Turkey - Privatization Implementation Assistance and Social Safety Net Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No 20417 IMPLEMENTATION COMPLETION REPORT TURKEY PRIVATIZATION IMPLEMENTATION ASSISTANCE AND SOCIAL SAFETY NET PROJECT (Loan 3728-TU) May 9, 2000 Private and Financial Sector Development Unit Country Department VI Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (as of December 31, 1999) Currency Unit = Turkish Lira 1 TL. US$ 0.000002 US$1 = 540,445 AVERAGE EXCHANGE RATES (Yearly Averages) Turkish Lira = Currency Unit 1990 - 2,060 = US$1.00 1991 - 4,168 = US$1.00 1992 - 6,864 = US$1.00 1993 - 10,965 = US$1.00 1994 - 29,668 = US$1.00 1995 - 45,731 = US$1.00 1996 - 80,785 = US$1.00 1997 - 150,000 US$1.00 1998 - 306,846 = US$1.00 1999 - 418,189 = US$1.00 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS GDC - General Directorate of Census HUAK - Hacettepe University for Actuarial Sciences IIBK - Turkish Employment Organization KOSGEB - Small and Medium Industry Development Organization LAP - Labor Adjustment Program MENR - Ministry of Energy and Natural Resources MOF - Ministry of Finance MOL - Ministry of Labor PA - Privatization Administration PHC - Privatization High Council PHRD - Policy and Human Resources Development Fund PPA - Public Participation Administration PPF - Project Preparation Facility SEE - State Owned Economic Enterprise SPO - State Planning Organization TAL - Technical Assistance Loan TOBB - Union of Turkish Chambers of Commerce and Industry TURKEY'S FISCAL YEAR January 1 to December 31 Vice President: Johannes F. Linn, ECAVP CountryDirector: Ajay Chhibber, ECCO6 Program Team Leader: Lalit Raina, ECSPF Sector Manager: Ilham Zurayk, ECSPF  FOR OFFICUL USE ONLY IMPLEMENTATION COMPLETION REPORT TURKEY PRIVATIZATION IMPLEMENTATION ASSISTANCE AND SOCIAL SAFETY NET PROJECT (Loan 3728-TU) Contents Preface ................................................................................. Evaluation Summary .................................................... . ........................... ii Part I. Project Implementation Assessment . ................................................................................1 A. Statement and Evaluation of Objectives ................................................................................. 1 B. Achievement of Objectives .................................................................................2 C. I[mplementation and Major Factors Affecting the Project ......................... ....................................4 D. Project Sustainability .................................................................................5 E. Bank Performance .................................................................................6 F. Borrower Performance .................................................................................6 G. Assessment of Outcome .................................................................................7 H. Future Operations ................................................................................. 10 I. Key Lessons Learned ................................................................................ 10 Part II. Statistical Tables ................................................................................ 13 TABLE 1: SUMMARY OF ASSESSMENTS .......................................................... ....................... 14 TABLE 2: RELATED BANK LOANS/CREDITS .............................................................16 TABLE 3: PROJECT TIMETABLE ..................................... 16 TABLE 4: LOAN/CREDIT DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL .................... 16 TABLE5: KEY INDICATORS FOR PROJECT IMPLEMENTATION ........................... ................ ............... 17 TABLE 6: KEY INDICATORS FOR PROJECT OPERATION .................................................................... 17 TABLE 7: STUDIES INCLUDED IN PROJECT .......................................... ................................ 17 TABLE 8A: PROJECT COSTS .......................................................................... 18 TABLE 8B: PROJECT FINANCING .......................................................................... 18 TABLE 9: ECONOMIC COSTS AND BENEFITS ................................................. ......................... 18 TABLE 10: STA"TUS OF LEGAL COVENANTS .......................................................................... 19 TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS ............... ............................ 21 TAI3LE 12: BANK RESOURCES: STAFF INPUTS .......................................................................... 21 TABLE 13: BANK RESOURCES: MISSIONS .......................................... ................................ 21 Appendixes: A. Borrower contribution to the ICR This document has- a restricted distribution and may be used by recipients only in the, performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   IMPLEMENTATION COMPLETION REPORT TURKEY PRIVATIZATION IMPLEMENTATION ASSISTANCE AND SOCIAL SAFETY NET PROJECT (LOAN 3728-TU) Preface This is the Implementation Completion Report (ICR) for the Privatization Implementation Assistance and Social Safety Net Project in Turkey, for which loan 3728-TU in the amount of US$100 million equivalent was approved on May 3,1994, and made effective on February 28, 1995. The Original Closing Date of June 30, 1998 was extended to June 30, 1999 and furthermore the loan was kept open for two selected categories of expenditures until December 31, 1999. Despite this, on an exceptional basis, the final disbursement took place in February 2000. After being amended in 1997, 1998 and 1999, the original loan amount was reduced to US$32.6 million and after the final adjustment, which took place on February 1, 2000, the balance of US$2.6 million is being cancelled. The ICR was prepared by Gurhan Ozdora of the World Bank Ankara Office and reviewed by Hans Morritz (former Task Manager), Vinod K. Goel (ECSPF), Lalit Raina (ECSPF), Ilham Zurayk (Sector Manager, ECSPF), and Sally Zeijlon (ECCA4). Preparation of the ICR began during the Bank's final supervision/completion mission in June 1999. It is based on material in the project files. The borrower contributed to preparation of the ICR.   IMPLEMENTATION COMPLETION REPORT TURKEY PRIVATIZATON IMPLEMENTATION ASSISTANCE AND SOCIAL SAFETY NET PROJECT (LOAN 3728-TU) Evaluation Summary Introduction 1. The process of economic liberalization during the 1980s exposed the weaknesses of Turkey's State-Owned Economic Enterprises (SEEs). Originally established in the framework of economic planning for industrial development and the provision of infrastructure, most of these enterprises were not equipped to face the challenges of a dynamic market economy. Continuing its economic liberalization program, the Government decided to privatize the SEEs. The main objective of the Government's program was to promote efficiency and productivity in the economy and achieve a permanent reduction in the fiscal deficit. 2. In 1986, a master plan for privatization was completed but not implemented. Following this, in 1992 a new Government and subsequent changes in the management and structure of the Public Participation Administration (PPA), the agency responsible for privatization, helped to accelerate the pace of privatization. In 1993, another Government announced a renewed privatization program coupled with the strengthening of the social security system and the development of a social safety net targeted at redundant workers and affected communities. To this end, the Government requested Bank assistance for the implementation of its privatization program and the Bank responded with a Technical Assistance Loan (TAL) in the amount of US$100 million. Project Objectives 3. The project aimed at accelerating privatization, helping to ensure a transparent and professional process, and laying the basis for a sustained divestiture and fiscal contraction process. It also aimed at building institutional capacity to manage the more complex workload entailed by a larger restructuring and divestiture program. Another important objective was the alleviation of the adverse impact of SEE downsizing and divestiture on displaced workers and their families by fully integrating social safety net measures, including labor adjustment programs, into the divestiture process. According to the Loan Agreement, in achieving these objectives, part A of the project was to be carried out by the Privatization Administration (PA), through a subsidiary project agreement with the Bank, parts B, C and E by the Treasury and part D by the State Planning Organization (SPO). 4. Part A of the project provided technical and financial support to privatization for: (i) the preparation and implementation of privatization transactions for the PA's existing portfolio and for futLre transactions as they arise; (ii) the strengthening of PA's capacity to implement privatization; (iii) the strengthening of Treasury's capability for debt management and restructuring prior to privatization; (iv) the development and implementation of a public information campaign to promote the Government's privatization program and broaden public  support; and (v) assessments of the environmental liabilities of relevant SEEs, and plant reconfiguration for Sumer Holding prior to privatization. 5. Part B was designed to support the institutional strengthening of Treasury for pre- privatization debt management and restructuring. Here the project aimed at assisting the Treasury with the review and analysis of SEE debt. Part C aimed at the development and implementation of a social safety net. Here the project included: (i) labor adjustment programs to deal with the increased demands for such services resulting from the privatization and downsizing of SEEs (including assessments of work force redundancy, job counseling, retraining schemes, and small enterprise development, including incubator programs, in regions experiencing concentrated layoffs); and (ii) studies to analyze the social security/pension and identifier systems. 6. Part D of the project was designed to support the preparation of a Regional Development Program for Zonguldak region, aimed at diversifying the economic base of the region in conjunction with the proposed divestiture/downsizing of Turkish Hard Coal agency (TTK) and Karabuk Steel Plant (Kardemir). Part E of the project involved preparation of a study on the regulatory framework for the privatization of telecommunications and an analysis of private participation in infrastructure services, aiming at developing a more coordinated strategy for the private provision of infrastructure in Turkey. Implementation Experience and Results 7. Although the loan was signed on May 5,1994 and project implementation was scheduled over a 4-year period the loan became effective more than nine months after its approval. The difficulties encountered in the passage of the privatization law in mid-1994 were a major reason for this delay. Since Parliamentary approval had to be sought for a new privatization law, there were extensive delays in implementing the privatization program. Also, the loan could not be declared effective since some of the conditions for achieving project objectives had been negated. Following Parliamentary approval of the new privatization law in November 1994, Treasury and the PA were in a position to complete the legal actions required to make the loan effective and the loan became effective on February 28, 1995. 