turkey state-owned enterprise sector...
TRANSCRIPT
Report No. 10014.TU
TurkeyState-Owned Enterprise Sector Review(In Two Volumes) Volume II: Annexes
March 3, 1993
Country Operations DivisionCountry Department IEurope and Central Asia Region
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distr,bution and may be used by recipientsonly in the perfornance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.Report No. 7281 -MAI
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
TURCU
CURREn Y TurkisALEirSCurrency Unit Turkish Lira (TL)USS1.00 = TL2609 (1900 Average)
ABBREVIATION LIST
ASOK Agir Sanayi ve Otamotiv Kurumu Csteeo, machinery, vehicles)BCRIC British Columbia Resource In.'estment CorporationBEP Basic Earning PowerBoO Board of DirectorsBOTAS Boru Hatlari ile Petrol Tasima A.S. (oil pipeline)CAYKUR Cay Isletmeleri Genel MOdOrlOgO (tea processing)CEO Coffpany Executive OfficerCIF Cost, insurance freightCITOSAN TOrkiye Cimento ve Topral Sanayi T.A.S. (cement)CPI Consumer Price IndexDHMI Devlet Hlava Meydanlari Isletmelesi Genel MOdOrLOgO (airport administration)DITAS Deniz Isletmeri ve Tankercilik A.S. (maritime tanker transport)DL Decree-LawDMB Deposit Money BanksDMO Devlet Malzeme Ofisi (printing and stationary)DSF Development and Support FundEBF Extra-Budgetary FundEBIT Earnings before interest and taxesEBK Et ve Balik Kurumu (meat and fish processing)EDC Earnings decline coverEM.SAM. Emekli Sandigi Genel MOd(rLOgO (Civil Servants Rctirement Furd)GEMSAN Turkiye Gemi Sanayi A.S. (shipbuilding)HAB High Audit BoardHDF Housing Development FundHDPPA Housing Development and Public Participation AdministrationHPC High Planning CouncilIGSAS Istanbul Gubre Sanayi A.S. (fertilizer)IIBK Is ve IsCi Buimu Kurumu (Turkish Esmployment Organization)ILO International Labor OrganizationISE Istanbul Stock ExchangeISO Istanbul Chamber of IndustryJSC Joint-Stock CoapanyMKEK Makina ve Kimya EndOstrisi Kurumu (weapons, chemicals)MOU Memorandumi of UnderstandingMRR Maximun Rate of ReturnORPL Output related profits levyORUS Orman Urunleri Sanayi Kurumu (forestry and wood products)PEI Public Economic InstitutionPETKIN Petrokimya Anonim Sirketi (petrochemicals)POAS Petrol Ofisi A.S. (oil products, retail)PPA Public Partnership AdministrationPTT TOrkiye Curmuriyet Posta Telegraf ve Telefon isl. Genel MOdOrLOgORPI Rate of price inflationSAS Scandinavian Airline SystemSCF Societe de Ciment FranCaisSEE State Economic EnterpriseSEKA TUrkiye Seltloz ve Kagit Febrikatari (paper)SEKER TOrkiye Seker Fabrikalari A.S. (sugar)SGA Single Government AgencySOE State Owned EnterpriseSPO State Planning OrganizationSPSF Support and Price Stabilization FundTARIM Tarim Isletmeleri Genel MOdurlOgO (agro products)TCDD Turkiye Cuihuriyet Devlet Demiryollari (railways)TDCI TOrkiye Demir ve Celik IsletmeLeri (iron & steet)TDI TOrkiye Denizcilik Isletmeleri (port administration and shipping)TEK TUrkiye Elektrik Kurumw (electricity)TEKEL Tutun, Tutun Mamulleri, Tuz ve Atkol Isletmesi GeneL MOdOrLOgO (alcohol & tobacco)THY TOrk Hava Yollari A.O. (airlines)TKI TOrkiye Kom.r IsLetmeleri Kurumu (hard coal mines)TMO Toprak Mahsulleri Ofisi (soil products)TPAO TOrkiye Petrotleri A.O. (refineries)TSEK TOrkiye Sut Endustrisi Kurumw (dairy)TTK TOrkiye Taskom.rO Kurumu (Lignite mining)TOGSAS TGrkiye Gubre Sanayi A.S. (fertilizer)TUPRAS TOrkiye Petrol Refinerilari A.S. (refineries)TZDK TGrkiye Zirai Donatim Kurumu (distribution of agro acts)USAS Ucak Servisi A.S. (airport catering)YEMSAN Yem Sanayi T.A.S. (animal feed)
FOR OFFICIAL USE ONLY
TURKY
STATE-eBrJED ENTERPRISE SECTOR REVIEW
ANNEX I
Overview of the Sector
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
STATE-OWNED ENTERPRSEB SECTOR REVIEW
Overview of the sector
Table of Contents
Paae No.,
A. criaiin, Size, and IMgortance. ............. * ..................... 1
Definition of the Sector .1Historical Background and Current Composition. .......... 2Economic Importance. ..... 4
B. Recent Reforms ... .... . 5
Pricing Policies .... 11Market Regulation .... . .. ........ 12Institutional Framework ..... 12Personnel ....... 13Privatization .... . .. . ... ......... . .14
C. Financial Performance. ...... .15
Aggregate Sector Performance 5......Profitability ... .......... 15...... iCapital Structure. .. ................ .. 17Financial Risk 8......Cash Flow Analysis. .... 19
Specific Cases: ...... 20Railways (TCDD)............................. . . . . . 21Hard Coal Mine (TTX) ...... 22The Soil Products Office (TMO)........ 23
Financial Viability of SOEs .. 3Methodology ...... .... ... . .... ..... 24Best Case Scenario. .... .... .. ............ 24A More Realistic Scenario....... 25
D. Economic Performance ...... . ................. 26
E. Concluding Bemarks. . . . ...... . .......... 31
Table of Contento Icontinued)
Page No.
List of Tableo
Table A1.1 Sector Classification of SOEs ................ 3Table A1.2 Value Added by Sector ... , 6Table A1.3 Fixed Investment of SOEs by Sector ................ .7Table A1.4 Employment of SOEBs by Sector ....................... 8Table A1.5 International Trade of SOEs ........................ 9Table A1.6 External Debt and Domestic Liabilities of SOEs ..... 10Table A1.7 Aggregate Profit and Loss Statement ................ 16Table A1.8 Aggregate Condensed Balance Sheet of SOEs .......... 18Table A1.9 Financial Risk Indicators of Aggregate SOE Sector.. 19Table A1.10 Aggregate SOE Sector Cash Flow Analysis ............ 20Table Al.l1 TCDD Financial Information ......................... 21Table A1.12 TTK Financial Information .......................... 22Table A1.13 TMO Financial Information ..... . 23Table A1.14 Forecast of Financial Accounts: Best Case Scenario. 25Table A1.15 Forecast of Financial Accounts: A Realistic Case ... 26Table A1.16 Comparison of Selected SOE Prices with Border
Prices ..................... e............... 27Table A1.17 Share of SOEs in Value Added, Employment and Fixed
Assets in 500 Largest Industrial Firms .......... 28Table A1.18 Incremental Capital Output Ratios (1985-1990) ...... 29Table Al.19 Labor Productivity ........ . 30Table A1.20 Total Factor Productivity for Selected SOEs
(1985-1990) . ............................. . 31
List of Fiqures
Figure A1.1 Capacity Utilization in Public and PrivateIndustry ........................................ 28
STATE-OWNED ENTERPRISE SECTOR REVIEW
OVRVIEW OF THE_SECTOR
A. Oricin. size. and IMnoRqtance
Definition of the Sector
1. For the purposes of this report, state-owned enterprises (SOEs)consist of SEEs, PEIs, their companies and affiliated partnerships as definedby Decree Law 233 of June 1984, with the following limitations andconventions:
(a) The distinction between SEEs and PEIs made in Decree Law 233 is oflittle relevance for the analysis; thus, all enterprises aregrouped under the term SOEs.
(b) The analysis of the report is limited to nonfinancial SOEs and,therefore, excludes the banks (Ziraat, Emlak, Halk, anaDenizcilik) subject to Decree Law 233.
(c) Enterprises owned or participated in by the Government outside thescope of Decree Law 233 are excluded from the analysis. Theseentities are not included in public accounts and their joint sizecompared with those subject to Decree Law 233 is relatively small.
(d) Decree Law 233 makes a distinction between "enterprise " (28units), "company" (62 units) and "affiliated partnership" (44units). An "enterprise" is ful'-y owned by the Government and actsas a parent-holding of a group of "companies," which it fullyowns, and "affiliated partnerships," in which it owns a majorityshare. The analysis in this report takes place mainly at theholding or enterprise level, with exceptions noted explicitly.
(e) SOEs also have minority participations in about 100 joint-stockcompanies, often representing a controlling stake. The linksbetween SOEs and minority participations are only relevant in asfar as SOEs contribute to the equity and receive a share of theirprofits.
(f) When SOEs are transferred to the PPA fcr privatization, they aresubject no longer to Decree Law 233 but to Decree Law 3291, thelaw on privatization. These SOEs (e.g., PETXIM, SUim6ebank, andTHY) are included in the analysis, to the extent possiDle.
(g) When SOEs are privatized they are, of course, no longer includedin the sector's accounts. Similarly, if SOEs are reclassifiedunder a different law, such as Turizm Bankasi in 1987, they arealso excluded.
-2- ANNEX 1
Historical Back2round and Current Composition
2. Strong sentiment against foreign business after the War ofIndependence (1919-23) left Turkey with only two possible agents ofindustrialization: the local entrepreneurs and the state. At the initialstages, the Government left industrial development to private forces andenacted two key laws: one provides incentives to private industry, and theother bars imports of goods already produced in Turkey. The GoverrMuentfounded a large bank and a state industrial holding (later to becomeStmerbank), which took over four existing state enterprises and entered intomixed ventures with private enterprise.
3. The disruption of agricultural export markets during the GreatDepression and the ensuing foreign exchange shortage accelerated industrialimport substitution and proved to be a decisive factor in the country's turntoward etatism. This move was reinforced by nationalism, distrust of privateenterprise, and the interests of the bureaucracy. Influential leadersemphasized the predominant place of private enterprise and the need forstatism to play a temporary role. Their initial motivation was to acceleratedevelopment by joining private capital or, if this was not possible, byselling shares owned by the state to private enterprise at an earlyopportunity and on easy terms.
4. On economic grounds the Government's intervention was motivated bytwo elements: the absence of domeetic capital and the lack of entrepreneurialand technical skills. Although the establishment of state enterprises is notthe best way to resolve these deficiencies, Turkey was eager to show rapidresults of industrialization. It also adopted a policy aimed at industrialindependence, which at that time, was synonymous to the development of heavyindustries. The need to unify the country politically added the dimension ofregional economic development.
5. The first legislation on SOEs (Law 3460 of 1938) emphasized thatthe public companies should be run as private enterprises; they would withdrawfrom a given field of activity, by selling shares to the private sector, assoon as private enterprise could be expected to become viable. Despite thesegood intentions, none of the SOEs has been sold to the private sector, andonly an insignificant amount of shares has been divested to the public. Theemphasis on the use ot SOEs later rhifted. They went from being a mainvehicle of industrialization to being an investor in large projects. Theyalso targeted projects that private industry would not find attractive or thatmight create bottlenecks in the economy. This shift led, during the sixties,to heavy investments in intermediate and capital goods industries, shelteredby import protection.
6. As Table A1.1 shows, SOEs today are still active in almost allsectors of the Turkish economy, and not only in such areas of services aselectricity, railways, and telecommunications, as they are in most other OECDcountries. The main activity of the SOE determines the sectoralclassification in Table A1.1, although most SOEs are large conglomerates withdiversified activities. A typical example is Etibank; primarily a mining
-3-
TabtL Al : Sector Clasification of SOEs
SOE Act i ty
AGRICULTUMR1 Tarim Isletmeleri Gnel ludurlugu tTARIN)l/ Agriculture2 Orman Urunleri Sanayfi Kurutm (ORUS) Forest Products
MININGI Etibank Aluminum & Zinc, Mining
Electronic mchinery, Chemicals2 Turkiyo Taskorumu Kurumu (TTK) Comt mining3 Turkiye Komur Islotmeleri Kurmu CTKI) Lignite Mining
MANUFACTURINGFOOD, BEVERAGES, TOBACCO
1 Turkiye Seker Fabrikalari A.S. (SEKER) Sugar Processing2 Et ve Balik Kurunu CEBK) Meat, Fish Processing3 Turkiye Sut Endustrisi Kurumu CTSEK) Dairy4 Cay Isletmesi Genel Mudurlugu (CAYKUR)1/ Tea Processing5 Tekel Isletmesi Genel Mudurlugu (TEKEL)1/ Tobacco and Alcoholic Beverages
TEXTILES1 SiUerbank 2/ Textfles
PAPER, PRINTING, PUBLISHING1 Turkiye Seluloz ve Kagit Fabrikalari Isletaesi tSFKA) Pulp and Paper2 Devlet Makzeme Ofis (DMO) Stationary and Printing
CHEMICALS, CHEMICAL PRODUCTS1 Turkiye Petrollerf A.D. (TPAO)3/ Crude Oil Refineries2 Petkim Petrokimya A.S. (PETKIM)2/ Petrochemicals3 Turkiye GObre Sanayi A.S. (TUOSAS) Fortilizer4 Istanbul GUbre Sanayl A.S. CIGSAS) Fertilizer
NON-METALLIC MINERAL PRODUCTS1 Turkiye Cimento Sanayf T.A.S. (CITOSAN) Cement
BASIC METAL1 Turkiye Demir ve CaLik Isletmeleri (TOCI) Iron and Steel
MACHINERY AND EQUIPMENTI Makina ve Kimys Endustrisi Kurtu (MIEK) Machinery and Chemicals2 Agir Sanayl ve Otomotiv Kurumu CASOK) Industrial machinery and
Automobiles, Steel3 Turkiye Gemi Sanayi A.S. COGENSA) Shipbuilding
OTHER MANUFACTURING1 Yem Sanayii T.A.S. CYEMSAN) Anim-aL Feed
ENERGY1 Turkiye Elektrik Kurutu (TEK)I/ Power, Electrical Equipment
SERVICESTRANSPORTATION
1 Turkiye Ciumihuriyet Devlet Demiryollar1 Isletmesi CTCDD)1I Railway Services,Transportation Equipment
2 Devlet Hava Heydanlari Islets.esi GenL Hudurlugu CDHMI)1/ Airports Administration3 Turkiye Have Yollari A.D. (THY)l/ 2/ Airline4 Turkiye Denizcilik Isletmeleri (TOI) Seaports Administration5 Boru Hatlari fLe Petrol Tasim. A.S. (BOTASA4/ Oil Pipeline6 Deniz Isletmeri ve Tankercilik A.S. (DITASA4/ Maritime Tanker Transport
COMMUNICATION1 Turkiye CLunuriyet Posta Telegraf ve Telefon (PTT)1/ Post, telegraph, teLephone
TRADE1 Toprak Mahsulleri ofisi (TMO) Soil Products2 Turkiye Zirai Donatim Kurumu tTZDK) Fertilizer Distribution,
Tractors, AgriculturalEquipment
3 Poas Petrol Ofisi A.S. (POAS)4/ Distribution of PetroleunProducts
Source: Treasury.Uotes 1 The enterprise is classified as a Pli3fc Economic Institute uider Turkish Law
All others regutated by Decree Law 233 are State Economic Enterprises (SEEs).2 Currently under PPA for Privatization.3 Excluding BOTAS, DITAS, and POAS.4 Affiliated cowanies of TPAO.
- 4- MNNIX
company, it also produces basic metal. (aluminum, ferrochrome) elect >nicmachinery, chemicals; it even owns a sizeable bank. Lack of disaggrtgateddata prevented a more detailed classification.
7. The results of Turkey's policy choices for industrial developmentaro clearly reflected in the sectoral composition of the SOEs. Coal, basicmetals, chemicale, paper products, and heavy machinery are mostly produced inthe public sector. Strategic considerations of self-sufficiency and an incomesupport policy geared at he agricultural sector and urban poor also lead toSOE involvement in agricultural products, especially trade and foodproceesing. Until recently, the processing and trade of tea, tobacco, sugarand alcohol were all state monopolies.
Economic lortance
8. Tables Al.2 - Al.6 on value added, fixed investment, employment,international trade, and debt indicate the importance of the SOE sector forthe Turkish economy.
(a) Aggregate value added (see Table A1.2) has been around 10 percentof GDP at factor cost for the last fivo years.-V The SOEs' sharein value added is disproportionately large in mining, energy, andtransportation, and communication. It has been declining inmanufacturing as a result of the Government's policy not to expandactivity in this sector during the last five years. In contrast,public value added rose significantly in transportation andcommunication.
(b) Gross fixed investment by SOEs (see Table Al.3) has declined from30 percent of total investment of the economy in 1985 to 15percent in 1991. This decrease reflects not only the Government'sdeliberate policy to move out of sectors competing directly withthe private sector but also the increasingly difficult budgetarysituation. Nevertheless, the share in investment is high comparedwith that of value added, which indicates the relatively capitalintensive nature of the SOEs. The bulk of public investment bySOEs takes place in the energy and transportation andcommunication sectors both in absolute and relative terms.
(c) Employment (excluding Petkim and SUmerbank) (see Table Al.4)declined from its peak in 1988-89 by about 4,000 people to a totalof almost 596,000. This represents a declining share in totalemployment, from 3.8 percent to 3.5 percent, and in nonagricultural employment from 7.8 percent to 6.7 percent. In linewith value added, SOEs employ more people in mining and energy.
1 Value added was estimated as the sum of all factor payments. It isbiased downward because of the practice of some SOEs to include a fraction ofinterest payments and personnel expenditure in investment and cost of goodsand services sold.
Although most SOEs gradually lowered einployment, in some sectors(electricity, airlines, and te:aeconmunication) there was anoticeable expansion.
(d) The trade balance (see Table A1.5) of the sector as a whole isnegative (US$lbillion), even after excluding imports of crude oilfor the public refineries. The use of SOEs in import substitutionactivities is an important explanatory factor for thin observation.In 1989, SOEs imported 33 percent of total imports of goods andnonfactor services (including oil) and 24 percent of investmentgoods. Exports are concentrated in a few sectors (mining,chemicals, and transportation services), and they declined from 13.6percent of total in 1985 to about 10.3 percent in 1989.
(e) Compared with the private sector, SOEs obtain a disproportionallylaLge amount of foreign and domestic credits (see Table A1.6). Onthe external side, explicit Treasury guarantees allowed them toborrow almost three times as much medium and long-term credits astheir private sector counterparts. Domestically they claim about 20percent of total credits from the banking system. Credits fromother sources, mainly other public entities also provide animportant amount of financing (about half of domestic sources). Lowequity, declining operating surpluses, and large investment programsmaintain SOEs' debt at this relatively high level.
B. Recent Reforms
9. In 1980, the Government issued the following guidelines for thereform of the SOE sector: the Government would (a) abstain from expanding thepublic sect(r; (b) reduce monopoly powers earlier granted to SOEs, such as thepower to increase competition and enhance productivity and creativity; (c)reduce (and eventually eliminate) the SOEs reliance on the Government's budgetfor both operating subsidies and debt financing; (d) revitalize and reorganizethe SOEs' management and make them competitive and profit and cost conscious;and (e) privatize SOEs that no longer have a specific national mission. Thechange was prompted by increased pressure on the Government's budget constraint,since the borrowing requirement of the SOEs had risen to three quarters of thetotal public sector borrowing requirement by 1979. New legislation was passedto implement these changes: Decree Law 233 on State Economic Enterprises andPublic Economic Establishments (June 1984), Law 3291 on Privatization (May1986), Decree Law 399 on the Personnel Regime of SOEs (January 1990), andfurther amendments as part of other legislations. Dissatisfied with the resultsof these modifications, Treasury prepared a new draft law in 1990 that was neverpassed. The general guidelines for reform translated into changes in pricingpolicy, market regulation, the institutional environment, and the personnelregime, at different episodes during the decade. In 1984, the Governmentformally set up the institution to deal with the privatization aspects of itsreform ntrategy. Actual divestiture only started toward the end of the 1980s.
-6- mN.EX I
IAW_"1..g: Value Added by Sector
A. Current prices TL bilLion
1985 1986 1987 1919
AGRICULtURE 30 51 90 119 179 348TARIM 16 20 44 58 79 215ORUS 14 30 45 61 100 133
NININO 403 536 777 1169 2278 2734Etibank 160 192 306 652 1053 847TTK 99 72 110 90 307 585TKI 143 272 361 427 918 1301
PAWUFACTURING 1182 1593 2374 2736 4560 8461SEKER 80 72 84 167 321 713EBK 17 23 9 8 86 164TSEK 5 6 10 16 33 65Caykur 54 44 68 100 175 231TEKEL 253 281 279 328 623 1766Saimerbank 90 151 244SEKA 44 66 124 246 444 464D:O 8 . 10 15 34 51 73TPAO 298 388 542 687 1031 2267Petkim 47 110 298TUGSAS 28 42 77 84 179 309IGSAS 83 42 67Citosan 48 96 150 183 310 603TDCI 105 171 263 516 636 921HKEK 71 91 139 175 430 697AS301 15 19 36 66 113 0GEM!'AN 15 17 25 31 72 93YEMSAN 3 6 9 13 12 28
ENERGY 418 589 780 1743 2378 3942TEK 418 589 780 1743 2378 3942
TRANS. & COM0M. 737 910 1636 3018 5919 9631TCDD 167 157 254 237 751 1801DHMI 23 37 67 170 236 414THY 65 59 125 278 522 688USAS 9 12 38TDt 112 144 209 340 479 691BOTAS 79 115 192 311 819 767DITAS 2 5 7 18 11 26PTT 279 382 744 1664 3102 5243
TRADE 171 164 72 387 695 1477TMO 81 70 -27 158 192 750TZDK 43 46 41 103 130 180POAS 47 48 58 126 373 546
AGGREGATE TOTAL 2940 3843 5728 9173 16008 26591
GDP AT FACTOR COST 25526 35628 52929 91741 151906 251732
B. Percentage of total - current prices
1985 1986 1987 1988 1989 1990
AGRICULTURE 0.6% 0.8K 0.9K 0.7K 0.7K 0.8%MINING 61.9K 70.9% 73.3% 63.7K 73.6% 60.1%MANUFACTURING 18.4K 17.7K 17.5X 11.5X 11.9K 14.3%ENERGY 44.7K 36.8K 35.6% 43.5K 38.0K 39.4KTRANS. & COHM. 27.2Z 24.9X 30.7K 32.4X 36.5K 37.6%TRADE 4.1K 2.7K 0.8% 2.4K 2.6K 3.3K
AGGREGATE TOTAL 11.5X 10.8X 10.8K 10.0% 10.5K 10.6%
Source: Treasury.
7 {L
10.Lm_?& : Fixed Investment of SOEs by Scctor
A. Current prices - TL billion
'i9r'--1986 198_ 1988 19899
AGRICULTURE 3 5 6 20 27 15MINING 243 257 175 302 206 350MANUFACTURING 358 563 526 580 798 1409ENERGY 459 684 1171 2166 3763 4267TRANSPORT. & COMNICATIONS 530 884 1368 1866 1908 3378TRADE 11 13 70 196 227 366AGGREGATE TOTAL 1604 2406 3316 5130 6929 9786
FIXED INVESTMENT TOTAL PUBLIC 3236 5233 7924 11494 17351 27826TOTAL ECONOMY 5270 8791 14587 24182 38304 60928
B. 1988 prices - TL billion
AGRICULTURE 12 12 10 20 17 6MINING 969 680 293 302 129 150MANUFACTURING 1423 1491 883 580 498 602ENERGY 1827 1811 1964 2166 2348 1824TRANSPORT. & COMMUNICATIONS 2111 2342 2294 1866 1191 1444TRADE 43 35 117 196 142 157
AGGREGATE TOTAL 6386 6370 5562 5130 4324 4183
FIXED INVESTMENT TOTAL PUBLIC 12881 13855 13292 11494 10786 11705TOTAL ECONOMY 20976 23278 24468 24182 23992 26045
C. Percentage of total public 1988 prices
AGRICULTURE 1.6K 1.4% 1.0K 1.9K 1.5K 0.7XMINING 71.5X 69.2X 53.4X 59.2X 37.8X 36.2%MANUFACTURING 74.7X 97.5X 96.9X 85.7% 101.5X 98.4XENERGY 60.5X 52.5 62.4X 70.3X 73.1% 7228KTRANSPORT. & COMMUNICATIONS 59.8% 58.2X 51.6X 54.8X 36.5% 36.2%AGGREGATE TOTAL 49.6X 46.0X 41.8% 44.6X 40.1% 35.7%
D. Percentage of total economy - 1988 prices
AGRICULTURE 0.8X 0.8X 0.6% 1.1X 1.0K 0.4XMINING 65.9X 61.5K 41.0X 43.8% 24.6X 26.1XMANUFACTURING 30.8X 32.3X 22.8X 15.9% 14.9% 14.4XENERGY 59.6X 50.8% 60.4X 66.5X 68.2X -6.2KTRANSPORT. & COMMUNICATIONS 42.2X 43.3X 39.0K 39.1K 25.2X 23.1K
AGGREGATE TOTAL 30.4X 27.4K 22.ZK 21.2% 18.0K 16.1%
Source: Treasury.
Taj_LeAIj.: Emptoyment of SOES by Sector
1985 1986 1987 1988 1989 1990
AgricuLture 17,356 16,400 15,203 15,962 15,604 14,115Percent of totat 0.21 0.,0 0.18 0.19 0.19 0.17
Mining 96,490 98,637 99,706 99,411 97,737 96,221Percent of total 47.77 45.67 45.53 46.45 47.22 54.67
Manufacturin6Food, Beverages, Tobacco 116,290 114,941 108,213 107,713 107,832 103,482Textiles 1/ . 42,359 40,236 39,151 0 0 0Paper, Printing, Pubtlishing 14,268 13,786 13,427 13,384 13,632 13,235Chemicals, Chemical Products 2/ 23,591 24,509 24,019 15,919 16,346 16,899:onHetallic MineraL Products 12,136 11,886 10,072 10,102 9,658 9,708Basic Metal 28,776 28,629 28,247 27,476 28,624 27,817Machinery and Equipment 25,732 25,853 25,615 24,837 22,24 22,081Other 1,414 1,571 1,565 1,646 1,728 1,676Total 264,566 261,411 250,309 201,077 200,064 194,870Percent of total 13.47 12.66 11.56 9.19 8.99 8.08
EnergyElectricity 62,690 67,175 66,308 68,789 70,906 73,423
ServicesTransportation 90,814 92,544 89,837 89,641 89,635 89,490Coffmunication 79,855 89,394 100,540 104,667 106,212 108,258Trade 21,870 22,520 21,739 22,996 22,194 22,820
TotaL 192,539 204,458 212,116 217,304 218,041 217,55Percent of total 3.85 3.90 3.86 3.83 3.75 3.59
Total 633,641 648,081 643,642 602,543 602,352 596,180
Memo:Total excl SCmerbenk/Petkim 583,729 600,116 597,042 602,543 602,352 596,180Percent of civilian employment 3.80 3.79 3.66 3.64 3.59 3.48Percent of non-cgric. erployment 7.80 7.64 7.28 7.17 7.01 6.69
Source: SPO.
Notes: 1 SUkerbank excluded from 1988 onwards.2 Petkfm excluded from 1988 onwards.
ANNE-
Table AI.5: International Trade of soes
18 1986 1987 1988 1989
IMPORTS
A. USS millionTotal 5,164 4,179. 5,495 5,801 5,146Investment Goods 967 1,232, 1,505 1,492 941TUPRAS 1/ 2,788 1,613 2,562 2,590 2,046
B. Share of imports of overall economyTotaL 45.52% 37.27% 38.81% 40.46% 32.58%
Investment Goods 37.17% 35.47% 39.43% 37.41% 24.46%
EXPORTS
A. USS millionAgriculture 0 0 90 28 6Mining 196 179 226 338 330Manufacturing 693 436 652 623 474
Food,Beverages, Tobacco 185 42 145 81 10RTextiles 2/ 24 43 0 0 0Paper, Printing, Publishing 24 28 34 12 1Chemicals, Chemical Products 3/ 388 227 351 391 257NonMetaltic Mineral Products 8 8 12 10 18Basic Metal 57 79 &8 111 45MachInery and Equipment 6 9 22 17 44Other 0 0 0 0 0
Services 702 710 932 1,283 1,172Transportation 570 612 781 936 977Communication 49 97 99 91 85Trade 84 2 52 255 110
TOTAL 1,591 1,324 1,900 2,272 1,982
B. Share of total exports 4/Agricutture 0.00% 0.00% 0.01% 0.00% 0.00%Mining 80.24% 72.33% 83.90X 94.56% 80.41%Manufacturing 11.57% 8.18% 7.21X 6.21% 4.61%Services 19.65% 21.79% 23.07% 18.18% 16.47%TOTAL 5/ 13.57% 12.35% 12.56% 11.48% 10.33%
EXPORTS-IMPORTS (EXCLUDING OIL)USS Million (784) (1,203) (1,032) (939) (1,118)
Source: Treasury.
Notes:ITUPRAS imports mainly crude oil for its refIneries.2 S(merbank is excluded after 1987, exports in 1987 were zero.3 Petkim is excluded after 1987.4 Series before and after 1986 are not comparable. After 1986 ISIC classification Is
used for total exports, consistent with the SOE classification. The main differenceconcerns processed agricultural products that are no longer part of agrSculturalexports in the ISIC classification.
5 Tctal exports a exports of goods and nonfactor services.
10- ~ANNEX 1
Teble A1.6: External Debt and Domestic Liabilities of SOEs
1985 1986 1987 1988 1989 1990 1/
Interest-bearing Liabitities (TL billion) 4169 7072 7391 17356 24102 35764Foreign Debt (Sm) 2/ 2343 3551 4217 4260 4551 6045MLT 2113 2938 3700 3988 4392 4785ST 230 613 517 272 159 1260
Domestic Debt (TI billion) 2817 4381 3086 9625 13572 18052Financial system 868 2046 3596 5373 6383 9858Central Bank 3/ 122 213 763 1082 1321 1321Bankirg system 746 1832 2833 4291 5062 8537
Other 4/ 1949 2335 -511 4252 7189 8194
Non-Interest bearing liabilities 5/ 993 1483 3329 4642 5362 7605
TotaL Liabilities 5162 8555 10720 21998 29464 43369
Ratilos:MLT External debt/Private 2.20 2.71 2.80 2.62 2.73 2.65External debt/Total 9.20X 11.06X 10.48X 10.46X 10.90X 12.33XCredits/DMB total credits 15.59X 20.35X 22.43U 23.60X 17.23X 19.18%Domestic Debt/M2 32.99M 35.69X 17.43X 35.39X 29.90X 26.2iXInterest-bearing Liabilities/GNi 15.00X 17.96X 12.62X 17.26X 14.14X 12.45X
Total Liabilfties/GNP 18.57X 21.73K 18.303 21.87X 17.29X 15.10X
MEMO:Cash and Deposits 595 1036 741 1872 3217 2852
Source: Central Bank, Treasury.
Wotes:I Estimate2 Excludes onlerding in foreign exchange by the Treasury.3 Including rediscounts.4 Mainly to public entities (Tax Administration, Treasury and EBFs). Discrepancies between
soe balance shoAet data and other data sources also enter this item.5 aifnly accounts payable-accounts receivable.
-13.- ANNEX 1
Pricing Policies
10. In 1980, arguing for an opening of the economy and an increase inits competitiveness, the Government raised prices of all SOE products andliberalized price controls on some of their products. Some prices had beenfrozen since 1973, and the operational accounts of the SOEs had been steadilydeteriorating as a result of major cost increases. No other measures we.etaken before the military took over the Government in the fall of 1980. Themilitary continued to regulate SOE prices but allowed them to move, on theaverage, in line with price developments in the private sector.
11. The next democratically elected Government issued the Decree Law233 in June 1984. It stated that prices of goods and services produced byplants of ventures, companies, and affiliated partnerships of State EconomicEnterprises are free. However, for SEEs, the Council of Ministers may imposeprice restrictions whenever necessary. The loss, as well as the forgoneprofits, are compensated in a way that guarantees a 10 percent profit margin.The amount of the loss is calculated by the concerned ministry in cooperationwith the Treasury. The Council of Miniaters may also impose other duties onthe SoEs, for which they will bt compensated in a similar manner. For PEIs,the High Planning Council may intervene and modify the prices and rateschedules. The implementation of this regulation effectively reduced theamount of budgetary transfers resulting from duty losses imposed by theGovernment. At present, prices of only six products and services continue tobe formally regulated: coal used for heating in Ankara and Eskesehir;electricity for the production of ferrochrome and aluminum; the distributionof fertilizer; grains; cargo transportation by rail, sea, and air; and sugar,depending on the market conditions.
12. In practice, however, price changes are still subject tomiristerial review. Evidence of these implicit price regulations can be foundby smparing the evolution of public and private prices before and immediatelyaft_r the elections in 1987. The average wholesale price index of publicproduction in agriculture and industry was lagging its private counterpart byalmost 20 percent over the first 11 months of 1987. After the Novemberelections, prices jumped by 21 percent but could not recover the lost ground;the private sector responded with a 7.2 percent increase in the same month.In 1988 subsidies were also received by the iron and steel company (TDCI), thepetroleum company (TPAO), and the tea company. This fact presents furtherevidence of Government interference in price decisions. Some managersadmitted that they have to seek permission from the concerned minister toincrease prices of their products.
13. The present pricing policy leads to a complex system of cross-subsidization in the public sector. Subsidies received by the coal company(TTK) benefit the electricity company, which, in turn, receives compensationfor low rates it charges to the producer of ferrochrome and aluminum(Etibank). For further details on subsidization and pricing, see Annexes 2and 5.
- 12 - ANNEX 1
Market Reg=lation
14. In 1984, state monopolies in sugar, tea, tobacco, alcoholicbeverages, and fertilizer distribution were abolished. The only remaininglegal monopolies in the manufacturing sector are for the production of lethalweaponry (MKEK) and newsprint and cigarette paper (SEKA). There are, however,sectors in which SOEs still have de facto monopolies. Etibank is the soleproducer of copper and aluminum, while Petkim and TTX are sole producers ofbasic petrochemicals and hard coal, respectively. TEKEL still holds amonopoly for the production of distilled spirits, as well as for its imports,although the Government planned to eliminate the monopoly by the end of 1990.Sugar prod 'tion and imports are heavily regulated, making the sectorunattractivA for private participation. Taxi meters and urea production arealso exclusively in the hands of the public sector. Finally, there is littleor no direct competition in the utility sector. Telecommunications, railwaytransportation, electricity distribution, airport and port authorities, andbroadcasting are in the public domain. THY is the only airline allowed tohave scheduled domestic flights.
Institutional Framework
15. The main objective of Decree Law 233 is to raise efficiency of theSOEs by granting them larger autonomy and by attempting to reduce politicalinterference. The law covers all nonfinancial enterprises in which theGovernment has a majority participation. It also contains a few minorregulations for enterprises with participations from the Government between 15but not more than 50 percent of equity. All operations of the SOEs that arenot explicitly regulated by this law became subject to Turkish commercialcode. The Decree Law still regulates in detail many aspects of the operationsof SOEs. For a complete analysis, see Annex 4.
16. Decrce Law 233 determined a new structure for the management andboard of the SOEs, but by leaving management with a majority on the board, itcreated a conflict of interest between owner and manager. Investment andfinancing programs continue to be prepared as part of the national investmentand budget plan; as such they must be ratified by the Council of Ministers.The concerned ministry appraises the projects and sends them to the StatePlanning Organization and the Undersecretariate of the Treasury for inclusionin the annual investment and financing program. The program's financing roleis set by the Treasury and the SPO. The acquisition and sale of a company,affiliated partnership or joint venture must be approved explicitly by theHigh Planning Council. The Public Participation Administration will undertakethe procedures relative to liquidation and sale, ae well as to the transfer ofthe operating rights. Assets of SOEs are considered state property and alltransactions, rights, and claims are governed by the laws on state property.
17. Given these features, Decree Law 233 did not achieve itsobjectives, and improvements in efficiency of the companies did not occur. Anew SOE law waa drafted with the objective of enhancing the autonomy ofcommercially oriented SOEs by amending Decree Law 233 in those areas where itdid not allow SOEs to operate on the same basis as their private sector
-13- ANNEX
counterparts. The main provisions of the draft law, reflecting the thinkingof key government officials, were as follows:
(a) Con-ersion to joint-stock companies: Subject to the results of"financial, administrative and technical evaluations," SEEs andPEIs will be converted by December 31, 1991, to joint-stockcompanies subject to the commercial code. SEEs and PEIs deemednot suitable by the High Planning Council for conversion to joint-stock companies will remain under Decree Law 233, though theycould be converted at a later date if their situation permits.
(b) Board of irectores: The board of directors of converted SEEa/PEIswould be composed of sevan members, including: the directorgeneral, two assistant directors general, and four other membersappointed by the shareholders. Affiliated partnerships will havea five-member board: the director general (appointed by theSEE/PEI board), two assistant directors general, and two others.Converted SEEs/PEIs will also have a three-member SupervisoryBoard appointed by the shareholde_s.
(C) Investments and oDerating budoet: Converted SEE/PEIs andaffiliated partnerships continue to be included in theGovernment's annual investment and financing program until theGovernment's shareholding falls below 50 percent. ConvertedSEE/PEIs that pay dividends and do not require financial supportfrom the Government will have full autonomy in investment, realestate, vehicle leasing/purchasing, and staffing. The Treasurymaintains the right to abolish this freedom, however, if it judgesthat the SEE/PEI is engaging in activities that delay debtpayments to the Treasury or damage their financial equilibrium.SEE/PEIS cannot be assigned duties for fulfilling investments oroperating enterprises for which budgetary allocations have notbeen made in the fiscal year.
(d) Sales of Shares: Converted SEE/PEIs and affiliated partnershipswill be permitted to sell shares as follows: 5 percent toemployees, 10 percent to residents of the province where theSEE/PEI is located, and, subsequently, additional shares to thepublic via the Stock Exchange.
18. The new legislation was never implemented, in part due totechnical reasons (expiration of the authorization law) and in part due tolack of political support. Efforts continue, however, to prepare anotherdraft law with a broader coverage.
Personnel
19. Appointments at the management level have been subject to specificconditions. Before Decree Law 233, experience in the public sector was aprerequisite to be eligible for appointment as director general or assistantdirector general. Decree Law 233 modified this requirement to a minimum of
-14 - ANNEX 1
four years of pablic sector experience out of a total experience of at least10 years. An amendment in June 1989 modified the requirement to a minimumexperience of eight years in the public sector or 15 years in the privatesector, or a combination of the two in which two years of private sector countas one year of the public sector. Since January 1990, there are no longerrequirements of this type. In any case, the concerned minister could alwayswaive the requirements.
20. The e mloyment regime differs for three dategories of employees ofthe SOEs (see Annex 6 for details). Workers fall under the general Labor Law(1475), which applies equally to public and private enterprises. The legalsituation for salaried and contractual employees is more restrictive becausepart of the permanent employees are civil servants and their status isregulated by Law 657 on civil servants. Decree Law 233 provided for thepossibility to hire employees on the basis of annual one-year contracts, butas a result of a court challenge of this practice, the Supreme Court ruledthat this provision violated Article 128 of the Constitution. Law 399(January 1990) corrected this situation by adding civil servant positions andby stipulating that employees can only be laid off for disciplinary reasonsnot for economic reasons.
21. There is little flexibility for SOEs with respect to thedetermination of salary levels and nayments of nerformance-based bonuses. Forcivil servants, the salary scale is determined by the High Planning Council.Until recently, there were differences in salary structures among SOEs, but astandardized structure with 10 categories was introduced for all SOEs. Law399 permits the payment of annual bonuses, but they are based on a rigid pointscale applicable to all SOEs and independent of the profits of the SOE. Themaximum allowed bonus is 8 percent of the annual salary. In the past, thetotal salary bill paid to contract employees could not exceed 10 percent ofthe total wage bill of permanent employees. Since 1988, however, only thesalary scale is still determined by the High Planning Council.
Privatization
22. Privatization was made an integral part or the Government's SOEsector strategy by including in Decree Law 233 a clause that permits theCouncil of Ministers to decide on the privatization of SOEs withoutparliamentary approval. Privatization of subsidiaries, majority-ownedcompanies, operations, and units can be decided by the Housing Development andPublic Participation Fund? with approval from the High Planning Council.Minority shares can be transferred and sold by the Public Participation Fundwithout further approval. Although the objective of making the economy moreresponsive to market forces was the most widely argued one, secondaryobjectives have been admitted publicly. They include the development ofdomestic capital markets by stimulating broad shareholdership, the reduction
9 In early 1990, the Housing Development and Public Participation Fundwas separated into two independent entities, the Housing Development Fund(HDF) and the Public Partnership Administration (PPA).
- 15 - ANNEX 1
of the budgetary burden, and the generation of revenue for the Treasury. As inmany other countries, the budget constraint seems to be an importantconsideration, and the recently observed increase in the list of companies tobe privatized coincides with rising public sector deficits. (See Annex 3 fordetails).
C. Financial Performance
AareQ~ate Sector Performance
23. The SOE sector has experienced a sharp decline in overallfinancial performance since 1985. There are several structural weaknessesunderlying the deterioration, including large operating deficits due toincreasing wage and interest expenses, high debt stocks to foreign anddomestic commercial banks due to negative cash flows, and unprofitable capitalinvestmentn.y All data presented in this section exclude the Soil ProductsOffice (TMO) to avoid too strong a distortion cf the data, since TMO is mainlyused to implement the government's income support policies.
Profitability
24. Table A1.7 shows the aggregate profit and loss statement for thesector. The operating surplus has been declining rapidly since 1985 due toincreasing wage expense and interest payments caused by growing debt stocks.Wage expense has risen over 200 percent, while interest expense has grown over100 percent in real terms since 1985. This increase in expense has culminatedin an operating deficit of almost TL2 trillion in 1990 and a projected 1991deficit of TL6 trillion. The operating result, which contributed 3.6 percentto GDP in 1985, is expected to reduce GDP by 1.4 percent in 1991.
25. The largest contributors to the overall 1990 SOE deficit includeTDCI (TLI trillion), TCDD (TL821 billion), TTK (TL752 billion), and TEK (TL639billion). Combined losses for all firms in the sector totaled almost TL5trillion, while profitable firms earned a combined TL3 trillion. The most
A Accounting practices are not uniformly followed by all SOEs. Someinclude part of interest payments, depreciation, and wage expenses in cost ofgoods sold. Nonoperating revenues and expenses include both operating andnonoperating income and expenses. Duty losses reported as income are actuallyaccrued duty losses (i.e., duty losses earned but not paid). SOEs have a one-time opportunity to convert debt owed to the Government to equity and, hence,debt related indicators show a peculiar behavior over time. Turkey'saccounting standards are not adequately adapted to the high-inflationaryenvironment. Fixed assets and depreciation are revalued based on aGovernment-imposed inflator, but the income statements are not adjusted. In ahigh-inflationary environment, input costs are understated relative to thesales they generate due to production lags, and revaluing input costs to theiractual value would substantially reduce reported operating surpluses.Inventories are valued at average historical cost of the previous threemonths.
-16 -NNIX
profitable SOEo in 1990 include TPAO (TLl.l trillion), PTT (TL641 billion),and TEKEL (TL592 billion). These three firms earned 78 percent of the totalprofits of the sector in 1990.
