Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2 [1st ed.] 9789811542251, 9789811542268

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Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application

Tekin Akdemir Halis Kıral Editors

Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2

Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application Series Editor Kıymet Tunca Çalıyurt, Iktisadi ve Idari Bilimler Fakultes, Trakya University Balkan Yerleskesi, Edirne, Turkey

This series acts as a forum for book publications on current research arising from debates about key topics that have emerged from global economic crises during the past several years. The importance of governance and the will to deal with corruption, fraud, and bad practice, are themes featured in volumes published in the series. These topics are not only of concern to businesses and their investors, but also to governments and supranational organizations, such as the United Nations and the European Union. Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application takes on a distinctive perspective to explore crucial issues that currently have little or no coverage. Thus the series integrates both theoretical developments and practical experiences to feature themes that are topical, or are deemed to become topical within a short time. The series welcomes interdisciplinary research covering the topics of accounting, auditing, governance, and fraud.

More information about this series at http://www.springer.com/series/13615

Tekin Akdemir Halis Kıral •

Editors

Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2

123

Editors Tekin Akdemir Ankara Yıldırım Beyazıt University Ankara, Turkey

Halis Kıral Faculty of Political Sciences Social Sciences University of Ankara Ankara, Turkey

ISSN 2509-7873 ISSN 2509-7881 (electronic) Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application ISBN 978-981-15-4225-1 ISBN 978-981-15-4226-8 (eBook) https://doi.org/10.1007/978-981-15-4226-8 © Springer Nature Singapore Pte Ltd. 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Foreword

A well-functioning Public Financial Management (PFM) system is essential for promoting macroeconomic stability and the efficiency of public expenditure. It can also foster good governance, including transparency and accountability in managing public funds. The 2008/2009 global financial crisis dramatically affected many developed and developing countries, creating vulnerable fiscal positions and weakening financial structures. The high costs of the crisis and weakened financial structures prompted renewed recognition of the need for robust PFM systems that encourage countries everywhere to establish the need for, and then design and implement, critical PFM reform measures. To these ends, many countries are looking outward to learn from international best practice, while recognizing the need to adapt and tailor international good practices to their own unique socio-political-institutional environments. Countries are also looking inward to better understand the constraints and opportunities in their own countries that determine success in improving the quality of their PFM systems. In recent years, there has been a growing body of literature on PFM reforms. This has focused on specific PFM reforms both in broad cross-country and more narrow country-specific contexts. While these studies have been extremely insightful, there is also value in understanding integrated reform packages appropriate for high- and middle-income developing countries. Such an in-depth, context-specific study would help identify the challenges in designing and implementing sustainable PFM reforms in these countries. Public Financial Management in Turkey: Progress and Challenges is just such a study. The two volumes of the study focus on the PFM reform strategy, together with recent shifts on PFM policies and administration, in Turkey. Discussion of the challenges faced and progress achieved in Turkey should be of relevance and interest to other developing countries facing similar challenges and seeking similar progress. Turkey has pursued comprehensive PFM reforms since the early 2000s to promote fiscal discipline and macroeconomic stability. These reforms, implemented as part of fiscal consolidation, not only made a remarkable contribution to the v

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reduction of the budget deficit and debt stock but they also enhanced economic growth. In the second decade of the 2000s, the Turkish economy experienced an economic contraction due to various external changes in the global environment, as well as internal structural problems. This prompted a renewed focus on the need to ensuring a robust and responsive PFM system to address the emerging challenges, including a need for expenditure rationalization. However, as with many other countries, the lack of a comprehensive analysis of the existing PFM policies, systems, and procedures in Turkey made it difficult to ensure consistency and integrity among the different components of these reforms, and to mitigate some of complex problems that arose in the process of reform. Public Financial Management in Turkey: Progress and Challenges provides a comprehensive analysis of different PFM reform components and reveals the challenges faced in designing and implementing PFM reforms in Turkey and other developing countries. Bringing together academics and practitioners, the two-volume study includes papers by PFM experts with differing perspectives on the ongoing PFM reforms affecting revenue management, expenditure management, public budgeting, financial management information systems, asset and liability management, intergovernmental fiscal relations, and accounting, financial reporting, and auditing. Richard Hemming, Ph.D. Visiting Professor of the Practice in the Sanford School of Public Policy Durham, NC, USA Roy Kelly, Ph.D. Professor of the Practice of Public Policy in the Sanford School of Public Policy Durham, NC, USA

Acknowledgments

First and foremost, we would like to express our sincere gratitude to all the chapter authors for submitting their high-quality work in an effective and timely manner. We would like to express our special thanks to all the anonymous reviewers including academics, experts as well as bureaucrats for their constructive comments and valuable suggestions on earlier versions of this book. We are also grateful to Barış Alpaslan and Hüseyin Şen for their helpful comments and to Richard Hemming and Roy Kelly for the foreword of this book, and to Kıymet Çalıyurt for her endless support and encouragement at every single stage of the book project. Last but not least, we would like to express our sincere gratitude to our family members, without whom this book would have never come to an end. Editors Tekin Akdemir Halis Kıral

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Contents

Part I 1

Asset and Liability Management

Extended New Treasury Single Account: New Tool for Government Cash Management in Turkey . . . . . . . . . . . . . . . . Barış Can

2

Public Debt Management Reforms in Turkey . . . . . . . . . . . . . . . . . Mete Saat

3

The Role of Risk Management in Public Debt Management: The Case of Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hakkı Karataş

3 21

41

4

Management of Contingent Liabilities in Turkey . . . . . . . . . . . . . . Şebnem Tosunoğlu

57

5

The Management of State-Owned Real Estate in Turkey . . . . . . . . Pınar Güven

73

Part II

Intergovernmental Fiscal Relations Reforms 89

6

Strategic Planning and Budgeting in Local Governments . . . . . . . . Hüseyin Güçlü Çiçek and Süleyman Dikmen

7

The Implications of the Latest Administrative Reforms About Intergovernmental Transfers . . . . . . . . . . . . . . . . . . . . . . . . 105 Zeynep Burcu Bulut-Çevik

8

Revenue Decentralization and the Soft Budget Constraint Problem in Intergovernmental Fiscal Relations: The Case of Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Tekin Akdemir and Birol Karakurt

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9

Fiscal Decentralization and Macroeconomic Management in Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Asuman Çukur

Part III

Accounting, Financial Reporting and Auditing in Public Sector

10 Public Sector Accounting Reform in Turkey: Moving Cash to Accrual Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Necdet Sıtkı Yakupçebioğlu 11 The Adoption and Implementation of International Public Sector Accounting Standards in Turkey . . . . . . . . . . . . . . . . . . . . . . . . . . 197 Ali Topakkaya and Nazire Kont 12 Public Internal Audit Reforms in Turkey: Structure, System, and Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 Halis Kıral 13 Reforms of Turkish Court of Accounts . . . . . . . . . . . . . . . . . . . . . . 233 Elif Ayşe Şahin İpek Discussions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267

Introduction

In the last 30 years, many countries have implemented reforms based on fiscal discipline, emphasizing transparency, accountability, and increasing the efficiency and sustainability of fiscal policies. Performance-based budgeting and medium-term expenditure approaches have been the main elements of these reforms that are aimed at improving public financial management (PFM (Kąsek and Webber, 2009). Especially, the mobilization of the spending process and the modernization of the budget cycle have been at the center of the reforms (Allen et al., 2013). In this context, many countries have introduced regulations to improve efficiency and effectiveness of management of public assets and liabilities, modernization of intergovernmental fiscal relations, accounting, financial reporting, and auditing. With these reforms above, it has been aimed at increasing the quality of public institutions and decisions and ensuring the efficient use of the resources (Keating, 2001). Although the implementation results of the reforms differ among countries, their experiences have been similar in terms of critical success factors and the lessons learned (Kąsek and Webber, 2009; Alkaraan, 2018). The success of the PFM reforms made by the developed countries has also attracted the attention of developing countries. As international organizations like the IMF and World Bank encouraged reforms in this direction, many developing countries took steps, especially in the 1990s, to strengthen their PFM systems. In many developing countries, the PFM reforms have been put into practice as part of public administration reforms aimed at maintaining economic and social development (Kettl, 2005). However, existing literature that analyzes the reforms has overwhelmingly focused on reforms in a particular area and the public sector reforms have not been analyzed in a holistic manner (Martinez, 2003). For example, the studies by Schick (1998), World Bank (1998), and Potter and Diamond (1999) assessed the PFM reforms focused on reforms related to the expenditure pillar of the budget cycle. It is important to note here that especially macroeconomic problems originated from the global financial crisis have increased the interest in these reforms. Since then, these reforms have started to be addressed with a systematic and holistic approach (Cangiano et al., 2013; Allen et al., 2013). After the global financial crisis period, the PFM systems became more complex and complicated. In xi

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the meantime, the re-design of the PFM systems to respond to changing macroeconomic conditions has been put on the agenda. Although the overall objectives of the reforms show similarities across countries, the methods adopted to achieve the intended outcomes have varied. As in many developed and developing countries, Turkey has implemented comprehensive and significant reforms in the PFM system. Experiencing macroeconomic imbalances in the 1990s due to the failure to ensure adequate discipline in public finance, high inflation, deterioration in the current account balance, instability in capital movements, and vulnerability of the banking sector, Turkey needed to introduce sound public finance especially after the year 2000 (Sak and Sönmez, 2000; Özatay, 2008; Karakurt and Akdemir, 2010; Özatay, 2012). Against this background, with the support of the World Bank, IMF, and EU, after 2000, Turkey has introduced innovative regulations in the areas of budget, debt management, public procurement, tax management, accounting, financial reporting, and auditing. The ultimate aim of these reforms has been to achieve long-term fiscal sustainability and eliminating macroeconomic imbalances. To do so, some measures have been taken toward the establishment of a public financial management and control system in Turkey in compliance with international standards and EU practices. With these reforms, regulations on revenue and expenditure management were put into effect, and measures were taken to improve the budget process. In order to establish the PFM system in line with contemporary developments, the scope of the budget has been expanded, and the efficiency of the budget preparation and implementation process has been increased. In addition, modern accounting and reporting techniques have been adopted, and arrangements have been made to ensure greater transparency and accountability in the allocation of public resources. Although the focus of the reforms was on budgetary arrangements, important arrangements were also made in the area of debt management, public procurement, re-organization of intergovernmental relations, and auditing. Concerning regulations in which the PFM reform is handled from a broader perspective, accrual-based accounting system was adopted to provide a more accurate presentation of the government financial transactions, and public accounting standards were adopted in order to ensure the compliance of accounting and financial reporting practices with international standards. For the efficient management of public assets and liabilities, debt management has been re-structured. With this, it is aimed to eliminate the blockages in front of public finance. Thus, the fragmentation of borrowing legislation was eliminated, fiscal discipline was introduced for borrowing, and the way was paved for the use of new financial instruments and techniques. As a result of these regulations, the efficiency of debt management increased, as budget deficits and public debt stock considerably decreased. This change in 2002 was followed by regulations based on further localization in intergovernmental relations in 2003 and 2004. With the local government reform, which was designed as an extension of the public administration reform, local governments were equipped with new duties and powers, while the revenues required by these duties were provided by Law No. 5779 enacted in 2008. Although this law partially eliminated the issue of inequality between local duties

