Mr. James Wolfensohn
President
The World Bank
Washington, D.C.
Dear Mr. Wolfensohn:
1. The economic reform program of the Government
aims to rid our country of high inflation and strengthen the foundations for
sustainable and equitable growth in line with Turkey's true underlying
potential. We believe that this program will prepare Turkey for the challenges
of the 21st century and help ensure early entry of our nation into the European
Union. The reform program covers the 2000-02 period. It combines tight
macroeconomic policies designed to lower inflation with broad-based structural
reforms designed to sustain macroeconomic stability and set the stage for
renewed growth. The program also encompasses actions to strengthen the social
safety net in order to ensure that the burden of adjustment does not fall
disproportionately on vulnerable segments of the population. In support of the
Government's reform program, the IMF Board approved a three year Standby
arrangement in December 1999. The Government also requests a program of
adjustment lending from the World Bank including the Economic Reform Loan and a
Financial Sector Adjustment Loan (para. 18). In order to ensure timely and
effective implementation of the program, the Government requests the Bank to
prepare new investment loans to support the complex structural reform measures
envisaged the areas of social security and agriculture reform. The Government is
keenly aware that its reform program will have short-term social costs. To help
address these, the Government requests support from the Bank to implement a
social safety net project designed to strengthen Turkey's social protection
system. A timely response from the Bank is essential to help the Government
sustain the momentum of its ambitious reform agenda.
2. The early results of the reform program are
encouraging. The Government's commitment to fiscal adjustment is demonstrated by
the 1999 outcome for the primary surplus of the consolidated central government
which exceeded the program target by almost 1 percent of GNP. A key result of
our policies has been the sharp fall in domestic interest rates to decade lows.
Auction rates on government securities have fallen to around 40 percent from
over 90 percent in the fourth quarter of 1999. Investor confidence has improved
and Turkey's rating in international capital markets has improved including the
issue of a 30 year Eurobond at a spread of 525 basis points over US Treasuries.
Preliminary indicators show that the real economy is also beginning to recover.
However, inflation remained high in December and January, in part due to the
impact of recent tax measures under the program, public sector price increases
in late 1999, and higher world oil prices. The sharper than expected decline in
interest rates does not justify relaxing the disinflation targets or the pace of
the structural reform program.
Macroeconomic Framework
3. In terms of macroeconomic objectives, the reform
program targets a sharp reduction in inflation to 25 percent by the end of 2000
and renewed growth of 5-5.5 percent. Consumer price inflation is targeted to
fall further to 10-12 percent by the end of 2001 and to single digits in 2002.
This compares with CPI inflation of about 69 percent in 1999. Wholesale price
inflation is targeted to follow a similar path, falling from about 63 percent in
1999 to 20 percent by the end of 2000. In parallel, real interest rates are
expected to fall from an estimated average of 40 percent in 1999 to about 25
percent in 2000, close to 15 percent in 2001 and 12 percent in 2002. Increased
price stability and lower capital costs will create the conditions for recovery
of the economy in 2000 following the severe recession in 1999 which was
exacerbated by major earthquakes in August and November. The Government projects
growth in the range of 5-6 percent to be sustained over the 2001-02 period.
4. In order to break the vicious cycle of
inflationary expectations and onerous real interest rates, the disinflation
program centers around stabilizing the stock of public debt as a share of GNP.