26. A firm's ability to generate an operating surplus from itsearnings and capital determines its profitabilLty. The ratio chosen toreflect the SOE's profitability in a high-inflationary environment is thereturn on capital employed ratio (ROCE). This benchmark is defined asearnings before interest and taxes (EBIT) / (equity + lnterest-bearing debt).The ROCE measures how efficiently (i.e., profitably) the firm is using its
Table A1.7: Aggregate Profit and Loss Statement-"(TL biLLion)
1985 1986 1987 1988 1989 1990 1991"' 1985-1990
REVENUE
TOTAL CURRENT REVENUE 9910 12892 17993 28143 48916 79693 132693SALES AND OTHER REVENUE 9555 12644 17847 27949 48559 79416 131621DUTY LOSSES 355 248 119 157 332 255 1042SUBSIDIES 0 0 27 37 25 22 30
EXPENSES
TOTAL EXPENSES 8393 11264 15603 25451 44607 76787 132079COST OF GOODS SOLO 6517 7603 10874 15617 29178 48890 85468DEPRECIATION CURRENT YEAR 374 777 1282 2311 3950 5724 7371PROVISIONS 33 42 85 137 230 630 485OTHER EXPENSES 1469 2842 3362 7386 11249 21543 38755OF WHICH WAGES 966 1273 2016 2907 7370 14498 29394
EARNINGS BEF. INT. & TAXES 1517 1628 2390 2692 4309 2906 614
INTEREST 267 509 1091 1561 2052 3638 5437
EARNINGS BEFORE TAXES 1250 1119 1299 1131 2257 -732 -4823
TAXES 251 515 665 709 864 1095 1321
OPERATING SURPLUS/LOSS 999 604 634 422 1393 -1827 -6144
DIVIDENDS 0 0 0 70 140 362 520RETAINED EARNINGS 999 604 634 352 1253 2189 -6664
Return on Capital Erployed 17.18% 14.25% 12.74% 10.64% 16.30X 6.79% 5.28% 11.98%Return on Capital Employed-Private M&E NA 22.90% 21.50% 21.30% 14.80% NA NA 20.13%
Operating Surplus as % of GDP 3.59% 1.53% 1.08% 0.42% 0.82% -0.64% -1.40%
MEMORANDUM ITEM: GNP 27797 39370 58565 100582 170412 287254 439637
Source: Treasury and IBRD estimates.Notes: Excluding T#O.
Program.
- 17- ANNEX 1
capital base (equity and debt) to generate an operating surplus. It alsoreflects the firm's financing rate breakeven point. If a firm's weightedaverage cost of capital is above the ROCE, it is not profitably using itscapital, becauce the cost of financing is greater than the return the firmearns on its capital investment. Subsequently, any additional, similarinvestments will continue to decrease the firm's operating surplus.
27. Whereas the ROCE of both public and selected private manufacturingand energy companies (these subsectors make up the majority of the SOE sector)fell since 1985, the average ROCE for the entire period is 12 percent for SOEsversus 20.1 percent for the private sector.i/ This 8.5 percent spread issignificant because it represents the difference between overall sectorprofitability and deficit. Moreover the ratio has been declining steadilysince 1985; it is now at 6.8 percent significantly below the weighted cost ofcapital (13 percent) for firms listed on the ISE. SOEs are not earningsufficient profits on their capital investments to cover their financingexpense, while the private sector can generate a surplus from its investedcapital.
gaoital Structure
28. The consolidated balance sheet for the sector is presented inTable A1.8. Total borrowing increased 13.6 percent in real terms between 1985and 1990. This increase contrasts with a 14 percent real decline in fixedassets during the same period, implying that SOEs are using outside borrowingto finance normal operational needs rather than to fuel profitable sectorgrowth. TMO's stocks have risen significantly in recent years, raising theshare of inventories in total assete from 15 percent in 1985 to 19.2 percentin 1990. This stock-building activity is exclusively related to policy-induced agricultural support purchases. Excluding TMO, inventories haveremained roughly constant as a share of assets over the period 1985-90.
29. Capital structure is important because the securities mix that afirm uses to finance its assets helps determine its overall financial health.The indicator chosen to reflect the sector's current capital structure is thefinancial leverage ratio. This gauge is defined as (equity + totalliabilities) / equity. The financial leverage ratio measures how much of afirm's capital is debt relative to owner's equity. A ratio close to 1.0implies that the firlm is primarily using equity to finance its working capitaland capital investment needs. The benefits of using leverage are itsflexibility in managing a firm's cash (i.e., cash is not dedicated tofinancing one or more projects) and its ability to allow firms withinsufficient liquid assets to finance potentially profitable capitalinvestmente. However, when real interest rates are high, too much leveragecauses exorbitant interest expense and usually precludes the firm from makinga profitable return on capital investments.
A The decline of the ROCE in private sector in 1989 is due to the sharprecession in industry in the first half of the year.
- 18 - ANNEX1
30. As Table A1.8 indicates, the financial leverage ratio for the SOEsector has averaged 2.37 from 1985 to 1990. The private manufacturing andenergy subsectors (both capital-intensive industrial subsectors) averaged1.32. The difference is to some extent due to the dominant weight of a fewlarge SOEs, such as TEK (electricity) and TDCI in the average, but for mostother SOEs the financial leverage is also higher than in the private sector.In a behavioral sense, the difference can be explained by the fact thatprivate companies facing high real interest rates prefer to use equity as themain source of financing to reduce interest expenditure. SOEs do not havethat choice because equity contributions are determin:ed through the centralgovernment's budgetary process, largely independent of the cost of financing.
Table A1.8: Aggregate Condensed Balance Sheet of SOEs1 '(TL billion)
1985 1986 1987 1988 1989 1990 1985-1990
ASSETS:
TOTAL CURRENT ASSETS 5144 6424 6541 14143 21492 28036OF WHICH INVENTORY 1848 2116 2952 4868 7919 12523
FIXED ASSETS 6826 9599 16313 24105 37582 54063OTHER LONG TERM ASSETS 990 1642 1908 2051 3209 3363
TOTAL ASSETS 12960 17655 24762 40299 62283 85462
LIABILITIES:
TOTAL BORROWING 7213 10510 11781 26123 35204 50371NON-INTEREST LIABILITIES 3272 3989 5274 10096 13797 22514OF WHICH ACCOUNTS PAYABLE 2928 3539 3588 6463 8039 15914
SHORT TERM BORROWING 1185 2255 1308 4857 6650 7017LONG TERM BORROWING 2756 4266 5199 11170 14757 20840
TOTAL EQUITY 5747 7155 12981 14176 27079 35091
TOTAL LIABILITIES & EQUITY 12960 17665 24762 40299 62283 85462
Financial leverage ratio 2.26 2.47 1.91 2.84 2.30 2.44 2.37Fin. leverage - Private M&E NA 1.40 1.33 1.31 1.22 NA 1.32
Source: Treasury and IBRD estimates.
Note: 1 ExcLuding TMO.
Financial Risk
31. Financial risk, or solvency, is related to a firm's capitalstructure and is defined as the risk to the owners from the use of debtobligations. Too much debt, relative to the firm's earnings, causes operatingdeficits because of larger interest expenses. If the debt load becomesunmanageable and the firm's liabilities are greater than their assets, thefirm becomes insolvent.
- 19 - dN
32. A measure of the firm's ability to generate an adequate operatingsurplus to repay the interest and fixed charges on its debt is the "timesinterest earned" ratio (TIE). It is defined as (BBIT + depreciation) /interest. The TIE ratio can also be used to determine to what point earningscan decline before the firm is no longer able to meet its interestobligations. This indicator is called earnings decline coverage (EDC) and canbe calculated as (1 - (1 / TIE)) x 100 percent. The earnings decline coverageindicator is an important measure of solvency. A firm with a low EDC is ahigh financial risk because its operating surplus is barely sufficient torepay its current debt obligations. An unexpected decline in operatingsurplus could cause the firm to default on its debt since it will haveinsufficient funds to pay its interest expenses.
Table A1.9: Financial Risk Indicators of Aggregate SOE Sectorl'
1985 1986 1987 1988 1989 1990 1991" 1985-1990
AGGREGATE TOTAL:
Times interest earned 6.87 4.72 3.34 3.21 2.57 2.02 1.47 3.24Earnings decline coverage 85.44% 78.81% 70.06% 68.82% 61.07% 50.44% 31.9% 69.11%
PRIVATE MANUFACTURING/ENERGY:
Times interest earned NA 2.36 3.11 2.94 3.85 NA NA 3.07Earnings decline coverage NA 57.60% 67.89% 66.04% 74.02% NA NA 66.39%
Source: IBRD estimates and Istanbul Chamber of Industry.
Note: ' Excluding TMO.Program.
33. The sector's earnings decline coverage has gradually decreasedfrom 85 percent in 1985 to 32 percent projected in 1991. This indicates thatthe sector is becoming increasingly risky (see Table Al.9). Wage increasesgranted in 1991 (141 percent nominal), which are not yet reflected in thefigures of Table A1.9, are more than sufficient to make the earnings declinecoverage negative. This trend implies that the sector would no longer be ableto cover interest payments, and, therefore, would be technically bankrupt.
Cash Flow hnalysis
34. Cash flow measures the firm's ability to generate sufficientinternal funds (through operating surplus and depreciation) to financeoperational (working capital) and capital investment nee4p. A firm with anegative cash flow can be investing heavily in new capital equipment to earnfuture profits or it can be consistently generating insufficient internal cashto finance operational and investment needs. A negative cash flow suggeststhat the firm requires outside financing (usually from commercial or foreignbanks) to meet these needs.
-20 - ANNEX 1
35. Table A1.10 examines the cash flow and borrowing requirements ofthe sector. Free cash flow is calculated as gross cash flow -(working capital+ capital investment) + (nonoperating income - nonoperating expenditure).Gross cash flow is defined as operating surplus - taxes + depreciation. Freecash flow, therefore, is the firm's total after-tax cash that is available toall providers of the firm's capital.
Table A1.1O: Aggregate SOB Sector Cash Flow Analysis(TL billion)
1986 1987 1988 1989 1990
NET OPERATING MARGIN 1590 2139 2696 2368 3419
DEPRECIATION 777 1282 2311 3950 5724TAXES -515 -665 -709 -864 -1096
GROSS CASH FLOW 1852 2756 4298 5454 8048
WORKING CAPITAL 563 -795 2486 3742 -2344CAPITAL INVESTMENT 4202 11545 10247 18585 22360
TOTAL INVESTMENT 4765 10750 12733 22327 20016
FREE OPERATING CASH FLOW -2913 -7994 -8435 -16873 -11967
NON OPERATING INCOME 21 676 -73 1942 381
FREE CASH FLOW -2892 -7318 -8508 -14930 -11587
Borrowing Requirement -988 -2036 -2436 -2285 -1314Percent of GNP 2.5% 3.5% 2.4% 1.3% 4.6%
Source: Treasury, IBRD estimates.
36. The sector's free cash flow shortage has been very high in recentyears (7 to 9 percent of GNP), but it improved somewhat in 1990. However,capital investment declined 45.2 percent, and working capital needs havefallen 5 percent in real terms since 1986.
Specific Cases: TCDD. TTK. THO
37. Several SOEs are in extremely poor financial condition, includingTCDD, TTK, TMO, Caykur, TZDK, and EBK. TMO, Caykur, and TZDK are inagriculture-related industries and are, therefore, subject to government-imposed price restrictions and subsidies. EBK is'a small company with aminimal impact on the sector. Hence, this analysis is limited to TCDD and TTK
- 21 - ANEX I
to determine the depth of their financial problems and their overall effect onthe economy.
Railwasys TCDDI
38. Table A1.11 summarizes the key financial information for TCDD.TCDD has embarked on a capital investment program that has increased debtstocks, causing interest expense to rise and operating surplus to declinecontinuously. Wage expense has also risen 204.4 percent in real terms since1985. Together, wages and interest expenses have strongly contributed to anoperating deficit of TL821 billion in 1990 and a projected 1991 operatingdeficit of TLl.9 trillion (0.5 percent of GNP).
Table A1.11: TCDD FinanciaL Information5TL billion)
1985 1986 1987 1988 1989 1990 1991"
OPERATING SURPLUS/LOSS 5 -41 -21 -83 -152 -821 -1919
Return capital employed 2.46X -1.88% 1.08% -0.39% 0.04% -8.75% .15.17XFinancial Leverage ratio 1.50 1.63 1.51 1.85 1.70 1.96 2.00Times interest earned 6.67 0.81 1.78 1.09 0.88 0.88 -0.46Earnings decline cover. 85.00% -23.08% 43.86% 6.36% -13.87% -13.38% NA
FREE CASH FLOW -115 -54 -907 -1380 -2176 -991Free Cash Flow as % GDP -0.29% -0.09% -0.90% -0.81% -0.76% -0.23%
TCDD borrowing requirement -26 15 -31 3 -137 -302 -1009Borrowing Req. as X GDP -0.09% 0.04% -0.05% 0.00% -0.08X -0.11% -0.23%
MEMORANDUM ITEM: GNP 27797 39370 58565 100582 170412 287254 439637
Source: Treasury and IBRD estimates.
Note: t Program.
39. The increase in capital ;nvestment and subsequent large operatingdeficits caused by the increese in wage and interest expensees have alsocontributed to a growing negative cash flow. This decline culminated in anegative free cash flow of TL2.2 trillion in 1990 (almost one percent of GNP).Subsequently, TCDD has been forced to further increase its debt stocks tofinance normal business operations.
40. TCDD has significant potential to increase its performance bydrastically reducing wage expense and working capital needs and selling itsmanufacturing company, which is draining operating and capital investmentfunds from the railway business. TCDD should also focus on areas where it hasa comparative advantage (e.g., transportation of bulk goods), and with theexception of a few profitable lines leave other activities (e.g., parceltransportation and passengers) to trucks and buses.
- 22- ANNEX 1
Hard Coal k._e TTK)
41. As Table Al.12 indicates, TTK also has severe financial problems.Its operating deficit totaled TL752 billion in 1990, and it is projected toreach TL2 trillion in 1991 (0.5 percent of GDP). This deficit io caused bywage expenses that have increased 160.7 percent in real terms since 1985 andcost of goods sold, which are greater than incoming revenues.
Table A1.12: TTK FinanciaL Information(TL billion)
1985 1986 1987 1988 1989 1990 1991'~
OPERATING SURPLUS/LOSS 7 *46 -77 -157 -350 -752 -1980
Return on capital emltoyed 12.77% -57.75% -37.06% -593.30% -94.23% NA NAFinancial teverage ratio 2.01 2.77 1.61 13.55 1.48 NA NATimes interest earned 9.00 -6.80 -5.08 -14.29 -14.66 -24.41 -27.48Earnings decline cover. 88.89% NA NA NA NA NA NA
FREE CASH FLOW -18 -169 1 -646 104 -1324Free Cash Flow as % GDP -0.05% -0.29% 0.00% -0.39% 0.04% -0.31%
TTK borrowing requirement 20 -18 -35 -96 -220 -1039 -730Borrowing Req. as % GDP 0.07% -0.05% -0.06% -0.10% -0.13% -0.36% -0.17%
MEMORANDUM ITEM: GNP 27797 39370 58565 100582 170412 287254 439637
Source: Treasury and IBRD estimates.
Note: Program.
42. TTK has inadequately replenished its fixed asset stock, which hascontributed to higher cost of goods sold. Its fixed assets have beendepreciated and not replaced because of its inability to self-finance capitalinvestments. TTK is not overburdened with interest-bearing debt; it hasfinanced its working capital needs through deferred payments (i.e.,noninterest bearing liabilities). Using noninterest liabilities is anaccepted working capital management technique, but the magnitude of the anountowed (TL1.4 trillion in 1990) combined with largs operating deficits impliesthat TTK will not he able to repay its creditors.
43. TTK'e current financial position does not give it an opportunityto reverse its current trend. It would have to reduce wage expense andreceive a sufficiently large equity infusion tr overcome its current negativeequity position and embark on a massive capital asset replacement program.This strategy would reduce cost of goods sold, but would dramatically increaseinterest expense because of the debt needed to finance this program. Theoverall effect of this course of action would bring TTK to the brink ofinsolvency.
- 23 - ANNEX 1
The Soil Products Office (TMO)
44. The Soil Products Office (TMO), excluded from the aggregateanalysis, is the agency executing the Government's agricultural support andurban income support policies. As such, the company is entirely policydriven; hence a discussion of its financial performance yields little. TableA1.13 shows some summary indicators of performance. Although TMO has alwayshad an operating loss, its borrowing needs have been modest until recently.In some years, the company has earned a reasonable return on capital. Yet,the volatility in the indicators and their recent deterioration show that thecompany is fulfilling a noncommercial role. When world prices foragricultural crops were high, TMO's performance was quite good (e.g., 1988),but recently the wedge between domestic purchase prices and internationalprices has become so large that TMO has been making significant losses.Excessive stockbuilding in 1990 pushed TMO's borrowing requirement to 1.9percent of GNP. Financing of these stocks and their sale at a loss isexpected to raise the operating loss to almost 0.5 percent of GNP in 1991.Before the higher than anticipated price increases took hold in the 1991season, TMO's borrowing needs in 1991 were anticipated to be 1.1 percent ofGNP. After the increases, the domestic price for wheat is about $US170 perton, 60 to 70 percent above world market priced.
Jeble A1.13: TH Financial Information
1985 1986 1987 1988 1989 1990 1991"
Operating surpluses" -0.24% -0.22% -0.26% -0.05% -0.12% -0.05% -0.44%
Borrowing reqcirement 0.35% 0.90X 0.81% 0.16% 0.59% 1.92% 1.1%
Return on capitat employed 15.0% 3.75% -8.8X 48.1% 22.2% 0.8% -3.6%
Financial leverage 4.4 8.9 25.5 23.6 24.6 4.1 1.5
Earnings decline cover 13.0% -181.0% n.a. 75.3% 19.55% -901.4% 195.2%
Source: Treasury and IBRD calculation.
Notec: D Program.Before duty loss compensation.
Fi ancial Viblity of SOEs
45. To anticipate future financial trends in the sector, a forecastingand valuation model was used to predict the viability of the SOEs over thenext five years to determine which SOEs should be privatized and which shouldbe liquidatod.
-24 I NE
Methodoloatv
46. Projected operating surplus, the need for interest-bearing debtfinancing, the projected free cash flow, the profitability of capitalinvestments, financial indicators, and the projected value of the firm in 1996were all used to claseify the enterprises as viable or nonviable. The valueof each enterprise was calculated as the sum of the present value of projectedfree cash flows for 1991 through 1996, plus the terminal value in 1996, minusthe value of projected liabilities in 1996. The terminal value was calculatedbased on a weiglhted average cost of capital of 13 percent, real revenue growthrate, and projected net operating income for 1996. This analysis assumes thatthe following SOEs will be retained in the public sector over the medium term:DlMI, PTT, TCDD, TDI, and TEK. In addition to these enterpriscs, Petkim,SUmerbank, THY, and TMO were also excluded from the analysis.
47. A firm with increasingly negative net income and negative freecash flow, a history of unprofitable capital investments, increasing debtburden, declining financial indicators, and a negative projected terminalvalue was determined to be a candidate for liquidation because it would haveno value for private Bector purchase. Marginal firms and those SOEs that,through better expense management and financial restraint, seem to have thepotential for improvement were considered privatization candidates.
48. There are two important caveats to the forecasting and valuationmodel. First, the analysis was done at the holding company level; hence, itcannot differentiate among companies within a holding because of a lack ofdisaggregated data. Second, the analysis takes the quality of the originaldata as given, even though some problems were discovered during theanalysis.11
Best Case Scenario
49. The best case scenario assumes that the SOEs, through reforms orprivatization, would be able to raise revenues by 20 percent. Additionally,the analysis assumes that the sector will decrease wage expenses by 30 percentand face a real interest rate of 7 percent on all outstanding interest-bearingdebt. Table A1.14 reflects these results based on 1990 accounting data.
50. Even under these positive assumptions, seven SOEs would not becomefinancially viable, leaving about 120,000 employees to be assimilated into theprivate sector. These liquidation candidates represent 13 percent of fixedassets and 21 percent of employment of the sample analyzed. The Governmentwill have to assume TL5.3 trillion in outstanding debt, which will bepartially offset by a cash gain of TL400 billion and the sale value of fixedassets (book value TL7 trillion).
I The most severe one was that for many SOEs the flow of fundsstatements could not be reconciled with changes in the balance sheets.
-25 - ANNEX l
Table_A_.14: Forecast of Financiat Accounts: Best Case Scenario
INVIABLE SALE RETAIN TOTAL
TL Trillion/UnitsNUMBER 7 18 5 30REVENUE 6.6 36.9 14.8 58.3FREE CASH FLOW -0.5 -1.2 -9.9 -11.6CASH GAIN/LOSS 0.4 -0.4 -0.1 -0.2DEBT 5.3 4.5 18.0 27.9FIXED ASSETS 7.0 8.9 38.2 54.1EMPLOYMENT 120242 201829 254270 576341
PERCENTAGE OF TOTAL
NUMBER 23.3% 60.0% 16.7% 100.0%REVENUE 11.3% 63.3% 25.4% 100.0%FREE CASH FLOW 4.3% 10.4% 85.3% 100.0%CASH GAIN/LOSS -235.3% 248.8% 86.5% 100.0XDEBT 19.1% 16.3% 64.7% 100.0%FIXED ASSETS 12.9% 16.5% 70.6% 100.0%EMPLOYMENT 20.9% 35.0% 44.1% 100.0%
ASSUMPTIONS:20% INCREASE IN REVENUES DUE TO PRODUCTIVITY GAINS30% DECREASE IN WAGE EXPENSE DUE TO PRIVATE SECTOR MGT. CONTROLS7% REAL INTEREST RATE ON DEBT
Source: IBRD estimates.
A More Realistic Scenario
51. In order to test the sensitivity of this analysis' assumptions, amore realistic scenario was created. In this case, prices will have to fallby 20 percent (see also next section), but, because of existing unusedcapacity and the state of the current fixed asset stock, productivity andefficiency will increase 15 percentY. The net effect is a five percentdecrease in revenues. However, wage expenses due to private sector managementcontrols are again assumed to decrease by 30 percent. Real interest rates arefixed at seven percent. Table A1.15 shows these results based on 1990accounting data.
52. In this case, 17 SOEs will not become financially viable, leavingalmost 194,000 employees to be retrained or assimilated into the privatesector. This number represents 56.7 percent of the firms, 33.6 percent oftotal sector employment, and 24 percent of fixed assets. The government willhave to assume an additional TL7.4 trillion (26.5 percent) of outstandingsector debt. Also it will realize a cash loss of TLO.1 trillion due to
A To the extent that it is linked to further reduction in tradeprotection, the 20 percent decrease in prices could also reduce imported inputcosts. However, imported inputs represent only 34 percent of the total costof production of SOEs; so a proportional reduction in fixed and intermediategood prices still has a significant negative effect on the firm'sprofitability.
-26- ANNEX 1
liquidation, partly offset by the sale value of fixed assets (book value ofTL12.7 trillion).
!RTabLe1.15: Forecast of Financial Accounts: A Realistic Case
INVIABLE SALE RETAIN TOTAL
TL TriLtLion/UnitsNUMBER 17 8 5 30REVENUE 15.5 28.1 14.8 58.3FREE CASH FLOW -0.3 -1.4 -9.9 -11.6CASH GAIN/LOSS -0.1 0.1 -0.1 -0.2DEBT 7.4 2.5 18.0 27.9FIXED ASSETS 12.7 3.1 38.2 54.1EMPLOYMENT 193747 128324 254270 576341
PERCENTAGE OF TOTAL
NUIJMBER 56.7% 26.7X 16.7X 100.0XREVENUE 26.5% 48.1% 25.4X 100.0XFREE CASH FLOW 2.6X 12.1X 85.4X 100.0XCASH GAIN/LOSS 77.6% -64.2X 86.5X 100.0XDEBT 26.5X 8.8X 64.7X 100.0XFIXED ASSETS 23.6X 5.8X 70.6X 100.0XEMPLOYMENT 33.6X 22.3X 44.1X 100.0X
ASSUMPTIONS:5K DECREASE IN REVENUES DUE TO DECREASE IN SUE PRICES TO MARKET PRICES30K DECREASE IN WAGE EXPENSE DUE TO PRIVATE SECTOR MGT. CONTROLS7K REAL INTEREST RATE ON DEBT
Source: IBRD estimates.
53. Recently, the Government agreed to give a further average nominalwage increase of 140 percent to SOE workers. Depending on the inflationoutcome for 1991, this jump could imply a real wage increase of 30 to 40percent. Barring any layoffs, many more companies will join the group ofinsolvent companies over the next two years. As the ability to self-financecapital investment and operational needs decreases, interest-bearing debtstocks will increase. This effect will put an additional strain on thealready over-burdened capital structure of the SOEs, resulting in largerinterest payments and a deeper deficit-debt spiral.
D. Economic Performance
54. A weak financial performance, as documented in the previoussection, need not necessarily imply low efficiency or low factor productivity.Output and factor prices faced by SOEs may differ from market values ae theresult of government interference. This argument hold. less for SOEsproducing tradeables, because selling below market prices would lead to excessdemand and rationing, which is not observed in Turkey. Interference inpricing decisions to achieve noncommercial objectives, if not adequatelycompensated by subsidies, directly distort. indicators of financialperformance. While price manipulations cannot be discarded entirely as acause of poor financial performance of SOEs in Turkey, Table A1.16 reduces the
-27 NNEX
power of this argument. It indicates that domestic prices of many goods andservices produced by SoEs are significantly above border prices. At least forthis subset of comnmodities, increased foreign competition would require a dropin the output prices, since they average 44 percent above CIF prices.Y
Table A1.16: Comparison of Selected SOE Prices with Border Prices(12/31/1990)
ENTERPRISE PRODUCTS IMPORT PRICE SOE SALE PRICE X DIFFERENCE(CIF S) (S) SOE/CIF
SEKA Newsprint (ton) 800.00 605.26 -24.34%Quality Paper (ton) 520.00 1,199.25 130.62%Kraft Paper (ton) 590.00 691.73 17.24%
CITOSAN Cement (ton) 41.00 63.53 54.96%
TDCI Cast Iron (Hungary) 264.00 338.35 28.16%Iron-Steel (Europe) 280.00 387.22 38.29%Iron-Steel (L. Am.) 265.00 360.90 36.19%
TTK Hard Coal (ton) 49.62 67.89 36.81%
TZDK DAP Fertilizer (ton) 180.00 281.80 56.56%TSP Fertilizer (ton) 140.00 187.58 33.98%Anmrniwn Sulfate 60.00 109.14 81.89%Urea (ton) 85.00 165.66 94.89%
SEKER Sugar (ton) 365.00 507.52 39.05%EBK Meat (Kg) 3.13 3.10 -0.79%CAYKUR Tea (Kg) 2.56 4.79 86.99%Etibank Copper (Ton) 2,735.15 2,706.95 -1.03%
Unweighted Average 44.34%
Source: Treasury and IBRD.
55. Indirectly, price distortions also affect allocative efficiencybecause SOE managers are not facing market signals to guide their operationaldecisions. The relatively inefficient use of resources is borne out by agenerally lower rate of capacitv utilization in the public manufacturingsector compared with the private sector (see Figure Al.1). Insufficientresource use was especially noticeable in 1990 because foreign competitionincreased due to the real exchange rate appreciation.
56. Comparing the share of SOEs in value added, labor, and capitalwith the private sector's 500 largest industrial firms shows that SOEs produceapproximately 45 percent of value added, with 66 percent of the fixed assetsand 55 percent of the total labor (see Table A1.17). uisless these industries
7 Even if increased foreign competition would lower the price ofimported inputs proportionately, the net effect on financial performance of
these SOEs would be negative, ceteris paribus.
- 28 - ANNEX-1
Figure A1.1Capacity Utilization in
Ptibtic and Private Industry
100 _
eo......... ....... ........ ;,,
70 <;>/.............. . ......... s
40 , . . . . . . .t 2 a 4 1 2 3 4 t 2 3
1 e 88 19s 0 1
P- ubllo - Private
are characterized by declining returns to scale, the fact that SOEs employ a
relatively higher share of both production factors indicates that
they use an inefficient factor combination. Such a practice leads to a
12roductivito that is overall lower than the private sector's. Given the fact
that SOEs are typically larger in size than private companies, decreasing
returns to scale could render this observation invalid. In that case it was
the decision on the size of the establishment rather than on the factor mix
that was the wrong one.
.Table A1.17: Share of SOEs in Vatue Added, Employmente.nd Fixed assets In 500 Largest Industrfat Firml
(percent)
- ~~~~ w ~~~~~ 1986 1987 1988 1989 1990
Effptoyment 57.0 54.9 55.5 54.5 53.4
Fixed AssetsCurrent Prices 69.0 68.7 69.8 68.9 65.91988 Prices 70.7 69.6 69.8 68.8 64.8
Value AddedCurrent Prices 45.8 44.8 47.0 45.8 41.6198B Prices 43.8 44.7 47.0 44.9 40.5
Source: ISO and 18RD calculatlons.
S7. A crude indicator of the efficient use of capital is the
incremental capital output ratio (ICOR), which under certain assumptions can
be interpreted as the inverse of the marginal productivity of capital. Table
-29- ANNEX 1
A1.18 shows that, in the aggregate, the ICOR of 80Ss is more than double thatof the rest of the economy over the last five years. Lower marginalefficiency of capital on SOEo is especially striking in manufacturing andenergy, while in mining, transportation, communication, and agriculture, SOEsappear to do better than the private sector. The latter may be due to sectorspecific characteristics and developments over the sample period.9' In anycase, if SOEs as a group had been as efficient as their private sectorcounterparts, real GDP could have been higher by 3 percent in 1990. Thisfigure is a rough eatimate of the efficiency loss due to suboptimal investmentdecisions in recent years.
Table A1,18: Incremental Capital Output Ratios (1985-90)
SOEs Non-SOEs
Total 9.25 4.56
AgricuLture 1.46 3.32
Mining 15.61 -19.55
Manufacturing 44.88 2.17
Energy 16.28 5.71
Transport & Comnunications 5.11 -67.2
Source: IDAR calculations.
58. Mainly as the result of the hiring freeze introduced by theGovernment in the second half of the 1980s, labor productivitv indicators showa modest upward trend (12.1 percent) in the period 1985-1989 (see TableAl.19). Change in labor productivity varies greatly among individual SOEs,ranging from -70.6 percent for TZDK (tractor production) to +62.8 percent forIGSAS (fertilizer production) over the sample period. Although the averageincrease in labor productivity is a positive development, the 12 percentincrease becomes insignificant when compared with the 100 percent uniform realwage increase over the same period. Moreover, in many cases the level ofproductivity in the SOEs is below that of the private sector, as indicated inpart B of Table A1.19. This trend especially applies to the sectors oftextiles, paper and publishing, machinery and equipment, and electricity. In
8 Value added of the private sector has fallen in mining andtransportation and communication over the sample period; in agriculture, thesample of SOEs includes only TARIM and ORUS, representing less than onepercent of value added of that sector.
_ 30 ANNEX 1
the sectors of mining, chemicals, and wood and wood products SOEs outperformthe private sector in terms of gross value added per wotker.V
Tablet AI19: Labor Productivity
1986 1987 1988 1989 1985-1989
A. Change in Labor Productivity3
Agriculture 33.5 -2.0 -1.6 1.2 30.3Mining 1.7 -2.9 -3.6 17.6 11.9
Manufacturing 10.3 19.2 -2.1 24.2 -2.5ELectricity (TEK) 3.5 14.4 4.5 5.2 30.1
Transportation & Communication -1.6 9.5 10.1 5.4 25.0Total 6.3 13.8 1.0 -8.2 12.1
Selected CompaniesTZDK -7.8 23.1 -13.8 -70.0 -70.6GEMSAN -32.8 55.9 -3.8 -42.0 -41.6DITAS -4.2 16.2 -8.0 -34.9 -33.4TTK -6.4 -3.8 -5.4 -4.2 -18.4Etibank 3.4 0.1 24.7 4.1 34.4THY 3.8 27.5 6.7 1.7 43.7TPAO n.a. 19.7 -0.4 23.3 46.9IGSAS -10.7 71.6 -4.3 11.0 62.8M:emo:Real Wage Increase 100X
B. Gross Value Added Per Workerl'(SOEs/Private Sector)
Mining 0.74 1.26 1.75 2.00 1.44Manufacturing 0.91 0.71 0.80 0.87 0.82Food, Beverage, Tobacco 1.27 0.87 0.60 0.66 0.85Textiles, Weaving Apparel & Leather 0.75 0.59 0.68 0.60 0.66Wood, Wood Products, Furniture 2.53 2.15 1.69 0.67 1.76Paper, Paper Products, Publishing 0.51 0.80 0.78 0.92 0.75Chemicals, Petroleun Products, Plastics 1.10 1.18 1.29 1.74 1.33Non-Metallic Mineral Produtcts 1.14 0.89 0.74 0.83 0.90Basic Metal Products 0.65 1.04 1.33 0.83 0.96Machinery and Equipment 0.44 0.28 0.32 0.58 0.41Electricity 0.13 0.20 0.29 0.33 0.24Total 0.85 0.74 0.86 0.90 0.84
Source: Treasury and ISO.Notes: 1 Based on a sample of main products representing 76 percent of total value of
production in 1988; volume indices weighted by 1988 share in value ofproduction.
2 Based on top 500 industriaL firmc in Turkey.
2 The figures in part B of Table Al.19 are subject to the caveat thatvalue added is expressed in current prices due to a lack of price deflator.that differentiate between public and private production. The sectorsmentioned here as poor performers would require increases between 25 percentand 75 percent to catch up with value added per worker in the private sector.Differences in price only are unlikely to be responsible for gaps of thissize.
-31- ANNEX 1
59. For a limited subsample of SOEs total factor productivity (TFP)growth was calculated for the period 19 8 5-1 9 9 0T (see Table A1.20). Withthe exception of THY (airlines) only those companies that reduce their netcapital stock were able to raise TFP. These companies are on an unsustainable
path that will turn the decline in capital into reductions in value added inthe near future. TEK (electricity) and PTT (telecommunications), which arerapidly expanding both capital and labor, are posting a significant decline inTFP.II/
Table A1.20: Total Factor Productivity for Selected SOEs(1985-1990, percentage change)
Value Labor Capital TFPAdded
TTK 1/ -2.24 0.61 7.48 -2.85TKI 50.50 3.09 *46.34 64.91TDCI 23.68 -4.06 -19.25 26.78TEK 56.80 17.12 221.11 -86.02TCDD 50.26 -8.67 142.67 -2.51THY 53.79 19.47 84.50 7.82PTT 173.09 35.57 305.63 -14.54
Source: Treasury and IBRO calculations.Note: 1/ TTK's personnel expenditure exceeds value
added over the saaple period. Its weightis set at unity for TFP calculation.
E. CQnCludina Remarks
60. SOEs in Turkey are still active in almost all sectors of theeconomy. Aside from the usual monopolies in the service sector, they dominatein basic metals and cnemicals as the result of the Government's importsubstitution policies before 1980. Had these companies been operating asefficiently as their private sector counterparts, much of Turkey's currentmacroeconomic problems (fiscal deficits and high inflation) could have beenavoided. Their performance on all indicators is poor compared with theprivate sector's and, worse, their performance deteriorated so significantlyin the last five years that it threatens macro stability. A similar problemwas solved in the early 1980s by raising SOE prices and depressing real wages,but this solution is much less an available option today. Increasingly highinflation, trade liberalization, and increased competition from the privatesector have eliminated this option for tradeable goods. Two other majorlossmakers (electricity and railways) can only partially rely on price hikes:
-Lo Companies with the largest stock of fixed assets in 1988 wereselected.
1J1 Since capital stock data are based on real net investment, thefollowing two elements might bias the TFP indicator downward: (a)underreporting of depreciation, and (b) gestation lags of investment.
-32 - ANNEX I
electricity tariffs are relatively high already, and railways face stiffcompetition from road transportation.
61. The poor performance of SOEs can be summarized as follows:
(a) The combined operating surplus (excluding TMO) declined from 3.6percent of GDP in 1985 to a deficit of 0.6 percent in 1990 and adeficit of 5.2 percent in 1991.
(b) After an initial increase to 5.2 percent of GNP in 1987, theborrowing requirement of the sector (excluding TMO) fell to 3.4percent in 1989 due to a drastic decline in investment (48 percentover 1985-91); however, deteriorating operating performance andlimits to the reduction of investment pushed the borrowingrequirement of SOES to a peak of 7.4 percent in 1991.
(c) Since 1987, it is no longer profitable to use the capital of theSOEs because the cost of financing is greater than the return oninvestment.
(d) The sector is becoming an increasingly higher financing risk, andafter the real wage increases of 1991, the sector is likely to betechnically bankrupt because it will be unable to cover interestpayments.
(e) The sector's cash flow shortage (savings-investment on a cashbasis) has reached a staggering TL11.6 trillion in 1990 (4 percentof GNP).
(f) Under optimistic assumptions about future improvements inefficiency, a large part of the sector, representing 21 percent oftotal employment, will not become viable.
(g) The marginal efficiency of capital in SOEs over the last fiveyears has been only half the private sector's; had SOEs been asefficient as private sector firms, in recent years GNP could havebeen higher by 3 percent each year.
(h) SOEs in manufacturing employ more labor and capital thancomparable firms in the private sector per unit of value addedproduced.
62. At the individual level, the picture is, of course, more mixed.Particularly poor performers are the hard coal mine (TTK) and the railways(TCDD). But also the electricity company (TEK), the steel mill (TDCI), and afew smaller companies (EBK, CITOSAN, TZDK) are in dire shape. There are fewgood performers, although some have good potential to become competitive (THY,PETXIM, ORUS, PTT, TPAO). In a class by itself, THO's financing needsincreased to P record 1.7 percent of GNP in 1990, falling to 0.8 percent in1991.
- 33 _
63. Although one can always point to immediate causes of thedeterioration of SOB performance, the recent real exchange rate appreciation,lack of investment funds and working capital, and tripling of the wage billare in fact caused by the same underlying problem: poor macroeconomicmanagement and continuing political interference in SOE decision making. Thisfact has prevented the SOEB from adjusting to the trade liberalization. Atthe beginning of the 1980s the Government was well aware of the problemscaused by the SOB sector, and it undertook some legal changes that would lowerinterference in SOE decisions and would prepare for the divestiture of a majorpart of the sector. Today it is clear that the process has failed and thatthe problem is rapidly growing worse control.
64. To break the vicious circle, the Government needs to deal with theSOB problem in a radical manner. A number of SOEs or parts thereof that arefinancially and economically inviable need to be liquidated. For many SOEs,there is no reason for the Government to continue operating the enterprises.The private sector in Turkey has proven to be the main engine of economicdevelopment over the last decade, and this role could be reinforced bytransferring ownership of potentially viable SOEs into private hands. Thisstrategy appears to be the only adequate solution to increase the efficiencyof the sector and the economy and to prevent politicians from imposingunwarranted noncommercial objectives on SOs. A few of the largest SOEs arelikely to remain in the Government hands. Among those, TEK and TCDD areproblematic cases that need to be (further) restructured and partiallydivested.
- 34 - ANNX 2
TURKEY
STATE-OWNED ENTERPRISE, SECTOR REVIEW
ANNEX 2
Fiscal Performance, Budaetarv Impact, and Subsidization
-35- alilX a
TURKEY
~TATE-OWNED ENTERPRISE SECTOR REVIEW
FISCAL PEREORMANCE. BUDGETARY IMPACT. AND SUBSIDIZATION
Table of Contents
Paqe No.
A. Introduction ................... o n- . .. . .. .............. 34
BO Fiscal Performae .................. ... ........... ......... ... 34
Distribution of Deficit .. .. ........ 44
Four Typical Performances ................s...... . ....... 44Financing of Deficits ... ..... ...... 47
C. Burden_of SOEs on the_Reet of th Public Secto r. 54
D. Subsidies: Who Benefits and Who Pays? . .................. 58
E. ncludino Remarkls ......... ...... .................. .. 60
List of Tables
Table A2.1 Borrowing Requirements .............................. 38Table A2.2 Concentration of Deficits, Investments, and Borrowing 45Table A2.3 TER - Fiscal Information ........................... . 46Table A2.4 Petkim, PTT - Fiscal Information . . .48
Table A2.5 TMO, TEXEL, SEKER - Fiscal Information.. 49Table A2.6 TRK, TCDD, TDCI - Fiscal Information. 50Table A2.7 Financing of the Deficf t . . 51Table A2.8 Commercial Bank Credits and Foreign Debt. 52Table A2.9 Financial Flows Between SOEs and the Rest of the
Public Sector... .. ... .. .. 55Table A2.10 Financial Burden on the Rest of the Public Sector 58
List of Figures
Figure A2.1 Public Sector Borrowing Requiremet by SOE.......... 39Figure A2.2 PSBR - Investment - Change in Sto ck. ... 40Figure A2.3 Investments ..................................... . ... 41Figure A2.4 Change in Stockst..... .. .... .. ......... 42
- 36- A X 2
TURKEY
STATE-OWNED ENTERPRISE SECTOR REVIEW
-FISCAL PERFORMANCE. BUDGETARY IMPACT, AND SUBSIDIZATION
A. Introduction
1. Thio annex reviews the performance of SOEs from the fiscal
perspective, using conventional fiscal indicators, such as borrowing
requirement (PSBR), primary deficit, and operational deficit. The sources of
the observed performance, as well as the main contributors to it, are also
investigated. Reviewing the composition of deficit financing gives an idea of
the contribution of SOEs to inflation (crowding out of the private sector from
the domestic financial market) and to the international creditworthiness of
the country.
2. There is a very complicated network of financial relations between
SOEs and the rest of the public sector. These relations are further obscured
by differences in accounting procedures among SOEs and by the elapse of time.
An attempt is made to disentangle these complex relations in order to identify
the actual financial impact of SOEs on the rest of the public sector, in
particular, the central government budget and extra-budgetary funds (EBFs).
Finally, the subsidies provided to (and/or through) SOEs and their ultimate
beneficiaries are discussed.
B. liscal Performance
3. The borrowing requirement (after transfers) of the LOB sector has
varied between 3.0 and 5.5 percent of GNP in the 1985-90 period, accounting
for 38 to 72 percent of the entire public sector deficit (see Table A2.1).
Graphs A2.1 through A2.4 show main aggregates for the sector, as well as
individual SOEs ae averages for the 1985-90 period, and for 19901'. The
fiscal performance of SOEs and the sources of SOE deficits have shown the
following three distinct patterns during 1985-90:
(a) Large and rising deficite (1985-87k: SOE deficits rose from 3
percent of GNP in 1985 to 4.4 percent in 1987. This period is
characterized by large investment e:Apenditureu, especially in
energy, telecommunication, and petrochemicals. Although
investments by manufacturing SOBs had started to decline, total
investment of the sector stayed around 6 percent of GNP. Stock-
building added another 2 percent of GNP to SOE financing needs.
The SOEs could, however, generate internal funds of only about 3.4
1 PETKIM and Sumerbank are not included in annual data for 1988-90.
IHowever, they are included in the averages for the period 1985-90.
-3?- ANEX 2
percent of GNP/. Despite the lack of internally generatedfunds, the implementation of large investment and stock programs(generally imposed by the Government, as in the case of TEK, PTT,Botas, TMO, and TEKEL), was the main cause behind the largeborrowing requirements during this period.
(b) Declininc deficits i1988-89): SOE deficits declined to 2.7percent of GNP in 1988 and 2.6 percent in 1989. They accountedfor 44 percent of the total public deficit in 1988 and 37 percentin 1989 (lowest in the 1985-90 period). As part of the temporaryfiscal adjustment program of the government in 1988, SOEinvestments were cut and SOE price adjustments were kept in linewith inflation (even ahead of inflation). In 1988, investmentexpenditures declined to 5 percent of GNP, while internallygenerated funds rose to 4 percent of GNP, leading to a decline inthe deficit from 4.4 percent in 1987 to 2.7 percent. Despite afurther cut in investments expenditures, equivalent to 1 percentof GNP, the deficit declined only marginally to 2.6 percent in1989 due to an erosion in internally generated funds.
(c) Drastic deterioration (1990): The SOE deficit exploded in 1990,reaching 5.5 percent of GNP and accounting for 52 percent of thetotal public sector deficit. The factors leading to this drasticdeterioration were quite different. First, a generousagricultural support policy led to a record-high increase instocks; equivalent of 4.6 percent of GNP. Second, internallygenerated funds dropped to 1.8 percent. This decline was due to alarge, and abrupt, increase in real wages. There was also anothercause for the decline: most SOEs were unable to adjust to higherreal cost of labor and increased private and foreign competitionfollowing the trade-liberalization in 1989 and the continuingappreciation of the real exchange rate.
I Internally generated fund - retained earnings + depreciation +provisions + proviaions for foreign exchange losses + unpaid dividends toshareholder othsr than Treasury, where retainedl earnings - prnfit/loss - dutylooses (claimed) - corporate tax - dividenids (paid) to Treasury.