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and revenues, a local financing structure based on intergovernmental transfers emerged. Particularly in the aftermath of the 2008/09 global crisis, public resource constraints and the need for increased infrastructure investments led to investments in transport, energy, and health be implemented through public–private partnerships, with the exception of traditional financing methods. While public–private sector partnerships allow the realization of large-scale investments through private sector, use of this method without detailed risk analysis and taking into account the medium- and long-term needs has increased the obligations and risks of the public sector arising from these projects. Treasury guarantees given within the scope of public–private partnerships has increased the financial risks arising from the contingent liabilities of the treasury due to the non-fulfillment of the obligations arising from the loans provided by the local governments with the treasury guarantee and the commitments made. This necessitated the establishment of a mechanism to eliminate the risks posed by financial localization in terms of macroeconomic management and the measures for minimizing the risks posed by contingent liabilities. While the resources allocated from the general budget increased especially for local administrations, this increase was not accompanied by mechanisms to establish accountability and fiscal discipline. Thus, with the effect of increasing public resources allocated to local administrations, local budget deficits turned into central government budget deficits. Moreover, due to the increase in the financial capacity of local administrations and imbalances in intergovernmental fiscal relations, financing through borrowing became more important. In particular, metropolitan municipalities have borrowed for their infrastructure investments, while non-metropolitan municipalities have occasionally turned to financing through borrowing to finance current expenditures. The risks posed by fiscal decentralization reforms for macroeconomic management have led to the need to re-consider intergovernmental relations. Macroeconomic instabilities, especially triggered by the global financial crisis of 2008/2009, have once again demonstrated the importance of disciplined, transparent, and flexible fiscal policies (Allen et al., 2013). It has also revealed that the government needs to strengthen its PFM systems in the face of economic risks, and good practices have considerably changed in the face of changing internal and external conditions. Changing circumstances have clearly shown that the PFM reform is a long-term effort or even an ongoing development process (Pretorius and Pretorius, 2008). In other words, the process revealed that the establishment of good financial management requires continuous development and improvement. Although Turkey has made significant achievements in the reforms performed after 2000 in the field of the PFM, failure to manage the reform process with a holistic approach, to fully reflect legal regulations into the practice, to implement the administrative reforms in a way compliant with the changes in financial structure as well as administrative and financial insufficiencies in capacity resulted in failure to fully reflect the impact expected from the process itself. Moreover, the changing structure of public administration internal and external economic conditions required a revision of the PFM system in accordance with the

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changing conditions. This book that deals with the PFM reforms in Turkey consists of two volumes. The first volume of the book deals with revenue, expenditure, and budgetary reforms, whereas the second volume addresses the management of public assets and liabilities, the reform of intergovernmental relations as well as the reforms in accounting, reporting, and auditing. Barış Can has examined Treasury Single Account (TSA systems, which were implemented throughout the history in Turkey, by considering the features of full-fledged TSA. He has urged on the methodology and operation of new TSA in terms of accounting, bank account architecture, and legal regulations. The author has emphasized that new TSA allows the cash resources of the public administrations to be managed centrally by a single hand and does not violate the administrative and financial autonomy of the public administrations. Can has also concluded that comprehensive TSA is favorable for Turkish PFM in terms of providing a considerable amount of additional interest revenue and reducing borrowing cost due to impeding over borrowing as well as contributing to achieving efficiency, discipline, and transparency in the PFM considerably. The second component of the reforms implemented within the scope of asset and liability was the regulations on debt management. Law No. 4749, adopted in 2002, and the regulations made in various laws related to debt management were combined under a single law. A debt management strategy was developed to meet the financing needs of the public sector with a predictable risk management in the medium and long terms. Saat has pointed out the successful transition of the Turkish public debt management in aftermath of the Law 4749. Thanks to decisive and appropriate implementation of debt management reform, associated with prudent fiscal policies, Turkey has made great improvements in all aspects of the public debt, i.e., the cost of the borrowings has dropped, the average maturities have extended, the composition of debt stock has improved in terms of foreign exchange rate and interest rate risks, and the foreign investor trust was built. The author concludes by providing some suggestions in the sense that the debt managers should stand behind the reform and take additional measures to keep or overreach the gains of the reform. As Saat have addressed, the new debt management framework considers not only the deficit financing but also the risks. At this point, Karataş in Chap. 16 has reviewed the risk framework in public debt management implemented in aftermath of the Law 4749. He has emphasized that the two most important lessons that can be drawn from the Turkish Treasury experience. First, risk management should be an integrated of cash and debt management and should cover all types of risks that debt managers encounter. Second, after a risk management framework has been developed, debt managers should focus on developing an asset and liability management framework to better manage long-term risks in a holistic way. The aim was to reduce the long-term risks of the budget with a debt management integrated into the management of assets and liabilities. In this context, the public financing needs were met with alternative methods. In particular, large-scale investments in infrastructure were implemented through public–private cooperation practices. However, intensive use of these methods has led to risks arising from

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contingent liabilities. In this scope, the management of risks arising from contingent liabilities (CL) has become extremely important for establishing an effective risk management framework. This is because CL create risks that can be concealed and cannot be appropriately addressed for the state balance sheet. As mentioned by Tosunoğlu in her chapter, “estimation of these risks is a challenging task in Turkey since there are no generally accepted methods for assessing these risks. However, necessary precautions must be put into practice in order to deal with the possible problems that may arise from these risks”. Asset and liability management includes not only financial assets and liabilities but also physical ones, such as state-owned real estates. Kıral has pointed out that although state-owned real estates are one of the most important resources of a state, they are the least visible and least recognized assets in the PFM systems. As a reflection of this situation, the real estate management is not among the priorities of the governments in Turkey. Thus, there has been so far no radical reform in this field. The author has addressed that the most important change in the field of state-owned real estate management is the fact that the General Directorate of National Property, which is the general responsible administration in state’s real estate management, has been no longer part of the Ministry of Treasury and Finance. It became a part of the Ministry of Environment and Urbanization in 2018. Thus, the disorganization of the authority and responsibility regarding the real estate management was partially eliminated and the bureaucratic procedures faced in this field were reduced. Reforms in improving financial management included steps to improve the administrative and financial capacity of the central government, as well as the reform of local governments. In order to ensure efficiency in the provision of public services, arrangements were made to strengthen local governments. While new tasks were allocated to local governments, revenues of these administrations were increased. However, the increase in local governments’ revenues was through intergovernmental transfers instead of their own revenues. This led to a central government revenue structure and a lack of tight linkage between revenues and expenses at the local level resulted in no financial disciplinary action. The amount of additional resources allocated to local governments resulted in an increase in the debt stock rather than reducing the budget deficits of these administrations. Although there are regulations in local managements’ organic law to establish fiscal discipline, fiscal discipline has not been fully achieved at the local level, as these regulations are not sufficiently restrictive and inclusive. For the establishment of effective financial management at local level, strategic planning based budgeting approach was adopted. However, the capacity constraints that local governments faced have led to the inability of reforms to be fully reflected in implementation. Therefore, the need for improving the administrative and financial capacities of local administrations, ensuring coordination in intergovernmental relations and legal institutional steps including hard budget constraints, became more and more felt. Güçlü and Dikmen have mentioned that a strong and prevalent legal framework is related with strategic planning and budgeting exist. However, they have remarked that corporate culture and efficient human-recourse empowerment, which are key

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factors in establishing the connection between planning-programming and budgeting, are below the targeted level. Also, they have indicated that local governments have difficulty in developing policies, identifying priorities, and providing services. Limited access to financial resources at the local level made it difficult to make strategic planning and allocate resources according to the priorities in the plan. Although changes were made in the framework laws of local governments in 2003 and 2004 and new administrations were assigned to these administrations, additional revenues to finance these duties were provided with a delay with the Law No. 5779 in 2008. Çevik has examined the change in the transfer system between administrations brought about by the Law No. 5779. She has addressed that Law No. 5779 is a significant development for the intergovernmental transfer system from the transparency, stability, and simplicity perspectives. However, changing to Law No. 6360 makes no substantial contribution to the system. The author has discussed that although the aim of Law No. 6360 is to achieve a more balanced and fair system, the GDP shares and General Budget Tax Revenue shares alter in favor of the 16 existing metropolitan municipalities. Moreover, the shares of newly announced metropolitan municipalities decrease substantially, but for the non-metropolitan municipalities, the shares decline slightly. Law no. 5779 did not fully ensure inter-administrative horizontal equality and led to a transfer-dependent local income structure. The increase in the revenues of the local administrations was not supported by the mechanisms to ensure accountability in these administrations. Akdemir and Karakurt have addressed the problem of soft budget constraints problem emerging in the relations in central government local management in Turkey. They have stated in their chapter that low autonomy in determining local tax bases and rates, transfer-dependent revenue structure, lack of transparency bring about a deterioration in local fiscal balances. They also indicate that inadequacies in the institutional capacity of local administrations and the lack of hard budget constraints on local government borrowing are also effective in budget deficits and increase in debt stocks at the local level. Unsustainable fiscal policies at the local level became a risk to macroeconomic stability. This necessitated a macro-perspective review of localization reforms and coordination between local–national fiscal policies. In her chapter, Çukur has discussed how excessive spending of Turkish local governments undermines fiscal discipline and how aggressive borrowings of local governments pose a challenge adding to the public debt and public budget deficits sabotaging fiscal discipline and macroeconomic management in Turkey. The author has emphasized the importance of accountability of local governments for the consequences of their financial actions. The chapter concludes ensuring fiscal discipline, and enhancing accountability in Turkish local governments is crucial to overcome the adverse impacts of fiscal decentralization on macroeconomic management in Turkey. The budget cycle, which starts with the formulation of the budget and then with the approval and implementation of the budget, can be completed only with the evaluation and audit of the budget implementation. In this context, accounting and