8. After the loan became effective, progress still remained slow due to political instability and institutional weaknesses, which manifested themselves in difficulties in decision-making and frequent replacements of the PA management. In addition to these, PA was confronted with the difficult task of providing corporate governance to a large number of SEEs and, at least in some cases, of restructuring those that would remain in its portfolio for some time. Lacking these capabilities, the PA could not restrain itself from becoming preoccupied with governance and restructuring functions, which deviated its attention from its main task. 9. The project failed to reach its original development objectives. The main problems confronting the implementation of the PIAL in its original form have been the institutional weakness of the Privatization Administration and the lack of political continuity and strong will to advance the privatization process, which together resulted in the failure of Governments' privatization programs. Since the Government did not come forward with timely and acceptable proposals on the full use of the loan proceeds within the given time limits and the objectives of  the project, and did not respond to the Bank's recommendations concerning an acceleration of the privatization process, the project was restructured three times, mainly by excluding the two core project components-technical support for SEE privatization and for labor adjustment services- and by including a comprehensive Energy Sector Reform study. 10. The implementation experience related to the remaining project components was characterized by initial delays in starting the implementation due to contractual and administrative issues and problems related to preparation, review and approval of the project TORs. The final status of these components can be summarized as follows: (i) the first-phase of the unique identifier system component has progressed well and was essentially completed by the closing date; (ii) the studies on the energy sector reform and privatization were completed by December 31,1999, as accepted by the third loan amendment in 1999; (iii) analysis of the social security systems, as well as of related financial management and policy recommendations, was completed and the reports have been submitted to the Treasury; (iv) the incubator in Zonguldak has progressed well, is considered a success by KOSGEB, and is much appreciated by the local authorities (KOSGEB intends to complete the original plan of establishing from two to three incubators in other parts of the country); and (v) the actuarial training component has been successful in creating a capacity for training of actuaries and supporting the "Center for Research, Implementation and Education in Actuarial Sciences" (HUAK) within the Hacettepe University in Ankara. 11. It should be noted that the implementation period for the privatization component was less than 3.5 years (this component was cancelled after the project restructuring in mid-1998), which is relatively short. Most other technical assistance loans have a longer implementation period and, in addition, have often had their closing dates extended repeatedly (the Bank-wide disbursement profile for TALs indicates that an average disbursement period of such projects is about six years). Compared with such projects, the rating of the PIAL in the Bank's supervision reports has probably been more critical. This was justified, however, by the slow progress in the area of privatization. Summary of Findings, Future Operations and Key Lessons Learned 12. The project, because of its specific nature and implementation performance cannot in itself be evaluated according to its sustainability. However, some of the project components that were designed to create new or strengthen existing institutional capacities can be evaluated according as to their continuity and sustainability. Of the five remaining project components, Unique Identifier system (MERNIS) and Actuarial Training components can be regarded as being sustainable since these components are actually parts of an existing and ongoing programs that are supported by their parent agencies. Sustainability of the Zonguldak incubator may be difficult without some financial and administrative support from KOSGEB. Sustainability of the Social Security Studies and Energy Studies will have to be evaluated as to their acceptance by the policy-makers and their influence on policies adopted. 13. The reasons for the delays and slow progress in privatization were mostly of a political and institutional nature. Their resolution would have required drastic organizational and legal measures. The experience with the project has shown that accelerated privatization can only be achieved if either the Privatization High Council (PHC) commits itself to reach specific targets  and enforces compliance, or if the privatization process is depoliticized by changing the composition and decision-making procedures of the PHC and strengthening the role of the PA by giving it more autonomy. In addition to this, a strong Government commitment to an agreed privatization strategy should have been a condition for Board presentation, in addition to the number of SEEs to be privatized. Other more quantitative performance indicators, such as savings to the Treasury through reductions in subsidies to SEEs, should have been established. 14. The main problem confronting the implementation of the project was its over-ambitious design. Designed with the purpose of supporting the Government's privatization efforts, it tried to achieve many objectives in synchronization with the privatization process. The project did not take into consideration the fact that privatization is a highly political process and that it would always be influenced by the changes in the domestic political scene. Since the main project component was predominantly designed to support privatization of the SEEs, delays and slow progress in this component due to political instability, caused disruption in the synchronization of the other components, which were basically designed to support the main component. As a result of this and restructuring of the project, where the privatization component was cancelled, these supportive components lost their significance for the privatization program as was originally intended and each component became an end in itself without much contribution to the privatization process. 15. A major lesson that was learned through this project experience is the importance of not going ahead with projects prematurely, where compliance with the loan covenants are subject to changes in the relevant laws and are beyond the control of the implementing agencies. In designing a project of this magnitude where there are many agencies involved, care should be taken in defining the relations between the implementing agencies and more attention should be given to possible sensitivities that might arise between these agencies.  IMPLEMENTATION COMPLETION REPORT TURKEY PRIVATIZATION IMPLEMENTATION ASSISTANCE AND SOCIAL SAFETY NET PROJECT (LOAN 3728-TU) Part I. Project Implementation Assessment A. Statement and Evaluation of Objectives 1. Continuing the process of economic liberalization that had started in 1980s, the Government decided to privatize the state-owned economic enterprises. The main objective of the Government's program was to promote efficiency and productivity in the economy and achieve a permanent reduction in the fiscal deficit. In 1986 a master plan for privatization was completed but not implemented. Following this, in 1992 a new Government and subsequent changes in the management and structure of the Public Participation Administration, the agency responsible for privatization, helped to accelerate the pace of privatization. In 1993 another Government, announced a renewed privatization program coupled with the strengthening of the social security system and the development of a social safety net targeted at redundant workers and affected communities. To this end, the Government requested the Bank assistance for implementation of its privatization program and the Bank responded with a Technical Assistance Loan in the amount of US$100 million. 2. The project aimed at accelerating privatization, helping to ensure a transparent and professional process, and lay the basis for a sustained divestiture and fiscal contraction process. It also aimed at building institutional capacity to manage the more complex workload entailed by a larger restructuring and divestiture program and alleviation of the adverse impact of SEE downsizing and divestiture on displaced workers and their families by fully integrating social safety net measures, into the divestiture process. 3. To help meet these objectives, the project aimed at assisting in: (i) the provision of technical and financial support to the preparation and implementation of privatization, including the management of SEE liabilities pursuant to privatization; (ii) the development and implementation of a social safety net, including labor adjustment programs (LAP) and studies to provide a robust analytical base for Government decision-making regarding the reforms of the social insurance/pension systems, and the design of a unique identifier system for Turkish citizens; (iii) the preparation of a regional development program for Zonguldak region; and (iv) studies to facilitate future privatization, including a study of the regulatory framework for privatization of telecommunications and an analysis of the private provision of infrastructure services. 4. Technical and financial support for privatization involved: (i) provision of resources for hiring financial advisers and other consultants to assist in the process of preparation and implementation of privatization transactions for Privatization Administration's existing and future portfolio; (ii) strengthening of PA's capacity to implement privatization; (iii)  - 2 - strengthening of Treasury's capability for debt management and restructuring prior to privatization; (iv) development and implementation of a public information campaign to promote the Government's privatization agenda and broaden public support; and (v) assessments of the environmental liabilities of relevant SEEs and plant reconfiguration for Sumer Holding, prior to privatization. 