In recent years, the need to finance fiscal deficits in an environment of high
real interest rates has placed the budget on an unsustainable path. Total public
sector debt, including the duty losses of the state banks, has increased from
about 44 percent of GNP at the end of 1998 to an estimated 58 percent by the end
of 1999. This rapid growth in public debt has put pressure on domestic interest
rates and crowded out critical public spending priorities. The resulting
macro-economic imbalance has left Turkey vulnerable to internal and external
shocks. The Government's disinflation program aims to stabilize the public
sector debt to GNP ratio at or near the current level. This will be accomplished
primarily through up-front fiscal adjustment to generate an underlying primary
surplus which is consistent with stabilization of the debt in the absence of the
inflation tax. In order to meet the high cost of debt service until interest
rates come down, fiscal adjustment will be complemented by an acceleration of
the privatization program geared to generate some US$18 billion in cash revenues
over the 2000-02 period (see para. 28). The debt service burden will be further
alleviated by shifting to a more balanced mix of internal and external
financing, made possible through the adoption of credible policies, compared to
the nearly exclusive reliance on domestic finance in recent years. The
Government is targeting US$14.5 billion (over 7 percent of 1999 GNP) in net
external borrowing by the public sector during 2000-02, of which US$5.3 billion
in 2000. About US$3 billion is expected in the form of quick-disbursing support
from the World Bank during 2000-02.
5. Macroeconomic stabilization will be underpinned
by strong fiscal adjustment. Our objective in the 2000 budget is to achieve a
primary surplus for the public sector of 3.7 percent of GNP (2.2 percent
including earthquake costs) including 1.2 percent of GNP in exceptional revenues
from windfall profits on the existing stock of treasury bills as inflation
declines. The fiscal targets for 2000 represent an adjustment of over 7 percent
of GNP relative to the underlying trend with unchanged policies. This level of
adjustment should be more than sufficient to stabilize the stock of public
sector debt over the longer run, however, it is needed during the 2000-02 period
in order to meet the temporary rise in the burden of interest payments as
inflation declines. The Government is committed to sustain this level of fiscal
adjustment in 2001-02 which, together with targeted revenues from privatization,
will underpin a modest reduction in the public debt to GNP ratio from 58 percent
in 1999 to 55 percent by 2002.
6. The Government and Parliament have taken decisive
steps to support the fiscal targets for 2000. The Parliament approved a major
tax package in November which includes additional personal and corporate income
tax payments based on 1998 declarations, a doubling of motor vehicle and
property tax payments for 1999, a special surtax on mobile phone bills through
the end of 2000, and an increase in the remittances of surpluses generated by
regulatory boards including the Istanbul Stock Exchange. In addition, the
Parliament has approved a scheme allowing certain categories of the population
to reduce the duration of military service against fee payments. In December,
the Parliament approved a withholding tax on government securities issued before
December 1, 1999 to recapture a share of the windfall gains. These measures are
estimated to generate about 2 percent of GNP in revenues in 2000. A
supplementary revenue package has been adopted by Government decree which is
expected to generate a further 1.1 percent of GNP in 2000. This package
includes: (i) an increase in the standard VAT rate from 15 to 17 percent, and
from 23 to 25 percent for consumer durables; (ii) a 20 percent increase in the
VAT on tobacco and alcoholic beverages; (iii) an increase in withholding taxes
on rental income and the self-employed from 15 to 20 percent; (iv) an increase
in withholding tax on interest income and repos by 2 percentage points; and (v)
limits on the increase in tax brackets and the special exemption for wage and
salary earners to targeted inflation. In late January, the Parliament approved
legislation converting petroleum consumption taxes from an ad valorem basis to a
unit tax basis indexed to inflation. This measure underpins an increase in
petroleum tax revenue of 0.4 percent of GNP. The Government has also revised the
method of computing taxable profits on corporate holders of government
securities (Article 279 of the Tax Procedure Law) as stipulated in the 2000
budget. This measure is projected to generate 1.1 percent of GNP in revenues in
2000.
7. On the expenditure side, the Government is
targeting total fiscal savings of 2.4 percent of GNP in 2000 including 0.5
percent from the social security reform introduced last August (para. 14) and
1.1 percent from the reforms of agriculture support policies to be introduced in
2000 (para. 20). Some 0.8 percent of GNP in savings will come through a package
of budgetary expenditure measures that the Government is introducing. This
package includes steps to: (i) eliminate 20 of the existing 61 budgetary funds;
(ii) introduce forward indexation of civil service salaries and impose limits on
replacement hiring of 80 percent in the civil service in the framework of the
2000 budget; (iii) impose limits on replacement hiring of at most 15 percent in
the SEEs under the Treasury's portfolio; (iv) reduce non-investment public
expenditure including expenditure on temporary personnel and cuts in other
current expenditure; and (v) impose a 2 percent cut in all primary spending
excluding personnel and transfers to the social security funds. This package
will be fully in place before the end of May 2000.
