Country Partnership Strategy Progress Report with the Republic of Turkey for the Period FY 2008-2011 by World Bank Turkey Office

Country Partnership Strategy Progress Report

Report Number: 51689-TR

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT WITH THE REPUBLIC OF TURKEY FOR THE PERIOD FY 2008-2011 December 3, 2009

Turkey Country Management Unit Europe and Central Asia Region International Bank for Reconstruction and Development Southern Europe and Central Asia Department International Finance Corporation Multilateral Investment Guarantee Agency

Country Partnership Strategy Progress Report

The date of the last Country Partnership Strategy was January 25, 2008 CURRENCY EQUIVALENTS (as of November 2, 2009)

USD 1= TL 1,48260 FISCAL YEAR

(January 1 to December 31)

WEIGHTS AND MEASURES Metric System

ABBREVIATIONS AND ACRONYMS AAA AKP AM APL ARIP BEEPS CBRT CCT CEM CPS CSF CSO CTF DPL DRM EC ECA EIA ERI ES EU EUR GAP GDP IBRD IFC IMF IMM ISKUR KfW M&E MEER MIGA

Analytic and Advisory Activities Justice and Development Party Annual Meetings Adaptable Policy Lending Agricultural Reform and Implementation Project Business Environment and Enterprise Performance Survey Central Bank of the Republic of Turkey Conditional Cash Transfer program Country Economic Memorandum Country Partnership Strategy Civil Society Funds Civil Society Organization Clean Technology Fund Development Policy Loan Disaster Risk Management European Commission Europe and Central Asia Environmental Impact Assessment Education Reform Initiative Enterprise Survey European Union Euro Southeast Anatolian Project Gross Domestic Product International Bank for Reconstruction and Development International Finance Corporation International Monetary Fund Istanbul Metropolitan Municipality Turkish Employment Agency Kreditanstalt für Wiederaufbau Bankengruppe (German Development Bank) Monitoring and Evaluation Marmara Earthquake Emergency Reconstruction Project Multilateral Investment Guarantee Agency

MOF Ministry of Finance MOH Ministry of Health MSMEs Micro, Small, and Medium Enterprises MTP Medium-Term Program NBFI Non-Bank Financial Institution NGOs Non-governmental Organizations OECD Organisation for Economic Co-operation and Development PFM Public Financial Management PISA Program for International Student Assessment PJPPR Programmatic Joint Portfolio Performance Review PPP Public Private Partnerships SMEs Small and Medium Enterprises SOE State-Owned Enterprise SPO State Planning Organization SWAp Sector-Wide Approaches TA Technical Assistance TCA Turkish Court of Accounts TEPAV Turkish Economic Policies Research Center TKGM Turkish Land Registration and Cadastre Agency TL Turkish Lira TOBB Union of Chambers and Commodity Exchanges TOG Community Volunteers Fund UN United Nations UNDP United Nations Development Programme UNICEF United Nations Children’s Fund USD United States Dollar UYAP National Judiciary Network Project VAT Value-added Tax WBG World Bank Group WBI World Bank Institute WWF World-Wide Fund for Nature YOIKK Coordination Council for the Improvement of the Investment Environment

Country Partnership Strategy Progress Report

The World Bank greatly appreciates the close collaboration with the Government of the Republic of Turkey in the preparation of this Country Partnership Strategy Progress Report. The document represents a team effort, which included involvement from all sector units of the ECA Region, as well as IFC. Key contributors include: Carla Pittalis, Carlos Pinerua, Cathy Summers, Frank Earwaker, Jesko Hentschel, Keiko Sato, Elsikutty Moses, Mark Thomas, Muammer Komurcuoglu, Oxana Bricha, Pinar Baydar, Sameer Shukla, SĂŠbastian Trenner, and Tunya Celasin.

Country Partnership Strategy Progress Report

Table of Contents

I. II. III. IV. V. VI. VII. VIII.

Introduction and Executive Summary Recent Economic and Social Developments Progress of the CPS at Mid-Term Pillar 1: Competitiveness and Employment Pillar 2: Equitable Human and Social Development Pillar 3: Efficient Provision of High Quality Public Services Portfolio Performance Policy and Reform Agenda for the Second Half of the CPS Turkey WBG Partnership in FY10-11 Partnerships with Third Parties Risks

1 3 6 6 8 9 10 10 12 14 14

ANNEXES Annex 1: Progress towards Achieving CPS Outcomes and Results Annex 2: International Knowledge, Experience and Expertise: WBG Contributions in FY08 and FY09 Annex 3: Eurobond Issuances in 2009 Annex 4: CPS Country Program FY08-11: Overview Annex 5: Overview of Financing Portfolio by CPS Pillar Annex 6: Partnership with CSOs

16 24 25 26 28 29

ANNEX TABLES Annex B1: Country at a Glance Annex B2: Selected Indicators of Bank Portfolio Performance and Management Annex B3: IBRD/IDA Program Summary Annex B3: IFC Investment Operations Program Annex B4: Summary of Non-lending Services Annex B5: Social Indicators Annex B6: Key Economic Indicators Annex B7: Key Exposure Indicators Annex B8: Operations Portfolio (IBRD/IDA and grants) Annex B8: Committed and Outstanding Portfolio (IFC) MAP: IBRD 33501

31 34 35 36 37 38 39 41 42 43

Introduction and Executive Summary

1. The FY08-11 Country Partnership Strategy (CPS) between Turkey and the World Bank Group (WBG) is shaped by the vision set out in Turkey’s Ninth Development Plan for 2007-2013: a country with stable growth, more equity, increased competitiveness, transforming into an information society and completing European Union (EU) harmonization. The strategy enjoys strong country ownership, and demand for Bank Group services and support is high and continues growing. This Progress Report reviews implementation of the CPS and describes how Turkey and the Bank Group are adapting the strategy to evolving country circumstances and development priorities, as the impact of the ongoing global economic downturn is felt in Turkey and around the world. 2. Turkey and the Bank Group have agreed on adjustments to the CPS to support the transition from weathering the global financial crisis to returning to sustainable growth. • Ongoing development policy lending for Turkey’s growth agenda will be adapted to support the response to the impact of the global crisis. The resulting Development Policy Loan (DPL) series will focus on recovering equitable growth and employment—including key investment climate and financial market reforms; skills, jobs, and critical social policies; and selected public management reforms. • Both the International Bank of Reconstruction and Development (IBRD) and International Finance Corporation (IFC) will accelerate and expand financing to the private sector. Small and Medium Enterprises (SMEs) are the largest source of employment in Turkey, and the global financial crisis has reduced their access to affordable credit. Increased WBG financing to these companies will help to fill the gap. • Analysis, advice, and financing for human and social development will be scaled up. It will include enhanced monitoring of poverty and social developments, and a focus on jobs and vocational training.