5. Development and implementation of a social safety net involved: (i) labor adjustment programs to deal with the increased demands for such services resulting from the privatization and downsizing of SEEs, including assessments of work force redundancy, job counseling /retraining schemes, and small enterprise development, including incubator programs in regions experiencing concentrated layoffs; and (ii) studies to analyze the social security/pension and identifier systems. These studies would: (a) assess the financial status and management capacity of the national pension schemes and evaluate alternative options for financially and operationally viable social security/pension systems for Turkey; (b) develop a unique identifier system for tax and social purposes; and (c) develop an implementation program for pension and social security reform based on the recommendations of the social security/pension study. 6. Other objectives of the project were: (i) the preparation of a Regional Development Plan for the Zonguldak region aimed at diversifying the economic base of the region in conjunction with the divestiture and downsizing of Turkish Hard Coal Agency (TTK) and the Karabuk iron and steel plant (KARDEMIR); (ii) to carry out a telecommunications study which would have three objectives: a revised legal and regulatory framework, a plan for the corporatization of telecommunications services and options for privatization. This study would, inter alia, consider the options for competition and regulation in basic and value-added services; compare sector structures and regulatory regimes in other countries, especially the EC; and present options for a regulatory framework; and (iii) to carry out a study to develop a more coordinated strategy for the private provision of infrastructure in Turkey, where the Government plans to increase private sector participation in electric power, water and transportation sectors. These efforts would benefit from more effective coordination and the development of an overall strategy that takes into account the institutional, legal and regulatory framework for attracting local and foreign investors B. Achievement of Objectives 7. As part of the loan agreement, seven "Criteria for Mid-Term Review" were agreed upon in the loan negotiations as a benchmark for assessing overall progress in privatization. Out of these criteria, five were related to objectives of the privatization component and two were related to the social safety net component. According to the first criterion, PA was to complete by the planned mid-term review in October 1995, the privatization of at least one half of the 10 SEEs, 12 affiliated partnerships and the 34 share participations in its January 1994 portfolio. In view of the legal problems encountered in 1994 and subsequent delays in loan effectiveness, the mid- term review was postponed to November 1996. Interim targets were set involving the privatization of three small and three major enterprises by the end of October 1995, and privatization of additional three enterprises by the end of 1995. 8. Concerning the interim targets, three small enterprises (EBK, SEK and Adiyaman Cimento) and two medium sized firms were privatized by the end of October 1995. However given the  - 3 - elections in December 1995 and slippages in technical preparation, no major enterprise was sold. Also, the target of additional three privatizations by the end of 1995 was not met. Concerning targets for the postponed mid-term review, neither these nor the more modest targets, agreed earlier for 1995 and the Governments targets for privatization revenues were met. By November 1996, more than one year after the agreed deadline, only three of the 22 enterprises and affiliated partnerships and some of the 34 share participations that were included in PA's 1994 portfolio were sold. 9. Progress in privatization, which started in 1985, had been very slow. Actual privatization transactions have consistently constituted a small fraction of the Government's announced privatization programs. Aggregate gross revenues from privatization between 1985 and 1999 amounted to about US$5 billion. In the same period, total privatization expenses were about US$5.8 billion where 90% of the expenditures were related to the financing of the companies in the PA's portfolio in the form of capital injections and loans. In 1998, privatization revenues reached a record high of US$1 billion (US$465 million in 1997), of which about 77 percent resulted from the privatization of EtiBank and IsBank (the rest from the sale of individual assets). Given the PA's large privatization portfolio and the fact that many of the problematic SEEs have been repeatedly prepared for privatization, this cannot be considered a breakthrough (during the first months of 1999, privatization revenues were back to a very low US$3.4 million). With few exceptions, the major loss-making enterprises that have been on the privatization list for years have not been sold. 10. Another objective of the project and second criterion for mid-term review was to help build popular support for the Government's privatization program through a public information campaign. Recognizing the need for popularizing privatization in Turkey, the PIAL included US$17 million for the financing of public information services. The campaign was implemented with the assistance of a domestic public relations firm which was contracted for US$5.1 million by PA in mid-1995 to develop a comprehensive public relations strategy and monitoring/marketing plan and to prepare and implement on this basis, campaigns from time to time. The media campaigns, launched in August and later in December 1995, when the public attention was mainly focused on the general elections, were not based on a proper long-term privatization strategy. For these reasons they did not have the desired and lasting impact on public opinion and no major privatizations followed the campaign. 11. Another objective of the project and the third criterion for the mid-term review was preparation of the SEEs in the PA's portfolio for privatization. The Treasury was to develop a methodology for the evaluation of the liabilities of all SEEs subject to privatization and apply that methodology to a set of selected SEEs. To enhance Treasury's capacity for pre-privatization debt-management and restructuring, a team of consultants was contracted in July 1994 for a period of two years. The consultants completed major reports on SEE financial performance and debt restructuring, monitoring and control procedures based on lessons learned from previous restructuring exercises. In addition, they prepared a number of enterprise-specific reports on debt-management of companies in the PA portfolio. These studies, however, proved to be of limited value, since the privatization plans for most of the involved companies did not materialize. An important contribution of this component was the training of the Treasury staff which will be capable of doing similar tasks as required in the future.  - 4 - 12. According to the fourth and the seventh criterion for the mid-term review, the Government was expected to have adopted a policy for the settlement of the environmental liabilities for the SEEs to be privatized and it was to make substantial progress in the restructuring and privatization of the Sumer Holding, respectively. In both cases, the progress was not satisfactory. No overall policy for the settlement of environmental liabilities was developed, and only seven out of thirty Sumer plants were sold. 13. According to the fifth criterion of the mid-term review, the Government was expected by October 1995 to develop the methodology and achieve substantial progress in the application and delivery of assistance for SEEs and labor adjustment services to workers in relation to the programs for SEE restructuring and privatization. As for the other components of the project, the establishment and start of operations of the Labor Adjustment Program were also delayed. However, the program, consisting of pre-layoff analysis and assistance and post-layoff services was fully designed and procedures established, benefiting from the assistance of international consultants, and it was "pilot-tested" in a first large privatization transaction. In addition, the Local Economic Development Planning Program was implemented successfully by TOBB. The LAP involved a number of "lead agencies" (IIBK, KOSGEB,TOBB) and was coordinated by the Treasury. Since the LAP services were to be provided to workers laid off as a result of the privatization, the implementation of the LAP depended on the progress achieved in the Government's privatization program, and as progress in privatization was very slow, the systems and procedures of LAP, developed with the help of consultants, were used to a very limited extent, mainly in locations that were affected by the privatizations of Petlas and some plants of Sumer Holding. 14. The objective of the Zonguldak Regional Development Plan component was to use this study as the basis for a regional development project, for which a feasibility study would be prepared under the PIAL. The project, executed by the State Planning Organization, supported the preparation of a Regional Development Program for the Zonguldak region, aimed at diversifying the economic base for the region in conjunction with the proposed divestiture/downsizing of TTK and KARDEMIR. Draft reports on the "Zonguldak Regional Development Plan" and "TTK and Kardemir Issue" were completed in March 1996 and December 1996, respectively, by a consortium of consulting firms financed by a PPF of Yen 106 million (US$2.0 million) provided by the Japanese Government under a Grant Agreement dated May 3, 1994. Although some revisions on these drafts were needed, upon the Government's request the funds allocated for this component of the loan were cancelled during the first loan restructuring in 1997. 15. The preparatory work for the private participation in infrastructure (PPI) studies were almost completed and the consulting agreement was negotiated, but not signed. The Treasury in 1999 informed the Bank that since no provision for this component had been made in the interim budget, the Ministry of Finance (MoF) was not in a position to clear the study. Since waiting for an allocation in the next budget would postpone this activity until after the closing date, the Treasury, as part of the restructuring in 1999, requested cancellation of this component. C. Major Factors Affecting the Project 16. Although the project was signed on May 5, 1994, and its implementation scheduled over a 4- year period, the loan became effective more than nine moths after its approval. The difficulties  - 5 - encountered on the privatization law in mid-1994 were a major reason for this delay. Since Parliamentary approval had to be sought for a new privatization law, there were extensive delays in implementing privatization. Also, the Bank loan could not be declared effective since some of the conditions for achieving project objectives had not been met. Following parliamentary approval of the new privatization law No. 4046 in November 24, 1994, pursuant to which the Privatization Administration was established as the legal successor of the Public Participation Administration, the Treasury and the PA were in a position to complete the legal actions required to make the loan effective and the loan became effective on February 28, 1995. 