US embassy cable - 05ANKARA1335

UNCLAS SECTION 01 OF 02 ANKARA 001335 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR ASHAH AND CPLANTIER 
PASS EXIMBANK FOR KOSTIC 
 
E.O. 12958: N/A 
TAGS: EFIN, TU 
SUBJECT: TURKEY: CONTROLS ON MUNICIPAL BORROWING 
 
 
This message was coordinated with Congen Istanbul. 
 
1. (SBU) Summary:  A Turkish Treasury official responsible 
for external borrowing claims that the proposal to expand 
municipalities' powers and responsibilities will not lead to 
uncontrolled borrowing.  He cited caps on municipal borrowing 
and approvals required from the central government as key 
constraints, and stressed Treasury's keenness to avoid 
Argentina-style local government profligacy.  Separately, a 
new law will allow Treasury to honor its guarantee to U.S. 
Eximbank of a long overdue commitment fee on a local 
company's unutilized borrowing.  End Summary. 
 
Municipalities to Get Increased Financial Autonomy: 
--------------------------------------------- ----- 
 
2. (SBU) In a meeting with visiting U.S. Eximbank officer 
Margaret Kostic, Turkish Treasury officials Memduh Akcay and 
Serdar Guzey discussed the financial provisions of a 
long-awaited decentralization law.  The law, which was vetoed 
in 2004 by Presdient Sezer, has been revised, removing 
politically-sensitive devolution of responsibility for 
education, and the GOT is re-submitting it to parliament. 
With new responsibilities, such as management of local health 
services, devolved to municipalities, the law increases from 
the current level of 5% the share of central government 
revenue to be allocated to municipalities.  Municipalities 
will also be allowed to borrow directly from financial 
institutions. 
 
3. (SBU) Akcay described constraints on the municipalities' 
ability to borrow, which he claimed would prevent 
municipalities from getting into financial difficulty.  A key 
provision caps the total stock of municipality debt at the 
level of the municipality's prior year allocation from the 
central budget.  In order to borrow from sources outside of 
Turkey, the municipality would have to get Treasury approval. 
 For domestic borrowings, according to Akcay, only Ministry 
of Interior approval will be required.  Borrowings for public 
investment projects would only be permitted if the projects 
were budgeted for and included in the national public 
investment program drawn up by the State Planning 
Organization. 
 
4. (SBU) Akcay said municipalities will be required to report 
all borrowings to Treasury, and that Treasury will closely 
monitor municipality indebtedness, reporting any concerns to 
the Ministries of Finance and Interior.  "We want to avoid 
Argentina," he added. 
 
Large Municipalities: 
-------------------- 
 
5. (SBU) Akcay said that large municipalities (Istanbul, 
Ankara and Izmir) will have a separate law.  Though the 
above-cited provisions will still apply, there will be scope 
for exceptions for large projects.  Note: Istanbul 
municipality, which has a credit rating, has a track record 
of borrowings, including external borrowings.  End Note. 
Akcay said the huge (over $2 billion) Marmaray project to 
expand Istanbul's subway system with a tunnel under the 
Bosphorus, is managed by the central government, not Istanbul 
municipality.  JBIC of Japan has financed the first 
phase--nearly $1 billion--with a 40-year loan with 10 years 
grace at 0.75% interest rate.  When asked about Ankara 
municipality, Akcay and Guzey chuckled.  They revealed that 
Ankara owes Treasury money under guarantees but has yet to 
pay, despite the municipality having the financial 
wherewithal to do so. They noted that the Ankara metro, one 
of high-profile Ankara mayor Melih Gokcek's pet projects, 
continues to expand to new suburbs. 
 
Central Government Guarantees of Public Sector Institutions: 
--------------------------------------------- -------------- 
 
6. (SBU) In recent years, following numerous problems with 
Treasury-guaranteed debt, the GOT has pursued a much stricter 
policy in granting Treasury guarantees of public 
institutions' debt.  Akcay said the budget law now puts a cap 
on central government (i.e. Treasury) guarantees.  The cap, 
which was $1 billion dollars in 2004 was increased to $2 
billion in the 2005 budget law.  When loans are guaranteed, 
the central government has the authority to seize the 
guaranteed entity's assets, or, in the case of 
municipalities, to garnish the municipality's budgetary 
allocation. 
 
Imminent Resolution of Commitment Fee Impasse with U.S. 
Eximbank: 
--------------------------------------------- --------- 
 
7. (SBU) Guzey confirmed that the GOT hoped to resolve the 
issue of overdue commitment fee payments to Eximbank very 
soon.  Note:  The non-payment of a commitment fee on an 
unused borrowing facility that Treasury had guaranteed had 
been an irritant in Eximbank's relationship with the Turkish 
public sector.  End Note.  Guzey said that recently-submitted 
legislation included a provision allowing Treasury to pay out 
on this guarantee, and that the funds had been included in 
the 2005 budget.  Separately, Akcay told us Treasury is 
pursuing collection from the borrower in the courts. 
 
Comment: 
------- 
 
8. (SBU) Though the officials' comments suggest Treasury will 
be vigilant to head off uncontrolled municipal borrowing, the 
issue bears watching.  Although public expectations have been 
raised by the success of the economic program and the high 
eocnomic growth rate, the mayors elected in last March's 
municipal elections are financially constrained from 
delivering new services or projects to their constituents. 
Pressure from mayors on the GOT could create pressures to 
abuse the expansion of the financial responsibilities under 
the draft decentralization law. 
EDELMAN