8. Exchange rate and monetary policies will provide
a nominal anchor for the disinflation program in the near term while avoiding
unnecessary rigidities over the longer run. On December 9, the Central Bank of
Turkey announced the introduction of a crawling peg exchange rate regime as well
as the rate of crawl for the first 12 months. This rate is consistent with the
inflation target of 20 percent for the WPI. At the end of each quarter, the
pre-announced exchange rate schedule will be extended for an additional three
months with a view to furthering the disinflation process. For the first 18
months until July 1, 2001, there will be no band around the pre-announced
exchange rate path. Thereafter, a symmetric, progressively widening band around
the central parity rate will be introduced. The band will widen at the rate of
15 percentage points per year. Until the band is introduced in mid-2001,
monetary policy will be based on a rule holding the stock of net domestic assets
at the end of each quarter constant at the level of December 1999, adjusted for
valuation changes. Therefore, with the exception of short-term fluctuations
within a quarter, all base money will be created through the balance of payments
and domestic interest rates will be entirely market determined. Capital flows
will not be sterilized allowing their impact on domestic interest rates to be
maximized. With the introduction of the exchange rate band during the second
half of 2001, the net domestic asset targets will become more flexible in order
to provide for a more flexible monetary framework in support of the disinflation
targets.
9. Incomes policy will support the disinflation
program by introducing forward indexation for civil service salaries thereby
providing clear signals to the private sector. Salary increases for civil
servants in 2000 will be set in line with targeted CPI inflation. A 15 percent
increase was given on January 1, and a further 10 percent will be provided on
July 1. The Minimum Wage Commission has announced adjustments in the minimum
wage for January and July 2000 that will result in an annual increase in line
with the inflation target. While supporting disinflation, incomes policy will
also play a key role in restoring growth by helping to sustain consumer demand.
In this regard, the Government will continue to ensure that all transfer
payments under government programs are made in a timely manner. An appropriately
balanced incomes policy will continue to be a core component of the
macroeconomic framework in 2001-02.
10. The macroeconomic framework aims to ensure
sustainable external balance and further integration of Turkey into the global
economy. The Government is targeting export growth of 5-6 percent in 2000,
following the slowdown in 1999, and a gradual recovery of tourism revenues to
1998 levels. Imports are expected to increase more rapidly given the general
economic recovery. Overall, the balance of payments is expected to register a
deficit of about 2 percent of GNP in 2000 and remain between 1.5-2 percent of
GNP over the 2001-02 period. This level is consistent with long-term solvency
and a slight decline in the ratio of external debt to GNP. Gross international
reserves of the Central Bank of Turkey are targeted to increase by some US$5
billion in 2000 and by a total of nearly US$20 billion over the 2000-02 period.
This increase will lower the ratio of short-term debt to reserves to less than
100 percent by 2001. The build up of international reserves will contribute to
macroeconomic stability and strengthen the credibility of our disinflation
program.
Structural Reform Program
11. The Government is implementing a broad program
of structural reforms designed to underpin macroeconomic stabilization and
provide the foundations for sustained and equitable growth. A top priority is to
implement structural fiscal reforms to support the fiscal adjustment and put
public finances on a sustainable path. A related priority involves reform of the
social security system which has become a major drain on the budget. In addition
to strengthening the system's financial balances, these reforms aim to improve
coverage and administrative efficiency in order to modernize this key pillar of
Turkey's social protection system. To promote growth, the Government is pursuing
long delayed reforms to strengthen the financial sector, modernize agricultural
support policies and increase private sector participation in the utilities
sectors. These actions will be complemented by a concentrated effort to
accelerate privatization including sale of major state assets in the industrial
and service sectors.