17. Following loan effectiveness, progress still remained slow due to political instability and institutional weaknesses, which manifested themselves in difficulties in decision-making and frequent replacements of the PA management. Excessive centralization of decision-making in the Privatization High Council (PHC), the requirement for unanimous PHC approval, and lack of autonomy for the PA were equally important obstacles to rapid privatization. Other problems included high staff turnover and institutional weaknesses in PA, delays in the implementation of the technical assistance components as well as ineffective use of TA. 18. The main problems confronting the implementation of the project have been its over- ambitious design, institutional weaknesses of the Privatization administration and the lack of political continuity and strong will to advance the privatization process. These factors together resulted in the failure of the various Governments' privatization programs. The labor adjustment program was fully developed under the project, but the slow progress in privatization resulted in very low demand for these services. D. Project Sustainability 19. The project, because of its specific nature and implementation performance, cannot in itself be evaluated according to its sustainability. However, some of the project components which were designed to create new or strengthen existing institutional capacities can be evaluated according to their continuity and sustainability. To ensure the sustainability of the LAP, which was to serve as an additional safety net for the workers laid off by privatization, a protocol was signed by the Treasury and the PA, according to which the responsibility for the LAP was transferred to the PA. 20. To this end, the expertise generated in the Treasury with the help of intensive consultant services, and some local consultants trained under the LAP, were to be transferred to the PA. However, due to the slow progress in privatization, there was no pressing need for LAP services, no staff were transferred and no activities were initiated following this protocol. Therefore, it is doubtful that this will ensure sustainability, since the PA will have to focus all of its institutional capacity on privatization, once the program is re-vitalized, and it does not have the necessary staff and know-how to operate the LAP. 21. As part of the post-layoff services in the LAP, PIAL included originally a program for establishing five business incubators. After the first attempt to establish an incubator in Eskisehir failed, a second attempt was energetically undertaken by KOSGEB, and the first incubator was opened in September 1998 in Zonguldak, a coal mining region on the Black Sea coast, where the closure of the TTK mines resulted in substantial unemployment. The incubator  - 6 - is considered a success by KOSGEB and is much appreciated by the local authorities in Zonguldak. Therefore KOSGEB intends to complete their original plan of establishing from two to three incubators in other parts of the country. Although the incubator seems to operate in an ideal setting considering the need for its services, availability of well-trained staff laid off by the mines, initial assistance by PIAL, availability of training facilities and potential support by German donor agencies, it is not yet financially self-sufficient, since it is not yet fully occupied and its administrative costs are relatively high, considering the small size of the operation. KOSGEB has, therefore, devised a plan to provide limited support to the incubators, which aims at establishing financial sustainability within 2-3 years. 22. Of the remaining project components, Unique Identifier System (MERNIS) and Actuarial Training Components can be regarded as being sustainable since these components are actually parts of existing and ongoing programs that are supported by their parent agencies. Through MERNIS, GDC has been provided with an efficient and integrated electronic database, that will ensure accurate and up-to-date citizenship records for the whole country. As of September 1999, transcription of records in 919 out of 921 subprovinces were completed. MERNIS project when completed fully is expected to bring many direct and indirect benefits such as; accurate citizenship records, database for improved population statistics, operational support for elections and a solid database for tax and social security purposes. However, these benefits will be realized only when the second phase of the project is completed. Sustainability of the social security studies and energy studies will have to be evaluated as to their acceptance by the policy-makers and their influence on the adopted policies following this. E. Bank Performance 23. Bank performance has been satisfactory in some respects and less satisfactory in others. Bank missions were fielded at regular intervals and the progress of the project components was followed closely. The Bank was responsive to the changes in project implementation and following a good mid-term review, the supervision missions of 1997 and 1998 emphasized the need for a review of how the project should evolve in response to the changes in the project objectives and borrower requirements. 24. While Bank supervision performance has been satisfactory, deficiencies at the time of preparation and appraisal should also be noted. The main weakness of the project appraisal were that the appraisers were not able to visualize in the beginning that the functional relationship between the PA and the PHC could be a source of problems in the implementation of the privatization program. Bank supervision missions provided useful guidance on technical issues, project management and institutional strengthening. Despite staff changes at the Bank, the project did not suffer from discontinuity. The working relationships with Treasury, PA and other implementing agencies were good. The Bank positively responded to the Borrower's request for changes in the allocations for the project components, and extension of closing date and withdrawal periods. F. Borrower Performance 25. On the borrower's side the main weaknesses were the deficiencies of the Privatization Law, the fact that the PHC did not take decisions and direct the PA to take actions, and that the PA  - 7 - managers were not able to make use of the PIAL resources which offered them a unique opportunity to strengthen their institution. The PA's performance also was poor in several aspects. While PA had a small core of strong staff, it lacked technical, financial and legal skills as well as the privatization-related experience needed to ensure timely and well-structured transactions. Due to this lack of privatization-related experience, the PA did not have an overall strategic policy formulation capability. Lack of privatization-related experience also resulted in inefficient process management and supervision. Low decision-making threshold of the PA resulted in excluding the PA from the decision-making mechanism for more important SEEs, and resulted in a rather politicized decision making process. 26. Due to the lack of autonomy of the PA and the political orientation of the PHC, the PA was unable to present a credible plan for project implementation. When the reduction of the loan was negotiated, the PA presented a list of activities for which the remaining funds would be needed. However, this list suffered from the same defect: progress in privatization and, therefore, in utilizing the loan is not determined by the PA. Since the Treasury's involvement in the project-- mainly through debt management of large privatization candidates and coordination of the labor adjustment program-was fully dependent on progress in privatization, the lack of a credible plan for future utilization of the loan by the PA made it impossible for the Treasury to present a plan for its own activities. It was only when part of the loan was cancelled that the Treasury was able to present a list of activities for which it would be able to use some part of the remaining loan amount. 27. The PA's Advisory Services department lacked a system for monitoring the use of the legal services and for controlling the advisors. PA management generally had doubts about the usefulness of international technical assistance, resulting from the poor performance of some of the consultants. This, in turn, was the consequence of the consultants not having been properly selected and not always used effectively, given the constant changes in the PA's management and also often unfavorable work environment, as well as the politically motivated slow progress in privatization. 28. Treasury's performance during project implementation was satisfactory. Apart from individual problems due to coordination between agencies, Treasury was successful in the coordination of various activities and also in implementing the project components under its responsibility. However there were a lot of delays in the compliance with loan covenants which required periodic submission of quarterly reports on the execution of the project and annual work programs. In most cases these reports were submitted after long delays and only after repeated reminders. There was also the problem of lack of coordination between Treasury, the PA and other agencies which has been an important problem throughout the project implementation. G. Assessment of Outcome 29. Since most of the privatization benchmarks, revised at the November 1996 Mid-Term Review, were not achieved, and loan utilization was very slow, the loan was restructured in August 1997. At that time, US$27.2 million from various loan categories was cancelled and the closing date for category 2(b), related to consultants' services, was extended for one year to June  - 8 - 30, 1999. Following this, the loan was restructured again in September 1998 when an additional US$33.5 million was cancelled reducing the loan amount by a total of US$60.8 million. 