1. 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 November 24-25, 2012 1

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 A. Municipal Affiliated Entities – Municipal enterprises B. 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

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 Tr 1‰, 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 TRL 2 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