-38 -NEX
Table A2.1: Borrowing Requirements tX of GNP)
1985 1986 1987 1988 1989 1990
A. Public SectorPSBR 4.6 4.7 7.8 6.2 7.1 11.2Primary Deficit 1.1 -0.1 1.9 -0.7 1.0 6.0Operational Deficit .. 4.1 5.6 3.7 4.3 7.1
S. SOEsPSBR (After Transfers) 3.0 3.4 4.4 2.7 2.6 5.5Primary Deficit 2.0 2.1 2.5 1.1 1.4 5.2Operational Deficit .. 3.2 3.8 2.2 2.2 5.8
C. Share of SOEs in total tX)PSBR 66.6 72.1 56.6 43.6 37.0 52.5Operational deficit .. 76.6 67.4 59.3 51.5 81.1
Memo ItemsInvestm6nts+Stock Bultd-up 8.1 7.6 8.0 7.2 6.3 7.9
Investments 6.2 6.1 5.7 5.1 4.1 3.4Stock Build-up 1.9 1.5 2.3 2.1 2.2 4.6
Intere3t Payments 1.0 1.3 1.9 1.6 1.2 1.3Internally Generated Funds 3.2 3.6 3.4 4.0 3.0 1.8
Source: Treasury.
_ ......................O- D>u - ot-u07e377< - -3zq-tD--o
-4 0 - o C-
' _ .. , -.-----------.................... d
o
0afotd
o _ 0
D) 0C} a> . .... ,, . ..............................
o . .................................... GI
<
c} 1I-o (D
. .............................. Lo
J6 _w.X .,,@ . ,.......................................... , .............. .
0~~~~~~~~~~0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~j.z. . . . . . . . . . . . . . . . . . . . . . . .
-g z ft~~~~~~~~~~~~~~~~~~~~~~~~~~.......... ..................... .......
is.. . . . . . . . . . . . . . . . . . . . . . . . . . CL . . . . . . . . . . . . . . . . . . . . . . . . .
U) U)
Ca ~ a,
0
z~~~~~~~~~
.0. -
o Z ~~~~~~~~~~~~~~~~~~~~~~~~~U)
o22~~ E cv E0~~~C .....................
. \ .OIW ~ C ,i C
CD rn m z ' ...-.-..-...... ,..,,,,,.,\,N........................... £ O.
a _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~aX @ c~n 0 a .,....... , .. ,,...........................
I .........
. . .. .,, ,- \ o C ~~~~~~~~~~~~~~~~~~~..... 1................
. l ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I-cl
,
MO
C' a- - ° ) U,Oa aY °aroNFEENU)>0vouJow>¢vU4ZUvEe
*14
..., -.----- ......----- ....-D ...................................................... to.............................................................._
~~~~~~~~~~~~~~~~~~~...............r..---.-X -.- ........... z
.... .-*------'-------v...................E7£
X
t)
-
av~~~~~~~~~ I 0 .
cn * CD - ? s. U Z F ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~ .............................................. C
C 0~~~~~~~~~~~~~~~~~~~~~~~~T.............................................. N R
>~~~~>E ~~~~~~~~~~~~~~~~~~~~............. |'........................................
; ' ~~~............................................... ......... a)
X l
0 -
U] oe-4<(2>eoWa<>elseM@oMzod<SE;oeo a2xeICDaE4 a^ ffiQC= Fnss o>aw>EfflO -n -; wg°Oav=0gFcOe>O I ee
4.)~~~~~~~~~~~~~~~~~~~~~u
I*~~~~~~..... ..................-.-.-.-.-.-.--.-------..
.. ............................... _ e
. ............................ - en
aT)a)cn I
0I)
qn I O
Q~~~~~~~~~~~~I I2
C .....................................
. .................................0~~~~~~~~~~~~~~~~
to, , ., .,,,,...,,,........................
C.- ~~~~~~~~~ U~~~.
g ~ ~ ~ ~ .................................................. _Co
1)* ¢eFDF8X> °°>F° pz Eoec;
U~~~~~~~~.t)EuoL0~~~~~~~~~
- 43 - ANBiX2
4. Deficits of SOEs have had different characteristics than those ofthe rest of the public sector, in particular the central government budget.Table A2.2 shows estimates of primary and operational deficite for the SOEsector and the entire public sector. The SO sector has always run primarydeficits contrary to the primary surplus for tho rest of the public sector.SOB primary deficits averaged 2.2 percent of GNP in 1985-87, 1.5 percent in1988-89, and 5.6 percent in 1990. This performance reflects high nonintereatexpenditures by SOEs, as well as low interest payments (on average 1.5 percentof GNP in 1985-90). The latter is mainly due to the fact that SOEa haverelied more on foreign borrowing (especially during 1985-87) than on interest-bearing domestic financing, and partly due to data problems. Relativelymore foreign borrowing leads to lower average nominal interest paymentsbecause with high inflation domestic interest rates contain a large nominalcomponent, which in fact is repayment of principal.
S. Mainly for the same reasons, the discrepancies between the PSBRand the operational deficit (meaning PSBR adjusted for the inflationarycomponent of interest payments) for the SOE sector have not been as large asthe discrepancies for the rest of the public sector. SOE operational deficitsaveraged 0.5 percentage points of GNP lower than PSBRs in 1986-89. Thisresult was basically due to the low level of interest-bearing domestic debt.The difference has increased to 0.8 percentage points, reflecting theincreased reliance on domestic borrowing in 1989 and 1990. Operationaldeficits being close to PSBRs means that (a) the SOB deficits have not beenlarge (especially for 1988-90) just because of high inflation, and (b) theyhave required the transfer of real financial resources from the rest of theeconomy and from abroad.
6. From the above review of SOZ deficits during the 1985-90 period,it is clear that operational inefficiency is one of the key causes of theproblem. The sector suffers from a multiple of operational inefficienciesthat render a significant number of SOEs financially unviable (see also Annex1). In addition to the array of government intervent:.ons in pricing andemployment, the SOE sector also has carried the burden of the government'sdevelopment strategy and agricultural support policy. Since the mid-eighties,the government has withdrawn from investing in manufacturing; it has shiftedthe emphasis of the role of the public sector in development to providingenhanced infrastructure in energy, telecommunications, and transportation. Ithas chosen SOEs (TEK and PTT) and extra-budgetary funds (EBFs, mainly thePublic Participation Administration (PPA)) as the instruments of thisstrategy. Hence, the burden of investmente has been shifted out of theGovernment budget to the SOE sector and EBFs. Consequently, SOEs have beenforced to undertake larce investment vroiects that they could not finance fromtheir own funds. Moreover, the government'. a,riggltural su-ort-i2licy,reflecting mostly political patronage, has been implemented through SOE
I Primary deficits are somewhat overeatimated because some SOEa (TMO,SEKER, and TPAO) include interest payments in cost of goods and services sold.Due to lack of available data, this portion of interest payments was notincluded in the estimates.
-44- ANNEX 2
(mainly TMO, TEKEL, and SEKER). These SOEs have been forced to accumulatelarge stocks. The bulk of the stocks could not have been markated withoutincurring large losses (i.e., low quality tobacco purchased by TEXEL and wheatpurchased at twice the world prices by THO in 1990). Given the poor financialperformance of these SOEs, the only way for them to implement the Government-imposed duties has been to increase borrowing.
Distribution of Deficits
7. A closer look at the distribution of deficits among individualSOEs brings out an important observation: the deficits have been highlvconcentrated. Table A2.2 shows concentration ratioo (CR) calculated for thelargest (CR1), the largest four (CR4), and the largest eight (CR8)contributing SOEs to total borrowing requirement of the sector, and to othermain aggregatesy. The SOEs listed (in the order of contribution) in eachblock are the largest eight contributors measured in terms of theircontribution to the average for the period 1985-90. The averages are theaverages of annual figures expressed as a share of GNP.
8. The SOE with the largest deficit (TEK for all the years except1990, when TMO ranked the first) has accounted for 22 to 55 percent of thetotal borrowing requirement in the years 1985 to 1990 (34 percent on anaverage basis). The borrowing requirements of the largest eight SOEs havebeen near the total for the sector, and they have even been higher than thetotal for some years (1986 and 1989). TEK and TMO (except in 1988) haveconsistently ranked in the first four. TEKEL, Seker, TCDD, TDCI, andSumerbank have ranked in the first eight for most of the years. Petkim, PTT,Botas, and THY have ranked in the first eight during 1985-87, and they naveeither showed a surplus or a lower deficit during 1988-90. Conversely, TTK'sperformance deteriorated after 1988, and since then it has ranked in the eightpoorest performers. A similar concentration is observed in investmentexpenditures and stock buildup. Moreover, the set of SOEs with the largestdeficits is almost a union (with a few exceptions) of the sets of SOEs withthe largest investment and stock build-up programs.
Four Tvpical Performances
9. Performance has not been even across SOEB and over time. Ananalysis of main indicators for individual SOEs revealed the following four"proto-types" of performance:
4 A "Concentration Ratio (CRn)" simply measures the share of the largestn companies in the aggregate considered. A higher CR indicates a higherconcentration.
-45 -EX 2
Table A2.2: Concentration of Deficits, Investments, and Borrowing
Average1985-90 85 86 87 88 89 90
A. PSBRCR1 34 22 39 37 55 56 27
TEK, THO, Seker, TEKEL CR4 69 63 92 76 94 112 70TDCI, PTT, TCDD. Sumer CR8 90 105 115 97 110 143 92
B. PrimarY DeficitCR1 44 24 47 43 258 134 35
TEK, THO, Seker, TEKEL rR4 103 80 123 102 475 285 84TCDO, TDCI, TT4, THY CR8 124 134 158 128 520 356 105
C. InvestmentsCR1 36 27 29 35 40 53 43
TEK, PTT, TCDD, Botes CR4 65 59 64 73 68 76 76PETKIN, TPAO, TKI, THY CR8 83 82 84 85 85 88 87
D. Stock Build-uwCR1 21 14 46 19 20 17 34
TWo, TEKEL, Seker, TPAO CR4 60 51 82 57 53 54 81TDCI, Sumer, Caykur, TEK CR8 75 71 99 78 74 71 88
E. Net Borrowing from BanksOCR1 34 26 46 54 35 33 63
ThOe TEl. TDCI, Seker CR4 63 77 92 83 105 80 90WPAO, PETKIN, TZDK, Suiner CR8 80 96 110 98 149 103 i02
F. Net Forelsn BorrowinG"CR1 27 27 34 26 51 74 50
TEK, TKI, THO, TPAO CR4 63 80 72 81 87 157 107PTT, TCDD, Botss, THY CR8 93 96 104 107 108 178 124
D A CRn in excess of 100 percent indicates that the remaining SOEs are net repayers.Source: Treasury ard IBRD estimates.
- 46 - hNNEX 2
Tabte A2.3: TEK - Fiscal Information
1985 1986 1987 1988 1989 1990
PSBR 0.66 1.33 1.61 1.48 1.38 1.18Primary deficit 0.47 0.97 1.10 1.15 1.11 0.76PSBR-lnvestments-Stocks -1.09 -0.50 -0.53 -0.68 -0.90 -0.37
Investments 1.65 1.74 2.00 2.15 2.21 1.49Stock build-up 0.09 0.10 0.13 0.01 0.08 0.06Interest payments 0.18 0.36 0.51 0.33 0.27 0.42
Internally generated funds 0.91 0.58 0.47 0.55 0.51 0.15
Investments+Stockin excess of internallygenerated funds 0.84 1.26 1.66 1.61 1.77 1.40
Source : Treasury and IBRD calculations.
(a) Heayily investing SOE: The typical example is TEK, which isthe only SOE with such a large and sustained deficit andinvestment program. Table A2.3 illustrates the case oflarge deficits stemming from large investment programs.TEK, by 4teelf, had a borrowing requirement of about 1.5percent of GNP during 1986-89, and 1.2 percent of GNP in1990. But, at the same time, it-had to implement the
largest investment program assigned by the government.Annual investment expenditures have been around 1.7 percentof GNP in 1985-86, in excess of 2 percent of GNP in 1987-89and 1.5 percent of GNP in 1990. During this period,internally generated funds have been only about 0.5 percentof GNP (0.15 percent in 1990). TEK could have generatedmore funds to finance a larger portion of investments if ithad been given more flexibility in employment and pricingdecisions and been able to overcome operationalinefficiencies. However, even a much better performancecould not have matched the financing needs of such a largeinvestment program with long gestation and recovery periods.More importantly, given the fact that Turkey needs tocontinue to invest in energy infrastructure, TEX is likelyto bo- in a esimilar situation unless covernment can attractprivate and/or foreign capital investment in energy.
(b) SOE with recently completed proiects: PETKIM and PTT are twoexamples. Performance of these SOEs is characterized by (i)fairly large investment programs during the 1985-87 period, fullyor nearly completed by 1988-89; (ii) large deficits during theinvestment period that eventually turned into surpluses; and (iii)internally generated funds during the postinveatment period (1988-90), on the average noticeably larger than those during the
- 47 - ANX 2
investment period (1985-87) (see Table A2.4). The case of PTTdiffers from TEX because PTT's investment program has beencompleted. More importantly, PTT has been more efficient in theareas of pricing and employment.
(C) Victims of acricultural ougport policy: Performance of TMO,TEKEL, and SEKER have mainly reflected the degree of generosity ofthe government in supporting agricultural producers, as well asconsumers. Purchases of grains, tobacco, and sugar beet atsubsidized prices and at amounts in excess of rational levels ofbuffer stocks have been the main cause of door performance ofthese SOEs. As shown in Table A2.5, this weak performance is mostpronounced in 1990. Aside from the financing of stockaccumulation, purchases and sales at subsidized prices andphysical losses due to purchases in excess of existing storagecapacity, have led to operational losses. It is clear that anysignificant improvement in these SOEs is contingent on a change inthe Government's agricultural support policy.
(d) Genuine voor nerformers: TTK and TDCI (and TCDD to some extent)are typical examples. The borrowing requirement of these SoEB hasmainly financed operational losses (see Table A2.6). These SOEsare characterized by outdated technology, lack of investment toupgrade efficiency, and excessive employment. These deficiencieshave surfaced more as these SOEs faced stronger competition,increasing real wages, and an appreciating real exchange rate.
Financing of Deficits
10. Table A2.7 shows the sources of deficit financing. During 1985-88, the SOE sector relied heavily on foreign borrowing to finance ongoinginvestment projects. Disbursements on foreign project credits were around$1.1 billion per year in 1985-88. A small number of SOEs accounted for alarge portion of foreign borrowing (TEK, PTT, THY, TKI, TDCI, TCDD, andBotas). During this period, net foreign borrowing by SOEs accounted for morethan half of total net foreign borrowing. More strikingly, SOEB borrowedabout $1 billion in 1988 when the economy as a whole recorded a net repaymentof $0.4 billion (see Table A2.8).
1il Borrowing from commercial banks (including rediscount creditsextended by the Central Bank) has been about 1.6 to 1.8 percent of GNP during1985-90, (except in 1988, when it was insignificant). Thc group of largestborrowers included TMO and SEXER (for agricultural support purchases), as wellas SOEs with large investment expenditures, such as TEK, PTT, and PETKIM.Borrowing from the Central Bank as reported in SOE accounts corresponds todirect credits from the Central Bank under Treasury guarantee. Since 1984,the Central Bank in principle closed this window for SOEs, except for THO.Borrowings from Central Bank in Table A2.8 are mainly THO's borrowing. Totalnet domestic financing has shown large fluctuations during 1985-88 (0.4percent of GNP in 1986 vs 2.1 percent in 1987).
- 48 _ NEX 2
Table A2.4: PETKIM, PTT - Fiscal Information
PETKIN 1985 1986 1987 1988 1989 1990
PSBR 0.42 0.35 0.28 -0.15 -0.32 -0.17Primary deficit 0.40 0.30 0.11 -0.55 -0.47 -0.20PSBR-Investments-Stocks -0.16 -0.20 0.07 -0.53 -0.47 -0.25
Investments 0.52 0.50 0.15 0.26 0.09 0.06Stock build-up 0.05 0.05 0.06 0.13 0.06 0.02Interest payments 0.01 0.06 0.18 0.41 0.15 0.03
Internally generated funds 0.12 0.17 0.21 0.54 0.48 0.26
Investments+Stockin excess of internallygenerated funds 0.45 0.38 -0.00 -0.15 -0.33 -0.18
PTT 1985 1986 1987 1988 1989 1990
PSBR 0.30 0.61 0.63 0.07 -0.26 -0.07Primary deficit 0.21 0.48 0.40 -0.17 -0.42 -0.16PSBR-Investments-Stocks -0.56 -0.49 -0.61 -0.85 -0.79 -0.86
Investments 0.86 1.15 1.28 0.91 0.51 0.73Stock build-up 0.00 -0.05 -0.04 0.01 0.03 0.06Interest payments 0.10 0.13 0.23 0.23 0.16 0.09
Internally generated funds 0.58 0.50 0.63 0.93 0.96 0.87
Investments+Stockin excess of internallygenerated funds 0.28 0.60 0.61 -0.01 -0.43 -0.08
Source : Treasury and IBRO calculations.
- 49-2
Xak.LJ AZs: T,4O0 TEKEL, SEKER - FIScal Information
TNO 1985 1986 1987 1988 1989 1990
PSBR 0.33 0.85 0.78 0.02 0.61 1.75Primary deficit 0.26 0.81 0.76 0.01 0.60 1.72PSBR-Investments-Stocks 0.25 0J5 0.24 -0.17 0.10 0.05
Investments 0.02 0.02 0.11 0.18 0.12 0.10Stock buildup 0.06 0.68 0.44 0.01 0.40 1.60Interest payments 0.08 0.05 0.02 0.02 0.01 0.03
Internally generated funds -0.24 -0.20 -0.26 0.03 -0.11 -0.10
S nvestments+Stockin excess of internallygenerated funds 0.33 0.90 0.81 0.16 0.62 1.80
TEKEL 1985 1986 1987 1988 1989 1990
PSBR -0.04 -0.03 0.15 0.44 0.35 0.90Primary deficit -0.19 -0.03 0.15 0.44 0.35 0.90PSBR-Investments-Stocks -0.34 -0.35 -0.16 -0.04 -0.01 -0.19
Investments 0.03 0.02 0.02 0.02 0.03 0.05Stock buildup 0.28 0.30 0.29 0.46 0.32 1.04Interest payments 0.15 0.00 0.00 0.00 0.00 0.00
Internally generated funds 0.40 0.40 0.17 0.08 -0.01 0.22
Investments.StockIn excess of internallygenerated funds -0.10 -0.08 0.14 0.41 0.37 0.88
SEKER 1985 1986 1987 1988 1989 1990
PSBR 0.11 0.00 0.31 0.37 0.30 0.75Primary deficit 0.11 0.00 0.31 0.37 0.30 0.75PSBR-Investments-Stocks -0.19 -0.12 -0.02 -0.07 0.02 0.00
Investments 0.08 0.06 0.08 0.07 0.05 0.05Stock buildup 0.22 0.06 0.26 0.36 0.23 0.71Interest payments 0.00 0.00 0.00 0.00 0.00 0.00
Internally generated funds 0.03 -0.01 -0.02 0.03 -0.04 -0.00
Investment&+Stockin excess of internallygenerated funds 0.27 0.13 0.35 0.40 0.31 0.76
Source: Treasury ard IBRD calculations.
-50- ZjNEX 2
Table A2.6: TTKD TCOD TOCI - Ffscal Information
TTK 1985 1986 1987 1988 1989 1990
PSBR 0.03 0.05 0.06 0.10 0.13 0.36Primary deficit 0.02 0.03 0.04 0.09 0.12 0.35PSBR-Investments-Stocks -0.03 0.03 0.01 0.06 0.09 0.29
Investments 0.02 0.02 0.03 0.02 0.03 0.02Stock buildup 0.04 -0.01 0.02 0.02 0.01 0.05Interest payments 0.01 0.01 0.02 0.01 0.01 0.01
Internally generated funds -0.04 -0.10 -0.12 -0.14 -0.19 -0.25
Investments+Stockin excess of internallygenerated funds 0.10 0.12 0.17 0,18 0.23 0.32
TCDD 1985 1986 1987 1988 1989 1990
PSB2 0.28 0.01 0.10 0.23 0.21 0.38Primary deficit 0.26 -0.03 0.04 0.16 0.16 0.25PSBR-Investirvents-Stocks -0.18 -0.19 -0.23 -0.14 -0.11 0.11
Investments 0.39 0.19 0.29 0.35 0.26 0.20Stock buildup 0.07 0.01 0.04 0.02 0.06 0.07Intcrest payments 0.02 0.04 0.06 0.07 0.06 0.13
1nternally generated funds -0.04 0.03 0.01 0.00 -0.06 -0.03
Investmente*Stockin excess of internallygenerated funds 0.50 0.18 0.32 0.37 0.38 0.29
TDCI 19SS 1986 1t87 1988 1989 1990
PSBR 0.38 0.20 0.01 -0.09 0.40 0.40Primary deficit 0.36 0.13 -0.09 -0.18 0.27 0.20PSBR-Investme,its-Stocks -0.08 .0.01 -0.10 -0.25 0.06 0.30
Investments 0.22 0.17 0.07 0.04 0.04 0.04Stock buildup 0.24 0.03 0.05 0.12 0.31 0.06Interest payments 0.02 0.06 0.11 0.08 0.13 0.21
Internalty generated furds 0.09 0.00 0.09 0.28 -0.08 -0.29
Investments*Stockin exc,es of internallygenerated furafs 0.37 0.21 0.02 .0.12 0.42 0.40
Source: Treasury and IBRD catcutations.
TabLe A2.7: Financing of the Deficit
1985 1986 1987 1988 1989 1990
1. PSBR (X of GNP) 3,05 3.42 4,41 2.70 2.64 5.50(After Transfers)
11. Financing (X of GNP) 3.05 3.42 4.41 2.70 2.64 5.50
A. Net deferred payments -0.09 0.80 0.18 0.75 1.44 3.76a. Private sector 0.48 0.02 0.75 0.89 0.37 1.25b. Public sector -0.57 0.77 Q*055 '0.15 1.07 2.51
Treasury 0.65 0.76 0.41 0.33 1.11 0.63Other public agencies -1.13 0.28 '0.92 -0.30 0.07 1.90Other SOEs -0.10 -0.27 -0.03 -0.18 -0.12 -0.02
S. Net domestic financing 1.60 0.i,2 2.11 0.26 0.64 1.52a. Chanqe in cash/bank -0.62 .1.28 -0.45 -0.49 -0.69 -0.18U. Change in securities 0.02 0.00 0.17 0.09 0.02 0.04c. ConerciaL bankz 1.83 1.55 1.83 0.30 1.45 1.63d. Central Bank 0.29 -0.00 0.31 0.31 0.00 0.008. Fxit-Bnnk 0.07 0.14 0.25 0.05 -0.14 0.04
r. Net foreign financing 1.55 2.21 2.13 1.69 0.57 1.18
I-!. Financing (X of total) 100 100 100 100 100 100
A. Net deferred payments -3 23 4 28 54 58a. Private sector 16 1 17 33 14 19;3. Public sector -19 23 -13 'S DO 39
Tretaury 21 22 9 12 42 10Other public agencies -37 8 21 -11 3 29Other SOIis -3 -8 .-1 .7 5 .0
B. Wet doamestic financing 52 12 48 10 24 24a. Change in cash/bank -20 .38 -10 -18 -26 -3b. Ch;nge in securities 1 0 4 3 1 1c. Commerciol bariks 60 45 42 11 55 25d. Ctrntral Bank 9 -0 7 11 0 0d. ExlmEBank 2 4 6 2 .5 1
C. Net foreign financing 5 it 65 48 63 21 18
Itemo IteTsNet financin; from privbte sector
X of CNP 1.72 0.30 2.23 0.79 1.15 2.74X of total 56 9 52 29 44 42
Source: Treasury and IORD estimateds.
- 52 - ANNEX 2
Tebtl A2.6: CoercIal Uank Credits nd Foreign Debt
1MK 1986 1987 1988 1989 1990
1. Commercfat Bank Credfts (TL btllton)a. Stock
Tota' 1/ 5,552 10,043 16,024 22,770 36,522 65,199SOEs 938 1,415 2,550 2,856 5,329 10,000SOEs X of total 16.9 14.1 15.9 12.5 14.6 15.3
b. ExpansionTotal 2,420 4,491 5,982 6.745 13,753 28,677SOEs 400 477 1,135 305 2,474 4,670SOEB X of total 16.5 10.6 19.0 4.5 18.0 16.3
It. Foreign Debt (S millfon)a. Outstanding
Total 25,476 32,101 40,228 40,722 41,751 49,035Public Sector 2/ 21,404 26,425 33,821 34,610 35,199 38,592SOEs 3/ 3,320 4,501 5.640 6,575 6,991 8,464SOES X of total 13.0 14.0 14.0 16.1 16.7 17.3SOEs X of public 15.5 17.0 16.7 19.0 19.9 21.9
b. Net Foreign BorrofingTotal 735 2,067 2,410 (353) (506) 3,654SOEs 719 1,182 1,138 935 416 1,161SOEs X of total 97.8 57.2 47.2 -265.0 .82.2 31.8
1/ Includes Centrat lank redIscount credits through tho banking sector.2/ Including Central Iank.3/ Includes onlnding in fareign exchaneo from Tr.ssury; for 1985-88 estimated using data on
net borrowiin nd stock data for 189.
Source: Treasury, Central lank and IMD estimotes.
- 53 ANNEX 2
12. Finally, the size of net payment arrears also fluctuated stronglyduring 1985-88. While SOEs have consistently run arrears to Treasury and theprivate sector, the direction and size of payment arrears between SOEs andother public agencies have varied.
13. The financing of deficit 'sB shown a different pattern in 1989-90,and even more so in 1990, as noted below:.
(a) The share of pavment arrears in total financing has dramaticallyincreased, reaching 3.8 percent of GNP, or 58 pircent of totalfinancing requirement in 1990. Payment arrears to the privatesector (mainly unpaid portion of support purchases by SEKER andTEKEL) amounted to 1.3 percent of GNP, while the bulk of theremaining arrears (1.9 percent of GNP) was claimed by other publicagencies (see section C for details).
(b) The size and composition of foreign borrowing has also changed.While the disbursements on foreign project credits have slowed,repayments have increased. Total net borrowing has declined to0.6 percent of GNP in 1989 from about 2 percent in 1986-87. A newborrower emerged in 1989 and especially in 1990: TMO. TMOborrowed $0.3 billion in 1989 to finance wheat imports, and $0.7billion in 1990 to finance support purchases of 1990 harvest. Netforeign borrowing by SOEBs, excluding TMO, has declined from about$1 billion in 1985-88 to $0.2 billion in 1989 and $0.4 billion in1990.
(c) Finally, TMO and SEKER have crowded out almost all other SOEs fromcommercial bank borrowing. In 1989, TMO and SEKER borrowed TLl.ltrillion from the banking sector (partly rediscount credits fromZiraat Bank), which accounted for 50 percent of commercialborrowing by the entire SOE sector. This crowding out was evenmore pronounced in 1990. They borrowed TL3.9 trillion, which was85 percent of total comnercial borrowing (TL4.6 trillion).
14. Regarding the macroeconomic consequences of SOE financing, thefollowing conclusions emerge from the above patterns: (a) SOEs havesignificantly contributed to high foreign debt ratios of Turkey. Their sharein total foreign debt of Turkey has increased from 13 percent in 1985 to 17percent in 1990. Thie increase is mainly due to the fact that SOEs havecontinued borrowing from abroad after 1987 while the rest of the economyreduced its foreign indebtedness. (b) The contribution of SOEs to the crowdingout of the private sector has increased during 1985-90. This happened morethrough indirect channels than through direct borrowing from the bankingsector. The share of SOEs has stayed around 15 percent in total commercialbank credit stock. However, total financing from the private sector,including payment arrears to the private sector, has been increasing.Moreover, SOZ arrears to Treasury and other public agencies have caused higherborrowing by those agencies and, hence, have indirectly contributed to thecrowding out of the private sector from domestic financial markets. (c) Thecontribution of SoEs to money creation is more difficult to assess due to the
-54- ANNE-2
lack of available data on rediscounts to SOE6. However, for the 1988-90period an analysis of the sources of money creation indicates that SOBs didnot contribute directly to base money creation.
C. Bur en of SOEs on the Rest of the Public Sector
15. Financial relations between SOEs and the rest of the public sectorare quite complex. The issue is further complicated by the fact thatfinancial flows reported in detailed SOE accounts correspond to actual cashflows in some cases, whereas in others they correspond to accrued claims andobligations. Hence, it is not possible to give a complete and comprehensivepicture of the financial burden of SOEs on the rest of the public sector.This section attempts to identify major components.
16. Table A2.9 shows a matrix of flows between SOBs and other segmentsof the public sector. In the SOE accounting system, financial relations withthe rest of the public sector are reported in three groups: (a) Treasury, (b)other public agencies, and (c) other SOEs. All Government agencies other thanTreasury are included in "other public agencies." There are basically thefollowing three groups of financial flow/claims/obligation:
(a) Budaetarv transfers: SOEs receive transfers from the centralGovernment budget in the form of equity, compensation for dutylosses, and aid (see Annex 5 for details of duty losses). Thesetransfers are actual payments received from Treasury and alsoreported in the Government budget.
(b) Subsidies and transfers: There are three mainsubsidies/transfera: (i) Support and Price Stabilization (SPSF)subsidy to fertilizer producers (TUGSAS and IGSAS). SPSFsubsidies reported in SOE accounts are subsidies to theenterprises and exclude subsidies paseed on to consumers throughthese enterprises. (ii) Development and Support Fund (DSF)transfers to TEK: Housing Development Fund (HDF) receives a shareof electricity revenues, which TEK has failed to pay during therecent years. The unpaid amount is first recorded as a liabilityto HDF, and, then recorded as a transfer item from DSF, whichpresumably records it as receivables from HDF. The bottom line isthat TEK uses the proceeds of tariff, which actually belong toHDF. (iii) Financing of TEKEL's support purchases: TEKEL has theobligation to purchase low quality tobacco from producers atsubsidized prices. TEKEL does not include these in changes instocks since they are not marketable. Inetead it records the sumas an increase in claims on "other public agencies."Y
2 Theme are in reality claisns from the central government budget. Itappears that TEKEL hao rarely been paid (in this regard it might be viewed asthe burden of the rest of the public sector on TEKEL). In the revised 1991financing program, TEKEL was supposed to receive a partial payment of TLO.8trillioni in the form of duty losses.
a. a .e .C W f|
.,0 s . * * ,e~~*
a. l U|fS
Z . _, .
* C s'i i_ F _gI
- 56 - ANNEX 2
(c) A variety of receivablea and pavables: In aggregate tables theseitens are included in advance and deferred payments. Theaccounting principle ie: flows related to changes in liabilitiesare included in deferred payments, and those related to changes inaBLets are included in advance paymentb. This is the mostcomplicated part of the flows between SOEs and rest of the publicsector. The balance of these items have been in the order of 1.5to 2.5 percent of GNP in 1989-90. Main items in this group are(i) net tax arrears to Treasury, (ii) unpaid dividends toTreasury, (iii) unpaid debt service payments on onlending inforeign exchange from Treasury§/, (iv) payments by Treasury toSOEs on previous years duty losses, (v) payments by SOEs toTreasury on accumulated arrears on onlending and unpaid dividends,(vi) arrears to EBF on accrued revenue shares (HDF and PPA) andpayments on accumulated arrears, (vii) unpaid premium to theSocial Security Institution, and (viii) changes in ordinaryreceivables and payables related to purchase and provision ofgoods and services to other agencies.
17. SOEs also have receivables/payables to other SOEs. The balance ofthese for the sector should be zero,provided that accounting ofreceivables/payables by the two SOEs involved is symmetric and equal.However, SOE accounts have always shown nonzero balances, indicating anaccounting anomaly. One reason for nonzero balances could be that when an SOEis transferred to the PPA for privatization, other SOEs might continue toinclude receivables/payable to this SOE in "receivables/payables to otherSOEs." Another reason could be that a given transaction has two differentvalues in the books of the two SOEs involved. The balance of these items forthe sector as a whole is disregarded in the estimation of the financial burdenof SOEs on the rest of the public sector.
18. For the purpose of this annex the sum of all payments and thebalance of the changes in receivables/payables is taken as a measure of thefinancial burden of SOEs on the rest of the public sector. This treatmentcould be an overestimate because receivable/payablee bear the market rate ofinterest and the prospects for them being paid are high. However, neitherseems to be the case. Some of the payment arrears carry high penaltyinterest. For example, penalty interest on unpaid taxes and social securitycontributions was 84 percent in 1990. In other cases payment arrears eithercarry no penalty interest, or penalty rates are much below the market interestrate. For instance, interest on overdue debt service payments on onlendingwas 30 percent until 1990, when it was increased to 60 percent. Moreimportantly, the prompects for accumulated arrears being paid have proven tobe quLte slim. In the past, accumulated arrears have been consolidated, oransumed by Treasury and converted into equity. For instance in 1989,
f Treasury pays debt services due on foreign borrowing even if thedebtor SOE fails to reimburse. In SOE accounts, these arrears are included inincrease in liabilities to "other public agenciea" although the liability isto the Trea6ury.
- 57 - ANNEI 2
accumulated arrears on onlending and dividends equivalent to 1.7 percent ofGNP were written off by Treasury and converted into equity (note thatconversion was on top of equity injection paid in cash and reported under"budgetary transfers").
19. Table A2.10 puto together available data on financial flowsbetween SOEs and the rest of the public sector. Note that some of these itemsare above-the-line items (budgetary transfers, SPSF, DSF, and TEKEL supportpurchases) in aggregate financial tables (for instance, the PSBR table), whileothers are below-the-line items included in deferred/advance payments. Theestimated burden turns out to be much higher than that reported under"budgetary transfers." It has reached 3.9 percent of GNP in 1990, clearlydemonstrating how the so-called "soft budget constraint" bails out SOES infinancial distress and displaces the financial burden to the rest of thepublic sector.
20. The financial burden on the Treasury was in the range of 1.2 to1.9 percent of GNP in 1985-90. SOEs have consistently received budgetarytransfers (in the range of 0.4 to 1.0 percent of GNP), have run arrears ontaxes (0.1 to 0.7 percent of GNP), and have rarely paid dividends to Treasury.The direction of net flows related to accumulated receivables/payables hasvaried.
21. Subsidies received (or claimed) from the EBF system havecontinuously increased as the EBF system expanded and the role assigned toEBFs in public finance increased. Total subsidies started with 0.1 percent ofGNP in 1985 and reached 0.9 percent of GNP in 1990. Transfers to TEK from DSFin 1989 and 1990 explain a large portion of this increase.
22. The sign of the change in net balance of receivables/payables toother public agencies fluctuated during 1985-89. In 1990, however, netarrears of SOEs jumped to 1.9 percent of GNP. Moreover, the figures for theentire SOE sector hide an important development. A large number of SOEs havealways had claims on public agencies, while a few of them have beennotoriously accumulating payment arrears, especially after 1987. Forinstance, in 1990 TEX had arrears of 1.1 percent of GNP on debt servicepayments on onlending and on revenue shares of PPA and HDF. This burden ispartly revealed in Table A2.10 in the steady upward trend in increase inliabilities (from 0.04 percent of GNP in 1985 to 1.9 percent in 1990).
-58- ANNEX 2
Table A2.10: Financfal Burden on the Rest of the Public Sector (1 of GNP)
1985 1986 1987 1988 1989 1990
Total (I. + II.) 0.33 1.52 0.89 1.59 2.30 3.92
1. Treasury 1.36 1.18 1.60 1.68 1.94 1.12a. Budgetary transfers 0.65 0.35 0.76 1.02 0.72 0.44
Equity 0.49 0.09 0.48 0.66 0.60 0.30Duty losses (paid) 0.16 0.26 0.28 0.35 0.11 0.13Aid 0.00 0.00 0.00 0.01 0.01 0.00
b. Arrears on taxes 0.66 0.49 0.27 0.11 0.35 0.57c. Unpaid dividends 0.05 0.07 0.60 0.51 0.29 0.14d. Change in receivables/payables -0.01 0.27 -0.03 0.04 0.58 -0.03
Decrease in receivables 0.02 0.37 0.00 0.09 0.33 0.03Decrease in payables -0.03 -0.10 -0.03 -0.05 0.25 -0.06
11. Other pubtic agencies -1.03 0.34 -0.71 *0.08 0.35 2.80a. Subsidies and aid 0.10 0.06 0.21 0.21 0.27 0.90
Support and Price Stab. Fund 0.00 0.00 0.05 0.04 0.01 0.01Development and Support Fund 0.00 0.00 0.00 0.00 0.22 0.20Railway Co. aid 0.06 0.05 0.04 0.03 0.02 0.04TEKEL Support Purchases 0.04 0.01 0.13 0.15 0.02 0.65
b. Increase in liabilities 0.04 0.01 0.48 0.88 0.89 1.92c. Decrease in assets -C.90 0.10 -0.62 -0.38 -0.54 0.40d. Others -0.27 0.17 -0.79 -0.80 -0.27 0.38
ill. Other SOEs -0.10 -0.27 -0.03 -0.18 -0.12 -0.02
Newo ItemsDuty losses claimed 0.05 0.07 0.60 0.58 0.37 0.27Consolidated arrears (equity) 0.00 0.00 0.00 0.00 1.73 0.17
Source: Treas-iry and IBRD estimates.
D. Subsidies: Who Benefits and Who paYs?
23. It is clear that subsidies and transfere have been instrumental inthe survival of the SOE sector. Not so clear is what are the gains, if thereare any, and who are the beneficiaries? For a balanced assessment the firststep is to sort out the existing explicit and implicit subsidies and transfersmade available to the sector and by the sector. The second step is toidentify whether these subsidies and transfers compensate for the intrinsiclosses of the recipient enterprises, or whether they ultimately end up inother sectors of the economy. A complete and comprehensive assessmentrequires an enterprise and subsidy specific analysis, which is neither in thescope of this annex nor possible with the available data.
24. During the 1985-90 period there have been basically the followingfive types of subsidies and transfers to the SOE sector from Treasury andother public agencies, EDFs in particulars
(a) compensation for duty losses incurred in supplyinggoods and services at subsidized (or below the normalprices charged by the SOEs) prices upon theinstruction from the government;
59 - ANNEX2
(b) subsidies and transfers received from BBFo, either tofinance support purchaaes in agriculture or as puretransfers to finance deficits;
(c) equity injection by Treasury, either through providingcash or writing off accumulated debts;
(d) financing from the State Investment Bank (which waslater turned into Eximbank in 1987), the Central Bankin the form of direct credits, or rediscount creditthrough public banks at subsidized interest rates; and
(e) implicit subsidies attached to provision of financingby allowing payment arrears.
25. SOEs, in turn, have executed the following noncommercial dutiesand functions:
(a) support producers in agriculture and consumers ofagricultural products;
(b) provide goods and services at below normal prices,such as cheap coal for residential heating in highlypolluted towns, operating nonprofitable railways andmaritime lines;
(c) create noneconomic and redundant employment (morepolitically imposed rather than as part of welldesigned and targeted programs);
(d) temporarily subsidize all customers by holding backprice adjustments under "instructiono" from thegovernment (sometimes meant to be a measure to curbinflation).
As was discussed above, some SOEs (such as TEK and PTT) have also undertakenlarge infrastructure investments in energy and telecommunication that havelong gestation and recovery periods. Even if these enterprtses had beenfinancially strong and operationally efficient, and had adopted effective costrecovery programs, they would have been in need of financial support, at leastduring the investment period. With this view, a V= of the subsidies andtransfers received by TEK and PT? should be linked to their investmentportfolio.
26. Regarding the ultimate beneficiaries of the subsidLes andtransfers flowing into the SOB sector, and of simply the existence of someenterprlses, two groups emerge as the unquestLonable ct beneficiariessfarmers and employees of SOEB. Farmers receive income transfer through thesupport purchase programs implemented by SOEs. Employees (perhaps not all ofthem) also receive income transfers simply by being employed in SOE9.
-60- ANNEX 2
27. There are, obviously, other groups that benefit from the exietenceof SOEs and the way they operate. BusinesBes supplying goods and services toSOEs and their employees (especially, in towns like Zonguldak and Karabuk,where virtually the whole town depends on SOB-related activities) andconsumers of subsidized agricultural products are examples. However, it isnot clear whether they are net beneficiaries or not. The reason is that theypay, either directly and/or indirectly, for the inefficiency of the SOE sectorand the subsidy programs through taxes, inflation, and the lack of quality andlevel of public services. In addition, they suffer from insufficientinfrastructure enhancement.
B. Concludinq Remarks
28. The SOB sector has been a major contributor to the worseningfiscal performance during 1989-90. SOBs have contributed to the fiscaldeterioration not only through increasing deficits but also through anincreasing burden on the rest of the public sector. Urgency of a fiscalcourse correction increased as the deterioration continued in 1991. Thereview in this annex shows that a fiscal adjustment package that does notproperly address the problems of SoBe will fail to produce desirable fiscalimprovements. Moreover, it should be noted that the success of an SOE reformprogram crucially depends on (a) the restructuring of the Government'sagricultural support policies and the role of SOEs in the execution of thesepolicies; and (b) the redefinition of the role of SOEs in the implementationof public sector investment programs, especially infrastructure development.
- 61 - A3X 3
TYPRXEY
STATE-OWNED ENTERPRISE SECTOR REVIEW
DiNEX 3
D2ivesti4ture
- 62 - ANNEX 3
STATE-OWNED ENTERPRISE SECTOR REVIEW
Divestiture
Table of Contents
Paoe Bo.
A. Backaround and GovernmnentStratecv ............................ 63
B. Proarese to Date ................. , .... ............ * 64
C. Obstacles ............. 67
Political Obstaclest............ .. ... .. .. 67
Technical Obstaclest a c l eo.. .............. 68
D. ProDosed Reforms. ........... 72
Liquidation ...... .O*..0... .00.....*. 73
Sal ........................... 74
Decentralization. ........... ..... O- .... ....... .. 75
Share Distribution . ....... ................. 77
B. Concluding Remarks. .. ... ............... ........ ...... 81
List of Tables
Table A3.1 Divestiture Through May 31, 1991.... ......... 65
List of Boxee
Box A3.1 The Hard Coal Hine (TTK)...................... 73Box A3.2 Share Distribution in British Columbia and
Eastern Europe* *.** 7.......... 78
- 63- ANNEX 3
STATE-QWNED ENTERPRISE SECTOR REVIEW
DIVESTITURE
A. Backaround and Government Strategv
1. By the late 19700, Turkey's inward-oriented policies and continuedreliance on the public sector as the engine of development caused growingfiscal and current account deficits. These shortfalls led to unsustainable
levels of debt and ultimately to triple digit inflation and a deep economic
recession. In 1980, SOEs were responsible for a deficit of 6.4 percent of GDPout of a total of 10.3 percent for the entire public sector. A new Government
reacted forcefully to the deteriorating situation and announced an ambitious
market-oriented and export-led reform program. Recognizing the drag of the
poor SOE performance on the rest of the economy, the Government emphasized the
need for improved performance of the sector. The initial guidelines for thereform program stated that the Government would (a) abstain from expanding thepublic sector; (b) reduce monopoly powers granted earlier to SOEs, such as toincrease competition and enhance productivity and creativity; (c) reduce (and
eventually eliminate) SOEs' reliance on the Government's budget for bothoperating subsidies and debt financing; (d) revitalize and reorganize theSOEs' management and make them competitive and profit and cost conscious; and(e) privatize SOEs that no longer have a specific national missior..
2. Initially, the Government's reform strategy emphasized improvementin efficiency (see also Annex 1 and 4) that was pursued mainly through priceliberalization. Divestiture had to wait until 1984, when the Governmentannounced that it would be the cornerstone of a strategy geared at improvingefficiency and competition and the development of a dynamic private sector.To this end, the Government created the Housing Development and Public
Participation Administration (HDPPA) (Law No. 2983), which would beresponsible for the divestiture process. It initiated major studies (somefinanced by the World Bank) to develop a privatization strategy. The
resulting privatization masterplan (completed in 1986) classified enterprises
into those to be liquidated, sold, or retained and recommended the course of
action needed for each SOB.