30. The main changes resulting from the second loan restructuring in 1998 were the termination of PIAL support for the PA's activities and for the LAP (with the exception of the Zonguldak incubator). The termination of support to the PA did not affect the Government's privatization effort, since the progress in privatization remained slow, and PA seemed to have easy access to adequate resources from the Privatization Fund. However, the objective of the PIAL was not just to provide resources in support of privatization, but to provide assistance to the PA in the areas of policy formulation and practical implementation through an active dialogue between the Bank and the PA. 31. Due to lack of timely and acceptable proposals on the full utilization of the remaining amount of the loan, the project was restructured for the third time, mainly by excluding the study on Private Participation in Infrastructure, reducing the allocation made for the Energy Sector Reform and Privatization Studies, canceling a part of the allocation made for the Actuarial Training Program, and increasing the allocation for the Zonguldak incubator. These changes resulted in reduction of the loan by an additional US$6.6 million, bringing the total loan cancellations to US$67.4 million and the outstanding loan amount to US$32.6 million. As a result of this final restructuring, the Loan Agreement was amended to provide for covering the costs of the newly structured loan category 2(d), for which the loan account was kept open until December 31, 1999. 32. Analysis of the social security systems which consisted basically of a financial and management review of the three social security institutions, as well as of related financial management and policy recommendations, was completed by the end of 1999 instead of the targeted dated of June 30, 1999. This delay was partly due to Ministry of Labor's (MOL) initial concerns about the scope of the study. The work on these studies is finished and the reports were submitted to the Treasury to be reviewed and approved by the steering committee. Given the very high contribution the social security system is making to the budget deficit, further efforts towards reforming the social security system will continue to have a high priority in the Governments' agenda and the Bank could assist the Government in these efforts if requested, although this would go beyond the time frame of the PIAL. In order to achieve sustainable results from this work that was done to improve the social insurance system, Treasury needs to take decisions on, whether and how the study will be coordinated with the efforts of the MOL, and how the results will be made available to high-level decision makers in order to ensure implementation. 33. The first phase of implementation of the MIERNIS project is almost completed. All 921 regional census centers have been provided with the necessary computer capacity (in total 3,850 PCs have been installed), the software has been prepared, 96 percent of the 120 million personal records have been keyed in, and computer staff have received the necessary training. On an exceptional basis the Bank agreed to honor withdrawal applications received by October 31, 1999, in respect of eligible expenditures incurred after the closing date of June 30, 1999 but not later than October 31, constituting a final payment of about US$0.8 million for engineering services, which the General Directorate of Census wants to retain until a final testing of the system has been carried out. The GDC, in February 1999, informed the Bank that, additional  - 9 - financing from the Bank would not be required. Given the importance of the MERNIS facility for various Government agencies, GDC can be expected to receive adequate budget support in the future, which, in addition to the revenues from fees, will ensure the sustainability of this project component. 34. Financing of preparatory studies related to reform and privatization in the energy sector was one of the targets agreed under the second restructuring of the project. Discussions on this comprehensive study continued for a long time between the Bank and the Ministry of Energy and Natural Resources (MENR). After long delays due to budgetary limitations and bureaucratic difficulties, an agreement was signed between the MENR and the consultant firm. (the contract price was US$1.7 million). At the request of Treasury, US$3.0 million of the US$5.0 million originally earmarked for this project component were cancelled during the final restructuring which took place on May 1999. Since it was clear from the beginning that the studies as originally conceived could not be completed by the closing date, the Bank agreed to keep the loan account open until December 31,1999, for withdrawal applications under this component. The work on the five studies requested by the MENR was completed and all of the reports were submitted in December 1999. 35. The study on private participation in infrastructure was also delayed for a long time. Since no provision for this component could be made in the 1999 interim budget, and the budget of the new Government was not expected to be issued in time before the closing date of June 30, 1999, this component was cancelled at the request of the Treasury during the final loan restructuring in May 1999. 36. The Actuarial Training Program, designed for the financing of a training program for actuaries in the Treasury and the social security organizations was included in the social safety net component as an additional subcomponent in October 1996. The program aimed at creating in Turkey a capacity for the training of internationally certified actuaries. In general terms, this component progressed well and was essentially completed by the project closing date. Disbursements accounting for a relatively small part of this component (10%), as agreed earlier, continued for a small number of students taking training abroad until August /September 1999. The Directorate of Insurance as a result of this capacity is now redirecting its efforts to the establishment of a "Hacettepe University Center for Research, Implementation and education in the Actuarial Sciences (HUAK)". In line with the original idea of the PIAL, some of the participants in the training program will be instructors at the Center. A small part (US$60,000) of the loan component was used for the acquisition of basic equipment for the new Center. The Center has already held some lectures but is in the process of developing a training program. The initiative of the Insurance Directorate has provided much-needed initial support to the Center and seems to have ensured sustainability of the actuarial training effort. 37. Although the project is rated unsatisfactory in terms of achieving its development objectives, in assessing the outcome of the project however, it should be noted that the overall project implementation period of approximately four years, is relatively short compared to most other Technical Assistance Loans that have a longer implementation period to start with and, in addition, have often had their closing dates extended repeatedly (the Bankwide profile for disbursements of TALs indicates that TALs have an average disbursement period of about six years). Compared to such projects, PIAL evaluations have been much more critical, mainly due  - 10- to the Government's inability to act in the area of privatization. However, it is quite clear that not much would have been achieved even if the implementation period for the privatization component had been further extended. H. Future Operation 38. During the project implementation there were various requests from the Government to extend some of the loan components and suggestions for alternative utilization of the loan proceeds. Although some of these requests for changes and extensions were approved, the Bank did not respond positively to others in the cases when the proposals were not found to be relevant to the privatization program. In the future, privatization efforts should be supported by the Bank, provided that the legal infrastructure is present, the government is determined and the funds are made available through a more suitable project. As of today, there are no indications for a similar operation in the future. I. Key Lessons Learned 39. The reasons for the delays and slow progress in privatization were mostly of a political and institutional nature and their resolution would have required drastic organizational and legal measures. The experience with the project has shown that accelerated privatization could not be achieved by agreeing with the PA on targets, unless either the Privatization High Council (PHC) committed itself to reach specific targets and enforces compliance, or if the privatization process was depoliticized by changing the composition and decision-making procedures of the PHC and strengthening the role of the PA by giving it more autonomy. In addition to this, the composition of the PHC should be changed, converting it into a more neutral organ that decides pragmatically and based on expert advice instead of political convenience. Decisions of the PHC should not require unanimity but should be taken with qualified or simple majority. 40. A strong Government commitment to an agreed privatization strategy should have been a condition of Board presentation of this project. In addition to the number of SEEs privatized, other more quantitative performance indicators, such as savings to the Treasury through reductions in subsidies to SEEs, should have been considered. Privatization of the SEEs in Turkey is based on the Privatization Law (no: 4046) of November 24, 1994. Although some authorities assure that there is nothing wrong with the Law, the fact remains that major privatization decisions have been contested in the courts resulting in the cancellation of various decisions and in substantial delays in the privatization process. Therefore, the Privatization Law should be reviewed by legal and privatization experts and revised as necessary. In addition, the PA should make better use of its external legal consultants to ascertain that privatization decisions are in line with the Privatization Law and the rest of the legal framework, including the constitution. 