Introduction and Executive Summary

• Reflecting Turkey’s rise as a regional and global player and its growing contribution to national and global environmental sustainability, the ongoing electricity DPL program will be broadened to include a strong focus on climate change and environmental sustainability. The program is expected to build on Turkey’s recent Kyoto Protocol ratification and the agenda for alignment with the EU Environmental Management Acquis. 3. At the Turkish authorities’request, IBRD agrees to increase new IBRD financing commitments in FY10 up to USD 3 billion. In FY11 the plan remains to commit up to USD 1.422 billion. Total IBRD commitments over the FY10-11 period could be up to USD 4.42 billion. Taking advantage of the full instrument mix flexibility in the CPS, Turkey and the Bank have also agreed to adjust the mix of development policy and investment financing—with up to USD 2 billion DPL financing in FY10. As the overall demand for IBRD financing has significantly increased since the onset of the global financial crisis and economic downturn, IBRD financing for FY11 and beyond, as for all IBRD countries, is uncertain and will be contingent on IBRD’s overall lending capacity. Overall Turkey has been and is expected to remain one of the Bank’s largest borrowers. Turkey’s disbursed and outstanding debt to IBRD stood at USD 9.8 billion at the end of October 2009. 4. The global economic and financial crisis that began in September 2008 changed Turkey’s short-term outlook considerably. When the CPS was prepared in 2007, Turkey had enjoyed six years of strong economic growth, averaging 6.8 percent annually during 2002-07, and was set on a path of continued robust growth. The global crisis triggered a major downturn in the real economy: output and trade fell substantially, unemployment rose sharply, incomes fell and poverty increased. As of the third quarter of 2009, leading output indicators are beginning to stabilize or improve. 5. Against this background, the three main pillars of the CPS—improved competitiveness and employment opportunities; equitable human and social development; and efficient provision of high-quality public services—have proven robust. They focus on medium- to longer-term policies and reforms that remain highly relevant and are critical for renewed sustained economic growth. 6. Country counterparts particularly value the Bank Group’s global experience, knowledge, and expertise. Bank analytic and advisory activities (AAA) respond to Turkey’s development agenda. Since the global economic crisis began, new AAA was launched on assessing the economic

Introduction and Executive Summary

and social impact of the crisis and policies and programs to mitigate it. Several AAA, with a focus on structural policies, institutions, and reforms to lay the basis for future growth, continue. The programmatic design of most AAA has proven useful in facilitating continuous and sustained dialogue on key policy and institutional issues and has provided a platform for broad engagement with stakeholders. IFC investee companies benefit from IFC’s global expertise in a range of areas (i.e., infrastructure, health, education) as well as corporate governance, environmental and social (including labor) standards (See Annex 2). 7. Reflecting strong country demand for Bank Group financing, implementation of the CPS financing program is on track. IBRD commitments in FY08-09 totaled USD 3.278 billion, just over half the initial USD 6.2 billion CPS financing envelope. Consistent with the original CPS, this Bank financing focused on competitiveness and employment, public sector management, energy sector reforms, and systemic health-sector issues. New IFC investments totaled USD 1.086 billion in FY0809—as IFC further diversified its portfolio, responding to demand from creditworthy secondtier companies, local banks serving SMEs and microfinance enterprises, sub-nationals, and private companies investing in the energy sector. In FY09, learning from past financial crises, IFC took a selective and prudent approach in supporting the re-structuring and re-capitalization of Turkish companies, giving priority to its existing portfolio clients. 8. While the global financial crisis has adversely affected Turkey’s aggregate economic performance, progress in several key areas has been strong. These include: (i) macroeconomic stability; (ii) social security and universal health reform; (iii) energy sector policies, reforms, and programs, including the adoption of an updated energy strategy; (iv) first-stage labor market reforms; and (v) ratification of the Kyoto Protocol and preparation of a National Climate Change Strategy. 9. At the same time, Turkey has a clear agenda of priority reforms pending for the second half of the CPS period. This agenda includes: (i) policies and programs to renew economic growth— including appropriate macroeconomic policies under the 2010-12 Government’s Medium-Term Program (MTP) and measures to facilitate commercial credit; (ii) further labor market reform to improve flexibility and worker (as distinct from job) protection; (iii) continued investment climate reforms; (iv) further improvements in the targeting and efficient delivery of social assistance, especially in view of the impact of the global economic crisis; (v) continuing advancement of public

Introduction and Executive Summary

financial management reforms, along with broader public administration reforms such as a new civil procedures code and the adoption and implementation of a new judicial reform strategy; and (vi) aligning public procurement legislation with EU directives. An emerging new priority is climate change and environmental management. 10. Macroeconomic, social, and political economy challenges from the impact of the global crisis and possible second-round shocks are the most important risks to the achievement of CPS results.

Recent Economic and Social Developments

11. In Turkey, the main impact of the global financial crisis and economic downturn has been on the real economy: export, production and output, and jobs. When the CPS was under preparation in 2007, Turkey was on a path of robust, export and private sector-led growth, building on 6.8 percent average annual GDP growth between 2002 and 2007. In 2008 this picture changed, with GDP growth of only 0.9 percent, implying stagnant per capita income, and a forecast for 2009 of a 6 percent contraction. Turkish exports contracted by nearly a third in the first eight months of 2009 compared to a year earlier, as Turkeyâ&#x20AC;&#x2122;s main export markets in Europe experienced a severe recession. The hardest hit industrial sectors have been the automotive sector (output contracted by more than 40 percent y/y in the first eight months of 2009), metal products (27 percent), refined petroleum products (29 percent), radio/TV/communications (18 percent), and electrical machinery (22 percent) (see Annex B6). 12. The slowdown has had a marked impact on employment. Unemployment in the period JuneAugust 2009 was 12.8 percent (higher than at the peak of the 2001 crisis), and almost one in four young workers is unemployed. There are now nearly 3.3 million people looking for jobs in Turkey. Pressures on the labor market are aggravated by demographic pressures. The working age population is increasing by more than 700,000 people each year, and about half of that number enters the labor force seeking jobs. Hence, it is not only the direct loss of jobs but the lack of job creation that is swelling the number of unemployed. Youth unemployment first rose considerably but then receded to the still high level of 23.2 percent in July 2009. Diagram 1 below shows that only few unemployed workers receive unemployment benefits â&#x20AC;&#x201C; the size of each bar shows total unemployment with the lightest area denoting those who receive unemployment benefits. Bank staff estimates show that the total number of unemployed could further rise to close to four million people if the recession does not end quickly. Es and microfinance enterprises, sub-nationals, and private companies investing in the energy sector. In FY09, learning from past financial crises, IFC took a selective and prudent approach in supporting the re-structuring and re-capitalization of Turkish companies, giving priority to its existing portfolio clients.

Recent Economic and Social Developments

Diagram 1: Unemployment in Turkey Projected

Diagram 2: Sectoral Distribution of Poor (simulated)

Source: World Bank Staff estimates

Recent Economic and Social Developments

13. Poverty is rising as a result of the economic slowdown, exerting pressure on the social safety nets. Bank staff estimates show poverty, at 18.6 percent before the onset of the crisis in 2007, rising significantly.1 They further suggest that the contraction of gross domestic product (GDP) in 2009, given its magnitude, could raise overall poverty levels significantly. 2 The majority of the unemployed today do not qualify for unemployed benefits because they either worked in the informal sector (i.e., workers and their employers do not pay social security contributions) or lost their jobs before accumulating sufficient time to qualify. Indeed, the loss of income disproportionately affects families that obtain their livelihood in the informal sector, estimated to account for about half of total employment. Families linked to the urban informal sector account for the largest part of the poor (see Diagram 2). Since those families are large, children appear to be at a particular risk of falling into poverty. Lower employment rates and rising poverty pose a major challenge for the Turkish welfare system, inter alia by reducing social security contributions while increasing claims for non-contributory health insurance through the so-called “Green Card” program. Turkey’s Green Card and Conditional Cash Transfer (CCT) programs are helping to cushion the adverse impact of the crisis on the poor. Pre-crisis data show that the CCT and Green Card programs have good coverage (they reach around 30 percent of all children and 50 percent of households in the poorest quintile, respectively) and high targeting accuracy (about 70 percent of CCT benefits and 60 percent of Green Card benefits go to the poorest quintile) by international standards. Nonetheless, a new Welfare Monitoring Survey, conducted in June 2009 by the Bank and UNICEF in five large urban centers, shows that up to one-fifth of the poorest population group in these urban centers have no access to any safety net (whether formal or informal). 14. Turkey’s financial sector has proved to be an underlying strength. Turkish banking had already undergone a major reform and restructuring after the 2001 crisis and, with only moderate levels of consumer credit and no “toxic assets”, it was relatively well positioned to withstand the turmoil provoked by the events of late 2008. The Government tapped the Eurobond market in July 2009 with a well subscribed USD 1.25 billion sovereign issue. In total, during January – October 2009 the Treasury has been able to issue Eurobonds in an amount of USD 3.75 billion at improving conditions (see Annex 3).

