Turkey

Turkey - Social Support Project (Vol.1), 2000/08/09, PID9284, Project Information Document

The overall goal of the project is to support privatization; increase the productivity of enterprises (formerly State Owned entities) by reducing labor costs, and cushion the social impact of privatization and the Economic Recovery Program.

The following project components have tentatively been identified by the Bank project team, in-consultation with Government officials, during the recent Economic Reform Loan sector work. These concepts were discussed with the Government during Bank missions in February and in June, 2000. A. Labor Restructuring: The objective of this component is to improve the productivity of certain elements of Turkey's industrial sector (previously State Owned entities) and to ameliorate the temporary negative social and economic impact of labor restructuring on workers displaced during privatization of SOEs. This component will finance temporary income support, specifically severance payments, to workers directly displaced by SOE restructuring to: (i) encourage excess workers to leave SOEs, and (ii) provide them with resources to maintain minimum living standards while finding alternative employment.

Turkey - Privatization Social Support Project (Vol.1), 2000/11/27, 20709, Project Appraisal Document

As noted previously, the proposed PSSP is an integral part of the Economic Reform Program and supports the related Economic Reform Loan (ERL). The proposed PSSP supports implementation of the fourth objective of the Economic Reform Loan (ERL) which promotes deregulation and private participation in energy, telecommunications, infrastructure, and acceleration of privatization. The Government is restoring the momentum of Turkey's privatization program which was dissipated in early 1999. Accelerating privatization is a key supply-side element in the effort to restore growth. It also represents a core component of the fiscal package for 2000 and 2001. A new privatization program, which includes major companies of national importance, has been approved, and the Government indicates that this will be formally extended in the last half of 2000. The Privatization Administration (PA) is making progress in implementing its program. The PA has already established a credible implementation track record for the 2000 program, including: (i) initiating tenders for at least 15 companies; (ii) initiating negotiations for at least 10 companies; and (iii) signing sale contracts for at least five companies. While this track record demonstrates the PA's ability to carry out the prograrn, the larger operations are scheduled to be completed later in the year and the PA must maintain if not accelerate its pace in order to meet the year-end targets.

Social support programs combine elements that encourage excess labor to leave over-staffed enterprises, while at the same time helping them to rejoin the labor market quickly. These measures should include both temporary income support and labor redeployment programs. To be effective, the measures must be carefully designed and targeted. Furthermore, there must be continuing monitoring of the social impact on displaced workers and their families to ensure that the most vulnerable do not slip into poverty, the labor redeployment services are reaching the most needy workers, and additional assistance is provided, as needed.

A total of about 48,000 employees are expected to be affected, representing about 40,000 workers (i.e., unionized employees), and more than 8,000 civil servants, based on an assumption that almost all the enterprises will be sold. It is possible that some will not be sold, and that they will have to be liquidated, which would raise the number of employees whose redundancy may be financed by the loan.

Of the 39 enterprises, four enterprises employing 5905 of the employees whose redundancy is expected to be financed by the loan, are mono-enterprises. They are steel plants, mines and forestry complexes. The remainder (5% of affected employees) are in diverse economies, and the remainder (83%) are in enterprises which operate in many locations throughout Turkey, and which have been classified as national enterprises.

Turkey - Privatization Implementation Assistance and Social Safety Net Project (Vol.1), 1994/03/03, 12682, Staff Appraisal Report

The proposed project would consist of:
(a) support for privatization, including the preparation and implementation of privatization transactions; a public information campaign to promote the Government's privatization agenda and broaden public support for it; the strengthening of PPA; and the strengthening of the capacity of Treasury to manage the debt liabilities of SOEs to be privatized;

Since 1992, there has been a significant acceleration in the pace and scope of SOE privatization. A number of sizeable transactions are on their way to completion and a substantial pipeline of SOEs has been identified for privatization over the next five years. Building the necessary momentum into the process will require that the Government promote the growing public awareness of the need to downsize the SOE sector, forge a political consensus, and broaden popular support for privatization; strengthen the legal framework as well as the capacity of implementing agencies; provide an effective social safety net for displaced employees; and assist with the recovery of the regions likely to be affected by concentrated layoffs.

