allocation is thereby made more or less efficient. As the number of activities benefitted grew, the differential impact of individual incentives has probably diminished, but the combined cost of higher tax rates on non-benefitted activities probably encouraged evasion and had an increasingly adverse impact on budgetary revenues. Between 1988 and 1993, collections from the CIT declined from 2 percent of GNP to barely 1 percent. The progressivity of the personal income tax (PIT) system has also been eroded by the high levels of inflation--through bracket creep and reduced value of basic exemptions--while the extensive reliance on lump-sum assessments for lower income levels facilitated tax evasion. 2.3 Organization and Procedures. Currently tax administration functions in Turkey are performed without an articulate organizational approach. The main responsibility lies with the Ministry of Finance (MOF), and within the Ministry with the General Directorate of Revenues (GDR). GDR staffing totals more then 55,000 positions with the vast majority located in about 1000 local tax offices.' The local tax office system consists of 400 pure tax offices with the balance being combined with other functions of the regional government. The GDR headquarters staff have many of the normal national office duties associated with collection of revenue. However, since the headquarters is not organized by function, many of the oversight activities of tax administration are not present. The GDR specializes in advising the Government on tax policy, interpreting the tax laws and producing statistics. There is no deliberate organizational design to provide taxpayer services, and insufficient attention is paid to internal performance monitoring or evaluation. Salaries are highly uncompetitive relative to the private sector. As a consequence, there is a scarcity of skilled personnel in key areas such as audit and automation. There are currently about 46,000 filled positions. - 4 - 2.4 Other organizational fractures include dual lines of authority between the Ministry of Finance and the Ministry of Interior over regional and local tax administration matters and staff, and multiple tax audit groups within the MOF. A regional administrator, the Defterdar, controls the local office network through the regional financial office. The division of oversight responsibility weakens coordination between the national (central) and subnational units of the GDR, and compromises both the effectiveness and accountability of the tax administration. 2.5 Administrative procedures are extremely complicated. Systems employ far more steps to accomplish goals than is strictly necessary. Although tax payments through banks and the postal system are allowed under the current regime, over 80 percent of tax payments are made at local tax offices despite considerable inconvenience to taxpayers. This is because: (a) the banks routinely avail themselves of a lengthy float, despite a 12 percent penalty per month for late transfers to the central bank; (b) there is only a manual system of passing the information back to the tax office for reinput (greatly increasing the risk of late or incorrect posting); and (c) taxpayers must still go to the tax office each month to file their tax return and secure their assessment document. Much of the problem seems to stem from the state banks, which have traditionally had exclusive rights to the business. The mails are reportedly so unreliable that virtually no confidence is placed in the postal route by taxpayers. 2.6 The lack of a unique (national) identification number for taxpayers, combined with an apparent legal requirement that tax returns be pre-assessed prior to payment, means that taxpayers must visit the local offices where their (manual) records are kept. Collections are highly concentrated in a few offices and regions in the country. It is estimated that less than 10 percent of the roughly 1000 tax offices collect about 85 percent of the tax revenues. This concentration of yield and the crowding of certain offices has encouraged the GDR to focus its collection efforts on the expansion and computerization of its network in particular regions and cities. 2.7 The focus on revenue collection has resulted in a neglect of other compliance-enhancing activities, notably audit, and most tax returns are judged to greatly underreport income. Audit coverage is very inadequate--for even the 24,000 largest companies. The audit staff is currently composed of 4 very different groups each supervised by a different organization and having a different status within the Ministry of Finance. 2.8 The two most highly trained groups are the Tax Accountants Board (TAB) and Finance Inspectors Board (FIB), which report directly to the Minister of Finance and traditionally audit the larger and more complex cases. The TAB allocates most of the time of its 325 staff to tax audit activity. The FIB, with 120 staff, concerns itself with tax audits only as a spillover of its mandate to review the management of government resources. The FIB spends about 70 percent of staff time on internal audit functions and about 30 percent on tax audits. A third group, the Revenue Controllers (RCs), 470 staff, spend about 60 percent of their time on tax audits and reports to the General Director of Revenues. Finally, there are 2100 Tax Control Officers deployed at the provincial and local levels, who carry out "compliance checks" and assist other (central) audit groups with their field work. The Tax Control Officers are GDR staff, but their day-to-day activities, including audit programs, are determined by the Defterdar. -5- 2.9 There is limited coordination between these audit groups. Audit plans are based on discussions within the Ministry as to what sectors of the economy should be targeted for the coming year and then the different audit staffs aim in those general areas. Audit selection lacks systematic informational support and relies on staff perceptions of evasion. The lack of an appropriate information infrastructure precludes smart uses of information that would guide the auditing process, as well as effective management of auditing performance. Public accounting is a relatively new profession in Turkey. This makes it difficult to depend on the accounting profession to take responsibility for a greater degree of auditing. Other major problems for compliance enforcement in Turkey include the application of grossly inadequate penalties to evaders, the frequent extension of tax amnesties and a reluctance to advertise to the public the results of audit activity so as to encourage wider compliance with the tax laws. 2.10 Information Systems and Management. There are 91 computerized local tax offices online to one of three regional computer centers located in Ankara, Istanbul and Izmir. The 80 computerized local tax offices have antiquated equipment and additional expansion is not possible. The regional computer centers possess state-of-the-art IBM mainframe systems. A fourth mainframe system is located at the national data center in Ankara. Currently, local office computerization is limited to taxpayer identification numbers (TIN) registrations, assessment transactions, and payment transactions. Only the tax return information needed to issue a notice of assessment is captured at the local tax office. National masterfile (database) online information is limited to taxpayer entity information and payments by type of tax. Universal assessment of each return and payment related information for each taxpayer, by type of tax has been computerized. However, error processing rates are very high and there is little confidence in the computerized system. Even the computerized local tax offices continue with duplicate manual systems. 2.11 A major shortcoming of the existing TIN (and masterfile) is that the local tax office number is part of the TIN. This ties taxpayers to specific local tax offices. When a taxpayer moves from one local tax office jurisdiction to another local tax office jurisdiction, s/he must visit the old tax office and cancel the old TIN and visit the new tax office to obtain a new one. Since the process does not have appropriate controls in place, multiple TIN cards are issued and used by taxpayers. In this way, the national masterfile is hopelessly compromised, and all local offices maintain a parallel manual system to conduct day-to-day business. In its current state, the national masterfile also cannot form a platform for third party data-matching and other strategic compliance enforcement activities. 2.12 Summary. The Turkish tax system has evolved into one where tax effort relies heavily on withholding from current transactions--notably, the value-added tax (VAT) and withholding from wages and financial transactions--and presumptive taxation. As the private sector has increased the range and sophistication of its activities, non-compliance has become widespread. Recent re-alignments in VAT rates and inadequate adjustments for (rapid) bracket creep have resulted in a growing tax burden on wage earners and low income groups. On the other hand, provision of a wide range of tax exemptions and full deductibility of nominal interest payments have reduced the burden for the corporations and private business. This has enhanced an inequitable tax incidence and encouraged non-compliance. Overall, administrative procedures are far too complicated and inflict a heavy burden on taxpayers. There is limited use of modern - 6 - Box 2.1. Structire and Perfornance of Taxation in Turkey The ratio of tax revenues to GDP averaged 18 percent in 1991-93, with roughly three-quarters of this accruing to the national government. By comparison, the tax ratio was 19% in Chile (1991-92); 21 % in Malaysia (1991-92); 14% in Mexico (1989-90); and 18% in Thailand (1989-90). Consolidated budget tax revenues in 1993 amounted to 13 percent of GDP. The main taxes are: personal income (40% of revenues), value added tax (30%) and corporate income (7%). All taxes are collected by the central government, and the local role and capacity is very underdeveloped. Currently about 11% l of tax revenue collection is transferred directly to local governments and is not included in the budget. In recent years, there has been a growing reliance on ad hoc levies imposed thorough extra-budgetary funds--3 percent of GDP in 1993. Turkey: Consolidated Budget Tax Revenues Percentage Shares 1985 1990 1993 i. Taxes on Income 46.9 52.1 48.6 Personal Income Tax 34.6 41.0 40.4 Corporate Income Tax 11.7 10.2 7.2 Taxes on Wealth 0.6 0.9 1.0 ii. Taxes on Goods and Services 43.6 40.5 45.7 Value Added Tax 24.8 27.2 31.0 Domestic 14.8 16.8 19.3 Imports 10.0 10.4 11.7 Other 18.8 13.3 14.7 iii. Taxes on Foreign Trade 9.5 7.3 5.8 Memo: Total Tax Revenues/GDP CX) 13.1 16.2 18.4 Source: MOF, Treasury and SPO The personal income tax (PIT) is obtained through withholding, income declaration and lump-sum methods. Marginal tax rates range from 25% to 55%. Withholding taxes amounted to 84% of total PIT revenues in 1993. The main element of withholdings is wage and salary income, which currently corresponds to 55% of total PIT, up from 30% in 1988. This trend is partly due to a steep increase in real wage rates during this period, combined with bracket creep. Taxes are withheld for around 5.5 million employees, of which 1.7 million are in public sector. A number of income categories (other than wage income) are also subject to withholding, and have varying withholding rates--2.5% to 10%. Wage earners whose taxes are withheld are not required to file a return unless they have incomes above TL 225 million. The same threshold applies for other income sources. The Government derives a relatively small part of its revenue from the corporate income tax (CIT). There are about 230,000 corporate taxpayers, most of which (190,000) are joint stock companies, including state enterprises. Despite high nominal CIT rates (46% in 1993), the share of the CIT in budget tax revenues is low (7%) and has been declining in recent years. This decline is due to the fact that, until the recent reforms, the high posted CIT rates were accompanied by a large number of exemptions and incomplete adjustments for the effects of inflation. In 1993, the legislature eliminated most of the tax exemptions, introduced partial inflation adjustments and reduced the basic corporate tax rate to 25% (minimum 20%). A supplementary income tax of (10% for listed companies, 20% for unlisted) was added to the new basic CIT. In net, this implies a reduction of 14/6 percentage points for listed/unlisted companies, from the prior common 46%. To help deal with the erosion of the value of collections by persistent high inflation (the Tanzi effect), 70% of the assessed CIT is collected in monthly advance payments. The VAT is broad based, covers services and has relatively few exemptions. Turkish VAT rates and schedules are roughly in line with European Union practice. There are two low rates (I % and 8%) for basic foodstuffs, a base rate (15%) and a luxury goods rate (23%). About I million lump-sum income taxpayers pay their VAT according to a presumptive calculation. Another 1.4 million pay according to the credit method, with exports zero rated. Imports account for 40% of VAT receipts. The VAT is paid monthly, according to a uniform schedule. Due to the requirement for physical presence in local tax offices to effect payment, this constitutes a major burden on tax payers. information technology in the tax administration. In particular, current computerization does not allow classification and selection of returns by norms, past audit results, third party information, general profiles or screening functions, with a view to selecting those returns for audit and other compliance checks, nor a management system that monitors the tax system and through a scientific method targets areas of non-compliance or systemic problems. 2. The Tax Reform Agenda 2.13 Recent Policy Reforms. Recognizing the deficiencies of the tax system, the Government has introduced a number of major tax reforms during the past eighteen months. New legislation has reduced by an estimated two-thirds the value of tax exemptions available under the CIT. This closing of "loopholes" permitted a substantial reduction of nominal tax rates, while increasing projected tax collections--the effective CIT rate was increased from 28 percent to 30 percent. Other changes to the CIT code effectively lengthen the "tax life" of fixed investments (reducing currently generous annual depreciation deductions) and introduce inflation correction into the valuation of inventories. The current full deductibility of nominal interest costs is being partially corrected for retail and wholesale businesses. The new legislation also removes the insulation of SEE and municipal government assets and makes it possible for the tax authority and the social security institutions to exercise claims against arrears. Municipal revenues are also being increased through a real estate tax and a tax to fund environmental improvements. 2.14 The personal income tax base has also been broadened to include interest and dividends and the top-bracket rate raised from 50 to 55 percent. The Government has also been authorized to move a large number of taxpayers from the lump-sum system to the income declaration system of taxation, and has begun implementation of this for groups believed responsible for a major part of tax evasion within the lump-sum system. A decree has recently been passed to transfer lumpsum (presumptive) taxpayers in the 13 largest metropolitan areas to the income declaration system. This would cover some 200,000 out of the estimated 1 million lumpsum taxpayers. The authorities plan to transfer about 90-95 percent of lumpsum taxpayers to the declaration system during the next few years. In the area of indirect taxes, significant further progress has been made to rationalize Turkey's external tariff rates in line with the requirements of the forthcoming customs union with the EU. The number of VAT rates has also been reduced from five to four and the average rate increased by 2-3 percentage points. The general VAT rebate system has been eliminated (except for pensioners), reducing by an estimated two-thirds the revenue losses from this source. 2.15 With the above policy and related legal and regulatory changes advancing, the Government's reform program is keyed to the idea that much of the potential revenue and efficiency gains are to be obtained from changes in tax administration to allow for an effective expansion of the tax base and to improve compliance, including through improved taxpayer service. In this connection, the strategy takes into account the fact that the impending expiration of the April 1994 package's one-time measures and desirable reductions in tax rates will erode the returns from this short term betterment. These make urgent the need for further changes to bring about more permanent revenue mobilization improvements. A number of important steps have already been taken. - 8 - 2.16 The GDR has recently signed a contract with Is Bankasi, the largest private sector bank, allowing for tax payments and other public monies to be paid at any Is Bankasi branch. The GDR plans to effect a wholesale transfer of tax payments to the banking system in 2-3 years, as well as possibly some routine tax administration processes. These changes are expected to reduce substantially the current tedious process for taxpayers in paying their taxes and filing returns, and permit a rationalization of the local tax office network. 2.17 Penalties for late payment and for nonpayment have been increased. These need to be vigorously enforced so as to promote a change in attitude towards compliance with Turkey's tax laws. The new legislation permits the use of third party information to detect non-compliance and mandates the introduction of a unique identifier system for taxpayers. Other compliance enhancing initiatives include: a new requirement that certified accountants co-sign certain large individual and all corporate returns, and be held jointly liable for evasion; and more stringent definitions of tax evasion, gross default and other faults with correspondingly increased penalties. 2.18 Although, there are a number of areas where further policy action would be desirable (see Box 2.2), the recent and proposed changes in tax policies and administration constitute the most substantive effort at fiscal reform by the Government to date, and will bring major benefits to the public finance adjustment process and enhance the competitiveness of the Turkish economy. The main challenge facing the authorities is to implement the changes expeditiously and forcefully. An important aspect of this challenge stems from the deficiencies of the tax administration noted above, which limit the ability of the GDR to carry out its mandate. The GDR's reform activities will also be directed at improving the policy or legislative framework, so as to ensure that the tax structure itself does not erode the tax base, and to strengthening the tax policy analysis capability of the GDR more generally. The medium-term program of institutional reforms and investments required to address these deficiencies is described in the next section. This program is envisaged to be supported by two partially overlapping lending operations from the World Bank. The proposed PFMP is the first of these. 2.19 Tax Administration Reform. As noted above, the authorities have recently embarked upon a program that will revitalize substantially the tax administration system. A number of studies and reviews have been carried out since 1992, which provide extensive recommendations for modernization and reform, and the process of change and modernization is already fairly advanced.2 The basic thrust of the program is to broaden the tax base in order to increase tax revenues while ensuring a more equitable distribution of the tax burden. Proposed activities will be directed chiefly at. strengthening the compliance enforcement and policy formulation capabilities of the tax authorities, introducing a more aggressive and coherent strategy for compliance enforcement and improving progressively conditions for taxpayers who comply. The tax administration reform program also will seek to ensure the sustainability and predictability of 2 The initial review in 1992 was carried out jointly by the GDR and the Office of Tax Administration Advisory Services, U.S. Internal Revenue Service under bilateral funding. A number of follow-up studies were conducted during the preparation of this project under the auspices of a grant from the Government of Japan. - 9 - the expected revenue increases through the modernization of organizational arrangements, procedures and computer based systems. 