The poverty line used in the simulations follows the definition of the Turkish Statistical Institute (TUIK) and comprises a basic basket of food, goods and services which are deemed necessary as minimum consumption needs for a typical family (see www.tuik.gov.tr).

The staff estimates are based on growth-employment elasticities and household specific probabilities of becoming unemployed and suggests that a 5 percent contraction of GDP could raise overall poverty levels to 22 percent.

Recent Economic and Social Developments

15. A global recovery and some economic stimulus measures are supporting Turkey’seconomy. The government’s response to the economic downturn has combined monetary easing with FX liquidity and confidence-building actions in the financial sector, some employment measures, and temporary tax cuts (see below). In part due to these measures, the economy now shows signs of bottoming out. Industrial production, adjusting for working days and seasonal patterns, increased slightly (0.8 percent, m/m) in August. The business confidence index rose above 100 (the threshold between optimism and pessimism) in July for the first time since May 2008, but then came down gradually to 94 percent in October 2009. These signals, allied with signs of a weak recovery of demand in some of Turkey’s export markets (most notably the euro zone), suggest grounds for cautious optimism in 2010. 16. Turkey took several actions to cushion the impact of the recession on employment, some of which can also help begin to address Turkey’s major long-term structural employment challenge, which relates to demographics and skills. The Government first (i) extended an incentive scheme for firms to offer jobs to women and young people until 2010; (ii) lengthened the time period for which workers can claim short-term benefits from the Unemployment Insurance Fund; and (iii) significantly increased targets for the delivery of active labor market programs. Additionally, a further package (May 2009) included both structural measures—most importantly increased flexibility for private temporary work agencies (the draft law is being revised after the President’s veto)—as well as a public works scheme, a new apprenticeship program for high school graduates, and further increases in active labor market program delivery. Combined with earlier measures that supported the hiring of first-time job-seekers, these actions can be expected to benefit population groups with low employment rates (young and women). 17. Overall macroeconomic policy has accommodated measures to mitigate the impact of the global economic crisis. Aggregate macroeconomic performance has naturally deteriorated and uncertainty and risks remain high - but policies remain sound overall and consistent with longterm debt sustainability. According to government figures, the aggregate fiscal cost of the crisis measures adopted is estimated to be 3.2 percent of GDP in 2009, 2 percentage points of which is linked to budgetary measures, and 5.5 percent over the three-year period 2008-2010; 4.2 percentage points of which is linked to budgetary measures. These figures include the fiscal cost of certain measures effective before September 2008, including a 5 percent cut in social security premiums, civil servant salary increases, transfers to local government, and increased investment in both the Southeast Anatolian Project (GAP) and road infrastructure. Excluding these items, the fiscal cost of budgetary measures falls to about 0.8 percent of GDP in 2009 and 1.1 percent in the period of

Recent Economic and Social Developments

2008-2010, modest in international comparison.3 The International Monetary Fund (IMF) estimates that emerging/developing G20 economies spent up to 2.2 percent of GDP on crisis measures: e.g., 4.1 percent in Russia, 3.6 percent in South Korea, and 1.5 percent in Mexico in 2009 (Source: 2008 EU Public Expenditure Program). 18. In its 2010-12 Medium-Term Program (MTP) the Government has introduced the framework for the transition to post-crisis consolidation, and debt sustainability is being addressed. The MTP, which was welcomed by analysts and rating agencies, targets ambitious but achievable fiscal goals and the stabilization of public debt as a share of GDP. The economic downturn has increased Turkey’s public debt to GDP ratio and there are moderate risks to Turkey’s public debt burden. Under the MTP, total gross public debt (EU definition) is projected to peak at 49 percent in 2010, before stabilizing in 2011 and then declining to 47.8 percent in 2012. Key fiscal measures supporting this debt reduction are limiting government personnel expenditures, cost containment in the health system, and revenue increases in 2010. Stress testing by World Bank staff suggests that even under adverse scenarios the gross public debt to GDP ratio would remain below the EU Maastricht criterion of 60 percent of GDP.4 The rise in debt ratios underlines the importance of the measures underpinning Turkey’s fiscal readjustment. According to the MTP, starting in 2011, public financial management will be conducted in line with a fiscal rule, whereby the public sector deficit will be set in line with a debt sustainability framework over the medium- to long-term. Strong implementation of the fiscal rule, along with other measures in the MTP, should allow Turkey to reproduce, as the economy gradually recovers in the coming years, its proven track record of reducing the public debt burden during the high economic growth period of 2002-08. Finally, the economic slowdown has for now removed the main source of pressure – the current account deficit – on Turkey’s external debt dynamics in recent years. The gradual economic recovery assumed in the MTP and the associated external financing requirements pose no threat of a rapid escalation of public or private external debt in the near future.

The G-20 recently estimated Turkey’s fiscal stimulus at 1.2 percent of GDP in 2009 and an expected 0.5 percent in 2010.

The Maastricht criterion is relevant for Turkey in view of its prospects for EU accession. It is worth noting that lower public debt to GDP ratios, in the 30-40 percent range or lower, have been shown to provide emerging market economies with a buffer that can help them maintain debt sustainability even in case of external shocks.

Recent Economic and Social Developments

19. Looking ahead, external finance remains a source of uncertainty. Capital flows to emerging markets have fallen dramatically from the highs of 2007 and risk premiums have escalated, creating vulnerability in economies like Turkeyâ&#x20AC;&#x2122;s, which had hitherto benefited from high net capital inflows. The corporate sector now faces major challenges in continuing to attract external finance and in rolling-over its external debt coming due. During most of 2008, the corporate sector was able to draw upon foreign borrowing in excess of repayments, but during the first nine months of 2009, the rollover ratio of medium-and long-term external debt of the corporate sector fell to 69 percent. To date, corporations have been able to finance debt service (net of new borrowing) mostly by drawing on foreign exchange deposits. Corporate medium- and long-term debt amortizations over this period were approximately USD 30 billion (private-sector short term external debt was USD 26.5 billion at end-September; and international reserves were USD 75 billion at end-October).