Personnel Regime. To circumvent the constitutional requirement to have SOEs managed by civil servants, Decree Law 233 introduced the possibility of hiring staff under one-year renewable -contracts. This measure was designed in part to attract better qualified people by offering higher salaries. The High Court of Justice ruled this practice unconstitutional, however. Subsequently, in January 1990, a new law on personnel in SOEs was enacted. This time, a new category was introduced: civil servants with contracts. Again, the High Court annulled this practice in August 1991, citing abuses as the main reason. Decree Law 233 and subsequent legislation eliminate the provisions of previous laws requiring experience in the public sector as a prerequisite for appointment to the management of an SOE. Even under the new regime, however, salaries are not linked to performance. By enacting a hiring freeze and issuing a regulation that only 20 percent of job-leavers could be replaced, the Government attempted to address the issue of redundant labor. Since 1989, wage negotiations in SOEs have become highly politicized, leading to a more than doubling of the real wage of workers in the two years prior to June 1991. The increases were moderated subsequently, with real wages increasing by 9 percent in 1992.

In the wake of the economic liberalization of the early 1980s, the Government decided to privatize state-owned enterprises (SOEs) which no longer had a national mission. The primary objective in the mid-1980s was to increase efficiency and lessen the budgetary burden of SOEs. Several major studies were initiated, culminating, in 1986, in a master plan for privatization that classified enterprises into those to be liquidated, sold, or retained in the state sector. In the Government's view, this master plan was inappropriate for Turkey; therefore, it was not implemented. Instead, a few small SOEs were sold and, for the most part, implementation focused on the sale of minority shareholdings through public offerings in order to raise revenues and develop capital markets. In early 1992, following changes in the institutional set-up for privatization, the program picked up with the sale of relatively large cement companies, the privatization of several agro-industry tirms, and continued sale of minority shareholdings. In July 1993, the new Government announced a renewed and far-reaching program of privatization to reduce the growing and increasingly unsustainable fiscal deficit and to increase efficiency and productivity in the economy as a whole. The overall program covers major SOEs in a wide range of sectors, with a first phase focussing on the immediate privatization of SOEs in tradeable goods sectors, and the preparation for a more comprehensive program in the future through the development of a sound institutional and legal framework and the establishment of an effective social safety net.

Following the Parliamentary vote of confidence for the new Government in July 1993, privatization gathered momentum and became a central component of the broader economic strategy aimed at improving efficiency and reducing the fiscal deficit. The scope of the program expanded from the sale of small and medium enterprises and minority shares to encompass the privatization of major enterprises in a wide range of sectors, including: (i) medium and large enterprises, predominantly in tradeable goods sectors, under the management of PPA; (ii) the restructuring and sale of large problem SOEs - Sumer Holding, Sumerbank (textiles and banking), and TDCI (steel); and (iii) the reform and eventual privatization of utilities, including TEK (electricity) and PTT (telecommunications).

in steel, investment bankers have been retained for the sale of the Government's share in ERDEMIR, an integrated steel mill and Turkey's only producer of flat products; the valuation process has been completed, and sale is expected in the first half of 1994. The prospects for the flat product market in Turkey are good, and the sale of the company, which is successfully operated by the private sector, could yield US$350 - US$450 million. Selling ERDEMIR is expected to be relatively straightforward and will provide PPA with valuable experience in privatizing steel firms;

following the recent sale of its remaining participation in NETAS (telecommnunications equipment) in international capital markets for US$50 million, PPA has advertised its minority shares in an additional 12 companies, and is preparing for the sale of its shares in TOFAS (auto assembly) in 1994.

-----Original Message-----
From: [email protected]
[mailto:[email protected]]On Behalf Of Robert Weissman
Sent: Saturday, June 23, 2001 4:13 PM
To: [email protected]
Subject: [stop-imf] Turkey succumbs to IMF demands, will privatize tobacco co.

Turkey passes tobacco law as part of IMF program
Source: Kathimerini, Saturday, 6/23/01

Turkey's Parliament late on Wednesday passed tobacco sector reform legislation essential to payment of the next tranche of a billion-dollar IMF crisis lending pact toward the end of June.

State-run Anatolia news agency said the law, stressed as crucial by IMF inspector Juha Kahkonen during a visit in early June, was passed in a late-night session of Parliament.

Turkey promised the International Monetary Fund it would pass the tobacco law by the end of May but it ran up against opposition from Prime Minister Bulent Ecevit's three-party coalition government. Privatization Minister Yuksel Yalova spoke of delays to the passing of the law and was swiftly pushed to resign.