2.20 A multi-year program of activities is proposed that combines technical assistance with significant technology transfer initiatives, and with investment in the supporting information technology (IT) environment for tax administration processing. The authorities' plan is to reach their objectives in two partially overlapping phases of activity. The first phase, to be accomplished in approximately eighteen months, will be directed at completing several key activities--analyses, studies, modelling and training--that will begin the process of administrative reform in the GDR and lay a solid foundation for a restructuring of the organization and major investments in new information technology and human capital across the national office network during a second phase lasting about 4-5 years. The medium term program is summarized in the remainder of this section. Additional detail is provided in Annex la. Box 2.2. Directions for Future Chanse in Tax Policy During the next few years, priority on the policy front should be given to: (a) moving a large number of tax payers from the lump-sum system to the income declaration system of taxation; (b) incorporating the EBF system's levies and surcharges into more efficient budgetary taxes; (c) expanding inflation-adjustments for interest deductions to the manufacturing sector; (d) harmonizing specific incentives in the tax code with practices prevailing in the EU; (e) equalizing the tax on different forms of financial savings; and (f) reducing corporate and personal income tax rates to levels in competitor economies. 2.21 Restructuring and Modernization of the General Directorate of Revenues. The three basic goals of the GDR are: (a) to restructure its management and administrative organization so as to reduce fragmentation of managerial authority and achieve a more functional and strategic orientation in the directorate; (b) to introduce modern automated systems for core tax administration and management functions, to allow for an expansion of business and more effective and efficient operations; and (c) to enhance substantially the policy-making capability of the GDR, including through the establishment of a permanent Policy Analysis Unit to replace the currently diffused and somewhat ad hoc process. 2.22 A three tier organizational model is envisioned with a solidly developed managerial infrastructure at each level, oversight responsibilities invested in each higher level, with ultimate command at the central level of GDR. The restructuring is based on establishing new regional offices under the supervision of the General Director of Revenues. These centers will provide a regional focus for a substantially enhanced audit function, as well as providing managerial oversight, training and IT support for a restructured and automated local office network. - 10- 2.23 Introducing Modern Automated Systems for Core Tax Administration and Management Functions. The objective in this area is to develop and implement modern, automated systems in GDR to allow for an expansion of business (including withholding functions for social security and unemployment insurance) and more effective and efficient operations. It is anticipated that the major processing of tax returns will be done at regional processing centers located in Ankara, Istanbul, and Izmir. IT capabilities will be significantly improved at all three sites. During a transitional period of 2-3 years, taxpayers will still file tax returns at local offices, and the local office will continue to have the primary responsibility for interface with the taxpayer. By the end of this period, it is envisaged that the assessment receipt requirement will have been eliminated--removing the main rationale for taxpayers to visit local tax offices--and the role of the banking sector in payment collections will have been increased considerably. The GDR would also like to introduce direct mailing of returns to processing centers as well. The removal of major returns processing responsibilities from the local offices, as well as an enhanced IT capability, will provide the framework for improved taxpayer service. 2.24 Strengthening Tax Policy Capability. The authorities understand that broadening of the tax base has an important analytical or policy dimension. Specifically, there is a need to ensure that the tax structure itself does not erode the tax base through excessive deductions, exemptions or other preferences. Attention also needs to be given to the fairness or equity aspect of the system, which currently places a heavy burden on wage and salary earners and lower income groups. Currently, projections of revenue are carried out using aggregate data from tax returns. None of the secondary economic effects of tax policy changes nor the incidence of taxes is captured. These issues are important. For instance, the ongoing debate over the replacement of extra-budgetary fund (EBF) levies by less distortionary budget taxes is complicated by the lack of information about the likely incidence and other effects of the proposed replacement taxes. It is also not possible to simulate the effects of changes in the macroeconomic environment on tax revenues. The GDR plans to establish a Policy Analysis Unit, with appropriate training for staff selected to serve in the Unit. In addition, a family of analytical models and databases will be developed suitable for the design of tax policy changes and for revenue forecasting for the budget. The envisaged models would be used to carry out a comprehensive review of the tax system, with a view to generating recommendations for change, as well as providing an ongoing capability for revenue forecasting and monitoring. 2.25 Developing Enhancements for Compliance Enforcement Capability. The main goal in this area is to develop and implement a third party tax information system that will progressively permit the broadening of the tax base and the growth of revenues through improved audit and other compliance checks. This effort will be coordinated with the ongoing citizens' registry computerization project (MERNIS) of the General Directorate of Citizens' Affairs (GDC) that is intended to result in the assignment of unique identity numbers (UINs) to all citizens.3 The third party information system will feature prominently in the GDR's efforts to improve compliance, and will eventually be a driving force for the proposed tax intelligence centers, as well as provide information-based resources for all audit boards and local offices engaged in collections and other 3 The current identity number is tied to local GDC offices and is not practical for national financial ffanagement purposes. - 11 - functions. In addition to the benefits to tax administration and policy to be derived from the MERNIS, the UIN will allow for the introduction of other reforms related to social security and health financing contributions and entitlements. A UIN would also reduce substantially the current burden on citizens who are required to visit the Citizens' Affairs office in their father's place of birth to obtain certifications for a range of transactions and documents. 2.26 The GDR has almost completed a major cleansing of its taxpayer database and has begun to assign taxpayer identification numbers (TIN) to existing taxpayers. Some expenditures for local office equipment have already been made using budgetary resources in order that this key task not be delayed. TINs will be assigned first to business taxpayers, and later to individual taxpayers. It is expected that the GDR will take affirmative steps to begin a manual cross checking of available sources of information for under-reported income. One such information source could be custom ledgers associated with import/export activity that could be used to match VAT records to other GDR records. 2.27 Since authority to collect and analyze third party information has already been granted to the Ministry of Finance, it is anticipated that legislation will be issued in the coming year requiring citizens to obtain a TIN to conduct specified transactions. The GDR will process all newly issued TIN's through the tax intelligence centers when they become available. In the near term, the GDR will conduct manual analyses to match specific groups or business sectors. One group can be derived from new vehicle purchases. The names of the purchasers can be cross-checked against the current taxpayer name file for tax return filing, and appropriate enquiries generated where there is evidence of non-filing. Other examples include real estate purchases or sales and rental property ownership. To the extent that the required information is available or known, the Phase I study will address the method of eventually cross-referencing TINs to UINs. 2.28 Most computerized audit enhancements are planned for Phase 11, since much of the improvements in the audit function are dependent on the modernization and re-structuring needed to establish tax intelligence centers and related computer based information and procedures. Building on an ongoing effort to introduce computer-assisted audit techniques, which is being supported by the German Government, selected auditors from each of the audit boards will be trained in computer auditing techniques. They will then train a selected group from their respective boards. After training, this group of auditors will make up a cadre of computer audit specialists. This unit will be engaged in specialized audits employing a market segmentation approach, and targeting business sectors and individuals who fit an identified profile. 