Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 25277

IMPLEMENTATION COMPLETION REPORT(SCL-46320; SCL-46330)

ON A

LOAN

IN THE AMOUNT OF US$1.1 BILLION

TO THE REPUBLIC OF

TURKEY

FOR A PROGRAMMATIC FINANCIAL AND PUBLIC SECTOR ADJUSTMENT LOAN

11/28/2002

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective November 27, 2002)

Currency Unit = Turkish Lira TL 1 = US$ 0.00000064US$ 1 = TL 1,552,624

FISCAL YEARJanuary 1 December 31

ABBREVIATIONS AND ACRONYMS

ASCU Agriculture Sales Cooperatives Unions MOF Ministry of FinanceBRSA Banking Regulation and Supervision Agency NBFI Non-Bank Financial InstitutionsCAS Country Assistance Strategy NPL Non-Performing LoansCBT Central Bank of Turkey PEIR Public Expenditure and Institutional ReviewCEM Country Economic Memorandum PEM Public Expenditure ManagementCFAA Country Financial Accountability Assessment PFMFC Public Financial Management and Financial ControlCMB Capital Markets Board PFMP Public Financial Management ProjectCOM Council of Ministers PFPSAL Programmatic Financial and Public Sector Adjustment LoanCPAR Country Procurement Assessment Report PFSAL Programmatic Financial Sector Adjustment LoanEBF Extra-budgetary Funds PIP Public Investment ProgramERL Economic Reform Loan PPL Public Procurement LawESW Economic Sector Work PPSAL Programmatic Public Sector Adjustment LoanEU European Union PSR Public Sector ReformFSAL Financial Sector Adjustment Loan QAG Quality Assurance GroupFX Foreign Exchange SDIF Savings Deposit Insurance FundGDP/GNP Gross Domestic Product/Gross National Product SEE State Economic EnterpriseGFS Government Finance Statistics SPO State Planning OrganizationHPC High Planning Council SSF Social Solidarity FundLOI Letter of Intent TCA Turkish Court of AccountsIDP Institutional Development Plan TIN Taxpayer Identification NumberIMF International Monetary Fund UNCITRAL United Nations Commission on International Trade LawLLP Loan Loss Provisioning VAT Value Added Tax

Vice President: Johannes F. LinnCountry Manager/Director: Ajay Chhibber

Sector Manager/Director: Paul Siegelbaum, Cheryl Gray Task Team Leader/Task Manager: Lalit Raina, James Parks

TURKEYProgramatic Financial and Public Sector Adjustment Loan

CONTENTS

Page No.1. Project Data2. Principal Performance Ratings3. Assessment of Development Objective and Design, and of Quality at Entry4. Achievement of Objective and Outputs5. Major Factors Affecting Implementation and Outcome6. Sustainability7. Bank and Borrower Performance8. Lessons Learned9. Partner Comments10. Additional InformationAnnex 1. Key Performance Indicators/Log Frame MatrixAnnex 2. Project Costs and FinancingAnnex 3. Economic Costs and BenefitsAnnex 4. Bank InputsAnnex 5. Ratings for Achievement of Objectives/Outputs of ComponentsAnnex 6. Ratings of Bank and Borrower PerformanceAnnex 7. List of Supporting Documents

Project ID: P070561 Project Name: Programmatic Financial and Public Sector Adjustment Loan

Team Leader: Lalit Raina TL Unit: ECSPFICR Type: Core ICR Report Date: January 2, 2003

1. Project Data

Name: Programmatic Financial and Public Sector Adjustment Loan

L/C/TF Number: SCL-46320; SCL-46330

Country/Department: TURKEY Region: Europe and Central Asia Region

Sector/subsector: Central government administration (50%), Banking (46%), Capital markets (2%), General industry and trade sector (2%),

KEY DATESOriginal Revised/Actual

PCD: 05/04/2001 Effective: 07/05/2001 07/17/2001Appraisal: 05/21/2001 MTR:Approval: 07/12/2001 Closing: 12/31/2001 12/31/2001

Borrower/Implementing Agency: GOVERNMENT OF TURKEY/UNDERSECRETARIAT OF TREASURYOther Partners:

STAFF Current At AppraisalVice President: Johannes F. Linn Johannes F. LinnCountry Manager: Ajay Chhibber Ajay ChibberSector Manager: Paul J. Siegelbaum - Cheryl Gray Paul Siegelbaum - Pradeep MitraTeam Leader at ICR: Lalit Raina - James Parks Lalit Raina - James ParksICR Primary Author: Gurhan Ozdora; Kamer

Karakurum OzdemirGurhan Ozdora2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: M

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:The main objective of the Programmatic Financial and Public Sector Adjustment Loan (PFPSAL)

was to address the Government's immediate financial and public sector reform priorities in the aftermath of the November 2000 financial turmoil and February 2001 financial crisis, while ensuring that social programs continued to be adequately funded. The rationale for supporting a combined package of financial and public sector reforms through the PFPSAL program was to help Turkey break definitively with the past vicious circle of inadequate fiscal management generating public deficits which in turn fueled inflation and financial sector instability. By laying out a medium-term program of combined financial and public sector reforms, the Government aims to bolster investor confidence by showing its determination to address the roots of macroeconomic instability and crises in Turkey. The PFPSAL was the first in a series of programmatic loans planned to be implemented over the 2001-2003 period in support of the Government’s comprehensive multi-year financial and public sector reform program aimed at restoring confidence in the banking system and correcting the underlying structural problems in the public sector. The single tranche PFPSAL of US$1.1 billion (of which US$400 million is on special structural adjustment loan (SSAL) terms and US$700 million on standard IBRD terms) was followed by the three tranche PFPSAL II of US$1.35 billion (of which US$800 million is on SSAL terms and US$550 million on standard IBRD terms) approved by the Board on April 16, 2002. The PFPSAL II became effective in August 2002, and the first US$450 million tranche was released, following fulfillment of the effectiveness condition regarding submission to Parliament of legislation extending the coverage of the audits of the Turkish Court of Accounts to the Presidency and Parliament, and allowing for external audit of TCA itself. This Implementation Completion Report covers both actions completed under PFPSAL and actions supported by PFPSAL II through mid-2002.

The PFPSAL and PFPSAL II operations were designed to support a medium-term program of second generation structural, policy and institutional reforms in the financial and public sectors. This program is grounded in the Country Assistance Strategy (CAS) Progress Report discussed by the Board in July 2001. It is closely integrated with other elements of the CAS and is supported by extensive Economic Sector Work (ESW) including analytical work on the key fiduciary aspects of public expenditure management. The program is designed to help Turkey prevent future crises by tackling the deep roots of financial instability in Turkey and achieve sustainable poverty reduction through macroeconomic stability and growth. The medium-term strategy for financial and public sector reform supported by the PFPSAL operations is targeted at helping the Government restore confidence by demonstrating how Turkey will resolve the underlying structural weaknesses which led to the February crisis. The PFPSAL program is part of a broader package of international assistance to support Turkey's strengthened program in response to the crisis, including an increase in IMF commitments from less than US$4 billion under the original Stand-by arrangement approved in December 1999 to over US$30 billion to date. The US$1.2 billion on SSAL terms within the PFPSALs was an addition to the original FY01-03 envelope, authorized in the CAS Progress Report as part of the Bank's broadening of support to Turkey in the crisis.

In response to the February 2001 crisis, the Government committed to a significant acceleration and widening of the scope of the financial sector reform effort already initiated as part of the Financial Sector Adjustment Loan (FSAL) to bring safety, soundness and productivity in the banking sector up to EU and international standards. Such acceleration and widening of the scope of the financial sector reform program was necessary to restore banking system confidence in light of the financial turmoil in November 2000 and subsequent macroeconomic/banking crisis in February 2001 and to respond to the changed sector circumstances because of the severe forex/interest rate and credit shocks suffered thereby. The development of the revised strategy was based on two post-crisis banking sector assessments and stress test results

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carried out during December 2000 and March 2001. The Bank management, in close consultation with the Turkish authorities decided to cancel the second tranche of the FSAL and to absorb the remaining FSAL reform actions in the two new PFPSAL loans. As part of the widened scope of its financial sector reform effort, and once the initial phase of urgent post-crisis banking reform and restructuring activity is over, the Government also plans to implement a comprehensive non-bank financial institutions (NBFI) reform program to complement the banking sector reform effort, and a study is being prepared by the Bank team in collaboration with the Government for this purpose.

The public sector reform (PSR) component of the PFPSAL operations aims at supporting measures to achieve sustained fiscal adjustment and create the conditions for transparent and effective government in line with EU and international norms. The Bank support for PSR through PFPSAL and PFPSAL II is designed to underpin the first phase of the reform program, notably efforts to sustain fiscal adjustment and start the change processes for core institutional reforms. The program builds on an initial set of structural fiscal reforms supported by the Economic Reform Loan approved in May 2000. The content of the public sector reform program draws on analysis presented in the 2000 Country Economic Memorandum (CEM) and the 2001 Public Expenditure and Institutional Report (PEIR). It also draws heavily on the Bank’s fiduciary sector work including the Country Procurement Assessment Review (CPAR) and the Country Financial Accountability Assessment (CFAA), both completed in 2001, as well as the Fiscal Transparency Review prepared by the IMF. The PEIR and public sector component of the CFAA were carried out as a joint exercise which contributed to an integrated approach.

