Turkey - Social Support Project

Report No. PID9284 Project Name Turkey-Social Support Project (@) Region Europe and Central Asia Region Sector Labor Markets & Employment Project ID TRPE69894 Borrower(s) GOVERNMENT OF TURKEY Implementing Agency Address PRIVATIZATION ADMINISTRATION Contact Person: Mr. Fevzi Aricioglu, Vice President, Privatization Administration Tel: (90-312) 441-6438 Fax: (90-312)468-4997 Email: Faricioglu@oib.gov.tr Environment Category C Date PID Prepared August 9, 2000 Projected Appraisal Date July 19, 2000 Projected Board Date November 9, 2000 1. Country and Sector Background The proposed social support operation is an integral part of the overall economic reform program. The economic reform program will have mostly long term positive impacts on people's lives, but there will be some areas of increased difficulty. The first major benefit from the government's reform program will be a reduction in inflation and in the costs of adjusting to inflation. A study on Living Standards Assessment and Social Welfare in Turkey (World Bank. 2000. Turkey: Economic Reforms, Living Standards, and Social Welfare Study. January. Volume 2: Background Papers. Paper No. 3. Dong He. "Turkey: Inflation and the Distribution of Income.) found there are significant adjustment costs to inflation for the vulnerable. The second impact and benefit from the government's reform program is the resumption of economic growth. Economic growth is the single best way to help people escape poverty because growth leads to more jobs and higher incomes. It has been estimated that 36 percent of the Turkish population were economically vulnerable and 7 percent were extremely poor in 1994 (World Bank Living Standards Assessment). This underscores that growth must be accompanied by stabilization to achieve better economic outcomes. The third aspect of the economic reform program, changes in relative prices and some taxation rates for basic goods, will affect the entire population, but will be especially significant for the vulnerable. Overall, the economic reform program's fiscal adjustment relies on measures from the revenue side, and requires much less adjustment in relative prices such as the exchange rate. However, the Turkish economic reform program projects little or no change in the real exchange rate, and, therefore, limited adjustment in the relative prices of tradeables. Revenue-side measures will have some regressive impact on the vulnerable since the standard value-added tax rate was increased from 15 to 17 percent. However, there are important exceptions for the vulnerable in the VAT schedule, since basic foods including bread are  subject to a lower VAT rate of only 8 percent. (These are only the most basic foodstuffs--refined foods such as sugar are taxed at the regular 17 percent VAT.) Additional one-time revenue measures which were introduced in November 1999 consist of additional personal income taxes (covering only the high income groups), corporate tax payments, and an additional amount of motor vehicle and property taxes. It is clear that these one-time tax adjustments will not be collected from the vulnerable. So, the relative position of the vulnerable facing these revenue adjustments is possibly even better than that of the rich, making the revenue reforms, if not progressive, at least evenly distributed across Turkish society. The agricultural reform may lead to a decline in the price of wheat and bread owing to the lowering of the support price for wheat down towards the international market price. However, the imperfections in the bread market may mean that a price decline for bread is not automatic. The vulnerable spend more of their household budget on bread than the wealthy do and the vulnerable will certainly benefit from any reduction in the price of bread. These very important advantages notwithstanding, there may be some groups of society that face temporary difficulties as a result of the economic reform program. Owing to these gaps in the social safety net, it will be difficult to protect all of Turkish society from adverse effects of the economic reforms. The main groups affected negatively by the reforms and not protected in Turkey's still-evolving social safety net will be workers laid-off from privatization of state-owned enterprises, beginning with the electricity sector and telecommunications; consumers who will face increased electricity prices; and small farmers who will lose agricultural subsidies. An analysis of impact on these groups is contained in the February 17, 2000 Bank Sector analysis titled Policy Options to Address the Social Impact of Economic Reform. This report outlines the potential scale of labor displacement from privatization, suggested social support programs, and costs. 2. Objectives The overall goal of the project is to support privatization; increase the productivity of enterprises (formerly State Owned entities) by reducing labor costs, and cushion the social impact of privatization and the Economic Recovery Program. 