2.29 At the start of Phase II, a coordinated audit development plan for the four audit groups in the MOF will be formulated under the direction of the DGR and approved by the Minister of Finance. This plan is expected to outline audit strategies and goals designed to increase efficiency and subsequent yield. Guidelines for an audit management information system will also be developed during this formulation to determine the criteria for computerized audit selection, to be implemented in Phase 1I. It is anticipated that while computerized audit systems are being developed, all audit boards will aggressively pursue manual audit leads such as land use, real estate and other pertinent information that is available through existing manual and automated government and other public data bases. - 12 - 2.30 Improve Taxpayer Service. The purpose of this initiative is to increase voluntary compliance with tax regulations by increasing the role of private banks and the postal service in routine tax procedures, eliminating steps in filing and payment procedures, simplifying forms and staggering present monthly deadlines. Working groups will be established within the GDR during Phase II to implement the tasks that are defined in the Phase I studies. Their responsibilities will include the proposal of legislation for the changes necessary to extend the tax return filing period. An extended filing season would ease the burden on taxpayers and spread the workload in local. offices over a longer period of time. One of the working groups will redesign all tax returns and related forms to conform with the restructuring effort, and will continue to monitor the need for changes in forms on an annual basis during the second phase. 2.31 Strengthen Human Resources in the GDR. The purpose of this effort is to undertake the training and other human resource investments needed to implement and sustain the initiatives discussed above, including the redesign of career paths and re-deployment of staff in the GDR. In Phase I, priority will be given to training GDR IT staff, who will be responsible for much of the development work in Phase 11. 2.32 On completion of the analyses for workload distribution and re-deployment of resources in local and regional offices discussed above, the GDR's central training division will develop training packages for the re-training of staff, as will be necessary because of new IT, process re- engineering and/or staff redeployment. This will include the selection and training of a basic instructor cadre, course design and instruction. In addition, training packages for management will be developed for entry, middle and executive level managers. Key managers will be encouraged to visit overseas tax administrations for study tours. B. EXPENDITURE AND PERSONNEL MANAGEMENT 1. Background 2.33 To a large extent, Turkey's current fiscal problems are the result of the practice of managing public expenditure from the financing, or cash, side rather than through a well- conceived above-the-line budgetary program consistent with a sound macroeconomic framework. Furthermore, there are two major structural weaknesses of the public expenditure management process. First, the lax and erratic nature of budgetary policy in the 1980s led over time to a proliferation of special mechanisms and a fragmentation of budgetary decision-making processes. Thus, basic regulatory changes are important and urgent to undo the results of this involution. Second, while the bases for budget preparation, monitoring and accounting remain workable, they date back to a much earlier time, and now require substantial modernization--in order to update, simplify and streamline the budgetary and accounting framework. Largely as a result of these two weaknesses, budget preparation has lost credibility at the same time as budget execution has weakened. 2.34 Budget Preparation and Coverage. By and large, the various "blocks" of the budget are assembled by the central economic agencies in Turkey (MOF, State Planning Organization and Undersecretariat of Treasury) in a technically-correct manner and in accordance with standard practice. However, there are some major problems: - 13 - (a) Incomplete budgetary coverage. As presently structured, the budget gives a fragmented and incomplete picture of government finances. The budget is divided into "general" and "annexed" budget, while extra-budgetary funds (EBFs) and revolving funds include extrabudgetary expenditures that are planned and managed in separate processes. There are at present 77 EBFs, of which 18 are completely outside the budget, and more than 3,105 revolving funds. Together, they account for an estimated 7.5 percent of the total government expenditure. In 1992, the Government achieved a partial consolidation of 59 EBFs into the budget. The measures taken serve to contain the cash outlays of the affected EBFs, but not their expenditure commitments. Thus, large arrears and future claims exist. The link between earmarked revenue and allocated expenditure also remains, exempting a significant portion of government spending from the opportunity cost scrutiny (and discipline) to which all other expenditures are submitted. (b) Insufficient integration among budget components at the preparation stage - especially between investment and current expenditure. (c) Systematic underestimation of expenditures, which averaged 9 percent in 1988-93 and 21 percent in 1991-93. The underestimation is related mainly, on the investment side, to the increase in the cost of imported equipment from the depreciation of the lira, and, on the current budget side, to the increase in the wage bill from a consistent underestimation of the inflation rate. (d) Structure of budget coding not conducive to economic analysis. The data aggregation and disclosure determined by the existing budget nomenclature and structure has limited value for economic analysis purposes. There is no presentation on a functional basis (for expenditure) and limited breakdown on an economic basis (by contrast, revenue reporting is quite detailed and broadly consistent with international reporting requirements). 2.35 As a result, the budget suffers from lack of credibility among spending agencies, is not the predictable and robust instrument of policy implementation that it should be, and it is extremely difficult to know actual expenditure on any program that involves more than one spending agency. 2.36 Budget Execution and Accounting. The expenditure management system, while cumbersome and involving many participants in the process, function relatively effectively. This is evidenced by the fact that consolidated financial information can be produced at the central level 15 days after the end of each month and a comprehensive statistical bulletin published within six weeks of the end of the month. However, the existing system has a number of weaknesses from both a conceptual and organizational point of view: (a) The payment processing system is completely manual, involving the functions of account control and verification, transaction recording and payment. Agencies rely on the accounting office for data relating to their expenditures and revenues. - 14 - (b) There exists a complex system of control/certification involving the MOF and the Turkish Court of Accounts (TCA), and which contains both duplication of controls and confusion concerning financial and accounting controls. (c) The system for data aggregation is also largely manual, involving substantial "double handling" of data before final data entry into the General Directorate of Public Accounts Data Processing System, which is primarily orientated to financial report production, rather than towards producing documents suitable for management information and decision purposes. The current system produces a lot of data and little information. 2.37 While it would be possible to continue with the existing labor-intensive manual accounting system for budget execution, demands by Government and institutions responsible for economic management are unlikely to be satisfactorily met in the future without substantial institutional modernization within the MOF, including major human resource investments. This modernization will also need to address the re-orientation of the accounting structure to one amenable to meaningful economic analysis, the modernization of working methods, and the computerization of the financial management information system. 2.38 Cash and Debt Management. Cash Management is the responsibility of the Treasury. Each government accountant holds a current account at the Central Bank of Turkey (CBT) or the Ziraat or National Agricultural Bank (AB). At the provincial level weekly cash adjustments are performed through a process involving local branches of the Agricultural Bank and the Central Bank. At the central level, the information flows between the Treasury and Central Bank allow daily management of central cash operations. The Treasury has an overdraft facility at the Central Bank, which is limited to 12 percent of the balance between current year budget appropriation and the budget of the previous year (Chart 2.1 describes accounts arrangements at the Central Bank). In 1994 a system of cash rationing was introduced in the provincial system. Accounting Offices are instructed to release only 50 percent of demands against appropriations, with the remainder released over the following two months in equal installments. - 15 - Chart 2.1. Account Arrangements at Central Bank (simplified) ADVANCES4 CST Advance Account Credit as required Repayment RECEIPTS PAYMENTS Tax Ministry Accounts Account Annexed Budgets NonTax 410 SEE Borrowings Domestic Debt T Bills T Bills Domestic Borrowing (G. Bonds) External Account 411/416 External Debt Service Borrowing Foreign Grants Foreign Currency Domestic Debt G. Bonds 2.39 The following are characteristic of the cash and debt management system: 3 The cash management system is in effect a centralized cash rationing system, required largely by the weak budget preparation process and insufficient overall financing. * While necessary in the current economic circumstances, this system is cumbersome and, although utilizing computers for detailed calculations, relies on manual intervention on a daily basis with little or no integration with the budget implementation process. 4 The credit limit of 15 percent of current year general budget appropriation is to be reduced progressively to 3 percent by 1998. 5 After conversion to TL, funds can be transferred to Account 410 if required for cash management purposes. - 16 - * Efforts to manage cash distribution between the central (CBT) operations and the provincial (AB) operations are apparently hampered by other demands on the AB and its overall liquidity position. * There is an overall lack of integration of government cash assets as ministries hold their own accounts at the CBT, with funds transferred daily from the Treasury Account 410, as required. * There is no automatic transfer mechanism between accounts at the CBT and at the AB. Accounting Offices hold bank accounts in the AB, operated autonomously by the Accounting Office, but within a Unified Treasury Account maintained at the AB. At the highest level of aggregation cash surpluses are often available in the AB, but cannot be transferred to the Treasury account 410 in the CBT because of other demands on the AB and its overall liquidity position. * Account balances are not netted for calculation of interest on the CBT advance account. e Emergency cash controls at the Provincial level frustrate the smooth operation of the system. 