The Bank’s programmatic assistance in support of financial and public sector reform in Turkey is a graduated response conditioned on concrete actions taken by the Government. The programmatic approach recognizes that the complex second generation policy and institutional reforms that Turkey is undertaking must be sequenced over the medium term. It also takes into account the uncertainties inherent in the crisis conditions that Turkey faced in 2001. It allows for a reasonable degree of adaptability of the program to unfolding events on the ground. Under the revised CAS, PFPSAL II is expected to be followed by two Programmatic Financial Sector Adjustment Loans (PFSAL) of US$500 million each and a Programmatic Public Sector Adjustment Loan (PPSAL) of US$375 million to support the continued implementation of the financial and public sector reform program.

The outcomes to date demonstrate that the goals and objectives of the PFPSAL program were appropriate and consistent with enabling the government to continue with the reform process. Project objectives were realistic and linked to monitorable performance indicators. Of particular note are the concrete targets for social expenditure which are now serving as important references within the internal dialogue between the Ministry of Finance, Treasury and responsible line agencies. The technical and financial assistance from the Bank and other donors allowed the government to address the immediate crisis while protecting critical social spending.

3.2 Revised Objective:The objectives of PFPSAL and PFPSAL II have not been revised.

3.3 Original Components:The PFPSAL and PFPSAL II operations have been designed to assist the Government in the

following areas:In the financial sector

1. Overhaul of the legislative and regulatory framework for banking activity to bring it in line with EU and Basle standards;

2. Institutional development of the new Banking Regulation and Supervision Agency (BRSA), and

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the bank failure resolution entity, the Savings and Deposit Insurance Fund (SDIF);3. Problem bank/bank failure resolution to undertake restructuring of the private sector banks and,4. State bank restructuring and privatization;

In the public sector5. Implementation of structural fiscal policies to underpin permanent fiscal adjustment;6. Design and implementation of reforms to modernize public expenditure management in line with

EU and international norms including budget reform, financial accountability and public liability management; and

7. Initiation of institutional reforms to improve public sector governance.

The focus and scope of the operation on reform, restructuring and recapitalization of the banking sector; and reform, adjustment and modernization of public sector management were appropriate given that structural weaknesses in these areas were at the root of the 2001 crisis. The PFPSAL operations have helped the government to enforce financial discipline on the banks and strengthen fiscal discipline in the public sector. The PFPSAL operations also assisted the government to undertake fiscal adjustment and manage its public debt burden, which increased greatly as a result of the crisis, while protecting social expenditure.

3.4 Revised Components:Loan components of PFPSAL and PFPSAL II have not been revised.

3.5 Quality at Entry:The objectives of the PFPSAL program were designed to be fully consistent with government

priorities. Government counterparts were involved in all phases of project preparation and design. Knowledge gained from ESW—notably the CEM (2000), PEIR (2001), fiduciary work under the CPAR and CFAA (2001), and informal sector work on banking (1998-99) helped in the design of the PFPSAL operation and the broader PFPSAL program. Although a quality at entry assessment for the first PFPSAL operation was not carried out by the Quality Assessment Group (QAG), the quality of preparation is judged to be satisfactory based on the fact that the project objectives were determined to be feasible during implementation. The objectives of PFPSAL II are fully consistent with the original PFPSAL program prepared together with the first PFPSAL operation. Quality at entry was rated satisfactory for PFPSAL II by a QAG panel chaired by the Vice-President of the PREM network.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:The single tranche PFPSAL was designed as the first in a series of two programmatic adjustment

loans structured to support both financial and public sector reforms in response to the 2001 crisis. It was followed by the three tranche PFPSAL II operation approved in April 2002. The rationale for a combined approach to financial and public sector reform derived from the urgent need to address simultaneously the close linkages tying chronic public sector deficits and financial sector vulnerabilities to macroeconomic instability. The lack of transparency of quasi-fiscal spending, including state bank duty losses, allowed part of the public deficit to be hidden from view which, when exposed by the crisis, contributed to the surge in the public debt stock. The PFPSAL program has aimed to break the vicious circle of inadequate public sector management in Turkey that led to ever increasing public indebtedness, thus fueling financial sector dependency and speculation on high-return government securities, which in turn further increased the public debt burden. By combining urgent, up-front measures in response to the crisis with initiation of deeper structural reforms, the PFPSAL program is geared to rebuild investor confidence by demonstrating that Turkey is finally addressing the core institutional weaknesses in the financial and public sectors that have contributed to macroeconomic instability. The status of the macroeconomic framework and structural

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reforms supported by PFPSAL and PFPSAL II is given in the sections below.

Macroeconomic Framework. For the macroeconomic environment, conditions to be fulfilled prior to Board presentation of PFPSAL included: (i) satisfactory macroeconomic framework consistent with the core objectives for 2001, including positive Gross National Product (GNP) growth during the second semester, inflation of 2 percent per month and nominal interest rates of 50-55 percent by the end of the year, and a primary surplus for the consolidated public sector of 5.5 percent of GNP, and (ii) approval of a satisfactory supplementary budget for 2001 consistent with the Government’s macroeconomic objectives which would also ensure satisfactory expenditure envelopes for health, education and social protection. These conditions were met prior to Board presentation of PFPSAL. For PFPSAL II, corresponding macroeconomic objectives were set for 2002 including an increase in the primary surplus to 6.5 percent of GNP and a decrease in the inflation rate to 35 percent by the end of the year.

The macroeconomic objectives supported by PFPSAL were established under the Government’s strengthened program announced in May 2001. The strengthened program was also supported by an additional US$8 billion from the IMF. As of end-2001, the fiscal targets of the program were broadly met including an overshooting of the primary surplus target. However, some of the macroeconomic outcomes deviated significantly from program targets; the recession turned out to be deeper than expected with GNP contracting by 9.4 percent and inflation reaching 68.5 percent by the end of the year. Nominal interest rates remained substantially higher than program levels which contributed to a higher than expected debt-to-GNP ratio of 93.3 percent. In September 2001, Turkey was hit by a new external shock as global financial markets and trade were affected by the terrorist attacks in the United States. In February 2002, the IMF approved a new US$16 billion Stand-by arrangement for Turkey covering 2002-04. Macroeconomic performance improved considerably in the first half of 2002, with a slow down in inflation, a drop in nominal interest rates combined with a relative stabilization of the exchange rate following the sharp depreciation in 2001, and encouraging signs of increased economic activity. However, interest rates increased once again from below 55 percent in April to above 70 percent by June, as political uncertainty increased prior to the announcement of early elections of November 3rd. The upward movement in interest rates was reversed immediately after the elections as the markets reacted favorably to the new single party government. Interest rates were down to the 50-55 percent range by mid-November. GNP expanded by 8.8 percent in the second quarter (year-on-year) and inflation has remained low. The end-year targets of 4 percent growth (revised upward from 3 percent) and 35 percent inflation are well within sight. The IMF program has remained on track. The 3rd IMF program review was completed in August 2002. Initial discussions on the 4th program review were held in October and resumed in December. Macroeconomic outcomes in 2002 have also remained on track on the basis of the quarterly indicators agreed under PFPSAL II. With regard to the social expenditure targets for education, health, and social protection, outcomes in 2001 were in line with the targets set under PFPSAL including overall social spending of 15 percent of GNP. Under PFPSAL II, the Government has committed to maintaining, or even exceeding, this target. As of October, preliminary data indicate that social spending is broadly on track, although there are significant shortfalls in spending on direct income support to farmers and social assistance payments throughthe social solidarity fund on which the Bank is following up with the Government.

Financial Sector Reform. In the financial sector, PFPSAL objectives were: to accelerate banking sector prudential regulation reform, especially concerning capital adequacy, foreign exchange exposure, loan loss provisioning, connected lending and risk management, to strengthen the newly created BRSA through a targeted institutional development effort, thereby strengthening banking supervision, enforcement and corrective action programs, to step up SDIF interventions in additional insolvent private banks and actions to resolve these banks rapidly, and accelerating the financial and operational restructuring of the state banks, including resolution of the duty loss issue. Most of these objectives were realized or will be

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realized through the ongoing PFPSAL II. Outcomes achieved through PFPSAL can be summarized as: restoring confidence and reducing the vulnerability of the banking system; and strengthening the foundation for an efficient and sound banking system through reform in the prudential regulations. Further actions are necessary, however, and are in the pipeline; these involve institutional development and strengthening of the BRSA/SDIF, bankruptcy reform, deposit insurance reform and the privatization of the state banks.