41. According to the Privatization Law, PHC decides among other things on: (i) the transfer of SEEs to the PA's portfolio; (ii) the method of privatization; (iii) the restructuring of SEEs in the PA's portfolio and the purchase and sale of shares of such SEEs; and (iv) the final transfer of property rights. However, it seems that the PA is often and always contacting the PHC during several interim steps in the privatization process. Given the existing legal framework and the ability of the PHC to guide the PA through regulations and directives, the PHC should be  - 11 - involved in decision making on specific privatization transactions only twice: to transfer the SEE to the privatization portfolio of the PA and to approve its privatization. Also the PA should have much more autonomy. Free limits below which the PA can make the final decision on privatization transactions should be increased. In addition, the privatization portfolio of the PA should be reduced to those SEEs that are realistically expected to be privatized, thus allowing the PA to focus more fully on its privatization function and avoiding a potential conflict of interest between governing and maintaining SEEs on the one hand, and the need for privatizing them as quickly as possible, on the other hand. 42. In order to be more efficient, the PA should be reorganized to focus on policy formulation, process management, monitoring and supervision. It should be run with a smaller, but highly experienced core staff that is strongly supported by in-house consultants. It should contract out all direct privatization transactions to carefully selected privatization consultants, where such consultants are given a deadline for individual transactions, freedom to act within legal and contractual guidelines, and a strong incentive (success fee) to carry out the transactions rapidly and at a favorable price. In essence, this means privatizing the privatization process. 43. The main problem confronting the implementation of the project was its over-ambitious design. Designed with the purpose of supporting the Government's privatization efforts, it tried to achieve many objectives in synchronization with the privatization process. The project did not take into consideration the fact that privatization in Turkey is a highly political process and that it would always be influenced by the changes in the domestic political scene. Since the main project component was predominantly designed to support privatization of the SEEs, delays and slow progress in this component due to political instability, caused disruption in the synchronization of the other components which were basically designed to support the main component. As a result of this and eventual restructuring of the project when the privatization component was cancelled, these supportive components lost their significance for the privatization program as was originally intended, and each became an end in itself without much contribution to the privatization process. 44. All of the findings and recommendations mentioned above were repeatedly brought to the attention of the Government through aide-memoires and to the attention of the Bank management through supervision and interim reports, but due to frequent changes in the PA administration these recommendations could not be implemented. The Bank considered closing the project in 1996, but later decided to only reduce it, since each succeeding government was wary of the political consequences of such a decision and each had promised to accelerate the privatization program. There were as many as six different governments and as many or more PA managements during the project implementation, where new hopes were created by each of them, inducing the Bank, which was eager to support privatization, to continue its efforts, although repeated loan reductions and project restructuring was unavoidable. 45. Project implementation period coincided with a period of political instability and a series of coalition governments, which did not always agree on the importance and targets of the privatization program. There was generally a lack of commitment on the governments' part which can be considered as the most important obstacle for the privatization effort. This can best be understood when compared with the commitment of the current government which, since the  - 12 - beginning of 2000, realized 66% of the privatization program by achieving $5 billion worth of privatization in four months where the target for the whole year was set at $7.6 billion. 46. An important lesson that was learned through this project experience is the importance of not going ahead with projects prematurely, where compliance with the loan covenants are subject to changes in the relevant laws and are beyond the control of the implementing agencies, due to politically motivated interference. In designing a project of this magnitude where there are many agencies involved, care should be taken in defining the relations between the implementing agencies and attention should be given to possible sensitivities that might arise between these agencies.  - 13 - Part II. Statistical Tables Table 1: Summary of Assessment Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative, Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions  -14- Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partialbl Not awlicable Macro Policies E L E0 Sector Policies a E Ea Financial Objectives E El 0l Institutional Development E IZ l Physical Objectives E E El Poverty Reduction E E I] Gender Issues ] E LI] Other Social Objectives E E El Environmental Objectives a E El Public Sector Management E E El Private Sector Development a E El Other (specify) a E E E (Continued) B. Project Sustainability Likely Unlikely Uncertain (V) (/) (/)  - 15 - Hi hly C. Bank Performance satisfactorv Satisfactory Deficient (V) (1) (1) Identification E La Preparation Assistance [ I] Appraisal Supervision : i:i D. Borrower Performance satisfactory Satisfactory Deficient (1) (1) (/ (1) Preparation Implementation ]E Covenant Compliance E Operation (if applicable) E. Assessment of Outcome satisfactory Satisfactory Unsatisfactr unsatisfactory  - 16- Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year of approval Status Preceding operations Ln.2400-TU Technical assistance for 1984 Closed in 1991.PCR state economic enterprises dated Feb.11, 1992 Ln. 3477-TU Technical Assistance for 1992 Active, Closing Treasury Data 06/30/00 Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual Identification (Executive Project Summary) September 1993 Preparation October 1993 Appraisal November 24, 1993 December 13, 1993 Negotiations February 14-18, 1994 February 14-18, 1994 Board Presentation May 3, 1994 May 3, 1994 Signing May 5, 1994 Effectiveness November 1, 1994 February 28, 1995 Midterm review (if applicable) November 20, 1996 September 15, 1998 Project Completion June 30, 1998 June 30, 1999 Loan Closing October 31, 1998 December 31, 1999 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ thousands) FY 94 FY 95 FY 96 FY97 FY98 FY99 FY00 Appraisal estimate 5,000 33,000 64,000 85,000 100,000 100,000 100,000 Actual 0 4,597 13,873 17,187 23,545 27,468 29,960 Actual as % of estimate 0 13.93 21.68 20.22 23.54 27.46 29.96 Date of final February 1, 2000 disbursement  - 17 - Table 5: Key Indicators for Project Implementation Indicators for project implementation not included in the PAD Table 6: Key Indicators for Project Operation Indicators for project operation not included in the PAD Table 7: Studies Included in Project Study Purpose as defined at Status Impact of appraisal/redefined study 1. Energy sector reform and Preparation of studies related Completed To provide privatization studies to reform and privatization the to be undertaken by the government government as agreed under with a the restructuring of the reference in project the energy reform and related legislation 2. Study on private Cancelled participation in infrastructure 3. Social security studies Financial and management Completed To provide review of three social the security institutions that government would lead to financial and with a policy recommendations to reference to the government. policy options in the social security legislation.  - 18 - Table 8A: Project Costs Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Item Local Foreign Total Local Foreign Total costs costs costs costs 1. Privatization 13.5 57.2 70.7 1.2 7.9 9.1 2. Social safety net 19.9 12.0 31.9 2.4 16.2 18.6 3. Zonguldak regional 1.0 1.0 2.0 development 4. Studies - 4.5 4.5 0.6 3.5 4.1 5. Refinancing of PPF advance - 2.0 2.0 0.3 1.9 2.2 6. Contingencies 13.6 4.3 17.9 0.4 0.4 Total 48.0 81.0 129.0 4.5 29.9 34.4 Table 8B: Project Financing Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Item Local Foreign Total Local Foreign Total costs costs costs costs IBRD 19.0 81.0 100.0 2.7 27.2 29.9 Cofinancing Institutions Other External Sources Domestic Contributions 29.0 0 29.0 4.5 0 4.5 etc. Total 48.0 81.0 129.0 7.2 27.2 34.4 Table 9: Economic Costs and Benefits No normal financial or economic cost benefit analysis was undertaken for this project  - 19 - Table 10: Status of Legal Covenants TURKEY 3728-TU Covenant Present Original Revised Description of Covenant Comments Agreeme Section Type Status Fulfillment Fulfillment nt Date Date LA 2.02 (b) 03 C PA to open and maintain a special Complied with account for part A of Project LA 2.02 (c) 03 C Borrower to open and maintain a Complied with special account for parts B,C,D and E of the project LA 3.03 (a) 03,10 C 08/03/1994 02/28/1995 Borrower to conclude the Complied with and Subsidiary Project Agreement, 6.01(a) satisfactory to the Bank, with PA LA 4.01(a,b, 01,09 C 06/30/1996 06/30/1998 Maintenance of project records and Complied with after long c) accounts in accordance with sound delays and repeated accounting practices and auditing clarifications of accounts LA 4.02 (a) 09 NC 11/30/1996 11/30/1998 Submission of proposed work Partially complied with and programs for the following year not required after project restructuring LA 4.02 (b) 09 NC 12/15/1995 11/30/1998 Borrower to submit evidence of a See covenant 4.02 (a) satisfactory work program approved by the Bank LA 4.03 09 C 10/31/1995 Borrower to carry out a The mid-term review was comprehensive mid-term review of postponed, due to the project implementation with political/institutional the Bank uncertainties, and was finally carried out in 11/96 LA 4.04 09 CP 12/31/1998 Borrower to furnish to the Bank Reports are received mostly quarterly progress reports on parts with long delays and repeated B,C,D and E of the project reminders LA 6.01 (b) 10 C 08/03/1994 PA to appoint consultants for debt Complied with and the work management and labor adjustment is completed services LA 6.01 ( c) 10 CD 08/03/1994 PA to appoint consultants for in- Consultants have been house strategic planning, legal appointed after delay. advisory and public information Contracts have been program terminated. LA 6.01 (d) 10 CD 08/03/1994 PA to conclude contracts for Contacts have been concluded financial advisory services for after delay. Contracts privatization of two SEEs terminated. LA Sched.5, 10 CD 08/31/1994 Borrower to enter into protocols none Para I with IIBK and KOSGEB to carry out the labor adjustment services under part C.2 of the Project LA Sched.5 10 CD 08/31/1994 Borrower to employ consultants to Study A (pension schemes) Para carry out social security pension completed in March 1996. 2(a)(i) studies under part C,4 of the Study B (financial Project; initial phase of such study management of three state to be carried out by 11/30/1995 insurance companies)was and the second phase by delayed, but is now 11/30/1996 completed. LA Sched.5 10 CD 09/15/1994 Borrower to employ consultants to The study was completed Para 2 carry out the unique identification (financed from other sources) (a) (ii) system study under Part C.4 of the and phase I of project Project implementation is nearing completion.  - 20 - LA Sched. 5 10 NC 12/31/1995 Borrower to employ consultants to This loan component was Para 2 carry out the study on the cancelled at the Mid-term (a) (iii) preparation of the Zonguldak review Regional Development Plan LA Sched. 5 10 CD 08/31/1994 Borrower to employ consultants to Study was completed after Para 2 carry out the study on the delay (a) (iv) regulatory framework for telecommunications and to prvatize telecom LA Sched. 5 10 NC 09/30/1994 Borrower to employ consultants to This loan component was Para 2 carry out the study to increase cancelled in the course of the (a) (v) private sector participation in the last restructuring infrastructure sectors under part E.2 of the project LA Sched. 5 10,09 NC Borrower to furnish the results and The study on Private -Para 2 recommendation to the Bank no Participation in Infrastructure (b) later than 2 months following the has been cancelled. Reports completion of each of the studies of consultants on social referred to under schedule 5, paras insurance has been received, (a) (i)-(v) but the final report is not yet approved PA 4.01 01,09 CD 06/30/1996 PA to maintain project records and 1997 audit was submitted late (a,b,c) accounts in accordance with sound and it was based on accounting practices and submit to provisional financial Bank audited financial statements statements. Auditors no later than six months after the confirmation requested that end of each year their opinion has not changed after reviewing final statements. PA 4.02 09 NC 11/30/1996 By Oct. 31 of each year, PA to Since the privatization (a,b) submit to the Bank a work program component was excluded as for the following calendar year, for part of project restructuring, part A of the project and to submit work program is not required evidence to the Bank that such work program satisfactory to the Bank has been approved PA 4.03 09 CD 10/31/1995 PA to carry out a comprehensive The mid-term review was mid-term review of Part A of the postponed due to Project with the Borrower political/institutional uncertainties, and it was finally carried out in 11/96 PA 4.04 09 NC PA to furnish to the Bank quarterly Since the privatization progress reports on part A of the component was excluded as project part of project restructuring. progress reports are not required Covenant types: Present Status: 1. = Accounts/audits 8. = Indigenous people C = covenant complied with 2. = Financial performance/revenue generation from 9. = Monitoring, review, and reporting CD = complied with after delay beneficiaries 10. = Project implementation not covered CP complied with partially 3. = Flow and utilization of project funds by categories 1-9 NC = not complied with 4. = Counterpart funding 11. = Sectoral or cross-sectoral budgetary or 5. = Management aspects of the project or executing other resource allocation agency 12. = Sectoral or cross-sectoral policy/ 6. = Environmental covenants regulatory/institutional action 7. = Involuntary resettlement 13. = Other  - 21 - Table 11: Compliance with Operational Manual Statements Project was compliant with applicable Bank Operations Manual statements (OD or OP/BP) Table 12: Bank Resources: Staff Inputs (Actuals) Stage of project cycle US$ (000) Preparation to Negotiations 648.4 Negotiations to Completion 834.6 Total 1,483.0 Table 13: Bank Resources: Missions Not available   REPUBLIC OF TURKEY PRIME MINISTRY THE UNDERSECRETARIAT OF TREASURY General Directorate of Foreign Economic Relations Ref: B.02.11.HM.0.DEi.01.04.187/404A4 Ankara, April 14, 2000 Mr. Gurhan OZDORA Operations Officer 5yij3t* 29931 The World Bank Resident Mission Dear Mr. Ozdora, With reference to your letter of April 13, 2000, please see attached the views of the Government of Turkey on the draft version of the Implementation Completion Report (dated April 11, 2000) of the PIAL Project. In addition to this, please see attached our views about the implementation and the outcomes of the project. As you would recall, these views has already been sent to the Bank with our previous correspondence of October 21, 1999 and we would like to send them to the Bank once again for your convenience. In this regard, we would appreciate the Bank's attention for incorporating our views to the ICR before publishing it. Best regards, Jale AKTAa Department Head Enclosed - (Views on the ICR report dated April 11, 2000) - (Views which was sent to the Bank on October 21, 1999) cc. Mr. Vinod Goel  VIEWS OF THE REPUBLIC OF TURKEY ON THE DRAFT VERSION (DATED APRIL 11, 2000) OF THE IMPLEMENTATION COMPLETION REPORT OF PIAL LOAN . In the evaluation summary part, paragraph 10, it is stated that the project was restructured for three times during the implementation period because of the reason that "the Government of Turkey did not come forward with timely and acceptable proposals on the full use of the loan proceeds within the given time limits and the objectives of the project, and did not respond to the bank's recommendations concerning an acceleration of the privatization process". However, we believe that, a credit should also be given to the Bank for the said restructuring efforts due to the weak design efforts of the project. On paragraph 12, it is clearly mentioned that the disbursement period of the loan was well below (3.5 years) the other Technical Assistance Loans (6 years) financed by the Bank. This in fact is an other indicator of the insufficient project design. Our views are also supported by paragraph 16, which indicates that the project design was over ambitious. On page 3, paragraph 10, we believe that the amount of the funds allocated to the public information campaign should be corrected. As you would recall, category 3 of the loan agreement (Media time and space under part A of the Project) was 8.75 million USD in the original loan agreement and it was just 3.27 Million USD in the latest amendment dated April 27, 1999. * On page 6, paragraph 22; please be informed that the numbers given as 919 and 921 denote the sub-provinces rather than provinces. * On page 7, paragraph 28, although it is true that the delays happened in the progress reports, we are not in the opinion that there was a lack of coordination between PA and Treasury. * On page 8, paragraph 31, the fist sentence should be changed. Treasury took all the prompt action for the unutilized amounts of the loan proceeds. For this reason it would not be suitable to mention these actions leading to the restructuring. It is obvious that the unutilized amount should be cancelled in order to prevent the payment of commitment fees. . On page 11, paragraph 45; please delete the words "....but no concrete actions materialized". * In Table 1 of page 14 and 15, Preparation Assistance of the Bank should be marked as "Deficient" rather than "Satisfactory" due to the reasons explained above. As it was mentioned in our letter of October 21, 1999, the Bank did Undersecretariat of Treasury - General Directorate of Foreign Economic Relations - Department of World Bank Projects  not take the prompt action to the factors affecting the project. For this reason, the supervision of the Bank should also be rated as Deficient instead of satisfactory and paragraph 24 in page 6 should be changed accordingly. * Please insert the Government's views to the ICR as the appendix of the report. As you would recall, Government's views were sent to the Bank with our letter dated October 21, 1999. Undersecretariat of Treasury - General Directorate of Foreign Economic Relations - Department of World Bank Projects   Enclosed 2 IMPLEMENTATION COMPLETION REPORT (ICR) FOR THE PRIVATIZATION IMPLEMENTATION ASSISTANCE AND SOCIAL SAFETY NETWORK PROJECT (PIAL) This report represents the overall view of the Government of Turkey (GOT) represented through its Undersecretariat of Treasury on the outcomes of the above mentioned project. GOT's privatization efforts, which basically aimed at i) increasing the efficiency and output in the state economic enterprises ii) increasing the overall production in the economy and iii) reducing the fiscal burden of those enterprises to the budget, were started in early 1980's. The current privatization law (No. 4046) was enacted in November 1994 after a couple of changes were realised in the regulation binding the privatization efforts. With the current law, the Public Participation High Council was replaced by the Privatization High Council (PHC), whereas the Public Participation Administration was turned into Privatization Administration. Privatization Administration (PA) is the executing agency of the privatization activities in Turkey. However, PHC, which is composed of 5 ministers chaired by the prime minister is the main decision making body. PHC also has the responsibility of determining the method privatization for the nominated enterprises. For the last 14 years, 211 companies were taken into the privatization portfolio, of which 22 of them were excluded for several reasons. For the time being there are 74 companies under in the privatization portfolio. Since 1985, the total amount of sales revenues was reached to 4.1 billion USD. In this period, the major privatization efforts were the sale of Kardemir to employees and the public industrialists and the sale of the %12.3 of the Turkish isbank, which was offered both domestically and internationally. With the sale of i,bank shares, 633 million USD was received. Currently, various companies are in the tender process. Among these, the most important ones are, Turkish Telecom, Turkish Airlines, PETKiM, TUPRA,5 and POAi. However, despite the above stated efforts, it should be stated that the privatization efforts are behind the schedule. The major reasons behind this lag are the frequent changes in the top management of PA in connection with the changes in the governments. Proiect Background: Undersecretariat of Treasury - General Directorate of Foreign Economic Relations 1 Department of World Bank Projects  PIAL project, which aimed to assist the GOT's above stated efforts was signed with the World Bank on May 5, 1994. The original loan amount was 100 million USD. During the life span of the project, 3 amendments were made between the Bank and GOT. With the first amendment, which was realised on September 11, 1997, a total of 27.25 million USD was cancelled. Besides this, the activities focused on the Zonguldak Regional Development were taken out of the project while the "Study B" component was included into the project. The second amendment, which was signed on September 30, 1999, caused the cancellation of an additional 33,575,804.67.