3. In 1986, as part of Law No. 3291, the "law on privatization" wasissued, prescribing the procedurca to be followed. The Council of Ministers
(i.e., the cabinet) would decide on the divestiture of SOEs (holdings), whilethe HDPPA would decide on the sale/liquidation of subsidiaries, affiliatedpartnerships, and minority participations. The HDPPA would also beresponsible for liquidation of units and the sale of assets. Upon thetransfer of an SOE to the HDPPA it would be converted into a joint-stockcompany and dissociated from its concerned ministry; furthermore, its equitywould be transferred to the HDPPA. The HDPPA would be responsible for alloperations of the SOE under its purview. Law 3291 stated explicitly that as
long as the public share in the company exceeds 50 percent, the Turkish
- 64 - ANNEX
commercial code would not be applicable; the Government may continue toguarantee debt, and personnel would maintain all their previous rights.
4. The Goverinment's divestiture strategy emphasized improvement inresource allocation and promotion of a market economy, rather than ideology.However, the High Planning Council decided in 1986 that the population atlarge was to be given a otake in former SOEs, and widespread domestic shareownership became one of the major objectives of the privatization program.The decree law, including this principle, was modified in 1990, after havingcaused significant problems for the divestiture process (see below). In 1990,the HDPPA was alec split into two separate extra-budgetary funds (Decree Law414), and the Public Participation Administration (PPA) was given theauthority to divest.
5. In the Sixth Five-Year Plan (1990-94), a document outlining broadeconomic policia, the Government reiterated its emphasis on privatization asa key instrument in reforming the economy. Efficiency and dispersion ofownership continued to be the primary objectives of the divestiture program.in addition, the Plan also emphasized the importance of reforming retainedSOEs. The following quote from the plan is illustrative:
'The principle Is to continue the privativrtion of SOEs In order to increase economic effectivenessand dispersknn of ownership. As privatization continues, policies will be introduced to enhanceprofitability and productivity of SOEs and make them self-sufficient. The following Issues will be ofImportance: (i) to increase the quality of goods and services provided by the SOEs, (ii) to makeSOEs competitive in international markets; (iii) to improve their production structure andtechnology in order to enable them to provide inputs to other producers at International prices; (iv)to maintain continuity In management of the SOEs anid Improve the skill profile of SOFemployees, and; (v) to increase the capital of the SOEs In order to make It proportional to theiractiviies, but the resources of the Treasury will determine the extent of the increases'.
B. ProgresB to Date
6. Seven years after divestituze started, less than 0.5 petrcent ofthe fixed assets of SOEs have been sold. Through May 31, 1991, the entiredivestiture process generated US$530 million, about one third of it came fromthe sale of 8 percent of the petrochemicals company (Petkim). Very few sales,however, can be defined as privatization since the public sector eithercontinues to control the companies or since it never had a majority stake inthe first place. Moreover, during the 1980a the state also bailed out severalailing private companies.
7. As Table A3.1 indicates, only six subsidiaries have been divestedin block sales to foreign investors: five cement factories to Societ6 deCiment Frangais (SCF), and one catering company to Scandinavian AirlineSystems (SAS). All of these sales have been overturned by court rulingsinvoking the Government's own decision relating to target groups. Although asubsequent decree explicitly allowed direct males to foreigners, the courtorder stayed. Nevertheless, at present the foreign owners still continue tooperate the companies, and the Government is expected to appeal the court's
- 65- ANNEX 3
Table A3.1: Divestiture lhrough Nay 31, 1991
Percent Govt, Percent Date Method Proceeds ProceedsOwnershfp Sold TL million USSIO0O
VenturesPetkim 99.6 8.0 6118/90 Public Offering 397,393 149,545THY 99.9 1.5 11129/90 Public Offering 13,897 5,000
SubsidiariesAfyon Cimento1' 99.6 51.0 9/05/89 Block-Foreign 34,558 14,810Afyon Cimento 48.6 n.s. 5/31/91 Public Offering 29,900 7,383Ankara Cimento!' 99.3 99.3 9/05/89 Block-Foreign 70,817 30,349Balikesir imentoy 98.3 98.3 9/05/89 Stock-Foreign 52,687 22,579Sake Cfmento!' 99.6 99.6 9/05/89 StockForeign 30,632 13,128Trokya Cimento!/ 99.9 99.9 9/C5/89 Block-Foreign 56,313 24,133USAS Caterfno1 100.0 70.0 9/02/89 Olock-Foreign 32,015 14,500Petrol Ofisi 100.0 5.n 5/31/91 Public Offering 41,604 10,260Nigde cinento 99.8 n.o. 5/15/91 Pubtic Offering 10,354 2,548T4pras 99.9 2.5 5/31/91 Public Offering 20.802 5,130
ParticipationsTeletos 40.0 22.0 2/29/88 Public Offering 15,400 12,592Ansan 88.3 88.3 10/28/88 Block-Foreign 22,850 13,575ErdemirZ' 51.5 2.9 4/09/90 Public Offering 132,393 53,245Cukurova Elektrik 25.4 5.4 4/16/90 PubiIc Offering 96,995 38,7131cpez Elektrik 51.5 13.1 4/16/90 PubLic OfferIrg 23,457 9,362Arcelik 15.0 5.8 4/30/90 Public Offerin 50,162 19,870Bolu Cimento 35.3 10.3 4/30/90 PJbifc Offering 20,852 8,260Celik Hotat 29.2 13.1 4/30/90 Public Offering 19,546 7,743Konya Cfmento 39.V 31.2 10/24/90 Putlfc Offerling 48,620 17,711inye Cimento 49.2 2.9 11/01/90 Public Offering 2,565 924
Mardin Cfmento 66.2 25.5 11/22/90 Pbl fc Offering 25,464 9,162Akiaray Yom 40.0 40.0 5/01/89 Slock-Local 950 457Corr Yoem 30.0 30.0 V/01/89 Btock-Locel 250 120EBkifehir Yem 45.0 45.0 5/01/89 Block-Locat 2,250 1,083Kayseri Yem 13.3 1S.3 S/01/89 Btock-Locat 175 84Bine; 47.5 n.e. 7/02/86 Block-Local 202 296'laniss Yem 15.0 15.0 ;/23/86 Block-Local 50 74Isparta Yem 15.0 15.0 7/23/86 Stock-Local 65 96
Yentn 20.0 20.0 11/21/16 Btock-Local 60 80Big& Yen 40.0 40.0 11/21/86 Block-Local 112 1SOBursa Soguk Depo 52.0 52.0 11/21/86 Ilock-Local 80 107Sane; 32.7 32.7 1/23/87 Block-Local 98 130Tofas Oto Tlicaret 39.0 16.0 2/15/91 Btctk-Forofgn n.o. n,a.Adana Cufento 47.3 33.9 2/15/91 Publfc Offering 87,921 23,082Mioros 42.3 35.9 2/15/90 Public Offering 16,199 4,718Dltas 14.5 2.5 n.o. Public Offerirg 865 227
Source: PPA.
NotestSale of this company mas anullted by Court decision, bjt goverrinmt Is expcted to oppealwnd foroign owner contfnues to orarte enterprise.
2 Erdelr is not a particfpotion of an SOE. It has Its own legal status.After the initslt sale of PetkIfm and Erdemir shares, the PPA repurchosed some of them torupport the prfce. Nene, the total proceeds are overestimated, but the exact timlng ofrepuchases In not avaINtbte
- 66 - A=X 3
decision again. The resolution of this situation may, at worst, reverse thesale of the companies, and will, at best, hamper future divestiture efforts toforeigners.
8. Of the remaining sales, only four can be legally defined aoprivatization (i.e., the share ownership of the public sector falling below 50percent). In two of them (Ansan, a state-rescued private bottling company re-sold to a foreign investor; and Bursa Soguk Depo, a storage company sold to adomestic investor) the entire public share was divested. In two others(Erdemir, a steel producer; and Kepez Elektrik, an electricity producer) thepublic sector retained a controlling stake, even though its total share ofequity dropped below 50 percent.
9. The PPA has been relatively more successful in selling minoritystakes in small companies. But even in these cases, contrary to the initialintention, it has not been able to divest the entire stake held by the state.Moreover, the benefit to the economy of such sales is limited because thecompanies are small and already under private control.
10. In 1990, the divestiture process accelerated somewhat, but thefocus shifted to the generation of fiscal revenue by selling small parts oflarge SOEs (Petkim and THY). Although this approach has the advantage ofproviding a market-based valuation for future sales, it had no impact oneconomic efficiency or control over the companies. Moreover, the markets didnot validate the initial offering price, and the value of Petkim declined by50 percent between June 1990 and September 19911 THY'r value fell by 38percent between Dacember 1990 and September 1991 relative to the ISE index.Admittedly, the overall ISE did not perform very well during that periodbecause of the Gulf crisis and uncertainty on macroaconomic policies, butcriticism of overvaluation was often heard. To support the value of Petkimshares, the PPA repurchased about half of the shares and sold them again insmaller amounts. These developments set a bad precedent, turning the sale ofTHY shares later in the year into a failure with only 1.5 percent of equitysold. Public offerings of minority participations (mainly in cementfactories) and a small parte of the equity of two large subsidiaries of thepetroleum sector (Tupras, the oil refineries; and Patrol Ofisi, the retaildistribution) were the main achievements in 1991 (through May).
11. Although the Government emphasized divestitire as the key toimprove the performance of the SOB sector and to prorinote overall economicefficiency, results have fallen short of expectations. With changes in themanagement and structuring of PPA in early 1992, significant progress has beenrealized recently. The results of the process through 1992 can be summarizedas follows"
la) No major holding, subsidiary, or partnership has been liquLdated.
(b) Between 1986-91, total proceeds from 42 sales amounted toapproximately $560 million. Almost one-thLrd of this total wasgenerated by the sale of 8 percent of PEFTKXI and(I another 10percent by the sale of 3 percent of Frdemir (iron and *teel).
67 - MN
These sales were emall relative to the size of the sector,representing less than 1 percent of fixed assets.
(c) Ao a result of the changes within PPA, 16 companies wereprivatized in 1992 with total eales proceeds of $412 million.
12. On-going PPA privatization activities that are close to completion(an additional 5 cement companies, trucks (TOE), department stores (GIMA),electric utilities (Cukurova and Kepez) and a variety of agriculturalprocessing operations) and PPA's five-year program (1994-2998) suggest that asignificant acceleration in divestiture is imminent. There are concerns,however, that past sales have not been accompanied by measures to promnotecompetition, or to safeguard consumers or workers. For instance, in theelectricity sector, where private participation in generation is welcomed, aregulatory framework addreesing the issues of competition, pricing, servicestandards or consumer interests has not been developed. As to workers, inrecent cement company sales, as much as 50 cement of the labor force has beenlaid off, without consideration of the need for income and emplcyment supportmeasures.
13. The remainder of thki chapter analyzes the main problemsencountered in the implementation of the divestiture program. rt alsopreeents some possible solutions that would speed up the diveetiture processand allow the Turkish economy to reap the benefits from the potentialimprovement in efficiency and resource allocation.
C. et!ace
14. Two eats of obstacleo appear to account for the gap betweenannounced diveatiture plans and acttutl progress in Turkey. These arepolitical and technical in nature, amplified by some exogenous factors, suchas the shallowness of capital markots and lack of readiness of SOEs for sale.
15. In general, a divestiture transaction in concluded when thoseller, potential buyers, and otnor involved actoro view the deal as apomitiva-sum game. Converasly, not much happens when the parties mostaffected by diventiture view the likely outcome &a negative. The problem iscompounded when thone who ntand to gain from divestiture are diffused,unorganized, and uninformed.
16. In Turkey, observers argue that divestiture was not perceived an apositive-sum game.iI Being aware of overstaffing of SOEs, workers perceLvedthe sale so threatening, eupecLally because the Government did not address
1 For example, see Even B. Kjellstrom, "PrivatizatLon in Turkey,"World Bank Working Paper Series No. 532, (Waslhington, D.C.s World Bank, 1990):and Foger Leads, "Turkeyt Implementation of a Privatization Strategy," amimeographed (Boston, Hass.: Uarvard University, 1987).
- 68 - ANNEX 3
their fear of income loso from layoffs. Although the male contract of thecatering company (USAS) included a provision against firing workers, thecompany did not abide by it and reportedly dismissed about half of the workforce. The Government did not attempt to enforce the condition, and theexperience has certainly escalated workers' fear of dLvestiture. Recently, astrike at Turkish Airlines, although related to wage negotiations,"convenientlym took place at a time when a potential foreign investor hadexpressed an interest in purchasLng the company. Civil servants vieweddivestiture as depriving them of the status and authority associated withmanaging an SOE. Some politicians opposed the process because divestiturewould diminish their ability to use SoEs to reward loyal supporters. Evensome private sector producers considered divestLture unwelcome, fearingincreased competition. Potential buyers, after the experience with Teletasand the legal problems, became auspicious and appear to prefer deals in whichthe controlling share of the state is eliminated. Exacerbating thesedifficulties is the fact that the benefits from improved efficiency, whichcould follow from divestiture, ultimately accrue to consumers and taxpayers.However, these groups in Turkey, as elsewhere, are diffused and unorganized.
Technical Obstacles
17. Even if political obstacles had been overcome, progress ondivestiture would still have been slow due to technical obstacles inimplementation and exogenous factors. Compared with countries wheredivestiture took off successfully (e.g., UK and Chile), the Turkish proceaswas hampered by the following obstaclest
(a) unclear and conflicting objectives, shifting from efficiency topromotion of widespread ownership and generatLon of revenue forthe Trsasuryl
(b) unclear guidelines regarding selection of companies, targetbuyers, and Pale instruments, which resulted in lack oftransparency and ad hoc practice, that led to public criticisms
(c) excessive centralization in the PPA, which, despite itsachievements, doea not have the adequate staff, autonomy, andincentives to handle rapid divestiture of all SOXa; and
(d) failure to systematically engage B0O managsro Lit the divestitureprocess and to address labor concerns.
And the following additional external factotrs
(a) the shallowness ot the Turkish capital narket and theavailability of attractive alternative investments leading tolimited private investment Ln industrial sectors; and
(b) lack of readiness of SOle for sale.
-69 - ANNEX 3
18. objectives. As part of the liberalization of the economy, theGovernment identified the improvement in overall efficiency of the economy asthe main objective of divestiture. By removing, through privatization, thenumerous privileges SOEs enjoyed, a more competitiva and less distortionaryenvironment would be created. This was a good start, but as events unfoldedthe clarity of the objectives faded. By 1987, the head of the privatizationsection of the HDPPA listed the objectives of the program as follows:
(a) making the economy more responsive to market forces;
(b) developing a viable capital market through widespread publicownership;
(c) reducing the burden of the SOE on the budget; and
(d) raising revenue for the Treasury.
19. Since then, the principal objective has shifted down the list, inexactly that order, except for (c), the third objective in the list above. Asa result of a decision by the High Planning Council in 1986, the PPA wasrequired to use bidding procedures emphasizing-widespread domestic shareownership. Employees, local small-scale investors, Turkish workers abroad,and investors in the Istanbul Stock Exchange were to bo the target groups forshare sales. Although foreignere were not a priori to be excluded, the abovementioned target groups were to get preference. This was not only overlyrestrictive but it also slowed down the process considerably as a result ofthe shallowness of the Turkish capital market. When the PPA, under preasuroto show results, resorted to block sales to domestic and foreign investors in1989, it ran into peculiar legal problems. Court rulings overturned the naleto foreigners argui-ng that they were not part of the target groupe identifiedby the HPC.
20. More recently, as a result of the rapidly deteriorating fiscalsituation, the PPA has been pressured to raise revenue from salee. The PPAresponded by reverting to sales through public offerings of minority holdinguand small tmounts of equity in 3arge companiies. Sliiftincj divestitureobjectives made it difficult for the PPA to operate offectively.
21. o An stipulated in theprivatization law, the Council of Ministers would choose which SOE to divest,whill the PPA woul.d m.lect subsidiaries, affiliates, and participations.Aside from theme general Lndications, tler. were no clear criteria to selcctcompanies for divestiture. If the Government's objective lhad been to promotxefficiency, the most inefficienlt companies anid those tthat couldt be soldquicker should have been selected first. Despite the fact that aprivatltiacti master plan (completed by Morgan in 1986) had sufficientlydetailed information to clansify theme companies, it was not used.Connequently, th* portfolio of companies currently under the purview of the,PPA is quite mixed. It cont:ains liquitdation catndidates, rostructuringcandidatem, and 5orm, much am 5Umif.vAnAk, thkat :wve( tLu be broken uLp ilmeaningful units prior to sale. Moreover, it also contains financial
- 70 - ANX 3
institutions and a large amount (63) of minority participations in a widevariety of economic activities.
22. The first sale, TELETAS (a producer of telecommunicationeequipment) was geared at promoting widespread public ownership.Unfortunately, a few months after the sale, another SOE, PTT (the maincustomer of TELETAS) drastically cut back its investment program. This moveinduced the share value to tumble below half of its issue price. Althoughthis drop is a normal commercial risk for a private enterprise, the fact thatthe Government played an important role in both companies made the publicsuspect it of withholding information crucial to determine the value ofTELETAS.
23. Resorting to block sales, the PPA had moderate success in the saleof a few small plants to domestic investors. However, there were no specificguidelines on bidding procedures, and the final decision on the value of thecompany and the details of the sales contract had to be approved by theminister to which the PPA reports. Moreover, even though target buyers hadbeen identified, the Government stimulated and approved sales to groupsexcluded from that liet. This action led to the legal problems alreadymentioned above.
24. In the absence of clear guidelines and transparent practice, thepublic has criticized block sales to foreign investoro, and sales contractsare cluttered with stipulations reflecting the Government'e concern not tostir up any more controversy. In the sale of the six subsidiaries to forelgninvestors it was contractually agreed that no more than 5 percent of the workforce would be laid off per year. SCF had to agree to sell 40 percent of itsuhares in four of the five cement plants to the public within five years ofthe sale and to make new investments of US$60 million. The contract with SAS,which purchased 70 parcent of the equity of USAS, contains a clause requiringUSAS to pay 21 percent of after tax profits to the Treaeury for the next 10years.
25. Recent saleo through public offerings of companies and controlledby the State have indicated a tendency to overvalue the companies. This trendreflects political interference in valuation in order to generate fiscalrevenue an high as possiblo and to avoid criticism of selling public assets attoo low a price. Since their sale, the price of slares of the largestcompanies has plunged compared wLth the ISE index. Petkim lost 50 percent,THY 38 percent, and Erdemir 26 percent. The opposite holds for companies thatwere already majority owned by the private sector and in which the publicsector had reduced Lts stake to an extent that it can no longer take part indecision making. In sum, investors lost TL450 billion (May 1991 prices) onall investments in public offerings, representing a negative real return of 30percent on the entire portfolio. Understandably, investors have becomeincr*asIngly wary of investing in companies where the Government maintainscontrol.
26. L Even if the objectives and guidelines ofdivestiture were clear, the PPA has not had adequate staff with the
-71 - ANNEX 3
appropriate skillo and incentives to divest over 200 enterprises in arelatively short period of time. Including support staff, the PPA employssome 100 people. Many of its professionals did not initially have muchdivestiture experience. The majority of them were drawn from public agencies,which resulted in a politically sensitive management group. In addition toworking under shifting and oometimes conflicting objectives, the PPA had alsoto address the issue of physical restructuring, the sale of incompletedplants, and the management of other assets, such as revenue sharingcertificates in infrastructure projects.
27. Managers and Workers. SOE managers have been given almost no roleto play in the divestiture proceso. Neither managers nor workers have beenoffered, for example, stock options or redeployment packages. As a result,the PPA wxperienced labor and management resistance to some of its divestitureproposals. For example, a divestiture proposal for Petkim --developed byinternationally renowned accounting and merchant banks-- was discarded uponits completion by Petkim's board and top management. Instead, the companydeveloped its own divestiture plan, based on forming a joint venture.
28. Capital Markets. The Istanbul Stock Exchange reopened in Decemberof 1986, and it has grown significantly since then: average daily tradingvolume increased 56 times between 1987 and 1990. TI-° rate of increaseobviously slowed down, but daily turnover is expected to double in 1991 fromUS$23 million in 1990. In March 1991, market capitalization wasapproximately US$19 billion. Despite its rapid development, the market isstill dominated by a few actors, reducing the depth, resiliency, and liquidityof the exchange. Assuming that the PPA would be able to issue new shares at arate of 5 percent of daily turnover, it would take approximately 290 workingdays or 1.3 calendar years to sell Petkim, for example (based on its marketvalue on May 31,1991). The elimination of political and related economicuncertainty after the October 1991 election may, of course, improve theattractiveness of tha stock market and could shorten this period.Institutional investors are very small: at the end of March 1991, the totaloutstanding value of mutual funds was only TLI.4 trillion, and a mere 3percent of the entire portfolio was invested in stocks. Moreover, thedomestic market for direct placements is also limited. Restricting the PPA todivest only through public offering and avoiding sales to foreigners impliessteps to slow down the process or reduce the number of companies that can bedivested.
29. Readiness of SOEs for Sale. The Government did not address thefinancial restructuring by clarifying the issue of guaranteed debt and theresolution of outstanding arrears of SOEs with the tax administration, socialsecurity organizations, and the Treasury. Most SOES employ redundant labor,almost certain to be laid off upon privatization. The Government did not dealwith the issue of labor restructuring up front. The fact that, under DecreeLaw 233, SOEs are not subject to the Turkish commercial code, accounting andcapital market regulations, combined with excessive centralization ofaccounting, increased the lead time needed to prepare them for conversion intojoint-stock companies and sale. Although it would have been better to break
-72 - ANNEX
up large SOEs in separate companies, this has not been done; only shares ofthe parentholding companies have been sold.
D. Proposed Reforms
30. The slow progress on divestiture has prevented the Turkish economyfrom achieving its growth potential. As documented in Annexes 1 and 2, theSOE sector is inefficient and imposes a heavy burden on the budget. Based onpreliminary estimates and on optimistic assumptions about potentialimprovements in efficiency, companies accounting for 13 percent of fixedassets and 21 percent of employment are potential candidates for liquidation.Under the same assumptions, companies representing 17 percent of fixed assetsand 35 percent of employment could be privatized. Therefore, urgent reform isneeded.
31. On the basis of the foregoing discussion, it is clear thatsuccessful divestiture will need to address the political and technicalconstraints. Prior steps to the implementation of a modified divestiturestrategy should include the following:
(a) a detailed analysis of SOEs at a disaggregated level in order todetermine their viability? and establish decentralized accounts,
(b) conversion of these companies to joint-stock companies in order toprepare them for sale or for liquidation, and
(c) announcement of a social safety net to deal wlth laborrestructuring.
Liguidation
32. Had losses of liquidation candidates in 1990 been investedproductively, some 25,000 jobs could have been created annually. Hence,within 4 years, improved resource allocation could create as many jobs as arenow maintained in these companies. So far, the Government has not actlvelyconsidered liquidation, even in cases that are generally acknowledged by allgroups of society to constitute a drag on the economy, such as the hard coalmine (TTK) (see Box A3.1). However, the slow progress on divestiture and lackof resources to maintain the capital stock of existing SOEs, adds more
v As most of the SOEs, subsidiaries, affiliates, and production unitsprovide goods and services in competition with the private sector or thatcould be provided under competitive circumstances, their viability should bebased on their net worth. Firms that have negative not worth have no value tothe private sector; hence they should be liquidated. Of course, the financialvaluation models should reflect the potential economic condition of the firmand should avoid any bias in performance indLcators am a result of the pursuitof noncomercial objectives by SOEs. In any case, advice from a financialspecialist, preferably with experience in the relevant sectors, needs to besought.
-73- ANNEX 3
companies to the group of liquidation candidates as time goes by. Moreover,postponing liquidation by itself increases the cost of it as debt accumulatesand social liabilities (severance) are likely to rise. Even under the bestcase scenario (see Annex 1), when only a few SOEs are classified as inviable,the continuing operation of these SOBE for the next 10 years will costapproximately US$18 billion. This contrasts with a much lower cost of US$4.5billion for liquidation over the next 2 years. Hence, the net present valueof a fast liquidation program exceeds that of a slower program. The issuebecomes a purely intertemporal one. Can the Government avail itself of thenecessary fiscal resources to implement the program? In any case, the programneeds to be initiated as soon as possible.
gm The HIrd Coat Mine (TTIK)
TTIK, a hard cost mine Located on the lack Sea coast, has ben under ative mining for mors than 100years. The extraction of the cost .& difficutt a Costty as all, mining is performed undergro4und InSubstandard sBcam. The mine soploys 4w* than 40,000 peopt* directly and is responsible for slmost sliteconomic activity in the town, Zon9ul4k40w.r4 it is located. Employee turnover is extrmety hioh andthe average life expectncy ot workers Is 46 years well below the Turkish average. feturn on assetshas, during the past three years, averaged arounJ NIJWS 100 percent. Since 1986, the compeny has bennunable to cover interest paymonts. In 990, TTK's operating deficit amounted to us$290 siltion ands-cumulated losses over the last fivw yeers rose to US$724 million. Its performnce Is showing acontinued rapid deterioration in profitability.
The main .ruwent for continuing operations ot Zonguldak has been esployment. However, had theaccumulated tosies over the last five yare ben Investod productively, about 23,000 jobs could havebeen created. moreover, the net prtsent value of closing the mine is equivalent to MINUS UsS2.2biltion (a sawirg 6 more years of operation and a eighted cost of capitat of 13 percent). Thus, ifthe mine were closed, each retired worker could contInue to be paid his regular wage of US$ 5,500 permnnna (i.e. 60 percent of totel pereonnl xpenditure) for the next 10 years at the same cost to theTreasurv.
33. In order to make the program politically and socially acceptable,the Government should take the following steps:
(a) initiate a dialogue with workers, labor unions, management, andthe local buoiness community to implement a redeployment programfor redundant labor (see nnex 6 for details);
(b) iesue transparont guLdelines on the management of the dispositionof assets, including sales methods, bidding rules and procedures,anu valuation;
(c) transfer the assets to an independent commission created todispose of them; and
(d) make funds available to (L) meet net liabilities, and (ii)compensate workers.
The inutitutional muchanism for the disix ,Jtion of assets should promote thespeed of the process. Separating the tau;- of selling off assets from that of
-74 - ANNEX3
the divestiture of enterprises an ongoing concerns might be helpful. In thePhilippines, the disposition of assets was assigned to the Asset PrivatizationTrust, managed by a Board comprising five full-time members drawn from theprivate sector. The bulk of the assets consisted of nonperforming accountstaken over from the banking system in order to avoid problems in the financialsector. There were, however, also assets from public enterprises slated forliquidation. The trust was oet up in 1987 with an explicit five-year limit onits existence. Despite legal problems emanating from the right ofredemptionY and political interference urging the trust to establish floorprices for the bids, the process was relatively successful. About half of theassets were sold in the first two years of operatLon. This success owed muchto the following features of the process: (a) priority was accorded to thesale of physical assets that would yield the largest revenue in the shortesttime possible; (b) all assets were sold through competitive bidding atauctions; and (c) no approval from higher authorities was required for thefinal sale price of aosets.
34. In other countries the restructuring of the public enterprisesector was also accompanied by a significant number of liquidationst During1989-90, Mexico liquidated 70 public enterprises, about half of a total of 139enterprises divested in that period. In Spain, the reprivatization of thebulk of the Rumasa group (800 companies) in the period 1984-86 led theliquidation of 400 enterprises. Of the remaining 226 were sold and 152returned to the original owners.
35. As long as ownership or control over the SOEs is not transferredto the private sector, efficiency gains will not be achieved. in the Turkishcontext, it is necessary to shift from the current strategy of revenuegeneration with continued government control to effective transfer of controlto the private sector. Moreover, the privatization process has beenremarkably slow and noeds to be accelerated. Whereas improvement in theenvironment, such as deepening the capital markets and promoting the role ofinstitutional investors might hielp, the main causes of delay in divestitureare found in the implementation process. To remedy these problems, theGovernment could pursue either of two options. The first option, anincremental one, focuses on improving the existLng process by introducingmechanisms to reduce or remove the problems mentioned above, mainly throughdecentralization. The second option, free share distribution, is geared atcircumventing the exieting problems by adopting a radically differentapproach. The sale of minority participations is not included in theseschemes and can be left to the PPA. By focusing on thie group, the PPA could
Al Debtors who default on their obligation and whose assets were seizedhave a legal right of redemption up to one year after the confiscation.
- 75 - ANX 3
accelerate their sale, and the proceeds could be made available to financeother components of this program.
Decentralization
36. In order to reduce or eliminate the constraints that have sloweddown the sale process in the past, iM,lementation of this policy would requirethe following decisions:
(a) Define the divestiture objective in terms of efficiency.maximization of sale proceeds for fiscal reasons should not bepursued at the expense of efficiency. This means that thegovernment would not grant any monopoly rights, import protection,preferential credit or tax exemptions, even if that were toincrease sale revenue.
(b) Appoint new Boards of Directors, with members mainly selected fromthe private sector with expertise in the area of operations of therespective SOE and/or divestiture.
(c) Decentralize the process by requiring that the Board of Directorsand/or managers develop, within a short period (e.g., 6 months),divestiture proposals. These proposals would specify anappropriate course of action for each subsidiary and a timetablefor implementation. In no case would the SOB Board ofDirectors/managers be allowed to include expansion or majorrehabilitation plans. Board of Directoro/managere unable to meetthe deadline would be replaced.
(d) Once the proposal is approved by the PPA for the SOEs currentlyunder its portfolio and by the Single Government Agency (Bee Annex4) for the rest, the Board of Directors/managere would start theimplementation. The decision by the two agencies would be madewithin the shortest period possible (e.g., 30 days).
(e) To motivate a Board of Directors/managers and to ensure timelyimplementation, stocks in the company could be offered inproportion to sale proceeds and speed of divestiture, subject to areasonable coLling.
(f) To prevent possible abuse and to ensure that the process is fairand transparent, issue guidelines on bidding procedures, saleinstruments, and target buyers. The guidelines should be
V The sale of minority participations could generate a significantamount of revenue. The market value of the shares hold by the PPA incompanies listed on the ISE was approximately US$440 million on August 8,1991. In addition, 80 percent of the participations are not listed and novalue could be calculated for these companies. Hence, the final amount ofproceeds from sales of minority holding may well be a multiple of this amount.
- 76 - hSEX
flexible, though, in order to allow for combinations of methods(for example, public offering with block sale and employeeparticipation) and to seek the participation of domestic andforeign private investors.
(g) To give momentum to the exercise, initiate the proceos by offeringworkers the preferential right to buy no more than 10 percent ofthe shares of any given company. This offer could engender theirsupport and, if the shares start to be traded, provide a benchmarkfor valuation.
37. Compared with current practice, the decentralization of theprocess has the advantage that it could accelerate implementation. Thisoption would avoid institutional bottlenecks, and, combined with a socialsafety net, would generate support from management and reduce opposition oflabor. If implemented successfully, it would generate more fiscal resources,which could be used to finance labor and minor financial restructuring.Finally, by allowing more flexible salee method. and creating consensus toinclude foreigners as potential buyers, this option could relax thelimitations imposed by the shallowness of the domestic capital market andrelatively modest domestic savings.
38. Its main draWbagk is the real possibility that this approach maynot reduce political interference. Further, it would still require auditing,valuation, and stock listing of enterprises, all of which are time-consumingand often costly. Therefore, a more sweeping approach to divestiture, such asshare distribution, looks appealing.
39. Mexico's privatization program started in a decentralized manner.In the period 1982 to 1988 the number of state-owned enterprises in industry,mining, and energy fell from 398 to 90. Overall the government divested 706enterprises in that period. Initially the process was decentralized andloosely defined. only in 1985 was a central males unit establiLhed, togetherwith sales procedures, based on the previous experience. Most of thecompanies sold were small to medium size, and no physical restructuring tookplace before sale. For large companies (e.g., Mexicana Air) foreign investorswere attracted, and some financial rehabilitation took place. In the contextof Turkey, there are also a considerable number of small SOEs or SOEe that caneasily be broken into separate production units and offered for saleindependently (e.g., cement factories, retail stores).
Share Distribution
40. Under this option, the Government would distribute the majority ofthe shares of each company to Turkish cLtizens, free of charge or for anominal fee (to cover distrLbution costs or to guard against legal provisionsprohibiting the giveaway of state-owned aseats). This strategy wouldLmmediately privatle the ownurship of the companies by returning them to thepublic at large. To guard against excessive dispersion of ownership, 20percent of the shares would be allocated to a mutual fund with the primaryobjective of divesting controlling blocks of the shares to private managing
- 77 ANNEX 3
groups in the shortest time possible. This strategy would privatize controlover the companies. However, trade in the shares could establish privatecontrol even before the remaining blocks are sold. This option has been usedin Canada, and it is now being implemented in Eastern Europe (see Box A3.2).
41. In its purest form, implementation of the share distributionscheme would require the following steps:
(a) Following the transformation of SOEs into joint-stock companies, anew Board of Directors would be appointed. It would consist offive to nine members selected from competent candidates (mainlyfrom the private sector, provided there is no conflict ofinterest).
(b) Prior to divestiture, debt explicitly guaranteed by the Governmentwould be swapped into commercial debt (to avoid legaluncertainties), and a social safety net for labor restructuringwould be announced. No physical restructuring would be performedby the State.
(c) Eighty percent of the shares of all companies to be divested wouldbe distributed to the public for free. Each citizen would receiveone share of each company. Shares would be immediatelynegotiable, and after six months a shareholders meeting would becalled. If deemed desirable, no more than 10 percent of theshares could be distributed to the employees of the companies; theshares to be distributed to the public would then be reduced bythe equivalent amount.
(d) The remaining 20 percent would be transferred to a self-liquidating fund under a private management contract, created withthe purpose of selling its shares in blocks during a limitedperiod of time (e.g., 2 years). The main purpose of these blocksales is to create a core investor/manager, who would effectivelyrun the company, since ownership would be diffused. The fund'smanagement would consist of a small group of financialspecialists. Their compensation would comprise a fixed salary anda bonus based on the realized net worth of the fund. After a two-year period, the fund would sell the remaining shares on the StockExchange and transfer the accumulated proceeds to tne Government.
(e) If after a fixed period (i.e., 3 months) from the creation of thefund, a market has not yet been created in the shares of a givencompany, the fund would sell three percent of the shares of thecompany by public offering, to establish market-based valuation.
(f) When all shares are listed, the fund would announce that blocks ofshares are available for sale during a fixed period of time. Atthe end of such a timo, the fund would transfer the shares to thehighest bidder. Block sales at a price below the observable shareprice would not be permitted.
-78- ANNEXEL
OM. A3.2: Shere Distribution in tritish Colitio and Estern Euroe
~fishI Colu Ia Resource tgvestment Corporat CCI)
.An alaost pure share distribution schene was ieptemented in 1979 when the Goverraent of0ritish colmia decidd to privatiza SCRIC bj gving away its shares to the public. The "ipuritiesNwere (a). the giveaway was corbined with an Incresse in equity through public offering; tb) theICoverrsnt maintained'a share, altowing it':to se!ect'te new artagnot and Cc) the scheme was usedfor<electoral-purposes, increasing its cost. -
:Shor distribution ues done in two rounds: first llt etigible citizens hed to apply toreeieve shares tand to subscribe to theAincrease in capitatl); nd second, sthres wre distributed andsold, eligibility criteria were Canadian citizonship, rsildent in Sriftish Coltfie for the lost 12months, and minimn 16 years otd.-. Lsch elisibl citizen Ah 'FplIfd would receive five shares'(asproximate market value $6 iach). Alt dietributlon 'weadodethrou existin fiaclifletinadiariea. -.... - .
share. Judging by the deree of participation f(8 ercet), the cheme wa a success. 10,36,035. 6reo: tz'of a total of 15 mIllion waro distributed to 2,,S pel for fr (the'rminingshares were later given aay by-the 5Overorent'-to'a chtriteble'foumdtion).' The admnlvatration of thes; ch-e* es relativety costly:. S8 million was spent on printing and dbt proessng, ad financial'Jhtermediariea charged $8.6 mllion"for the tinistration of the giveaway scheme.
7Potanjd
The Potish miHnstry of ownership Changes decided, to create a inber of "ational wealthfbnaqWgeaent' Funids in iich attl Polish citiiens tresident in Polnd and it least 18 years of age)rf reeive a,pa<rticfpatil6h certificate 18*24 months:after,the start of the progra..,At that time tradingin certificates of participation nd shareosin'the investment grops wilt be atlowed. A total of 60
;i percent of 'the shares in vco6anies to be piyatized willt be dietributed to the invistment finds-'.,divied in a block ot percent allocated to the u dn invmestment group and 27 percent distributed,' on all others., Up t'' 10 )"ercnt wtil be giVen tV #ptoyera 4nd 30.percent wiLl'be retained by the
stte.' .The investment grwoiq wlt -be closedended with the objective to maximize their value, Theywilt.be free totraes o oher and sell shares to third parties.'wi to'p tra 's of - , .. .
Vouchers wilt be distributed to alt citiziens'that will be exchanged for shares in the tlrgeenterprises Incutwad 'in the,scheme at modalities to be determined.
, -the privatizafon law transferre 30 percent of theuequity in state enterprises to the; aetionalAgency for Privaization (NAP)M vucuhers wilt be fssuied to every citizen over the age of 18to be used to acquire the' 30 percent of the capital owned by XAP. - The vouchers have a predetermInedmonetery vatue based on book.value.- Of .the conpwaes, 1 percent of the shares will be sold to; *trprit ewloyees it favorable prices, n: the remander will be sold to other. Investers.
?,.-~~~~~~~~~~~..... .. .y ........ ;. .. , ...
(g) During the transition period to private control, existingmanagement would remain. No sales or purchases of fixed assets orwage increases would be allowed, and management would be heldaccountable to the fund. As soon as a single shareholder or agroup of them accumulate 15 percent of the shares, they could calla General Assembly. The General Assembly could elect a new boardand management group. In addition, the fund would monitor theperformance of the existing management. Since the Fund would have20 percent of the shares, it could call, if it so wished, a
- 79 -
shareholders' meeting to remove the existing management and/orboard.
42. The free share distribution scheme has several tAgDvntae over theincremental option, including the following:
(a) Aside from the initial, admittedly difficult political decision toImplement the scheme, it eliminates all further politicalinterference.
(b) It allows potential investors to take control over the companywith limited means (15 to 20 percent of equity)y.
(c) It is erultable because the companies are returned to their actualowners (i.e., the public) and, thereby, avoids the common concernthat public wealth is transferred into the hands of a few privatepeople.
(d) It avoids the valuation problem and costo associated with it,since a market would be created up front; hence, it avoids thecommon public criticism of selling asseto below a fair price.
(e) It is simple and transparent.
43. The share distribution option also has a significant gjkakwAgt bygiving away the shares for free, the Government forgoes the proceeds ofprivatization. However, given the deteriorating performance of the SOEs,potential proceeds from privatization are diminishing rapidly, andalternatively, slower schemes may generate little revenue in the end. In anycase, the Government will receive 20 percent of the proceeds, as well as moredirect taxes from increased profits of the companies and capital gain taxes.Initially, the option might also lower the level of new investment and thetransfer of technology. However, facing competition, the new private sectorowners would have to rehabilitate enterprise technology eventually. Anotherconcern is that a giveaway scheme may depress the price of the shares becauserecipirnts of these assets may prefer to liquidate them at once. This concernhas led some governments considering giveaways to propose a freeze on theexchange of shares for a certain period of time. Because most people arerelatively uninformed about the role of capital markets and risks and rewardsof individual share ownership, the announcement of a share distribution schemeshould be accompanied with a media campaign aimed to educate the publLc onthese isoues. Massive sales of shares that could temporariLy depress shareprices would then reflect the free choice of an informed public, thus removinga drop in price as a reason to freeze the exchange of shares. Finally, the
I In the incremental option at leaet 51 percent of equity would haveto be transferred to the private sector. Moreover, if the Governmentmaintained h large share, it would still have a representation on the Board.Thus the Government could limit the possibility of the private sector to sellshares to the public, without riski.- losing control over the company.
-80- ANNEX 2
distribution of shares in each compan Y to each citizen could pose ser.ouslogistical problems, could be costly,T and could also lead to each sharehaving a negligible value, making it difficult to create a market.-S
44. Some of the drawbacks of the scheme can be alleviated byintroducing a few gualifications, but there are always trade-offs with otherdrawbacks. To reduce logistical problems of distribution and cost, the numberof stocks to be distributed could be reduced (by limiting the number ofeligible participants, or by reducing the number of legal entities) or theallocation mechaniam could be simplified. In the Turkish context, limitingeligibility to citizens above 18 years of age would cllt logistics by two-thirds. Several other allocation mechanisms that could further reducelogistics include the following:
(a) Pure Mutual Fund Anuroach: In this option, one third of theshares of each company would be allocated to each of three mutualfunds, whose stocks would be distributed equally to all citizensof Turkey. If only citizens above the age of 13 were eligible,this plan would require the printing and distribution of about 60million shares. This approach does have significantdisadvantages: First, if the fundo are not self-liquidating, thetransfer of ownership and/or control to the private nector may behampered. Second, the valuation problem of individual firms isnot circumvented, raising the costs significantly. Third, if thefunds would have to exercise ownership control, as well as managedivestiture of hundreds of coinpanies (akin to the currentsituation with PPA), institutional capacity may be lacking andpolitical interference could continue.
(b) Randomized Privatization: To avoid the need for valuation and tomaintain critical mass in the shares of each company, only oneshare of one company would be allocated to each eligible citizenby means of a national lottery. Hence, only a total of 20 millionshares would have to be printed (i.e., a fixed amount for eachcompany). This alternative haa tne properties of the pure sharedistribution scheme proposed above. In addition, it represents
J Because it would be best to break SOEs into separate entities (it isdifficult to sell an operation that, for example, does banking, retailing, andproduction of textiles and leather at the same time), the number of companiescould become quite large.
v A commercial bank estimated distribution cost between US$100,000 andUS$400,000.
v However, at present, shares on the Istanbul stock exchange trade invery small denominations. For example, there are 158 million shares ofPetkim, at TL1030 per share (September 6, 1991) representing only 8 percent ofthe company's equity.
- 81 - EPF
low cost and stimulates transactions by creating a higherconcentration of ownerahip. But it doea have a drawback: thevalue of each of the shares allocated to each citizen will vary.Thus, even though the allocation of shares is randomized and,therefore, fair, the final income diatribution is not.
(c) jcnitable Randomized PrivatizatLo_: If equity of the scheme is amajor concern, an approximate valuation of the companies could beperformed and 20 million shares of approximately the same value(by issuing a different number of shares for each companyaccording to its share in total value) could be distributed.Again, the drawback is that companies need to be valued, but theother advantages of the pure share distribution scheme aremaintained and even enhanced by providing higher concentration ofinitial ownership.
X. Concludino R2marhk
45. Although the need for divestiture was recognized in the early1980s, and no major liquidation has taken place and progrmss towardprivatization has b2en slow. In the meantime, performance of SOEs hascontinuted to deteriorate, raising the costs of reform and postponing thepotential benefits of efficiency. To keep costs manageable and to reap thebenefits of a decade of liberalization, divestiture needs to be acceleratedsignificantly. More attention should be paid to the need to liquidateunviable units. A major obstacle to this component of the reform strategy isthe political cost of firing workess. This barrier can be addressed, asrecommended, by a social safety net package.
46. On privatization, political, technical, and exogenous factors havecontributed to the lack of progress. The Government could remove most of theimplementation problems, without compromising efficiency, by pursuing eitherof the option. described above. Flexible sale methods, including reliance onforeign capital, and measures to strengthen the capital market would furtherimprove the prospects of rapid divestiture. The share distribution schemewould also minimize political interference (beyond the decision to implementit) and circumvent the problem of lack of private domestic resources. Hence,it appears to be the most efficient and potentially fastest approach.
- 82 - &i2
STATE-OWNED ENTERPRI SECTOR REV1EH
Tosa3d_nst tA uton Leaal Befcorm
-83 - 4nnx 4
TURKEY
STATE-OWNLED ENTERP I S SECTOR REVIEW
Toward Institutional and Legal Reform
Table of Contents
Paae No.