Public Sector Reform. In the public sector, PFPSAL objectives were: (i) to support urgent fiscal measures to respond to the crisis while ensuring that social spending is protected, (ii) to lay the foundation for permanent fiscal adjustment to ensure a sustainable path for the public sector debt and prevent a recurrence of the conditions which led to the 2001 crisis, (iii) to modernize the public sector through improving transparency and management of public expenditure and liabilities, (iv) to ensure financial accountability in line with international standards, and (v) to raise the quality of public sector governance. The actions in support of these objectives to be taken before Board presentation of PFPSAL were all achieved. Further progress towards the objectives is being made under the ongoing PFPSAL II.

4.2 Outputs by components:FINANCIAL SECTOR REFORM

The approach to financial sector reform adopted in PFPSAL was essentially similar to the one incorporated in the FSAL. The first tranche of FSAL was disbursed in December 2000. But within a few months of project effectiveness, a severe financial crisis in February 2001 required the Bank and the Government to reconsider their strategy. The second tranche of FSAL was cancelled and the remaining actions envisaged for FSAL's second tranche were subsequently implemented as Board presentation conditions for the PFPSAL in July 2001 and PFPSAL II in April 2002, and the remaining actions are planned to be carried out as second and third tranche conditions for PFPSAL II. Continuity of the strategic reform framework, as envisaged during the preparation of FSAL and still valid during the preparation of the PFPSALs, was maintained with necessary tactical changes based on the circumstances at the time. The banking reform had four strategic pillars (each loan had tactical implementation components of the strategic objectives): (i) strengthening the legislative and prudential regulatory framework to international standards; (ii) strengthening banking supervision and failure resolution institutional capacity (BRSA and SDIF); (iii) reform/restructuring/resolution of private banks to increase systemic safety and soundness; and (iv) restructuring and privatization of the state owned banks.

Under the FSAL first tranche, a new banking law was enacted by parliament (in place of a constitutionally obsolete decree law). The law created a new independent and dedicated banking regulation and supervision entity (BRSA), strengthened the banking supervisor's rights and obligations for undertaking corrective actions on problem banks in order to ensure banking system safety and soundness, and strengthened the legal authority and capacity for BRSA and the failure resolution entity SDIF (Savings and Deposit Insurance Fund) to intervene in problem banks. In conjunction with FSAL, the government also upgraded all key prudential regulations like capital adequacy, foreign exchange exposure, loan loss provisioning and connected lending regulations to international standards, initiated corrective action through intervention in a number of private banks, including closure, sale or merger for such banks; and enacted enabling legislation for the restructuring and privatization of the state owned banks Vakif, Emlak, Halk and Ziraat.

Once FSAL second tranche was closed and replaced by PFPSAL and PFPSAL II, the PFPSAL: (i) completed the deepening and broadening of the regulatory framework to bring consolidated regulation, and a risk management approach; (ii) initiated formal institutional development program for BRSA and SDIF;

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(iii) undertook broad intervention and cleaning up of mismanaged and insolvent private banks; and (iv) amended the legislation facilitating the privatization of Vakif bank, liquidated the third largest state owned bank, Emlak; and completed the financial restructuring (including duty losses)of the two largest state owned banks, Halk and Ziraat.

Under the ongoing PFPSAL II, the key reforms being undertaken or planned include: (i) clarifying the collateral valuation regime for loan loss provisions, strengthening enforcement of the regulatory regime with the help of corrective action programs, and bringing repo transactions on balance sheet; (ii) implementing the institutional strengthening programs of BRSA and SDIF; (iii) completing the restructuring of the private banking sector including closures, mergers or recapitalizations as necessary; (iv) implementing the asset resolution strategy for the stock of assets with the SDIF; (iv) strengthening and improving the effectiveness of the bankruptcy framework including a corporate workout framework; and (v) completing the operational restructuring of the two state owned banks, Halk and Ziraat, and the full privatization of Vakif bank.

All the actions planned under PFPSAL were completed before loan signing as a single tranche operation and the details are presented below. The details of the progress to date of actions under PFPSAL II are also outlined below with the objective of presenting the updated status of the sector. A. Regulatory Framework for Banking:

• To comply with the required conditions for the PFPSAL Board presentation in July 2001, the Parliament had enacted a banking law amendment in May 2001 allowing full tax deductibility of all specific loan loss provisions required by the BRSA effective for the year beginning January 1, 2001. In June 2001, the BRSA issued new LLP regulations and lifted the exemption of Ziraat’s agricultural support loans from specific provisioning. Also in June 2001, through a separate regulation by the BRSA, application of connected exposure limits on a consolidated basis was allowed while retaining the existing phase-in period in the law for connected exposures to reach EU limits. With a regulation published on January 31, 2002, a transition period until January 1, 2004 has been granted to banks for the monthly reporting of consolidated capital adequacy and FX exposure ratios. This regulation while introducing separate exposure limits for equity investments in non-financial subsidiaries in line with the applicable EU Directive, also defined connected exposure based on EU directives and applied this definition and maximum exposure limits on a solo and consolidated basis, with a phase-in period satisfactory to the Bank. In June 2001, a regulation amended the solo and consolidated capital adequacy and FX exposure rules, increasing the reporting frequency from quarterly to monthly. A further amendment to the solo and consolidated capital adequacy regulations was made in February 2002 through a regulation imposing a Basel-compliant market risk based capital charge on banks effective January 1, 2002 on a solo basis, and July 1, 2002 on a consolidated basis. This was followed by a new capital adequacy regulation introduced in January 31, 2002 in which the principles and procedures about inclusion of the structural positions in the calculation of capital adequacy ratio was incorporated. The principles on the structural position were regulated in detail and announced by a circular following the decision of the Board dated February 5, 2002. IAS and EU Directives related to accounting were adopted for the annual accounts and consolidated accounts of banks and other financial institutions in June 2002. With this regulation, banks shall ensure that their balance sheets, income statements and other financial statements along with their disclosures, comply with the IAS.

• Due to the coverage period of the ICR which extends up to July 2002, actions which were part of the PFPSAL II Board and second tranche conditions and which were completed by July 2002 are also

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reported in this ICR. Before the PFPSAL II board presentation: (i) in January 2002, the BRSA issued a supplementary memorandum to the LLP rule to clarify fair value accounting rules for collateral; (ii) an amendment to the provisional article 2 (f) in the Banking Law 4389 was made in January 2002, eliminating the four year phase-in period for pre-June 1999 loans; (iii) an amendment to the LLP rule was made on June 2002, to facilitate the restructuring of corporate loans and ensure that restructured loans are only upgraded to a higher classification category once renewed debt service track record and creditworthiness are firmly established; and (iv) the BRSA issued a new regulation on December 2001 with applicability as of February 1, 2002, requiring banks to bring repos on balance sheet as collateralized finance transactions. By the end of May 2002, the BRSA had completed a three-stage audit process and corrective actions which were undertaken during January–August 2002 period. This process, which was undertaken to determine which banks were out of compliance with the limits on capital adequacy, new connected lending and non-financial equity exposure, has revealed several banks with excess connected exposures and the management and control of one of these banks was transferred to the SDIF and the others took corrective action to comply with the regulatory limits. There were three banks with lower than required capital adequacy ratios; one of these banks was intervened by SDIF, the other bank has been instructed by the BRSA to undertake corrective action and the third bank has received Tier-II support from SDIF. Through this action, a PFPSAL Board condition which was later transformed into a second tranche core condition for the PFPSAL II has also been met.

B. Institutional Development of the BRSA/SDIF:

• Development of BRSA and SDIF as independent regulatory bodies is an essential element of the financial sector reform and actions in this regard are part of the PFPSAL and PFPSAL II conditions. As part of the Board conditions for the PFPSAL, the BRSA Board adopted a time-bound institutional development plan during its June 2001 meeting, however implementation progress has been slower than planned, as most of senior management’s attention and scarce human resources have been devoted to resolving problem banks and taking actions to stabilize the banking system in the aftermath of the crises. For the purpose of satisfactory implementation of the Institutional Development Plan (IDP), the BRSA Chairman has appointed a Committee for reviewing and increasing the efficiency of the BRSA Organization. The Committee has recently completed the reorganization study and produced a report addressing the required changes under the title of “Organizational Build-Up at the BRSA: Towards Prudential Supervision”. In view of the report, the Banking Regulation and Supervision Board approved the regulation proposal concerning required organizational changes on September 25, 2002 and the new BRSA organization became effective on the same date. However, following the re-capitalization exercise, the management has turned its focus back to the institutional development priorities and rapid progress is anticipated in the areas of a common database, development of a comprehensive monitoring system, corrective action programs, risk based supervision, and consolidated supervision.

• The SDIF Board accepted a strategic plan for the institutional development of SDIF on August 5, 2002. Based on this strategic plan, three project groups were established as of September 1, 2002. The SDIF Board accepted an asset resolution strategy, which is under implementation and the institutional structuring for asset resolution is completed. A number of fairly critical decisions currently under discussion are related to: (i) the geographical location of SDIF in Istanbul (where the banks are) or in Ankara (where the government is);(ii) the deposit insurance regime and financial resources of SDIF in future including removal of the existing blanket guarantee.These are expected to be resolved over the next several months as part of the reform implementation

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program. Consequently, the second tranche condition on the adoption by the SDIF Board of an institutional development plan has been met.

