Page 1 PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6449 Operation Name Second Restoring Equitable Growth and Employment Programmatic Development Policy Loan (REGE-DPL2) Region EUROPE AND CENTRAL ASIA Country Turkey Sector General public administration sector (30%);Health (20%);Other social services (20%);General education sector (20%);Banking (10%) Operation ID P123073 Lending Instrument Development Policy Lending Borrower(s) REPUBLIC OF TURKEY Implementing Agency Undersecretariat of Treasury Inonu Bulvari, Eskisehir Yolu Emek Ankara Turkey 06530 Tel: (90-312) 204-6000 Fax: (90-312) 212-8550 hazine@hazine.gov.tr Date PID Prepared March 8, 2011 Estimated Date of Board Approval May 10, 2011 Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. I. Country and Sector Background: Turkey has recovered strongly from the effects of the 2008-09 global crises. The Turkish economy contracted by 4.7 percent in 2009 but bounced back to grow by more than 8 percent (est.) in 2010. This recovery was underpinned by economic reforms undertaken since 2001: fiscal consolidation, modernized debt management, an independent central bank, inflation targeting, a freely floating currency, and improved banking supervision. Turkey also continues implementing a major long-term structural reform agenda —ranging from public financial management, health systems, and education to large-scale privatization and regulatory, energy, and environmental reforms. The government’s program proposed to be supported by the Second Restoring Equitable Growth and Employment Development Policy Loan (REGE-DPL2) focuses, in particular, on critical business climate and competitiveness reforms, while carrying forward Turkey’s ongoing fiscal and public financial management reforms. With these reforms, Turkey aims to encourage private-sector led growth, employment, and improved social outcomes. They will also help manage external vulnerabilities to safeguard and extend recent economic gains. II. Operation Objectives: With the transition from crisis management to renewed growth, the program supported by the REGE-DPL2 advances critical reforms on Turkey’s business climate and broader competitiveness and growth agenda, while carrying forward Page 2 the ongoing public sector reform agenda. The PPDPL/REGE-DPL program support key reforms in the provision of inclusive social services (health and social security), while making these sustainable by reining in costs. Reforms in the area of equitable growth and employment focus on the business climate and selected improvements to vocational and basic education. III. Rationale for Bank Involvement: The proposed REGE-DPL2 was included in the Country Partnership Strategy (CPS) as updated by the Country Partnership Strategy Progress Report, which was presented to the Executive Board on January 7, 2010. The program supports all three pillars of the CPS: · Business climate reforms (enactment of the new Commercial Code, enactment of the new civil procedures law, and enactment of the new Code of Obligations) support the first pillar aimed at improving competitiveness and employment; · The expansion of universal health insurance and the implementation of the pre-school expansion program contribute to the second pillar, equitable human and social development; The enactments of the new Turkish Court of Accounts (TCA) law and the new State Aid law, as well as the implementation of spending caps for university and private hospitals, support the third pillar, the efficient provision of high-quality public services. IV. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 700 Borrower/Recipient 0 Total 700 V. Institutional and Implementation Arrangements: The proposed loan will follow the Bank’s disbursement procedures for DPLs. The untied finances will be disbursed against satisfactory implementation of the program and not tied to any specific purchases and no procurement requirements will be needed. Upon approval of the loan and notification by the Bank of Loan effectiveness, the government will submit a withdrawal application. At the request of the Undersecretary of Treasury, the IBRD will deposit the proceeds of the loan with the CBRT into a designated deposit account which will form part of the official Foreign Exchange reserves of the country. The government will utilize the proceeds of the loan in foreign currency for either foreign debt servicing or for crediting the local currency equivalent into the treasury single account for financing budgeted expenses. Prior to that, the borrower will pay a front-end fee amounting to 0.25 percent of the loan amount from its own resources. If, after deposit in this CBRT account, the proceeds of the loan are used for ineligible purposes (for example, for financing items imported from non-member countries or goods or services on the IBRD standard negative list), the IBRD will require the borrower to refund the amount directly to the IBRD, and the IBRD will cancel an equivalent undisbursed amount of the loan. Page 3 VI. Risks and Risk Mitigation: There are three main risks to the program’s outcomes: ( i ) economic and external risks which comes from a reversal of capital flows could cause a significant growth slowdown, given the high level of the current account deficit and Continuation of sound macroeconomic policies and structural reforms will be the key to mitigating external financing risks, ( ii ) implementation risks which relate to the need of having strong coordination and monitoring for the effective implementation of major public reforms, and (iii) political risks which relate to continuing domestic political differences and the possibility that the outcome of the upcoming general elections expected to be held in June 2011 could slow the pace or reduce the effectiveness of economic and social reforms. VII. Poverty and Social Impacts and Environment Aspects: The program of reforms supported under REGE-DPL2 is expected to reduce poverty and inequality in Turkey over the long run. The program supports private-sector led growth and productive employment generation through reforms to (i) improve the climate for businesses, particularly SMEs (more than 90 percent of firms), to grow through improved access to finance and reduced burden of regulations (also facilitated by a prudent management of public finances), (iii) make labor market more dynamic and enhance worker protection; (iii) increase access of the unemployed to productive employment through ALMP; and (iv) improve skills for work and reduce inequalities by providing a solid foundation in the early years. Also, the universalization of health insurance provides equal access to health services and financial protection for the poor, improving the health status of poor. The introduction of caps on hospital expenditures may decrease the quality of health services unless these caps are based on adequate pricing of health inputs. Finally, public financial management reforms increase transparency and accountability of public institutions (including local administrations), thus improving the provision of public services, which the poor tend to consume disproportionally. The rest of the section highlights some of these impacts. The reforms supported by the proposed operation are not likely to cause significant effects on the country’s environment or natural resources. VIII. Contact point World Bank Contact: Marina Wes Title: Lead Economist Tel: 5242+8359 / 90-312-459-8359 Fax: Email: mwes@worldbank.org Location: Ankara, Turkey (IBRD) IX. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Page 4