A. Summary and Aiunroach ... ......... *. ................... 85
B. Intendl Structanaemen f Turkieh SOEs .............. 86
Corporate Structure....... 86Board of Directors and Mangen. e. .. . 87
SOEBs (Called Ventures in Decree Law 233) ............ 87
Subsidiaries (Calles Companies in Decree Law 233).... 87Affiliates (Called Affiliated Partnerships in
Decree Law 233) ... .. ... ... ........ 88Partcptios ... .... 0 .... $ ........ 88Critical Constraints and Iesues ....................... 88
SOE Management Iesueo ... ...... ....... o.........*..... 89
Management by Civil Servants......... ............. 89Managerial Autonomy ..... ....... *t .............. 89
C. 64O--overnMent Relations ........ * ..... ... .- .. .... **- .... .... t 92
Institutions Involved in Ownership Functions............. 92
Objectives, Planning, and Budgeting................... 94
obecies...... ..... .... e .. 94Planning and Budgeting. .......... ... .. I. ... . .. ... 94
Reporting and Audit.#... ....... ... .. .. .. ..... .00-6.. 96
Reporting Systems ..... ... ............. ..... 96High Audit Board. .... ... ............ ..O.... 96
other Forms of Control and Interference................. 97
Special Financial Treatment of SOe ......... ......... *.... 98
D. Recomendations -for- nt I tt'onal and Leal erm............. 98
Issues, Objectiveo, and Outline ts...... .... 98Corporate Form. . .... .. .............. . . . . . . . ... . . . . .. . . 99Government-SOB Relations. . ............ ............ o. 100
Board of Directors...... 66 ....... &....o ... .. .......... 102Management Autonomy. tn.....m. y. ..... .... ..... ........ .. 102
Performance Monitoring, Evaluation, and Incentives....... 103Monitoring and Audit. ...... ........ .. .O.. ...... 103
Performance Evaluation and Contractsk................. 104
Incentive Systems..... o........ e ...... * c......... 104
- 84 - Annex 4
Table-of Contento (continue
Paae No.
Implementation of Refor m ............... 105Inotitutional Cha ngen ...... ................. . 105Legal Reforms . . ............ 106Regulatory Frameworka m e w o rk.. .... .. 107Restructuring. ................ . . . ................. 108
List of Boxes
Box A4.1 Instituto Per La Riconstuzione Industriale in Italy 107
-85- Annex 4
TURKEY
STATE-OWNED ENTERPRISE SECTOR REVIEW
TOWARD INSTITUTIONAL AND LEgAL REFORM
A. Summarv and Approach
1. Turkish SOEs today operate in a manner and in an environment thatdoes not permit them to be run as efficient commercial busineoses. They faceunclear and, at times, conflicting objectives that emanate from agencies thatclaim to speak in the name of the government's ownership prerogatives. Theyare obliged to undertake noncommercial activities motivated by socio-politicalconsiderations, and only a soft budget constraint policy that discouragesfinancial discipline allows the SOEs to continue to operate under thesecircumstances. Programs and budgets are geared to available resources, ratherthan to objectives in the context of medium-term business plans andstrategies.
2. These features of the SOE environment prevent properaccountability and severely constrain management's autonomy. Many of theseissues are encouraged and aggravated by a legal and institutional franeworkthat promotes and often forces the adoption of bureaucratic attitudes dndprocedures. Often this posture is more suitable to running a governmentdepartment than an enterprise.
3. These problems should be resolved by a transfer of ownership tothe private sector or through liquidation. For SOEs already operating incompetition with the private sector (domestic or foreign) this argument is nowwell accepted. For SOEs that are linked to natural monopolies (electricity,post office and telecommunications, railways, port and airport administration)there is also an increasing tendency toward privatization. In the US manyutilities (electricity, railways) have always been in private hands, while inthe UK this privatization has implied divestiture (telecom, airports, gas).Other OECD countries (Japan, France) are also moving in the direction ofdivestiture. For Turkey privatizattozi of TEK, PTT, TCDD, DHMI, and TDI couldproceed in several stages. First, manufacturing units could be transferred tothe private sector, and some of the SOEs could be split into separate units(e.g., PTT into post office and other). Second, of the trimmed-down,remaining SOEs, the Government could sell part of the shares to the privatesector (to induce some market valuation and move toward financial discipline)and prepare a regulatory fLamework for natural monopolies. Third, when theregulations are in place the sectors could be opened to private participation,and the Government could sell its remaining share to private investors.
4. The phasing of the reform program for these five SOEs implies thatin the transition period an improved legal and institutional framework needsto be established. The reform measures recommended here aim at enablingretained SOEs to operate in a manner comparable to that of private commercialenterprises and to compete with other enterprises, public and private, without
-86 - Annex 4
the benefit of special advantages. The reform model is based on certain keyconcepts, including (a) the separation of state ownership and SOE managementfunctions; (b) the granting of operational autonomy to management, especiallyin the basic areas of pricing, procurement, and, most importantly, employment;(c) the elimination of political influence to the extent possible; theorientation of SOEs toward a hard-budget constraint that will induce financialdiscipline; and (d) the establishment of clear and simple lines of oversightresponsibility reflecting management's accountability to its owners. Itshould be noted, however, that as long as the Government maintains controlover the SOEs, some political interference will continue. The recommendationsof this analysis are an attempt to minimize such interference; they remain,however, second best to private sector control.
5. Some of the issues just mentioned are internal to the SOE'sorganization, while others arise from the relations between the SOE and thedifferent parts of the governmental apparatus, which represents its owner, theState. The sections that follow attempt to group the description and analysisof the issues, as well as the subsequent discussion of a recommended reformmodel, in accordance with this division.
B. Internal Structure and Manaaement of Turkish SOEs
CorRorate Structure
6. The system of state-owned enterprises in Turkey is extensive. Asof May 1990, it comprised 28 nonfinancial and 3 financial enterprises. of the28 nonfinancial enterprises, 20 are officially called State EconomicEnterprises and the Government, as well as the law ruling their activities,expects them to operate commercially and profitably, although both theopexpectations are mostly not fulfilled. The nonfinancial SOEs have 62subsidiaries (which are wholly owned) and 44 affiliates (in which the otatehas a majority share). They also have a minority stake of more than 15percent in about 100 participations. The remaining eight enterprises are notnecessarily expected to operate at a profit; most (but not all) of themprovide infrastructure-type goods and services (power, transportation, andcommunications). Although they are officially called Public EconomicInstitutions, they are usually, and in common with the other 20 enterprises,referred to as SOEs. They were founded by a decree of the Council ofMinisters.
7. SOEs, and their subsidiaries and affiliated companies are governedby Decree Law 233: enacted in 1984, except in those matters not covered by thedecree, in which case commercial law applies. Participations are goveriedentirely by commercial law. All SOES are supervised by a specific minieter,who is called the concerned minister. The concerned ministry may be anexisting ministry in charge of a given sector (agriculture, transportation) ormay be created as a ministry of state in the Prime Minister's officespecifically to be in charge of one or more SOEs.
8. The existing hierarchical pattern of the SOE sector has turnedmost SOEs into holdlng companies responsible for subsidiaries (e.g., Etibank,
- 87- Annex 4
which has 12) and/or affiliates. This trend resulted in overbureaucratizationand centralized accounting, facilitating cross-subsidization. The fact thatDecree Law 233 take. precedence over the commercial code implies that SOEsoperate in many key respects, quite unlike joint-stock companies that aregoverned entirely by the commercial code. In addition, two key articles inthe Constitution constrain personnel management and auditing.
Board of Directors and Management
SOEs jgalled Ventures in Decree Law 233)
9. Decree Law 233 prescribes in considerable detail the number,qualifications, and the powers and responsibilities of the SOEBs Board ofDirectors. The chairman is also the SOE's CEO (director general) and isnominated by the concerned Minister and appointed by "Joint decree" (i.e.,signed by the President, the Prime Minister, and the concerned Minister).Apart from the Chairman/CEO, the board has five members. All are appointed byjoint decree, one upon nomination by the Treasury and the four others uponnomination by the concerned minister; two of the latter group must benominated from among the SOE's assistant directors general.
10. All P-'ards of Directors are appointed for renewable three-yearterms; the decree does not limit the number of reappointments. Neither thechairman nor the members of an SOE'e Board of Directors are permitted to serveon the board of any other SOE.
11. The moat important powers and responsibilities of the SOE boardsare as follows:
(a) to establish the SOE's operating principles and policies;
(b) to ratify the annual programs and reports of the SOE and itseubsidiarien and affiliates;
(c) to appoint the SOE's assistant directors general and otherexecutives, as well as the members of the boards of Management ofsubsidiaries and of the Board of Directors of affiliates, all uponnomination by the chairman/CEO;
(d) to monitor the activities of the director general; and
(e) to establish rules for the purchase and use of vehicles by theSOE.
Subsidiaries (Called Comoanies in Decree Law 233)
12. An SOB's subsidiaries are formed by resolution of the SOS's Boardof Directors upon the proposal of it. chairman/CEO. A subsidiary does nothave a Board of Directors; its top body is the Board of Management. Inaddition to the chairman, who is also CEO (director), it has four members who
- 88 - Annex 4
are drawn from the management of the subsidiary. The function of the Board ofManagement is limited to the actual management of the subsidiary's operations.
Affiliates (Called Affiliated Partnerships in Decree Law-233)
13. An affiliate is a joint-stock company in which whose majority ofshares are owned by an SOE. As with SOEs, the decision to found it must beembodied in a decree of the Council of Ministers. It has a Board ofDirectors, headed by the chairman, who is also the CEO (director general).There are four other merbers, so that each member is deemed to represent 20percent of the shares. A maximum of two members are elected by the privatesector shareholders; the chairman/CEO and the other public sectorrepresentatives are appointed by joint decree upon nomination by the concernedminister.
Particioations
14. A participation is a joint-stock company whose shareholdersinclude an SOE or its affiliate(s). It is totally ruled by the commerciallaw. The public sector is represented by one member of its Board of Directorsfor each 15 percent of SOE or affiliate shareholding (15 percent is theallowable minimum for state participation).
Critical onstraints and Issues
15. Board ComnDos_itio: The composition of an SOB's Board of Directorsas prescribed in Decree Law 233 has the basic defect of combining the jobs of(a) board chairman and CEO, and (b) two board members and assistant directorsgeneral. Aside from the ratifying of annual plans, the board's functionsprominently include the monitoring of the activities of the CEO and morebroadly of the performance of the managemea*t team in carrying out these plans.Although these are legitimate board functions, the situation in which the CEOand two top members of his management team constitutu half of the board meansthat they are, at the same time, judge and jury. The clear and immediateconflict of interest created by this situation is, however, not of their ownmaking; it in due solely to the law that underlies it.
16. qualifications: Qualifications of SOE board members are the dameas those required for eligibility in Government service, plus a collegedegree, and "managerial and professional expertise" in a field related to theSOE's activities. Considering the level of position and responsibilityinvolved, this description is more vague than would be desirable; moreover,the concerned minister nominates and waives their qualifications (i.e., fourout of six). While they are not excluded, no specific provision is made forthe inclusion of private sector members, although most of the necessaryexpertise is to be found in that sector.
17. Other Issues: A lesser isbue is raised by Decree Law 233'slisting of a board function relating to the SOE's vehicle purchases and uses.Even the realization that the acquisition and use of vehicles has been thesubject of much abuse does not justify its specific mention in a listing of
- 85 - Annex 4
functions C)f the highest management organ of an important entity like an SOE.Mentioning -.he subject tends to trivialize the importance of the otherfunctions. Such a narrowed view io also symptomatic of a certain hesitancy inadopting a larger vision of the SOB as an enterprise with its own existence,rather than just another government department whose potential excesses needto be guarded and regulated against.
18. Decree Law 233 preecribes a minimum frequency of two boardmeetings a month. Although this schedule is understandable, given the presentcharacter of the board as a quasi-managing organ (half of whose members are infact SOE executives), it is far too frequent if the board's functione are tobe restructured to emphasize the making of SOE operational policy and themonitoring of its performance. As experience elsewhere has shown, toofrequent board meetings tend to encourage members to involve themselves inmanagement matters beyond their proper functions.
19. About three years ago, some SOEs were given a Consultation Board.Its function is not well defined, but it is not expected to be a topmanagement organ in the way a Board of Directors is. Composed largely ofpolitical aprointees and headed by senior government officials, theConsultation Board was conceived to .nitigate the apolitical character of theboard at a time when more technical directors were being appointed.
SOB Manaqement Issues
Management by Civil Servants
20. Article 128 of the Constitution requiring SOEs to be managed bypublic (i.e., civil) servants and other public employees, is, without doubt,one of the most important constraints on effective SOB management. An attemptto sidestep this provision by giving contracts to more appropriately qualifiedprivate sector managers was declaved unconstitutional by the High Court in1990, thus confirming the validity of Article 123. On the other hand, thereappeared to be no legal quarrel with tlhe practice of civil servants working inSOB managements under contracts that provide two or three times their regularcivil eervice pay while maintaining their privileges as regular civilservants. However, the compensation provided in these contracts is uniformacross SOEs, is not linked to performance, and falls short of salariesreceived by the professional managers in the private sector.
Managerial Autonomy
21. Decree Law 233 defines the SOE as an entity founded to operate inthe economic area in accordance with the rules of commerce (see Article 2).It also charges the SOB's director general with the responsibility of ensuringthat the SOE's resources are used in accordance with the principles ofproductivity and profitability (see Article 13). Nonetheless, these and othermore generally worded precepte make it clear that to comply with them, SOEmanagements should be "free to manage," particularly in the vital areas ofpricing, employment, and procurement.
- 90 - Annex 4
22. Pricing: Article 35 of Decree Law 233 ia devoted entirely topricing and related matters, ouch as duty louses. Section 1 states explicitlythat SOEs are free to establish the prices of their output, but Section 2stipulates that, whenever necessary (it is not defined what constitutesnecessity), the Council of Ministers may establish the prices of the output.If the latter turn out to be below "primary costs," there is a procedure forrecovering resultant losses computed on a 10 percent profit realization overcost of "goods and services that were sold."
23. In practice, the imprecision of this article and the subsequentimplementation of its computation and compensation provisions have given riseto difficult and time-consuming conflicts about amounts owed. Also theapplicability of this procedure to given cases has been called into question.The process is an extremely poor substitute for managerial price-settingauthority and flexibility of the kind that is needed to deal with marketsignals.
24. In this area, political interference with SOE management appearsto have been the strongest. That interference is mostly used to limit or toavoid price increases because they might be considered to have a negativepolitical impact. Experience has shown that, under present institutionalarrangements, SOE managers often find it difficult to stand up to this type ofinfluence. On the other hand, being informal and (in any event) neverrecorded, that influence is hard to document. Furthermore, there is nowidespread evidence that manufacturing SOEs' prices are controlled or eventhat those of aome of the large monopolies are (with significant exceptions,such as TEX and TMO) too low. However, top SOE managers and governmentoversight officials appear largely unanimous in their criticism of suchinterference; they continue to hold it largely responsible for the SOEs' poorfinancial performance in recent years.
25. EmploymentY. The autonomy of SOE managements in regard toemployment matters is impaired in two ways: (a) the constitutional constraintreserving SOE management positions (in practice all positions down to divisionchief) to civil servants; and (b) the effective though informal prohibition ondismissing workers.
26. Different legal provisions apply to the following categories ofpeople employed in SOEs:
(a) Civil servants (without contract), ruled by Law 657, paid inaccordance with the civil service pay scale.
(b) Civil servants under contract, ruled by Law 399, mostly in topmanagement positions. Their top salary level (currently TL7.5million/month) is set each year by a decree of the Council ofMinistsrs; their salaries are generally at least twice, and may beas high an six times, the pay received by civil servants withoutcontract;
See also Annex 6.
- 91- Annex 4
(c) Contract employees, ruled by Decree Law 399. They must be inpositions below division chief. Their salary ceiling (currentlyTL6.75 million/month) is set by the annual budget law.
(d) Workers, ruled by Law 1475.
Civil servants with or without contracts can only work in SOEs, subsidiaries,or affiliates, but not in participations; this is because the Constitutiondefines state enterprises for this purpose as those in which more than half ofthe capital directly or indirectly belongs to the state.
27. The practice of giving contracts to civil servants assigned to topSOB management positions was sanctioned from 1988 on. Although the law allowspaying such civil servants considerably more than is paid to civil servantswho do not have contracts, the top pay authorized under the scheme is still atleast 30 percent below what a comparable position would command in the privatesector. On the other hand the scheme preserves job security; If and whencivil servants leave the SOE they will be able to go (back) to the CivilService at the Decree Law 657 scales applicable to them, with their retirementand other privileges intact.
28. By excluding all but civil servants from the management of SOEs,the present system necessarily limits the search for suitable candidates forthese key jobs to a very small segment of the available talent pool. Afurther limitation is posed by the general terms of official qualificationsfor management jobs that do not sufficiently stress prior entrepreneurial andmanagerial experience under competitive conditions. There are no jobdescriptions; entry class is determined solely by the level of education. Asis typical of civil service employment, promotion is largely automatic; withineach class, promotion to the next step occurs after three years (if there is avacancy).
29. None of the large number of civil service salary supplements andbonuses, calculated according to complex formulas, are tied to performance.The practice of r.jing two extra months per year to civil servants who work inSOEs with or wit.sout contract did start out as an optional bonus to be paidonly in caee of satisfactory performance; over the years, however, it hasbecome an automatic entitlement that is paid without any regard to the qualityof work done or to SOE results.
30. Redundant labor and SOE management's effective inability todetermine their work force is an even larger problem. Careful analysis at theplant level, which has not been done so far, would be necessary to provide areliable estimate of that excess. At this time, managers and governmentofficials alike consider that at least one-third of the workers would have tobe laid off to achieve the level of productivity that for most SOEs is theessential prerequisite for profitable operation.
31. The reason for this inability is partly legal, partly political.Law 1475 (see Article 16) and the regulations of Decree Law 102, meticulouslyadministered by the Social Security Department in the Ministry of Labor,
- 92- Annex 4
provide for dismissals without fault by the worker, including for redundancy,and prescribe the detailed obligations of the SOE (e.g., not to refill theredundant post for an ini.lIal six months) and entitlements of the worker(e.g., severance pay of one month's wages for each year worked). On the otherhand, the law places an absolute limit on dismissals with severance (nineworkers per month per SOB) but permits unlimited voluntary terminations.Further, for every 100 workers leaving the SOE for whatever reason, only amaximum of 70 may be replaced.
32. However, not even the limited terminations allowed by the law canbe carried out in practice. The reason is the blanket instruction issued toSOE managements by concerned ministers. It states in effect that no workersmust be dismissed without the minister's specific permission. Permission hasbeen given so rarely that most managements now do not even bother to make therequest. The reason is, of course, political.
33. When worker reductions become indispensable in the concernedminister's judgment, his/her approval may in some cases require ratificationby the Prime Minister. For example, TCDD's manpower reductions over the lastthree years from 57,000 to 54,000 workers were contained in a personnelretirement program submitted each year to the concerned minister; the latter'sapproval was not effective until confirmed by the Prime Minister.
34. Wage decisions are another area where management autonomy isinexistent. Workers' compensation is set by collective bargaining between anumber of worker unions and the union of public employers representing all SOBmanagements. Wage increases are set by agreement every two years, and asliding scale provides for adjustment at six-month intervals if inflationturns out to be above given threshold levels. Thus, besides having to workwith a labor force that is typically far larger than managements would like,managements also have to pay that labor force across-the-board wage increaseswithout regard to differences in productivity or to the SOE's financialsituation and performance.
35. Procurement: All SOB procurement must be carried out inac-ordance with the Government's Procurement Code and Regulations. Thisplaces great reliance on tendering and bidding processes; managementsgenerally consider that this constraint is responsible for delays that in turnmake the entire procurement process too slow for efficient oparation. In1991, the SOB director general'e signature authority fon procurements waslimited to TL1 billion; for amounts above this limit the Board of Directorsassumes signature powers.
C. SOE-Government Relations
Institutions Involved in OwnershiD Functions
36. The legal owner of SOEs is the state. Through its legislativepowers the National Assembly determines the executive powers that enable themany governmental agencies involved to fulfill the SOE functions appropriateto state ownership. A listing of the principal agencies of the Government's
- 93 Annex 4
legislative and executive branches that are involved with SOEs is shown belowothe asterisks signify that the agency has some approval, supervising on otherauthurity over one or more SOEs):
(a) National Assembly's Standing Committee for SOE Operations*
(b) Council of Ministerm*
(i) High Planning Council*
(c) Presidency of the Republic*
(d) Prime Ministry*
(i) Ministry of State for Treasury and Foreign Trade*
1. Undersecretariat for Treasury and Foreign Trade*a. General Directorate of Treasuryb. (State Banks)
(ii) Ministry of State in charge of (among others)a. State Planning Organization*
(iii) Five other Ministries of State*, each in charge ofsubsectoral holding SOEs as follows:
a. SEKA (pulp and paper) and CITOSAN (cement), with9 subsidiaries and 20 affiliates
b. TDCI (iron and steel) with 5 subsidiaries and 1affiliate
C. Etibank (nonferrous minerals and metals) and TTK(coal), with 12 subsidiaries and 2 affiliates
d. TPAO (oil and gas) with 4 affiliatese. TUGSAS (fertilizers) with 1 subsidiary and 3
affiliates
(iv) Public Partnership Administration*
(v) High Audit Board*
(vi) Sectoral Ministries* as follows (in brackets, number of SOEsfor which responsible):
1. Finance and Customs (1 SOE and 5 subsidiaries)2. Industry and Trade (3 SOEs, 1 subsidiary, and 8
affiliates)3. Energy and Natural Resources (1 SOE and 11
aubsidiaries)4. Agriculture (6 SOEs, 9 subsidiaries, and 1 affiliate)5. Transportation (2 SOEs and 1 affiliate)
- 94 - AnnQ4LA
37. The most basic ownership functions are providing the objectives tothe enterprise, monitoring its performance, evaluating its longer term resultsat suitable intervals, and providing both initial and expansion capital.Against this background, the tabulation indicates the kind and number ofagencies that exercise the state's ownership function, as now conceived. Themechanisms that carry out the function are still based on the concept ofcentralized control although reforms are slowly beginning to point some ofthem in a different direction. The sections that follow summarize theseprincipal relationships and dealings that carry these concepts into practice.
Objectives Planning. and Budgetina
Qectiyea
38. The objective of most private sector companies, profitmaximization, is rarely, if ever, the principal objective of a Turkish SOE.Other objectives, many of a nocial or political character (among them areemployment maximization, or more realistically, unemployment minimization;regional development; and introduction of a new industry) are imposed withoutpaying attention to the crucial question of whether the SOE is the appropriatevehicle for attaining the objective. Even less attention is paid to whetherthe various objectives are compatible or conflicting. Although Decree Law 233contains such general wording as profitability and efficiency, theaccompanying articles make the attainment of these objectives practicallyimpossible. The rules are spelled out in great detail. In a market economy,each company decides the degree of details for itself. For example, thelengthy articles in Decree Law 233 about wages, premiums, and bonuses dealwith the kind of problems that should be decided by the Board of Directors.
39. There are few if any legal instruments ruling state-ownedenterprises in the world that are as encumbered with the degree of detailfound in Turkish laws, including the Constitution itself. It is moreover verynoticeable that the rules contained in the legislation are almost exclusivelyconcerned with inputs and their control, right down to the SOE's vehicles.Very little is said about output and about the SOE's strategic objectives orthe kind of performance that is expected of it to achieve the objectives.What is worse, this omission of all but the most short-term objectives is ineffect continued by the actions of the agencies responsible for approval ofthe SOE's plans and budgets.
Plannina and Budgetino
40. Operating and financial plans are annual. It is not the SOE butTreasury that prepares the initial version of the SOE's annual program aroundJuly of the preceding year. In the following two months the program isdiscussed with and agreed by management, and by mid-October, it is acceptedby the Council of Ministers and published in the Gazette. The SOE thenprepares its budget in accordance with that program, which must be approvedsuccessively by the Board of Directors, the concerned minister, and the HighPlanning Council (an inter-ministerial body that has replaced the earliercoordination council and must clear all plans arnd decisions of predetermined
- 95 - Annex 4
importance); Treasury receives a copy for information And for early clearance
in the context of the national budgeting law, which eventually require.
Parliamentary approval. Each approval may involve consultation and conoequent
amendments. The system applies only to SOEs; planning and budgeting for
subsidiaries and affiliates is considered to be an internal matter for the SOE
to deal with as it sees fit.
41. Investment guidelines are iosued each year by the Prime Ministry.
They indicate priorities to be followed, and they are remarkably stable; only
10 to 20 percent change from year to year. Each SOB then applies the
guidelines to the existing development plan, which used to be a rigid five-
year plan but has now partially evolved into a series of more flexible plans
of an indicative nature. Following its internal preparation, which culminates
in board approval, each SO! submits next year's investment proposals and their
capital requirements. First, the proposal goes to the SOE's concerned ministry
for review and then to SPO. Prioritization is in theory done within the SOE,
but in practice it is predominantly influenced by SPO. SPO accepts the
project(s) submitted as the project(s) of the SOE. At present it accepts no
proposals for new investments, only those for rehabilitation or renewal
investm'ents.
42. If the SOE can finance the proposed investment projects either
from its own funds or through its own credit arrangements, they are usually
approved by SPO. After that it only takes the High Planning Council's
approval, followed by the issuance of a government decree, to make the project
a reality. The Ministry of Finance is not normally involved, except in
matters related to budgetary transfers; this is not the case with the SOE's
self-financed projects.
43. If the SOB cannot find its own financing, or if it is a loss-
making SOS, the projects can either be treated as separate projects for
external financing or they can be approved for financing from Treasury's block
allocation for SOEs. In practice the outcome depends very much on the SOE's
internal financing capacity and on whether the project can be given a high
enough priority. It must compete with all other public sector projects. SPO
in consultation with Treasury assesses the projects in light of the
appropriate guidelines and the availability of funds.
44. Any investment project that needs Government financing, wholly or
in part, must (after SPO and Treasury approval) be included in the
Government's capital investment budget. Inclusion in the overall national
budget in turn requires the approval of the High Planning Council; finally the
national budget is debated and approved by the National Assembly.
45. From the beginning of the process, SPO requires the SOE to perform
detailed forward cash flow projections for the period of the project's life.
This projection forms part of the feasibility analysis that the SOE must
prepare. There is, however, no other requirement for SOB forward pl ning for
more than the one year of the annual program and budget. Thus there 4s a lack
of consistency between the time frames used (multiyear for projczt studies,
one year for all other plans and budgets); one result is that feasibility
- 96 - AnnE_
study-related projections tend to be leas solid and credible than they wouldbe if they were prepared within the context of a corporate multiyear businessplan, which encompasses both current and capital account operations. Further,for investments in noncommercial SOE projects there is no requirement thatcompensation for duty losses in future years be provided for in advancethrough contractual or similar arrangements; much compensation is left to becovered by each succeeding annual program and budget exercise.
Reporting and Audit
46. All the processes and approval procedures discussed so far are ofan ex ante character; they and others of similar type form the main body ofgovernment controls. Their importance reflects the emphasis the system putson the input rather than on the output side of SOE operations; the approach isbureaucratic (emphasis on compliance with reg9ulations) rather thanentrepreneurial (emphasis on successful performance).
Reportin_ Systems
47. On the ex Dost side there are large quantities of SOE reports thatare required periodically by all the government agencies mentioned so far, andother that have not been mentioned. By far the larger part of what has beencalled a flood of diverse and mostly fragmented reports do not fulfill anypurpose except to satisfy a bureaucratic requirement. A frequently heardcomplaint is that the reports are often not read or reacted to. Even ifinformation is already contained in a report, separate requests for thatinformation are submitted and need to be responded to. The SOBs' realbehavior and management performance is likely to be influenced far more byinformal communications (usually by telephone) between CEOs and asniorofficials in oversight agencies than by anything that comes out of the formalreporting system.
High Audit Board
48. The only Government agency that regularly audits SOE performanceis the High Audit Board (HAB), which acts on behalf of the National Assembly.Starting in 1985, external audits are performed for those SOEs that are put onthe privatization lists and consequently placed under the authority of thePPA. HAB audits are carried out on the basis of SOEs' annual financialstatements, as well as annual reports on operational, technical, andmanagerial aspects of the SOEs' activities (annual reports are also sentroutinely to the concerned ministry, Treasury, and SPO). HAB actions thus gobeyond a routine financial audit; they constitute the sole opportunity in thewhole system for carrying out meaningful performance evaluation.
49. There are no formal evaluation yardsticks apart from the SOE'sannual program and budget. HAB also audits and evaluates subsidiaries, eventhough they have no standard annual program and budget that could be used as ayardstick. For its work HAB is guided by a Handbook for Auditors issued someyears ago. It provides and elucidates the various criteria to be used. I1ne19 members of the HAB are appointed by decree of the National Assembly, and
97 Annex 4
each member is in charge of a group of about 20 auditors. All haveprofessional qualifications.
50. HAB does not rank an individual SOE's performanca as is done, forexample, in Korea and Pakistan. For each SOE audit it issues an evaluationreport; if this shows specific serious problems the report may (but need not)make recommendations on how to resolve them and improve performance. Thereare no rewards or sanctions for positive or negative performance. The reportgoes to the Prime Ministry for review, and from there to the SOE Committee ofthe National Assembly. If the report contains action recommendations, thecommittee decides whether to endorse them, and if it does, the recommendationgoes back to the Prime Ministry for final decision and action.
51. By its own admission HAS prefers to avoid radical actionrecommendations. There has been only one case (Yurtas, a marketing company)of an enterprise being shut down because of persistent negative performancethat was considered incapable of significant improvement through maaagement orother changes. There have been a number of cases where fraud was uncoveredand court action taken and where SOE officials have been replaced as a resultof HAB recommendations.
52. On the whole HAB emerges as a worthy institution that is mostuseful in determining and affirming the SOE's adherence to the rules; thusolder SOEs with traditional bureaucratic-style management tend to be satisfiedwith FAB, while newer SOEs or those with more business-minded managementsometimes differ strenuously with HAS's approach to management and itsevaluation. There is little doubt or disagreement that HAD is presentlyunable to make performance evaluation meaningful by linking it to a specificresults-related system of rewards and sanctions.
Other Forms of Control and Interference
53. Besides the official supervisory and control processes summarizedabove, there is also a large and varied assortment of other ways in whichcontrol over SOE activities is exercised formally and informally. Formallythere is the impact of Government regulations that are not only time consumingbut also often hinder the efficient running of the SOB by its management. Forexample, any travel abroad needs approval by the concerned minister. Thedelays created in the process of trying to obtain that approval can often besubstantial, and they are felt with particular force by export-oriented SOEoor those that rely on imported equipment or other inputs. Such delays alsomakes it hard for managements to obtain staff training that can only beprovided abroad. In the same way SOEs Board of Directors are obliged toestablish vehicle use instructicns that are based on Government guidelinesestablished in accord with the Public Vehicles Decree Law. In reality theseare the kind of decisions that should be delegated to SOE management.
54. Many SOEs are obliged by a Government authority to carry outactivities based on political and/or social rather than commercialconsiderations. This approach is probably one of the oldest and mostwidespread practices among state-owned entexprises around tee world. However,
- 98- Annex 4
it is being recognized with increasing clarity and frequency that it shouldonly be considered if noncommercial activities are separated from commercialones at the planning, operating, and accounting levels, and if their new costsare reimbursed to the enterprise by the owner. Failure to do so inevitablyresults in an inability to assess the enterprise's profitability andefficiency, since financial results are obscured by merging the two kinds ofactivity. It further makes it impossible for the state to know the true costsof the noncommercial activity and thus to judge at any given time whether theresults are worth it.
55. The controls that are hardest to pin down are the informalpressures, frequently political, that often come in a telephone call and seekto influence the operation of the SOB. As long as state authority isexercised by many organizations, state ownership will always result in manyclaiming to speak with the owner's authority; as long as there is no cleardividing line between owner and management, the latter will feelunderstandably at risk in totally rejecting that kind of influence. Thepressures thus serve as a-priori controls that, at best, dilute management'scommercial judgment or, at worst, negate it altogether. From JOE managers toinvolved government departments, all sides seem to agree that the top priorityof any reform must be to restructure institutional arrangements so that theseinfluences are eliminated, or failing that, reduced to the minimum.
Special Financial Treatment of SOEs
56. Turkish SOEs are disadvantaged by the rigidity of their relationswith government as well as other constraints. If they did not benefit from asoft-budget constraint, thanks to their state-owned status, they would not beable to continue to operate (see Annex 5 for details). This fact isexacerbated by the absence of either positive or negative incentives tomanagement. It is also aided by SOEs' sense of security that Government isnot likely to have recourse to liquidation, even though liquidation of SOEs islegally possible both within the privatization process and outside thatprocess.
D. Recommendations for Institutional a d Lecal Reform
Issues, Obiectives, and Outline
57. The preceding sections identified the principal problems of theSOEs as a consequence of the legal and institutional environment they face,including the following:
(a) multiple and conflicting objectives;
(b) inadequate corporate structure, leading to a noncommercialculture, barriers to exit and preferential treatment;
(c) overlapping ownership and management functions;
(d) incomplete management autonomy;
-99 -
(e) absence of medium-term business strategies and planning;
(f) lack of financial discipline; and
(g) absence of effective accountability, performance evaluation, andincentivea;
58. Hence, the new model of the sector should avoid these problems, ifpossible, and should force the SOEs to operate in conditions similar to thosofaced by the private sector. Specifically, they should compete with otherprivate and public enterprises on a level playing field, manage theiroperations free from political influences, and stand accountable to theirowners. For SOEs enjoying natural monopolies, the new legal and institutionalframework must be complemented by a regulatory framework that promotesefficiency, stimulates competition, an3 safeguards the rights of consumers.In essence, the new environment can be summarized as follows:
(a) Objective: profit maximization in a dynamic sense, i.e.,maximization of the value of the firm (subject to regulation fornatural monopolies).
(b) Corporate forms joint-stock companies fully subject to thecommercial code.
(c) Government-SOE relations: Single Government Agency (SGA) as thesole interface between other public agencies and the board of theSOB.
(d) Management policy and oversight: independent Board of Directors.
(e) Operations: autonomous and accountable management subject toperformance monitoring, evaluation, and sanctioning.
Corporate Form
59. All SOEs should be organized as joint-stock companies (JSCs)subject to the commercial code. Ownership should be structured through theshareholder assembly; the requirement for at least five shareholders beforesuch assembly can be convened can be easily met (without affecting effectivecontrol) by Government issuing four nominal shares to nongovernmental persons(e.g., managers or board members). The corporate mechanism (shareholders -board - executive management) can then be put in place just as it would be ina private company. one of the reasons why the conversion of rOBs to JSCO isso basic to meaningful reform is that the commercial code provides for anorderly procedure for closure. Effective competition with the private sectorand financial discipline can only be a reality if the ultimate sanction forfailure of an SOE, bankruptcy and closure, is available.
- 100 - Annex 4
government--SoE Relations
60. Reduction of Hinisterial Control. As a consequence of restoringto SOEs the normal functiona of the JSC, there would be an important change inthe functions of sectoral and other concerned ministries. Their functionsthat have a direct impact on the SOEs would be virtually eliminated? insteadthey would apply themselves only to the formulation and implementation ofmacroeconomic and sectoral policies. The exclusion of sectoral ministriesfrom direct operational ties with an SOE will end their involvement in theSOEs' business policies and day-to-day management, a development that isessential to the other components of the reform model.
61. Creation of a Sinale Interface Function. On the Government sideof SOE-Government relations, the key to the success of the reform measures isthe elimination of political influences on SOB operations. Thus it would beprudent to establish a single channel of communications between SOE managementand the state as owner. This link would eliminate conflicting and confusingsignals caused by the involvement of multiple public agencies in SOE decisionmaking. This requirement can best be made operational by a new SingleGovernment Agency (SGA) whose basic purpose is to exercise the ownershipfunctions of the State a, sole or majority SOB owner. SOA would then becomethe sole point of interface with the SOEs for government agencies withlegitimate responsibilities and concerns. Apart from the basic decisions oncreation of the enterpr1se, how to provide for its capital needs, and theappointment of its directors, all prerogatives of the owner can be exercisedby the SGA, which would have the following principal functions:
(a) Appoint the Board of Directors (BoD).
(b) Define shareholder objectives in terms of profit maximization,over time (i.e., maximization of the value of the firm) inconsultation with Treasury, SPO, and the concerned ministry.
(c) Instruct the BoD to pursue these objectives and reach agreement onsimple performance indicators (mainly profitability, supported byother such indicators as productivity, when necessary); and whenappropriate, cast all of these parameters in the form of amutually committing agreement (e.g., performance contract) thatspells out the resultant obligations of each party.
(d) Receive the SOE's annual operational program and budget forpurposes of information and comment only, except when equitycontribution from the central government's budget is involved.When this happens, SGA also retains approval authority jointlywith Treasury. Receive and approve, on similar basis, multiannualcorporate plans prepared by the SOE.
(e) Monitor the SOE's performance through receipt and analysis of BoDreports; and at least annually evaluate SOE results throughoperation of a performance evaluation and incentive systempreviously agreed to by the SOE. Also in applicable cases,
- 101 - AnnonL
participate in the negotiation, execution, follow-up, and generaladministration of a performance contract or similar agreement.
(f) Approve major changes -n the SOE's structure, including inater aWiits closure for reason of persistently unsatisfactory performancein its line of business and its capitalization.
62. The above list is exhaustive: the SGA should do nothing more thatinfluences SOE decision making. Introducing other functione beyond the oneslisted will render the performance evaluation system meaningless and lead toexcess interference. If necessary, the SGA could perform other functions,such as the maintenance of a standardized central data base on SOs and thedevelopm.ent of files on candidates for managerial slots. If the Government iscommitted to ultimate divestiture, as it should be, it could indicate itscommitment by making the SGA a temporary and self-liquidating institution. Asregulations and regulatory agencies are established, the SGA's role wouldshift to implementation of the divestiture strategy.
63. If the objective of minimal political interference is to beachieved, an answer needs to be found to the crucial question of who willappoint the members of the SGA and to whom they will be accountable. Thepotential for successful operation of the entire remaining SOE sector rides onresolution of this issue. There are, unfortunately no clear and unambiguousanswers to this problem. A system of checks and balances between thelegislative and executive branch of the state could introduce some degree ofneutrality in the process. One solution may be for any new SOE legislation toexplicitly provide that the members of the SGA be appointed from the privatesector, with experience in managing large enterprises. A further issue to beresolved is how to provide the proper incentives to the SGA. Clearly, membersof the SGA should be hired on a contractual basis, not subject to conditionsof employment in the civil service. Their remuneration could be linked to theperformance of the enterprises as well.
64. The above proposal for a sole interface agency between SOEs andthe Government agencies follows the recent literature and experience on thebest ways to organize this type of relationship. As many economies evolved toa consumer-preference oriented market economy, the function of SOEs hasshifted, and the need for flexible management has increased. Hence, runningSOEs is certainly no longer a role in which the Government has a comparativeadvantage. Norway and Sweden are at the frontier of this approach. They haveestablished a small unit within the ministry responsible for SOEs in order toexecute the ownership role. In Sweden, the unit consists of only eightprofessionals. In both countries the unit does not own the SOEs (i.e., it isnot a holding); it defines the broad objectives of the enterprise, hires andfires the board of directors, monitors performance, establishes dividendobjectives, approves annual accounts and the distribution of profits, andensures that strategic and financial plans are developed by the board. Theunits do not intervene in board decisions, maintain a data banks or rosters ofmanagement candidates, nor do they perform management functions.
- 102 - Anow_
Board of Directors
65. Conversion to JSC status should be followed at once by thecreation of a new Board of Directors for each SO. The BoD should be eet upas the top management body of the SOE rather than as an instrument of day-to-day government control. its members should be selected by theowners/shareholdors from candidates with technical and managerial experiencerelevant to the SOE's activities; such experience is mainly to be found in theprivate sector. There should be no appointments of civil servants or militarypersonnel, either active or retiret.., unless ouch persons can demonstrateoutstanding experience or expertise relevant to the SOE's management. The BoDshould not include any member of executive management, with the possibleexception of the CEO; if included at all, the CEO should not be chairman, andshould not have a vote, unless the board decides otherwise. The board shouldbe the only body of the SOB to deal with and report to the SGA.
66. The BoD should have the following principal functions:
(a) agree with the SGA on the quantification of indicators thatcorrectly reflect the degree of attainment of the objectives;
(b) appoint the CEO, and in relevant cases (e.g., very large SOEs)nominate and/or appoint the senior management team uponrecommendation by the CEO;
(c) following prior consultation with the SGA and management, prepareand approve SOE operational and financial policies and plans onboth current and capital accounts;
(d) monitor CEO's and management's performance;
(e) approve investments and sales of assets; and
(f) approve major changes in corporate policy.
Management Autonomy
67. The above recommendations signify that Government leavemanagements of retained SOEs free to run them as profitable businesses underthe commercial code in a competitive and cost-effective manner. To do this,SOB managers need substantial autonomy especially in pricing, procurement, andemployment. The legal provision granting the Government the right to restrictfreedom of pricing should be removed except where industry regulation isnecessary to avoid inefficiencies (i.e., natural monopolies). The existingsyatem of duty losses should be replaced by contracts between the Governmentand the SOE (just as with any private supplier) for which ex ante budgetaryprovisions are made. Similarly the obligatory adherence of SOBs to publicsector procurement roles ie incompatible with the freedom needed by SOEmanagements to run their enterprise as efficiently as possible. However, themost cumbersome of all present obstacles to management autonomy are no doubtthose relating to emplovment. Not only does the Constitution prescribe the
- 103 - Ilkqa
exclusive uBe of civil eervice personnel in all management positions (SOEs are
currently overstaffed) but managers also have no s^y in decisione on levels ofemployment and payment of the labor force. Consistency with the new modelwould dictate that constraints to management decilsion making in all of theseareas should be removed entirely. Continuing these constraints isincompatible with making retained SOEs commercial. Maintaining theconstraints would lead to the failure of any reform program instituted to putan SOE on a market-oriented footing.
68. Another issue incompatible with management autonomy is the use ofSOEs in the pursuit of noncoMmercial activities. SOEs are inefficientinstruments to achieve these objectives, and forcing them to bear thefinancing of the cost of these activities hides the true cost to the budget,leads to conflicting objectives, and renders performance evaluationimpossible. Noncommercial activities should only be assigned to an SOE oncondition that the Government (a) negotiates a contract with the SOE just asprivate customers would; and (b) takes advance measures, primarily byincluding adequate appropriations in the national budget.
Performance Monitoring. Evaluation, and Incentives
69. An autonomous management must be held accountable to its owner forits performance. Both efficient performance and accountability can only besuccessfully pursued if autonomy is accompanied by both positive and negativeincentives to management. The current system does not contain any financialincentives linked to performance or effective sanctions for reasons mentionedabove. Moreover, performance evaluation can only be meaningful if performanceis properly monitored.
Monitorina and Audit
70. Present efforts to monitor and evaluate SOE performance areconcentrated in the concerned ministries and the HAB; however, they have nouniform format, and they are not coordinated. Emphasis is placed on theachievement of annual program targets rather than on competitive success andprofitable results. Although HAB could, in theory, evaluate SOEs so that (a)the quality of the performance is measured and corrected if necessary, and (b)owners are informed of the situation, in practice it has not lived up to thisexpectation.
71. It is recommended that HAB's auditing functions related to SOEs bedownecaled to financial auditing only; managerial and other types of auditexamination now done by HAB should become part of the new SOE performanceevaluation function proposed below. Further, it is also suggested to increaseaudits by independent entities outside the public sector (i.e., private auditfirms consisting of highly qualified and experienced professionals). NABcould become an implementing agency by contracting out to qualified firms.
- 104 -
Performance Evaluation and Contracts
72. Once the state-owner has set tha objeotivo for the SOB, it must bein d position to evaluate whether objectives have been met, and if they havenot, what changes are indicated. The frequency of evaluation will vary. Atthe least, annual review is needed to assess the degree of target achievement.Just as objective-setting must be aingle-minded, evaluation of performancemust follow a set of previoualy agreed yardsticks that correctly reflect theobjectives. Such performance indicators should first of all streasprofitability measures; but they may be supported by other financialindicators (e.g., return on capital employed, return on equity, anddebt/equity ratios) and indicators related to productivity. The yardsticksmust be simple, practical, and neutral.
73. It is recommended that an evaluation system along these lines beinstituted for retained SOEs. The evaluation system should be administered bythe single oversight agency mentioned earlier. In the case of certain public-service utilities, it is also recommended to examine the potential of aperformance contract system that carries matters a step further. Whileperformance evaluation deals solely with the results achieved by shq SOEs,performance contracts (in France called Contract-plans and in India Memorandaof Understanding, or MOUs) contain commitments of a more mutual nature --certain inputs by the state, certain outputs by the SOE concerned. The bavisfor both is given in a corporate plan prepared by the SOE.