Turkey's National Assembly has been working regularly late into the night recently, passing reams of economic reform laws drawn up by Economy Minister Kemal Dervis in order to convince the IMF and World Bank to back a $15.7 billion rescue package.

The IMF board is expected to meet in late June to approve a $1.56 billion payment from the loan. The tobacco law aims to reform the sector in Turkey by scrapping from the 2002 budget state-subsidized purchases of goods from farmers and by setting the stage for the privatization of Turkey's spirits and tobacco monopoly Tekel.

It aims to rationalize tobacco farming and remove tobacco plants from regions not expressly earmarked for the crop. It also establishes a seven-person regulatory board to regulate tobacco and alcohol production. The law additionally allows companies which produce more than 2 billion cigarettes annually in Turkey to import, price and sell more of a similar range of products.

Turkey has promised the IMF that it will sell Tekel by the end of 2002.

It has gradually been phasing out Tekel's range of monopolies, most recently ending its sole production of raki, the aniseed-based spirit that many Turks drink.

Tekel had sales in year 2000 of around 2,200 trillion lira ($3.5 billion at the time) of which 400 trillion came from alcohol.

Memorandum of Economic Policies, June 26, 1998

Privatization has a key role to play in the disinflation strategy. Major progress has already been made, with a total of US$1.8 billion in privatization proceeds already realized through the sale of GSM licenses, shares in IS Bank, and other operations. Before the end of this year, we plan to sell share holdings in POAS, Turkish Airlines, Erdemir, and a number of other companies, with substantial additional sales scheduled in 1999. The Council of Ministers has given approval for the sale of 49 percent of Turk Telekom, a transaction that will be completed in 1999. Once the approval of the High Administrative Court (Danistay) has been secured, it will be possible to move quickly in finalizing the transfer of operating rights for the generation and transmission of electric power, covering an initial 9 power stations (estimated revenue of US$1.2 billion) and the first 15 of the eventual 20 distribution districts (estimated revenue of US$1.7 billion, payable in instalments over three years). The transfer of operating rights for several additional power stations and the remaining 5 distribution districts should become possible in the course of next year. The aim is to generate receipts of at least US$3 billion this year, and at least a further US$3.6 billion (and very possibly well over US$5 billion) in 1999. In 1998, some US$2 billion of privatization proceeds will be used for debt reduction. In 1999, at least US$3 billion will be used for this purpose, with a maximum of US$2 billion over this amount available to finance additional investments, provided that the overall disinflation program is progressing as planned. In line with the goals on privatization, the government will introduce international pricing for petroleum products effective July 1 and, by end-December 1998, will submit to Parliament an appropriate regulatory framework for the telecommunications and energy sectors.

A sweeping reform of the social security system is obviously needed. The Turkish economy can simply not afford a system that permits workers to retire in their forties. And retired workers cannot afford to live on the benefits now provided by the system. The government will continue its efforts to forge a consensus for major reforms that would eliminate the deficit of social security within a relatively short period through appropriate increases in the minimum retirement age and minimum contribution period, and an expansion of the reference period for calculating pension benefits coupled with an increase in the ceiling on wages subject to contributions. As a first step, the government will request early parliamentary approval for raising the minimum retirement age for existing workers to 50 for women and 55 for men, and to 57 for women and 60 for men for new entrants to the labor force, while requiring that new entrants contribute a minimum of 7,200 days for women and 9,000 days for men to be eligible for full benefits. Also, before the end of 1999, improved cost controls and wider application of user fees will be introduced in the health care system.

Main Economic Policy Actions
Fiscal Policy
· Limit the July 1998 public sector salary increase to a maximum of 20 percent; and public sector wage increases in 1999 to targeted inflation.

Letter of Intent, September 29, 1999

Before the earthquake struck, we had made considerable progress in structural reform. First, a constitutional amendment allowing international arbitration in contracts involving the state and foreign investors-which was the major bottleneck facing the government's ambitious privatization program-has been approved. The passage of this constitutional amendment will, among other things, allow quick progress in transferring operating rights for power plants and distribution grids and in attracting vital foreign investment in the energy sector. We now intend to move speedily in enacting all the necessary supporting legislation to allow privatization in energy and telecom sectors. Second, a long-awaited new banking law, establishing an independent regulatory and supervision agency, has been passed. This new law will strengthen bank regulation and supervision and raise supervision standards in line with international norms. In coming weeks and months, the government will take specific steps to strengthen the financial position and institutional structure of the banking system, through a comprehensive plan of action. The limit on the banks' open foreign exchange position has been lowered from 30 percent to 20 percent (effective September 30, 1999).