C. Problem Bank/Bank Failure Resolution:

• Before the Board presentation for the PFPSAL, BRSA had to identify all capital deficient banks in the system, and to agree on capital restoration plans with these banks. This process was completed in July 2001. As part of the agreed action plan in the PFPSAL, the Treasury in cooperation with the CBT injected into the SDIF banks by end May 2001 enough marketable government securities (in TL and FX) carrying quarterly floating rate market-based coupon interest to ensure that the banks had sufficient liquidity to operate and honor any deposit withdrawals, and to recapitalize the SDIF banks up to 0 percent capital adequacy. As part of this operation, cash (in lieu of the government securities above) was also injected to retire at least two thirds of all on and off balance sheet overnight high cost liability funding of the SDIF banks outstanding on March 16, 2001 (excluding liabilities to the CBT). The CBT by end May 2001 was able to mop up excess liquidity through open market operations within an overall ceiling on the stock of repurchase agreements of the SDIF and state-owned banks with the CBT, amounting to TL 7 quadrillion.

• In order to start the collection process, the SDIF decided to transfer problem loan files from the SDIF Banks to the SDIF and transfer of other files began before the Board presentation. As part of the problem bank resolution process undertaken by the SDIF, Esbank and Interbank were merged into Etibank in June 2001. Egebank, Yurtbank, Yasarbank, Bank Kapital and Ulusalbank were merged into Sümerbank and later on August 8, 2001, Sümerbank was sold to Oyakbank. The banking and deposit taking licenses of Etibank and Kentbank were revoked as of December 28, 2001 and the liquidation process of these banks was initiated. In the general assembly meetings of these two banks, held on April 4, 2002 within the framework of the decisions of the BRSA and of the SDIF, the liquidation processes was cancelled and these banks were merged under Bayindirbank. Following up on the problem bank resolution, the SDIF sold Sitebank to Novabank; the share transfer agreement with Novabank was signed on December 20, 2001 and the transfer of shares was completed on January 25, 2002. Bank Ekspres was sold to the Tekfen Holding, and the transfer of shares was completed on June 30, 2001. Demirbank was sold to HSBC, and the transfer of shares was completed on October 30, 2001. EGS bank was merged into Bayindirbank as of January 18, 2002. The remaining performing loans of all the intervened banks except Pamukbank have been transferred to Bayindirbank which is under the control of the SDIF.

Currently there are two banks under the SDIF management: Pamukbank, for which the legal process is continuing and the Bayindirbank which is used as a bridge bank assigned with the task of managing the assets and mainly the remaining performing loans of the banks intervened by the SDIF. The consolidation process of the SDIF banks is rapidly progressing. The number of branches, excluding Pamukbank, declined from 1,619 to 59 as of November 5, 2002 and is expected to decline to 11 by year-end. The number of staff (excluding Pamukbank) declined from 32,569 to 1,268 by November 5, 2002 and is expected to decline to 250 by year-end. With these actions, Board and second tranche core PFPSAL II conditions have therefore been met.

• Under the SDIF resolution program agreed with the Bank and the IMF, all SDIF banks intervened before November 2001 were to be sold, merged or closed by end 2001. To address this issue, during December 2001, the SDIF auctioned off US$2.9 billion (US$2.6 billion in FX and US$0.3 billion in TL) of SDIF bank liabilities and matching assets to private banks and transferred the residual assets and liabilities to Ziraat and Halk banks (US$2.4 billion of FX liabilities and assets) and all remaining deposit liabilities and non-deposit liabilities together with corresponding amounts of assets were transferred to

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Toprakbank (intervened in late November 2001) and Bayindirbank. The SDIF also has transferred all non-performing loans, real-estate assets and subsidiary companies of intervened banks to the SDIF collection/asset sales department. A significant number of real-estate assets have been sold through public auctions and similarly, most of the large value subsidiaries have also been sold. Packaging of bundles of non-performing loans for sale to the market is being planned (first sale tranche was announced by the end of October with a face value of US$ 250 million). Through these actions, the PFPSAL II Board condition related to the resolution of the liabilities remaining with the SDIF and preparation of an asset resolution strategy to deal with all the remaining non-financial assets, non-performing loans, and other investments in subsidiaries of these banks, were completed. SDIF has since been carrying out satisfactory implementation of the asset resolution strategy. Upon the decision of the Board, further implementation progress is being made on the strategy for asset resolution. Resolution of Tarisbank was completed as of October 21, 2002 with the share transfer agreement regarding the transfer of the concerned Bank shares to Denizbank A.S., and the actual transfer of shares was completed on October 25, 2002. Furthermore, upon the decision of the Banking Regulation and Supervision Board, as of September 30, 2002 Toprakbank A.S. was merged under Bayindirbank A.S. and its license to perform banking activities and take deposits was revoked as of the same date. Turk Ticaret’s liquidation started in August 19, after being approved in the August 9 shareholders' meeting. With these actions, a second tranche PFPSAL II condition has also been met.

• As part of the PFPSAL II Board conditions, by January 2002 the BRSA had taken necessary regulatory and enforcement actions to launch the process of ensuring that all non-performing loans are correctly and transparently stated through proper classification and provisioning procedures in the private deposit taking banks’ balance sheets in order to reflect the true capital position of the banking system. This was followed by issuance of implementing regulations in February and March 2002, for the public support scheme for re-capitalization of private deposit taking banks, thus realizing a PFPSAL II second tranche condition.

• Bankruptcy Reform. Under PFPSAL II, an Insolvency and Creditor rights ROSC was undertaken by the Bank in close cooperation with the government. The recommendations of the ROSC were presented to the government and a working group on the reform of Execution and Bankruptcy law is preparing comprehensive amendments to the law to improve the effectiveness of the bankruptcy legislative and institutional framework. The amendments are expected to incorporate an accelerated court approval process for corporate workout arrangements. A draft of the proposed amendments has been prepared and is being reviewed by related government institutions, and a final draft is expected to be ready for submission to Parliament after the final review of internal committee in December 2002. Completion of this comprehensive review of the Execution and Bankruptcy Law is a second tranche condition for PFPSAL II.

D. State Bank Restructuring and Privatization:

• As part of the financial restructuring of the state banks, Treasury, in cooperation with CBT, injected into Ziraat and Halk banks enough marketable government securities by end-May 2001, to: (i) ensure that these banks had sufficient liquidity to operate and honor any deposit withdrawals; (ii) write off all remaining duty loss claims and re-capitalize the two banks up to at least 8 percent capital adequacy; and (iii) reissue all already existing government securities in the books of these two banks in uniformity with the new set of securities as necessary. In addition to these, cash (in lieu of the government securities above) was also injected to retire at least two thirds of all on and off balance sheet overnight high cost liability funding of the two state banks outstanding as of March 16, 2001 (excluding liabilities to the CBT). The CBT by end May 2001, was able to mop up excess liquidity through open market operations within an

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overall ceiling on the stock of repurchase agreements of the SDIF and state-owned banks with the CBT of TL 7 quadrillion as of end-May 2001. In addition to these, short term TL repos in Ziraat were eliminated by end May 2002. As part of the operational restructuring of the state banks, an independent professional governing board (Joint Board) for the two banks with the mandate to manage these banks in accordance with commercial principles and all prudential guidelines was appointed in April 2001. The governing board has initiated the operational restructuring of the two banks, including the closure of unprofitable branches and the reduction of redundant staff.

The three State Banks (Ziraat, Emlak and Halkbank) had a total of 2478 branches as of April 2001, the date the “Joint Governing Board” was appointed to office. In July 2001, Emlakbank was closed, its branches, personnel, liabilities and part of its “good”assets were transferred to Ziraatbank and Halkbank, its “bad” assets and non-banking activities were left with “Emlakbank in liquidation” and its land development/construction activities were transferred to the Mass Housing Administration-TOKI. Of the initial 2478 branches, 788 were closed by 30 June 2002, reducing the total number of branches to 1690 (1141 Ziraat, 549 Halk). Since end June, the number of branches has been reduced to 1133 at Ziraatbank and to 452 at Halkbank. Thus, the total number of branches has decreased by 803, from 2478 in April 2001 to 1675 today. Between April 2001 and June 2002, staff in the public banks were reduced by 26,000, followed by a reduction of 3,000 in July 2002. As a result of further changes between July and November 2002, the total number of staff in the remaining two public banks has been reduced to about 30,000 (20,000 Ziraat, 8,000 Halk) from the initial number of 60,000 staff in the three public banks (all numbers rounded) in April 2001, resulting in a 50 % staff reduction in public banks. The PFPSAL II second tranche core condition in this regard has therefore been met.