12. The Government intends to replace the temporary
measures in the 2000 fiscal package with more permanent actions to support the
2001-02 budgets. Emphasis will be given to completing implementation of the tax
reform introduced in 1998. In this context, the Government will use its
authority under Article 2.2 of Law 4444 with respect to advance tax payments,
effective July 1, 2000. This measure is targeted to generate 0.4 percent of GNP
in revenues in 2000. Efforts to strengthen tax administration will continue in
part with the support of the World Bank under the Public Financial Management
project (PFMP). On the expenditure side, the Government intends to eliminate at
least 25 more budgetary funds by August 2000. The remaining budgetary funds will
be closed by June 2001. The Government has also requested the support of the
World Bank to carry out a Public Expenditure and Institutional Review (PEIR) in
order to develop recommendations which can be incorporated into the 2001 budget.
These expenditure reforms are expected to include: (i) a reduction in the number
of non-budgetary funds, (ii) limits on the introduction of new projects into the
public investment program, (iii) establishment of a public registry of
government guarantees and limits on the issuance of new guarantees, and (iv)
more effective expenditure control mechanisms. New control mechanisms will
include the introduction in 2001 of accounting and reporting on a commitment
basis for the consolidated central budget and an integrated financial
information system. Support for these activities has been provided through the
PFMP project. The PEIR will be carried out in two phases. The first phase in
2000 will focus on public expenditure reforms. The second phase, to be completed
in mid-2001, will focus on institutional issues concerned with improving public
sector governance.
Social Security Reform
13. The Government is committed to ensuring a
financially sound and equitable social security system for Turkey. The social
security reform program has three phases: (i) policy reforms to the public
pay-as-you-go (PAYG) pension system to ensure its financial viability, (ii)
administrative and organizational reforms to improve coverage and compliance by
strengthening and harmonizing the three social insurance institutions, and (iii)
establishing the legal and regulatory framework to support supplementary
voluntary private pension schemes. The Government has requested support from the
World Bank in the form of an investment project to accompany implementation of
the social security reform program.
14. In August 1999, the Parliament adopted a major
policy reform to the PAYG pension system which: (a) increases the minimum
retirement age for a full pension to 58/60 (women/men) for new entrants and
52/56 for existing contributors with a 10 year transition period; (b) increases
the minimum contribution period to 25 years for new entrants for BK and ES (7000
days for SSK), for existing contributors to SSK, the minimum period is increased
from 5000 to 6000 days with a 10 year transition period; (c) reduces the
replacement rate for a basic pension for SSK and BK; (d) extends the reference
period for calculating initial pensions up to the full working history; (e)
increases the ceiling on premiums up to three times the minimum insurable wage
and indexes this to the CPI plus GDP growth; (f) indexes pension benefits to the
CPI; (g) holds the SYZ benefit constant in nominal terms; and (h) increases
health insurance contribution rate for BK from 10-12 percent to 15 percent. The
reform package also introduced an unemployment insurance scheme. The PAYG reform
will contain the deficit of the pension system which was approaching 3 percent
of GNP. The Government expects that it will generate 0.5 percent of GNP in
savings in 2000 relative to the baseline without reform.
15. The Government recognizes that further policy
measures will be needed over the medium term to complement the policy reform
adopted last August. These reforms will be designed to ensure the longer-term
financial balance of the public PAYG pension programs while setting the stage
for the introduction of a full multi-pillar pension system. As an initial step,
the ceiling on contributions to the PAYG system will be increased to four times
the minimum level by April 2001 and to five times the minimum level by April
2002. It is important that the unemployment insurance scheme be properly
implemented, that it not become a burden on the budget or distort labor market
incentives. To this end, the Government will monitor carefully the functioning
of the unemployment insurance scheme during the course of 2000 and make policy
changes in consultation with the World Bank.
16. The second phase of the social security reform
focuses on administrative and institutional reforms to be initiated in 2000.