74e For both systems simplicity and brevity (but not ot the cost ofclarity) is preferable. Recent Contract plans in France have been as short as10 pages or leas. Experience elsewhere, has also shown the importance ofensuring the Govarnment's ability to make good on its financial commitments in
a full and timely fashion; failure to do so has been the prime reason whythese instruments have not always been successful.
Incentive Systems
75. Performance evaluation in SOEs loses much of its effectiveness ifit is not also tied to monetary incentives and disincentives. The pioneercountries in this area (Pakistan, Korea) have incorporated ranking systemsinto the evaluation process. The ranking leads to a predetermined bonusamount for management, depending on how different weighted aspects ofperformance compared with targets. For unsatisfactory performance the systemrelies mainly on withholding bonuses rather than on outright pay cuts.Incentive systems are most effective if they are tailored to the country'scircumstances and culture; the crucial element all have in common is that theytie rewards directly to the level of performance. The administration of thesystem should be as consistent as possible: a predetermined scale ofperformance indicators should correspond with a predetermined scale ofrewards, and discretion should be avoided.
- 105 -+
76. No doubt? the reforms suggiested above will, if implemxented, have aprofound impact on the role of many Government agencies and the corporateculture of the SOEs. The reforms require an overhaul of the existiniglegislation regarding the SOEs and t ' establishment of a regulatory frameworkwhere needed. They could neconaitat.- 'nancial, and to some extent physical,restructuring of the SOEe in order to aeiow them to survive in the newenvi:onment.
Institutional Chan es
77. The recommendations described above require the creation of onlyone additional institution: the Single Government Agency. It should deal withmatters related to the commercial operation of the SOE only, consist of asmall group of competent professional people, and have access to the highestlevel of power. The organizational at'achment of the SGA should be guided bythe potential to climinate politioal interference in SOE operationse. Giventhese general requirements, the attachment of ths SGA to an existinggovernment department would be preferable. In this case, it would also bebeneficial and efficient to select one that would, in any event, haveimportant approval and consulta.ive connections with the SGA's work andfunctions. The SGA should neither be a new ministry nor an administrativebody or a holding company. A new ministry or admtnistrative body would simplybecome a focal point for political interference. Such a body would attempt toperpetuate its role, hampering the shift in the government's role towardregulatory agent. Experience with holding companies suggests that theyinivariably lead to greater, rather than less, politicization, excessivecentralization, and poor performanice. The sheer size of the multisectoralcompanies creates unnecessary layers of management and slows decision making.IRI (Istituto per la Ricostuzione Industriale) in Italy is a case in point(ser Box A4.1). Sweden, which established a super holding in 1970, moved awayfrom it after two government inquiries in 1977 and 1982 concluded that it hadbecome too large and too complex to be managed effectively.
78. For most other institutions presently involved in SOB operations,the new setup would imply a curtailment or modification of their functions.The tabulation below illustrates which agencies and functions would no longerbe required. The listing is tentative and not exhaustive; at this time itsfinal form is unforeseeable.
- 106 - Annex 4
Subiect area Aaencies with present responsibilities
Supervision, operational guidance: Concerned State and rector Ministries
Investment planning and SPOauthorization:
Appointment of SOE managements: Presidency - Prime Ministry - ConcernedMinistries (note that BoD appointmentswould still engage top government levelsthough not necessarily the same ones)
Auditing and evaluation: BAB, Prime Ministry, concerned Ministries
Rehabilitation and restructuring: SPO
Personnel adjustments: Ministries of Labor and Finance, StatePersonnel Office, Union of Public
Employers
Lenal Reform3
79. To draw up and implement the reforms recommended above, the legalframework underlying the present SOE system needs to be modified. A detailedoverview of the required changes goes beyond the scope of this study. Acareful analysis of the entire legal corpus relevant to SOEs must be performedprior to implementation in order to avoid challenges against crucial reformson legal grounds (such as the High court ruling against the use of noncivilservice employees in management pos3tions). Timing of the legal changes iscrucial: the principles of the reform of the sector must be agreed uponbefore the changes arG implemented, since the reforms themselves cannotcommence until the new legal framework is in place.
80. Most of the specific legal obstacles to reform are embodied inDecree Law 233 and in the Constitution, but many of the smaller impedimentsresult from the indiscriminate application of bureaucratic regulations(procurement, travel, vehicle use) to public agencies, including SOEs. As ageneral guideline, it is recommended that the new law limit itself to generalprinciples in order to avoid thr rigidity of Decree Law 233. The kind ofdetail that is typical of Decree Law 233 is best left to the governmentaloversight agency and the SOEs' top management.
81. Articles 128 (decreeing SOB management to be carried out by civilservants) and 165 (obliging all wholly or majority-owned SOEs to be audited byParliament) of the Constitution suffer from the same excessive degree ofdetail. Both articles are ill-adapted for present-day circumstances, and, asmentioned before, if they remain in place, much of the suggested reform islikely to be ineffective.
- 107 -Annex 4
-^..76:-::>A;<: .n: MM A1:Istitto Perto tlcostuzione Jna*atiaieMhIaiy .- ;:;.: :
I- iy~~esia~~tis triat,portfoiloi ~1 the NIb ent6erprise sctrThe...a: .iely establshed IRI in 1933 to manage the Inutrial sector..#v The rationale for setting tp thltsAarfienaLtIstetrl holding was<that-Itcould a) aict as a buffeer.-Against political Interfere6se; 6b} r6VId6 effectiv coordinat}io of decision making, strategic guidance
financiat d.istiptine; s(c)aassist In.po6iig"arce managenent t-lents,t and (d) lead to benefits of.**:flbyi o6wev,or, %a4the diagram below shMws; the.resulting ayers of nterpiset aind governent bodies;.5involved :in pXblic enterprjses 7n ltalybecemneexcessive.>
.Pa- :Pa.:-ent. -
I Iintperhiniter
torsi 0Lrotdiog
$itSsi diar~
Hence, r ather th.a ef -tt f. the 'sae a' () becam ve too or pob ticsl"Interference b lack -an appropri rl ) has excessive f iSanci s -ai creates excessive.'1 ay ers'-of'a maae en;(). sbow&deciiI6nmk#g.an 1 a gtveefeto oivtion arid qua Ity
p. a:aui;gers& . 0 . 7
Reaulatorv Framework
82. As the retained SOEs will almost exclusively be linked to naturalmonopolies (electricity, mail and telecommunications, port and airportadministration), the reforms recommended above will fall short of improvingefficiency unleBss they are accompanied by the introduction of a regulatoryframework. Although regulations are clearly industry specific, they should bebased on the principle of stimulating competition and efficiency. To fostercompetition, the regulation should stimulate market entry. Breaking some ofthe large SOEs into independent units wtay be desirable.
- 108 - Annex 4
Restructuring
83. The aim of SOE reform iso to make it possible for retained SOEs tooperate profitably without benefit of subsidies or other favorable treatruentby government. Government financial support would occur only in the form ofspecifically justified capital injections for SOEs that are expanding theiractivities. Such support should be considered unlikely because the SOE reformis precisely geared at the reduction of SOSs in order to foster thedevelopment of the private sector. However, as a result of the pastinefficiencies, some of the retained SOEs may not be able to operate understrict financial discipline, since they are insolvent. If SOEs are to becompetitive, they will need to have access to financing on a competitivebasis; yet in the absence of financial restructuring, many SOEs would neversucceed in gaining access to credit on commercial terms (and unguaranteed bythe government, either explicitly or implicitly). Consequently, it may benecessary to restructure existing debts of retained SOEs.
84. Financial restructuring may not be sufficient in itself becauseoperational inefficiencies caused by redundant labor, obsolete capital, andunprofitable lines of business may still lead to SOEs having a negative networth that bars them from competitive access to credit. Labor restructuring,liquidation of unprofitable lines of business, and selective capitalinvestments will be required. This restructuring will have an unavoidablecost to the owner (Government), and it should only be undertaken if thecontinued involvement of the state can be economically justified. Therestructuring should be done within the framework of a strategic corporateplan. Although this operation ix a matter to be left to the board andmanagement in consultation with the SGA, the internal planning capacity neededfor restructuring still needs to be developed.
- 109 - ax 5
TURKEY
STATE-OWNED ENTERPRISE SECTOR REVtIEW
ANNEX 5
Competition and Financial Discipline
- 110 -
TUYKEY,
STATE-OWNED ENTERPRISE SECTOR REVIEW
copnetition and Financial 2is_lpijDli
Table of Contents
A. Competitigj_B 4 een SOEs and Private Entero rise ....... 112
Introduction ............. 1 .... **.. . .. 12Soft Budget Constraints ...... ........... . ............ 114
Commercial and Central Banking Lending to SO 0E.......... 115Gurantees on Foreign Loans ............ ... 117Arrears ............ O. ................ 118subsidies.* . ... .*. . *. c .e.. . . . . . . . . ... . . . . . . . 120
Low Return on Equity. .................. ........... ..... . ..... .123Monopoly Power. ........ ... ..... ............. .... 123Legal Constraints on Exit ..... ........................... .. 125
B. eaulation of SOEs Remainlin In the Publi Secto,r.............. 126
General Issues on Regulation .......... .............. 127Agencies .................... 0............0# 127Pricinge ........... *..... 0......... 0060. 127Quality of Services. ................... .........O 129Coptton.**.***..*.*........ 0 130
Regulation of PTT and TEK ...... ...... .... ........ 131PTT ...... #*............................. so* . 131TEK*.#. .......................... ...... ***¢*X***** 1 31
C. Alternative Metho of Achieving NonCommercial Objective_ ...... 132
Redeployment Program. .. ...... . .. .............. .00 133
Agricultural Pricing Policy ............. *........*....... 133
D. C£2lusion,s and Recommendations. .... . ............ .... 134
- 111 - ANNhEX I
Table of Contents (continued)
Eaae Ng-
List of Tables
"rable A5.1 Value Added and Fixed Investment ........................ 114Table A5.2 Debts to Commercial Banks ............................... 11 S
Table A5.3 Debts to Ziraat ...... * ............ 116Table A5.4 Foreign Debts of SOEs at the End of 1990 ................. 119Table A5.5 Subsidies to SOEs ..... .......... .. 120Table A5.6 SOEs' Returns on Equity in 1990 .......................... 124
Table A5.? Ranking of Schemes for Regulating British Telecom'sProfitability ....................................... 129
Table A5.8 Budgetary Transfers to TMO ............................... 134
List of Fiourea
Figure A5.1 Public and Private Wholesale Prices . . . 113Figure A5.2 Medium and Long-Term External Debt ........ ...... 122Figure A5.3 Return on Equity ....................... ...... . . 123
List of Boxes
Box A5.1 Arrears to Eximbank .................... . ... . 120Box A5.2 Recent Claims and Payments for Duty Losses........... 122
- 112 A
TURKEY
STATE-OWNED ENTERPRISE SECTOR REVIEW
COMPETITION ANM FINANCIAL DISCIPLINE
A. Com2etition Between SOEs and Private Enterprises
Introduction
1. At first sight, there appear to be no serious problems related to
the issue of competition between SOEs and private enterprises in Turkey.
During the 1980s the Government eliminated most differences in treatment
between SOEs and private enterprises, so that currently they appear to be on a
level playing field. Common characteristics include the following:
(a) SOEs purchase inputs at the same prices as private enterprises.
Only a few input prices are subsidized (see below), and the
subsidies are available to both public and private enterprises.
(b) SOEs pay the same interest rates on loans as privateenterprisesl/.
(c) Although tariffs and duties still provide considerable protection
to the Turkish industry in general, sectors where production isdominated by SOEs do not appear to enjoy higher protection levels,
either from tariff or nontariff barriers.
(d) Fiscal incentives to exports and investment are equally available,
under the same conditions, to SOEs and private enterprises.>
(e) Only a few SOEs have been granted legal monopolies in the past.
The monopoly on tobacco products has recently been abolished.
(f) SOEs do not receive direct subsidiesy.
I With the occasional exception of TSEK, the state-owned dairy products
manufacturer.
9 There is one exception to this rule: SOES that have been granted legal
monopolies cannot apply for fiscal incentives in either of the forms of tax
credits or cash grants.
A There are some exceptions to this rule. See section on subsidies, para.17, below. This section argues that SOEs receive large sums that can be
classified as subsidies but that formally are equity injections, payments for
duty losses, and "aid."
- 113 - ANNEX 5
2. As discussed in Annex 1, the Turkish SOEs operate at reducedefficiency levels, and some of them have been running losses. The mainfactors causing inefficiency are the following:
(a) Labor overhang. Most SOEm are severely overstaffed, and caseswhere half of an SOE labor force is redundant are not uncommon.
(b) Inadequate institutional structure. A weak framework leads tointerference and lack of management autonomy and accountability.
(c) Forced undertaking of unprofitable activities.
(d) Public ownership. The lack of large indiyidual shareholders thatwould appropriately monitor managers creates room formismanagement.
(a) Price controls. Price liberalization in the early 1980s made mostSOEs financially profitable at once, but implicit price controlsstill existY. Also, with the exception of TEX, SORe do notadjust prices on a monthly basis. Honce, SOE prices frequentlylag behind inflation for a few months, just to catch up with alarge adjustment later, as shown in Figure A5.1.
FIGURE A5.1Public and Private Wholesale Prices
SMo"ft OFhang S
20 .......................................
... ...... L. .. .......... ...
FMAMJ JASOOJFMWMJJASONODJeFMJJADNFMAMJJA6ONJAA
-Pwibflo -+- Pflv,t
me. e r.. .
i The lag in price adjustment that took place before the 1987 electionscontributed to the financial decline of SOEs. Recently, the new economicministers publicly urged the SOEs to increase their prices at a rate below theinflation rate.
-114- ANNEX 5
3. Burdened with excess labor, lese than optimally managed, facingprice controls, and forced to undertake unprofitable activities, SOEs are at adisadvantage in the competition with the private sector. If this disadvantagewere not compensated by some kind of Government support, some of them wouldlose market share, suffer financial losses, and eventually go bankrupt. Theimportance of SOEs in the economy would then gradually decline. Theparticipation of SOEE in value added in manufacturing has decreased slowlyduring the eighties (see Table A5.1), as a result of the rapid growth of theprivate sector in that period. However, in absolute terms the size of the SOEsector has actually increased (see Table A5.1). The share of SOEs in grossfixed investment decreased rapidly, as it became more difficult to financethese projects.
Table A5.1: Value Added and Fixed Investment
1985 1986 1987 1988 1989 1990
Value Added (TL billion)Total: Current Prices 2940 3843 5728 9173 16008 26951
1990 Prices 20251 20740 25120 23622 25099 26951
Manufacturing (Share) 20.1 17.7 17.5 11.5 11.9 14.3
Gross Ffxed InvestmentCurrent Priccs (TL billion) 1604 2406 3316 5130 6929 9786Share of Total 30.4 27.4 22.7 21.2 18.0 16.1
Source: Treasury.
4. SOEs enjoy no apparent advantages compared with privateenterprises. Thus the ability of SOEs to survive and sometimes expand whenfaced with so many handicaps presents a puzzle to the casual observer. Thispuzzle is easily solved. The following four major factors allowed the SOEs tosurvive the competition from the private sector: (a) they faced "soft budgetconstraints"Y; (b) they were allowed to earn low returns on equity; (c) someof them enjoyed monopolistic positions; and (d) there are legal obstacles toexit.
Soft Budget Constraints
5. Although the SOEs were not, for the most part, subsidized, theyenjoyed significant advantages over the private sector, with regard to accessto credit. They were also allowed to run large arrears on their debts, andthey received sizable equity injections. The combined effect was that theSOEs faced soft budget constraints. Some SOEs managed to stay in business
A The term "soft budget constraint" was first coined by the Hungarianeconomist Janos Xornai to denote a common syndrome in socialist countries: almostunlimited amounts of funds were made available by the financial system toenterprises. These funds either covered losses or financed large investmentprojects.
- 115 - a&EXL5
despite mounting losses. others undertook large investment projects thatcould not be financed out of retained earnings and whose economic merits werequestionable. Specifically, the softness of budget constraints stemmed fromthe following four main sources:
(a) noncommercinl financing by commercial banks or the Central Bank;
(b) explicit guarantees on foreign borrowing;
(C) arrears on debts to the Treasury, to the Social Security, tocommercial banks, to foreign creditors, and to suppliers; and
(d) subsidies, although mostly disguised.
Commercial and Central Bank Lending to SOEs
6. Commercial Bank Lending to SOEs. The Turkish SOEs have borrowedmostly from public sector commercial banks. There is an "understanding" inTurkey that public sector deposits go to public sector banks, and that thesebanks provide a lion's share of the credits to SOEs. Commercial banks in theprivate sector have also been extending loans to SOBs. They do so not becauseof pressures from the Government but because they see these loans as
Table A5.2: Debts to Comercial Banks(in million TL)
1989 1990
I4KEK 160,806 140,511SEKA 12,281 0TDCI 640,954 987,489CITOSAN 199,992 336,051ASOK 71,486 73,037ETIBANK 0 0TTK 0 29,814TKI 2 2TEK 645,824 150TPAO 0 0BOTAS 0 0IGSAS 0 0TUGSAS 109,296 216,022GEMSAN 59,105 138,616TSEK 7,240 19,878TMO 19,346,57 5,062,319TEKEL 174,715 299,797SEKER 497,429 1,127,378YEMSAN 11,585 41,721TZDK 1U,242 301,101CAYKUR 69,626 104,486EBK 36,112 162,865TCDD 11,475 24,812PTT 35 0DiShl 0 0TDI 4,060 83,143GEMSAN 123.510 125.591TOTAL 4,914,432 9,274,783
Source: Treasury.
116 - ANNEX 5
carrying low risks. Although neither the Treasury nor the Central Bankprovides explicit guarantees on domestic borrowingi, the banks considerloans to SOEs as effectively guaranteed by the Treasury. Table A5.2 shows theevolution of commercial bank lending to SOEs. Ziraat Bank, which is stateowned and is the largest commercial bank in Turkey, and Is Bank, in whichthe state holds a share of 41 percent, are respectively the first and secondlargest lenders to SOEs. Finally, the Central Bank has also lent to TMO andSEKER.
7. Ziraat Bank is the largest provider of credit to SOEs. At the endof April 1991 it had exposure to 14 SOEs, amounting to TL3.5 trillion,including accrued interest. Ziraat Bank's largest SOE borrower is TMO, with adebt amounting to TL2 trillion. Since TMO was unable to service this debt,Ziraat Bank negotiated an agreement with the Treasury, in which the latterassumed Ziraat Bank's exposure.Z. Ziraat Bank has not provisioned for TMOdebt because credits for agriculture do not have to be provisioned. Some timeago Ziraat Bank faced a similar problem with the Agricultural SalesCooperatives, and it was paid TL3.3 trillion in securities by the Treasury.Table A5.3 shows the credits of Ziraat Bank to SOEs.
TABLE A5.3: Debts to Ziroat(TL miltion)
1988 1991990Cash Credits Guarantees on Cash Credits Guarantees on Cash Credits Guarantees on
Foreign Debts Foreign Debts Foreign Debts
Caykur 39,974 0 65,000 0 65,000 0Em.San.Gen.Mud. 12,075 0 a 0 0 0EBK 0 0 38,051 26,154 0 0NKEK 0 100 0 0 0 0ORUS 0 113,125 0 0 0 0PTT 73,317 0 0 0 0 0TPAO 0 305 0 0 0 0SEKER 13,9281 0 1,876,31 0 87,435 0TTK 0 2,384 0 0 0 0TZDK 49,580 0 61,771 0 50,054 0TARIM 37,190 0 59,104 0 51,857 0TEKEL 0 0 182,640 0 261,375 0TMO 758,171 0 926,413 0 1,451,227 512,887CITOSAN 13,987 1,538 0 0 0 0TDCI 15,707 2,023 0 0 0 0TDI 48,56?/ 0 40,45Y 0 3 ,5 16 0TEK 0 0 328,668 0 345,369 0TUPRAS 0 0 295,225 0 184,906 0BOTAS 0 0 0 0 0 0ASOK 25,000 0 22,543 0 12,763 0
TOTAL 1,044,786 117,094 2,171,092 26,154 2,570,634 512,886
Source: Ziraat Bank.
Notes: X Rediscounts.2 World Bank loans.
6 The Central Bank is forbidden by law from extending guarantees to SOEs.
Z This agreement is reflected in Article 45 of the 1991 budget.
- 117 -
8. In some cases, specific SOEs have borrowed large amounts from asingle bank. These loana exceeded prudential regulations aimed at decreasingthe risk of bank failureB associated with defaults by large clients. TheTreasury usually allows commercial banks to go beyond these limits on lendingto SOEf.
9. Loans to SOEs cannot be collateralized. According to Decree Law233, the real estate and the mobile and immobile assets of SOEs or of theirsubsidiaries cannot be seized. However, there are no statements in the lawconcerning the assets of affiliates. Hence, the commercial banks could askaffiliates for collateral on their lending. However, since they considerthese loans as carrying low risk, they do not do so.41 Some banks actuallyhave a preference for lending to SOEs, which then onlend the funds to theirsubsidiaries and affiliates. Normally banks do not provision for SOE loans.
10. The private commercial banks do not lend to a few SOEs that areconsidered particularly bad risks. TCDD and TTK are the moat important cases.TCDD is experiencing severe financial difficulties, due to the competitionfrom the trucking industry, and to overstaffing. Since TTK is not paid by itscustomers, most of them other SOEs, it cannot pay its creditors.
11. Central Bank Lending to SOEs. The Central Bank has extendedcredits to SOEs, in particular to THO and to SEKER. The principal on theseloans is about TL260 billion. TMO has two kinds of loans from the CentralBank. About TL900 billion are direct loans, and TL600 billion arerediscounts of Ziraat Bank's credits. The risk on the rediscounts is borne byZiraat Bank. TMO will continue to get financing from the Central Bank in1991, at the rediscount interest rate. Now financed through the SugarBank9s, SEKER will no longer receive credits from the Central Bank.
Guarantees on Foreign Loans
12. There are three types of external borrowing by SOEs: onlending,publicly guaranteed credits, and direct borrowing. Only the two first typesare of practical relevance, since SOEBs have not done a significant amount ofdirect borrowing. Onlending and guarantees by the Treasury are methods ofreplacing firm-specific risk by sovereign risk. Since the Turkish Governmenthas been giving a high priority to servicing foreign debts, foreign creditorssee these loans as carrying low risk. Accordingly, they have been willing toincrease their exposure to TurkiLh SOEs. Figure A5.2 shows the evolution ofthe foreign medium and long-term external debts of SOEs, onlending excluded.
of course, lending to private enterprises is collateralized.
2 The Sugar Bank is owned by cooperatives and by SEKER (10 percent).
- 118 -ANE_
13. Onlendina. Onlending of FIGURE A5.2fore..gn credits to the SOEs is done Medium and Long-Term External Debtby the Treaeury. The amountsborrowed appear as foreign debt inthe SOE's balance sheet before the 0umilllondue date. If the SOE does not repaythe loan by that date, the loan is 400 ..... .------.. . -X.- -
converted into debt to the Treasury.The interest rate on these arrears 30 ...._._._._was 30 percent per annum until April,1990, when it was adjusted to 60 000 .........percent per annum. By May 1991 theTreasucy had paid TL1.2 trillion to 1000
foreign creditors on account ofonlent credits for the current year.The expectation is that another TL1.6 0104 10" "s6 17 1066 1080 1o
trillion will be paid during 1991.
14. Guaranteed Credits. Guarantees on foreign credits to SOEs areextended either by the Treasury or by public sector banks. The main lendersare the IBRD, banks from Italy and France, and the German government. SOEsnever default on their guaranteed foreign loans. The Treasury pays them dutylosses or makes equity injections, so that they are able to service thesedebts. The Treasury never actually pays the creditors directly. In theGovernment's annual programming, repayment of foreign debts has top priority.TEK has 200 foreign loans, and it is the only SOB that has obtained guaranteedforeign credits in the last two years. Table A5.4 shows the foreign debts ofSOEs in TL million at the end of 1990.
15. Direct Borrowina. Direct borrowing by SOEs did not exist before1988. The amounts directly borrowed by SOEs from foreign creditors arerelatively small.
Arrears
16. SOEs unable to service their debts have been running arrears to avariety of creditors, including the Social Security Organization (TCDD), theTreasury (TCDD), commercial banks (Etibank, Stixmerbank), the Central Bank(TMO), and suppliers (TTK). Arrears to the Treasury relate to tax liabilitiesand to onlending of foreign credits to SOEs. The latter type of arrears,including interest, amounted to TL1.686 trillion at the end of 1990. Amongthe commercial banks, SOEs have arrears to EXIMBANK (see Box A5.1, Arrears toEXIMBANK) and Ziraat Bank.
-119- ANNEX E
Table A5.4: Foreign Debts of SOi6s at the End of 1990(TL million)
On-LendingY Guaranteed Total
MKEK 0 0 0SEKA 19,551 65,128 84,679TDCI 17,553 1,087,629 1,105,182CITOSAN 152,611 23,684 176,295ASOK 24,640 56,533 81,173ETIBANK 63,168 3,252 66,420TTK 39,258 2,907 42,165TKI 1,268,253 230,499 1,498,752TEK 3,267,747 7,322,109 10,589,856TPAO 338,160 243,339 581,499BOTAS 320,970 828,924 1,149,894IGSAS 20,388 0 20,388TUGAS 396,140 58,200 454,341TARIM 3,064 21,702 24,766TSEK 0 15,098 15,098TMOS 176,607 3,011,232 3,187,839TEKEL 0 0 0SEKERY 0 227,265 227,265YENSAN 0 0 0TZDK 0 0 0CAYKUR 0 0 0EBK 0 1,500 1,500TCDD 1,685,047 321,882 2,006,929PTT 1,113,989 801,130 1,915,119DHMI 43,722 0 43,722TDI 42,679 142,488 185,167GEMSAN 5,612 59,863 65,475TOTAL 8,999,159 14,638,934 23,638,094
Source: Treasury.
Notes:a Guaranteed foreign debt converted into TL debt
onlent by the Treasury.2 of this total TL1912402 million are owed to
Ziraat Bank, and TL657442 million are rediscounts.a Of this total TL101638 million are owed to Ziraat
Bank, and TL364781 million are owed to SEKERBANK,both credits were rediscounted at the Central Bank.
- 120 - ANNEX 5
*0K *5~ Ar;-rears to Wxiai*
ii n June991, SOEsS hiad T£L4& bililon of overdue paMMents to EXIMBANK. This i"s the: 4f laning -by the $tiat. Invetiient Bank, nhleh wa's 1ter` transformed into. the EXIMBANK. If an S4E.
e f:svisIe it; __A,t to EXU4iSAJd4at the end of the year the 4 .is4'eosheidied accordin.to market.,.; Y. dit.io. Hfigh ntty ti~tes are tp i`_id,W- dedits are short ter_,; If -n SOE refue. to servieitssatc* tW s:, R -JJnd the .re tils between EXINBAI.IC aid the SOV' 'top management.. If anjjgiwunat i nowt rechd, i xI takesegal actiin. lUsuially. At this point the SOE becoanes mrewang Sifito negottei2^. In somaease#, legal proceuires may continue.' These would allow EXIMBANK to takeINQ*IVIt5 n4 ni.nte rmdiat* 4o6d4, etlbank (Copper works) and S(imerbank are two O$s that had problomswith QX1J,I8A)4 *$C J.woere eentualy solved. ..>.¢ >.->
Subsidies
17. SOEs have been receiving payments that are, in fact, subsidies butare formally classified under other headings. IGSAS i3 the only SOE that hasbeen receiving explicit subsidies, although TCDD and the shipbuilding companyreceive "aid." The greater portion of the subsidies extended to SOEs arpformally classified as either "equity injections" or "payments for dutylosaes." Table A5.5 shows the different types of subsidies received by theSOEs.
Table A5.5: Subsidies to SOEs(Tt million)
1985 1986 1987 1988 1989 1990 1991L'
Equity Injections 135,752 36,000 280,000 663,900 1,024,075 873,800 5,739,000Aid 0 16,585 22,332 11,040 8,850 5,280 8,850Duty Losses' 44,988 102,000 165,600 349,560 190,275 378,000 1,239,000Subsidies3' 0 0 26,686 37,141 25,130 22,291 30,046Total 180,740 154,585 494,618 1,061,641 1,248,330 1,279,371 7,016,896
Source: Treasury.Notes:
X Program.2 Amounts accrued during the year. Amounts actually paid by the Treasury are typically
different.2 Includes only subsidies to IGSAS.
18. Ecnuitv Iniections. As seen above, most SOEs have been able toborrow from the public sector commercial banks. However, credit financing iscostly, as real interest rates have remained positive in Turkey during thelast decade. Equity financing should be equally coatly, in a market system,since investors would require the same risk-adjusted returns on their funds.The Turkish Government, wh"ich does not require such high returns, has been
- 121- ANNEX 5
willing to provide equity injections to SOEs. This gesture is a favorite wayof rescuing SOEs in difficulties. Also, SOEs that do not generate enoughretained earnings have been able to continue investing due to large equityinjections. An SOE that wishes to receive an equity injection applies to theHigh Planning Council. The High Planning Council consults with the Treasury.In most cases the Treasury opposes the injection, since it represents a fiscalburden, but, due to political pressures and to the need to keep SOEs afloat,the Treasury ultimately pays.
19. At the end of 1990, cummulative equity injections in SOEs amountedto TL22 trillion, but only TLll trillion had actually been paid. Theexpectation is that the Government will pay another TL3 trillion in equity toSOEs during 1991, so that, by the end of 1991 the Treasury will have paid TL14trillion.
20. Aid. As seen in Table A5.5, the amounts received by SOEs underthis heading have been relatively small. TCDD receives aid for maintenancefrom the Ministry of Transport. GEMSAN receives aid from the Treasury.
21. Payments for "tDuty Losses." Some SOEs had their prices controlledby the Government, or were required to undertake unprofitable activities.These SOEs have the right to claim comp4nsation for the consequent losses asstipulated in Article 35 of Decree Law 233. SOE claims for duty losses areaudited by the Treasury and by the concerned minister, and therefore paymentsare only made in the next fiscal year. The payments are calculated on a basisthat provides a 10 yercent markup over costs to the SOE. The Treasuryfrequently delays p jments; consequently it owes large sums to specific SOBSon this account. However, in the profit and loss statements of SOEs, dutylosses appear as claimed. Thus the profitability of SOEs is exaggerated,since the audited value may be less than the claimed value. Also contributingto this exaggeration is the fact that Treasury does not pay interest on itsarrears on duty loBS payments. Box A5.2 contains information about recentclaims and payments for duty losses.
22. Formal Subsidies. IGSAS is the only SOB that has been receivingcash subsidies from the Government. Some other SOEs receive interest ratesubsidies or buy inputs at subsidized prices. For example, TSEK, thestate-owned dairy company, is able to borrow at lower interest rates, ascompared with the private dairies. The ferrochrome and aluminum companies(subsidiaries of ETIBANK) purchase electricity at subsidized prices. Energyis also sold to the steel sector at subsidized prices. Producers in both theprivate and public sectors benefit from this subsidy, but the bulk of thegains go to the state-owned steel mills, which have a dominant position in theindustry.
- 122 - ANNEX 5
KK 025 RceitClam an %uets or Duty LseW, -'s . , .-. ,, .~~~94CCA i :f Ci
A:;Although most amoi*ts of du.t oses ae relatIvely sash, with th eixception of ma, the t ist below..S illustrative of the-pervaslv.ness.md discretion of the use.t of OEs for noncmwmercal duties.
* ( - ii WCt: 1989 this.0 aOty lOSses t . a wa7thi sinIeda M Tt2ObHbiftulossbt'W itwsaaded onlty V.17.7 bitllIo6n.'thi s $06uses hard:coal, which an be use "flrheating. thas :to sendthe usedcoat to certainregions 4t a prifce that is below' arket..
: : TELX Aording:to.1 l986b deore&saliirinun and ferroerhome produers should geta discount of 50percento n etectricityptices.. The duty. 16sses coipoensate fEK 1r tle subsidy.it extendato these; producers- kwich are Qs (stbsi4iaifes of ETWOANIkQ. on February 1990 these subsidies were removed..
yThe were einstated, but with a discourit of 40.percent instead of 50 percOnt on Octobr 8 190. Atthe.lei dof 1989 the stock of duty osses, due to TE6 was .7L26.7. btillion. .' mClTss in. 1990 was 1L42.8'.2.:.billio (TL,15.3 biltion :fromi 1/1/0 to 2/26/90 and :27.4 bilhIco from. ctober to Ceceiter 31, 1990).:Thdle: stock of duty losses e tO-TEK it the end of 1990 uias TL69.6 b1ilion. In 1991 losses wllt be muchlarger., snte prdcrs.ire usings ior nergy and last year there were subsidies onty for fouwr onths.
T in 1989 this 0 l ; illi on t of weat at $165 perton.n In- 199 it Is .gong toexP rtt3.3 *ilion tonsof weat;at $80 per. ton. TMHO:also purchased grain in 1990Gm the doeiticm;parkcet atthe t: of $18 per ton., TH140 must ,export to. beable to pay interest on loans. At the endf 1990 the stock dfdutt IQ$s@s de by Teasury. was.iTt1 tr-i Ilion. In 1991 the .treasuryis going
. .to pay TtO9lbitIon.wle .the xpected duty loss s TLJ.7 trillion 1991 TherWOis.no fnterest onTreasury arrears.- .. ; . = ..
i TWO -Althoughi aitway tariffs ia not controtd,this$0 receives paymentsk for- duty .losses,because is is f6rde to. keep- operati;ng iiprof itable lies. (about t2500. m ut of a total network of10000 .1.i cm0l).: In 1989 this .80 earned duty losses on:the Y1uount of 13.92 bilion. At the end of that yearthe .-tl#stock of iduty losses due by the Treasury to TCDQ was 1125 4 billion. In 1990.the lo5s ws 1191.2b;illion, en pa .nnts. 1 the treasury.awountedSg tqt1189.6 Sbilion .v
nl 1 ̀lDI5 Thisi $E operates two'uTpro4fable shipping ines The stok. of duty losses due by theTrea.sury ag end of; 1989 was n?37 billionan e loss in 1990 was TL183 bdtiono. the 5stock at thesnd o.f. 190was TL.5W9 nSS bitllio .. Its affitiat DE I0 Z NAKLIYATI , fri the buiness of transportihg: goods, opetes unprofitable lines to gomanla. The stock of:duty losses dze b the Tesasurg at the endof 1980isas'TL25 billion. n. 199O the tosses were 1120.9 .billion 1 :6 the Treasury paidTIl.1btillion; A TI0. billion loss:is expeted in 1991.
-;-<SEKERS. Its claim of L40 bill I for 1990, is being audited.
MAw. 19in 98 there. vas: a harvest1 s-thebtsof.farmrs -to this 90O had to be rescheduled without interest The loss in 190 was TLV bili1on in 1i0, and the: TrSasury paid Tt4.bi ltion.
BTAS. Due. to the Gulf Mar its operations had to stop. tThe Treasury paid It US5 million.
TEKEXpL. This $0 can also claim duty losses, but according to tiw 196, not according to' Decree Law. . 233, whihch other SOEs cite, 3O fer it has not received any duty losses payments from the Treasury.The stork due by the Treasury on aCcount at the end of 1990'was TtZ.6 trillion. A loss of Tt2.4..trillion is expected in1991. The T9reasury expects to pay 1800 billion ri 1991.
-123 ANNEX 5
Low Return on Ecruitv
23. Many SOEs that make FIGURE AS.3accounting profite are not profitable Return on Equityin the economic sense. That is,theme SOEs have earned low returns onequity. In some cases, profit andloss statemnents show positive butsmall profits, insufficient to oadequately remunerate the -4 ...............shareholders' equity, as measured bythe SOE's book value. Other SOEs ...
seem to earn high returns on equnty ...but in fact do not. The book valueof their aBSets severely -20 ........................................
underestimates the corresponding - 5 _. _____________-
market value. If equity were 2se 1Sao l98 Vol91
revalued to reflect this high market s.urea.nw. ardI"DVa io.ItWon.
value of assets, the returns would socw:V PV@
show to be inadequatelY. Boththese types of SoEs are notprofitable in the economic senses if the opportunity cost of capital wasproperly accounted for, total costs would exceed revenues. As shown in FigureA5.3, the aggregate returns on equLity of the SOE sector have been declining.Table A5.6 shows the return on equity SOE in 1990. Several SOEs have negativereturns, a multiple of the value of their equity.
HonoDol, Power
24. SOEs that currently enjoy monopoly power in the domestic marketare PTT, TEK, SEKER, TCDD, TDI, and DHHI. Until recently TELEL was also amonopoly. The moncpolistic positions of these SOEs allowed them to earnprofits, or at least helped hold their losses to a minimum, although they wereplagued by such problems as overstaffing, mismanagement, and politicalinterference. Some other SOEs that are not monopolists also have some marketpower!ll. Thus, they are protected from foreign competition by tariffbarriers. Annex 1 (see Table A1.15) already indicated that some SOEs havebeen charging substantial premiums above international prices.
Lo TSEK is an example, although its returns on equity are quite low, Itmakes accounting profits, but probably is unprofitable in the economic sense.TSEK's plant is located in Istanbul, so its transportation costs are very low.However, the market value of the land where the plant is located is very high.If the opportunity cost of the land were accounted for, TSEK would be makinglosses, or equivalently, it is not making adequate returns on equity.
-U PETKIM, for example, enjoys a dominant position in many markets forchemical products.
-124 ANNE-S
TbtLe AS.6: SOEs' Returns on Equity in 1990
MKEK -1.65XSEKA -8.55XCITOSAN -3.43XTDCI -105.81XASOK 11.20XORUS -2.62XETIBANK 17.75XTTK -758.31XTKI 9.46XTEK -7.04XTPAO -14.01KBOTAS 23.16XDITAS 21.45XPOAS 38.23XTUGSAS -99.06%IGSAS 15.11KSEKER -4.05XEBK 6.80KTHO 3.18KTSEK 75.12KCAYKUR -117.74XTEKEL 58.19XTARIM -26.56KYEMSAN -561.55KTZDK 16.41XDM0 21.19KTCDD -29.02%PTT 17.49XDHMI 47.67XGEMSAN -35.76KTOI 6.67X
Source: Treasury and IBRO calculations.
25. T_T. This SOE undertakes eeveral activities, from traditionalpostal and telephonic services to telecommunications. While the Governmentmay wish to keep some of the most traditional activities within the publicsector, many of the activities related to telecommunications can be spun offand privatized. In particular, three areas can be liberalized: mobiletelephone services, satellite communications, and data transmission services.Traditional postal services can be gradually spun off to the private sector,or entry may be allowed.
26. PTT may also need restructuring. There is no clear advantage inhaving postal, telephone, and telecommunications services provided by a samecompany. The new telephone company could then be split along regional linesto generate some competition. PTT or the new companies will need to beregulated. Independent regulatory bodies should be established to deal withsuch issues as pricing, quality of services, competition, etc (see below).
27. M. This SOE has a monopoly on distribution, and it is the mainproducer of electricity in Turkey. Economies of scale in distribution createa natural monopoly, but generation should be further opened to competition.Electricity prices in Turkey have been in line with prices charged inneighboring European countries. Like those countries, Turkey is not a large
- 125 -NEX 5
producer of energy, and is a net consumer. Since TEK is one of the SOEs thatis likely to remain in the public sector, at least for some time, it needs apricing system. Ideally, prices ehould reflect long-run marginal costs, butoptimal pricing may not be implementable for practical reasons (see below).At any rate, tariffs should be differentiated by region and time of day.Currently, pricing decisions are made by the Ministry of Energy and areheavily influenced by political considerations. An independent agency shouldbe established for the purpose of regulating energy provision. Tt should dealwith such issues as pricing (including cross-subsidization prevention),quality of services, competition, etc. (see below).
28. SEKER. There are no economic grounds for maintaining a monopolyin the production and distribution of sugar. So SEKER should be broken intosm3ller companies that should compete with each other. But once this isdone, these companies should be privatized.
29. TCDD. Although this SOE has a monopoly on railway transportation,it faces stiff competition from the trucking industry, which has much lowerlabor costs. While TCDD is enormously overstaffed, truck drivers workovertime and do not earn benefits. TCDD should, therefore, restructure, shedexcess labor and unprofitable lines, and concentrate on the large-scaletransportation of materials for such industries as steel or mining. These arethe only activities where TCDD may be considered to have some market power,and where price controls may be needed.
30. TEKEL. This SOE had a monopoly in the production, manufacturing,and marketing of tobacco products and hard liquor. This monopoly wasliberalized in June, 1991; currently any domestic or foreign firm can produce,import, or distribute these products.
31. DHMI and TDI are the airport and port authorities, respectively,with the latter also operating passenger and cargo shipping lines. There areno good economic reasons to maintain these companies in public hands. In themedium term, privatization is a viable option, although for airport and portadministration a strict regulatory framework needs to be established to avoidexploitation of rents and ensure adequate quality of services. The presentunprofitability, especially of TDI, results from interference in itsoperations.
Leaal Constraints_on Exit
32. It is remarkable that no SOEs have been liquidated. The HighPlanning Council has the power to close them down but has not exercised it,even in cases where liquidation is clearly indicated, such as TTK. Creditorsare also unable to take SOEs into bankruptcy, since there are no provisions in
- 126 -
the legislation that would allow for the bankruptcy of SOEs. Also, the assetsof SOEs and of their subsidiaries cannot be seized by creditorsa.I.
B. Regulation of SOEs Remainina in the Public Sector
33. In the long run, most SOEs should be liquidated or privatized. Inthe interim, TER, PTT, TDI, DHMI, and TCDD could remain state owned, althoughpartial divestiture should not be excluded. These SOEs, or parts thereof, aremonopoliesLI. Monopolies in the private sector have to be regulated forthe sake of economic efficiency. Whether state-owned monopolies also needregulation is an ongoing issue.
34. Conceivably, monopolies in the public sector would not need to beregulated, since managers could be directly instructed to act as A regulatedmonopolist. Unfortunately, due to agency problemsiA in enterprisemanagement, this simple solution may not be optimal. Managers of SOEs shouldbe instructed to achieve well-defined objectives and should be accountable forthe outcomes of their decisions. Just to instruct them to act as a regulatedmonopolist, or even to equate prices to long-run marginal costs, w4ould notsuffice. Lack of information would preclude adequate evaluation of managerialperformance if such instructions were issued. Giving managers clear-cutobjectives would also minimize the possibility of political interference inthe decision-making mechanism at the enterprise level. It might be better totell SOE managers to maximize profits and evaluate them according to thefinancial performance of their enterprises. But in this case, like any otherprofit-maximizing monopolist, SOEs would have to be regulated. The existenceof SOEs that are natural monopolies, therefore, poses a difficult problem tothe Government. Attempting to directly run the monopolies with the objectiveof welfare maximization would lead to low efficiency due to agency problemsand political interference. Instructing managere to maximize profit requiresregulation, which is inherently imperfect. Regulation also renders tneevaluation of managerial performance more difficult. The choice between thesetwo options is a difficult one.
3- The assetB of affiliates can be seized. In practice commercial bankslend to SOEs, which then onlend to subsidiaries and affiliates. This practiceis acceptable to the banks because they perceive that credits to SOEs will beguaranteed by the Treasury.
a One must be careful not to be overly rigid when classifying an industryas a natural monopoly. Technological changes may eliminate the economies of scalethat create natural monopolies. Also, the output of what may be considered anatural monopoly frequently consists of a bundle of products or services, someof which may be produced competitively.
14 Agency problems involve a principal (e.g., the owner of a firm or theGovernment) and an agent (e.g., the firm's manager). The principal does not havefull information about the agent's circumstances and behavior. So the principalhas to devise an incentive scheme to induce the agent to act in the principal'sinterests.
- 127 -NEX 5
General Issl es on Reaulation
Agencies
35. Regulation should be performed by independent agencies -hat do nothave an ownerahip role in the industry they are regulating. Public ownershipdoes not invalidate this proposition because it is prone to agency problemsand political interference. Hence, even in a transitory period, if the statecontinues to own and operate some of the monopolies, regulation should be putin place.
36. Regulatory agencies should be sector specific, staffed withcompetent people, and have as their objective the increase of welfare throughthe pursuit of efficient resource allocation. In the case of Turkey it may beuseful to draw on international expertise, at least at the beginning. Itshould be emphasized that the quality of regulations is important because itwill influence the behavior of the firm it intends to regulate. The wayprices are regulated, the time elapsing between revision of prices (regulatorylag), and the type of information the agency uses to set its price and qualitystandards are key inputs into the firm's decision on how much to invest and towhat degree to pursue innovations.