• In preparation for privatization, this governing board was to appoint a restructuring advisor for Ziraatbank and a restructuring and privatization advisor for Halk Bank. Although this has not been realized yet, the Government in the Letter of Intent (LOI) dated July 30, committed to appoint a privatization advisor for Halkbank by end-September 2002 and to prepare the bank for sale by first quarter of 2003. As part of the PFPSAL II second tranche condition, a study on the future strategic direction of Ziraat vis-a-vis agricultural finance in Turkey with the objective of future restructuring/privatization of Ziraatbank has been launched, and is planned for completion by December 2002. Treasury and the governing board for the public banks have agreed on the amount of interest and principal payments to be made in cash during 2002 on government securities in the books of Ziraat and Halk banks. The coordination between Treasury and the two banks for elimination of short term liabilities has worked well, and satisfactory debt-service payments have been made to date by Treasury on the Ziraat/Halk government bond portfolio. Through these actions, PFPSAL II Board and second tranche conditions have been met.

• In order to prepare Vakifbank for privatization, the Parliament in June 2001 adopted amendments to Vakifbank law (no:6219) to allow for simultaneous sale of A and B shares. This was followed by Vakifbank management appointing a privatization advisor (Merrill Lynch) to advise on the Vakifbank privatization strategy and the sale process, also a PFPSAL II Board condition. Following the due diligence process by the advisor, seeking expressions of interest from prospective buyers was completed in early June 2001. The sale process could not be completed as none of the bidders submitted a final bid by June 28. Operational restructuring to remove non-bank assets is needed to ensure successful sale of the bank. A new tender date also needs to be set as soon as possible. Completion of the privatization of Vakifbank will be a critical challenge for the government in meeting the third tranche conditions for PFPSAL II.

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PUBLIC SECTOR REFORM

The PSR component of PFPSAL was aimed at supporting the Government’s program which included measures to achieve sustained fiscal adjustment and create the conditions for transparent and effective government. In particular, PFPSAL supported measures in three areas: (i) implementation of urgent fiscal measures to underpin the primary surplus target for 2001; (ii) initiation of the public expenditure management (PEM) reform process including preparation of key legislation to underpin improvements in financial accountability and public liability management; and (iii) initiation of work on a national strategy to improve governance and fight corruption. The follow-up PFPSAL II addresses core public sector reform areas including: (a) deepening structural fiscal polices (both revenue and expenditure measures) aimed at more permanent fiscal adjustment; (b) implementation of the first phase of the PEM reform including a pilot program for introducing GFS budget classification and coding, rationalization of the public investment program, and preparation of legislation to underpin modernization of budget management; (c) enactment of legislation on public procurement and public debt management; and (d) adoption and publication of the national anti-corruption strategy.

A. Structural Fiscal Policies:

Fiscal Program for 2001 and 2002: • The public sector primary surplus reached 5.9 percent of GNP in 2001, exceeding the program target, while the improvement with respect to the previous year originated mostly from the non-central government part of the public sector. A supplementary budget for 2001 under the strengthened program was approved by the Parliament on June 15, 2001, and additional revenue and expenditure measures were taken to augment the original fiscal package for 2001. Among these measures were: increases in the petroleum consumption tax and VAT rates, and price adjustments by SEEs.

• A fiscal package to underpin the fiscal targets was announced in early 2002 and nearly all of the elements of this package have been implemented. The fiscal outcome as of end-June 2002 was broadly in line with the program targets and the outcome through August will be evaluated as part of the 4th IMF program review. Real increases in SEE prices, which had been delayed, were implemented to a great extent in June-August. No agriculture credit subsidies were included in the 2002 budget and indirect agriculture subsidies were reduced (although unplanned hazelnut support purchases were announced in September). In order to reduce operating expenditures, the Government has issued a circular to close regional administrations and shift certain departments to the provincial administrations, although information on the status of implementation of this program has been difficult to obtain. The preliminary data for social expenditure as of October 2002 show that the Government is broadly on track with respect to its end-year overall target, although there are significant shortfalls in spending on direct income support to farmers and social solidarity fund.

Structural Revenue Measures:• Prior to PFPSAL Board presentation, a new tax regulation was enacted in June 2001 to expand the use of Tax Identification Numbers (TIN) to owners of bank accounts, users of banking services and participants in financial transactions. The new regulation was a key step in broadening the tax base in Turkey.

• In January 2002, the Government adopted a medium term tax strategy meeting a key benchmark

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set under the PFPSAL. The strategy includes tax policy and tax administration components to address the complexity and lack of transparency of Turkey’s tax system. It is based on a review carried out jointly with the World Bank. This strategy is a significant step towards improving the stability, transparency and equity of the tax system. The aim is to minimize tax distortions, broaden the tax base and improve the efficiency of tax administration, all leading towards a reduction in marginal tax rates. To this end, the government’s tax strategy lays out a series of coordinated actions over the course of the next three years to address important issues regarding tax policy and tax administration. One of the major actions in the strategy was the enactment of the Special Consumption Tax law in June 2002 which became effective in August. Preparation of the functional reorganization of the General Directorate of Revenues is underway but its implementation has been delayed temporarily due to the November elections. Significant additional technical assistance is likely to be needed to ensure sustained implementation of the tax strategy as the issues to be addressed become more complex, in particular those related to direct tax reform. The direct tax reform package, originally scheduled for submission to Parliament in October 2002, was postponed until after the November elections.

Structural Expenditure Measures:• The Government has initiated a comprehensive public employment program as part of the longer term process to modernize the public sector. In 2001, the number of civil servants was kept constant in the central government and SEE employment (including Turk Telekom and enterprises in the portfolio of the Privatization Administration) fell in line with the 15 percent replacement hiring rule. For 2002, the ceiling on civil service employment was expanded to cover local governments and the replacement hiring rule for SEEs was tightened to 10 percent. Preliminary first quarter results as monitored by the Treasury Controllers indicate that overall compliance with the SEE replacement rule is on track although performance may vary from enterprise to enterprise.

• Redundancies in SEE employment have been identified by the Government as 45,800 and over 20,000 of these redundant positions were eliminated, essentially through voluntary retirement, between end-January and end-October 2002. In support of the redundancy program, the Bank carried out a desk study on SEE overemployment in early 2002 which was shared with the authorities. The retrenchment in SEEs promotes both improving the overall balances of SEEs and reducing the crowding out of private sector investment and job creation.

• In an effort to better monitor public sector employment, the Ministry of Interior issued a circular in February 2002 to all local governments for gathering their employment data. First quarter employment figures for local governments were provided to the Bank by the Government as well as the benchmark end-2001 figures thereby meeting conditions for second and third tranche release of PFPSAL II.

B. Public Expenditure Management:

The multi-year strategy for Public Expenditure Management (PEM) reform prepared by the Government was based on the recommendations of the Public Expenditure and Institutional Review carried out jointly with the Bank. The content of the PEM reform was further refined and publicized through the International Conference on Effective Government, co-sponsored by the Government and the Bank in December 2001. To coordinate the implementation of the PEM reform, the Government has established a high-level Steering Committee including senior representatives from the Ministry of Finance, Treasury, State Planning Office and Turkish Court of Accounts as well as selected line ministries and agencies as needed. Further, the Government has formed a Ministerial Committee in May 2002 to oversee the overall public sector reform including the PEM reform and anti-corruption strategy. However, these coordinating

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structures do not yet function effectively. As a result, while reform measures under the responsibility of one or another agency have been moving forward, those elements of the program which require cross-agency cooperation have progressed more slowly.

The PEM reforms supported by PFPSAL I and II seek to establish a transparent and accurate budget system that provides comprehensive coverage of general government finance and expenditure and the appropriate budget legislation to define roles and accountability. Under PFPSAL II, budget classification and accounts are being improved, the public investment program has been rationalized, new procurement and debt management laws have been approved, and a modern public finance management and financial control law (PFMFC) is to be prepared and legislated to enable gradual development of a performance focus in government. A draft PFMFC law was submitted to the Parliament in August.

The agreed actions under PFPSAL and PFPSAL II addressed three core PEM areas: budget reform, financial accountability and public liability management. The main achievements in these areas are summarized below.

Budget Reform: Actions taken in this area aim to reform the processes of budget preparation and execution in

Turkey. Progress is as follows:

• In addition to the 46 budgetary funds and 6 extra-budgetary funds (EBFs) that had been closed as of March 2001, exceeding the targets under the Economic Reform Loan, the Parliament adopted legislation in June 2001 to close 15 more budgetary funds and two EBFs. As a result, all budgetary funds, with the exception of the Support Price Stabilization Fund linked to the reform of the agricultural sales cooperative unions (ASCUs) under the Agriculture Reform Implementation Project with the World Bank, and all but five EBFs (Social Solidarity Fund, Defense Fund, Promotion and Publicity Fund, Saving Deposit and Insurance Fund and the Privatization Fund) were eliminated in the 2002 budget. The Government also committed not to create any new budgetary or extra-budgetary funds. The presentation of the 2002 budget to the Parliament was supplemented with the submission of the accounts and financial outlook for the contingent liabilities of the Treasury, the remaining EBFs, the social security institutions, autonomous agencies, local authorities and SEEs. The special accounts/special appropriations mechanism which has remained after closure of the funds has perpetuated the earmarking of significant amounts of revenue. The Bank is following up closely with the authorities on measures to terminate the usage of this mechanism as soon as possible.

