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.

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Government Committed to Social Security Reform
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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.

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Business Community Concerns
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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.

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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.)

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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.

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Comment
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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.

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MCELDOWNEY