But the most telling sign of the government's resolve to forward structural reform has been the recent approval of the social security reform, which was completed soon after the earthquake. The passage of this new law is a major breakthrough. The deficit of the social security system had grown rapidly in recent years and was set to reach almost 20 percent of GNP by the middle of the next century. This new law: (i) introduces a minimum retirement age of 58/60 (female/male) for new entrants to the system and 52/56 for current contributors, with a ten-year transition period; (ii) increases the minimum contribution period for new entrants to SSK (the largest of the three existing systems) from 13.9 years to 19.4 years, with a lower, but still sizable, increase for current contributors, and also increases in the ceiling on contributions; (iii) raises gradually the reference period for calculation of pensions to the employee's entire working life; and (iv) establishes an automatic indexation of pension benefits to the CPI. According to our estimates, the reform will not only prevent the trend deterioration in the accounts of the pension funds, but bring about a steady and sizable improvement in the social security balances: over the next ten years, instead of increasing by some 2½ percent of GNP, the deficit is projected to fall by 1 percent of GNP.

Fiscal policy in 2001-02
29. Privatization will continue with the goal of reaching privatization receipts of at least 3¼ percent of GNP in 2001 and 2 percent of GNP in 2002 (see below).
Incomes policy
35. Incomes policy will be essential to support disinflation and our exchange rate policy, and in particular to guide the private sector to set wage and price increases in line with the inflation target. To this end, salary increases for civil servants will be set in line with targeted CPI inflation (25 percent during 2000, of which 15 percent on January 1, and the remainder on July 1). We believe these increases will be sufficient to protect civil servants from erosion in their purchasing power. However, should CPI inflation during the first six months of 2000 exceed 15 percent, in July there will be an additional increase in civil servants' salaries equal to the difference between the CPI inflation rate during the first six months and 15 percent.
36. Minimum wage increases are determined by the Minimum Wage Commission, consisting of representatives of the government, the trade unions, and the employers. However, the government will endeavor to ensure that the minimum wage increase in 2000 will be in line with targeted inflation.
Pension reform
42. The new government has completed the first part of a comprehensive agenda for social security reform. In particular, the reform approved by parliament in September: increases the minimum retirement age for new entrants to 58/60 immediately and to 52/56 for existing contributors over a ten-year transition period; raises the minimum contribution period for entitlement to a pension; reduces the average replacement ratio from 80 percent to 65 percent; extends the reference period for calculating pensions to the lifetime working period; indexes pension benefits to the CPI; and increases the ceiling on contributions. Whereas in the absence of reform, the deficit of the social security system was expected to widen sharply from 3 percent of GNP this year to some 16 percent by 2050, following the reforms this trend will be reversed and, indeed, the deficit is projected to decline steadily in the short to medium term. To facilitate this, government will raise the ceiling on contributions to four times the minimum level on April 1, 2001 and five times the minimum level in April 2002. In the coming months, the government plans to deepen social security reforms by, on the one hand, undertaking administrative reforms to improve coverage, compliance and administrative efficiency and, on the other hand, creating the legal framework for private pension funds with a view to diversifying the sources of long-term savings. Progress in this area will be the subject of future program reviews.
Privatization and the capital market
48. Realizing privatization receipts is imperative if domestic interest rates are to decline and economic efficiency is to improve. To this end, in August 1999, parliament passed key constitutional amendments permitting international arbitration in concession contracts, permitting the appropriate legislation to define the scope of state concessions, and clarifying the role of the Danistay in reviewing contracts. Building upon this important step, legal measures will be introduced to: (i) enable Turk Telekom to act as a private entity by making it subject to the Turkish commercial code and permit it to retain exclusivity on fixed-line operations until at least end-2002; and (ii) establish a regulatory body for the telecom sector. This body will be established within three-six months following the enactment of the law. All receipts from the privatization of Turk Telecom will be transferred to the treasury shortly after the sale. The provisions of the telecommunications law will be consistent with this. Passage by the relevant parliament committees of a telecommunication law in line with the above requirements will be prior action for the program. Passage of such a law by parliament by January 31, 2000 will be a structural performance criterion. Privatization in the energy sector will also be crucial, both to realize receipts through transfer of operating right (TOR) contracts, and to foster investment and efficiency in this sector. Thus, legal amendments will be passed by parliament to define energy as a sector subject to the Turkish commercial code (a prior action). A financial recovery plan for state enterprises in the energy sector will be prepared and wholesale and retail electricity prices shall be raised over time to stem fiscal losses, as necessary.
49. The privatization program for 2000 is ambitious, but we expect to realize some US$7.6 billion (in cash) over the course of the year. These receipts are expected to come from: (i) the sale of 20 percent of Turk Telekom to a strategic investor, as well as wireless licenses (the latter will take place during the first quarter of 2000), with an additional wireless license to be issued to Turk Telecom; (ii) the TOR for electricity distribution and power plants; and (iii) the sale by the Privatization Agency of the enterprises listed in Attachment II. Based on current procedures which will not be changed, the Privatization Agency will need approval from the Privatization High Council for the enterprises currently in its portfolio, only at the time of completion of the privatization operation.
50. With a view to realizing another US$6 billion (2¾ percent of GNP) of privatization receipts in 2001, we shall, by the time of the second program review, identify the next set of companies to be privatized, and by end-August, secure passage of the relevant decisions enabling the addition of these companies to the Privatization Agency portfolio (a structural benchmark for the third review). A law establishing the regulatory framework in the electricity and gas sector will be passed in 2000. Privatization receipts in 2002 are expected to amount to about US$4 billion. These targets for privatization receipts may be revised during the program's reviews in light with developments in the borrowing requirement of the public sector.
The above actions and measures will strengthen public confidence in the banking sector and remove upward pressure on interest rates resulting from distress borrowing (and excessively high deposit rates) by these banks. However, the state banks are another important source of such distortions. We are addressing the long standing problems of these banks by strengthening their oversight, while pursuing actions to begin the commercializa-tion of Ziraat Bank and Halk Bank with an eventual privatization goal, through development of strategic corporate plans, operational restructuring, and financial and capital restructuring plans with phased-in timetables, which will be initiated in year 2000. In the interim, in order to impose financial discipline on the operations of these banks, while improving their cash management, cash transfers to cover losses on subsidized lending have been specified in the 2000 budget. Moreover, as in 1999, 15 percent of the unpaid duty losses at end-1999 will be converted into securities earning an interest linked to CPI inflation, to be serviced in cash. The yield on the stock of unpaid duty losses at end-1999, excluding the part converted in securities, will be computed quarterly based on the average of monthly treasury bill rates plus a spread of 35 percent for Ziraat Bank and 21 percent for Halk Bank. This spread will also remunerate state banks for nonremunerated services provided to the government; these services will be more properly priced in the future. Management of state banks will be expected to maintain the profitability of state banks under this tighter budget constraint.