• The number of revolving funds, which are used by local institutions to supplement budget allocations, was reduced from over 2,600 to 1,981 by late 2001. An additional 548 revolving funds were closed by end-March 2002.

• The Government completed preparation of a new budget classification for consolidated budget agencies in line with the GFS standards in June 2001. The new GFS classification is being implemented on a pilot basis in the 2002 budget—six pilot agencies are participating in the program. The MOF has issued a circular to make the new classification system operational along with the old classification system in 2003 for all consolidated budget agencies. The full introduction of the new system has now been delayed until 2004.

• The Government has taken important steps to improve the credibility of the budget preparation process and rationalize the public investment program (PIP). The need to rationalize the PIP had arisen

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from the extremely high average completion times and the existence of inactive projects in the investment portfolio which received “trace allocations”. As a Board condition for PFPSAL, a High Planning Council decision was issued in June 2001 to accompany the Prime Minister’s Budget Call. The decision: (i) provided a macro-fiscal framework for 2002 budget preparation including overall levels for the recurrent and investment budgets, (ii) established indicative ceiling for both the recurrent and investment budgets for ministries and line agencies based on an indexation formula applied to the actual budget allocations that each ministry and line agency received in 2001, and (iii) called for a rationalization of the PIP in the 2002 budget with the objective of reducing expected average time of completion of the overall PIP by 20 percent in 2002 along with limits on the introduction of new multi-year investment projects except for emergency projects. After preparation of a public investment review jointly with the Bank in October 2001, SPO published the PIP for 2002 in January 2002. The average completion time was cut by 32 percent, from 12.5 years to 8.5 years, thereby meeting a key benchmark for PFPSAL II Board presentation. The action plan, which was prepared by SPO for further rationalization of the PIP in 2003-04, was adopted by the Government in October 2002.

• As part of the efforts to build capacity for policy formulation, SPO has prepared draft guidelines for strategic planning by key ministries and departments including costing policies. The Bank is engaged in supporting finalization of the strategic planning guidelines by SPO and their phased integration into the improved budget preparation process.

• The government is carrying out a related pilot program to improve operational performance under the responsibility of MOF. Six pilot agencies successfully completed, in the context of their selected operations, an exercise in strategic planning which facilitated a clear statement of objectives, proposed performance goals and a request for budget appropriations consistent with those goals. Implementation of the pilot will continue through the remainder of 2002 and into 2003.

C. Financial Accountability:

Although Turkey’s system of public financial accountability possesses some of the basic elements, the system has significant problems and lacks coherence. The following actions are being implemented under the PFPSAL program to address these problems and modernize public financial accountability in Turkey in line with EU norms and international best practice.

• A new, internet based, automated accounting system (“say2000i”) has centralized the MOF’s accounting database and contains data on all individual transactions across all consolidated budget agencies. The MOF has completed the installation and commissioning of the say2000i in the approximately 1,500 sites of the General Directorate of Public Accounting across Turkey. The say2000i system went on-line on January 2002 for the consolidated budget agencies, meeting a key benchmark for PFPSAL II Board presentation.

• The Ministry of Finance was given, by the 2002 budget law, the authority to issue accounting standards for all general government agencies in line with GFS. Accounting standards on the modified accrual basis, manual and chart of accounts consistent with GFS have been drafted and were issued to the three agencies participating in the joint pilot program on January 23, 2002 (PFPSAL II). The draft accounting standards regulation and statutory chart of accounts have been prepared and are under review by the Bank prior to their publication as a condition for third tranche release of PFPSAL II. The regulation will establish framework accounting standards and chart of accounts which will subsequently be elaborated over time. To support this effort, the Bank has proposed to the Government to establish a Government

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Accounting Standards Board in line with evolving international practice.

• Turkey has made good progress in upgrading its public procurement legislation in line with international standards under the PFPSAL program. The new Public Procurement law which meets UNCITRAL standards was enacted on January 22, 2002 meeting a key benchmark for PFPSAL II. The new law was prepared in close coordination with World Bank and EU experts, and is a significant advance towards Turkey’s compliance with EU requirements. Although the initial thresholds above which foreign bidders cannot be restricted were set at high levels, amendments to the law satisfactory to the Bank were enacted in June 2002. In accordance with the new law, the Public Procurement Agency was established to oversee public procurement and ensure enforcement of the new procurement standards (thereby meeting a third tranche condition for PFPSAL II). The Bank is now supporting implementation of the procurement reform under an IDF grant to the new Public Procurement Agency.

• An audit task force was established in June 2001 to develop an audit reform program with the following objectives: (i) to develop a plan of action, including necessary legal amendments to expand the scope of Turkish Court of Accounts (TCA) audits, and (ii) to prepare a new law on internal financial control and audit in line with international standards. Subsequently, the Ministry of Finance prepared a draft law on Public Financial Management and Financial Control (PFMFC) that will replace the existing Public Accounting law. As was the case with the public procurement law, the Bank closely coordinated its advice on the draft PFMFC law with the EU, and coordinated closely with the IMF as well. The draft law includes a provision to extend the coverage of TCA to the Presidency and the Parliament as well as a provision for the external audit of TCA itself. The draft law was submitted to the Parliament in August 2002 (thereby meeting the effectiveness condition of PFPSAL II). While the PFMFC law draft was reviewed by the audit committee, a number of outstanding issues remain to be resolved among the various ministries and agencies. These issues will have to be resolved during Parliamentary review of the law. The difficulties in reaching internal consensus within the government agencies on the PFMFC law is an indication of the broader coordination problems affecting the public sector reform program. In parallel, TCA has prepared a draft plan of action for the expansion of the scope of TCA audits to all agencies of the general government. However, this plan will require substantial further improvement before it can be adopted by the Government. In particular, TCA will need to (i) formulate a package of credible internal reforms in order to develop the capacities of a modern supreme audit institution, and (ii) reach a consensus with the other public audit institutions in Turkey on the process and timetable for implementing the action plan.

D. Public Liability Management:

The role of the build-up of quasi-fiscal and contingent liabilities in the state banks in triggering the crisis in 2001 highlights the importance of strengthening the public liability management in Turkey. Efforts to improve public liability management under the PEM reform strategy focus on strengthening debt management and containing the spread of contingent liabilities.

• As a first step to improve public liability management under the PFPSAL program, the Government adopted a decree in April 2001, followed by related legislation in June 2001, to eliminate all existing legal provisions authorizing creation of duty losses (i.e., unfunded mandates resulting in quasi-fiscal losses) in the state banks.

• A significant further step was taken by the Government to strengthen the institutional framework for public debt management and address the structural sources of contingent liabilities through enactment

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of the new Public Finance and Debt Management law in April 2002. Submission of the draft law to the Parliament in June 2001 was a PFPSAL Board condition. The new law confirmed the Treasury as the single borrowing authority for the central government and initiated development of a comprehensive fiscal risk management framework. Supporting secondary legislation was adopted for the issuance of Treasury guarantees and for public sector borrowing without Treasury guarantees as a condition of second tranche release of PFPSAL II. Based on the new public debt law, the Treasury has issued a communique to establish a new office for public debt and risk management (the "middle office"). The responsibilities and structure of the new middle office were discussed during a workshop held in May 2002, jointly with the Treasury and the World Bank. Technical assistance to the new middle office is now being provided under the Bank's PFMP project.

E. Public Sector Governance:

Actions to improve public sector governance aim to reduce political influence over economic management and upgrade the quality and effectiveness of Turkey’s public services. • The Government initiated preparation of a national strategy to improve governance and combat corruption in 2001 as a Board condition for PFPSAL. The strategy was prepared by a steering committee consisting of the representatives of the Treasury, the Prime Minister’s Inspection Board, the Financial Crimes Investigation Board of the Ministry of Finance, the Ministry of Justice and the Ministry of Interior. An International Conference on Good Governance and Combating Corruption held in September 2001, co-sponsored by the Government and the World Bank, provided input on international experience and best practice to help shape the strategy. The national strategy was adopted by the Council of Ministers in early 2002 and subsequently published on Treasury’s website (fulfilling a Board condition for PFPSAL II). A decree establishing a new Steering Committee for the implementation of national strategy was published in June 2002. However, the committee has yet to become operational and further implementation progress may well be delayed until after the elections.

• The medium-term agenda for improving public governance necessarily encompasses civil service reform which is vital to raising the quality of public services while aggregate government expenditure adjusts in line with medium-term resource constraints. In February 2002, the Government established a Ministerial Committee to oversee the preparation of a civil service reform strategy and carry out a functional review of the government (meeting another Board condition for PFPSAL II). However, this committee has not been operational and the initiation of the functional review process has been delayed. The Bank is actively following up on this issue with the Government.

4.3 Net Present Value/Economic rate of return:N/A

4.4 Financial rate of return:N/A

4.5 Institutional development impact:Most of the key institutional objectives of PFPSAL have been achieved as detailed in the following paragraphs. An important shortcoming is that the coordination structures for the public sector reform program have not functioned as effectively as expected and therefore coordination of cross-cutting elements of the public sector reform program has remained difficult. The limited time horizon of the single-tranche PFPSAL and the medium-term nature of the institutional reform objectives under the program provide the

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basis for the modest institutional development impact rating in this ICR. While the institutional development agenda of the program is broadly on track, more time will be needed to complete this agenda and evaluate its outcome fully.