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reporting systems that can produce timely and reliable financial statistics, functionally independent public internal as well as functionally, institutionally, and financially independent external auditing are integral parts of sound PFM systems (Allen et al., 2013). Like many developed and developing countries, Turkey has also supported the reform of financial management with the arrangements for accounting, reporting, and internal and external auditing. These arrangements were examined by Yakupçebioğlu, Topakkaya and Kont, Kıral, and İpek. Yakupçebioğlu has provided a detailed analysis of Turkey’s comprehensive changes in the government accounting system after 2004. He has indicated that although the regulations in secondary legislation were very close to international standards, it is still a fact that government accounting faces some difficulties. The author has summarized these difficulties under three main headings: diversity of the public institutions, misperception of government, and insufficient number of people trained in government accounting. Topakkaya and Kont have supported Yakupçebioğlu’s opinion and noted in their chapter that accounting maturity level reached approximately 90% in Turkey as a result of focusing on international standards and updating the legislation. They have emphasized the importance and contribution of the transition to the accrual-based accounting system, production of financial statements, elimination of deficiencies in financial reporting and innovations in IT systems in reaching this maturity level. On the one hand, harmonization of public accounting with international standards and on the other hand, internal and external auditing increased the reliability of financial reports and financial statistics. However, the need for improvements to increase the effectiveness of internal and external auditing has continued. When it comes to the internal audit, Kıral has underlined the need to make progress public internal of the audit of Turkey mainly in two areas. These areas are to raise further awareness among senior managers on internal audit and enhance the competency of internal auditors. The author has also addressed that any progress in these areas depends on a strong central harmonization unit, the separation of internal audit and inspection duties and tasks, and increased coordination and cooperation between internal audit and the Turkish Court of Accounts (TCA). In the very last chapter of the Volume, İpek has provided a comprehensive analysis of the TCA in terms of its auditing, jurisdiction, and reporting functions. For the audit function, the author has stated that the TCA has not fully complied with international audit standards in performance audit. Instead, the TCA has carried out the performance information audit produced at the institutional level. When the TCA is evaluated in terms of its judicial function, she has noted that the judicial mandate of the TCA has become transaction-based with the new sense of responsibility adopted by Law No. 5018. Lastly, İpek has pointed out that “it has assisted the parliament by means of a statement of general conformity for debates on the final account draft law, but has not been able to submit any other periodic reports” in terms of the TCA’s reporting function. With PFMC Law no. 5018 and the new TCA Law No. 6085, the auditing area of the TCA has been expanded to cover public economic enterprises, President of TCA has been obliged to provide the Parliament with information by means of

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reports, and publicizing the TCA audit reports has become compulsory. Related to the TCA, Chapter 26 by Şahin İpek provides a comprehensive analysis of the reforms of the TCA. The author scrutinizes radical changes made in the TCA as the supreme audit institution to enhance the parliament's budget power. She evaluates the reform process of the TCA in terms of independence of the TCA, change in auditing area of the TCA, change in its institutional capacity, and change in its relations with the GNAT. Tekin Akdemir Halis Kıral

References Alkaraan, F. (2018). Public financial management reform: an ongoing journey towards good governance. Journal of Financial Reporting and Accounting, 16(4), 585–609. Allen, R., Hemming, R., & Potter, B. H. (2013). Introduction: The meaning, content and objectives of public financial management. In: The International Handbook of Public Financial Management (pp. 1–12). Palgrave Macmillan, London., p.1. Cangiano, M., Curristine, T., & Lazare, M. (Eds.). (2013). Introduction: The emerging architecture of public financial management. In Public Financial Management and Its Emerging Architecture (pp. 1–20). Washington, DC: International Monetary Fund. Karakurt, B., & Akdemir, T. (2010). Kurallı maliye politikası: Türkiye’de kurallı maliye politikası örnekleri. Maliye Dergisi, 158, 226–261. Kasek, L., & Webber D. (eds.) (2009). Performance-Based Budgeting and Medium-Term Expenditure Frameworks in Emerging Europe, The World Bank, Poland, Warsaw Office, ISBN 978-83-88911-17-0. Keating, M. (2001). Public management reform and economic and social development. OECD Journal on Budgeting, 1(2), 141–212. Kettl, D. F. (2005). The global public management revolution 2nd ed., (The Brookings Institution Press, Washington, D.C.). Martinez, J. L. M. (2003). Public sector management in New Zealand: lessons ad challenges (Graham Scott), International Public Management Journal, 6(1), pp. 91–93. Özatay, F. (2008). Expansionary fiscal consolidations: new evidence from Turkey. Economic Research Forum, Working Paper (No.406), pp. 1.25. Özatay, F. (2012). Mali Disiplin ve Büyüme: Türkiye Deneyimi (No. 2012/110). Discussion Paper. Potter, B. H., & Diamond, J. (1999). Guidelines for public expenditure management. International Monetary Fund. Pretorius, C., & Pretorius, N. (2008) A Review of PFM Reform Literature. London: DFID Sak, G. & Sönmez, S. (2000). Kamu Hesaplarında Saydamlık ve Borç Yönetimi, XV. Turkey Public Finance Conference, 15–17 May 2000, Antalya, pp. 77–109. Schick, A. (1998). A Contemporary Approach to Public Expenditure Management. Washington: World Bank. World Bank (1998). Public Expenditure Management Handbook. Washington: World Bank. Retrieved from: http://www1.worldbank.org/publicsector/pe/handbook/pem98.pdf.

Editors and Contributors

About the Editors Tekin Akdemir is Professor of Public Finance at the Ankara Yıldırım Beyazıt University, Faculty of Political Sciences. He is also Co-head of Public Finance Department. Before this post, he was an Associate Professor at the Erciyes University. He is also a member of the Turkish Tax Council. He received his Ph.D. in public finance department at the Institute of Social Sciences, Dokuz Eylul University in 2006. His research focuses on Budgeting and financial management, Government cash and debt management, and local government finance. He has authored and contributed to numerous books, book chapters, articles, and reports on intergovernmental finance, public financial management, and public debt and cash management. In addition to his academic research and expertise in the management and provision of technical assistance, he has considerable experience in the development and delivery of academic courses and professional training programs in the areas of public sector finance, (fiscal) decentralization and government budgeting, and financial management issues. Halis Kıral is an Assistant Professor at the Social Sciences University of Ankara in Turkey. He is also Head of Audit and Risk Management Department and Director of Center for Audit and Risk Management (ASBÜDRM) at the ASBU. He was a Visiting Scholar at Duke Center for International Development (DCID) for the 2017–2018 academic year. He has also worked in the Ministry of Finance of Turkey as a state budget expert, public finance expert, Head of the Department of Central Harmonization for Internal Audit, and Head of the Budget Policy Department. As the Head of Central Harmonization Unit for Internal Audit, he led several projects including developing Public Internal Audit Software (İçDen©) for public internal auditors and publishing Public Internal Audit Manual, Information Technology Audit Manual, Quality Assurance, and Improvement Manual and Performance Audit Manual for Public Internal Auditors. He wrote a number of

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Editors and Contributors

articles, books, and book chapters on topics such as public finance, public financial management and control, specifically internal audit and risk management, public budgeting, and applied economics. Currently, he is also working on impact analysis, monitoring, and evaluation.

Contributors Tekin Akdemir Department of Public Finance, Ankara Yıldırım Beyazıt University, Ankara, Turkey Zeynep Burcu Bulut-Çevik Ankara Yıldırım Beyazıt University, Ankara, Turkey Barış Can Treasury and Finance Expert at Cash Management Department, Ministry of Treasury and Finance, Ankara, Turkey Hüseyin Güçlü Çiçek Süleyman Demirel University, Isparta, Turkey Asuman Çukur Public Finance Department, Ankara Yıldırım Beyazıt University, Ankara, Turkey Süleyman Dikmen Süleyman Demirel University, Isparta, Turkey Pınar Güven Ministry of Environment and Urbanization, Ankara, Turkey Birol Karakurt Department of Public Finance, Karadeniz Technical University, Trabzon, Turkey Hakkı Karataş Ministry of Treasury and Finance, Ankara, Turkey Halis Kıral Social Sciences University of Ankara, Ankara, Turkey Nazire Kont Ministry of Treasury and Finance, Ankara, Turkey Mete Saat Head of Department, Ministry of Treasury and Finance, Ankara, Turkey Elif Ayşe Şahin İpek Faculty of Economic and Administrative Sciences, Department of Public Finance, İzmir Kâtip Çelebi University, İzmir, Turkey Ali Topakkaya Ministry of Treasury and Finance, Ankara, Turkey Şebnem Tosunoğlu Anadolu University, Eskişehir, Turkey Necdet Sıtkı Yakupçebioğlu Ministry of Industry and Technology, Ankara, Turkey

List of Figures

Fig. 1.1 Fig. 1.2 Fig. Fig. Fig. Fig. Fig.

1.3 1.4 1.5 1.6 1.7

Fig. 2.1 Fig. 2.2

Fig. 2.3

Fig. 2.4 Fig. 2.5 Fig. 2.6 Fig. 2.7

Fig. 2.8

Project plan of new TSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . The coverage of new TSA in Turkey. Source (PEMPAL 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The process of new TSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . The pyramidal banking architecture of new TSA system. . . . Accounts of the new TSA Source (Can 2017) . . . . . . . . . . . IT system used in TSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits of institutions managed within the new TSA by the Presidential Decree. Sources (Can 2018) . . . . . . . . . . Budget Performance of Turkey in 2002–2017. Source Ministry of Treasury and Finance, Budget Statement 2019 . . EU Defined General Government Debt of Turkey in 2002–2021. Source Ministry of Treasury and Finance, Budget Statement 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Expenditure-to-GDP of Turkey in 2002–2017. Source Ministry of Treasury and Finance, Budget Statement 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Structure of Central Government Debt of Turkey in 2003–2017. Source Ministry of Treasury and Finance . . . Currency Structure of Central Government Debt of Turkey in 2003–2017. Source Ministry of Treasury and Finance . . . Average Maturity of Domestic Borrowing (Months), Turkey in 2002–2018. Source Ministry of Treasury and Finance . . . Share of Foreign Residents in Domestic Debt Stock (%), Turkey in 2002–2018. Source Ministry of Treasury and Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central Government External Debt Stock (Million USD). Source Ministry of Treasury and Finance . . . . . . . . . . . . . . .

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Fig. 2.9

Fig. 3.1 Fig. 3.2 Fig. 7.1 Fig. 7.2 Fig. 7.3

Fig. 7.4

Fig. 7.5

Fig. 7.6 Fig. 8.1

Fig. 8.2

Fig. 8.3 Fig. 8.4 Fig. 8.5 Fig. 8.6

List of Figures

Central Government External Debt Stock by Source of Funding (Million USD). Source Ministry of Treasury and Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Methodology of Risk Management in Turkish Treasury . . . . General Framework of Operational Risk Management in Turkish Treasury. Source Turkish Treasury . . . . . . . . . . . Intergovernmental Transfer System Schedule—Law No. 5779 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intergovernmental Transfer System Schedule—Law No. 6360 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average Metropolitan Intergovernmental Transfer Shares per GDP (%, 2010–2017). Source Authors’ calculations, Ministry of Finance, Turkish Statistical Institute, General Directorate of Mapping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average Real Annual Change of Metropolitan Intergovernmental Transfer Shares (%, 2010–2017). Source Authors’ calculations, Ministry of Finance, Turkish Statistical Institute, General Directorate of Mapping . . . . . . . . . . . . . . . Average Metropolitan Intergovernmental Transfer Shares per GDP (%, 2010–2017). Source Authors’ calculations, Ministry of Finance, Turkish Statistical Institute, General Directorate of Mapping, Ministry of Development . . . . . . . . . . . . . . . . . Average GDP Share of Intergovernmental Transfers (year 2014 is excluded). Source Authors’ calculations . . . . . Local Government Revenue and Expenditure, 1975–2017, As a Percentage of GDP. Source Authors’ calculations based on the figures provided from Presidency Strategy and Budget Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Local Government Debt and Its Components, 2006–2017, As a Percentage of Total Government Debt. Source Authors’ calculations based on figures provided from General Directorate of Accounting Statistics . . . . . . . . . Composition of Special Provincial Administrations Revenue (As a Total Share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Composition of District of Town Municipalities Revenue (as a Total Share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Composition of Metropolitan Municipalities Revenue (As a Total Share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Composition of Provincial Municipalities Revenue (As a Total Share). Source Authors’ calculations based on the figures provided from General Directorate of Accounting Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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36 46