Progress of The CPS at Mid-Term

Progress of the CPS at Mid-Term

20. Progress toward CPS outcomes has been satisfactory overall, although results are naturally affected by the impact of the global economic crisis. The role of the World Bank is catalytic, considering that total CPS financing and knowledge services are small compared with Turkeyâ&#x20AC;&#x2122;s total external financing and demand for AAA. The Bank Groupâ&#x20AC;&#x2122;s contribution focuses on the most important and most relevant elements of Turkeyâ&#x20AC;&#x2122;s development agenda. The Progress Results Matrix in Annex 1 provides a summary. In addition, Annex 2 summarizes and highlights key features of FY08-09 AAA. Pillar 1: Competitiveness and Employment 21. Turkey achieved steady progress in improving competitiveness and employment opportunities until the global economic and financial crisis began in the second half of 2008. Macroeconomic stability has been maintained; nonetheless the re-establishment of sustained post-crisis growth poses a challenge. Overall macroeconomic policies have been sound. The banking sector remains highly solvent and liquid, and balance of payments pressures diminished as the current account deficit fell sharply. The Government has engaged the Bank in a wide-ranging dialogue on country economic issues as well as the investment climate, labor market reform, human development, social security, and energy security. Three Bank DPLs, for a total amount of USD 1.7 billion, supported continued macroeconomic stability, along with key private and public sector reforms that will help lay the basis for renewed growth. 22. Access to medium/long-term finance for private sector investment had improved before the crisis, and measures have been taken to address the effects of the global crisis on credit conditions. Credit to the corporate sector increased by 11 percent in 2008 (y/y) in real terms and credit to SMEs increased by 8 percent. The most recent Business Environment and Enterprise Performance Survey (BEEPS) and the 2005 Enterprise Survey (ES) of Turkish manufacturing enterprises confirm that the proportion of enterprise investments financed with bank loans increased from 19

Progress of The CPS at Mid-Term

percent in 2005 to 36 percent in 2008. WBG support for this agenda has included (i) IBRD credit lines for exporters, for SMEs, and for renewable energy, (ii) IFC’s long-term finance to local banks, which allows them to expand their operations with Micro, Small and Medium Enterprises (MSMEs), particularly in less developed urban areas; and (iii) IFC credit to Turkish companies investing abroad to become regional players, for example, in India, Bulgaria, Russia and Tunisia. 23. The Government is actively seeking to improve the investment climate. The Prime Minister chairs an Investment Advisory Council of top international CEOs and foreign investor representatives, which convenes annually with senior government officials and the leadership of major Turkish business associations and international financial institutions, including the WBG. An investment climate assessment made recommendations for improving the access of companies to finance and infrastructure, and for increasing the flexibility of the labor market and better aligning the skills of the labor force to private sector needs. Three key reforms identified in the CPS results matrix and noted in the 2009 Doing Business Report remain pending: (a) amendments to the bankruptcy law to preserve company values and protect lender’s rights; (b) simplification of procedures for starting operations (permits, etc); and (c) transparency of state aid and aligning its provision with EU standards. 24. Labor market flexibility and the effective protection of workers continue to be at the center of Turkey’s development agenda. The Government completed a first phase of labor market reforms with the adoption of an Employment Package by Parliament in May 2008. This first-phase reform was mainly geared to lowering non-wage labor costs through a targeted, time-bound and step-wise reduction of employer’s social security contributions for women and youth (100 percent in the first year, declining thereafter by 20 percent each year); an across-the-board reduction of employer’s social security contribution by five percent; and a relaxation of obligatory hiring regulations. Turkey also continued strengthening the development of a competency-based skill-building system, boosted active labor market programs such as on-the-job and specialized training, and continued reforms of curricula in secondary schools. The Bank supported this agenda with analyses of options, technical notes, and policy dialogue and advice, as well as financing through the Second Competitiveness and Employment DPL. The Bank also collaborated with the Government in joint work on female labor force participation and is engaged with a broad range of stakeholders in work on the school-to-work transition.

Progress of The CPS at Mid-Term

25. Reforms in the energy sector will improve supply security, enhance reliability, and increase sustainability. The electricity market, wholesale as well as retail, has developed, thereby enhancing supply security and the efficiency of private sector generators.5 A cost-reflective passthrough mechanism was introduced in July 2008, whereby energy utilities adjust tariffs on a quarterly basis to fully reflect costs under the oversight of the Energy regulator – this mechanism has resulted in electricity prices reaching close to cost-recovery levels. The 2007 Energy Efficiency Law is being implemented and regulations have been introduced for energy efficiency in industrial and government facilities. Targeted subsidies are designed to promote commercially viable energy efficiency investments by helping demonstrate the feasibility of such investments and by improving access to finance. The Bank and IFC are active partners in supporting policy reform and financing infrastructure (see Box 1).

Box 1: Building a Clean, Sustainable and Reliable Energy Sector in Turkey The Government’s development strategy for the energy sector seeks to achieve supply security while contributing to environmentally sustainable growth. Turkey ratified the Kyoto Protocol in February 2009, and shortly after became the first country to access the Clean Technology Fund (CTF) for renewable energy and energy efficiency investments. Together with the ongoing Renewable Energy Project, these IBRD investments are estimated to contribute to greenhouse gas emission reductions of about 3.5 million tons of CO2 equivalent per year. Overall, Turkey aims to enhance significantly the development of clean sources of energy (to 30 percent of all electric power generation by 2023) as well as efficient usage of energy – energy efficiency will help reduce energy consumption and minimize greenhouse gas emissions. Turkey is reforming and restructuring the electric power sector. The principal elements of the reform program, which is consistent with the framework of the EU Acquis Communautaire, are: (i) establishing an independent regulator to regulate the performance of entities operating in the market, ensure that prices are cost-reflective and economic, monitor the market etc.; (ii) unbundling the sector into generation, transmission, distribution, wholesale trading and retailing; (iii) restructuring SOEs into independent corporate entities; (iii) privatizing power generation and distribution; (iv) establishing competitive markets for electric power at the wholesale level and at the retail level; and (v) expanding the use of renewable energy. In May 2009 the Bank approved a first Programmatic Electricity Sector DPL in support of the electricity sector reforms. Turkey’s private sector is playing an increasingly prominent role in both generating and distributing electricity. 5 The wholesale electricity market, launched in August 2006, currently accounts for about 18-20 percent of the total electricity consumption in Turkey; and about 40 percent of the retail market is currently “eligible”, i.e., these large consumers can choose their own supplier.

Progress of The CPS at Mid-Term

Pillar 2: Equitable Human and Social Development 26. The enactment of social security legislation to reform the pension system and to establish a system of universal health insurance was a major accomplishment in May 2008. The new law unified a previously fragmented system of pension and health insurance funds. For pensions, the reform represented an important parametric adjustment (including a step-wise increase of the pension age) that significantly improved the long-run fiscal outlook of the system. Shortly after the passage of the social security reform, Government lowered the social security contribution of employers (by 5 percent), with a view to aligning Turkeyâ&#x20AC;&#x2122;s previously high tax wedge with international comparators and reducing non-wage labor costs to support employment creation. The combined impact of these two measures is still a substantial improvement of the long-term fiscal position of the unified pension fund. 27. Turkeyâ&#x20AC;&#x2122;s establishment of its new universal health insurance system is a fundamental structural reform. Turkey is implementing the reform and adapting the system to increase effectiveness and efficiency. The new unified system is being phased and is based upon three principles: (a) participation is mandatory with contributions based on income; (b) Government will subsidize insurance contributions for the poor with the aim to reach universal and equal coverage; and (c) cost-effectiveness is to be enhanced by pooling risks and by introducing incentives for efficiency and quality in the provision of health services. Since 2003, reforms have been critical at eliminating fragmentation and duplication in the health financing and delivery systems and assuring universal access to health insurance and health services. Financial protection of the poor and vulnerable has improved through the expansion of coverage of the Green Card program that provides free insurance for beneficiaries (increasing from around 2 million people in 2003 to over 9 million today). In the future, the Government plans to provide beneficiaries with subsidized health insurance access to the full and same rights as contributing beneficiaries. Further, the reach of family medicine has been significantly extended with a focus on the quality of preventive public health. Family medicine, which entails family physicians working in a private setting and being paid on a capitation basis, has now been introduced in 35 provinces of Turkey, which is well in excess of the 15 provinces targeted by the CPS. Two phases of an Adjustable Program Loan (FY05 and FY09) are supporting these transformations. 28. Enhancing educational qualifications and skills of youth contributes to labor productivity and employment growth, as well as individual earnings and distribution of income. Turkey has made progress in access to education in recent years with almost universal participation in