These reforms will improve the coverage, efficiency and transparency of the
current system. Key institutional objectives are to coordinate and harmonize the
three existing social insurance systems and ensure a clear separation of
administrative and accounting functions between pensions, health insurance and
unemployment insurance. An action plan for the administrative/institutional
reform of the social security system has been adopted by the Government and
draft legislation to support implementation of the administrative reform will be
submitted to Parliament in May. The administrative reform will be accompanied by
steps to address the problem of contribution arrears to the social security
system. The Government has finalized and adopted a plan for reducing
contribution arrears including the elimination of all public sector arrears
within a three year period.
17. Establishment of a legal and regulatory
framework for supplementary voluntary private pension schemes constitutes the
third phase of the social security reform. Draft legislation concerning
voluntary private pension schemes has been prepared and will be submitted to the
Parliament in May 2000. The law will ensure appropriate coordination between the
new voluntary private pension schemes and the public PAYG system. Under the law,
a Coordination Board will be established to license and regulate private pension
funds. The Coordination Board will collaborate closely with the Capital Markets
Board which will supervise the investments made by these pension funds. An
accompanying law will provide for adequate and fair taxation of the new schemes.
The private pension law and accompanying law on taxation will be enacted before
the end of 2000.
Financial Sector Reform
18. Reforms to strengthen the financial sector are
an integral component of the Government's program. In June 1999, the Parliament
approved a new banking law that establishes an independent supervisory authority
(the Banking Regulation and Supervision Agency, BRSA). The Parliament
subsequently approved a series of amendments to the banking law in December
which will provide BRSA with full authority over entry and exit from the banking
sector, as well as authority over changes to the prudential regulations. The
amendments also clarify the procedures for problem bank resolution. The
Government has taken steps to strengthen prudential regulations as well,
including revising loan loss provisioning rules, issuing capital adequacy and
foreign exchange exposure rules on a consolidated basis, tightening limits on
connected and insider lending, and reversing the temporary relaxation of loan
classification rules introduced in mid-1999. Following enactment of the banking
law amendments, the Government transferred five insolvent private banks to the
Deposit Insurance Fund with a view to their satisfactory sale and liquidated one
smaller investment bank. The financial sector reform program encompasses
operational and financial restructuring of the state banks leading to their
privatization over the medium term. The Government has requested a Financial
Sector Adjustment Loan from the World Bank to support the financial sector
reform program.
Agriculture Reform
19. In agriculture, the Government intends to make a
sharp break with the past in an effort to stimulate growth and reduce the burden
of agriculture support policies on the budget and consumers. The medium-term
objective is to replace the existing system, based on government subsidies for
inputs, credits and price supports for major crops, with a program of direct
income support which would be increasingly targeted to smaller farmers over
time. The Government has adopted and announced its strategy for implementing the
direct income support program over the 2000-02 period. The direct income support
program will be tested on a pilot basis in 2000 and preparation of a national
farmer registry will begin. Based on the pilot, the program will then be
introduced at the national level in 2001 and its rollout completed in 2002.
Initiation of the pilot will start in March 2000. Overall, the agriculture
reform program is expected to generate about 1 percent of GNP per year in
long-term fiscal savings and save the Turkish consumer several percent of GNP.
More importantly, it will eliminate the incentive distortions which discourage
farmers from moving to higher value-added crops and hamper private investment in
agriculture. The Government has requested that the World Bank assist with the
design and implementation of the direct income support program, the
establishment of a broader agriculture database, implementation of the
alternative crop program, and the restructuring of the agriculture sales
cooperative unions (ASCUs) into autonomous cooperatives (para. 22) through
investment project lending to complement the Economic Reform Loan.