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List of Figures

Fig. 11.1

Fig. 11.2 Fig. 11.3

Map of Countries Accounting Bases for Annual Financial Statements in 2015. Orijinal Source OECD and IMF staff estimates, based on public information, including Blöndal and Moretti (2016) and Eurostat (2014) Source Cavanagh, J. Flynn, S. and Moretti, D (2016, p. 2) IMF, Implementing Accrual Accounting in the Public Sector . . . . . . . . . . . . . . . . . . Overview of the Turkish Public Accounting Reform. Source Mengüloğul, (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . The process of setting Public Accounting Standards . . . . . . . . .

xxiii

198 199 201

List of Tables

Table 1.1 Table 1.2 Table 3.1 Table 3.2 Table 7.1 Table 8.1 Table 9.1 Table 9.2 Table 9.3 Table 9.4 Table 11.1 Table 11.2

Table 12.1 Table 12.2

Benefits of TSA Source (Guide to Public Financial Management-USAID 2014) . . . . . . . . . . . . . . . . . . . . . . . . Evaluation of Turkish TSA systems’ features . . . . . . . . . . . Loans Subject to Debt Assumption Commitment Source Turkish Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . Operational Risk Matrix Source Turkish Treasury . . . . . . . Net GBTR Shares by municipality types . . . . . . . . . . . . . . The restructured debt by consolidation or cancellation laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Local Government Expenditures and Revenues as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . Local Government Expenditures as a percentage of Total Government Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . Total Local Government Revenues as a percentage of Total Government Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of Treasury Guaranteed Loans of Local Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Published Public Accounting Standards (DMSs) . . . . . . . . Public Accounting Standards (GGAR with IPSASs) (This table has been prepared based on DMSs (http://www.dmsk. gov.tr/), GGAR (The Ministry of Treasury and Finance 2018b) Central Government Accounting Regulation, (The Ministry of Treasury and Finance 2018c)) . . . . . . . . . Internal auditor appointments . . . . . . . . . . . . . . . . . . . . . . . Status table for 2018 internal auditor appointments (on the basis of administration) . . . . . . . . . . . . . . . . . . . . .

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xxv

Part I

Asset and Liability Management

Chapter 1

Extended New Treasury Single Account: New Tool for Government Cash Management in Turkey Barı¸s Can

1.1 Introduction Treasury Single Account (TSA) is a pooling cash system that enables public cash resources to be managed centrally and efficiently. In literature, it is defined as a unified structure of a bank account or a set of linked accounts through which the government transacts all its receipts and payments based on the principle of unity of cash and treasury (Pattanayak and Fainboim 2010). In fact, TSA means more than a single bank account. It means a banking arrangement system that ensures public resources to be managed in a consolidated way and enables governments to monitor and control all the transactions related to this public account in a holistic manner (Guide to Public Financial Management-USAID 2014). In this context, TSA can be seen as one of the most important tools for effective public financial management. In literature, a full-fledged TSA should have comprehensive scope to cover almost all public resources, including budgetary and extra-budgetary funds. It is observed that the TSA system has a wide scope in international good practices. For example, France has a well-developed TSA, covering the cash resources of central government agencies, municipalities, quasi-government agencies, local authorities, and even overseas authorities. United Kingdom has also a comprehensive TSA, including central government agencies, and all extra-budgetary funds (Pattanayak and Fainboim 2010). However, the scope of TSA in Turkey was quite narrow when compared to international good practices. It only covered payment and collection accounts of the general budget administrations, which are the only subset of the central government budget. This limited scope of the TSA was the biggest obstacle to effective cash management because it caused a substantial amount of public resources managed out of the scope of the TSA (Can 2018). In this context, efforts B. Can (B) Treasury and Finance Expert at Cash Management Department, Ministry of Treasury and Finance, Ankara, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_1

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on extending the scope of the TSA system have been started and then New Extended Treasury Single Account (New TSA) system, which enables public resources to be managed by single hand without disturbing the administrative and financial autonomy of public administrations, has been established with the latest amendment to the Law No. 4749, dated on March 21, 2018. By the law, the New TSA has comprehensive coverage to include almost all public resources (Law on Regulating Public Finance and Debt Management 2002, 2018). In addition to its wide spectrum, the New TSA in Turkey has an idiosyncratic structure that is convenient for all institutions with different structures. This chapter analyzes the New TSA with its different aspects. In this chapter, after the importance of TSA for cash management is addressed, the features of an ideal TSA and its historical development in Turkey are examined. Thereafter, following a brief summary of the New TSA project plan, the structure of the New TSA is discussed. Then, its design is examined in detail. In addition, an expected return from the New TSA is revealed. In conclusion, our assessments set forth have been summarized.

1.2 The Importance of TSA in Cash Management In literature, cash management is defined as the strategy and associated processes for managing cash flows in a cost-effective manner (Williams 2004). The main aim of cash management is to have the right amount of money in the right place and at the right time to meet obligations of the government (Storkey 2003). A modern cash management approach consists of the following four pillars: (i) the establishment of a TSA, (ii) an effective cash forecasting and cash planning, (iii) determining liquidity buffer and remunerating cash resources with alternative instruments, and (iv) using cash management borrowing instruments, respectively. Although each of all these pillars is quite necessary for effective cash management, the establishment of a TSA, compared to others, has a particular importance for strengthening the cash management function. Williams (2010) alleged that a well-designed TSA is a prerequisite for modern cash management, since it provides a consolidated view of government cash resources, allows to offset cash flows mismatching, helps to improve cash control, and ensures transparency and accountability of public transactions. TSA accelerates the modernization of cash management process by allowing cash management units to go beyond their traditional payer role to perform the functions of a modern financial manager. Namely, TSA spurs them on adopting efficient planning, forecasting, financing, and financial investment mechanisms as well as managing cash flows actively. In short, it paves the way for the effective implementation of other pillars (Yaker et al. 2015; Mu 2006). Table 1.1 summarizes the likely contributions of the establishment of a TSA. Considered benefits below, a TSA is seen as one of the most important tools for improving a cash management system, especially for countries with mostly fragmented systems. Features of Effective TSA

1 Extended New Treasury Single Account …

5

Table 1.1 Benefits of TSA Source (Guide to Public Financial Management-USAID 2014) Benefit Area

Specific Benefits *Effective control over aggregate cash balance *Improved cash visibility Improved Liquidity *Efficient and timely collection and disbursement processes Management *Improved debt management (realistic cash flow projection) *Significant cost reduction (transaction processing and interest costs) *Single disbursement account (centralized TSA) *Low cost transactions Improved Payments *Facilitates payment automation through interfaces to operating systems Processing *Allows utilization of modern payment services such as pre-paid cards, electronic funds transfer and direct deposits *Controlled disbursement accounts *More efficient collection of government revenue Improved Revenue *Improved government services through enhanced transaction recording Mobilization *Improved cash projection *Improved control against theft and fraud

Improved Internal Control

*Simplifies the government cash flow to only a few bank accounts, which means fewer bank reconciliations *Limits other agencies from opening bank accounts *Few individuals have access to checks, wires and other payment instruments *Clear segregation of duties

Improved Accounting Processes

*Automation of payments allows real-time recording of cash transactions *Allows automated daily reconciliation *Provides easily accessed audit trails *Increases reliability of accounting data

In literature, a full-fledged TSA should contain the following features: (1) The government bank accounts should be unified within TSA to ensure that only one authority (treasury) is responsible for operating government resources (Concentration). (2) TSA should be located at the Central Bank (Location). (3) The scope of TSA should be designed as comprehensive as to cover all government cash resources in order to provide a full consolidation of government cash resources (Coverage). (4) Collected government resources should be swept into TSA immediately, and disbursement should be made when expenditures are justified (Timely transaction). (5) Information on TSA’s cash position should be accessible in real time (Timely information). (6) Government resources should be used by treasury temporarily for cash management purposes (Fungibility). Moreover, the general framework of TSA should be defined on legal basis, since a legislation ensures TSA’s robustness against autonomous institutions that are prone to object to be included in TSA (Williams 2013; Pattanayak and Fainboim 2011).

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1.3 Historical Development of TSA in Turkey Upon the need for equilibrating public cash flows in terms of time and place, the first TSA system, named “Single Account (SA)”, was established in Turkey in 1972. However, the SA was behind the international practices in many respects. For the SA, accounting units of the general budget institutions had accounts at Ziraat Bank (ZB), a public commercial bank acting as the agent of the Central Bank of Republic of Turkey (CBRT). In the SA, accounting units used the same bank accounts for both collections and payments. In the SA system, there were no daily cash transfers between the Treasury and the accounting units. Instead, the Treasury would meet their needs once a week. Therefore, they used their cash balances for making their payments without Treasury’s approval. Even if they did not have enough cash amount in their bank accounts, they were also able to make payments by funding from ZB in order to avoid a delay in payments. The SA system was based on a weekly reconciliation. Accounting units used to send realizations of their expenditures and collections to the Treasury weekly. Then, reconciliation was used to be done between the Treasury and the Ziraat Bank. Following the reconciliation processes, if needed, the Treasury used to transfer necessary cash to ZB or vice versa. Albeit the reconciliation period would take 7 days, the overall reconciliation process could extend up to 12 days in practice (Erdener and Cicek 2014; Karabulut 2013). In 2007, the first transformation took place by establishing Treasury Single Current Account (TSCA). In the TSCA, accounting units were not allowed to make any payment unless there was sufficient cash in their payment accounts. Moreover, they could not make a payment without the Treasury’s approval so it can be easily said that the Treasury with the TSCA system could control cash flows better than the SA. In addition to this, with the TSCA system, the function of payment and collection accounts were separated from each other; thus, accounting units were not able to spend their collections. By doing so, all collections were gathered into the TSCA. However, these developments are not enough for an ideal TSA, because there was still a fragmented banking account structure and were too many manual processes within the TSCA. In 2011, through technological advances, the second transformation was realized when Public Electronic Payment System (PEPS) was introduced. With PEPS, payment accounts of spending units were transferred from the ZB to the CBRT. The payment structure of the TSA system has become more centralized in this way. Thus, the TSA has become one step closer to international best practices. As it can be understood from Table 1.2, by the virtue of technological developments, the Turkish TSA has undergone a considerable progress in operational and structural areas over the years since its establishment; however, there were still some areas to be improved. Current TSA (prior to New TSA) in Turkey satisfies the four of six fundamental features (location, timely information, concentration, fungibility) listed above exactly, but not the remaining two features (timely transactions and coverage). Hence, some structural reforms in the field of public financial management should be put into practice.