3. Rationale for Bank's Involvement The key added value of Bank support will be the financial resources to allow the Government to continue with privatization of SOEs and improve productivity of these enterprises through reduction in labor costs. The Bank is also in a strong position, due to its related work in Turkey (e.g., ERL, PIAL and ETP) and the region (e.g., Romania, Macedonia, and Poland) to ensure that criteria and procedures used to apply these resources are efficient and effective and result in resources getting to those who qualify. 4. Description The following project components have tentatively been identified by the Bank project team, in-consultation with Government officials, during the recent Economic Reform Loan sector work. These concepts were discussed with the Government during Bank missions in February and in June, 2000. A. Labor Restructuring: The objective of this component is to improve the productivity of certain elements of Turkey's industrial sector (previously State Owned entities) and to ameliorate the temporary negative -2 -  social and economic impact of labor restructuring on workers displaced during privatization of SOEs. This component will finance temporary income support, specifically severance payments, to workers directly displaced by SOE restructuring to: (i) encourage excess workers to leave SOEs, and (ii) provide them with resources to maintain minimum living standards while finding alternative employment. B. Labor Redeployment: The objective of this component is to provide labor redeployment assistance to workers, who have displaced by the privatization of SOEs and the Economic Recovery Program, to help them reenter the labor market. The component will finance: (i) technical assistance to develop administrative capacity at the implementing agency to administer pre- and post-layoff labor redeployment services to these workers; (ii) technical assistance to support provision of in-plant pre-layoff assessment and preliminary job counseling services to workers; and (iii) the cost of delivering a range of post-layoff services to displaced workers, via competitively selected private, NGO, and public services providers. C. Social Monitoring: The objective of this component is to monitor the social impact of the economic reform program and determine ways to refine and improve targeting of income support and labor redeployment programs. The component will finance: (i) follow-up surveys of workers directly displaced from SOEs; (ii) surveys to monitor the general social impact of the economic reform and privatization on selected affected communities; (iii) follow-up surveys to monitor the net impact of labor redeployment programs; and (iv) identification of alternatives to improve social assistance programs based on review of international experience as it might be used in the Turkish environment. D. Project Management: The objective of this component is to ensure effective administration and coordination of the overall project program, financial accounts, and procurement. The component will finance technical assistance and minor goods to: (i) coordinate project execution form a global perspective between the implementing agency and other key agencies involved; (ii) procure all project financed goods and services for implementing agencies; (iii) to operate the financial management system according to Bank LACI requirements; and (iv) act as a technical liaison between the Government and the Bank. 5. Financing Total ( US$m) Government 0 IBRD 246.6 IDA GOVERNMENT OF TURKEY 108.9 Total Project Cost 355.5 6. Implementation These details will be worked out during project preparation but, based on previous and current experience in dealing with labor restructuring and unemployment in Turkey and in related Bank projects (e.g., PIAL, ETP), the following is proposed:(a) Overall Project Management: This will be -3 -  carried out by the Privatization Administration (PA).(b) Labor Restructuring (severance payments): This will be coordinated by the PA. Detailed identification of eligible individuals will be carried out by relevant agencies (e.g., PA, Treasury), and actual payments will be made by the Employment Agency (IIBK), State Retirement Fund (ES) and SOEs.(c) Labor Redeployment: PA which will have a Labor Assistance Group (LAG) which will organize and deliver pre-layoff in-plant services with related agencies and provide oversight for the overall post-layoff services program. Day-to-day contracting and management of post-layoff services will be done by three key implementing agencies which will have an interagency agreement with PA, including: IIBK for employment services, retraining, temporary community employment; KOSGEB for small business assistance and incubator programs; and TOBB for local economic development planning activities. Actual delivery of labor redeployment services will be done, as appropriate, by competitively selected local private, NGO and public institutions which have performance based contracts with key implementing agencies to deliver services to displaced workers.(d) Social Monitoring and Benefits: These will be contracted to one firm and managed by the project implementing agency (PA).