20. The Government is accelerating rationalization
of its agriculture input and credit policies in parallel with introduction of
the direct income support system. The fertilizer subsidy has been held constant
in nominal terms since 1997, resulting in a reduction of the unit subsidy from
approximately 45 percent of the total price at the end of 1997 to approximately
31 percent by August 1999. The fertilizer subsidy will remain constant in
nominal terms in 2000-01. With regard to credit subsidies channeled through
Ziraat Bank, the interest rates on subsidized credits were increased by 5-15
percentage points in 1998 to an average of about 60-65 percent. In December
1999, the Government introduced a program for phasing out agriculture credit
subsidies over the course of 2000. The program involves: (i) holding the nominal
interest rate on agricultural credits constant until it is equal to the 3 month
rolling average of the 12 month T-bill rate plus 500 basis points and then
holding this spread constant; (ii) introducing a variable rate loan option for
farmers; and (iii) providing cash compensation from the budget to Ziraat Bank
for any subsidy accrued in 2000. Furthermore, the nominal increase in subsidized
credit granted by Ziraat and Halk Bank will not exceed 55 percent in 2000. This
program, which also covers subsidized credit from Halk Bank for small and
medium-scale enterprises, is expected to generate 0.6 percent of GNP in fiscal
savings in 2000.
21. With regard to agriculture support prices, the
Government has announced a set of policy changes which introduce a link between
support prices and relevant world market prices and initiate a phase-out of
government subsidies for support prices by 2002. Support prices for grains in
2000 will be linked to appropriate world reference prices and set at levels
which reduce the premium over these world prices to no more than 35 percent.
Import tariffs on grains will be reduced in an effort to alleviate the burden on
consumers as well. The sales price for grain of TMO, the state grain purchasing
company, will be no less than the lower of: (a) the purchase price of TMO plus
storage costs incurred up to the date of sale including imputed interest charges
on stocks, or (b) the tariff-inclusive import parity price for grain of
equivalent quality. An auction for tobacco will be introduced for the 2001
season and prices for tobacco not sold at auction will be set at a discount
below the lowest auction price. The discount will be increased over time in
order to discourage production of low quality tobacco. These measures are
expected to generate 0.3 percent of GNP in fiscal savings in 2000. Additional
measures will be introduced in 2001, including: (i) further reduction in the
premium over world grain prices and import tariffs on grains; (ii) reduction of
premium paid on oilseeds and cotton; (iii) reduction of payments under the tea
pruning program in coordination with acceleration of the alternative crop
program; and (iv) reform of pricing mechanisms for sugar beets to reduce fiscal
costs and make these prices more market determined. Savings from these further
reform measures in 2001 will be channeled back to farmers through the direct
income support program.
22. The agriculture reform program encompasses
restructuring and privatization of state assets in the sector with the
medium-term objective of withdrawing the state from a direct role in
agricultural and agro-industrial production. In the first phase in 2000, the
Government will impose a hard budget constraint on agricultural state-owned
enterprises (SEEs), including specific enterprise-by-enterprise limits on
Treasury loan guarantees, equity injections and budgetary transfers. The
Government has prepared legislation to give complete autonomy to the ASCUs which
currently operate under the Ministry of Industry. The Government intends this
law to be enacted before the end of May 2000. The law will eliminate all
preferences and government role in the operation of the ASCUs, and establish a
framework for carrying out their restructuring into true private cooperatives.
This measure is expected to generate 0.2 percent of GNP in fiscal savings in
2000. In parallel, privatization proceedings will be initiated for agricultural
SEEs and all assets of the defunct state input supplier, TZDAS, will be
liquidated and all remaining employees separated or reassigned by the end of
2000. The Government is preparing legislation to authorize the privatization of
Tekel's production facilities for spirits, salt, and tobacco products which it
intends to be enacted in 2000. The actual privatization of these facilities will
start in 2001. The Government intends to initiate the privatization of the tea
factories of Caykur and the sugar factories of TSFAS in 2001. This will involve
a decision of the Privatization High Council to transfer these assets to the
Privatization Administration.