• The comprehensive institutional development plan approved by the BRSA is under implementation. This comprehensive plan prepared by the BRSA aims at: strengthening the human resource functions, operational policies and procedures of BRSA, and increasing the efficiency of BRSA's monitoring and early warning systems. The plan also is aimed at increasing the integrity of BRSA's financial databases and efficiency of coordination between the various on site, off site and enforcement departments through a team based approach.

• The new Joint Board of Directors set up for both the state owned banks, Ziraat and Halk, has effectively strengthened the professional skills, decision making autonomy and governance on a prudent commercial basis, thereby strengthening the institutional structure of the state banks. The Joint Board has also taken fundamental steps towards operational restructuring of the state banks as a preliminary step towards their privatization as envisaged in the PFPSAL loans.

• The new Public Procurement Agency is functional and fully concentrated on the necessary preparations for the successful implementation of the new procurement law, which will be effective on Jan 1, 2003. The Agency has a fully autonomous status and is managed by a governing board appointed by the Council of Ministers. The Bank is providing technical assistance to the Public Procurement Agency under an IDF grant which, inter alia, is financing consultants to assist with the preparation of the secondary legislation required to implement the new public procurement law. Assistance under the IDF grant is being coordinated with technical assistance to the Agency from the EU.

• A middle office for public debt and risk management is being established in the Treasury, together with a high level debt committee responsible for overall debt management policy under the new Public Debt law. The middle office will have a central role in managing fiscal and financial risks facing the Government, including those arising from contingent liabilities linked to project guarantees. The Bank is providing technical assistance to the middle office under the PFMP project to carry out a comprehensive fiscal risk analysis of the current Treasury portfolio, and to establish procedures for evaluating fiscal and financial risks.

• The Public Financial Management and Financial Control law currently before Parliament will set the legal foundation for broad-based institutional reforms to modernize Turkey's system of public expenditure management. Among other things, the PFMFC law will complete the consolidation of the general government budget, establish a structure for decentralizing financial control to spending agencies in line with EU standards, and give MOF the authority to set public accounting standards across all of general government. The law will also establish the legal basis for the consolidation of external audit authority under the TCA.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:The September 11 events came as an adverse shock to the economy causing interest rates to remain above program levels which contributed to the delay of the economic recovery and the increase in the public debt to GNP ratio to levels above the 2001 program baseline. The very high levels of public indebtedness, based in large part on the historical accumulation of duty losses and contingent liabilities in the banking sector, are contributing to the large risk premiums evident in the high real interest rates facing Turkey

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today. To offset this factor, the Government is obliged to take exceptional measures to strengthen market confidence.

The deterioration in the health of the Prime Minister in mid-2002 contributed to the sudden onset of political uncertainty which led in turn to the decision to call for early elections. The early elections created some unexpected implementation delays in the program supported by PFPSAL II. The Bank is following up with the new government on measures to restore the pace of implementation of the program.

5.2 Factors generally subject to government control:The factors subject to the Government’s control relative to PFPSAL implementation were managed effectively and the loan was completed on schedule. Similarly, the factors subject to the Government's control for PFPSAL II Board presentation and effectiveness were managed reasonably well given the crisis conditions, and key benchmarks were met, albeit with some delay.

In the PSR area, the ministerial level committees and other high-level structures established to ensure inter-agency coordination have not functioned effectively which is a risk factor for sustained implementation of the program in the future. The prevailing institutional culture in the Turkish public administration and (until November 2002) the coalition structure of the Government have been challenges to effectively addressing this collective action problem.

Unplanned spending in the run up to the November elections (e.g., new hazelnut support purchases and ad hoc increases in civil service salaries) is a factor which may affect the 2002 fiscal outturn.

5.3 Factors generally subject to implementing agency control:With regard to the PSR component of PFPSAL, all of the key implementing agencies (Treasury, MOF, SPO and TCA) effectively managed the factors under their respective responsibilities. The preparation of the national anti-corruption plan represented a notable example of successful inter-agency cooperation. The delays, in particular, in meeting the effectiveness condition were in part due to unexpected delays in Parliamentary appointment of a new TCA president. While several important second and third tranche conditions for the PSR component of PFPSAL II have already been taken, the key implementing agencies will need to develop more effective mechanisms for inter-agency cooperation in order to follow through effectively on the PSR program in the future.

The actions supported for the Financial Sector Reform component by the Treasury, BRSA, SDIF and Governing Board for Public Banks were implemented satisfactorily.

5.4 Costs and financing:N/A

6. Sustainability

6.1 Rationale for sustainability rating:The medium-term nature of the structural and institutional reforms under the PFPSAL program

require sustained commitment by Turkey over a considerable period of time. This commitment will have to endure through periods of political uncertainty and electoral change. The structure of the Bank's support for financial and public sector reform (based on a carefully sequenced series of programmatic operations backed by complementary investment projects, technical assistance and ESW) takes into account the need for sustained commitment at both the political and bureaucratic levels in Turkey. The one-tranche design of PFPSAL provided rapid support to launch the program and help the Government overcome the immediate impact of the 2001 crisis. The three-tranche design of PFPSAL II provides continued close

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support for the program in a context of macroeconomic vulnerabilities and clear linkages of Bank disbursements to concrete implementation. By protecting critical social spending, the PFPSAL program was designed to help ensure that the fiscal adjustment does not undermine public support for the reform program. Public outreach efforts under the program, such as the international conferences on good governance and effective government held in 2001, are designed to increase public awareness and support for the program's core objectives.

The substantial progress achieved so far in both the financial and public sector components of the PFPSAL program provides a reasonable basis for sustainability of the reform program, although some delays and adjustments may occur. Medium-term strategies are well in place for all core areas of the program (e.g., bank restructuring and institutional development in the financial sector; tax, public employment, PEM reform, and anti-corruption in the public sector). Much of the legislative foundation for the program is also in place, and new institutional structures have been established to implement critical elements of the program (e.g., BRSA in the financial sector and the Public Procurement Agency in the public sector). In many areas, implementation is already completed (e.g., bringing regulatory framework up to EU and international standards, enforcement of corrective actions in problem banks, weeding out of failed private banks, capital strengthening of remaining private banks, financial and operating restructuring of state owned banks), or well advanced (e.g., rationalization of the public investment program). In most areas, ownership of the program within the public administration is relatively strong. Implementation progress continued even during the run up to the November 2002 elections. At the political level, the new Government has expressed its general intention to continue with financial and public sector reforms, although some fine-tuning is likely. The markets have reacted positively to the new, single party Government and its commitment to pursue reform. More broadly, there is a clear dynamic for modernization and change in Turkish society as witnessed by the liberalization of freedom of expression and minority rights pushed through Parliament in August. Turkey's perspective of future EU membership and on-going dialogue with the European Commission on adoption of the acquis communautaires represents another key factor underlying sustainability of the reform program.

The new Government has an opportunity to demonstrate to the markets and Turkey's international partners that the economic reform program, including financial and public sector reforms, is a national project which transcends individual political parties. To achieve this, the Government will need to move quickly to unveil its detailed reform plans and take concrete action in order to sustain and build on the recent improvements in investor confidence. Such a demonstration would provide a strong signal of Turkey's determination to tame inflation and could be the key to lowering real interest rates and unlocking the country's full growth potential. More narrowly, within the context of the public sector reform program, a strong commitment from the new Government to take full political ownership of the reform process and enhance inter-agency collaboration would help lock in medium-term sustainability of the program.

The medium-term programmatic structure of envisaged World Bank support for financial and public sector reforms in Turkey is designed to contribute to sustainability of the reform program. The PFPSAL approved in mid-2001 has been followed up by PFPSAL II approved in mid-2002. Looking ahead, two Programmatic Financial Sector Adjustment Loans (PFSAL) and a Programmatic Public Sector Adjustment Loan (PPSAL) are envisaged under the current CAS to support continued implementation of the program. A second PPSAL is tentatively envisaged beyond the CAS period. Some adjustment of timing and sequencing on these may occur, in coordination with the government, in the context of the new CAS for FY04-06 currently being finalized. These future programmatic operations will be underpinned by a full ESW program.

6.2 Transition arrangement to regular operations:

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N/A

7. Bank and Borrower Performance

Bank7.1 Lending: The Bank’s performance during the preparation of PFPSAL was satisfactory given the very difficult crisis environment and country context faced by the team. The time taken to prepare the loan was 3 months, which was a very rapid response.

7.2 Supervision:PFPSAL was a front-loaded operation, with much of the policy and regulatory reforms being carried

out prior to Board presentation. Supervision of PFPSAL was fully integrated with preparation of PFPSAL II. Together with strong continuity in the project team and management, this helped ensure full coherence of the program. With regard to the PSR component, the decentralized structure of the team allowed for continuous supervision and dialogue with the Government and other key stakeholders.