(e) Project Management: Overall project management will be done by PA (i.e., the project coordinating unit will be at PA) which has agreed to undertake this responsibility. 7. Sustainability The labor restructuring and labor redeployment components of the project are not intended to be sustained over time, as they are one-time payments and services intended to facilitate privatization of SOEs and increase productivity of these enterprises. However, experience gained during operation of these programs can assist the government to design and implement additional downstream SOE privatization and Civil Service reform programs, and the project will indentify alternatives for reform of the social assistance system in Turkey. 8. Lessons learned from past operations in the country/sector Lessons of experience need to be considered from several perspectives: (a) lessons learned from working in Turkey; (b) lessons from regional experience, including similar operations in Macedonia, Romania, Poland, and Bosnia; and (c) broader lessons learned from other regions and countries. Turkey has experience in operating both labor restructuring (severance) and labor redeployment programs with its own funds, as well as under the PIAL and ETP. This experience indicates that it may be better to provide workers the option for job loss compensation in tranches or as a lump sum, as anticipated under the SSP, as opposed to using only monthly payments as this approach discourages investment and small business startups, and encourages consumption. Operation of previous and current labor redeployment programs emphasize the need to carefully refine criteria and procedures (e.g., temporary community employment programs should be operated by private or NGO entities, as opposed to public entities, to improve post-program job placement and employment). This and other lessons have been incorporated into the project design. Many countries around the world have and are implementing economic restructuring and recovery (e.g., Europe and Central Asia, North America and Western Europe) which are part of an ongoing process of economic change and renewal. However, the design and use of social support programs varies considerably among countries and is greatly influenced by the economic environment, including the level of unemployment, and the - 4 -  type of general social support programs already in place in the country where economic restructuring is occurring. A review of 12 case studies of enterprise divestiture in Europe, Latin America and Asia indicated that workers as a class did not lose by divestiture, but that individual workers could be worse off, especially where layoffs or reduced hiring were involved (Welfare Consequences of Selling Public Enterprises. "Case studies from Chile, Malaysia, Mexico and the UK" Synthesis of Cases and Policy Summary. World Bank Conference Proceedings. June, 1992.). Unfortunately, this is the environment in which divestiture often occurs, and this is why temporary income support and labor redeployment programs are instituted to minimize losses. Income support programs can be quite costly in the short-run (e.g., in excess of an average of US$10,000 per worker). However, costs can be reduced significantly if displaced workers are able to find alternative employment rapidly. Additionally, making one-time severance payments to workers to encourage them to leave an enterprise is often less costly than continuing to employ them in loss making enterprises, and will help enterprises return to profitability. Labor redeployment programs are designed to help displaced workers quickly re-enter the labor force to increase overall productivity and decrease use of state supported income support payments. These services support, and need to be coordinated with, income support payments. These programs can have a significant positive impact if appropriately targeted and well run (e.g., services are demand-driven and delivered by service providers which have performance-based contracts). Experience in Turkey and other countries, indicates that these services are normally used by about one-third to one-half of displaced workers and are relatively low cost (e.g., averaging US$750-1,000 per worker) as compared with income support payments. It should also be noted that while income support payments are usually directed only to displaced workers, that other affected workers (e.g., family members, secondary layoffs) may need access to redeployment services. These programs have helped produce positive social and political reactions to economic reform programs, at a reasonably low cost. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues There are no environmental issues in this project. This is a social support project. The environmental category has been rated as C by the Regional Environmental Sector Unit. 11. Contact Point: Task Manager David Herbert Fretwell The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202) 458-7792 Fax: (202) 477-1996 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 -5-  Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending August 11, 2000. - 6 -