MINISTER BABACAN COMMITS TO SOCIAL SECURITY AND

C O N F I D E N T I A L ANKARA 000019 SIPDIS SIPDIS TREASURY FOR INTERNATIONAL AFFAIRS - JROSE, MNUGENT E.O. 12958: DECL: 01/07/2012 TAGS: EFIN ENRG EINV TU SUBJECT: MINISTER BABACAN COMMITS TO SOCIAL SECURITY AND OTHER ECONOMIC REFORMS REF: ANKARA 6707 Classified By: CDA Nancy McEldowney for reasons 1.4(b) and (d). ¶1. (C) Summary: Economy Minister Babacan told the Ambassador December 22 the AKP Government was committed to the Social Security Reform despite the recent adverse court ruling and would move ahead, albeit with a delay. Babacan agreed that the business community was concerned about the upcoming elections and the EU accession process but also worried about the need for more power generation capacity. However, Babacan opposes a state role in increased investment in the sector. End Summary. -------------- - Government Committed to Social Security Reform -------------- - ¶2. (C) In a December 22 meeting that focused largely on EU issues (septel),Economy Minister Ali Babacan stressed the Government's commitment to Social Security reform despite the recent Constitutional Court decision striking down key parts of the law. Babacan said the Government had not yet come to its final decision on how to move forward, but it could not accept that there be one set of rules for civil servants and another for private sector workers, as the court's decision required. Even if the Government tried to create separate rules, there would be a strong reaction from the business community and private sector unions, both of whom have already expressed concern about such an approach. ¶3. (C) Though the reform may have to be delayed for six to twelve months, Babacan emphasized the Turkish Government's strong support for the reform, claiming the Government decided to undertake the reform because it recognized its necessity, and not merely to placate the IMF: "We need to do it for the next generation." In terms of the delay's effect on the IMF program, Babacan said the Fund would have to be realistic, given that the court decision was no fault of the Government's. Moreover, if the Government tried to move ahead with a quick fix in this very political season, there is a danger the opposition would filibuster, as they did when the reform was passed, and that parliamentarians might try to cherry-pick the reform package. ¶4. (C) Babacan downplayed the short-run budgetary implications of postponing the reform, emphasizing that the fiscal savings are very gradual and long-term. The reform targets a savings of 1% of GDP in ten years time, so the impact on 2007 of a postponement will be minimal. Nevertheless, Babacan recognized the need to initiate the reform to begin to derive its benefits. -------------- Business Community Concerns -------------- ¶5. (C) The Ambassador and Babacan traded notes on what they had each picked up at the recent Ankara meeting of TUSIAD, the influential Istanbul-based corporate executives association. Businesspeople were concerned about upcoming elections creating political instability, as well as about prospects for Turkey's EU accession process and the social security reform. Executives from the construction industry had told the Ambassador they were concerned that the IMF might induce the government to restrict expenditure on construction projects. Babacan said the contractors don't like him because reforms under the AK Party Government have included tighter controls on spending over contracted work. Babacan said that before these reforms, once a contract had been opened by the State, a contractor could keep work going and receive more payments from the state. This was a key reason that budget outturns often diverged sharply from budgeted spending, citing the example of 2002. Wheras the targeted primary surplus that year was 6.5% of GDP, the end-of-year result was 4%. Instead of having large investments by the public sector, the Government's strategy is to maintain fiscal discipline, thereby bringing interest rates and inflation down and spurring more private sector investment. Babacan said that the private sector now accounts for 75% of investment in the economy. -------------- Need for Powergen Investment -------------- ¶6. (C) Babacan said some of the business executives were worried about the need for additional power generation capacity. As Economy Minister, Babacan said he is fiercely opposed to the public sector making the needed investments or providing state guarantees. He admitted, however, there is still a feeling that the state needs to do something so "we need to discuss this amongst ourselves, especially with the Energy Minister." (Energy Minister Guler has pushed for state guarantees.) -------------- Cargill -------------- ¶7. (SBU) The Ambassador reviewed Cargill's problems in Turkey and the Government's efforts to pass legislation that would resolve the situation. The Ambassador asked Babacan, as the Minister responsible for foreign investment policy, to keep an eye on the issue. Babacan agreed and said Industry Minister Coskun had the lead on the issue. -------------- Comment -------------- ¶8. (C) We believe the Government is committed to the Social Security reform, as Babacan says. The Government has taken a political risk to do the right thing and put Turkey's red ink-bleeding pension system on a sustainable footing, only to be sabotaged whenever possible on the issue by the secularist establishment (opposition party, President and Constitutional Court). The reform will now have to be delayed until the Government can figure out how to come up with a court-proof version of the law, thereby putting the timing of the legislation into the heart of election season. It will be that much harder, but sooner or later, the AK Party will do its utmost to push it through, again. Visit Ankara's Classified Web Site at http://www.state.sgov.gov/p/eur/ankara/ MCELDOWNEY