Progress of The CPS at Mid-Term

primary education and increased participation in pre-school, secondary and higher education.6 As a result, the education debate in Turkey has turned to education quality and the need to link the education system with labor demand. Results of international tests of learning—for example, the Program for International Student Assessment (PISA)—show that the learning achievements of 15 year olds in Turkey remain well below the results of almost all other OECD countries. Curriculum reforms in primary, secondary and vocational education are advanced, albeit substantial change is still needed in teacher training and teacher policies to maximize the impact of the new curricula. Regarding skill building of the workforce, Turkey has established the Vocational Qualification Authority to match better educational qualifications and occupational needs. 29. Promoting equity is the focus of a far-reaching dialogue involving the public, private and civil sectors of the society. Findings of analytic work on equality of opportunities include that at least one-third of the wealth disparity is due to inequality of opportunity – in Turkey the most important factor being the area of birth and parental education. Other analytic work, undertaken jointly by the Bank and the State Planning Organization (SPO), included papers on poverty and welfare, female participation in the labor force including the demand for female labor skills and how households make decisions about women entering the labor force. This work included visits by international experts to advise on the design and implementation of social policies and social safety nets and cooperation with other international organizations, principally the United Nations (UN). Pillar 3: Efficient Provision of High Quality Public Services 30. There has been notable progress on Turkey’s public financial management agenda. The secondary legislation to the Public Financial Management and Control Law was completed in 2006 and strategy development units monitoring the effectiveness of line agency expenditures have been established in all institutions of the general government. Broadening the responsibilities of the Turkish Court of Accounts (TCA) remains on the legislative agenda. Legislation has been drafted but not yet enacted to give the TCA a mandate to act as the controlling entity for the entire general government through both financial and performance audits. Programmatic Bank collaboration has covered public financial management performance benchmarking, joint work on parliamentary oversight, and grant-funded technical assistance on internal audit. Key areas identified by this joint work include comprehensive coverage of the government sector in the fiscal accounts and budget execution, notably expenditure control and monitoring of arrears. The Bank has also supported the improvements in public expenditure and financial management through the programmatic public sector DPL series.

The Implementation Completion Report of the Social Risk Mitigation Project (2001 to 2008) estimates that net girls’ secondary school attendance rate has increased by 5.4 percent through the CCT program.

Progress of The CPS at Mid-Term

31. In the governance arena, the CPS program is narrowly focused on judicial reform. With respect to judicial reform, the Government’s agenda includes the adoption of draft legislation of a new civil procedural code, which is currently in Parliament. The establishment of Regional Courts of Appeal to ease the burden of litigation on the judicial system is now targeted for 2010. A Mediation Law that would introduce alternative procedures for the resolution of disputes and thereby further reduce the need for litigation is encountering some opposition from the stakeholders. A new Judicial Reform Strategy and Action Plan have been endorsed by the Cabinet and both have been published. 32. A Municipal Revenues Law of July 2008 increased the share of general budget revenues going to municipalities. Despite the new law, however, local authorities have not been granted greater autonomy in generating their own revenues and, without stronger oversight and control mechanisms, local government spending remains a source of fiscal risk. Additional measures to strengthen municipal government and build local infrastructure will be important for further improvements in the delivery of local services. The Istanbul Municipality arranged for the IFC and a consortium of banks to participate in financing the construction of a metro rail line. This investment was the first time that the Bank Group had financed an operation at the sub-national level in Turkey without a sovereign guarantee. 33. Governance at the local level has been enhanced by modernizing the cadastre and land registry. Turkey’s Land Registry and Cadastre Agency has launched a program to improve the effectiveness and efficiency of land registry and cadastre services. Work is in the beginning stages but standards for the harmonization of electronic records have been introduced and property valuation will be revised in line with international practices. The Bank-financed program benefited from the experience of the Bank-supported Agricultural Reform and Implementation Project (ARIP) which piloted the electronic records of cadastre maps and titles for rural land holdings in 24 provinces. 34. Turkey has become an international leader in disaster risk management. These include improvements in the legal framework and institutional arrangements, and implementation of a major seismic risk mitigation program in Istanbul. Introduction of a new legislation which consolidates the functions of the existing three separate agencies will enable better coordination of disaster risk reduction activities and will in time improve emergency management and response. Istanbul embarked on a large scale seismic retrofitting program targeting schools and hospitals to make them more resilient against earthquakes. With the Bank’s support, some 370 public facilities, predominantly schools and hospitals, have been retrofitted or rebuilt at mid-term out of 400 targeted in the CPS. Moreover, Istanbul’s response capacity has been strengthened with a state-of-the-art disaster management center and better equipped response units. The World Bank Institute (WBI) is supporting the efforts with a program that adopts a wholesale approach to capacity development by strengthening the capacity of leading universities to deliver a certification program and to customize disaster risk management (DRM) teaching materials.

Portfolio Performance

35. Turkey’s portfolio continues to do well, with joint portfolio management and good results on the ground. The portfolio consists of 19 active projects (as of October 2009), with total commitments of USD 4.8 billion. The portfolio composition has shifted to fewer and larger operations. A gradual shift in the sector composition of the portfolio toward private sector development and energy (from 47 percent in FY07 to 60 percent in FY09) reflects the government’s demand for financial support of Pillar 1—reinforced by the impact of the global economic crisis. The portfolio is overall healthy. A few problem projects exist, however. Two such projects were re s t r u c t u re d re cently and ac tion plans for improvement agreed upon for the res t. A three -year Programmatic Joint Portfolio Per formance Review (PJPPR) was launched in 2008.

Results frameworks and indicators have been strengthened for several

projects and for the overall portfolio. The government intends to use PJPPR as a means to strengthen its own capacity for results monitoring and evaluation. The PJPPR is also used as a tool for identifying and pro-actively managing issues of ongoing projects.

Portfolio Performance

Table 1: Turkey Portfolio Overview, FY07-10

Policy and Reform Agenda for the Second Half of the CPS

36. Turkey’s 2010-12 MTP addresses the impact of the crisis and at the same time continues with fundamental structural and institutional reforms and infrastructure investments to lay the basis for future growth. Items on the Government’s priority agenda include implementation of policies and programs to renew economic growth, labor market reform, investment climate reforms, and advancement of public financial management reforms, including the public procurement law. An emerging new priority is climate change and environmental management. 37. The effective protection of workers to cushion the impact of the crisis and increase the flexibility for private business to employ workers to expand production and realize investments are priorities for the government. The current economic slowdown has shown the limited income protection for workers and employees offered by Turkey’s social security system, as most of those who are openly unemployed are not eligible for unemployment benefits. At the same time, Turkey continues to have one of the most inflexible labor markets in the Organisation for Economic Co-operation and Development (OECD), featuring strict regulation that seeks to protect jobs, not workers, including high severance pay obligations and strict temporary employment regulations. Reducing job protection while improving worker protection, e, g., by bringing more workers into the formal sector and therefore into the unemployment insurance system, will be important for Turkey to realize fully the benefits of renewed growth. These reforms will be equally vital for Turkey to manage its demographically-driven expansion of the labor force resulting in large numbers of new entrants into the job market over the next two decades. 38. Improving the investment climate and investing in private sector development continues to be a priority, both for medium-term growth and especially in the short term during the crisis. The Government’s investment climate agenda includes several major reforms, including (i) enactment of a new commercial code; (ii) a legal framework for capital markets; (iii) continuation of