1 Extended New Treasury Single Account …

7

TSA operations are conducted by solely the Ministry of Treasury and Finance, and no institution within TSA can maintain resources in their bank accounts (concentration ✓). The TSA account is held with the CBRT (location ✓). Any information related to cash transactions stemming from government operations and banking accounts within the TSA system can be accessed immediately by the Ministry through Treasury Internet Banking System (TIBS) (timely information ✓). Any balances remaining in the accounts of the public administrations are transferred to the TSA via sweeping mechanism at the end of every day. All collections, irrespective of the institutions collecting them, are gathered in the TSA, and all disbursements are made from the TSA to them by considering their cash needs (fungibility ✓). When all these features are taken into account, it is obvious that current TSA system in Turkey performs very effectively. However, the lack of the other two features restricts its effectiveness. The first one is related to timely transactions. In current TSA (before the New TSA), tax collections were transferred to TSA after having been kept in the bank accounts for a certain period of time since no commission fee is paid to banks in response to their collection services on behalf of the government; instead, they were allowed to use their collections for a while. Using the cash amounts with a delay brought about bearing implicit costs for the Ministry. However, ideally, any collections should be transferred to the TSA immediately after it realizes, and the authority responsible for managing the TSA should use that collected cash amounts without delay (timely transactions X). When compared to international best practices, the scope of the current TSA (before the New TSA) in Turkey was quite narrow. In literature, it is alleged that the TSA coverage should be designed as much comprehensive as to cover public institutions of the general government, at least public institutions within the central government. Taking international applications into consideration, we can see that TSA systems have a wide spectrum. While TSA’s scope in some countries covers central government, in other countries it includes social security funds, local administrations, and extra-budgetary funds, even all the public institutions. Many countries such as France, Great Britain, Russia, Austria, and Brazil have extended the coverage of TSA in accordance with the related literature. However, the TSA system (until 2018) in Turkey just covered the general budget administrations (coverage X). This situation led to a substantial amount of public cash resources to be managed outside of the TSA and mitigates the effectiveness of public cash management. As shown in Table 1.2, the New TSA will solve the aforementioned shortcomings of the current TSA and satisfy all features of a full-fledged TSA that is accepted in the literature.

1–2 Weeks

Manual Process

Reconciliation period

Cash transfer/sweeping process (Manual or Electronic)

Central bank

General Budget institutions (Only Regional Units)

Fragmented

Partial fungible

Treasury has partial authority

None

Yes

TSA location

Coverage

Bank accounts structure

Fungibility

Authority on TSA

Remuneration of TSA

Legal basis

Structure

Decentralized

None

Sweeping mechanism (Days)

Collections—Irregular Payment—Daily

Payment method

1 week later

Timely transaction (On Average)

1972–2007 (SA)

Timely information

Operational

TSA Features

Table 1.2 Evaluation of Turkish TSA systems’ features

Yes

None

Treasury has full authority

Completely fungible

Fragmented

General budget institutions

Central bank

Partial Electronic Process

On a daily basis

On a daily basis

Centralized

Collections—2–3 days Payment—Daily

Instant access (Partial)

2007–2011 (TSCA)

Yes

Remunerated daily (CBRT)

Treasury has full authority

Completely fungible

Unified

General budget institutions

Central bank

Electronic Process

On a daily basis

On a daily basis

Centralized

Collections—2–3 days Payment—Daily

Instant access

2011—(Current TSA)

Yes

Remunerated daily (CBRT). Remunerated daily, weekly, monthly (Other state-owned banks).

Treasury has full authority

Completely fungible

Unified

Central government, local administrations, social security institutions, state owner enterprises, funds

Central bank

Electronic Process

On a daily basis

On a daily basis

Centralized

Collections—Daily Payment—Daily

Instant access

2018—(New TSA)

8 B. Can

1 Extended New Treasury Single Account …

9

1.4 New TSA in Turkey 1.4.1 The New TSA Project Plan After the examined the TSA’s shortcomings, the efforts on extending the scope of the TSA started in 2016 and continued until 2018 when a New TSA was established as a result of intensive work. The establishment of the New TSA has taken almost 2 years, because it necessitated making alterations in many different fields such as banking architecture, accounting structure, legislative framework, and IT infrastructure. So, it needed a full-fledged project plan to cover all the issues necessary for an effective TSA (Fig. 1.1). Thus, at first, a project plan was prepared and then project team was formed in accordance with the project plan. The system was designed with the contribution of each member of the project team, by closely examining international best practices. After the completion of the design of the system, the account inventory of public institutions was examined, and the issues requiring regulations for the legislation, banking architecture, IT, and accounting infrastructures were determined. Afterward, some necessary amendments regarding those steps have been made in line with the project plan. As of October 17, 2018, a pilot implementation has been initiated with a single institution. In the following process, it is planned to gradually expand the scope of the system and aimed to cover all institutions.

Fig. 1.1 Project plan of new TSA

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1.4.2 The Definition of New TSA With the latest amendment, dated on March 21, 2018, the New TSA definition was added into, and its general framework was regulated in the Law No. 4749, named as the “Law on Regulating Public Finance and Debt Management”. By the Law No. 4749, the New TSA defined as The main account in which financial resources of public administrations except for the Unemployment Insurance Funds are collected to be managed by Ministry of Treasury and Finance provided that they are recognized as receivables without being associated with revenue and expense accounts of budget.

The definition clearly reveals that the New TSA system is designed for the purposes of managing all public resources by a single hand without disturbing institutions’ administrative and financial rights over their resources. Moreover, the definition implies that the New TSA structure is found on bank–customer relations between the Ministry of Treasury and Finance and the institutions and any transactions between each other create debt–credit relationship. While the Ministry works as the bank of institutions, institutions work as the customer of this bank. Whereas Treasury becomes debtor to them, relevant institutions become creditor in response to putting their financial resources within the New TSA.

1.4.3 The Scope of the New TSA With the latest amendment to Law No. 4749, the scope of the TSA system in Turkey has been redesigned to cover all public resources excluding Unemployment Insurance Fund. The Law authorizes President of the Republic of Turkey to determine which institutions’ resources would be managed under the scope of the New TSA system. Within the limits of the powers conferred by the Law, the President of the Republic issued Presidential Decree on the scope of new TSA, dated on August 8, 2018. According to Presidential Decree, the New TSA’s coverage is composed of special accounts of general budget administrations, the financial resources of special budget administrations, regulatory and supervisory agencies, social security institutions, extra-budgetary funds (excluding Unemployment Insurance Fund, Saving Deposits Insurance Funds), and revolving funds (Presidential Decree on Determining the Scope of New TSA 2018) (Fig. 1.2).

1 Extended New Treasury Single Account … Outside of the Coverage Broad Coverage by Law Coverage Determined by Presidential Decree

Coverage of the Old TSA System

11 - Unemployment Insurance Fund - Public Banks - Turkey Wealth Fund - Municipalities - State-Owner Enterprises - Saving Deposits Insurance Funds - Other - Central Government (including special accounts) - Social Security Institutions - Extrabudgetary Funds - Revolving Funds

- General Budget Institutions

Fig. 1.2 The coverage of new TSA in Turkey. Source (PEMPAL 2018)

1.4.4 The Design of New TSA The Ministry of Treasury and Finance is responsible for financing of the general budget institutions’ expenditures based on the accrued budgetary expenses according to current TSA. But now, with New TSA, it is also responsible for providing all the cash requests of the institutions under the coverage of New TSA and for managing public cash resource as the sole authority. Namely, with the New TSA, the Treasury undertakes a new role as the banker of institutions in addition to its financing role. In order to perform its new role, Regulation for Implementation of the New TSA was issued on August 9, 2018, which regulates cash requesting, daily and monthly cash programming processes, payment and collection processes, bank account structures, accounting responsibilities, remuneration of the New TSA, revenue sharing mechanism, and other issues. According to Regulation, the New TSA is found on a framework comprising four pillars: (i) cash request/programming module that cash demands of institutions are collected, and cash programming and payment are made for them on a daily basis; (ii) banking architecture, which is a well-designed zero-balance sweeping mechanism that helps to transfer balances of institutions into TSA at the end of day, and the payment/collection systems through which all government transactions are carried out on real time and in electronically; (iii) an effective accounting module recording any liabilities–assets (payables–receivables) stemming from transactions within the TSA on a daily basis, and (iv) information technologies infrastructure.

1.4.4.1

Cash Forecasting, Requesting, Programming, and Payment/Collection Method

The Ministry of Treasury and Finance works as the bank of institutions in the framework of the New TSA. Therefore, cash requirements of the institutions should be met

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on a daily basis. In this regard, new cash request/forecasting/programming modules were set up in order to make better estimations on the cash flows of institutions and to prepare cash programs accurately. Institutions upload their expected monthly cash inflows and outflows to these modules on a daily basis. Based on the forecasting of cash flows of the institutions, the Ministry prepares a monthly cash program and informs them via the same system. Monthly cash forecasting is only used for envisaging expected cash flows not for programming stringent daily cash transfer plan since it is based on forecasting of institutions (not actual cash request). Following monthly cash program, institutions should notify their daily cash requests to the Ministry till 10.30 a.m. for every day via the same system. After collecting daily cash requests, the Ministry makes daily cash program and then sends payment orders to the CBRT to transfer the cash amount to payment accounts of institutions in line with daily cash program. Then, institutions can give their payment orders to the ZB for transfer cash to vendors. Collection and payment accounts of each institution are zero-balance accounts, so balances remaining in the bank accounts of institutions following payments are swept into the New TSA at the end of day. Hence, this process should be repeated for each day (Regulation for Implementation of the New TSA 2018; Can 2017) (Fig. 1.3).

Treasury Forecasts and Requests of Institutions

Approved Cash Requests

Instuons Forecast & Requested Cash Data (Monthly,Daily)

Reconciliation Data for Collections

Programmed/Approved Cash Requests

Central Bank

Make Payments

Vendor Ziraat Bank

Fig. 1.3 The process of new TSA

1 Extended New Treasury Single Account …

1.4.4.2

13

Banking Architecture

All operations within the scope of New TSA are carried out through specific bank accounts. Banking architecture of new TSA is pyramidal. The main account, called as “New TSA Bank Account (THKH)”, is the top of this pyramidal structure. In addition to THKH, each actor within the TSA has four accounts for the purposes of operating cash flows. The Ministry uses four accounts with the CBRT, two of them for payments and other two for collections. Each institution has also two transaction accounts for collections with the CBRT and two transactions account for payments with the ZB. Additionally, if they need, each institution can open sub-collection/payment accounts in other domestic banks by way of receiving formal approval of the Ministry. The main reason for opening two payments and two collections accounts for each institution is to follow budgetary and extra-budgetary transactions separately. All these accounts are zero-balance accounts and maintained directly linked to the THKH. Balances of institutions are swept into the THKH at the end of each day. At the beginning of the next day, upon demands of the institutions, the Treasury transfers cash amounts to the payment accounts of them via New TSA Payment Account or New TSA Special Payment Accounts. Collections of institutions are transferred into THKH through New TSA Collection Account or New TSA Special Collection Account (Fig. 1.4). No transfer can be made between payment and collection accounts. Any balance of collection accounts can not be used for payment purposes or vice versa. All transactions are realized electronically, so cash withdrawals cannot be made from the payment and collection accounts.

