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Stephen Karam & Mihaly Kopanyi

Turkey: Fiscal Management of Local Administrations Forum Market-Based Financing of the Turkish Municipal Infrastructure Some Insights from the Turkey Urbanization Review. Stephen Karam & Mihaly Kopanyi Sustainable Development Sector Leader & Sr. Municipal Finance Specialist The World Bank

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Stephen Karam & Mihaly Kopanyi

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  1. Turkey: Fiscal Management of Local Administrations ForumMarket-Based Financingof the Turkish Municipal InfrastructureSome Insights from the Turkey Urbanization Review Stephen Karam & MihalyKopanyi Sustainable Development Sector Leader & Sr. Municipal Finance Specialist The World Bank November 24-25, 2012

  2. Market-based Financing Outline • Definition • Demand side issues • Supply side issues • Options moving forward

  3. Market-based financing context Channeling 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?

  4. Demand side The Demand side is very diverse • Municipal Affiliated Entities – Municipal enterprises • Municipal Entities • Metro municipalities, district municipalities, and fist-tier municipalities within jurisdiction; • Non-metropolitan provincial municipalities; • Small other municipalities (Towns, boroughs) • Megacities, large cities Very different capacities in infrastructure finance, management, and revenue base HIGH NEED, LOW DEMAND

  5. 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

  6. Budget situation OUTLOOK • Good outlook because of shared tax • Own revenues low • Low property tax rate Tr1‰, EU 1% (10x) • Metro Municipalities Have no Property Tax • Room for borrowing more

  7. 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

  8. Challenging trends • Own-Source Revenues Share is Declining • Share of Capital Expenditure is Declining

  9. 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%

  10. 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

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

  12. Conservative Scenario for the next 5 years development Market based Debt financing has a role to play, domestic debt could grow to TRL2 billion per year. (Today TRL 0.9 bn. short term loan) Investments and Debt Annual Financing composition

  13. Conditions for Market Financing Ex ante rules by Government • Transparency and reliable financial accounts • Credit ratings • Hard budget constraints, borrowing limits Ex 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,

  14. How the World Bank Can Help Phase 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

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