Policy and Reform Agenda for the Second Half of the CPS

the privatization agenda, primarily in the energy sector; (iv) facilitation and improved consistency of judicial processes for the private sector, e.g., through strengthened mediation; and (v) updated technology and innovation policies. In line with global developments, credit conditions have tightened, with total credit shrinking in real terms during the first five months of the year by about one percent. In response, the Government has put in place a credit guarantee scheme and exporter credit programs to provide an enabling environment to jump-start credit growth. As they are implemented over the medium term, these reforms will all help Turkeyâ&#x20AC;&#x2122;s attractiveness for private business and investment. 39. Designing a coordinated social assistance system. In 2010, under the guidance of the Prime Ministry, the roles and responsibilities of the institutions responsible for administering social assistance will be redefined in order to increase coordination and improve effectiveness. 40. Broadening and deepening public financial management reforms, building on the substantial progress achieved since 2002, is a continuing priority. Key elements of this agenda are defining a medium-term fiscal responsibility framework, strengthening financial controls (including at local government level), enhancing monitoring and evaluation functions of central and line agencies, harmonizing the external audit framework with the new Public Financial Management (PFM) structure, and enhancing Parliamentary oversight. Adoption of new TCA legislation is also part of the PFM agenda. Fully implementing these reforms at the line agency level (and beginning their roll-out to the sub-national level) will help strengthen overall fiscal balance and increase transparency. The governmentâ&#x20AC;&#x2122;s stated intention (announced in the 2010-12 MTP) to adopt a fiscal rule further underlines the importance of such strengthening of PFM. 41. Sustainable energy reform continues, including climate change and deepening environmental protection. With Turkeyâ&#x20AC;&#x2122;s ratification of the Kyoto Protocol in February 2009 and with the National Climate Change Strategy under preparation, the Government plans to design mitigation measures to decouple economic growth and greenhouse gas emissions through more efficient production and use of energy. Planned measures include upgrading and improving the environmental performance of power plants, increasing the share of renewable energy sources in electricity generation, expanding rapid transit systems, and improving fuel quality. The EU Integrated Environmental Approximation Strategy of Turkey provides a solid framework to improve the management of natural resources and environmental protection in line with the EU

Turkey WBG Partnership In FY10-11

Turkey WBG Partnership in FY10-11

42. Turkey and the Bank Group have agreed on adjustments to the CPS to reflect global developments and evolving country priorities. The resulting CPS program is focused on the priority areas identified by the Government, the Bank Group and the international community as crucial for mitigating the impact of the crisis and for renewed growth: stimulating private sector, especially SMEs, business and job creation; and sustainable energy and infrastructure. Dialogue is ongoing for supporting strengthened human capital and social protection of the most vulnerable groups. See Table 2 for a summary overview of CPS Financing and Non-lending FY08-11. A more detailed overview is provided in Annex 4. Table 2: Summary of CPS Financing and Non-lending FY08-11: Overview

Turkey WBG Partnership In FY10-11

43. Pillar 1: In mitigating the impact of the global economic downturn, Turkey will pursue reforms in competitiveness, employment policy and human development. Ongoing Bank DPL for Turkey’s competitiveness and employment agenda and for public sector reforms will be bundled and re-configured in support of Turkey’s response to the impact of the global crisis. The resulting DPL series will focus on restoring equitable growth and employment—including key investment climate and financial market reforms; skills, jobs, and critical social policies; and selected public management reforms. This programmatic DPL financing will be grounded in analytic and advisory work including country economic work on savings and growth, public expenditure management, and welfare and social policy work. 44. Robust private sector growth and job creation is a priority for Turkey, and the Government has requested increased WBG support for private sector financing. Both IBRD and IFC will accelerate and expand financing to the private sector, especially creditworthy secondtier companies, exporters, SMEs and microfinance enterprises. SMEs create most jobs in Turkey, and the global financial crisis and economic downturn have reduced their access to affordable credit. Increased WBG financing to these companies helps fill the gap. The Multilateral Investment Guarantee Agency (MIGA) will continue offering guarantees to foreign investors in Turkey and Turkish investors abroad. • The updated CPS program envisages a new IBRD credit line for SMEs channeled through Turkish financial intermediaries in FY10 and possibly an additional line of credit targeted at export-oriented companies in FY11. Such credit lines have been highly successful in the past. • IFC plans to continue providing financing for microenterprises and SMEs through portfolio financial institutions and private equity fund investments. IFC’s investment in Seker Bank is the first effort of its kind to reach micro and small enterprises in rural areas particularly in the agribusiness sector. • IFC also places emphasis on infrastructure, funding mobilization for viable industrial companies, innovative products such as energy efficiency and renewable energy as well as support for the financial sector. IFC has adjusted the products it offers to focus more on short-term finance, such as trade finance. It also considers exceptional financing for commercially viable client companies that have been unable to roll-over short-term debt because of global credit restrictions. Given the recent pull-back of commercial banks from the market, IFC expects to play a more prominent catalytic role in mobilizing long-term funds from other official multilateral and bilateral sources.

Turkey WBG Partnership In FY10-11

• Supporting further privatization in power distribution and generation capacity, including financing environmental retrofits, as well as financing new private generation capacities, is particularly critical at present market conditions. Accordingly, IFC investments and MIGA guarantees are under consideration. Also IBRD partial risk guarantees may become an option to consider in the future. 45. Pillar 2: The impact of the global crisis highlights the importance of job creation, investment in human capital, and support for the most vulnerable groups. The human and social development pillar in the updated CPS program, closely linked to the envisaged DPL series under Pillar 1, includes substantial new analytic and advisory work as well as financing. Envisaged analytical work spans continued technical advice and tailor-made studies to assess the welfare impact of the economic slowdown (together with UNICEF), support the implementation of the universal health insurance, assist the design of a performance management system for the employment agency, provide options to improve education quality and strengthen the social safety net system. Apart from financial support provided through the DPL series (Pillar 1), support for improvements in the quality of basic education or the skills and employment opportunities for the youth is also under discussion for possible financing. 46. Pillar 3: As Turkey has set out to strengthen its contribution to local, national, and global environmental sustainability, reflecting its role as a rising regional and global player, the Government and the Bank plan to broaden the ongoing electricity DPL program to include energy efficiency, climate change, and key environmental sustainability reforms. The strengthened Turkey-Bank partnership in this area is expected to build on Turkey’s recent Kyoto Protocol ratification, the OECD Environmental Performance Review, and the agenda for alignment with the EU Environmental Management Acquis. The Government and the Bank envisage analytic and advisory work focused on climate change and environmental management to underpin the development policy financing in this area. IFC envisages further increasing its energy efficiency and renewable energy program in Turkey. 47. At the Turkish authorities’ request, IBRD agrees to increase new IBRD financing commitments in FY10 up to USD 3 billion. In FY11 the plan remains to commit up to USD 1.422 billion. Total IBRD commitments over the FY10-11 period could be up to USD 4.42 billion. As outlined in the CPS FY08-11, total Bank financing will be regulated by the Bank’s review and approval of each new loan commitment, with a focus on maintenance of sound macroeconomic management, financial sector stability, and progress in the three CPS pillars. Furthermore, as the overall demand for IBRD financing has significantly increased since the onset of the global financial crisis and economic downturn, IBRD financing for FY11 and beyond, as for all IBRD countries, is uncertain and will be contingent on IBRD’s overall lending capacity. Taking advantage of the full

Turkey WBG Partnership In FY10-11

instrument mix flexibility in the CPS, Turkey and the Bank have also agreed to adjust the mix of development policy and investment financing—with up to USD 2 billion DPL financing in FY10. Overall Turkey has been and is expected to remain one of the Bank’s largest borrowers. Turkey’s disbursed and outstanding debt to IBRD stood at USD 9.8 billion at the end of October 2009. 48. The current CPS covers FY08-11 and ends in June 2011. The Bank plans to develop the next CPS with the new government that takes office after Turkey’s next national elections currently scheduled for November 2011.