37. In the United States, for example, most regulatory agencies haverelatively vague mandates, leaving commissioners with significant discretionand opening up opportunities for pressure group lobbying. Clearly, regulatoryagencies should avoid becoming captured by the interest of a particular group.Although, with respect to pricing there are sufficiently large offsettinginterests (e.g., commercial buyers, politicians) there is some concern aboutregulation of entry into the market. Effects of entry restrictions onconsumers are less visible than effects of price fixing, and the nature of thenatural monopoly implies that efficiency will be achieved when goods andservices are produced by a single firm. Producers may use this argument(apparently in the public interest) to obtain entry restriction. Among thereasons in favor of making entry as free as possible are the following: (a)if the existing producer is efficient it is unlikely to be vulnerable to entrythreats; (b) technological progress and the inherent difficulties ofestablishing in practice whether an industry is a natural monopoly make itrisky to restrict entry since it may be more efficient to have severalsuppliers; and (c) removing entry threat may lead to a loss of incentives forproductive efficiency and innovation.
Pricina
38. If a natural monopoly does not operate under increasing returns toscale, long-run marginal cost pricing is the appropriate rule because it willallow the firm to break even. Even so, there are problems with this rule interms of definition, monitoring, and the time horizon over which the rule isapplied.
39. If industries are subject to increasing returns, which are oftenassociated with natural monopolies, long-run marginal cost pricing will not
-128 - ANNEX 5
allow the industry to break even; thus, subsidies would be required. Thisoutcome would make it difficult to assess managerial performance. In theliterature, Ramsey pricing is often proposed as a second best solution.Ramsey pricing is the result of optimizing the firm's problem under aconstraint to break even or to generate some profits while taking into accountthe income distribution effects of charging a higher price to consumers.Unfortunately, to induce Ramsey pricing, the Government (or the firm) wouldrequire a large amount of information (income elasticities, cross priceelasticities of substitutes, etc.) that is difficult to obtain.!J/
40. Practical regulatory mechanisms do not have strong optimalityproperties, and they are subject to strategic manipulation by the regulatedenterprises. In Britain the so-called RPI-X!' method has been frequentlyadopted. This system imposes a ceiling on the average price that can becharged by the firm. The ceiling is periodically revised. More specifically,the scheme requires the regulated firm to "set tariffs so that the price indexfor a basket of its services increases by no more than the rate of generalprice inflation minus X percent annually."IZI There are severalconsiderations to be made before choosing a method of monopoly regulation.The most important criteria to be met are the following:
(a) Protection against monopoly. The scheme should prevent themonopolist from using its market power to increase prices andrestrict output.
(b) Efficiency and innovation. The scheme should provide incentivesfor internal enterprise efficiency and should not discourageinnovation.
(c) Burden of regulation. The scheme should not impose excessiveinformational and administrative burdens on regulators.
(d) Promotion of competition. The scheme should foster competitionand prevent the monopolist from deterring entry.
(e) Proceeds and prospects. The scheme should maximize the net valueof the monopolist (or equivalently, the proceeds from its sale)and enhance its commercial prospects.
.5 There are also two technical difficulties associated with implementingeither one of these two pricing schemes. First, assigning costs to specificactivities may be almost impossible. Second, there may be costs associated todifferentiating prices across activities or services.
0 RPI - X stands for Rate of Price Inflation minus X.
17 see J. Vickers and G. Yarrow, Privatizations An Economic Analysis(Cambridge, Mass.: MIT Press, 1989).
- 129 - ANNEX"5
41. These sometimes conflicting objectives must be weighted when choosinga method of monopoly regulation. Table A5.7 ehows a ranking of severalmethods of regulation, according to a well-known study.M8 The Maximum Rateof Return (MRR) method gives a rebate to consumers in case the rate of returnin an activity exceeds an allowed rate (5 to 7 percent). The Output RelatedProfits Levy (ORPL) method gives output related tax rebates to the monopolist:the higher the output level, the less taxes paid.
Table A5.7: Ranking of Schemes for Regulating British Telecom's Profitability
Criteria No MRR ORPL Profit RPI - XConstraints Ceiling
Protectionagainst monopoly 5 3 2 4 1
Efficiencyand innovation 1 4= 4= 3 1=
Burden of regulation 1 5 4 3 2
Promotion ofcompetition 1 5 4 2= 2-
Proceeds and prospects 1= 4 5 3 1=
Source: Vickers and Yarrow, "Privatization: An Economic Analysis,"NIT Press, Cambridge, Mass., 1989, p. 207.
Quality of Services
42. There is a variety of forms of intervention that are necessary toguarantee the high quality of services. Some are related to the commonsproblem. There is a commons problem when there is free access to a scarceresource, so that agents do not internalize social costs. The outcome is theoveruse of the resource. This problem is particularly important in the areaof telecommunications.i9
43. Regulation is also necessary to prevent the exploitation ofmonopolistic powers through decreases in the quality of services. Thismeasure becomes a particularly important issue where prices are regulated.Since the issus of quality of services is so important to consumers, theservices should have representation in the agency regulating their quality.
18 S. Littlechild, Regulation of British Telecommunications'Profitabiliy, (London: HMS0, 1983).
19 For example, if the Government failed to properly assign radiofrequencies to operators, a chaotic situation would develop, and the outcomewould be a less effective flow of radio communication.
- 130 - ARN_EX
Competition
44. Regulation may also play an important role in promotingcompetition. Following are three main areas where regulation may be needed:(a) to prevent entry deterrence by incumbents, (b) to limit the activities ofmonopolies in networks and vertically related markets, and (c) to establishyardstick competition.
45. Prevention of Entrv Deterrence bv Incumbents. Large monopolistsmay use their market power to deter entry. In the case of a natural monopolythis occurrence is not a problem, since in this case it is optimal to have asingle firm in the industry. However, due to the fast pace of technologicalchange, large firms may lose their cost advantages in a short period of time,and lose their condition of natural monopolies. In such occasions the entryof new competitors becomes desirable. Regulation should ensure that entry isalways possible, so that monopolists continually face potential competition.
46. Limitation of Activities. In some industries several disti.cteconomic activities are required to supply the final product to consumers.Examples are the gas, electricity, transportation, and telecommunicationsindustries. In these industries competition is usually more feasible in someactivities than it is in others3A0 Ideally, there should be a monopolyonly in those activities that are natural monopolies. The problem is that thedominant position of the monopolist in an activity frequently gives it anunfair advantage in the other activities. This provision makes it easy forthe monopolist to thwart competition in the related activities.' Thereare two ways of dealing with this problem: vertical separation andinterconnect rulings. Vertical separation consists simply of prohibiting themonopolist from operating in the related sectors. Interconnect rulingsstipulate the terms of the relationship between the monopolist and the relatedsector.
47. Yardstick Competition. Yardstick competition may be used togenerate information about regulated firms. For example, a nationalmonopolist may be split into several units that would operate ingeographically distinct areas. If cost and demand conditions are similar inthe different areas, then the price that a monopolist would be allowed tocharge in one area would depend on the costs in the other areas.
20 For example, competition in long distance telecommunications ispossible, but there is still a natural monopoly in local networks in manycountries. However, technological advances (mobile phone) are increasinglybypassing the local network and are watering down (if not abolishing) the localmonopoly.
21 For example, there is no technological basis for a monopoly inelectricity aeneration (as opposed to transmission, which is a natural monopoly).However, a monopolist ih transmission who is also an electricity producer mayattempt to prevent competition from other producers.
- 131 -NEX 5
Regulation of PTT and TE
48. The two main SOEe that should remain state owned and have naturalmonopolies are PTT and TEK. They must be regulated, according to the generalprinciples just outlined.
PT-T
49. PTT is a multiproduct firm, and in a first stage, postal servicesshould be separated from the rest of the company. Next, privatization in theform of liberalization of competition and regulation are required. For postalservices, segments of the market may be opened up for competition from theprivate sector. Parcel post is one of the areas where many other countriesalready allow private sector activity.
50. For the telecommunications part of PTT (including telephone), adistinction should be made between monopoly-related activities and those thatare not. The supply of terminal equipment should certainly be provided undercompetitive conditions. To some extent, this activity is already taking placein Turkey. In this area the issue of attachment to the rest of the system(i.e., the networks) must be regulated so that fair competition is possible.PTT or its successors should be prevented from controlling this part of theactivity and from favoring one supplier over another.
51. Running of telephone networks, at least locally, is a naturalmonopoly, although technological progress (cellular phone) could lead toeffective competition by altering the cost conditions of the industry. Longdistance transmission (the so-called trunk lines) do not necessarilyconstitute a monopoly. For natural monopolies a regulatory framework mustimpose service standards, a pricing rule, and measures to foster competition.
52. In restructuring the telephone and telecommunications part of PTT,potential competition should be the guiding principle. The restructuringshould take place before ownership is transferred to the private sector inorder to avoid the problem of a dominant firm (as is the case with BritishTelecom). Splitting the company in regional units (e.g., AT&T in 1982) hasoeveral advantages, among them are the following: (a) it reduces the dangerof anticompetitive behavior due to size; (b) it provides information aboutcosts and efficiency from different sources; and (c) it stimulates competitionin related markets.
TER
53. Competition in the electricity sector is significantly distortedby the presence of TEX. Although there is moderate private sectorparticipation in generation, TEX control. the market and owns the distributionnetwork. TEK's financial difficulties, its use for infrastructuredevelopment, and its close relation to the central government --- combinedwith political interference in electricity pricing --- make the sectorunattractive for private participation. Private suppliers have been demandingsome guarantee. and preferential right., such as monopolies on localdistribution, thereby lowering overall economic efficiency and welfare.
-132 - ANNEX 5
Hence, before improvements in efficiency can be pursued by furtherliberalization and regulation, TEK' difficulties need to be sorted out.
54. The electricity industry can be split into four parts:generation, national grid, local grid (marketing and distribution), andcontracting, and appliance marketing. Given current technology transmission,
grids can be defined as natural monopolies. Whether in public or private
ownership, they should be regulated. There is a case for separating localdistribution from the national grid and establishing independent localdistributors. Such a step allows yardstick competition among distributors andenhances tho prospects for competition in generation and related services.
For the same i:eason it would also be desirable to separate generation andtransmission. While e3ontracting and appliance marketing can be provided under
competitive conditions, generation will require some form of regulation to
ensure safety, an adequate level of investment, and conservation of theenvironment. Prices of electricity Aeed not be reguilated, and the provision
to allow large commercial customers to negotiate directly with suppliers would
enhance competition. Under the present circumstances, however, electricityprices will have to be regulated as long as TEK, or units thereof, are unable
to compete with the private sector on a level playing field.
C. Alternative Methods of Achievinci NonCommercial Objectives
55. Some of the distortions observed in the SOB sector arose because
the Government used SOBs to attain noncon1 nercial objectives. In particular,
the Government forced SOEs to employ excessive numbers of workers, and usedTMO as an instrument to stabilize grain prices and to keep food prices low.
However, these policies contributed to the SOE sector's huge deficits which
are threatening to destabilize the economy. They are, at this point,counterproductive, since the fiscal and monetary measures needed for
stabilization would lead to a decrease in employment and could lead to a fallin agricultural and other incomes. The three objectives of (a) reducing
unemployment, (b) stabilizing agricultural prices, and (c) providing adequate
nutrition to the poor can be achieved by other means. Hence, Governmentintervention to force SOEs to keip excess labor and the use of TMO as a policyinstrument should be phased out by restructuring labor and rationalizing the
implementation of agricultural support policies.
56. Probably the best way of ensuring a high level of employment is to
maintain the rhythm of accelerated growth of the 1980s during the 1990e.
support measures, such as the enhancement of training programs, etc., may also
be helpful. But most active employment promotion measures tend to be
counterproductive. on the other hand, there is a real problem ofoveremployment in SOEs, and it needs to be dealt with am soon as possible. A
redeployment program for SOB workers ohould be implemented.
57. Agricultural price stabilization can be achieved by a system offlexible tariffs. The advantage of such a system is that it generatesrevenues for the Government. The poor can be protected from the resulting
price increases by a eystem of targeted subsidies.
- 133 -ANNEX -
Redeployment Program-W
58. Although no detailed estimates have been made, more than one-thirdof the labor force in SOEs appears to be redundant. Of these, about 100,000workers are in enterprises that should be liquidated, and the remainder are inenterprisee that are viable but need to be reconstructed or privatized. Theredeployment program would help smooth out the transiticn of these workers toother occupations or to retirement. It would contain several compnnents,including the following:
(a) job search and training counseling;
(b) a retraining program, which would facilitate the transition ofworkers to other jobs;
(c) a microenterprise creation program, which would absorb displacedworkers --- including credit and training components; and
(d) severance compensation enhancement, which would complement theregular unemployment insurance and severance payments for specificgroups of workers.
Agricultural Pricino Policy
59. Government intervention in the grains market has two objectives:supporting producer prices and keeping consumer prices low. TMO is the mainvehicle of these policies. It purchases grains from farmers at or above fixedminimum prices and sells the grains to processing units at a lower price. TheTreasury compensates THO for duty losses. Producer prices have remainedapproximately constant, when compared with other domestic prices. That is,they have increased at approximately the inflation rate. The (negative)percentual margin between producer and consumer prices has also remainedapproximately constant. Hence, the profitability of TMO has been a functionof international market prices. Turkey is marginally self sufficient ingrains. In years of bad crops it has to import grains. TMO may profit orlose from these imports, as international prices may be below or abovedomestic consumer prices. The system is effective in stabilizing bothproducer and consumer prices inside Turkey, but it is rather costly to theTreasury. Table A5.8 shows the budgetary transfers to TMO. TMO has also madesome costly mistakes. In 1989 it imported 5 million tons of wheat and othergrains at the then current international price of US$165.00 per ton. Theseimports were supposed to compensate for a shortfall in domestic supply causedby a drought. However, the severity of the domestic shortfall had beenoverestimated, and in 1991 THO exported most of the grain at a price of US$81per ton.
32 See also Annex 6.
- 134 -
Lts. _AJf: Budgetary Treif*rs to TMO(mfllion TL)
Year 1985 1986 1987 1988 1989 1990 1991
Equity 0 0 0 26680 0 0 2076550
Duty loss 0 22000 2Z000 111320 22500 167200 309750
Total 0 22000 27000 138000 22500 167200 2386300
Source: Treasury.
60. An alternative system based on free competition between tradingcompanies and on targeted subsidies could increase efficiency and reduce theburden of grain price support. Thus, TMO's monopoly would be eliminated andfree entry should be allowed in grain trading. A system of flexible tariffs(which could conceivably be negative, i.e., import subsidies) would then beimposed. The tariff system's function would be to stabilize domestic producerprices. Domestic consumer priceo would increaoe with the elimination of thenegative wedge between producer and consumer prices. The poor could beprotected by a system of targeted subsidies (e.g., food stamps). The systemwould be more efficient because the private trading companies, free frompolitical intervention and facirj the realities of competition, would be ableto purchase grain at lower prices abroad. It would be loss of a burden on theTreasury since the subsidies would be targeted..
D. Conclusions and Reconyaendations
61. stimulating competition in the Turkish economy can best be done byprivatizing the majority of the SOZ. Some of them are unlikely to be viablein an environment where the hard budget constraint holds; thus they will haveto be liquidated. Few Soto should/could be maintained in Government hands.These enterprises are monopolies; they supply essential services, and theycannot be allowed to close down. Hence, two conclusions follow:
(a) Although it would be highly desirable to impose strict financialdiscipline on these SOEs, their very nature prevents them frombeing liquidated or taken over by the creditors (other than thestate). However, their monopolistic position should ensure thatthey remain profitable.
(b) Management of retained SOEs should be instructed to maximizeprofitc, subjeot to a propsr sot of industry-specific regulations.The Government should negotiate contracts with these SOEs, as itd:ex with any private supplier, in order to protect theprofitability of the enterprise and to enable performanceevaluation and sanctioning.
62. If the Covernment cannot move quickly on privatization andliquidation of most SOle, then at least tight financial discipline should beimposed. More specifically, the following steps should be takens
- 135 -
(a) The Treasury should make it clear to the commercial banks thatonly those loans to SOEs carrying exolicit guarantees would beguaranteed.
(b) The practice of extending explicit or explicit subsidies to SOEsshould be gradually discontinued. The process should be made moretransparent. -or this, equity injections should only be madewhere the expected rate of return is attractive.
(c) Performance indicators should be developed so that triggermechanisms can be established. Thus, bad financial performance(including the accumulation of arrears) should lead to automaticactions, including replacement of management, and, as a measure oflast resort, liquidation.
(d) Trade barriers should be lowered, and competition should befostered so that inefficient SOEs will not be able to enjoymonopolistic positions that are not justified on technologicalgrounds.
- 136 - AI6
STATE-OWNED ENTERPRISE SECTOR REVIEW
ANNEX 6
Labor Issues and Social Safety Net
- 137 - MEiJLA
STATE-OW'NED _NTRPRS REVIEW
Labor Issues and Social Safety Net
Table of ContLe_ts
Pace No.
A. Introduction . . .... . . .. . ....... 138
B. abor Policies ........ ....... ..¢ ... 139
Wages, Salaries, and Benefite . ............ 143
Trends in Personnel Expenditure and Wages . 144
C. Labor Re9tructqiM-f ............. ....... ........ * .......... 149
Dismissals and Severance ........................ . . 150Social Safety Net . .,. . ........... 154
Income Support Measures .......... ....... 155Employment Services .. ......... 0. 159
Training and Employment Generationi ........... ..... 162
D. Regional Impact ............. ... .O ... . *.......... . . 164
E. TerMs of nditions of Emulovma in Restructurimg SQNg... 165
F. Recommendations ............................... .O .... . 166
List of Tables
Table A6.1 Emp3- nt in SOEs by Category ...................... 139
Table A6.2 Indices of Total Employment by SOE ................. 142Table A6.3 Evolution of Total Employment by Category .......... 143
Table A6.4 Distribution of Total Expenditure by Categoryr.... 145
Table A6.5 Average Personnel Expenditure by Category .......... 146
Table A6.6 Average Personnel Expenditure by Category ......... 147
Table A6.7 Average Wages by Category ....... ............. 148
Table A6.8 Average Real Labor Cost in Total Public Sector SOEs 148
Table A6.9 Average Hourly Wages in Public and Private SectorManufacturing ..................... ... . ........ . 149
Table A6.10 Cost of Severanc PaY ...... 5...3............. 153
Table A6.11 Total Amount of Income Support ..................... 156Table A6.12 Average Cost of Income Support Worker e 157
Table A6.13 Cost of Severance and Income Support per Worker .... 160
Table A6.14 Regional Distribution of SOB Employment 1985 ....... 165
- 138 - ANNEX 6
TURREY
STATE-OWNED ENTERPRISE SECTOR REVIEW
LABOR ISSUES AND SOCIAL SAFETY NET
A. Introduction
1. The existing employment regime in SOEs suffers from the followingproblems:
(a) Higher level staff are civil servants with pay and promotionbased on noneconomic criteria and lifetime guaranteedemployment.
(b) Contract employees are not compensated on the basis ofeconomic criteria.
(c) The level of employment of workers and their wages aredetermined through uniform collective bargaining with acentralized government agency, outside the autonomy ofmanagers and independent of the performance of theindividual SOE.
(d) The level and trend in employment suggest that there may besignificant overstaffing.
(e) While the evidence is not unambiguous, it appears that payin the public sector (at least for workers) is higher since1990 than in the private sector.
(f) Real wages in the public sector have risen faster thanchanges in labor productivity over the last two and halfyears, and faster than their private sector equivalents.
2. All components of the sector reform program will require asignificant amount of labor restructuring. Trade unions can be expected tooppose the program and attendant dislocation, income losses, and unemployment.To make the program socially acceptable, the Government will have to addressthese issues upfront by establishing a social safety net. Aside from thepayment of severance to workers, a legal obligation, the Government shouldanticipate providing temporary income support, employment services, andtraining to retrenched workers. Severance pay and income support might costup to US$3.8 billion in a two-year program, under reasonable assumptions.However, the program is estimated to save at least US$1.6 billion in personnelexpenditure per year. The other components of the safety net will alsoengender fiscal outlays, but they will also generate savings as less incomesupport will be needed if workers find new jobs faster. If properly designedand implemented, employment services and training will more than pay forthemselves.
- 139- ANNEX 6
3. This annex provides a detailed analysis of these issues. It starts
by discussing the existing employment situation. Then it describes severance
pay, income support, regional impact of reform, and future labor policies in
retained SOEs.
B. Labor Policies
Employment
4. Categories of EmPloynment and Leaiolative Provisions. SOEs employed
an estimated 596,180 people in 1990. This number represents 3.1 percent of
the civilian labor force, 3.5 percent of civilian employment, and 6.7 percent
of nonagricultural civilian employment. There are five categories of
employees in SOEs: civil servants, contract employees, unionized workers,
nonunionized workers, and temporary workers (see Table A6.1).
Table A6.1: Effployment in SOEs by Category (1990)
SOE Civil Contract Workers TotaLServants Employees Unionized Nonunionized Temporary Total
MKEK 858 3273 10526 0 0 10526 14657SEKA 118 1742 9546 0 0 9546 11406CITOSAN 154 1592 7490 0 472 7962 9708TDCI 675 3225 23133 0 784 23917 27817ASOK 0 0 1899 691 3 2593 2593ORUS 335 560 2937 0 600 3537 4432ETISANK 168 6946 19070 595 74 19739 26853TTK 100 2633 34349 0 0 34349 37082TKI 530 3901 27855 0 0 27855 32286TEK 997 23474 48839 113 0 489S2 73423TPAO 0 1534 7344 1360 0 8704 10238BOTAS 0 2 998 477 360 1835 1837DITAS 0 0 0 170 0 170 170POAS 275 2267 4992 599 0 5591 8133TUGSAS 44 143o 4036 0 437 4473 5953IGSAS 0 0 602 106 0 708 708SEKER 1449 3357 12589 0 12954 25543 30349EBK 464 1123 3928 0 1345 5273 6860TMO 1849 4961 1152 0 0 1152 7962TSEK 423 314 1013 0 0 1013 1750CAYKUR 392 1275 1611 0 11121 12732 14399TEKEL 1491 4678 35604 0 8351 43955 50124TARIM 783 676 5902 0 2322 8224 9683YEMSAN 164 513 924 0 75 999 1676TZDKI' 2831 815 2657 0 479 3136 6782DW0 208 906 680 35 0 715 1Q29TCDD 9538 18899 26777 0 4309 31086 59523PTT 2844 86624 431 0 18359 18790 108258DHMI 51 3749 0 0 277 277 4077THY 0 1137 6462 294 760 7516 8653GENSAM 0 1 3457 525 820 4802 4803TDI 0 1 11450 480 225 12155 12156
TOTAL 26741 181614 318253 5445 64127 387825 596180Percent of Total 4.5 30.5 53.4 0.9 10.8 65.1 100.0
Source: SPO and Treasury.
Note: -' Discrepancies between date sources required an upward adjustnent of Treasury data usingSPO/Treasury ratio of 1989.
- 140 - ANNXZ 6
5. Civil servanto who are permanent Government employees allocated toSOEs, account for 4.5 percent of total employment. Under their terms ofemployment set out in Decree Law 657, they are guaranteed tenure, except foroffenses against discipline or conduct rules. Under existing legislation theycannot be diomissed or retrenched for economic reasons. Decree Law 399effective from January 1990 enabled civil servants in the higher grades, inboth government service and the SOEs, to be given contracts that could pay upto six times the equivalent maximum civil service salary, while retainingcivil service status and the employment guarantee.
6. Contract employees are now noncivil servants employed on a 12-monthcontract, and they can be dismissed or their contract not renewed at the endof their contract period. In 1990, 30.6 percent of the total employees werein this category. The proportion in individual SOEs varied from none in ASOKand DITAS to 80 percent in PTT and 92 percent in DHMI. A number of posts(often the more senior and higher graded posts) in SOEs have been filled bycivil servants employed under Decree Law 6571 they, therefore, have been paidcivil service rates of pay.
7. Decree Law 233 of 1984 allowed SOEs to employ people on a contractbasis. It also determined the terms and conditions of employment ofexecutives and similar grades in SOEs. In January 1985, the Governmentguaranteed civil service rights to civil servants moving to contracts. DecreeLaw 233 was amended in January 1988 to allow civil servants to change fromcivil service terms and conditions to contract employees. Many did so toobtain the higher rates of pay available to contract employees. However, theHigh Court subsequently ruled this practice unconstitutional based on Article128 of the Constitution, which reads as follows:
"The funcamental and permanent functions required by the public services that the State, state economicenterprises and other public corporate bodies are assigned to perform, In accordance with the principles ofgeneral administration, shall be carried out by public servants and other public employees....@
The requirement that certain functions be carried out by public employees (orcivil servants) means that those performing these functions must be civilservants within the coverage of Decree Law 657, which provides them withemployment security. It also means that civil servants who had transferred tocontract statuo will not under the then existing legislation (Decree Law 657)be allowed to receive the higher pay from contracts; instead they will be paidunder the normal civil service provisions of Decree Law 657. Six monthsnotice of this decision was given, and the ruling became effective in January1990. The Government introduced Decree Law 399 effective from January 1990 todeal with the consecpiences of the High Court's ruling.
8. Decree Law 399 provides for two different types of contractemployees with annual contracts. First, there are the civil servantsreferred to above. Second, there are other ponts in SOEs that can be filledby noncivil servants on a contract basis. These people have no employmentguarantee beyond their annual contract. As a consequence of the marked shiftfrom civil service to noncivil service contract status, there are nowrelatively few civil servants employed in the SOEs. In August 1991 the High
- 141 -
court of Justice also ruled contracts of this nature illegal, citing abuses asthe main reason. It is too early to see the implications of this decision.
9. Workers in SOEs are employed under the general labor legislationof Law 1475, which applies to private sector companies as well as SOEs. Inthis report this category of workers is referred to as "unionized." They canbe dismissed, and they are entitled to compensation through seniorityseverance pay, based on length of service. In 1990 they accounted for 53.4percent of employment, although none were employed in DITAS and DHMI, and only0.4 percent were employed in PTT. While these workers can be dismissed, thereare legal restraints on employers hiring replacement workers within a six-month period of the dismissal. ThiB ruling may limit the freedom of aprivatized or retained SOE to reAtructure its work force.
10. Nonunionized workers are senior employees who are prevented bySection 21 of Act No. 2821 (May 1983) from becoming members of a tradeunion.!/ They occupy the more senior posts, and they are covered by the samelegislation as unionized workers. In 1990 they were found in only 11 of the32 SOEs and accounted for only 0.9 percent of total SOB employment. But inDITAS and BOTAS, they accounted for 100 percent of employment.
11. Temporary workers? can be dismissed, and they are unlikely toqualify for statutory compensation. The employment statistics for SOEsdistinguish temporary workers as a separate category; it accounts for 10.8percent of total employment in 1990, and as much as 77 percent in CAYKUR. Itis possible that some of these individuals have been employed for more than 30working days, even though they are classified as temporary. However, in theabsence of further information, it is assumed that the SOEs have no legalobligation to make seniority severance pay or provide compensation to thiscategory.
12. Trends in Employment. Table A6.2 shows the trend in totalemployment in each SOE for which data is available over the period 1985-90.Total employment (excluding Petkim and Sumerbank, for which no data wereavailable for 1990) has increased by 23.5 percent since 1979. Some of thisincrease is the result of expansion in individual SOEs since 1979, but animportant part of the growth in employment is the result of new SOEs startingsince 1979. TEK has expanded almost three and a half times, and BOTAS by four
1 "It shall be unlawful for any of the following persons to constitute orto join any workers' or employers' trade union: inspectors, auditors, directorsand any other persons carrying out similar functions in the establishments,institutions, administrative agencies, banks and insurance companies referred toin the second paragraph of section 40".
V "Employment which owing to its nature does not last for more than 30working days shall be deemed to be temporary work and employment for a longerperiod shall be deemed to be permanent work".
- 142 - hEE-6
times. Nineteen of the 32 SOEs had a decrease in employment in 1990.Eighteen of them had lower total employment in 1990 than in 1985, but totalemployment rose by 2.2 percent between 1985 and 1990. It declined 1 percentin 1990 from its peak in 1988-89.
Table A6.2: Indices of Total Enployment by SOE (1979=100)
SOE 1985 1986 1987 *1988 1989 1990
MKEK 93.6 93.0 90.4 87.4 78.7 77.6SEKA 104.9 101.3 99.1 97.8 99.1 96.0CITOSAN 199.0 194.9 165.1 165.6 158.4 159.2TDCI 77.3 76.8 75.8 73.7 76.9 74.7ASOK 757.8 837.1 988.6 984.8 951.4 926.1ORUS 95.8 97.2 102.5 106.1 104.9 91.6ETIBANK 88.9 86.3 86.0 85.3 83.9 84.3TTK 101.5 106.1 108.2 107.5 104.8 102.1TKI 44.1 46.0 46.4 46.7 46.4 45.5TEK 245.2 312.7 308.6 320.2 330.0 341.7TPAO 95.9 103.3 104.6 103.7 105.4 106.1BOTAS 225.1 271.6 280.2 309.9 355.5 404.6DITAS 178.0 196.0 200.0 . 216.0 304.0 340.0POAS 98.0 106.5 108.6 111.9 114.5 118.2TUGSAS 96.0 96.7 91.8 83.2 86.7 94.5iGSAS 103.9 102.8 98.5 95.9 100.3 99.5SEKER 110.1 107.6 105.2 108.8 109.8 107.7ESK 82.3 80.1 77.0 78.0 78.5 79.4TMO 86.9 89.0 80.1 91.1 83.1 90.6TSEK 68.1 64.6 66.4 65.4 66.5 51.6CAYKUR 76.1 73.2 70.9 71.2 70.0 59.1TEKEL 84.1 84.6 76.9 74.5 74.5 73.5TARIM 108.7 100.0 87.5 92.6 90.0 82.8YENSAN 98.7 109.7 109.3 114.9 120.7 117.1TZDK 93.5 92.1 90.3 91.1 87.5 84.6DMO 103.2 99.9 94.6 100.7 106.2 104.6TCDOD 95.7 96.6 93.7 90.8 89.8 87.4PTt 118.8 133.0 149.6 155.7 158.0 161.0DHMI 102.5 102.3 111.5 171.4 187,8 117.1THY 117.8 123.1 111.1 118.0 132.0 140.8GEMSAN 100.0 101.4 98.3 94.9 89.3 91.1TDI 97.7 101.6 99.0 93.3 86.1 86.5
Total 120.9 124.3 123.7 124.8 124.8 123.5
Source: Treasury.
13. There has been a significant change in the distribution ofemployment among the five categories, as shown in Table A6.3. The large
increase in the share of contract workers in total employment is the result of
a large shift away from civil servants and some reduction in the relativeshare of unionized workers.
- 143 - ANNEX 6
Tabte A6,3: Evolution of Total Employment by Category(percent of total)
Civil Contract Unionized Non-Unionized AllServants Workers Workers Workers Temporary Workers Total
1979 31.4 0.0 59.3 0.6 8.8 68.6 100.01980 31.5 0.1 59.3 0.6 8.5 68.4 100.01981 31.8 0.1 60.1 0.7 7.3 68.2 100.01982 31.8 0.1 58.7 0.8 8.6 68.1 100.01983 33.0 0.2 57.7 0.6 8.5 66.8 100.01984 31.0 0.0 55.6 0.7 12.6 68.9 100.01985 29.5 0.6 59.7 0.6 9.6 69.9 100.01986 28.5 3.2 56.1 0.8 11.5 68.3 100.01987 20.2 12.7 54.7 0.8 11.6 67.1 100.01988 12.9 20.6 54.1 0.7 11.7 66.5 100.01989 6.4 27.8 54.0 0.7 11.1 65.8 100.01990 4.5 30.5 53.4 0.9 iO.8 65.1 100.0
Source: Treasury.
14. Changes in the numbers employed do not indicate whether presentstaffing levels are appropriate or whether there is any significant degree ofoverstaffing. Detailed examination of labor utilization and work organizationat the establishment level are necessary before employment levels appropriateto the technology and production methods can be determined. However, thereare indications that significant overstaffing may exist in some SOEs.Reported discussions with managers suggest that overstaffing may be as high as40 percent in TCDD and between 25 to 30 percent in other SOEs. If this is sothen both privatization and the restructuring of retained SOEs may lead tosignificant retrenchment. On privatization, USAS retrenched 50 percent of itsworkers. Indirect evidence of redundant labor stems from the observation thatthe capital-labor ratio in the largest 500 companies is similar for bothpublic and private sector companies, but the share of public companies isabout 67 percent of capital and only 45 percent of value added. Assuming nodecreasing returns to scale and no large differences in the industrialcomposition of the two sectors, this evidence suggests significantoverstaffing.
Wages, Salaries, and Benefits
15. Civil servants employed in SOEs are paid according to the rulesset out in Decree Law 657 and Decree Law 399, which allow civil servants to bepaid by contract. The civil service pay system is extremely complicated and alarge amount of information concerning individual appointments and posts isnecessary to calculate effective rates of pay. The various elements in totalpay include the following: (a) basic salary; (b) function allowance; (c)supplementary allowance; (d) flat-rate addition; and (a) additional payments.The basic salary has a range of only 3:1, and entry levels are determineduniquely by education. Twice a year the Council of Ministers sets the salarycoefficient used to determine the TL equivalent of the corresponding entry inthe scale. Special qualifications, extra responsibility, risk, orgeographical location are rewarded by the functional and supplementary
-144 - ANNEX 6
allowances. Higher level positions receive additional payments, and there aresome other allowances (child, family) and an annual bonus. The complexity ofthe pay system allows Government to change differentials easily. Since July1989 differentials have been narrowed.
16. Civil servants with contract will receive individual paymentsrather than civil service scales and allowances. In 1991, the maximumcontract payment for civil servants is TL7 million a month. The maximum fornoncivil service employees employed on contract is TL6 million. The maximaare determined by the Government, but no information was available toestablish how the actual levels of contract payment for those not on themaximum are settled.
17. Details of the pay systems for workers in SOEs are not available.Broad principles set out in various documents are as follows: The pay ofunionized workers and possibly temporary workers is determined by collectivebargaining processes, but the government seeks to establish common wagesystems throughout SOEs. Nonunionized workers are not permitted to join tradeunions, and their pay is apparently determined within the guidelinesestablished by government. Management of individual SOEs has little autonomyin determining wage levels. Recent trends seem to have gone toward a morerather than less centralized system of wage determination. Thus the paysystem of SOEs appears to be strongly controlled by central Governmentalinstitutions rather than the management of individual SOEs. Bonuses are paidbut are not directly related to output or performance in any economic orfinancial sense. The pay system reflects a civil service approach whereuniformity is sought and in which there are no economic criteria against whichto determine pay.
Trends in Personnel Expenditure and Wages
18. No direct information on average wages and salaries in SOEs wasavailable. Details of total Personnel Expenditure for each of the fivecategories of employees in each SOE are available. These provide indicationsof the movements in total pay and other benefits, such as employers'contributions to social insurance schemes, and social benefits, as well asbasic wages, bonuses, and allowances. It is possible to estimate averagewages from these figures.
19. Personnel expenditure includes all items of labor costs. Therehave been significant changes in the distribution of total personnelexpenditure by category since 1979 (Table A6.4). Then civil service employeesaccounted for about one-fifth of all personnel expenditure, unionized workersfor about 70 percent, temporaries for 6.6 percent, nonunionized workers for1.0 percent, and there were no contract employees. In 1990, civil servantsaccounted for only 4 percent of total personnel expenditure, unionized workersfor 59.1 percent, contract employees for 26.5 percent, temporary workers for8.8 percent, and nonunionized for 1.8 percent.
- 145 - ANNEX 6
Table A6.4: Distribution of Total Expenditure by Category
Civil Contract Unionized Non-Unionized AllServants Workers Workers Workers Teffporary Workers Total
A. TL Million1979 27811 0 95530 1366 8821 105717 1335281980 43558 67 154940 2091 15217 172248 2158731981 53001 126 207497 3614 18408 229519 2826461982 69474 279 238003 4630 23090 265723 3354761983 96513 550 296416 5973 33236 335625 4326881984 139355 721 457459 8138 63653 529250 6693261985 180798 7821 618881 11879 76750 707510 8961291986 242788 21718 812859 18896 98402 930157 11946631987 306276 156007 1198030 32731 168517 1399278 18615611988 342188 509558 1852828 66025 283918 2202771 30545171989 422680 1929055 4352233 119714 651441 5123388 74751231990 587210 3827489 8621726 279322 1268763 10169811 14584510
B. Percent of Total
1979 20.8 0.0 71.5 1.0 6.6 79.2 100.01980 20.2 0.0 71.8 1.0 7.0 79.8 100.01981 18.8 0.0 73.4 1.3 6.5 81.2 100.01982 20.7 0.1 70.9 1.4 6.9 79.2 100.01983 22.3 0.1 68.5 1.4 7.7 77.6 100.01984 20.8 0.1 68.3 1.2 9.5 79.1 100.01985 20.2 0.9 69.1 1.3 8.6 79.0 100.01986 20.3 1.8 68.0 1.6 8.2 77.9 100.01987 16.5 8.4 64.4 1.8 9.1 75.2 100.01988 11.2 16.7 60.7 2.2 9.3 72.1 100.01989 5.7 25.8 58.2 1.6 8.7 68.5 100.01990 4.0 26.5 59.1 1.9 8.7 69.7 100.0
Source: Treasury and SPO.
20. Differentials in average personnel expenditure among the fivecategories show large variations between 1979-1990. They also show that in1990 the average personnel expenditure for civil service employees (81.1percent) and contract employees (77.8 percent) was lower than that forunionized workers (see Table A6.5). This decline is somewhat surprisingbecause it could be expected that contract employees, and civil servants withcontracts, would be paid more than unionized workers. On the other hand, thehigher average personnel expenditure for nonunionized workers is to beexpected because they are the higher graded employees who have been preventedfrom joining a trade union because of their senior positions. Although nodetails are available, it is likely that the indirect labor costs for civilservants and contract employees are a smaller percentage of personnelexpenditure than for unionized workers. If this is the caoe, a lower averagepersonnel expenditure differential could be consistent with a higher wagedifferential.
21. The very large swings in the differential for contract employeeswith large increases in 1984 and dramatic reductions in 1985 and 1986 areexplained by the individual composition of the contract employees. In 1984,the number of contract employees fell from 805 to 152, rising considerably in
- 146 -ANNE fi
each succeeding year. Changes in the composition of the category have had alarge impact on average personnel expenditure.
Table A6.5: Average Personnel Expenditu. by Category
A. TL Thousand
Civil Contract Unionized Non-Unionized AllServants Workers Workers Workers Temporary Workers Total
1979 190 341 516 215 326 2841980 297 234 555 743 384 535 4601981 376 362 769 1120 567 751 6331982 483 607 885 1344 594 854 7361983 587 683 1020 1845 789 999 8631984 768 4743 1392 1923 863 1302 11381985 1005 2612 1845 3095 1255 1767 15371986 1431 1134 2408 4111 1434 2265 19931987 2558 2061 3661 6739 2445 3489 31211988 4433 4125 5674 14891 4038 5489 50741989 11067 11513 13371 27931 9751 12918 124101990 21959 21075 27091 51299 19785 26223 24463
S. Indfces of Category Differentials
Civil Contract Unionized Non-Unionized AllServants Workers Workers Workers Temporary Workers Total
1979 55.7 100.0 151.4 63.2 95.8 83.31980 53.5 42.2 100.0 133.9 69.3 96.5 83.01981 49.0 47.1 100.0 145.6 73.7 97.7 82.31982 54.5 68.5 100.0 151.9 67.1 96.5 83.21983 57.5 67.0 100.0 180.9 77.3 97.9 84.61984 55.1 340.7 100.0 138.1 62.0 93.5 81.71985 54.5 144.8 100.0 167.8 68.0 95.8 83.31986 59.4 47.1 100.0 170.7 59.6 94.0 82.71987 69.9 56.3 100.0 184.1 66.8 95.3 85.31988 78.1 72.7 100.0 262.4 71.2 96.7 89.41989 82.8 86.1 100.0 208.9 72.9 96.6 92.81990 81.1 77.8 100.0 189.4 73.0 96.8 90.3
Source: Treasury and SPO.
22. Average personnel expenditure for all SOE employees rose by morethan 5300 percent between 1980 and 1990 and average real personnel expenditureincreased by 24.7 percent (see Table A6.6). All categories of workers showreal increases, the highest for contract workers (111 percent) and civilservants (74 percent).
- 147 -A X 6
Table A6.6: Average Persornet Expenditure by Category(1980z100)
Civil Contract Unionized NonUnionized AllNominal Servants Workers Workers Workers Temporary Workers TotaL
1980 100.0 100.0 100.0 100.0 100.0 100.0 100.01981 126.8 154.6 138.6 150.7 147.5 140.3 137.41982 162.7 258.9 159.6 181.0 154.5 159.5 159.91983 197.8 291.6 183.9 248.4 205.3 186.6 187.51984 258.7 2024.8 251.1 258.9 224.6 243.2 247.11985 338.7 1140.6 332.7 416.7 326.7 330.1 333.71986 482.2 484.2 434.2 553.5 373.3 423.0 432.81987 861.9 879.6 660.1 907.2 636.3 651.8 677.81988 1493.6 1760.7 1023.1 2004.6 1050.8 1025.5 1102.01989 3729.0 4914.4 2410.8 3760.3 2537.8 2413.3 2695.11990 7399.3 8996.1 4884.7 6906.1 5149.2 4898.8 5313.0
Rea LV
1980 100.0 100.0 100.0 100.0 100.0 100.0 100,01981 92.4 112.6 101.0 109.8 107.5 102.2 100.11982 92.6 147.4 90.9 103.0 88.0 90.8 91.01983 85.7 126.4 79.7 107.6 89.0 80.9 81.21984 75.5 591.2 73.3 75.6 65.6 71.0 72.21985 68.2 229.8 67.0 83.9 65.8 66.5 67.21986 72.1 72.4 64.9 82.8 55.8 63.3 64.71987 92.8 94.7 71.1 97.7 68.5 70.2 73.01988 91.7 108.1 62.8 123.1 64.5 63.0 67.71989 140.3 184.9 90.7 141.5 95.5 90.8 101.41990 173.7 211.1 114.6 162.1 120.9 115.0 124.7
Source: Treasury and SPO.Note: 1 Deflated by urban areas CPI.
23. In the absence of information on average wages for the fivecategories in the SOEs, the data for personnel expenditure have been used toestimate average wages. Basic wages as a percentage of total personnelexpenditure for public sector corporations (a larger coverage than the 32SOEs) have declined from 61 percent in 1986 to less than 50 percent in 1990.Adjusting this proportion for the two-month bonus, nominal and real indices ofwages can be calculated (see Table A6.7). As wages have decreased as aproportion of total personnel expenditure, the increase in average wages overthe period is less than the increase in average personnel expenditure.
24. Real average wages for all employees rose by almost 30 percentbetween 1983 and 1990. There had been a fall by 25 percent through 1988, andthe increases occurred only in the most recent years. The largest increasewas for civil servants, almost 70 percent. Temporaries gained only 13percent, and unionized workers 20 percent. Nominal wages were furtherincreased by 141 percent in 1991, a greater rate of increase than in prices.
- 148 - ANNEX 6
Tabte A6.7: Average Weges by Cetegoryi(1983=100)(TL thousand)
Civil Contract Unionized NonUnionized AllServants Workers Workers Workers Temporary Workers Total
Nominal1983 100.0 100.0 100.0 100.0 100.0 100.0 100.01984 131.3 697.0 137.0 104.6 109.8 130.8 132.31985 173.9 397.1 183.7 170.3 161.6 179.6 180.71986 249.1 169.7 241.3 227.7 185.8 231.7 235.91987 394.1 272.7 326.6 330.3 280.3 315.9 326.91988 683.1 546.0 503.2 72V.9 462.9 492.0 531.61989 1670.1 1493.4 1161.8 7341.5 1095.5 1146. 1274.01990 3123.2 2575.1 2217.4 2320.9 2093.9 2191.; 2365.7
Real1983 100.0 100.0 100.0 100.0 100.0 100.0 100.01984 88.5 469.7 92.4 70.5 74.0 88.2 89.21985 80.8 184.6 85.4 79.2 75.1 83.5 84.01986 86.0 58.6 83.3 78.6 64.1 80.0 81.41987 98.0 67.8 80.7 82.1 69.7 78.5 81.31988 96.8 77.4 71.3 103.5 65.6 70.5 75.41989 145.1 129.7 100.9 116.5 95.1 99.5 110.61990 169.2 139.5 120.1 125.7 113.4 118.7 128.1
Source: JSRD Calculations.Note: ! Average wages estimated from Average Personnel Expenditure
adjusted by the coefficient of Basic Wages plus two months Bonus to Total LaborCosts for wage earners in the Public Sector.