- USD. After this amendment, the total amount cancelled increased to 60,825,804.67-, more than %60 of the original loan amount. In addition to this, with the second amendment two brand new activities were inserted into the loan agreement, namely the Energy Sector Studies and the Private Participation in Infrastructure Study. The latest amendment was executed on May 28, 1999 with which a further 6.6 million USD was cancelled. The original closing date of the loan was June 30, 1998. But, except for the part implemented by the Privatization Administration and the Labour Adjustment Project (excluding the activities performed by KOSGEB), the other parts were extended for one year until June 30, 1999 with the second amendment. In addition to this, with the third amendment, the Energy Sector Studies which is performed by the Ministry of Energy and Natural Resources (MENR) was extended until December 31, 1999 and the Bank also accepted to honour the withdrawal applications submitted for Actuarial Training and Unique Identifier System components after the closing date but before October 31, 1999. Project Implementation Issues: Privatization Program: The aim of the component, as discussed in the loan agreement, was to support GOT's privatization efforts through technical assistance, training and implementing a public media campaign. Most of the activities which had to be performed by the Privatization Administration under the project were already started at the time when the project was commenced. This was the main reason behind the low disbursements under the PA part, the major component of the project with a total of 59 million USD. As a result of this factor, a large amount of resources which were not utilised were cancelled. The frequent government changes during the project implementation period exposed different approaches towards the implementation efforts Undersecretariat of Treasury - General Directorate of Foreign Economic Relations 2 Department of World Bank Projects  whereas the recurrent changes in the management of PA caused delays in the project implementation. This was another factor behind the low disbursement ratios. The media campaign was launched in the second half of 1995 in order to create awareness of the privatization efforts. This activity was financed by the loan proceeds and for this category around 3.2 million USD was disbursed. Labour Adiustment Project: The weak performance in the privatization efforts during the life of the project limited the success Labour Adjustment Project (LAP) which was implemented by Turkish Employment Organisation (iiBK), Union of Chambers and Exchanges (TOBB) and Small and Medium Industries Agency (KOSGEB) under the general coordination of the GD of State Economic Enterprises of Treasury. As a part of the social safety net component of PIAL, LAP's purpose was to enable the workers to find out or develop businesses who lost their jobs after the privatization efforts. But, due to the fact that privatization efforts was limited, LAP could not be as beneficial as originally planned. An important part of the LAP was to carry out the incubator program through the guidance of KOSGEB. Only one incubator center could be established in Zonguldak. However, as a result of the internal financing problems, the project lacked to provide seed capital for the new businesses. After the second loan amendment, LAP activities were turned over to PA by a protocol signed between Treasury and PA. With this protocol, it was decided to further implement the LAP activities by the PA after the project closing date of June 30, 1998. But the LAP activities after the said date would not be financed by loan proceeds. However, due to the reason that none of the SOE's were privatized after the transfer of LAP component to PA, no progress was made in the LAP component. Actuarial Training: The actuarial Training, one of the successful parts of PIAL, was started in 1996. It aimed at improving the institutional structure of the related government agencies and universities in the social security system through providing actuarial training to the employees of these institutions. With the project, 27 people were sent to masters and diploma programs in USA and UK. From this point of view, the project helped to form a solid actuarial background which Turkey lacked for a long time. In addition to these, with the proceed of the loan a seminar was successfully organised in Istanbul in 1997 and experts from the Undersecretariat of Treasury - General Directorate of Foreign Economic Relations 3 Department of World Bank Projects  relevant General Directorates of Treasury were sent to short term training programs in abroad. Also, some computers and office equipment were acquired for the Insurance Department of Treasury financed from the loan. The project will also finance the establishment of an actuarial science center in the Hacettepe University. Approximately 80.000 USD will be used for this purpose and the this is planned to be realised in September 1999. Study A: "Study A" was conducted by International Labour Organization (ILO) as the international consultant. However, a steering committee, which was comprised of the representatives of the related public institutions, actively participated the implementation process. The aim of the study was to analyse the social security policy options. Under the study two quantitative models were developed, namely the actuarial and the social. These two models are actively being used by the Turkish authorities. The models showed that the current pension social security is unsustainable. It can easily be argued that the study was successful. The reason is that the study provided the Turkish authorities a solid quantitative base for the assessment of the reform options. Study B: "Study B - The audit of accounts and financial management study" was started relatively late. the reason behind this delay was majorly the approval of the Ministry of Finance for the consultancy contract. The final contract was signed on April 15, 1998. However, the beginning of the project was further retarded due to the as the Ministry of Labour requested the consulting firm for not continuing the study of SSK and Bag-Kur. This inconsistency was surpassed by inserting the word "financial review" instead of "audit" in the name of the study. The consulting firm prepared several reports and these reports were reviewed by the steering committee. Among these reports, 6 of these reports have not been approved by the steering committee due to the critiques raised by the member of the committee. The revisions on these reports are still continuing. Unique Identifier System Component (Memis): Mernis component was implemented by the Ministry of Interior with the management services provided by UNDP. The component was one of the most successful among the other components. However, the Undersecretariat of Treasury - General Directorate of Foreign Economic Relations 4 Department of World Bank Projects  procurement for the printers have not been finalised as of today and it is not possible to complete process by using the loan proceeds. In addition to this, although the Bank has given its no-objection for honouring the withdrawal applications for the engineering services submitted after the loan closing date but before October 31, 1999, the activities have not been finished yet. But the overall impact of the project to Turkey will be highly beneficial if completed successfully. Enerqv Sector Studies: The component which is currently implemented by the Ministry OF Energy and Natural Resources(MENR) was inserted into the project after June 30, 1998. The original amount allocated to the project, 5 million USD, was reduced to 2 million (including some contingencies) as the contract signed with the consultant was 1.7 million USD. Although it was planned to be closed by June 30, 1999, Bank gave its approval for an extension of 6 months. The effective starting of the project delayed because of some governmental factors. As the budget law was enacted by the parliament in June, the counterpart financing was a problem until that time. Besides, the delay in granting the Ministry of Finance visa to the contract signed with the consultant firm created some delay. On the other hand, the 5 studies, which has to be conducted by the consultant firm for the Ministry, are progressing. For the time being, one study was completed by 85%, two studies were completed by 65%, and the other two studies were completed by 60% and 45% respectively. Private Participation in Infrastructure: No progress was made in this component, which was included to the PIAL project after June 30, 1999. The reason was that the budget law was not approved on time and the provisional budget did not allow the insertion of the new budget allocations. For this reason, the tender evaluation committee decided to cancel the tender, considering the fact that the project would not be completed in the short period of time until the closing date. In this respect, 3 million USD which was allocated for this purposed was cancelled in order to prevent the payment of unnecessary commitment fees. Assessment of the outcomes: The project were always regarded as unsatisfactory due to the reasons mentioned above. Among the successful part are, the Mernis component, except the recent problems in the procurement of printers, actuarial training. Although the starting of the Energy Sector Studies were quite delayed, the achievements realised in the 5 studies in the short period of time are worth noting. The Study B part, could be more successful if the consultant firm was better in analysing and evaluating Undersecretariat of Treasury - General Directorate of Foreign Economic Relations 5 Department of World Bank Projects  the current system as well as presenting more concrete solutions to the problems. Borrower Performance: The project had many implementing agencies. The deficiencies of these agencies in the project management as well as the lack of qualified personnel hampered the successful implementation of the project. Frequent changes in the project implementation units, especially in the PA which was the biggest implementing institution was another drawback. Besides this, out of the control of the implementing agencies, the changes in the governments and the coalition structure of the new governments caused significant delays both in terms of decision making and implementation. Bank Performance: It is considered that Bank's efforts during the design stage of the project was insufficient. PIAL project was unique among the other Bank financed projects such that the whole 100 million USD was allocated to Technical Assistance (TA) activities with very minor equipment purchases included in it. The design mistakes were resulted low disbursements, significant amount of cancellations, and the project's permanent "unsatisfactory" rating through out its implementation period. During the implementation stage, Bank did not take prompt action to respond the factors affecting the project. Undersecretariat of Treasury - General Directorate of Foreign Economic Relations 6 Department of World Bank Proiects