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Implementation Completion Report (ICR) Review - Economic Reform Loan


  
1. Project Data:   
ES Date Posted:
04/18/2005   
PROJ ID:
P068792
Appraisal
Actual
Project Name:
Economic Reform Loan
Project Costs(US $M)
 759.6  759.6
Country:
Turkey
Loan/Credit (US $M)
 759.6  759.6
Sector, Major Sect.:
General agriculture fishing and forestry sector, Central government administration, Telecommunications, Other social services, General energy sector,
Agriculture fishing and forestry; Law and justice and public administration; Information and communications; Health and other social services; Energy and mining
Cofinancing (US $M)
   
L/C Number:
L4549      
   
Board Approval (FY)
  0
Partners involved
 
Closing Date
09/30/2001 03/31/2003
         
Prepared by: Reviewed by: Group Manager: Group:  
Fareed M. A. Hassan
Chad Leechor Laurie Effron OEDCR

2. Project Objectives and Components:

a. Objectives
The overall objective of the Economic Reform Loan (ERL) was to assist Turkey implement core structural components of its reform program to ensure the sustainability of the disinflation program and create the basis for restored growth. Seven development areas were targeted as vehicles for meeting this objective, namely:

1)Macroeconomic performance, the objective was to lower inflation to 10-12 percent by 2001 while promoting growth, and strengthen the external account.
2) Fiscal reform and adjustment, the objective was to underpin fiscal adjustment through a combination of revenue increases and measures to strengthen the tax system and improve public expenditure management.
3) Social security reform, the objectives were to introduce reforms to the three public social insurance funds with a view to ensure financial sustainability, increase coverage, and improve quality, and create legal and regulatory framework for private pension funds.
4) Agriculture sector, the objectives were to introduce a direct income support program to poor farmers, phase out price and credit subsidies, and restructure Agriculture Sales Cooperative Unions and initiate privatization of state enterprises.
5) Telecommunication reform, the objectives were to promote private participation and competition in the sector, and accelerate privatization.
6)Energy reform, the objectives were to strengthen legal and regulatory framework for private participation, promote efficiency, and accelerate privatization.
7) Enterprise privatization, the objective was to accelerate privatization.

b. Components
There were seven components corresponding to the above-mentioned seven areas targeted for reform.

c. Comments on Project Cost, Financing and Dates
The loan had two tranches, the first one (US$384.6 million) disbursed upon effectiveness, and the second tranche (US$375 million) disbursed four years after effectiveness, two and a half years later than envisaged. The closing date was extended several times to allow for more time to meet the second tranche conditions, especially on account of the privatization program in the telecomm and energy areas.


3. Achievement of Relevant Objectives:

1) Macroeconomic performance. A stable macroeconomic performance framework was maintained, but some objectives were achieved later than envisaged. GDP grew at 7.9 percent in 2002 and 5.9 percent in 2003, and is expected to remain high in 2004. Inflation dropped to program levels in 2004 rather than 2001. Fiscal performance fell slightly short of primary surplus target, achieving a 2003 primary balance of 6.3 percent against a goal of 6.5 percent. However, the current account remains of concern.
2) Fiscal reform and adjustment. All extra-budgetary funds except one were closed and public investment program was streamlined. VAT rates were increased, resulting in additional tax revenues amounting to 1.1 percent of GNP. A package of new taxes, tax increases, and surcharges were introduced raising around 2 percent of GNP. The country's primary balance improved significantly, achieving a surplus of 5-6 percent, compared to a negative balance in 1999, consistent with the IMF program.
3) Social security reform. The objective of ensuring financial sustainability was not met. Budgetary transfers to social security funds rose by around 19 percent from 1999 to 2003, reaching 4.5 percent of GNP by 2003. The envisioned expansion of coverage did not occur. Legislation supporting private pension funds was passed and regulations promulgated. Subsequent to the loan, the new Government in 2002 took some populist measures that widened the pension deficit.
4) Agricultural reform. About 90 percent of the country's farmers were registered and received direct income support payments by September 2004. Subsidies and price supports were nearly eliminated. Budgetary transfers to Agriculture Sales Cooperative Unions were terminated. Significant progress was made in the privatization of other agricultural state enterprises. This was an extraordinary achievement.
5) Telecommunication reform. The planned sale of 20 percent of Turk Telecomm (TT) did not succeed. A loan condition was not met, a waiver was granted, and the government agreed to substitute reform programs instead of the original condition. Legislative amendments were passed permitting privatization of up to 100 percent of Turk Telecomm and the tender process for the block sale of 55 percent of TT was initiated.
6)Energy reform. While progress was made in establishing and strengthening the regulatory framework (e.g., an electricity law was passed and an independent regulatory agency was established), a key condition of launching pre-qualification tenders for the sale of electricity distribution companies, was not met, and the condition was waived. There was progress however. Twenty distribution entities were set up as preparation for privatization and the Government is now taking steps to start up the process.
7) Enterprise privatization. All government shares in a petroleum distribution company and an alcoholic beverage unit were sold in stages from 2000 to 2003. The government shares in a steel company and a refinery were brought below 50 percent and 34 percent respectively.

4. Significant Outcomes/Impacts:

In the area of fiscal reform and adjustment, almost all extra budgetary funds were closed, exceeding the ERL targets.
  • Turkey's primary balance improved significantly, achieving a surplus of 5-6 percent, compared to a negative balance in 1999.
  • The legal and regulatory framework for telecommunications, energy, and social security was strengthened.
  • Several large public enterprises were privatized.

5. Significant Shortcomings (include non-compliance with safeguard features):

Many project benefits were achieved later than initially envisioned.
  • In the social security area, the objective of ensuring financial sustainability was not met during the loan period.
  • Resistance to privatization and restructuring of telecommunications and energy sectors proved stronger than anticipated. As a result, the privatization of several important public enterprises in these sectors were unsuccessful or have remained incomplete. For example, Turk Telecomm was not privatized and the expected launch of pre-qualification tenders for the sale of electricity distribution companies did not take place.
  • The estimated implementation period of only one and a half years for a very broad and complex program was unrealistic, especially since Bank experience with the time required to conduct public enterprise reforms and privatization is well known.
6. Ratings:ICROED ReviewReason for Disagreement/Comments
Outcome:
SatisfactorySatisfactory
Institutional Dev.:
SubstantialSubstantial
Sustainability:
LikelyLikely
Bank Performance:
SatisfactorySatisfactory
Borrower Perf.:
SatisfactorySatisfactory
Quality of ICR:
Satisfactory

7. Lessons of Broad Applicablity:

The Bank needs to be more careful about timing and attribution of results when it supports adjustment programs.
  • A complex privatization program should be well sequenced with a long time-frame, taking into account critical precedent steps necessary for its achievement (e.g, definition of what is being sold and establishment of market rules).

8. Audit Recommended?  Yes

          Why?  Given that the ERL was complemented by other policy-related loans (e.g., PFPSAL I-III, FSAL), it would be useful to examine the overall impact through a cluster audit (i.e., PPAR).

9. Comments on Quality of ICR:

The ICR is of good quality. Since ERL was a broad catch-all operation that was complemented by a number of other sector specific policy-related loans (and sometime implemented concurrently), it would have been helpful if additional analysis on separating ERL achievements from other loans' achievements had been presented.

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