Letter of Intent, June 22, 2000

In line with the budget law, civil servants' salaries were adjusted in June by the difference between inflation in the first five months of 2000 and 15 percent, plus a 2 percent compensation for the erosion of wages that took place until June. Civil servants' salaries will be raised by 10 percent in the second half of 2000.
· To remove the backward-looking elements in the formation of personnel costs in the private sector, parliament has approved a law to switch from backward-looking to forward-looking indexation in the determination of the minimum premium base on social security contributions for 2000-01. The resulting losses to social security institutions will be offset by raising the ceiling on contributions to four times the minimum level, as well as through the savings arising from the administrative and legal measures related to Bag Kur mentioned above.
· Regarding public sector wages, it is our intention that all wage increases in 2001-2002 be fully in line with the government's inflation targets.
16. In addition to the sale of 51 percent of Petrol Ofisi A.S., already mentioned in the March 10 LoI, two other key operations have taken place so far: the public offering of 31½ percent of Tupras; and the sale of one GSM license. The receipts from the latter operation will amount to about US$2½ billion (excluding VAT). Altogether these operations amount to US$ 5 billion, most of which is expected to be cashed this year. So far the total receipts cashed from these operations amount to almost US$1¼ billion. The receipts from the sale of the GSM license are expected to be cashed during the third quarter.
17. As to other operations, the tender of 20 percent of Turk Telecom was announced on June 13, but the sale may not be finalized before end-September (one month later than envisaged in one of the program's structural benchmarks). Nevertheless, the target of privatization receipts of US$7.6 billion for 2000 remains within reach. Privatization operations will continue in 2001, and to this end, we have identified a new portfolio of enterprises that will be transferred to the Privatization Agency by end-August (a structural benchmark). This portfolio includes factories from TFAS (sugar), CAYKUR (tea), MKEK (machinery and chemicals), and ETI holding. In addition, we intend to privatize parts of TEKEL (see below), the thermal generation plants and distribution companies which remain under state management after 2000, and plan further disinvesture of enterprises that started being privatized in 2000.
Three new laws necessary to phase out the support price mechanism for tobacco and for reforming TEKEL will be enacted in 2000. The first law will separate TEKEL's support purchasing unit from its other commercial units and will introduce an auction mechanism for the sale of tobacco, whereby the support purchasing unit of TEKEL will buy the unsold tobacco at a discount of at least 15 percent from the lowest auction price for comparable qualities. The second law will de-monopolize the production of alcoholic spirits thereby allowing private sector entry into the industry. The third law will enable the privatization of TEKEL's production facilities for spirit, salt, and tobacco products. The divestiture of TEKEL's commercial assets will start in 2001 and will be completed by end-2002.