25. There is no recent comprehensive wages or earnings ourvey forTurkey. Various comparisons between the_public and private sector can be madeusing data from different sources. Table A6.8 presents indices of averagereal labor costs for the public sector, SOEo, and the private sector for they.ariod 1980-89. Over the full period average real labor costs in the privatesector have risen, while they have fallen in the public sector and remainedroughly constant in the SOEs. SOE wages were lagging behind the privatesector for most of the period 1980-89.
TABLE A6.8: Average Real Labor Cost in Total Public Sector SOEsand Private Manufacturing
(1980=100)
Year Public S0f' Private
1980 00.0 100. 100.01981 105.9 100.1 105.81982 95.8 91.0 102.21983 93.2 81.2 95.11984 80.2 72.2 90.01985 68.5 67.2 84.21986 60.0 64.7 81.61987 75.4 73.0 90.41988 61.4 67.7 85.21989 89.1 101.4 110.5
Source: SPO.Note: I Public: all pubtic sector.
I Personnel expenditure for all workers.
- 149 - A 6
26. Table A6.9 reporto significantly larger increases in averagehourly wages in public companies in manufacturing than in private companieOsince the beginning of 1988. Average hourly wages in public oectormanufacturing rose ten-fold over the eleven quarters, while those for privatesector manufacturing rose by less than half as much. The public sectoraverage hourly wages were slightly less than those in taie private sector inthe first quarter of 1988, and twice as large by the third quarter of 1990.Changes in pay relationships of this magnitude are unusual, and there may havebeen some shifts in the occupational composition of the data, buc evon so thisevidence still indicates a relatively large improvement in the relative hourlyearnings of workers in public sector manufacturing. The large increases in1991, which raised real wages by some 35 percent, will have widened the gapeurther.
Table A6.9: Average Hourty Wages in Public and Private Sector ManufacturingCTL)
Year PubLic Private Public/Amount Index Amount Index Private
1988 1 825 100.0 857 100.0 96.311 960 116.4 994 116.0 96.6III 1067 129.3 1154 134.7 92.5IV 1275 154.5 1425 166.3 89.5
1989 1 1371 166.2 1600 186.7 85.7I1 2411 292.2 1904 222.2 126.6III 2828 342.8 2403 280.4 117.7IV 3445 417.6 2673 311.9 128.9
1990 1 3961 480.1 3172 370.1 124.911 6402 776.0 3417 398.7 187.4III 8254 1000.5 4120 480.7 200.3
Source: SPO.
27. The available information suggests that since 1990 the publicsector probably pays a higher average pay to broad categories of workers thanthe private sector does. There is fragmentary evidence quoted in variousreports that pay for higher graded posts is considerably lower in SOEs than inthe private sector, but no firm statistical evidence has been produced tojustify this conclusion.
C. Labor Restructuring
26. The reform program for the SOEs is likoly to lead to retrenchmentof labor. Civil servants employed in SoEB cannot be dismissed. However, forother categories dismiscal in permitted, and in the absence of general socialsecurity provisions for unemployment in Turkey, there could be severe hardshipunleus special social safety net provisions are introduced. The impact ofclosure or retrenchment could be particularly severe in some localities whereSONs currently provide the main income-employment opportunities. There isalso need for improved labor policies in SOEs that, would, at leasttemporarily, remain in public hands. Once management of SOFs are heldaccountable for the financial performance of their enterprises they require
- 150 - ANNEX 6
autonomy in employment and wage policies. Further, improved efficiency and
performance will be much more easily obtained if more appropriate pay systemsand incentives are introduced at the enterprise level.
Dismissals and Severance
29. Civil servants cannot be dismissed for economic reasons. They canbe dismissed for certain disciplinary offenses, but this eection is not
relevant to the issue of retrenchment. Under current legislation civilservants must be employed in certain posts to perform specified functions inSOEs. This provision will not apply to SOEs that are privatized. Civil
servants employed in SOEs that are liquidated must be absorbed elsewhere inthe civil service. While this step could impose some cost, the Governmentcould allocate this staff to posts that would have been filled with newentrants. Those employed in SOEs that are to be privatized can remain civilservants. They would then have to be absorbed elsewhere in the civil service.However, eome of them may choose to remain with the privatized SOE and resignfrom the civil service.
30. An amendment has been proposed to change the requirement of theConstitution that certain functions carried out by holders of posts in SOEsmust be performed by civil service employees. With such a change it would bepossible to employ noncivil service employees in all posts in the remaining$0E. If the law is changed, the main possibilities are as followst
(a) Civil servants will remain employed by the SOE but maybe requiredto transfer from civil service to contract status.
(b) Some individuals will not be required by the SOE and will claim
their right of transfer to civil service employment elsewhere, asin the case of closure or privatization.
(c) Some individuals will not be required by the SOE and willvoluntary terminate their employment sub3ect to receiving
compensation as discussed below.
31. Contract employgee, who were not formerly civil servants, can bedismiesed at the end of their contract by its not being renewed andpresumably, before the end of the contract if compensation is paid. They haveno entitlement to any compensation if their contract is not rcnewed. It canbe argued that in the event of retrenchment, contract workers should beeligible for income and employment support (see the Social Safety Net Sectionbelow). Contract employees who were formerly civil servants and whotransferred to contract status in order to obtain higher pay than was possibleunder the civil service system, have reacquired the job security of civilservant.
32. Unionized and nonunionized workqX_q are covered by the generalLabor Law 1475. It in possible to dismiss or retrench these categories.Contracts under Law 1475 can be properly terminated by giving two weeku'
notzLe to those employed less than eix months; four weeks' notice for those
- 151- ANNEX 6
employed more than six months but less than one and a half years; six weeksnotice to those employed for more than one and a half years but less thanthree years; and eight weeks notice to those employed for more than threeyears. In the event of liquidation or retrenchment on privatization orrestructuring, at least eight weeks' notice will have to be given to someworkers, but there will no doubt be longer periods of consultation andpreparation for the changes, so the eight weeke requirement should impose nosignificant burden. However, it will be neceesary to ascertain whether anySOEs have made agreements to extend these periods of notice, since suchagreements could extend the time taken to close an establishment or retrenchsome workers.
33. The provisions of Article 24 of Law 1475 may place restraints onthe restructuring of employment within an SOE. While it is likely thatmost terminations will be aimed at shedding excess staff who will not need tobe replaced, in some cases management may wish to replace existing staff bymore experienced or better qualified individuals. This move might fall afoulof Article 24, which seemingly would require an offer to rehire. There willno doubt be legal piecedents for guidance, but the importance of thisprovision is that the straightforward replacement of individual employees withnew recruits, who may be better qualified but who are demonstrably replacingthe retrenched workers, may not be consistent with Law 1475. One solution insuch cases might be to make the receipt of benefits under the social safetynet provisions conditional on voluntary resicnation, which would apparentlynot be subject to Article 24 (this needs to be confirmed by national legalexperts). It should be made clear, however, that by accepting voluntaryresignation or agreed termination, the workers concerned would not lose theirentitlement to notice, severance allowance, and other components of the socialsafety net. In order to avoid legal complications, and to make it clear thatthe laws on severance do not apply, it may be necessary to replace the"severance" allowance with a "termination benefit."
34. In the case of dismissal of 10 or more workers, the employer isrequired to communicaj their names and qualifications to the relevant officeof the labor and employmesit service, at least one month prior to the date ofdismissal, with a view to their placement in another undertaking. Thisrequirement imposes no significant restraint on an SOE, and it is envisagedthat there will be considerably more liaison with the Ministry of Labor andemployment services than specified in the law. Some collective agreementscovering SOEs may well contain provisions regarding redundancy and
> "Article 24, Xff_Rct6 of digmissal. Employers shall not employ any newworker in place of workers .....whose contracts are terminated under Section 13of this Act, for a period of six months, effective from the date of suchtermination. If an employer is obliged to engage new workers for the same jobsat the same workplace within this period, he shall give notice of the vacanciesto the provioualy t.rmina,ed workers. The right to claim reinstatement shallcease to be operative after 15 days have elapsed from the date of receipt of sucha notice."
- 152 - ANNEX 6
retrenchments in the selection of individuals, perhaps according to length ofservice, and the terms to be offered them. It would be necessary to ascertainwhether any such agreements have been made and, if so, their torms.
35. Section 14 of Labor Law 1475 provides that seniority severancepay shall be paid if an employer terminates contract workers covered by thelaw, unless the contract is terminated because of the workers, immoral ordishonorable conduct. Seniority severance pay must also be paid if theindividual terminates the contract for the purpose of qualifying for an old-age or disability insurance pension or lump-sum payment from an organizationestablished by law. It is important to ascertain whether any contracts orcollective agreements have been made that provide for additional payments overthe 30 days per year of service. This condition could have significanteffects on estimates of the potential cost of seniority severance pay by SOEs.For retrenched workers seniority severance pay should be determined by theirlength of service and the last level of wages of each individual. Thecalculations in this report assume that there are no additional payments abovethe legally specified amounts.
36. Section 14 of Law 1475 also states that the last public employershall be liable to pay the seniority severance pay for the total period ofservice ir cases where a worker was employed in several distinct publicinstitutions. Section 14 also requires the employer to establish a fund tocover seniority severance pay and old age, retirement, disability, death, andlump-sum payments. However, it appears that SOEs have not established orregularly contributed to such funde. If this is the case, the coats ofproviding seniority severance pay will be an additlonal item of expenditure tobe met by SOEs or the Government.
37. In the absence of detailed data, eatimates of the cost ofseniority severance pay for all workers have been made based on the averagewage for each category in 1990. Because the distribution of workers by yearsof service is not known, estimates have been made for 5, 10, and 15 years ofservice. Table A6.10 shows for each SOE the average severance pay forunionized workers with different years of service in 1990 prices. It isassumed that the 1991 pay increase will lead to an increase of about 40percent in real wages, so the amounts were adjusted accordingly.
38. The estimated XMtraae,ost per unionized worker of seniorityseverance pay for workers with 10 years service (after the 1991 wage increase)is TL18.4 million and TL34.8 million for nonunionized workers respectively.For all SOEBs the cost of severance pay for all workers, assuming an average of10 years service, would be equivalent to 29.6 percent, or three and one-halfmonths of total annual personnel expenditure. In DHMI there are no workers,and in PTT there are so few workers that even if they have an average of 15
- 153 - ANNEX 6
Tobtl A6.10: Cost of Severance PayCTL thousand, 19v0 prices)
Average Years of ServiceSOEs 5 10 15
A. Per UnionIzed WorkerWKEK 9758 19515 29273SEKA 9842 19685 29527CITOSAN 10267 20534 30801TDCI 12501 25000 37500ASOK 7293 14587 21879ORUS 7127 14253 21381ETIBANK 7952 15904 23855TTK 8735 17471 26205TKI 8803 17605 26408TEK 7589 15179 22768TPAO 16695 33391 50086BOTAS 8138 16276 24413DITAS 0 0 0POAS 13419 26838 40257TUGSAS 8781 17562 26342IGSAS 17485 34968 52452SEKER M7 15455 23181ESK 9862 19723 29583THO 6943 13887 20829TSEK 13467 26933 40401CAYKUR 8078 1615 24235TEKEL 7571 15144 22715TARIM 6402 12804 19207YEMSAN 7895 15788 23682TZDK 8290 16401 24601DM0 6S80 13320 19979TCDD 8275 16549 24825PTT 9404 18806 28210D0141 0 0 0TOY 17346 34692 52039GENSAN 8736 17473 26209TDI 11785 23569 35354
TOTAL 9186 18373 27559
-. Per Nojnialonized Vorker1'ASOK 14650 29201 44551ETI7ANK 15608 30136 45205TEK 13479 26960 40439TPAO 22667 45336 68004BOTAS 15491 30982 46472DITAS 17207 34415 51622IGSAS 23752 47505 71257THY 37162 74323 111485GEMSAN 21066 42132 63197IDI 17312 34624 51936
TOTAL 17395 34790 52185
Source: JBRD Calculations.
mote: I Other SOEs do not Wploy this category of labor.
- 154 - ANNEX 6
years service, the coat would be no more than 0.4 percent of annual totalpersonnel expenditure. If average length of service is 10 years, severancepay will cost almost half a year's total personnel expenditure in ASOX, TPAO,DITAS, IGSAS, GEMSAN, and TDI.
39. The effects of the large wage increase in 1991 on the relationbetween wages and total personnel expenditure are not known. The two monthsbonus will rise by the same proportion as basic wages, and it is possible thatmany of the other items will do the same. In the absence of detailedinformation it may not be too misleading to take the percentage personnelexpenditure relationships as a broad guide. The requirement to pay 30 dayswages has been taken as one month's wages, and the upper limit referred to inLaw 1475 has been ignored. If these calculations were applied to the bestcase scenario ,see Annex 1), the ensuing retrenchment would have a totalseverance pay cost of US$1.1 billion.y
Social Safety Net
40. The anticipated retrenchments and closures could lead to highunemployment. Retrenching one-third of the total workforce would, forexample, lead to about 190,000 unemployed. Approximately every 1 percentdismissal or retrenchment creates 5,700 unemployed. In addition, some 90civil servants would have to be absorbed in the public sector. Given thepotentially large amount of unemployment from restructuring, closures, andprivatization, and the absence of any income support system in Turkey otherthan the seniority severance payments, there is a case for providingadditional social safety net payments targeted to these unemployed.
41. Essentially a social safety net should
(a) provide income support to dislocated workers to ease their jobsearch without discouraging active search and action to obtain newemployment or self-employment;
(b) provide couneelling and guidance to assist dislocated workers inadapting to a new activity;
(c) provide training and retraining support to enhance theoccupational and job mobility; and
(d) stimulate new economic activity by encouraging employmentgeneration, self-employment, or small scale enterprisee.
42. These objectives are both socially and politically beneficial, andthey will ease and speed the economic adjustment of the restructured publicenterprises. Also, they will facilitate a smooth introduction and acceptanceof the puiblic sector transformation.
' US$780 million in SOEs to be liquidated, US$220 million inprivatization candidates, and US$140 million in retained SOEs.
- 155 -AEX 6
Income SuoRort Measures
43. An income support scheme should provide adequate compensation tothose affected, while encouraging individuals to seek and accept reemploymentas quickly as possible. In the case of privatized or retained restructuredSOEs, it might be prudent to make payment of income support conditional onvoluntary resignation from the enterprise. Such a requirement may help avoidpossible consequences regarding rehiring under Section 24 of Law 1475.
44. Special unemployment benefit for a specified maximum period can bepaid to dislocated workers from SOEs. The level of unemployment benefit paidto dislocated workers should be based on the previous level of wages asdefined for calculation of seniority severance pay, or some proportion ofthis. Experience shows that schemes that guarantee unemployment benefit for aspecified period may discourage active job search. The arrangements should,therefore, include incentives to encourage individuals to find and acceptsuitable employment as quickly as possible. This can be done by payingdislocated workere a lump-sum compeneation based on the amount of "unused"unemployment benefit remaining in the specified maximum period for which thebenefit could be paid. This would not be the full amount of unemploymentbenefit; it would be reduced by some fraction.
45. The proposed income support would, therefore, consist of twocomponents: (a) unemployment benefit compensation equivalent to w percent ofprevious monthly wages to be paid for a maximum of T months; and (b) onbecoming reemployed or entering self-employment, a lump sum bonus L. Thebonus L will be determined as follows:
L - z(T-t)*w
where: z - the fraction of monthly wages to be paid as a lump sum; T - themaximum number of months for which wages will be paid in the event ofunemployment; t = the months unemployed; and w = the wage level paid asspecial monthly unemployment benefit.
46. Table A6.11 shows the total amount of unemployment benefit pluslump-sum payment that could be received by a worker for various values of zand w for different periods of unemployment expressed in months of wages. Forexample, if unemployment benefit was paid for (T-) 18 months at full previouswages (w=l) and "unused" unemployment benefit was converted to a lump sum at(zn) 75 percent of previous wages, a worker finding a new job immediatelywould receive 13.5 months, wages as lump sum; one who remained unemployed forthe full 18 months would receive 18 months, wages. Someone finding a jobafter six months would receive a total of 15 months, wages. If unemploymentbenefit was paid at (w-) 75 percent of previous wages and "unused" months ofbenefit were converted to a lump sum at (z-) 50 percent, someone finding a newjob immediately would receive 6.75 months, wages; someone remaining unemployedfor the full 18 months would receive 13.50 monthe, wages over the 18 monthe.
- 156 AZNEX 6
Table A6.11: Total Amount of Income Support(n months of wages, T=18)
Months Unerp,toyedz w 0 3 6 9 12 15 18
0.75 1.00 13.50 14.25 15.00 15.75 16.50 17.25 18.000.50 1.00 9.00 10.50 12.00 13.50 15.00 16.50 18.000.25 1.00 4.50 6.75 9.00 11.25 13,50 15.75 18.00
0.75 0.75 10.13 10.69 11.25 11.81 12.38 12.94 13.500.50 0.75 6.75 7.88 9.00 10.13 11.25 12.38 13.500.25 0.75 3.38 5.06 6.75 8.44 10.13 11.81 13.50
0.75 0.50 6.75 7.13 7.50 7.88 8.25 8.63 9.000.50 0.50 4.50 5.25 6.00 6.75 7.50 8.25 9.000.25 0.50 2.25 3.38 4.50 5.63 6.75 7.88 9.00
Source: IBRD Calculations.
Notes: z u conversion coefficient for "unused" tmonthsof unemiployment benefit for payment of luip sun.
w = coefficient of unemptoyment benefit to previous wage level.
47. The fact that the total amount of benefits increases as the timeof unemployment rises is not at odds with the notion of an incentive to find anew job. A new job will provide for additional income. For example, if after6 months (with z=0.75, and w=l) a worker that finds a new job will get totalbenefits of 15 months plus 12 months of actual wage. Thus it will always berewarding to find a new job. The incentive to find a new job quickly will begreater the higher z it and the lower w is, and the higher the rate of timepreference of the worker, given that the rate of wages in alternativeemployment discounted for the disutility of the job is at least equal to w.If workers have a high rate of time preference and there is some positive netwage from other employment, the lump sum may provide a strong incentive tofind new jobs. With regard to the appropriate value of w, there may be aconflict between the provision of incentives to find new employment morequickly (which suggest a relatively low value for w), and the realities of thelabor market and the requirements of social policy (which suggest a highervalue of w) to provide adequate income support in conditions when alternativeemployment opportunities may be severely limited. While a value of w=1 may beconsidered too generous, particularly if the seniority severance pay of manyworkers is taken into account, a value of .5 may be too low to provideadequate income oupport for those unable to find other jobs. A high value ofz may be desirable to encourage speedy reemployment.
48. While financial support should be provided to those adverselyaffected by the restructuring, this benefit should not discourage speedy andeffective readjustment of individuals. Safecuards are necessary to ensurethat individuals receiving either special unemployment benefit or lump-sumcompensation do move into real employment or self-employment. The mootimportant safeguard is to ensure that individuals enter real jobs whenclaiming the lump-mum compensation. Any claim for lump-sum payment can betaken as evidence that the individual has relinquished claims on further
- 157 - ANNEX 6
payment of the special unemployment benefit; however, if the job proves to beahort term, there could emerge social or political pressures for furtheremployment assistance.
49. Table A6.12A shows the actual averace cost of income support forunionized workers in 1990 prices, taking into account the 1991 wage increase.If unemployment benefit at full wages is payable for 18 months and z=0.75, thecost of lump-oum payments for those finding a new job immediately would beTL24.7 million, and TL27.5 million for someone finding a job after six months.The cost of paying unemployment benefit for the full 18 months would beTL 32.9 million. Table A6.18B gives the same details of cost for the averagenonunionized worker.
Table A6.12 Average Cost of Income Support Worker(T=18, TL thousand, 1990 prices)
Months UneItvlovedz w 0 3 6 9 12 15 18
A. Unionized0.75 1.00 24708 26081 27454 28826 30199 31572 329450.50 1.00 16472 19218 21963 24708 27454 30199 329450.25 1.00 8236 12354 16472 20590 24708 28826 32945
0.75 0.75 18531 19561 20590 21620 22649 23679 247080.50 0.75 12354 14413 16472 18531 20590 22649 247080.25 0.75 6177 9266 12335 15424 18513 21583 24708
0.75 0.50 12354 13041 13727 14413 15100 15786 164720.50 0.50 8236 9609 10982 12354 13727 15100 164720.25 0.50 4118 6177 8236 10295 12354 14413 16472
B. Non-Unionized0.75 1.00 46266 48836 51406 53977 56547 59117 616880.50 1.00 30844 35984 41125 46266 51406 56547 616880.25 1.00 15422 23133 30844 38555 46266 53977 616B8
0.75 0.75 34699 36627 38555 40482 42410 44338 462660.50 0.75 23133 26988 30844 34699 38555 42410 462660.25 0.5 11566 17350 23098 28881 34664 40413 46266
0.75 0.50 23133 24418 25703 26988 28273 29559 308440.50 0.53 15422 17992 20563 23133 25703 28273 308440.25 0.50 7711 11566 15422 19277 23133 26988 30844
Source: IBRD Calculations.
50. Applying these calculations to our best case scenario (see Annex1) under the same assumptions about layoffs as in Appendix 1 of the mainvolume and with z-0.75 and w-l (i.e., generous support), the total cost to theGovernment would vary between US$1.2 billion (if all workers found new jobsimmediately) and US$1.7 billion (if all workers remained unemployed for 18months).
-158- ANNEX 6
51. The safety net provisions are designed to compensate those
dislocated workers who have been employed for some time. It may be argued
that the most recently recruited younger employees may actually be losing more
by restructuring. They may have joined the SOE with the expectation of job
security for the next 20 or 25 years. However, it does not seem appropriate
to provide the same level of benefits to those who had been employed for only
six months as for those who have been employed for 5, 10, or 15 years, nor
does it seem proper to seek to justify the additional cost of providing full
benefits to the more recent recruits. Hence, it appears appropriate to adjust
the benefits in line with seniority of the workers. Those with less than
five, but more than, say one-year of service could be granted a proportion of
the full benefits. There are various possibilities to implement this scheme.
Two examples are (a) reduce the benefits in proportion with time served, and
(b) reduce the duration for which the income support is available in that
proportion. For the first, total compensation would be calculated as follows:
c = t*w(l1s) + z.(T-t).w(i a) for tcTS S
where: S = total years defined as "less senior," (e.g., 5), and o = actual
years of service. In the oecond case, the formula would be the following:
C - t-w + z*f(T-rZs)-t]-w for tsT-1*sS S
S2. The selection of a minimum length of service for qualification for
entitlement to full income support is essentially a matter of judgment. It
can best be made after details of the distribution of workers by length of
service have been obtained. There could be political and industrial relations
consequences if the qualifying period is long enough to exclude a significant
proportion of the work force. The shorter the qualifying period, the greater
the financial cost to Government. It may also be appropriate to make some
small payment to those who have been employed for only a short period, say
less than one year. They will not receive any significant seniority severance
pay, and payment of one or two months wages would help ameliorate financial
hardship.
53. Contract_emgLovees have been employed in that form only since 1984
and most of them will have relatively short periods of seniority as contract
employees. Contract employee status was originally designed to circumvent the
civil service pay limits and provide higher salaries as incentives for civil
servants employed in SOEs, as well as to offer more competitive pay torecruits from the private sector. While contract employeae can be released at
the end of their one-year contract, those who were civil servants had
expectationo of job security. So too had many of those recruited from the
private sector. It may be appropriate, therefore, to provide some special
income support provisions for them. However, contract employees should
generally have relatively higher skills; therefore, they may be unemployed for
a shorter time and require le retraining. It might be appropriate to grant
them the same sort of unemployment benefit and lump-sum provisions that inprovided for unionized and nonunionized workers, but for a shorter period.
- 159 - ANNEX 6
54. The cost of providing unemployment benefit on full wages (w=1) for(T-) 12 months with the lump-sum payment converted at (z-) 0.75 would beTL12.8 million per contract employee if all found new jobs immediately andTL17.1 million if all workers remained unemployed for 12 months. Again, usingthe best case scenario (see Annex 1), the total fiscal cost would be betweenUS$260 million and US$350 million.
55. It is possible that some temnorarv workers have been employed bythe SOE for longer than 30 days or on a recurring basis. If this is the caseit may be decided to make an ex gratia payment to them. As an illustration,temporary workers who have a cumulative length of service of 12 months mightbe given two months wages. This practice would be consistent with thesuggested payment of one-fifth of a years' benefits for each year of servicefor workers with less than five years seniority. Per temporary worker thisbenefit would amount to TL26 million. If all workers were granted the benefitin the best case scenario, the total cost would be less than US$20 million.
56. With considerable variation among SOEI, the total averaae cost -erworker in 1990 prices of the severance payment and income support system isabout TL35 million, or US$13,500 (see Table A6.13). Assuming that a maximumof 250,000 workers would have to be retrenched, the total cost would be aboutUS$3.4 billion. In reality, because not all retrenched workers would stayunemployed for the whole duration of the unemployment benefits period, thefiscal cost would be lower. Moreover, it was assumed that uwemploymentbenefit would be paid at the last wage, whereas in reality a somewhat lowerwage may be warranted. Lowering w by 10 percent would save about US$300million.
Em2loyment Services
57. Labor Market Information. In each area likely to be affected byunemployment, the local offices of the Ministry of Labor should haveinformation on the following:
(a) Vacancies in that locality. Extra efforts should be made toobtain details of all vacancies and not rely on existingarrangements for voluntary notification. It is not proposed thatlegislation be changed to require employers to notify vacancies orto require them to recruit first only through Ministry of Laboroffices, the current practice for SOEs.
(b) Vacancies in other areae.
(c) Training and retraining schemes established elsewhere for thetypes of skille required by the vacancies or by the industries andactivities that might develop in the locality.
(d) Self-employment opportunities.
(e) Training for self-employment schemes that have been usedelsewhere.
-160 - ANMEX 6
58. Advance Notification. SOEs should give as much advance
notification as possible to the employment services and training agencies so
that they can prepare special programs. This should be longer notice than
required under Law 1475.
Jable A6.13: Cost of Severance and Incom2ia Support Per Workery'(TL thousand, 1990 prices)
Severance-' Social Safety Net TotalWorkers31Contract Employees"' Tein,orarfeS' Average' Average
MKEK 19515 35126 14746 0 30293 45179SEKA 19685 35432 18713 0 32853 49500CITOSAN 20534 36962 26187 3430 33509 49607TDCI 25000 44999 24460 2587 41334 62642ASOK 18619 33514 0 5687 33482 52079ORUS 14253 25657 16480 1872 20918 31136ETIBANK 16335 29402 26242 1622 28502 40540TTK 17471 31447 21975 0 30773 47000TKI 17605 31691 18838 0 30110 45553TEK 15206 27371 13937 0 23017 33295TPAO 35257 63464 1632 0 54199 84174BOTAS 31022 55839 15869 7028 46230 71138DITAS 34415 61950 0 0 6i050 96367POAS 26838 43125 12752 0 38051 57146TUGSAS 17562 31611 22503 780 27118 39113IGSAS 34885 66321 0 0 66321 103166SEKER 15455 27818 19498 2560 15530 22263EBK 19723 35501 15371 514 24610 36722THO 13887 24995 15978 0 17678 20295TSEK 26933 48480 11631 0 39760 60320CAYKUR 16157 29083 26743 2624 7863 9721TEKE: 15144 27258 19136 3005 22313 33400TARIM 12804 23047 20429 2441 17472 25963YEMSAN 15788 28419 15852 2640 22876 32524TZDK 16401 29522 16400 2165 23498 34528DH0 13320 23975 8534 0 20935 26810TCDD 16549 29790 16811 2187 22502 31368PTT 18806 0 16505 3145 14249 14326DHMI 0 0 20603 0 19185 19185THY 36417 65551 2m7 1063 54918 83352GEMSAN 20750 37303 20920 962 31095 48277TDI 24014 41099 4883 1127 40356 62764
TOTAL8' 18373 33410 17140 2684 24902 35170
Source: IBRD calculations.
Note: L excluding civil servants.Z assuming 10 years of seniority, workers only.' T18; w=1; z=0.75.- T12; w1; z:0.75f 2 months.B weighted.
59. Rapid ResDonse and Local Involvement. Experience in other
countries ohowe that programs to assist dislocated workers are likely to have
more success if there is widespread local involvement, particularly by
- 161 - MEX 6
employers and trade unions, in the preparation and implementation of specialmeasures. Once it is known which SOEs are likely to be affected by closure orretrenchment, local advisory committees should be established with members ofthe local employers associations and trade unions. Public authorities, aswell ae representatives of the Ministry of Labor, also should be involved,together with management representatives fromn the SOEs concerned. Thesebodies can advise on suitable job opportunitiL. and the types of labor thatmight be needed.
60. It is important that the Ministry of Labor and other bodiesinvolved in job counseling, job placement, and training provisions be able torespond quickly when retrenchment is anticipated. The local advisorycommittees should, therefore, be established as soon as retrenchment isanticipated, and local officials of the Ministry of Labor should be trained asearly as possible in the special duties required for dealing with largenumbers of dislocated workers. The longer the delays in initiating placementand training programs for workers affected by the first round of closure orrestructuring, the greater the opposition to subsequent reform.
61. On-site Counseling. Counseling on job search and retrainingshould be provided on an individual basis for every dislocated worker whowishes it, and they should be encouraged to take advantage of the service. Itis better to hold the individual counseling sessions at the place of work.Joint teams or pairs of Ministry of Labor officials and SOE executives canprovide counseling that combines knowledge of opportunities for otheractivities and knowledge of the individual's aptitudes, skills, andmotivation. Preliminary discussions between the managers and the Ministry ofLabor officials would be necessary to clarify the skills that occupations inthe SOE may require and the types of other occupations that the skills beadapted to.
62. Considerable resources are required for the counseling stage. Thecost of the managers time would presumably be borne by the SOE, and Governmentwould find the civil servants. Even so, some additional Ministry of Laboradvisers will probably be needed. It is not possible to provide an accurateestimate of the cost of this step until decisions have been made on which SOEsare to be affected by which measures and analyses have been made of their workforce, other job opportunities locally, and the type of retraining that mightbe suitable. Providing employment and counseling services through the 102offices of IIK8 is estimated to cost US$27 million. If this project isimplemented, the additional direct cost of providing special counseling fordislocated SOE workers should not be high. The main additional element wouldprobably be the time of the executives from the SOEs who take part in thecounseling team. This element has a high opportunity cost, yet Britishexperience in the steel industry shows that it can be a crucial factor in asuccessful program. Executives and managers of the enterprise would have moreknowledge of the individual workers than ministry officials and would bebetter able to assess the worker's suitability for different types of work orretraining programs.
-162 - ANNEX 6
63. MObility Assistaw . In some localities relatively fewalternative employment opportunities can be found. Offering workersassistance to move to other areas may be necessary. Hence, the Government mayconsider providing temporary housing subsidies and special relocation grantsin addition to the income support measures. If this help induces workera tomove and find other jobs rather than remnaining unemployed there will besavings of unemployment benefit payments. The savings can then be used tofinance the assistance program. Grants of TLI million, for example(approximately US$400), would still lead to considerable savings inunemployment benefits, if workers found a job within a few months.
Training and FEmployment Generation
64. For some individuals further training may be unnecessary. Theypossess skills that are marketable; thus the main assistance to be provided isin job search. Others may have low, poor, or out-dated skills with littleprospect of finding other jo.s without training. If employers in the localityhave vacancies, individuals can be selected for training with tileparticipation of the employers.
65. The choice of the type of skill/occupational training provided andthe selection of individuals for appropriate courses in the absence ofpotential job offers by employers necessarily injects uncertainties into thedecisions. The Ministry of Labor in association with other economicministries should decide which skills are needed. The selection ofindividuals for training courses is best done by groups with experience oftraining and of employment of the skills in question. Once decisions aboutthe type of training have been made, the selection of individuals would bebest done by committees that include representatives from the SOE, theproviders of training, and private sector employers rrom the industry orsectors concerned.
66. Eiplovment Guarantee Scheme. The Employrnent Gtuarantee schemealready operating can be extended and targeted to the retrenched workers ofSOEs. In this scheme employers enter into an agreement with the Ministry ofLabor to train school-leavers and guarantee to employ those who complete thetraining course successfully. The training would be provided on employers'premises with special financial support to meet at least some of the coste.It would be necessary to ensure that employers do not abuse the scheme byconverting the intended training period into a productive activity performedby unpaid labor. Employers would take part in the selection of individuals fortraining.67. Cost of Training. Estimating the cost of training is difficultwithout some indication of the type of training to be provided. Wlth thepackage of measures proposed for income support there would be no cost ofsupport for workers receiving training, other than the unemployment benefitpayments. The items of cost are, therefore, the actual provision of training-instructors, equipment, premises, materials, ard any payment to employers ifthey provide the facilities. There will also be secondary indirect costs ofthe Government employees preparing the training programs or advising onemployment placement.
- 163 - ANNEX 6
68. Costs of training programs in other countries, even when expressedin terms of the previous wages of the trainees, are seldom a useful guide.There are widely differing methods of training in different countries, theinitiel skill levels of the w-orkers vary, as do their experience and age. Itis preferable, therefore, to make rough estimates of the possible costs oftraining based on such material as is available on Turkey, although the typeof training required by dislocated workers from large scale SOE clonure orrestructuring will not be the same as that provided in most existing trainingschemes. In general, training schemes in Turkey may cost about US$400 perworker if there in a sizeable retraining in new skills. This is about themidpoint of a range of costs found in ILO training schemes. It is alsoestimated that IIBK could provide contract training for 200,000 workers overthe next five years at a cost of about US$40 million.
69. If unemployment benefit is paid at full wages for 18 months, anaverage unionized worker who found a job after six monthe training wouldreceive a total of TL27.5 million. Unemployment benefit for the full 18months would cost TL32.9 million. The "saving" as a result of unemploymentthat lasts only six months would be about US$2,000. Hence, even if trainingprograms cost significantly more than the estimated US$400 per worker, if theyare effective in reducing the duration of unemployment, the Government willsave in net terms. IP fact, even if it takes 15 months for the worker to finda job with the training (at US$400), the program would still break even.
70. Self m2laoyment. The provision of lump-sum compenmation inaddition to seniority severance payment would provide some individuals withthe financial opportunity to start some self-employment activity. Britishexperience shown that it is essential to provide training in business methode,bookkeeping, financial matters, such as cost control and pricing, as well asin the teclhnical aspect. of the activity. Local employers and businessmencan provide valuable asoistance in thie training. Cooperation between themand the Ministry of Labor through the local advisory committees can onuurethat the training for self-employment/small buoineso activity io realistic.if training for self-employment is provided, there could be a rule that theworker would be regarded as having begun self-employment on completion of thecourse, or say one or two months after. The lump-sum payment would then bepaid on a declaration that the worker had begun self-employment. It wouldthen be possible to calculate the saving when transferring from unemploymentto self-employment and payment of the lump sum. The variable t would be thelength of the training plus any extra one or two months allowed for setting upthe activity. The amount that would be saved from the possible maximumunemployment benefit for the full perlocl would bo known; thus a decisionregarding the amount that could be spent on trainAng and still lead to theGovernment breaking even could he determined.
71. gmall gollective Busin Rses. A group of unemployed workersseeking to establish a small firm on a collective basis may need training intechnical productive aspects. Most, if not all of them, wouild reqluirtraining in business organization, legal matters regarding company activities,accounting, finanice, and marketing. The same approach as suggested for self-
- 164 - ANNEX 6
employment can be adopted to figure payment of the lump-sum and calculate thecost of training.
72. The combined severance pay and lump-sum compensation may not beenough to finance a venture. The Government should consider providing specialtemporary assistance with the initial cost of obtaining premises, equipment,and working stocks. This help could be low-interest loans for a specifiedperiod, providing that the proposed project has been properly coated andassessed. Where closure of the SOE takes place, there may be opportunities toprovide premises to small ventures on specially favorable terms for a fixedperiod. In other cases it may be feasible to sell some of the equipment fromthe SOE to the venture on special terms.
73. In all these cases there could be a conflict between the desire toassiBt the unemployed start up small ventures that are economically viable inthe longer run and the proper assessment of the project to ensure that publicfunds are responsibly disbursed. As an international generalization, civilservants are not normally well equipped to assess commercial ventures.
D. Regional Imgact
74. The share of SOEs in total nonagricultural employnment in provincesin 1985 is shown in Table A6.14. The figures are for provinces, and theeffect of closure of SOEs on a locality may be more severe than indicated bythe provincial percentages. There may be considerably greater concentrationof employment in some towns. Even so, in some provinces SOEs account for morethan 10 percent of the total employed population, excluding agriculture. Lackof detailed data prevent further analysis. It doss appear, however, that whenSOEB have been identified for closure or serious restructuring of employment,a detailed analysis of the impact on employment in the locality should bemad.
75. Although it was not possible to obtain data on collectiveagreements, it is understood that collective agreements often includopxovisions for family assiotance and education funds. it would be neceuoaryto obtain details of all the collective agreement provisions in each SOEaffected by restructuring. if mnedical care or some aspects of education areprovided under collective agreements, the closure of an enterprise,partictularly if it is a major employer in the locality, can have seriousimpact on the local social services and infrastructure. It may he appropriatefor Government to rnake a special payment to the municipality to meet costs oftransition from SOE provision to community provision of some of theseoneen.iAl social services. Such a guarantee could remove some of thejustifiable fears and opposition to restructuring.
- 165- ANNEX 6
Table A6.14: Regional Distribution of SOE Enployment 1985(share of nonagricultural employment)
Province Percent Province Percent
I ADANA 3.84 35 IZMIR 3.472 ADIYA 4A 1.09 36 KARS 2.153 AFYONKARANISAR 5.96 37 KASTAMONU 5.224 AGRI 3.74 38 KAYSERI 2.985 ANASYA 4.05 39 KiRKLARELI 4.106 ANKARA 9.35 40 KIRSEHIR 1.317 ANTALYA 2.02 41 KOCELI 4.128 ARTVIN 11.58 42 KONYA 5.299 AYDIN 2.01 43 KUTAHYA 9.7010 BALIKESIR 4.54 44 MALA1YA 10.3511 BILECIK 1.68 45 MANISA 2.3612 BINGOL 0.37 46 KAHRAMANHARAS 3.2113 BITLIS 5.86 47 HARDIN 1.3614 BOLU 1.99 48 MUGLA 3.9215 BURDUR 3.43 49 MUS 6.5616 BURSA 1.99 50 NEYSEHIR 0.2417 CAMAKKALE 0.36 51 MIGOE 1.7818 CANKIRI 8.46 5. ORDU 0.2619 CORUM 3.48 53 RIZE 12.7620 DENIZLI 0.18 ;4 SAKARYA 5.0921 DIYARBAKIR 6.09 5t SAMSUN 11.2622 EDIRNE 2.08 56 SIIRT 9.5223 EIAZI4 11.64 57 SINOP Z.4224 ERZINCAN 3.24 58 SIVAS 16.9825 ERZURUM 9.45 59 TEKIRDAG 0.5626 ESKISEHIR 6.69 60 TOKAT 5.0127 GAZIANTEP 1.99 61 TRABZON 6.4428 GIRESUN 2.35 62 TUNCELI 0.5829 GUWJSHANE 0.14 63 SANLIURFA 2.6230 HAKKARI 1.18 64 USAK 1.4631 HATAY 8.03 65 VAN 7.3232 ISPARTA 4.42 66 YOZGAT 0.8833 ICEL 1.28 67 Z'IGULDAK 15.93
All 4.35
Source: SPO.
Px Vex cmitiO-A QfuOJtJALQ=R
76. Some DOEs will remain, at leart temporarily, in public ownersthip.They will need to be restructured in terms of employment and paydetermination. It is assumed that they will operate under market conditionsthat require them to maximize profitability within constraints of a strongfinancial discipline subject to appropriate regulations to prevent abuse ofmonopoly power. If the Board of Directors of an SOE is responsible for theperformance and profitability of the Son, it requires autonomy to drtermine*mployment and romuneration levels. It will not be posslble to judge theperformanco of the board or sonior managemerit if they are compelled to followoutside decisions regarding staffing and pay levels.
77. With the exiuting Article 128 of the Constitution, restructuredSoBs are required to employ civil servant" to perform certain functions.
- 166 - ANNEX 6
Certain higher positions would, therefore, continue to be filled by civilservants on civil service conditions, although they may be given civil servicecontract status. This practice is neither conducive to the efficientoperation of the SOEs nor compatible with the autonomy of SOEs. Thisdifficulty can be removed only by modifying the Constitution. If this isdone, restructured SOEs would not be required to employ civil servants. Theywould be free to select their own staff on the basis of efficiency,competence, and qualifications. Many restructured SOEs would, in the pursuitof profitability, reduce existing otaffing levels and replace some of thecurrent employees with more suitable staff. Staffing levels should bedetermined on the basis of wor- study. It would undoubtedly help the smoothtransformation to a successful, autonomous, and viable SOE if trade unions arefully involved in the processes of determining staffing levels andestablishing work study standards.
78. Pay and terms of conditions of employment should be determined bythe usual processes of collective bargaining for all employees exceptnonunionized workers. Incentive payments and bonuses should be determined bythe management of the SOE and related to actual measured performance againstspecified criteria. The existing general labor legiolation would continue toapply to restructured SOEs without the complications of civil serviceemployees subject to different legislation. Management should have autonomyto negotiate terms and conditions of employment appropriate to the enterprise,its financial position, anid prevailing collective bargaininrg and marketcircumstances.
F. Recommendations
79. Despite the enactment of a hiring freeze and a replacement ratioof 70 percent, employrnent (excluding Petkim and Sumerbank) has risen by 2.2percent since 1985, but it fell 1 percent in 1990 from its peak years of 1988-89. Compared witlh 1979, SoZe employed 23.5 percent more people in 1990.There has been a significant shift out of civil service employment (still 30percent in 1985, but only 4.5 percent in 1990) and into contract employment(up to 30 percent of total in 1990, from zero in 1985) becauoe of moreattractive pay conditions. Average real wagen during the period 1980-90 roseby 18 percent, but they were atill 25 percrent below their 1980 levels in 1988,indicating that thsee wage increases are a recent phenomenon. Labornegotiations in the first half of 1991 reculted in increases by 140 percent innominal termis, leading to continuing real increases. The current wage andemployr.ent levels are unsustainable in the long run.
80. Any future reform program of the sector will necessitateretrenchment of labor. For such a restructurinag to be succecsful the laborissue needs to be dealt with up front in crioperation with all affected groups(workers, matinagement, local community). Aside from the legal requiremenlt ofproviding severance pay (for workers), thLi study recomrnends theimplementation of a social safety net consisting of income support, employmer.tservices, training, and einploylmetnt genreration. income support should bedesigned in a way that provideo workers with an incentive to find newemployment or become self-employed. Counseling and advisory services rhould
- 167 - ANNEX 6
be expanded and targeted to the dislocated workers. Local managers andexecutives of SOEs could play a crucial role in thio process. The package ofmeasures should be enhanced in cases where the SOE is the sole income-employment provider of the region. Civil servants would have to be absorbedin the public sector, while workers and contract employees could benefit fromthe safety net. The cost of such a program is not excessive compared to thegains. If training services are effective and workers find new jobs quickly,the public sector may already break even in the first year of the program(since less income support would be required). The implementation of thissafety net does not require changes in the legislation, provided that workersresign voluntarily to avoid a complication in rehiring as a result of LaborLaw 1475.
81. For SOEs that would be retained by the state, at least for thetime being, considerably more autonomy and flexibility in personnel managementwould be needed. It would be highly desirable to amend Article 128 of theConstitution to permit noncivil service employment in manaaement positions.Management would also need the power to determine employment levels, as wellas to negotiate the wages of its workers.