Country Partnership Strategy Progress Report

Partnership with Third Parties

49. Strong working relations with civil society are an important part of the Turkey-World Bank partnership. Both the Turkish authorities and the World Bank (WB) engage with civil society in the preparation and implementation of projects such as the Health Transition Project and the Istanbul Seismic Risk Mitigation and Emergency Preparedness Project. Academia, think tanks, private sector associations and businesses, as well as a wide range of non-governmental organizations (NGOs), are also engaged in the analytical and policy work the Bank undertakes with the authorities—such as the Middle East Technical University in joint human development policy dialogue (also with the United Nations Development Programme (UNDP)), in which international experts reflect on social policy reforms, and the Union of Chambers and Commodity Exchanges (TOBB) and Economic Policies Research Center (TEPAV) in investment climate work. The Bank held a Development Market Place competition “Youth in Turkey: Shaping Our Future” together with a wide range of Civil Society Organizations (CSO) partners across Turkey during FY09—mobilizing around 800 project proposals from CSO teams and awarding USD 400,000 to fund the implementation of 20 winning project during FY10. During FY09, the Bank also awarded 9 gender-focused Civil Society Funds (CSF) grants to Turkish NGOs. Annex 6 provides a more detailed summary of the CSO interactions. 50. The WBG collaborates closely with the IMF, EU, United Nations (UN) organizations, and key bilateral partners. A stand-by arrangement with the Fund was brought to a satisfactory close in May 2008. Discussions continue with the IMF on a possible new stand-by arrangement. The Undersecretariat of Treasury of Turkey plays an active role in donor coordination and a recent notable example is a discussion forum on municipal environmental infrastructure. The WB collaborates closely with the EU in Ankara. The partnership with the UN system has continued and intensified over the past two years. Together with the United Nations Children’s Fund (UNICEF), the Bank team has designed and fielded a Welfare Monitoring Survey which assesses the impact of the economic slowdown on different dimensions of household welfare. The Bank and UNDP have begun working together on climate issues, through for instance, UNDP’s pilot program on the Ceyhan basin in south-central Turkey. The Bank is also working together with the German Development Bank, (Kreditanstalt für Wiederaufbau Bankengruppe (KFW)), and UNDP in providing technical assistance to industry and financial intermediaries for energy efficiency investments.

Country Partnership Strategy Progress Report

Risks

51. Global economic risk factors. High uncertainty over the pace of global recovery creates still substantial downside risks to the global demand (especially from the EU) for Turkish exports, to output growth and correspondingly fiscal performance, and to the availability of international private capital flows to finance Turkish investments and the corporate sectorâ&#x20AC;&#x2122;s roll-over of external loans. In addition, there remains some risk of further systemic disruption in the global financial system, with potentially significant ripple effects on the Turkish economy. Realistically, there is little that Turkey can do to mitigate the most severe risks of further global economic disruption, beyond continued strong management of its own economic span of control (monetary and fiscal policy). Turkey also faces uncertainty stemming from international energy prices. Here mitigation measures include increasing energy efficiency and diversifying into non-oil sources such as wind and solar energy, policy areas where the Bank and the Government are collaborating closely. 52. Economic management risk. The main risk comes from the challenge to macroeconomic, especially fiscal, management in the face of the current slowdown. The 2010-12 MTP has set a fiscal policy framework with measures and targets addressing the risk of rising public debt ratios. Mitigating this risk is the governmentâ&#x20AC;&#x2122;s strong record of fiscal management and high capacity in public debt management. A longer-term risk is that fiscal balance is achieved at the cost of declining levels of public investment in growth-enhancing areas such as core infrastructure, reducing potential growth. The risk of further delay of some key reforms in the area of the labor market and worker protection, and the investment climate (e.g., Capital Markets Law, Leasing Law, and Commercial Code) is reduced as the same medium-term program also covers them. Actions to mitigate these risks include continued close dialogue between the government, Bank teams, and those of other institutions (e.g., IMF, European Commission (EC)), and the programmatic structure of the Bankâ&#x20AC;&#x2122;s DPL support to Turkey. 53. Political risks. Turkey has had a stable government since 2002 under the Justice and Development Party (AKP), facilitating the implementation of major reforms. Key risks relate to continuing domestic political differences and the possibility of declining public support for reforms due to the impact of the crisis. There is also a risk that a focus of legislative and policy activity on the political agenda could delay ambitious and controversial reforms during the remainder of the CPS period. The EU accession anchor continues to mitigate political risks.

Risks

54. Social risks: The severe recession over the last 12-18 months caused a strong increase in poverty7 and unemployment, especially youth unemployment, and as the recovery will likely be moderate and gradual, there is a high risk that unemployment and poverty will stay at elevated levels for some years. High unemployment and increased poverty, especially among young people, in turn create risks of social tensions and declining support for Turkeyâ&#x20AC;&#x2122;s reform agenda, including the outstanding second phase of the labor market reform which is to shift the protection of jobs to the protection of workers. Mitigating the risk is the emphasis the Governmentâ&#x20AC;&#x2122;s program places on labor market measures, including active labor market programs. 55. Vulnerability to natural disasters: Turkey is highly vulnerable to natural disasters, especially earthquakes, but also floods and landslides. Recent improvements in disaster preparedness and response are a mitigating factor. The Government has enacted legislation to restructure and streamline institutional responsibilities for disaster management by consolidating functions until recently spread between three separate institutions (General Directorates for Emergency Management, Disaster Affairs, and Civil Defense). This new institutional set-up at the central level will be also reflected in the provinces, enabling better coordination of disaster mitigation activities and emergency response.

Bank staff simulations find that poverty could rise from 17-18 percent before the crisis to around 22 percent at year end 2009. A recent Bank/UNICEF Welfare Monitoring Survey showed that a sizeable portion of the poorest population group in five large urban centers (Istanbul, Ankara, Izmir, Adana, and Kocaeli) lacks access to either formal, family or other traditional support systems.

CPS matrix indicators are printed in regular font. Actual outcomes are printed in bold font.