Civil servants' wages will be raised in December so as to offset the excess of inflation over targeted inflation during 2000. As to the first half of 2001, wages will be raised by 10 percent in January. However, should CPI inflation exceed 10 percent, there will be an additional increase in civil servants' salaries equal to the difference between the CPI inflation rate and 10 percent. The same policy (setting salary increases in line with targeted inflation with a later adjustment if inflation exceeds the target) will be applied also in the second half of 2001. Moreover, the hiring of civil servants in 2001 will be limited to 80 percent of civil servants retired in the previous year (except in the sectors of education, health, and security).

Reflecting the full-year effect of the introduction of unemployment insurance premia during the second half of 2000, the primary surplus of the unemployment insurance fund is expected to improve from 0.2 percent of GNP in 2000 to 0.5 percent of GNP in 2001.

Minimum wage increases are determined by the Minimum Wage Commission, consisting of representatives of the government, the trade unions, and the employers. As in 2000, the government will endeavor to ensure that the minimum wage increase in 2001 will be in line with targeted inflation.

To accelerate privatization in 2001, the government will carry out a tender for the sale of 33.5 percent of the shares of Turk Telecom to a strategic investor with transfer of strong management rights.

The tender for the sale of 51 percent of Turkish Airlines (THY) has been announced on December 14, 2000 (a prior action), finalizing the sale by end-March 2001 (structural benchmark).

Launch by April 15, 2001 the pre-qualification tender for the sale of the electricity distribution companies, which remain under state management after the March 31, 2001 deadline for the TOORs.

To allow further progress in 2001, by December 20, 2000, we will transfer additional companies to the PA (implementing, with some delay, the actions envisaged in one of the program's structural benchmarks). The companies will include, in addition to agricultural companies (see below), some factories of MKEK (machinery and chemicals) and of ETI holdings.

Building on the breakthrough pension reform adopted in 1999, the government has designed a second package of reforms aimed at improving the administration of the pension funds and introducing a voluntary private pension system. Four decree-laws had been adopted in September, but, based on the recent constitutional court decision, they will have to be submitted as laws to parliament (although they remain temporarily in force). These laws call for the creation of a social security agency supervising the activities of SSK (the major public pension fund), Bag-Kur (the pension fund for self-employed and farmers), IS-Kur (employment agency in charge of the management of unemployment insurance), and the administrative restructuring of these institutions. Moreover, legislation already submitted to Parliament envisages parametric adjustments in SSK and Bag-Kur (such as the increase in health premia and co-payments) and the introduction of a voluntary private pension system.

44. The phasing out of the indirect support policies would lead to a reduced involvement of the state in the production and marketing of agricultural products. This will lead to a rapid privatization of the SEEs involved in this area. To that effect, at least six sugar factories of TSFAS (the SEE involved in the purchase and processing of sugar beets) will be transferred to the PA's portfolio by December 20, 2000 (prior action), with the aim of completing their privatization by end-2001. The remaining sugar factories will be transferred to the PA portfolio during 2001 with the aim of completing their privatization by end-2002. A sugar law reforming the sugar market will be submitted to parliament by February 15, 2001 and enacted by March 15, 2001. Restructuring TEKEL and reforming the tobacco sector will involve:
· Adopting by end-January 2001 a decree restructuring TEKEL and issuing a high privatization commission decision which would allow the transfer of all of TEKEL's tobacco-processing units to the PA's portfolio
Regarding the state banks, the stock of duty losses of Halk Bank and Ziraat Bank will be converted into securities bearing market interest rates, in line with progress in implementing the restructuring plans of these banks. The interest on the stock of duty losses will accrue in 2001 at a rate equal to the monthly weighted average of treasury bill and discount bond rates times 1.33 for Ziraat Bank and times 1.60 for Halk Bank. The strategy to privatize the state banks will proceed on the basis of the law enacted in November 2000.