Deregulation and
Privatization
23. Promoting investment and private sector
participation in the infrastructure and energy sectors is critical to the future
of Turkey's economy. In August, Parliament adopted a set of constitutional
amendments which: (i) create a constitutional basis for privatization and allow
the authorities to determine by law which investments and services carried out
by public entities can be contracted out or transferred to private agents; (ii)
provide for international arbitration to settle disputes arising from concession
contracts and other legal agreements concerning public services where there is a
foreign element, i.e., where a foreign investor has either a direct or financial
interest; and (iii) limit the Council of State (Danistay) to an advisory role
with respect to concession contracts and other legal agreements concerning
public services. On the basis of these amendments, the Parliament passed
revisions to the Law on Build, Operate and Transfer (BOT) projects in December
which: (a) include electricity generation, transmission, distribution and
trading projects within the scope of the law; and (b) subject BOT
projects--including electricity, water and transport-to civil law under the
Commercial Code. In December, the Parliament also passed revisions to the
Danistay law to limit it to an advisory role with respect to concession
contracts and set a two month timetable for its review. In January, the
Parliament passed further legislation to provide for international arbitration
for concession contracts with a foreign element and to authorize the Council of
Ministers to extend the right to international arbitration retroactively to
existing contracts on a case by case basis.
Telecommunications Reform
24. The Government is moving quickly in the
telecommunications sector. Legislation was enacted in January which will: (i)
enable Turk Telekom to be converted into a joint-stock company subject to the
Commercial Code; (ii) establish an independent regulatory authority for
telecommunications; and (iii) allow private provision of all value-added and
wireless services. On the basis of the law, Turk Telekom will be transformed
into a joint-stock company with a structure conducive to competition. An action
plan for carrying out this conversion of Turk Telecom has been prepared. Turk
Telecom's cable television operations and future mobile phone services will be
placed into separate subsidiaries in accordance with EU standards. Under the new
law, Turk Telecom's monopoly on fixed-line services will be terminated at the
end of 2003 in conformity with Turkey's commitments under WTO. The Government
will sell two more licenses for mobile phone services to private investors. The
tenders for this sale were launched on March 1, 2000 with the objective of
completing the transactions during the second quarter of the year. The Board of
the regulatory authority will be appointed by March 2000 and the authority will
be fully functional by mid-year. The Government intends to open up the capital
of Turk Telekom in stages with the objective of divesting up to 49 percent of
the company by the end of 2001. The first stage involves the sale of 20 percent
of the company to a strategic investor in 2000. Two additional share sale
transactions will be completed during 2001: (i) sale of 5 percent of the shares
to the employees of Turk Telekom, postal service workers and local investors,
and (ii) sale of at least 14 percent of the shares through an international
public offering.
Energy Reform
25. The Government intends to revitalize the energy
sector reform program in 2000 in order to ensure Turkey's energy security at
affordable cost. The legal changes to introduce international arbitration
represent an important step. However, further action is needed, particularly in
the electricity sector where the financial condition of TEAS, the state
generation and transmission company, has deteriorated over the past year. A key
factor has been the high purchase price of electricity from the newly
established BOT operations, but other factors have played a role as well notably
the poor level of collections for electricity sold to TEDAS, the state
distribution company. The Government has decided to address these problems
through a comprehensive framework based on moving to a competitive market for
electricity which transfers the task of supplying electricity, as well as the
associated market risks, to the private sector. The cornerstone for this new
approach will be the electricity markets law currently under preparation. The
law will meet applicable EU standards. It will establish an independent
regulatory body with full authority over tariff policy, establish the framework
for a competitive market and set a clear timetable for moving to the market
model of 1.5 years following enactment of the electricity markets law. The
Government expects the electricity market law to be enacted in 2000 and has
requested technical assistance from the Bank to implement the new market
structure. As a first step towards the new market model, the Government will
issue a decree in April separating TEAS into distinct generation, transmission
and electricity trading companies. Of course, introducing competition will take
time and the transition period must be properly managed. To address the
immediate problems, the Government has adopted a time-bound financial recovery
plan for TEAS. The recovery plan encompasses up-front actions to address the
sources of the problem, including steps to prioritize lower cost generation
projects, improve collection performance, and reduce TEAS's operational costs.
The plan includes adjustments of wholesale and retail electricity tariffs which
is a last, but necessary, resort.