New TSA (Main Account)

New TSA Payment and Collecon Accounts (Transit Accounts)

Payment and Collecon Accounts of Instuons (Transacon Accounts)

Fig. 1.4 The pyramidal banking architecture of new TSA system

14

1.4.4.3

B. Can

Accounting Structure

The principle of New TSA is to provide full fungibility of government resources and to allow the Ministry of Treasury and Finance to manage government cash resources more effectively without violating institutions’ tenure on their resources. A well-designed accounting structure that enables institutions and the Ministry to bookkeep their asset-liabilities within the New TSA reciprocally is essential for the New TSA’s effectiveness. In this regard, new accounts and accounting processes regarding the New TSA were regulated with the amendment on General Government Accounting Regulation and Central Government Accounting Regulation, dated in February (2018). According to the mentioned regulations, these two accounts and their accounting processes are defined as below: 135- New TSA Receivables: This account is used by institutions for bookkeeping their receivables from the Ministry of Treasury and Finance. This account reflects how much financial resources public institutions hold within the New TSA. Institutions record debit in this account in response to increasing their receivables when they transfer their cash resources into new TSA or Treasury grants are released for them. When taking cash from the Ministry, they reduce their receivables by crediting with this account. 335- New TSA Payables: This account is used by the Ministry for bookkeeping its payables to the public institutions within the New TSA. This account reflects how much financial resources public institutions hold within the TSA. The Ministry credits with this account when receiving cash amount from institutions or giving Treasury grants to them. When transferring cash amounts, it reduces its payables by debiting this account (Fig. 1.5). These accounts are used for determining the ceiling of cash amount that can be transferred to institutions by the Ministry and for bookkeeping the institutions’ tenure on their resources kept within the New TSA. Actually, these accounts are the heart of the new TSA system since they are used as the control parameter of the system.

Fig. 1.5 Accounts of the new TSA Source (Can 2017)

1 Extended New Treasury Single Account …

1.4.4.4

15

Information System Structure

The New TSA operates through three separate information systems: (i) In order to gather cash request/forecasting information and to make cash programming, New TSA system, which is a stand-alone system developed using Java with Spring Framework and Hibernate as a multi-tier architecture, is used. New TSA system runs on SAP NetWeaver Portal 7.3, with role-based access control. (ii) In order to transfer electronic payment order, in the collaboration of CBRT and the Ministry, an integration called “Treasury Internet Banking System (TIBS)” has been developed, using Java Web Services (JAX-WS). In the New TSA System, the Treasury uses TIBS for making cash transfers from TSA to institutions’ payment accounts. (iii) In order to record all transactions within the scope of New TSA, the “New Government Accounting Information System” is used. Additionally, in order to use in cash programming, New TSA System uses the integration, developed using Java Web Services (JAX-WS), to collect information on account records from the New Government Accounting Information System (Fig. 1.6).

1.4.5 Likely Contributions of New TSA to Public Financial Management in Turkey The main motivation behind the extension of TSA is to utilize from public cash resources more efficiently by averting the cash resources from being idle for extended periods in numerous bank accounts held by institutions, while the government continues to borrow to execute its budget (Can 2018; Pattanayak and Fainboim 2010). In addition to this, another motivation is to remunerate public cash resources optimally and to control government cash resources by a single hand. Actually, the Ministry of Treasury and Finance in Turkey has already monitored the government cash resources. Hence, it is aware of the amount of public resources, but it has not controlled all those resources through current TSA. This situation causes a large part

New Government Accounng Informaon System (Accounng

New TSA System (Cash Forecasng/ Cash Requesng/ Cash Programming)

Module)

Treasury Internet Banking System (Payment/Collecon Module)

Fig. 1.6 IT system used in TSA

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B. Can

of the public resource to not be managed effectively. In order to overcome the trouble emerged from partial coverage of current TSA, the New TSA is established; therefore, the Ministry have the opportunity to control almost all government resources by this way. The New TSA brings novelty on public financial management in many respects which are summarized below: • Monitoring all public resources and drawing complete information on government cash resources in real time: By consolidating government cash balances into TSA, uncertainty about government cash position is alleviated and transparency regarding cash flows is enhanced. • Enabling public resources to be collected in a single pool and utilizing those more efficiently through economies of scale: Although the course of total deposits of institutions that will be managed within the New TSA varies from period to period, it has revolved around  53.6 billion on average.1 Namely, the Ministry can use these considerable resources without bearing cost in the long run through the New TSA. When analyzed the course of these resources for the 4-year period, it is easily observed that total deposits for that period have followed a fluctuating course within the range of  38.2 billion– 73.8 billion, and the resources have not fallen below  38 billion. This means that there is a significant and stable amount of public resources that could be used by the Ministry for cash management purposes. Moreover, those stable resources have risen over the years so the Ministry will probably have the opportunity to utilize from much more resources within the next years via the New TSA (Fig. 1.7).2 • Reducing and avoiding unnecessary borrowing by allowing the Ministry to use a substantial amount of cash resources: The New TSA provides full fungibility Total Deposit

Average Deposit

75 70

BILLION ₺

65 60 55 50 45 40

Feb 2014 March 2014 Apr 2014 May 2014 June 2014 July 2014 Aug 2014 September 2014 Oct 2014 November 2014 Dec 2014 January 2015 Feb 2015 March 2015 Apr 2015 May 2015 June 2015 July 2015 Aug 2015 September 2015 Oct 2015 November 2015 Dec 2015 January 2016 Feb 2016 March 2016 Apr 2016 May 2016 June 2016 July 2016 Aug 2016 September 2016 Oct 2016 November 2016 Dec 2016 January 2017 Feb 2017 March 2017 Apr 2017 May 2017 June 2017 July 2017 Aug 2017 September 2017 Oct 2017 November 2017 Dec 2017

35

Fig. 1.7 Total deposits of institutions managed within the new TSA by the Presidential Decree. Sources (Can 2018) 1 During

2014–2017. covers 2014–2017 and data obtained from the Deposits and Securities Statistics of Institutions within the Scope of General Communiqué for Public Treasurership.

2 Period

1 Extended New Treasury Single Account …

•

•

• •

•

17

of resources meaning that the Ministry can use these resources for alleviating short-term cash deficit without bearing cost when there are government resources being held idle; thus debt management unit can prepare their financing programs without considering short-term cash shortage and it does not need to borrow more than necessary. Hence, the New TSA paves the way for reducing borrowing costs. Remunerating government resources with more appropriate instruments, maturities, and rate of return: A significant part of public resources is currently being held in demand deposits or in short-term time deposits. This situation demonstrates that public resources currently out of TSA are not remunerated efficiently. However, with the New TSA, Treasury can remunerate public resources with more appropriate maturities and the rate of return, thanks to economies of scale. Also, the Ministry can deposit the substantial amount of cash in public banks for a long period since the total available balance for the Ministry’s use becomes more stable when all public resources are consolidated within TSA. The analysis of the likely effects of the extension of TSA shows that with New TSA Treasury can get around  4 billion additional interest revenue.3 Positive contribution to the general budget: The New TSA makes positive contributions to general government budget. The study on likely effects of the establishment of New TSA shows that the Ministry can gain approximately yearly 4 billion  additional interest revenue on its deposits through the New TSA without bearing any additional borrowing cost. These additional interest revenues obtained from public resources within the New TSA are recorded as income on the chart of the general budget (B) by the Law No. 4749. Improving operational control during budget execution: The Ministry can plan and implement budget execution in an efficient, transparent, and reliable manner when it can access to full information about government cash resources. Lowering precautionary liquidity reserve: Some institutions’ inflows cancel out other institutions’ outflows, and therefore overall cash resources remain at steady by consolidated within the New TSA. Thus, the New TSA allows the Ministry to maintain a lower precautionary cash reserve/buffer to meet unexpected fiscal volatility. According to the study on the likely effects of the expansion of TSA, the fact that the Ministry with the New TSA can access roughly  38 billion available resources on average helps to reduce the volatility of cash flows of Treasury. The banking sector is affected positively: Almost all public resources are swept into TSA, held at CBRT, with the New TSA. This situation may create a concern for liquidity withdrawal among public banks because a large part of public resources currently is kept in public banks. However, this type of concern is groundless since the New TSA aims to remunerate public financial resources in an effective way without disturbing current liquidity positions of public banks. Hence, a new statement, which enables the Ministry to remunerate its resources on public banks as well as CBRT, was added to the Law No.4749 with the latest amendment. By the Law, government resources within the new TSA can be remunerated in both

3 For

detail, see the master thesis, “The Impact of Expansion of Turkish Treasury Single Account System on Public Financial Management in Turkey”, prepared by Can (2018).

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B. Can

the CBRT and other state-owned banks (public banks). This amendment provides benefits for both the Ministry and public banks. It provides alternative investment opportunities for the Ministry to consider when evaluating the government cash resources and the Ministry can deposit its resources for a longer term and more appropriate returns, thanks to stable resources. Moreover, it relieves the concern for the liquidity position of public banks which keep the balance of institutions since the resources will be held in them for longer term. Therefore, it is easy to say that the New TSA makes positive contributions to the liquidity position of the public banks as well. • Allowing public institutions to concentrate on their duties rather than evaluating their cash and reducing bureaucratic processes: With the New TSA, all responsibilities of institutions regarding remunerating cash are handed over to the Ministry. Furthermore, any charges, fees, commissions, and similar amounts to be paid for transactions and other services made within the scope of New TSA will be made by the Ministry. Hence, they do not waste their time on financial affairs, and they can focus on their main duties. • Institutions turn out to be profitable when being involved in the New TSA: The revenue sharing mechanism between Treasury and some institutions is regulated in the Law No.4749 for protecting their financial rights. According to the Law, provided that the resources of municipalities, special provincial administrations, state-owned enterprises and their subsidiaries, establishments and businesses and their associations are included within New TSA, amount of interest income to be shared with the aforementioned institutions is determined by considering 70% of the weighted average interest rates for deposits (up to 1 month) in Turkish Lira by banks announced by the CBRT. Aforementioned institutions currently gain interest revenue from their resources with lower rate than the above-mentioned rate. Thus, revenue sharing mechanism will contribute additional revenue to them. Concisely, the total benefit obtained from New TSA will spread to overall economic actors, from the banking sector to institutions.

1.5 Conclusion Modern cash management is the strategy and associated processes for managing cash resources in a cost-effective manner. With the adoption of a modern cash management approach, it is possible to meet state’s obligations in an effective and timely manner with the lowest possible costs and risks. To achieve those purposes, establishing a comprehensive TSA system, which enables the consolidation and the optimum utilization of government cash resources, is essential. TSA system facilitates utilizing public resources more effectively, reducing unnecessary borrowing and ensuring that public resources are remunerated with an appropriate rate of return and instruments. TSA system was started to be implemented in Turkey in 1972; however, in that period of time, the function of the TSA was different from international practices.