Letter of Intent, January 30, 2001

"Structural Conditionality":
4. Finalize sale of Turkish Airlines End-March 2001 Benchmark

The reform strategy for the tobacco sector and the restructuring of TEKEL, one of the main component in our agricultural policy reform and in our privatization drive, is being strengthened with respect to the December LoI. We will transfer the state monopoly agency (TEKEL) to the Privatization Agency (PA), instead of transferring only its tobacco processing units. To this end, a law-which will also reform the tobacco sector and phase out support purchases of tobacco-will be enacted by end-February 2001 (a structural benchmark, Annex C).

Letter of Intent and Memorandum on Economic Policies, May 3, 2001

Structural Policy Conditionality, 2001
20. Parliamentary approval of legislation to facilitate Turk Telekom privatization &21 Prior action for 6th and 7th reviews

21. Appointment of new professional board and management team for Turk Telekom 21 Condition for the completion of the 8th review

Governance of Ziraat and Halk will be strengthened through the establishment of a common and politically independent governing board, reporting to the Treasury, and the appointment of new management (a condition for the completion of the sixth and seventh reviews) who will apply commercial criteria to operations and pricing policies that ensure profitability. The governing board will also formulate plans for the privatization of these banks.

These actions will be accompanied by new risk management procedures to be applied by the governing board and the managements of the banks. To reduce operating costs, the operations of these banks will be streamlined as rapidly as possible.

Among the remaining two smaller state banks, one is insolvent and unviable while the other one is in the process of privatization. The banking license of the insolvent bank (Emlak) will be withdrawn (the bank will be closed) and its liabilities and some assets transferred to Ziraat (implementation of this action by end-May 2001 will be a condition for the completion of the eighth review). Ziraat will be provided with additional capital to facilitate the absorption of Emlak. The launching by the other bank (Vakif) of an initial public offering in the Istanbul Stock Exchange has been delayed by the recent crises, but the privatization process will be resumed as soon as market conditions allow.