7.3 Overall Bank performance: Overall Bank performance has been satisfactory, the more so considering the difficult crisis environment and time constraints. Responding to the needs of a country experiencing the paralyzing effects of a major economic crisis, the Bank task team has worked with dedication and from a basis of in-depth country and sector knowledge. An excellent relationship with the government agencies has been sustained throughout the preparation and supervision stages. The interaction with the IMF team on this program has also been satisfactory with the Bank team adding value and substance to the macroeconomic projections and structural conditionality under the Fund program. The continuous approach adopted under the four operations (ERL, FSAL, PFPSAL and PFPSAL II) has been instrumental in catalyzing sustained implementation of financial and public sector reforms.

Borrower7.4 Preparation:

The Borrower's performance during preparation was satisfactory. The Undersecretariat of Treasury, MOF, SPO, BRSA and all other Government agencies involved worked in close collaboration with the Bank in defining the scope and content of the policy measures to be implemented under the PFPSAL program. In this regard, it is worth mentioning that the PEIR which provided the analytical underpinnings for much of the PSR component of the program was a truly joint collaboration between the Bank and the Government, with strong government leadership of the study.

7.5 Government implementation performance: The Government's performance in implementing the PFPSAL program has been satisfactory so far. Productive relations have been established and are continuing with all of the government counterparts under the program. The counterparts moved quickly in close collaboration with the Bank to design and launch the PFPSAL program in the months after the February 2001 crisis, and have been successful in sustaining ownership and overseeing implementation of the program since, even during the period of political uncertainty which preceeded the November elections, although some delays have occurred.

7.6 Implementing Agency: The performance of Government agencies involved in implementing the policy measures supported by this operation has been satisfactory. While some implementation of certain actions was delayed as a result of the elections, the key implementing agencies are continuing to focus on the program. The progress achieved to date in de-politicizing economic management in Turkey had a major impact in sustaining

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implementation during the period of political uncertainty prior to the November elections.

7.7 Overall Borrower performance: Overall, the Borrower's performance in both the PFPSAL and PFPSAL II operations has been satisfactory, particularly given the extensive and ambitious agenda of the program.

8. Lessons Learned

Lessons learned from PFPSAL are given below. Since it was a continuation of the PFPSAL, some of these lessons were instrumental in designing the PFPSAL II operation, while others are derived from the implementation experience of the latter operation and will guide the preparation of future adjustment lending in support of the program. • The approach of combining financial and public sector reforms into a single operation is well suited to the Turkish context at this stage. The combination provides important synergies, including in terms of ensuring consistency between fiscal adjustment and the financing requirements of the bank restructuring program and in demonstrating to investors that Turkey is tackling the core structural weaknesses underlying the country's chronic macroeconomic instability.

• Urgency and complexity of the financial and public sector reforms—juxtaposed with real world constraints on the institutional capacity of the Turkish administration—argues for selectivity in determining core conditions and flexibility with regards to the timetable for the implementation of specific reform measures. The single tranche structure of PFPSAL provided substantial up-front support in the critical period immediately following the February 2001 crisis. The multiple tranche structure of PFPSAL II allows the Bank to stay closely engaged at this crucial point in the reform program and provides additional flexibility to link the Bank’s financial support more effectively to the actual implementation of specific reform measures. The number of core conditions for the second and third tranches of PFPSAL II has been streamlined in order to focus on the most important priorities while maintaining overall program coherence as represented by the Letter of Development Policy and policy matrix.

• In order to tackle the complex policy and institutional reforms that Turkey is undertaking, the programmatic design of the PFPSAL operations recognizes the need to sequence measures over time, while taking into account the uncertainties inherent in the crisis conditions that Turkey has faced since early 2001. The programmatic design allows for a reasonable degree of adaptability to unfolding events on the ground while maintaining overall coherence and direction of the reforms.

• A high degree of up-front political leadership, ownership of the strategy by the Government including key ministries, and consensus behind the program are necessary preconditions for the successful adoption and implementation of reforms. In most cases, reforms face resistance from vested interest groups that would prefer to maintain the status quo. This would create risks for the program if political leadership, ownership and consensus were to fall short. The PFPSAL program has worked to mitigate this risk through intensive collaboration with the Government during preparation and supervision, an up-front focus on strategy elaboration by the authorities, and public outreach efforts.

• In cases where Government/agencies are also trying to deal with a crisis situation, the program benchmarks should be designed with an understanding that due to crisis management efforts by the Government/agencies, attention to the program actions will often be focused on urgent short-term problems as explained in part by the delays in meeting some of the benchmarks for PFPSAL II. Flexibility in the timetable for meeting certain benchmarks under the program was provided through the multiple tranche

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design of PFPSAL II.

• Unless a realistic assessment of the institutional capacity constraints of the counterpart agencies is made and factored into the program, the program will be vulnerable to these constraints which are likely to be a serious obstacle to program implementation. These capacity constraints can be alleviated, in part, through timely provision of well focused technical assistance, e.g., as is currently being provided for public procurement and public debt management.

• A credible macroeconomic stabilization program is essential for the success of both financial and public sector reforms. The Bank has collaborated closely with the IMF at each stage of the PFPSAL program. Overall coherence of the reform program can be enhanced by closely coordinating IMF and Bank conditionality where the Bank can provide value-added on substance while the IMF provides additional financial leverage. In such cases, well coordinated conditionality is complementary. The PSR component of the PFPSAL program provides a clear example of this complementarity.

• Where the counterparts are often not the decision makers but are answerable to elected officials with vested interests in maintaining the status-quo, there can be an issue of full ownership of the reforms.

9. Partner Comments

(a) Borrower/implementing agency:The Bank’s support to economic reform program of Turkey has been formulated through a series of

structural adjustment loans under programmatic financial and public sector adjustment loans. This programmatic approach introduced by the revised Country Assistance Strategy has proved to be effective to date, especially in accelerating the reform of financial sector. With regards to the public sector reform area, the Bank’s support has provided a momentum to move forward although there is still a lot to be done.

During the preparation stage of PFPSAL, which is the initial operation of this multi-year lending program, all of the related institutions involved in the studies have proved their commitment to reform through the work they presented. As far as the implementation stage of PFPSAL is concerned, strides have been achieved paving the way for second-generation structural reform programs under the subsequent operations. The Bank’s support to the structural reform program was very important to provide market confidence that the concomitant implementation of medium–term reform program both in financial and public sectors was initiated.

Although the single tranche structure of a such a high amount loan might have been a reason for imposing strict conditionalities when starting an ambitious structural reform program, it would have been much more effective to provide flexibility in establishing conditionalities.

The relatively on-time implementation of reform program from the beginning, is a sound basis for effective cooperation with the Bank in future operations.

(b) Cofinanciers:N/A

(c) Other partners (NGOs/private sector):N/A

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10. Additional Information

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

Not applicable, as this is an adjustment operation.

Output Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

Not applicable, as this is an adjustment operation.

1 End of project

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)AppraisalEstimate

Actual/Latest Estimate

Percentage of Appraisal

Project Cost By Component US$ million US$ millionNot applicable, as this is an adjustment operation.

Total Baseline Cost 0.00 0.00

Total Project Costs 0.00 0.00Total Financing Required 0.00 0.00

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent)

Expenditure Category ICBProcurement

NCB Method

1

Other2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

3. Services 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Miscellaneous 0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

6. Miscellaneous 0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

Total 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)

Expenditure Category ICBProcurement

NCB Method

1

Other2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

3. Services 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Miscellaneous

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0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

6. Miscellaneous 0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

0.00(0.00)

Total 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

1/ Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.2/ Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff

of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in US$ million equivalent)

Component Appraisal Estimate Actual/Latest EstimatePercentage of Appraisal

Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF.

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Annex 3. Economic Costs and Benefits

Not applicable, as this is an adjustment operation.

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/Preparation5/01 1 Joint Team Leader/

Lead Financial Sector Specialist1 Joint Team Leader/

Lead Economist1 Lead Financial Sector Specialist3 Senior Economist3 Senior Legal Counsel1 Senior Operations Officer1 Financial Management Specialist1 Banking Adviser1 Financial Accountability

Consultant1 Bank Restructuring Consultant

Appraisal/Negotiation5-6/2001 1 Joint Team Leader/

Lead Financial Sector Specialist

1 Joint Team Leader/Lead Economist

1 Lead Financial Sector Specialist3 Senior Economist3 Senior Legal Counsel1 Senior Operations Officer2 Financial Management Specialist1 Banking Adviser1 Financial Accountability

Consultant1 Bank Restructuring Consultant

Supervision7-12/01 1 Joint Team Leader/

Lead Financial Sector Specialist

1 Joint Team Leader/Lead Economist

1 Lead Financial Sector Specialist2 Senior Economist1 Economist1 Banking Adviser1 Financial Accountability

Consultant2 Financial Management Specialist1 Senior Financial Analyst

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ICR9/01 1 Senior Operations Officer

1 Economist

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 69.43 402,267.16Appraisal/Negotiation 18.62 63,146.90Supervision 20.03 142,564.91ICR 5.0Total 113.08 607,978.97

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

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