2.40 Personnel Budget Management. The Turkish civil service is characterized by considerable over-staffing due to poor information on and controls over personnel expenditures. There are also serious problems of staff quality and performance due to the inadequate wage structure, weak career incentives and inefficient procedures. In 1994, the total number of employees in the Central Government was about 1.7 million--a 40 percent increase in staffing over ten years. In 1993, personnel expenditures accounted for about 55 percent of total expenditures, excluding debt service. By contrast, goods and services expenditures accounted for only 10 percent of total expenditures, excluding debt service. During the period 1989-93, personnel expenditures exceeded original appropriations by substantial amounts (about 27 percent per year on average). From the personnel costs control perspective, the following are the most important deficiencies: (a) The use of extra-budgetary funds and of revolving funds to grant bonuses or to hire employees (about 72,000) hampers budget preparation and monitoring. The separation of the procedures for preparing the current and investment budgets creates loopholes for additional recruitment and makes it difficult to optimize the allocation of civil servants to priority areas. (b) The methods of budgetary preparation do not permit clear identification of the different components of projected appropriations (actual wage bill, effects of inflation, promotions, recruitment, etc.). Under these conditions, spending agencies may get funding which will allow more recruitment than expected. (c) The budget does not contain specific caps on state employment. The control of posts is based on "kadros" (cadres). These cadres, when consolidated, give a - 17 - distribution of personnel by service, title, class and grade. They are revised by law. The revisions of cadres do not fully take into account the budgetary constraints. The number of positions in the cadres is generally higher than the number of occupied posts by about 15-20 percent. In 1993, the cadres include 1.7 million positions of permanent employees in the consolidated budget, while the number of corresponding occupied posts was less than 1.5 million. (d) Budget revisions lead to substantial increases in appropriations for personnel expenditures. The total number of positions in the cadres is steadily increased by specific laws. The preparation and the vote on these laws, which result in increasing public expenditures, are disconnected from the budgetary process. However, in light of the control over requests for recruitment that the MOF carries out, these laws do not have an automatic impact on personnel expenditures, but they give strong justifications for increasing appropriations and recruitment, and amplify pressures from spending agencies. According to the rules on transfers between budgetary items, transfers from goods and services expenditure items to personnel expenditure items are easier than transfers in opposite direction. This system aggravates, during the budget execution, imbalances in the distribution of public expenditures and circumvents budgetary constraints. (e) Budgetary controls are numerous and redundant. However, as they are not implemented at the appropriate level, these controls do not allow adequate regulation of the wage bill. The cadres are not appropriate tools to reach the objective of stabilizing the number of civil servants and the wage bill. Their implementation in full would lead to an unsustainable growth of public expenditures. To circumvent this difficulty, about 3 percent of cadres have been frozen and the Prime Ministry controls the release of the other cadres. The MOF also carries out an additional control, which is based on budget appropriations. However, this control is insufficient to complement controls based on the cadres. As recruitment is done through the year, one may estimate roughly that the financial effects of recruitment, made in a given year, will be twice as high in the following year. The Budget Officers verify that recruitment have been authorized, when preparing payment orders. The other controls from the Budget Officers on the payroll generally duplicate the controls carried out by accountants. (f) The replacement of an existing employee is systematically authorized. There is no systematic program of functional review examining the inputs and outputs required to produce particular government outcomes. This system of management and control is insufficient for implementing structural reforms, which would include, for example, the redistribution of personnel between sectors. (g) The payroll is prepared by spending agencies. Accountancies record in an "Individual Earning Book" data on personnel, related to the calculation of salaries. A manual control of the payroll based on this book, is carried out by the Accountancies. Several accountancies use computers for the payroll preparation, but with various systems. In the absence of a common payroll information system, - 18 - the control by accountancies remain manual even when spending agencies have computerized its preparation. The manual treatment of the payroll is the main time consuming and detailed activity carried out at accountancies. (h) The monitoring of budget appropriations and the monitoring of positions are carried out in separate processes. The monitoring of personnel expenditures is included in the system of monitoring of budget expenditures. The General Directorate of Budget and Fiscal Control and the State Personnel Presidency, which is attached to the Prime Ministry, both monitor the occupied and vacant positions of the cadres through a form provided quarterly by spending agencies. These departments produce several statistical analyses. However, this system of monitoring is not linked with the monitoring of budget appropriations and is not done position by position. As a consequence, it does not provide an adequate base for sound policy formulation. 2. The Reform Strategy 2.41 As noted above, budget preparation has lost credibility at the same time as budget execution has weakened. Improvements in budget preparation would facilitate stronger budget execution and that, in turn, would lead to still better budgets thereafter. It is therefore important to approach both sides of the problem: stronger guidance of the budget-making process by the central economic agencies (MOF, Treasury and SPO) goes hand in hand with greater delegation of expenditure management responsibilities to the spending agencies--within the approved budget. In turn, in the context of a fully-financed ex ante budget within a consistent overall macroeconomic framework, cash management and liquidity problems should lessen substantially, thus contributing further to improvement of the overall public expenditure management process. To support the process, a comprehensive information system will also be needed. Thus the component aims to build over time a budgetary system that combines the best of both worlds-- preserving the advantages of its traditional methods and arrangements while building-in greater flexibility and efficiency than is found in several European countries. In pursuit of these goals, Turkey will benefit from the advantage of its long-standing administrative tradition. (1) Budgetary Procedures * Budget coverage. The central government budget should include all expenditure by public agencies financed from general revenue, in order to have a clear picture of all central government spending and, more importantly, to submit all proposed expenditures to the same standards of comparative economic efficiency. Thus, the objectives should be: (a) elimination of all EBFs except a very few "strategic" ones; (b) elimination of revolving funds not financed mostly by revenues internal to the agency in question; and (c) integration of annexed budgets into the single consolidated budget. * Budget Integration. The determination of investment, current and transfer spending should be made concurrently and within a single decision-making process (although, of course, the initial preparatory and technical work would be entrusted to the competent agencies). For this to occur, it is necessary among other things to operate within an explicit - 19 - macroeconomic framework that corresponds both to government goals and to economic realities. In operational practice, such a framework would also alleviate the separate major problem of systematic expenditure underestimation. * Budget Discipline. In addition to respecting a sound macroeconomic framework, also needed would be: (a) refusal by the Ministry of Finance to recommend increases above the budgeted amount, except in unusual circumstances (e.g., an earthquake destroying a water supply system); (b) totally non-discretionary quarterly appropriations release in the context of a projected cash plan; (c) corresponding cash availability from Treasury; and (d) routine approval by the Ministry of Finance of intra-program transfer requests by spending agencies. Stronger budgetary discipline permits (and, in the long-term, requires), greater delegation of budget execution responsibility to the spending agencies. * Controls. To make controls more efficient while avoiding cumbersome procedures, it will be necessary to: (i) correctly define controls needed at the different steps of the control/certification process, namely financial control before commitment is made, accounting control before payment is made and audit after payment; and (ii) review the responsibility of agencies in charge of budgetary control, for eliminating duplicate controls and centering their activities on their essential functions. A shift in emphasis from formal controls to monitoring of results and performance will be made. * Flexibility. Improvement of flexibility in the budget process will need to strictly define and delineate the role of core agencies and spending agencies in the budget process, to give more responsibility to spending agencies to allocate their expenditure within their budget, while enhancing budget discipline. (2) Government Financial Management Information System 2.42 Many of the modernization measures proposed, and the expenditure management system developed for this project incorporate revised, efficient, and non-redundant control/certification steps which help to simplify and streamline the expenditure management process, whether computerization proceeds or not. Nevertheless, the complexities encountered in meeting this simple objective dictate that an automated system be employed whereby all necessary data can be captured, analyzed and reported in a variety of ways, depending on user requirements. The system must also ensure completeness of data capture (no transaction should be processed outside the system) and contain rigorous, but not repetitive, relevant financial controls for all transactions. The Turkish expenditure management system in operation now does provide a firm basis upon which to carry out reforms which will, in essence, upgrade the system from one involved predominantly in manual data processing to one which introduces modern accountability mechanisms and produces information useful for analysis and decision making purposes. 