TURKEY: CONTROLS ON MUNICIPAL BORROWING

1. (SBU) Summary: A Turkish Treasury official responsible
for external borrowing claims that the proposal to expand
municipalities' powers and responsibilities will not lead to
uncontrolled borrowing. He cited caps on municipal borrowing
and approvals required from the central government as key
constraints, and stressed Treasury's keenness to avoid
Argentina-style local government profligacy. Separately, a
new law will allow Treasury to honor its guarantee to U.S.
Eximbank of a long overdue commitment fee on a local
company's unutilized borrowing. End Summary.

Municipalities to Get Increased Financial Autonomy:


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2. (SBU) In a meeting with visiting U.S. Eximbank officer
Margaret Kostic, Turkish Treasury officials Memduh Akcay and
Serdar Guzey discussed the financial provisions of a
long-awaited decentralization law. The law, which was vetoed
in 2004 by Presdient Sezer, has been revised, removing
politically-sensitive devolution of responsibility for
education, and the GOT is re-submitting it to parliament.
With new responsibilities, such as management of local health
services, devolved to municipalities, the law increases from
the current level of 5% the share of central government
revenue to be allocated to municipalities. Municipalities
will also be allowed to borrow directly from financial
institutions.



3. (SBU) Akcay described constraints on the municipalities'
ability to borrow, which he claimed would prevent
municipalities from getting into financial difficulty. A key
provision caps the total stock of municipality debt at the
level of the municipality's prior year allocation from the
central budget. In order to borrow from sources outside of
Turkey, the municipality would have to get Treasury approval.
For domestic borrowings, according to Akcay, only Ministry
of Interior approval will be required. Borrowings for public
investment projects would only be permitted if the projects
were budgeted for and included in the national public
investment program drawn up by the State Planning
Organization.



4. (SBU) Akcay said municipalities will be required to report
all borrowings to Treasury, and that Treasury will closely
monitor municipality indebtedness, reporting any concerns to
the Ministries of Finance and Interior. "We want to avoid
Argentina," he added.

Large Municipalities:


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5. (SBU) Akcay said that large municipalities (Istanbul,
Ankara and Izmir) will have a separate law. Though the
above-cited provisions will still apply, there will be scope
for exceptions for large projects. Note: Istanbul
municipality, which has a credit rating, has a track record
of borrowings, including external borrowings. End Note.
Akcay said the huge (over $2 billion) Marmaray project to
expand Istanbul's subway system with a tunnel under the
Bosphorus, is managed by the central government, not Istanbul
municipality. JBIC of Japan has financed the first
phase--nearly $1 billion--with a 40-year loan with 10 years
grace at 0.75% interest rate. When asked about Ankara
municipality, Akcay and Guzey chuckled. They revealed that
Ankara owes Treasury money under guarantees but has yet to
pay, despite the municipality having the financial
wherewithal to do so. They noted that the Ankara metro, one
of high-profile Ankara mayor Melih Gokcek's pet projects,
continues to expand to new suburbs.

Central Government Guarantees of Public Sector Institutions:


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6. (SBU) In recent years, following numerous problems with
Treasury-guaranteed debt, the GOT has pursued a much stricter
policy in granting Treasury guarantees of public
institutions' debt. Akcay said the budget law now puts a cap
on central government (i.e. Treasury) guarantees. The cap,
which was $1 billion dollars in 2004 was increased to $2
billion in the 2005 budget law. When loans are guaranteed,
the central government has the authority to seize the
guaranteed entity's assets, or, in the case of
municipalities, to garnish the municipality's budgetary
allocation.

Imminent Resolution of Commitment Fee Impasse with U.S.
Eximbank:


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7. (SBU) Guzey confirmed that the GOT hoped to resolve the
issue of overdue commitment fee payments to Eximbank very
soon. Note: The non-payment of a commitment fee on an
unused borrowing facility that Treasury had guaranteed had
been an irritant in Eximbank's relationship with the Turkish
public sector. End Note. Guzey said that recently-submitted
legislation included a provision allowing Treasury to pay out
on this guarantee, and that the funds had been included in
the 2005 budget. Separately, Akcay told us Treasury is
pursuing collection from the borrower in the courts.

Comment:


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8. (SBU) Though the officials' comments suggest Treasury will
be vigilant to head off uncontrolled municipal borrowing, the
issue bears watching. Although public expectations have been
raised by the success of the economic program and the high
eocnomic growth rate, the mayors elected in last March's
municipal elections are financially constrained from
delivering new services or projects to their constituents.
Pressure from mayors on the GOT could create pressures to
abuse the expansion of the financial responsibilities under
the draft decentralization law.
EDELMAN