Annex 1: Progress towards Achieving CPS Outcomes and Results

Annex 1

Annex 2

Annex 2: International Knowledge, Experience and Expertise: WBG Contributions in FY08 and FY09 Turkish stakeholders value the international knowledge and experience generated and shared through strong analytic and advisory activities (AAA). Key features of WBG AAA include: • Customized mix of major AAA on long-term structural and institutional issues (e.g., growth, investment climate, technology & innovation, opportunities for the next generation) with quick-response policy advice on focused issues (e.g., social security and health reform, labor market, impact of the global economic crisis). • Programmatic design, with modules that build on each other over time. Examples: Country Economic Memorandum (CEM) on informality; investment climate assessment and dialogue; public financial management Economic and Sector Work (ESW) and Technical Assistance (TA); energy expert panel TA; innovation and technology ESW. • Engagement and continuous interactive dialogue with wide range of stakeholders. Examples: investment climate work with YOIKK; CEM on informality with Turkish Industrialists’ and Businessmen (TUSAID); PFM work with TCA and Parliament; human development policy dialogue with academia, government, and other donors; energy expert panel TA with Ministry of Energy and Natural Resources, Energy Market Regulatory Authority, Privatization Administration, and electricity utilities. • Joint work with country counterparts and international partners. Examples: study on female labor force participation with the SPO, health sector assessment with the OECD. • Results focus through integrated monitoring and evaluation (M&E) support, e.g., TA to the Turkish Employment Agency (ISKUR) to design performance management system and evaluation of scaled-up employment service delivery. • Trust Funds. Turkey is the first country benefitting from the Clean Technology Fund (first allocation of USD 100 million to finance renewable energy and energy efficiency initiatives). Other Trust Funds, such as the Global Facility for Disaster Reduction and Recovery, the Energy Sector Management Assistance Program, the Governance Partnership Facility, the Global Environment Facility, the Gender Action Plan Trust Fund or the Institutional Development Fund, support the Government’s various initiatives.

Annex 3

Annex 3: Eurobond Issuances in 2009

Annex 4

Annex 4: CPS Country Program FY08-11: Overview CPS Financing Program FY08-11:

Annex 4

CPS Non-Lending Program FY08-11:

a/ Includes GEF

AF: Additional Financing

Financing Portfolio CPS FY08-11 by CPS Pillar Note: Some projects contribute to more than one pillar

Annex 5: Overview of Financing Portfolio by CPS Pillar 44 Annex 5

Annex 6

Annex 6: Partnership with CSOs Strong working relations with CSOs are an important feature of the Turkey-WB Partnership. The goals of the cooperation with civil society are to help (i) build common ground among stakeholders, encourage public-private cooperation, and promote local ownership of and support for national policies, reforms, and development strategies; (ii) give a voice to stakeholders, particularly poor and marginalized groups; (iii) strengthen the impact of development programs by drawing on local knowledge, providing targeted assistance, and generating social capital at the community level; and (iv) bring innovative ideas and participatory approaches to solve local problems. The engagement and partnership with civil society is continuous and covers the full spectrum of development work. For example: • Projects. Both the Turkish authorities and the WB engage with civil society during the project management cycle. Examples of such engagement can be found in the Social Risk Mitigation Project (SRMP), the Health Transition Project, or the Seismic Risk Mitigation and Emergency Preparedness Project (ISMEP). • AAA. Academia, think tanks, private sector associations and businesses, and a wide range of NGOs, are also engaged in the analytical and policy work the Bank undertakes with the authorities. As an illustration, the Female Labor Force Participation study is a joint effort by the WB, the Government (SPO) and Academia (Middle East Technical University). The follow-up on the Investment Climate Work, involving the Union of Chambers and Commodity Exchanges of Turkey, is another example of partnership with civil society. • Advocacy. As CSOs such as the Education Reform Initiative (ERI), the World Wide Fund for Nature (WWF), or Community Volunteers Foundation (TOG), have been leading awareness or advocacy campaigns on issues such as education, climate change, and youth, the Bank has been working with them on those same key development issues. • Development Market Place. The Bank held a Development Market Place competition entitled “Youth in Turkey: Shaping Our Future” together with a wide range of CSO partners across Turkey during FY09. This contest mobilized project proposals from around 800 CSO teams. Twenty projects, to be implemented in FY10, were awarded funding for a total amount of 400,000. The topics of the winning projects range from young women entrepreneurship to engagement of rural youth on protection and sustainable use of resources. • CSF Grants. Since 2001, the Bank awarded CSF grants to Turkish NGOs each year (except in 2004). Over the last 3 years, the awards focused on Women and Youth in 2007, on Marginalized Groups (youth, women,

Annex 6

elderly) in 2008, and on Gender in 2009. The grants awarded in 2009 have supported small scale projects in areas such as the inclusion of disadvantaged women into the economic sphere. • Istanbul Annual Meetings (AMs). In view of the AMs in Istanbul in October 2009, consultations took place with CSOs. The goal of the consultations has been to allow the CSO Forum during the Annual Meetings (AMs) to be inclusive—with space for active NGO participation and engagement on key debates about opportunities and challenges facing the international community, such as the impact of the ongoing global economic crisis, the role of youth in development, or the fight against climate change. Consultations during the Preparation of the CPS. In June 2006, during the consultations with civil society representatives on the ongoing 2008-11 CPS in Istanbul and Ankara, CSOs had: (i) requested stronger financial and institutional cooperation, including through direct financial support and possibly the creation of a support mechanism via a project or a newly created CSO consultative body; (ii) placed emphasis on capacity building measures strengthening Turkish CSOs; (iii) suggested increased Bank involvement in education, labor, gender, social work, youth, migration and transparency issues; and (iv) advocated a stronger role of civil society in the social sectors. Engagement with Civil Society During Preparation of the CPS Progress Report (CPSPR). The Bank Team met with Turkish CSOs to listen to their perspectives on Turkey’s development opportunities and challenges, and on the role and value-added of the Bank as Turkey’s development partner; to share with them the progress in CPS implementation; and to consult and brainstorm with them on past, ongoing, and future collaboration. The main messages CSOs conveyed in these meetings centered around four areas: (i) further strengthening coordination between the Government and CSOs as part of WBG activities; (ii) exploring the scope for more dialogue between the Bank and CSOs; (iii) fostering CSO ownership through more upstream CSO involvement in the preparation of project and analytical work and (iv) engagement with CSOs on the results of analytic studies results. CSOs would particularly appreciate a special effort of wide distribution of the Bank’s analytical work. CSOs also shared their views on issues within their respective areas of expertise—such as the importance of setting up an integrated river basin management, or of developing a monitoring and evaluation system for teachers. Public Information Centers. The WBG has two CSO-run Information Centers in Turkey: one in Ankara under the stewardship of the Turkish Economic Policies Research Center (TEPAV), a think-tank associated with the Turkish Union of Chambers of Industry and Commerce, and one newly opened in July 2009 in Gaziantep under the stewardship of the Gaziantep Chamber of Industry. The Centers support the Bank’s policy of open access to information on projects and programs, which allow a healthy public policy debate on development issues. They are an integral part of the WBG’s transparency effort, and they facilitate collaboration with the Government, the public sector at large, academia, media, broader civil society, and the public.

Annex B1

Annex B1: Country at a Glance

Annex B1

Annex B2

Annex B2 - Turkey Selected Indicators* of Bank Portfolio Performance and Management As of October 27, 2009

Annex B3

Annex B3 - IBRD/IDA Program Summary Turkey As of November 17, 2009

Annex B3

Annex B3: Turkey: IFC Investment Operations Program As of October 27, 2009

Annex B4

Annex B4 - Summary of Non-lending Services - Turkey As of November 17, 2009

Annex B5

Annex B5: Turkey Social Indicators

Annex B6

Annex B6: Turkey - Key Economic Indicators As of October 27, 2009

Annex B6

Turkey - Key Economic Indicators (Continued)

Annex B7

Annex B7: Turkey - Key Economic Indicators As of October 27, 2009

As of Date 10/27/2009

Annex B8 - Turkey Operations Portfolio (IBRD/IDA and Grants)

58 Annex B8

Annex B8

Annex B8: Turkey Commited and Outstanding Portfolio (IFC) As of September 30, 2009 (in US$ millions)

Country Partnership Strategy Progress Report