2.43 The project will support the implementation of a fully integrated Government Financial Management Information System (GFMIS) capable of meeting the demands of Government, economic management agencies and line agencies in a phased and cost effective manner. Demands on such a system will range from the requirement to carry out functional and economic analysis of the implementation of government policy through the budget process (aimed - 20 - particularly at enhancing expenditure policy formulation), to the processing of a payment order against a particular budget line item appropriation. A system to meet such diverse demands will take time to implement fully, although there is every indication that some components and concepts can be introduced quickly in Turkey and yield early benefits. The essential elements of a GFMIS are described in Annex 2e. 2.44 A broad indication of the modules or components involved in a fully integrated GFMIS is shown in Chart 2.2. The core of the system is the Financial Ledger System (FLS), which is best described as a set of self-balancing budgetary and proprietary (asset and liability as appropriate for central governments) accounts covering all central government financial operations. (This section only addresses the budgetary accounts). Accounts would be formulated for consistency with the Government Finance Statistics (GFS) functional and economic requirements and would be organized on an administrative basis so that operations of different institutions could be processed without confusion over their various transactions or statements within the system and, most importantly, so that automatic consolidation of such statements could take place. 2.45 It is essential that all Government financial operations be included in one Financial Ledger System, so that the agencies responsible for financial management have access to the necessary data for analysis and reporting purposes. That is not to say, however, that one agency should control all the data. Indeed, the system should be designed such that sections of the Ledger System are controlled by the most appropriate agency (for instance in the case of public debt interest payments, Treasury would be the logical control agency) with the overall system managed by one agency; in this instance the Ministry of Finance. (3) Personnel Management 2.46 The authorities recognize the need for reducing the size of the public administration and concentrating it more on essential public functions. They appreciate that changes in these directions could contribute more to lasting fiscal deficit reduction than the continuation of further wage restraint of civil servants and public enterprise employees. There is general appreciation that the latter is essentially a "holding" device, and that the desirable goal is the creation of a more effective administrative apparatus at considerably smaller employment levels. 2.47 However, the authorities also know that a major administrative reform designed to successfully reorganize and downsize the public service requires an analytic base for comprehensive revisions. That does not now exist. Therefore, until it is developed, the strategy calls for a phased approach. The immediate first steps involve the introduction of personnel budgets for all budget agencies, and increasing the transparency of personnel costs in the budget and accounting systems. These would make it possible--as cannot now be done--to identify and prevent increased staff expenditures, currently being accommodated by faulty personnel management controls. Specific employment caps could then be imposed. - 21 - Chart 2.2 Government Financial Management Information System--Modules' Budget Implementation =Budget Execution= Budget Economic Trend - Appropriation Preparation Analysis - Commitment l ~~~~~~- Verificationl - Funds allocation Investment Financial Planning Planning ___ - Forecast of revenues [Financial Ledger and expenditures System - Forecast of debt Fiscal (Data Bank) servicing Reporting l - Cash management Financial Execution - Inflows to Banks Debt Management - Outflows from Banks Internal - Internal - Payments and - External - Receipts External Controls Accounting - Chart of accounts - Accounting rules - Controls Each module is a set of operations utilizing the Financial Ledger System (Data Bank) (FLS) with information flowing both to and from the FLS. - 22 - 2.48 The ability to exercise effective posts control is fundamental to regain control over civil service employment and personnel expenditures. Although the final design of a new procedural system requires careful studies (these are ongoing), some principles may be defined: (a the Budget must include the posts (positions) authorized; (b) budget appropriations and authorized posts must be kept fully consistent during the budget execution; (c) Ministries may retain actual implementation responsibilities on personnel management; (d) the procedural system must be sufficiently flexible to allow the spending agencies to optimize the allocation of their human resources. Other measures, concerning transfers of appropriations and classification of personnel expenditures will contribute to the control and the monitoring of the budget. 2.49 Once tools to control personnel expenditures are designed or in place, the objective will be to develop a modern and efficient civil service. To achieve this objective, it would be necessary to reform the regulatory framework and the system of compensation, to carry out functional analysis of required personnel level and distribution, to streamline and reduce the size of the civil service and to introduce incentives for improving the efficiency of civil service. None of these issues, which are the essential ones, is addressed directly in Phase 1. However, regardless of the eventual civil service reform that is adopted, the system will require the ability to control employment and wage expenditure. This is the main objective of the proposed project in this area. Simultaneously, the reform strategy envisages the elimination, restructuring and retrenchment of selected organizations within the Government's financial management complex (e.g., the budget, accounting and local tax offices). C. CUSTOMS MODERNIZATION 1. Background 2.50 Policy and Legal Frameworks. During the last fifteen years, Turkey has steadily liberalized its external trade regime. The liberalization process involved an initial shift from non- tariff import barriers to a greater use of tariffs, followed by a gradual reduction in the average level of tariffs (the average import-weighted tariff rate is estimated at less than 8 percent at the start of 1995) and flexible exchange rate policies. Overall, there has been a substantial shift from import substitution towards a more export-oriented trade strategy. 2.51 Recent changes in the trade policy regime have been driven largely by the requirements of Turkey's international trade treaty obligations, notably the customs union with the European Union (EU) that is scheduled to begin in 1996 (see Box 2.3).6 Required actions include the elimination of the special levies on imports used to finance the activities of extra-budgetary funds, as well as rationalization of the export incentive regime. 6 The EU is already Turkey's largest trade partner. Turkey is the EU's 10th largest partner. The trade volume with the EU reached $20 billion in 1993. The EU's share of Turkey's imports is about 44 percent ($13 billion in 1993). The EU absorbed 45 percent of Turkish exports in 1993 ($7 billion). Imports from the EU are concentrated in machinery, equipment and consumer goods. Textiles and garment are the leading Turkish exports to the EU. - 23 - Box 2.3. Turkey's Customs Union with the EuroDean Union The various framework documents and protocols for the customs union cover: (a) adoption of EU external trade policy; (b) competition and state aid; (c) intellectual property protection; (d) harmonization of standards and industrial regulations; (e) customs procedures; (f) liberalization of services and public procurement; (g) decision making; and (h) special provisions for trade in coal, iron and steel, agricultural and processed agricultural products. The most recent Legal Framework Agreement (LFA) for the customs union was approved by the EU Association Council in March 1995. The European Parliament is expected to ratify the LFA in September 1995. The LFA defines the time table and other conditions for the elimination of customs duties and charges, and of quantitative restrictions and measures having equivalent effect. In line with this provision, Turkey needs to fulfill the following obligations by the end of 1995: (a) elimination of remaining custom duties applied to the EU; (b) adoption of the Common Customs Tariff (CCT) against third country imports; (c) elimination of the Mass Housing Fund levy; (d) approximation and implementation of the EU's commercial