While the timing of privatization operations will depend on market conditions, our goal is to remove all obstacles to a successful privatization policy, so as to be in the best position to act quickly as soon as market conditions allow. Actions for the remainder of 2001 will focus on completing all preparatory work for privatization of majority stakes in key state-owned enterprises including Turk Telekom, TUPRAS (petroleum refineries), Turkish Airlines (THY), ERDEMIR (steel), TEKEL (tobacco and spirits), SEKER (sugar), and electricity generation (TEAS) and electricity distribution (TEDAS). The Privatization Administration (PA) will also continue to divest its portfolio of small- and medium-sized companies. These operations could bring very high cash receipts to the budget, but their specific timing will depend on market conditions. Thus, we have lowered the expected yield from privatization receipts to US$1 billion for the balance of 2001 (in addition to the US$2 billion already cashed from operations concluded in 2000). In 2002, privatization proceeds are expected to rise to US$3½ billion. More specifically:
· In the telecommunication sector, the government intends to adopt legislation to: (i) authorize divestiture of up to 100 percent of Turk Telekom, excluding a golden share which will remain with the government (as in similar privatization operations in other countries, the golden share will cover security and protection of national interests); (ii) reserve 5 percent of the shares of Turk Telekom to employees and small investors; (iii) allow foreign ownership of the shares of Turk Telekom of up to 45 percent , while not excluding majority foreign participation in a strategic investor consortium that could acquire a majority share; (iv) revise the composition of the tender committee, which takes decisions by simple majority, as follows: two representatives from the Privatization Agency, two from the Ministry of Transportation, and one from the Treasury; (v) remove the monopoly of Turk Telekom on fixed lines and other telecommunication services effective from the date the government shareholding falls below 50 percent; (vi) transfer all licensing authority for telecommunication services and infrastructure to the Telecommunication Regulatory Authority; and (vii) give Treasury, as owner, the authority to amend Turk Telekom's Articles of Agreement without the approval of the Ministry of Transportation and to appoint the board and management team of Turk Telekom. Parliamentary approval of this legislation will be a prior action for completion of the sixth and seventh program reviews. In accordance with the new law, the PA will submit a revised privatization plan for Turk Telekom to the Council of Ministers for approval. In order to ensure full commercialization of the company, the members of the new professional board and management team appointed by the general assembly of Turk Telekom will have recognized qualifications and experience. The board and management team will have members with relevant private sector experience (appointment of such a board and management team will be a condition for the completion of the eighth review ). Moreover, the board of directors of Turk Telekom will adopt a comprehensive corporatization plan. The corporatization plan will: (i) introduce international standards, financial controls, and management procedures, adequate to ensure unqualified audit opinions; (ii) bring staffing levels in line with the real operational requirements of the company; and (iii) address the need to expand both internet and rural access. Preparatory work will also be initiated for speeding up the sale of third generation mobile phone licenses.
· With regard to TUPRAS, the PA intends to carry out a further public offering which will increase the private sector stake in the company to 51 percent.
· The law to reform the sugar market was approved in April. The Tobacco Law--which liberalizes the tobacco sector, phases out the support purchases of tobacco, and allows for the sale of TEKEL assets--is expected to be approved by Parliament in May (a condition for completing the eighth review). Following the approval of this law, the privatization of TEKEL and SEKER, which is expected to be completed by end-2002, will be coordinated with other components of the agriculture reform program that we expect to be supported by a loan from the World Bank.
· ERDEMIR will be privatized through a merger with ISDEMIR and additional sale of shares on the Istanbul Stock Exchange.
· The government intends to privatize those thermal electricity generation and electricity distribution assets remaining in state hands after the June 30, 2001 deadline for the transfer of operating rights stipulated in the electricity market law. The PA will engage investment advisors to conduct these transactions under a timetable consistent with the market reform strategy set forth in the law.
· Parliament has approved a law to reform the gas sector. This legislation includes a framework for privatization of the gas distribution assets of BOTAS (the natural gas company).
· As the level of civil servants' wages was low by historical standards at end-2000, our goal is, in spite of the recession, to maintain civil servants' wages constant in real terms during 2001 with respect to end-2000. Civil servants' salaries were raised by 10 percent in January, and will be adjusted further during the first half of 2001 by the difference between the CPI inflation rate and 10 percent. As stated in the Budget Law, a 2 percent adjustment has been granted during the first half of the year to compensate for the one month lag in salary adjustments existing under this system. Salaries will be raised in July 2001 by 5 percent. However, should cumulative CPI inflation exceed the salary increases granted up to July, salaries will be adjusted by that difference before end-2001. Halting the trend registered during the 1990s, the number of civil servants will not increase in 2001 in spite of the need to raise employment in key social sectors (mostly health and education).
In addition, we will continue to implement the policy of replacing up to a maximum of 15 percent of retiring personnel in the SEEs in the Treasury's portfolio, in the PA portfolio, in Turk Telekom, and in public banks. Personnel transferred from one SEE to another will be treated as replacements. In all cases, new hiring is subject to approval by Treasury. Before applying to Treasury for new employment, SEEs will transfer their employees among their regional units, and retiring personnel will not be re-employed by SEEs. No workers will be transferred from the companies in the PA portfolio, funds and revolving funds to the SEEs or to the consolidated budget. Overtime payments will be strictly limited.

Wage increases in the public sector will be supportive of our disinflation effort and fully consistent with the fiscal targets. It is also important and desirable to reduce the disparity between civil servants and government workers which has resulted from the very large increases accorded to public sector workers two years ago. In the medium term, we want to introduce a much stronger link between wage contracts and the performance of individual state enterprises. As detailed above, we will maintain the purchasing power of civil servants wages, first through increases in line with targeted inflation and second through ex-post compensation if inflation exceeds the target (a policy that is different from indexation and is not inconsistent with our disinflation effort). For public sector workers, we will negotiate new two-year wage contracts with the unions representing these workers that are supportive of the stabilization and reform program. We believe the nominal wage increase during the contract period should have an important signaling effect, and thus constitute one of the anchors of the disinflation program. We will aim at reducing the ratio of average net salaries of public sector workers and civil servants from 2.6 in 2000 to 2.0 during the contract period, with a decline in the ratio of about one fifth in the first contract year. The wage contracts for public sector workers will be adjusted for inflation exceeding the targets, but not before the end of each six-month period. The adjustment will not, however, exceed 80 percent of the difference between actual and projected inflation, and there will be no such adjustment for the first six-month period.