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Turkey: Fiscal Management of Local Administrations Forum

Market-Based Financingof the Turkish Municipal Infrastructure

Some Insights from the Turkey Urbanization Review

Stephen Karam & Mihaly KopanyiSustainable Development Sector Leader & Sr. Municipal Finance Specialist

The World BankNovember 24-25, 2012

Market-based Financing Outline

Definition Demand side issues Supply side issues Options moving forward

Market-based financing contextChanneling funds for infrastructure

development from domestic financial and capital market

Current Municipal situation: Capital Investments 2/3 budget, 1/3 debt on

average High volatility, short maturity Debt stock 120%of budget revenues

Muni Enterprises borrow from market?

Demand sideThe Demand side is very diverse

A. Municipal Affiliated Entities – Municipal enterprisesB. Municipal Entities

Metro municipalities, district municipalities, and fist-tier municipalities within jurisdiction;

Non-metropolitan provincial municipalities; Small other municipalities (Towns, boroughs)

C. Megacities, large cities

Very different capacities in infrastructure finance, management, and revenue base

HIGH NEED, LOW DEMAND

Debt capacity Factors Predictable transfers Stable current balance Debt stock=121% of Total Revenues Substantial overdue debt (TL7.5 billion owed to

Treasury, TL3.6 billion reconciliation) Hard budget constraints in operating revenues,

but soft in debt service? Largest cities have capacity and experiences with

large scale projects and large foreign borrowing

Budget situationOUTLOOK

Good outlookbecause of shared tax

Own revenues low Low property tax rateTr 1‰, EU 1% (10x)

Metro Municipalities Have no Property Tax Room for borrowingmore

Snapshot of debt stock Metro Municipalities take the lion’s share of

foreign debt, which is growing fast Long-term bank credit is steadily growing The bulk of Municipal liabilities is due to public

entities

Challenging trends Own-Source

Revenues Share is Declining

Share of Capital

Expenditure is Declining

Supply Side #1- Apparent Municipal Market

Vast majority of current financing is non-market. Of the total TL29 billon debt stock: 84% of finances via or with guarantees by public entities(including Iller Bank); ¼ of Total debt is overdue

Foreign exposure 73% Foreign Borrowing 20%

Supply side #2 Turkish private sector finances and

implements large projects in volume of several100 million dollars (energy, manufacturing, tourism)

There is good financing and management capacity to finance large municipal projects.

Time to test domestic Capital Market funds for municipal infrastructure carefully and gradually

Start with Tailored Instruments

Untested Instruments Domestic Bonds Syndicate Loans Project-based financing PPP Land-based Financing Guarantee instruments

Conservative Scenario for the next 5 years developmentMarket based Debt financing has a role to play, domestic debt could grow to TRL 2 billion per year.(Today TRL 0.9 bn. short term loan)Investments and Debt Annual Financing composition

Conditions for Market FinancingEx ante rules by Government

Transparency and reliable financial accounts Credit ratings Hard budget constraints, borrowing limitsEx post regulation

Refrain from present practice of repeated “debt resolutions” (2002, 2005, 2010)

Adopt Framework for municipal insolvency Protect customers Protect creditors Framework for debt restructuring,

How the World Bank Can HelpPhase I: Technical Assistance Pilots – PPIAF Funding (Jan-Dec 2013)

Prepare up to 5 Shadow Credit Ratings for Municipalities Support Selected Municipalities (5) in Preparing Municipal Financial Self-

Assessment (with Guide and Consultant Support) Provide Credit-Worthiness Enhancement Capacity Building (one)

Phase II: Sustainable Cities Investment Operation (Jan 2014-Dec 2018)

Expand Coverage through Rollout of Phase I to participating municipalities Explore possibility of establishing a systems approach and performance-based

policy instrument to improve, e.g. municipal own-source revenue collection, debt management and debt service, accessing capital markets

Expand financial services of Iller Bank: Financial Intermediation: Pooling of Municipal Finance Demand & Bond Structuring Expand use of Guarantee Instrument Test syndicate-based financing with domestic entities