policy regulations including, procedures for administering quantitative quotas, anti-dumping rules and procedures for officially supported export credits; and (e) elimination of customs duties on processed agricultural products not covered by agreed lists. Turkey is also to retain customs duties higher than the CET in respect to third countries for automotive products and spare parts until January 1, 2001. For its part, the EU will remove textiles and clothing product quotas as soon as Turkey has passed an intellectual property law and a competition law (both have been approved), and has adopted the EU's textiles and garments agreements with third countries. The LFA reaffirms the parties' conmnon objectives to move towards the free movement of agricultural products between Turkey and the EU. The harmonization of agricultural policies is required before free circulation of agricultural products can take place, and it is appreciated that this will take several years. Taking account of this, the Association Council notes that an additional period (10 years) is required to put in place the conditions necessary to achieve free movement of agricultural products. The LFA also identifies the customs provisions that Turkey should adopt in the following fields: (a) origin of goods; (b) customs declarations; (c) release for free circulation; (d) customs debt; and (e) right to appeal. The LPA lists the rules for competition and provisions with respect to state aid (incentives). The following incentives are compatible with the functioning of the customs union: (a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment; (b) aid to facilitate the development of certain economic activities without adversely affecting trading conditions between the EU and Turkey; and (c) aid to promote culture and heritage conservation. The LFA also establishes a time table for the approximation of Turkish laws to the EU legislation in the areas of competition, government procurement, direct and indirect taxation. Finally, the LFA attempts to determine the conditions, rules and timetables for the abolition of the existing restrictions on freedom of establishment and on freedom to provide services. - 24 - 2.52 Organization and Procedures. Changes in organization and procedures have lagged sorely behind the policy liberalization, and the present administrative system is costly and inefficient and detracts from the competitiveness of Turkish exports and the country's attractiveness as a site for investment. Consequently, there is considerable demand from the trade community for modernization and change of the customs administration. The Undersecretariat of Customs (Customs) in Turkey is also facing the same challenges for modernization as other customs administrations including: increases in the volume of trade; changes in the types of goods being imported and exported; application of other government department regulations; and, more sophisticated means of smuggling. 2.53 Spurred by the forthcoming customs union, Customs is currently assessing the changes in procedures, organization and computerization that are necessary to support a modern administration that will be able not only to administer the EU common external tariff but also provide support to Turkish importers and exporters as they compete in the customs union and beyond. The key issues to be addressed are elaborated on below. 2.54 As in the case of the tax administration, the Customs organization is characterized by inadequate functional orientation and lacks clear lines of authority and responsibility. The headquarters, regional, and local office responsibilities overlap in many areas. Certain headquarters units have operational responsibilities, for example, the Audit General Directorate is responsible for matching and tracing temporary entry documents for vehicles. There are two complete and separate regional organizations, one each for customs operations and enforcement. The customs operations regional offices have no responsibility for post release review of declarations (this responsibility rests with the headquarters Audit General Directorate). Responsibility for information systems and management is also divided between two directorates. The fractures in functional responsibility account in large measure for the overstaffing of the organization (see below) and help explain the persistence of many redundant activities. 2.55 With 10,000 employees, the organization appears to be significantly over-staffed in relation to the workload. In 1993, Turkish Customs processed about 1 million import and export declarations and 20 million passengers. This compares with about 800,000 import and export declarations with 1,200 staff by Chilean Customs, and 9 million import declarations and 130 million passengers with 10,000 staff by Canadian Customs.7 2.56 Every modern customs administration is built on the principle of self-declaration, whereby, it is the responsibility of the importer to determine and pay the duties and taxes owing. It is the responsibility of Customs to complete the level of verification required to determine if a true and complete declaration has been made. Verification is normally completed on a selective basis taking into account the record of the importer or exporter, the types of goods, the value and the level of risk (e.g., high rates of duty, exemption claims, or the zero rating of exports for VAT). Customs administrations have also found that the most effective revenue control procedures are completed after release of the goods. Physical inspections are valuable, for 7 It is recognized that these comparisons may not be completely valid as Turkey may require more resources due to the significant threats from its neighbors in terms of both commercial smuggling and drug traffic. - 25 - example, to verify quantities and to assist tariff classification. However, they do not enable Customs to value goods or determine eligibility for exemption. It is necessary, therefore, to establish effective post release controls including the audit of the books and records of enterprises. 2.57 Currently, import and export procedures in Turkey do not meet the accepted international standards employed by modern customs administrations. The following are some of the most obvious examples: (a) 100 percent of imports and exports are physically inspected by Customs--there is no use of selectivity to target high risk goods and enterprises for physical inspection or documentary review. (b) Duty and tax payments must be made before release of the goods and are only accepted in cash or by certified cheque (c) Pre-arrival presentation and processing of import declarations is not permitted. 2.58 Customs brokers, importers and exporters, complain of lengthy delays in the release of import shipments and excessive controls by customs and other government departments for both imports and exports. The following specific examples are illustrative: (a) To obtain release of an import shipment arriving by sea it requires, on average, more than one week from time of arrival of the ship (2 days for the presentation of the manifest to customs; 1-2 days for the broker to receive the bill of lading from the shipping agent; and, 2-3 days for Customs to process the declaration). This time period is much longer if the goods are subject to additional controls by customs (e.g., laboratory analysis) or other government departments. (b) Every importation must have a "permission to import", presented in 6 copies for distribution to Customs, importer, Central Bank, Undersecretaries of Treasury and Foreign Trade, and the importer's bank. This form serves no apparent purpose as it relates to foreign exchange control procedures that were dropped several years ago. (c) For exports, it takes 3-4 days from time of notification (from the exporter to the broker) for the broker to complete the necessary paperwork. The procedures include obtaining a "free export certification" from the export association; certificate of origin from the Chamber of Commerce; additional certification from the Chamber of Commerce if the goods are proceeding to the EU; and customs formalities (about one half day). 2.59 The use of laboratory tests is excessive. Perhaps as many as one-third of all import and export declarations are subject to laboratory testing. - 26 - 2.60 In summary, current import and export processing regulations and procedures (for Customs and other government departments) are characterized by duplication, excessive paperwork and unnecessary physical controls. This results in high compliance costs to the importing and exporting community in the form of both the indirect costs of delays and direct costs for physical inspections and documentation. Without a major overhaul of the legal and regulatory framework, followed by corresponding changes in procedures, no modernization (automation) effort can be meaningful. 2.61 Information Systems and Management. Computer systems development and maintenance is the responsibility of the Electronic Data Processing Department, which reports directly to a Deputy Undersecretary. In addition to computer systems, the department is responsible for other equipment including portable radios for the customs guards. There is a headquarters staff of 43 including 14 programmer/analysts and 7 computer operators. 2.62 The major computerization effort of Customs has been the development of the GIBOS system (Customs Administration Integrated Automated System) which was initially introduced in the Ankara Airport on a pilot basis in 1987. Each system operates on a local mini computer with updates to the files being transmitted through a modem from headquarters. The system has been implemented in other offices in Izmir and Istanbul. However, only 27 percent of import declarations are currently processed through GIBOS. Customs has been unable to implement the system in other locations due to financial constraints. The Customs Systems Directorate also still has no computing center of its own and uses that of the Ministry of Finance. 