26. The Government is pursuing its program of
privatization in the energy sector. The Government expects that the introduction
of international arbitration will facilitate efforts to transfer state-owned
distribution companies and thermal power plants to the private sector either
through concession contracts (transfer of operating rights) or direct
privatization. The transmission system will continue to be publicly owned. Under
amendments to the BOT law adopted in January, firms that have been awarded
concession contracts for electricity generation or distribution can apply for
retroactive application of international arbitration. Those firms whose
application is approved by the Council of Ministers will be given adequate time
(until December 31, 2000) to implement the contracts. Under the electricity
markets law, the Government will seek the authority to sell electricity
distribution companies and publicly owned power plants to the private sector. In
the first quarter of 2001, pre-qualification tenders will be launched for the
sale of electricity distribution companies which remain under state management
with the objective of completing their privatization by December 2001.
Privatization of thermal power plants which remain under state management is
expected to be completed by mid-2002.
27. Liberalization of the gas sector is essential to
ensuring stable and cost-effective development of Turkey's energy sector. The
Government intends that amendments to the Petroleum Law, which will establish
the framework and timetable for reforming the gas sector, will be enacted during
the course of 2000. This reform program will establish independent regulation
and de-monopolize the gas sector in line with EU standards. The program will
include a timetable for privatizing state-owned gas distribution companies. The
Government intends for the regulator to be effective by December 2000 and for
the market to begin operation in 2001. The Government intends that BOTAS will be
immediately separated into a gas/oil transmission company, gas distribution
companies, and a gas trading company. After establishment of the regulator, the
state owned gas trading company will not enter into any new gas purchase
contracts and will operate under the same conditions as other licensed
wholesalers.
Privatization Program
28. Accelerating the privatization program is a top
priority for strengthening the private sector and generating resources for the
budget. The privatization agenda for 2000 comprises the program of the
Privatization Administration (PA) in addition to the partial sale of Turk
Telekom, two new wireless licenses, and the energy privatization program
mentioned above. The Government is aiming to generate US$7.6 billion in cash
from privatization in 2000. Realizing this ambitious objective will depend
critically on ensuring a transparent and efficient decision-making process. The
Government has provided the PA with the full authority to implement its program
for 2000 with only the final approval by the High Privatization Council required
to complete each privatization transaction. The PA is moving quickly to
implement the 2000 program which comprises 28 large enterprises including many
of Turkey's biggest public companies: TUPRAS (petroleum refineries), POAS
(petroleum retail distribution network), PETKIM (petrochemicals), THY (Turkish
national airlines) and ERDEMIR (steel), as well as a number of smaller but still
important companies in the insurance and textile sectors (e.g., SUMER HOLDING).
By the end of February 2000, the PA had achieved the following milestones in
order to stay on course to meet its targets for the year: (i) initiate tenders
for at least 15 companies; (ii) initiate negotiations for at least 10 companies;
and (iii) sign contracts for at least 5 companies.
Social Safety Net
29. The Government is determined to strengthen
Turkey's social safety net. This is a critical imperative for sustaining the
social consensus for the reform program. The social security reforms that we are
implementing, including the introduction of unemployment insurance, will
reinforce the safety net. Turkey also has in place a system of severance
payments for laid-off workers. However, Turkey does not have a national social
assistance benefit and the unemployment insurance program will take some time to
become operational. The Government has requested urgent project assistance from
the World Bank including technical support to upgrade the existing social
protection system in the short run and financial support to meet the increased
demand for these social services which is expected as the reforms proceed. This
project should include support for an enhanced monitoring system to track on a
more frequent basis the impact of the reform program on vulnerable groups.
Conclusion
30. I would like to assure you, Mr. President, that
the Government will implement fully our reform program as outlined above. We are
resolute in our determination to tame inflation and modernize Turkey's economy
in this global age. The Government believes that the policies and measures
detailed in this letter are adequate to realize the goals of our program.
However, we stand ready to undertake additional measures if required to achieve
our disinflation objectives and restore economic growth. In this context, we
count on the support of the international community and in particular the World
Bank. We intend to consult regularly with the Bank as the program unfolds.