1 Extended New Treasury Single Account …

19

Since its establishment, the structure of TSA has been revised many times to converge international good practices. Nevertheless, these revisions were for the improvement of function of TSA, not for the scope of it. In this context, the New TSA system was established in 2018 which has a comprehensive scope to cover almost all public resources and an idiosyncratic structure that enables public resources to be managed in a holistic manner without violating the public administrations’ administrative and financial autonomy. The new TSA provides many benefits to improve public financial management in Turkey. With the New TSA, the Ministry could manage significant cash amounts which are mainly stable ( 53.6 billion on average). Moreover, the Ministry can remunerate a substantial amount of cash resources with some alternative investment instruments, and it could gain a considerable amount of additional interest revenue on its deposit (average on  4 billion). Additional revenues collected from public resources managed within the New TSA will make positive contributions to the government budget as well. Furthermore, the evaluation of public resources collected within the New TSA for longer periods in public banks will contribute to improve the resource allocation of public banks. Besides, in addition to the tangible benefits of TSA, it will also contribute to achieving efficiency, discipline, and transparency in public financial management considerably. Accordingly, the total benefit obtained from the New TSA will spread toward the overall economy. In conclusion, when its benefits are considered, the New TSA is seen as one of the most significant reforms for the public financial management in Turkey.

References Bureau of Economic Growth, Education and the Environment Office of Economic Policy Capacity Building Division. (2014). Guide to Public Financial Management. United States Agency International Development. Retrieved on May 3rd, 2019 from http://pdf.usaid.gov/pdf_docs/PA00K55Q. pdf. Can, B. (2018). The Impact of Expansion of Turkish Treasury Single Account System on Public Financial Management in Turkey (Master thesis, TOBB University of Economics and Technology, Ankara, Turkey). Retrieved on April 2nd, 2019 from https://www.researchgate.net/ publication/327474188_The_Impact_of_Expansion_of_Turkish_Treasury_Single_Account_ System_on_Public_Financial_Management_in_Turkey_Tek_Hazine_Hesabi_Sisteminin_ Genisletilmesinin_Turkiye_Kamu_Mali_Yonetimine_Etkisi. Can, B. (2017). A proposal for a new extended treasury single account model (Treasury Expert Thesis). Undersecretariat of Turkish Treasury, Ankara, Turkey. Central Government Accounting Regulation 2014. (2018, February, 24). Erdener, G., & Cicek, S. (2014). Moving towards a modern cash management: the Turkish experience. In C. Cangöz & E. Balıbek (Eds.), Treasury Operations in Turkey and Contemporary Sovereign Treasury Management (pp. 189–214). Ankara, Turkey. General Government Accounting Regulation 2014. (2018, February, 24). Karabulut, A. (2013). Treasury single account, selected country practices and Turkey experience (Treasury Expert Thesis). Undersecretariat of Turkish Treasury, Ankara, Turkey. Law On Regulating Public Finance And Debt Management 2002. (2018, March 21).

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Mu, Y. (2006). Government cash management: Good practice & capacity-building framework (The World Bank Financial Sector Discussion Series Working Paper, Report Number: 96463). Washington DC, USA: The World Bank. Pattanayak, S., & Fainboim, I. (2011). Treasury single account: An essential tool for government cash management (Technical Note). Retrieved on May 5th, 2019 from https://www.elibrary.imf. org/view/IMF005/121439781475504699/12143-9781475504699/12143-9781475504699.xml. Pattanayak, S., & Fainboim, I. (2010). Treasury single account: Concept, design and implementation issues (IMF Working Paper, No: 10/143). Washington DC, USA: IMF. PEMPAL (2018, November). Extending the coverage of TSA system in Turkey. In Proceeding of TCOP cash management thematic group meeting, Vienna, Austria. Presidential Decree on Determining the Scope of New TSA 2018. (2018, August, 8). Regulation for Implementation of the New TSA 2018. (2018, August, 9). Storkey, I. (2003). Government cash and treasury management reform. (Asian Development Bank - The Governance Brief, issue no. 7). Retrieved on June 14th 2019 from https://www.adb.org/ publications/series/governance-briefs?page=2. Williams, M. (2013, July). Overview of government cash management. In Proceedings of Middle East Regional Technical Assistance Center IMF—METAC, Budget execution and cash management. METAC meeting, Beirut, Lebanon. Williams, M. (2010). Government cash management: Its interaction with other financial policies (IMF Technical Note). Retrieved on May 4th, 2019 from https://www.elibrary.imf.org/view/ IMF005/11035-9781462318254/11035-9781462318254/11035-9781462318254.xml. Williams, M. (2004). Government cash management: good and bad practice. The World Bank. Yaker, I. F., Albuquerque, C. M., & Vargas, J. A. (2015). The treasury single account in Latin America: An essential tool for efficient treasury management. In C. Pimenta ve M. Pessoa (Eds.), Public Financial Management in Latin America: The key to efficiency and transparency (pp. 129– 180). Washington DC, USA: Inter-American Development Bank.

Barı¸s CAN is a Treasury and Finance Expert at Ministry of Treasury and Finance of Turkey and he also continues to PhD program in Economics at the Graduate School of Social Sciences, Middle East Technical University. He graduated from Hacettepe University, Department of Economics in 2013 with honor degree and got his Master of Science in Economics degree with master thesis entitled “The Impact of Expansion of Turkish Treasury Single Account System on Public Financial Management in Turkey” from TOBB University of Economics and Technology. He has many articles in the field of government cash management and Treasury Single Account in referred journals. In 2014, he started his career at General Directorate of Public Finance of Turkish Treasury of which he has served in several departments. He is currently working at Cash Management Department as Treasury and Finance Expert. During his career, he has worked on several projects for improving public financial management in Turkey such as “Integrated Public Financial Management Information System”. He also conducted “Extending Treasury Single Account (TSA) System” project as a project owner. He designed and proposed new extended TSA model for Turkish Treasury by creating proper accounting, operational and legal framework. He was given the “2019 Outstanding Performance Award” for his efforts by the Minister of Treasury and Finance.

Chapter 2

Public Debt Management Reforms in Turkey Mete Saat

2.1 Introduction Public debt is a natural outcome of the financing of deficit-producing budgets. In an economy, if there is a fiscal imbalance, then public debt is inevitable. In other words, public borrowing is not a choice for economies which cannot produce balanced budget or surplus. Borrowing is an exceptional and temporary way of budget financing. The past fiscal imbalances are transferred to the future via borrowing. Public debt perceived as remedy for fiscal deficits, if not managed properly, may itself turn into source of fiscal problems. Increased level of indebtedness can imply negative impacts on the economy such as raising cost of government funding, reducing the private investment and thus a decrease in the potential economic growth (Lojsch et al. 2011). Additionally, the countries with higher debt stock are more vulnerable to shocks, have less budget flexibility, and sooner or later face a debt solvency problem. The most recent incident regarding solvency was experienced in 2008; the global financial crisis caused widespread large deficits and swelling public debt in many countries (Cherif 2012). The likelihood of occurrence of another “Great Depression” triggered expansionary fiscal policies in many countries in 2009. However, fiscal stimulus through increased expenditures accounted for only a small fraction of the increase in debt, whereas collapsing revenues and higher unemployment and social benefits contributed the largest share (IMF 2011). The IMF (2012) estimated that the level of public debt for advanced countries increased from about 75% of GDP before the crisis to above 100% of GDP in 2011, a level unseen since the Second World War. It is evidenced that the fiscal failures sooner or later hit the public debt. The debt burden has been one of the significant fundamental problems of Turkish economy for a long time until 2001. The debt burden reached its peak level with M. Saat (B) Head of Department, Ministry of Treasury and Finance, Ankara, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_2

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M. Saat

the financial crisis in 2001 and the country faced its most severe debt crisis in its history. After this year, Turkey drew its lessons from the crisis. Thanks to efforts for transformation of public debt management system in Turkey, the effect of global financial crisis was limited on government debt. This paper discusses the public debt management reforms that were introduced after 2001 financial crisis in Turkey. Although the reforms cover a long list of areas like receivables management, operational structure changes, information technology development, and human resource management, the focus of this paper is on the changes in legal framework, the new risk management approach, the developments in cash management, and the improvements in transparency from the debt management perspective. Finally, the outcomes of the reforms are demonstrated with the debt indicators and whether the public debt management reforms paid dividends or not is discussed.

2.2 Public Debt Management Reforms in Turkey The public debt management became a vital economic problem with the rising debt burden for both developed and developing countries in the last decade. The challenge of debt sustainability is a concern not only due to its internal dynamics but also due to the rising concerns regarding the global public indebtedness. The spillover effect was observed in the late 90s Asian, Russian Debt Crisis, and European (PIIGS) Debt Crisis,1 and this effect is the most fearful aspect of the debt crisis. Regardless of the level of debt, the financial contagion fear raises stress on the government borrowing. The best way to overcome this stress is to minimize the risk associated with the structure of public debt, so that to immunize debt stock to financial shocks. After 1980s especially with the deepening and outspread effect of globalization on financial crisis, the main objective of the public debt managements has evolved from purely borrowing the necessary cash in the money market to managing the debt with risk and market consideration. The main purpose of the contemporary public debt management is to raise the required funding for the government operations in line with the risk and cost objectives taking market developments into account. The development of the government securities market and supporting monetary policy can also be counted as other purposes of debt management. With this regard, the public debt management is defined as “the process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet any other sovereign debt management goals the government may have set such as developing and maintaining an efficient market for government securities” (IMF, World Bank 2001). Choosing

1 During the European debt crisis, the PIIGS was used to refer to the economies of Portugal, Ireland,

Italy, Greece, and Spain, EU member states that were unable to refinance their government debt or to bail out over-indebted banks on their own during the crisis.

2 Public Debt Management Reforms in Turkey

23

the optimal timing, pace, and tools to reduce public debt are the main challenges confronting policymakers faced with high public debt. From the debt dynamics equation, fiscal consolidation, high growth, large inflation, or low interest rates constitute the elements of a debt reduction strategy (Cherif 2012). Turkish Treasury started domestic borrowing auctions in mid-1980s and diminished the reliance on Central Bank financing. Turkish economy had suffered from frequent crisis resulting from structural problems such as chronic high inflation, unstable growth, high public deficits, and weak financial sector structure (Cangöz and Balıbek 2014). Moreover, Turkey was severely influenced by the debt crisis that took place nearby with a lag of few years. Turkey’s high level of public debt was in an increasing trend in 1990s. The rise in the first half of 1990s can be attributed to high budget deficits. In the second half, the high debt level associated with high real interest rates put Turkey into a vicious circle. The lack of financial management discipline through all levels of government resulted in higher deficits which financed with costly domestic borrowing. In 1990 31 TL, in 1999 72 TL, in 2002 85 TL out of every 100 TL tax collection was allocated for interest payment (Turkish Treasury 2003). The public debt reached an unsustainable level for Turkey in the early 2000s. The public debt was the main reason for the financial turbulence due to its high level and unsustainable structure. Considerable part of the state liability was buried in the balance sheets of the state-owned banks, namely, Ziraat Bank, Halkbank, and Emlak Bank. The weak banking sector balance sheet also poisoned the public debt through rescue operations. Consequently, the consolidated budget domestic debt stock to GNP leaped from 29% in 2000 to 69% in 1 year and total debt stock exceeded the GNP. The poor and unsustainable structure of the public debt called an alert and the government decided to change the course how the debt is handled in Turkey and adopted the Law No. 4749 on Regulation of Public Financing and Debt Management (PFDM). The Law was put into effect on March 28, 2002 and the debt management reforms took start, in other words, the milestone for the Turkish debt management is Law No. 4749. The following sections will be on the reforms brought with PFDM. In the following sub-sections, we discuss Turkey’s debt management reforms and strategies to cope with high public debt in 2000s.