2.63 In addition to the systems developed and operated by the Electronic Data Processing (EDP) Department, import and export trade statistics are captured by a system introduced in 1989 and operational in 41 customs offices (the non-automated offices forward the declarations to headquarters for keying). The system is operated and maintained by the General Directorate for Customs. The statistics are available by the tenth of the month following importation/exportation and are forwarded to the State Institute for Statistics and the Central Bank. The EDP Department is also undertaking development activity for vehicle control and valuation. 2.64 Given the split in systems development and operations between the Electronic Data Processing Department and the General Directorate for Customs, it is unclear who has primary responsibility for new systems development. There is no systematic review of the automation needs of Customs and no committee structure to review and approve proposals for automation. For example, it is unclear how the changes to the computer systems (both the GIBOS and statistical systems) required for Turkey to administer the legislation and requirements of the customs union in 1995 are being assessed and implemented . The current systems do not support analytical work necessary for management monitoring and enforcement (e.g., the information is not stored in a data base making flexible retrieval and reporting difficult). 2. Modernization Strategy and Program 2.65 Recent Developments. Until recently, the Customs administration was part of the Ministry of Finance. As a first step towards modernization, Customs was removed from the Ministry of Finance in July 1993 and established as an Undersecretariat in the Prime Ministry. - 27 - The Customs program now aims at advancing the changes which would enable the newly independent Customs Undersecretariat to manage the EU common external tariff and other trade policy provisions. The revisions would also encompass actions for supporting Turkish importers' and exporters' competition in the Europe-wide customs union, partly by reducing their currently high transaction expenses. The strategy furthermore seeks to upgrade the Undersecretariat's capabilities to deal with the problems which have arisen from considerable increases in trade volumes, marked changes in goods being imported and exported, and in the sophistication of smuggling tactics. Through simplification and automation, Customs has the opportunity to reduce these costs while, at the same time, to increase the effectiveness of its control and revenue collection responsibilities. 2.66 In preparation for entry into the Customs Union, several measures have already been taken, including: the passage of new pieces of legislation covering anti-dumping and intellectual property rights; introduction of the General Agreement on Trade and Tariffs (GATT) Valuation Code; and the preparation of amendments to the Customs Law that would bring it in line with EU requirements. One of the most important requirements of the customs union is the administration of the EU common external integrated tariff and, in this regard, Customs will be required not only to apply the rates of duty in the tariff but also its trade policy provisions (e.g., EU quotas). The Customs Administration received technical assistance from the EU to identify the legislative and procedural changes required by Customs to implement the customs union requirements (the program began in September 1993 and included experts visiting Turkey to assess the needs and Customs sending officers to the Community members to review customs procedures). 2.67 The Customs Modernization Propram. The main objectives of the program are to: 3 Implement modern, up-to-date customs legislation e Simplify and automate customs procedures 3 Introduce greater reliance on post release controls i Provide good service to the trading community e Delegate increased responsibilities to regional and local offices. 2.68 The modernization strategy is to be based on the following principles: self-assessment; selectivity for physical inspection and document review; strengthening of the post release review function; simplification of procedures as a pre-requisite to automation; reduced reliance on physical controls (more trust in the trade community to comply); and, rationalization of controls of other government departments. 2.69 The modernization program has been developed by responding to the following questions: what procedures are to be simplified to benefit from automation; how are the systems to be developed; what are the priority components of the system; and, how are the benefits of modernization to be delivered to the trade community. Three major areas have been identified for action: legislation and procedures; computer systems development and implementation; and human resource management and training. The thrust of the modernization plan in each of these areas is summarized below. Annex 3a provides a detailed description of the major activities to be undertaken within the context of this operation. - 28 - 2.70 Legislation and Procedures. For the most part, laws and procedures related to customs administration are governed by international rules, conventions, and codings. For Turkey, with the entry into a customs union with the EU, the customs administration must not only be able to apply the usual international standards but, at the same time, they must also apply certain EU legislation. In addition, the import and export procedures must be similar to those applied in the EU. Consequently, the automated systems must be able to support administration of certain EU laws (e.g., application of the common external tariff) and procedures. 2.71 Drafting of the Customs Law is complete and awaits passage through Parliament. The customs tariff legislation is being modified to ensure that it conforms to EU common external tariff and is scheduled for completion in September 1995. 2.72 As part of the process of developing the plan for modernization, with the assistance of the Bank, a review of the import and export procedures was undertaken (using the principles for development as previously described). The new procedures meet both international and EU standards. The procedures, when implemented, will simplify significantly the import and export customs regimes and will lead to successful implementation of automated systems. Annex 3e provides a detailed description of these procedures, which have been developed for: * Import processing - Transit and cargo reporting - Declaration processing - Physical inspection - Payment of duty and release of goods - Post release checks * Export processing 2.73 Computer Systems Development and Implementation. Headquarters, 18 regions and 45 customs offices will be automated over a three and a half year period. The 45 customs offices account for 90 percent of workload and 90 percent of revenue (non-automated offices will forward documents to automated offices for processing). The following subsystems will provide automated processing at the customs offices: * Import declaration processing * Export declaration processing * Revenue accounting * Manifest * Transit * Warehousing * Management information e External interfaces. 2.74 Automated support will be provided to headquarters to produce management information and trade statistics, perform analyses, and receive and distribute updates to the EU integrated tariff. The regions will be supported by automation to perform post release reviews and monitor - 29 - local office activities. In addition, headquarters and the regions will be supported by office automation. 2.75 After implementation of these subsystems at the automated customs offices, a second automation phase will extend automation to other customs offices and the following additional subsystems will be developed: * Enforcement analysis * Passenger processing * Appeals, refunds, and rulings Although these sub-systems are not included in the scope of the PFMP, the design of the system includes provision for their future development and implementation. 2.76 Automation is to be based on the "community system" approach. It is to be developed using an open computer architecture to permit ease of interconnection with members of the trade community and other government ministries using electronic data interchange (EDI).8 The objective of these systems is to provide the opportunity for all participants in the trade system to submit and receive information electronically. Verification activities are carried out primarily through the use of automated selection criteria to determine which goods require physical inspection, documents requiring review, and audits of the books and records of enterprises. 2.77 The proposed system is comprised of a three-tier (headquarters, region, and local office) network of computers with higher organizational levels containing a subset of lower level databases.9 To support this approach, a UNIX operating system is recommended to operate with a relational database. Initially databases will be updated daily by file transfer using an X.25 network and on-line access to databases will be by dial up. After implementation of the new system, a feasibility study will be performed to determine whether on-line updating of the headquarters database would be cost effective. 2.78 The IT staff have limited experience with the recommended UNIX environment and with data base management systems. In addition, the system must be developed in a short period of time to support administration of the EU legislation and procedures. Therefore, developing application software "from scratch" is not the best option. In recognition of this fact, the Customs Administration has entered into a bi-lateral agreement with French Customs to acquire the SOFIX '" application software which is based on French Customs automated system software. I Information regarding imports and exports by enterprise will be shared with the Tax Department for tax enforcement purposes. For this purpose it will be necessary for the Customs Administration to use the Taxpayer Identification Number from the GDR. I Thirteen regional computer systems will support the eighteen regions (smaller regions will share a computer system). '
Группа Всемирного банка · Staff Appraisal Report
Turkey - Public Financial Management Project (Vol. 1 of 3) : Main report
Открыть оригинал документа
Полный текст размещён на сайте публикующей организации. lawenc.com индексирует метаданные и ведёт на официальный источник.
Полный текст
Основные сведения
Организация
Группа Всемирного банка
Тип документа
Staff Appraisal Report
Страна
Турция
Источник
Всемирный банк