2.2.1 Legal Framework The Law No. 4059 on the Organization and Duties of the Undersecretariat of the Treasury and Foreign Trade and the yearly budget laws used to draw the framework for debt management in pre-reform period. These two laws included provisions to

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M. Saat

authorize Treasury2 to borrow on behalf of State under specified limitations. Aforementioned laws were enough to handle day-to-day operations but did not specify a systematic debt management approach. The high indebtedness brought public financing reform onto the agenda. The Law No. 4749 on the Regulation of Public Financing and Debt Management was enacted. The main purpose of Law is to regulate the domestic and foreign borrowing in coordination with the fiscal and monetary policies while maintaining the confidence and stability in the market. Besides, it also aims to help ensure fiscal discipline and to increase transparency and accountability in the management of debts and claims. Treasury’s functions according to the aforementioned laws may be summarized as administration of domestic and external borrowing in the name of State, managing the risk of liabilities and claims, management of the cash for general budget institutions, extension of Treasury guarantees, debt assumptions, and grants. Besides, the annual budget law authorizes government not only to collect and spend resources but also to raise debt. The laws are also detailed with the supporting secondary regulations like by-laws on Central Government Accounting, debt, and risk management. The most challenging and restraining part of Law No. 4749 lies in the third part which is on the limits. Article 5 defines the limits for borrowing, on-lent, and guarantees. Formerly, the borrowing limit was defined loosely in yearly budget law and Law No. 4749 revised both the borrowing limit quantitatively and qualitatively. The borrowing limit was redefined as the difference between the total initial budget allocations and the total estimated budget revenues in general budget level. The former limit was considering net domestic debt utilization, whereas the new definition is based on net debt utilization. The other aspects of the new borrowing limit include the amount of increase allowed in a year lowered from 15 to 10%, issuances for special purposes were included in the limit, and the limit changing feature of supplementary budget was removed. Before PFDM Law, the limit on guarantees specified in the annual Budget Laws only imposed an upper limit on the amount of Treasury-guaranteed credit but with the Law, guarantees to be provided for build–operate–transfer projects were also included in the limit. The limit on debt assumption facility provided for public– private partnership projects was added as an article to the Law in 2013. The amount of the limits on guarantees and debt assumption are left to be determined each year through an article of the Budget Law for the year in question. In order to ensure budgetary and borrowing discipline and to enable the borrowing program to be prepared more effectively, the assumption of guaranteed debts and the use of foreign project credit, which were not included in the budget but nevertheless created financing needs, have been included in the scope of the budget starting in 2003 in accordance with PFDM Law. Another legal reform directly related to debt management was the introduction of Law No. 5018 on Public Financial Management and Control (PFMC) in 2003

2 With the Presidential Decree No.1, the Law No. 4059 was abolished and The Ministry of Treasury

and Finance (MoTF) had been assigned as the new authority.

2 Public Debt Management Reforms in Turkey

25

which redefined the public sector classification and altered the shortsighted budgeting approach. Law No. 5018 provided a new public internal financial control system to be established; the scope of the central budget law is increased; a new medium-term expenditure framework has been developed; strategic planning, performance-based budgeting, and performance audit systems have been developed; internal and external audit mechanisms have been established; the ex ante financial control power have been delegated to line ministries. Application of the Law brought accountability, transparency, and efficient, economic, and effective collection and utilization of public resources which are essentials of prudent fiscal policy and a sound debt management environment.

2.2.2 Risk Management Approach and Organizational Structure Changes Turkey has made considerable improvements in enhancing its public debt risk management practices over the past two decades. Of course, the debt managers were always aware of the fact that borrowing in short term brings about refinancing risk, or issuing foreign exchange denominated bonds increases the vulnerability to foreign exchange shocks in the 1990s. Unfortunately til the introduction of the Law 4749, there was no systematic approach to diminish the interest or foreign currency vulnerability of the public debt stock in Turkey. The aim of the Law is to increase transparency and accountability in the management of the debt and claims, also together with the Law 5018, to ensure the fiscal discipline in order to resolve debt problem. Since the establishment of the Treasury in 1994, in the institutional framework of the debt management in Turkey, front office function of external borrowing has been conducted by Directorate General of Foreign Economic Relations (DGFER), whereas the front office of domestic borrowing, accounting, cash management, and reporting functions are held by Directorate General of Public Finance (DGPF). Pursuant to the article 12 of the Law 4749, the strategic benchmarks and relevant application framework for the management of Treasury’s assets and liabilities are determined by Debt and Risk Management Committee (DRMC) which is comprised of the minister, undersecretary, and his/her deputies and general directors related to debt management. The benchmarks and framework are subject to the final approval by the minister. The policy development and proposals are prepared by the risk management unit under DGPF which serves for both external and domestic borrowing. In accordance with the “Regulation on the Principles and Procedures for the Coordination and Execution of Debt and Risk Management”, the DRMC specified the borrowing strategies and targets for 2003 as follows: 1. Extending the annual weighted average maturity of cash domestic borrowing as far as market conditions permit,

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M. Saat

2. Strengthening the Treasury’s cash reserve, and 3. Beginning to use short-term borrowing instruments on the money markets in coordination with the Central Bank. Although the numeric targets are not disclosed, more or less the same borrowing strategies and targets are kept for all years so far. Meanwhile, as part of risk management approach and to keep the market risk at manageable levels, • strategic benchmarks on borrowing and stock level or reserve levels for TL and FX have been calculated using simulation models, • a credit scoring model was developed to creditworthiness of institutions seeking Treasury guaranteed or on-lent loans, • medium-term debt sustainability programs were prepared using macroframework, and • a budget forecasting model was prepared to simulate fiscal performance and predict budget financing requirement (Cangöz and Balıbek 2014). The decisive and successful implementation of the risk management approach to public debt gave affirmative results, sensitivity of the debt stock to macro variables reduced. As noted in the Debt Management Indicators Report of the MoTF in 2018, the amount of the percentage change in debt-to-GDP ratio stemming from 5.0% change in real exchange rate has diminished from 2.1 in 2001 to 0.5 in 2017. The debt-to-GDP ratio changes by 0.8 points as a response to 500 bp change in TL interest rate in 2017, whereas the ratio change was double in 2001. In 2017, 2.0% point change in GDP growth creates 0.5 point change in debt-to-GDP ratio; the change was more than triple of this in 2001.

2.2.3 Fiscal Performance and Primary Surplus Era With the fiscal discipline promoted by the fiscal constitutional Law No. 5018, Turkey has moved into an era of implementing prudent fiscal policies after the consecutive crisis in 2000 and 2001. In return, it was able to diminish the budget deficit. The central government deficit has diminished as low as 0.6% in 2006 from more than 11% in 2002 (Fig. 2.1). Thanks to the significant improvement in budget performance, the public borrowing requirement has fallen sharply. Due to Global Financial Crisis, borrowing requirement increased in 2009 mainly due to poor economic performance but the following recovery period helped to improve the public balance and borrowing requirement healed again. Primary balance is a generally accepted figure to have an insight into to what extent the fiscal policy is supporting the debt reduction policies. It is basically calculated as the difference between the revenues and the non-interest expenditures. As explained in the KBYR 2003, the primary balance stands out as an important fiscal policy

2 Public Debt Management Reforms in Turkey

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Fig. 2.1 Budget Performance of Turkey in 2002–2017. Source Ministry of Treasury and Finance, Budget Statement 2019

instrument since the interest expenditures are externally determined, and it is the cost of borrowing carried out to finance the deficits incurred in the current year and the past. Turkey ambitiously focused on the producing primary surplus (positive balance) in post-2001 Crisis Period between 2002 and 2008. Although it is still kept on positive side, the magnitude of primary surplus has fallen due to the relatively expansionary fiscal policies to boost economic growth. Eyraud and Weber (2013) argue that the debt ratio does not decrease one-for-one with fiscal tightening because fiscal tightening reduces GDP in the near term—an effect referred to as the “fiscal multiplier”. Lower GDP in turn reduces the denominator of the debt ratio and also partly offsets the consolidation effort, thus affecting the numerator (automatic stabilizers). Although this simple math seems true for most countries, at end of the strong fiscal consolidation period between 2003 and 2007, Turkey has produced an average primary surplus of more than 4.7% of GDP and succeeded to drop the debt-to-GDP ratio by 34%. This achievement is a good example of how fiscal policy affects a country’s struggle with public debt and proves why Turkey prioritized the fiscal policy as the most important reform area for coping with high sovereign indebtedness. In this sense, the PFMC Law is regarded as complementary to PFDM Law or vice versa.

2.2.4 Debt and Cash Management Interaction Although many consider the budget management and cash management the same, these two have different horizons. Williams (2013) defines the budget management as ensuring the budget is managed consistently within agreed financial limits, whereas the cash management is about ensuring the government has the liquidity to execute

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its payments. Sound budget execution does not necessarily mean the cash is managed properly. The analogy of the profitability and solvency of a company may illustrate the distinction; the government may face cash shortages because of the expenditure and revenue timing mismatch; nevertheless, budget is producing surplus. In the public financial management system of Turkey, cash management is a very important integral part of debt management. There is a two-way relationship in between; cash management unit provides future cash flow projections to debt management unit; in return, the debt management unit provides the borrowing program and redemption profile to keep the cash program updated. The crosswise data sharing is crucial for the accuracy of both sides’ programming. The deviation in one side results in deviation in other. Thus, in line with strong liquidity buffer policy, Treasury cash reserves are managed taking into consideration strategic benchmarks and indicators defined by DRMC. Moreover, a short-term borrowing facility has been introduced to meet the shortterm cash shortages, and a new appropriation has been defined to meet the relevant financing cost in Law 4749. The facility has never been deployed so far but it serves as a buffer to balance the uneven distribution of cash flows without increasing debt. Besides the introduction of the use of short-term borrowing and strategy of strengthening the Treasury’s cash reserve, the most important reform in cash management is eventually the establishment of Treasury Single Account (TSA) in 2010. In TSA, the government revenues are consolidated in the bank account of cash management unit, in Turkey’s case, in Treasury’s account held in Central Bank of Republic of Turkey (CBRT). Government revenues are consolidated in TSA, and government expenditures are met from this account. All of the balances of line ministries are transferred to TSA at the end of the day, and cash managers utilise these resources. The benefit of using ministries idle cash balance in meeting expenditures helped to reduce the borrowing requirement and increased Treasury’s cash balance. In line with international best practices, a protocol is signed with CBRT regarding the remuneration of Treasury cash balances in order to reduce the amount of idle Treasury cash reserves in 2011. According to the reciprocity principle, a monthly fee that is calculated on the basis of relevant year’s tariffs is paid to CBRT for Treasury operations such as borrowing and payments. In net, Treasury is earning more interest in its cash balance than the fee it pays; in other words, TSA with remuneration helped to reduce the amount and cost of borrowing in Turkey.

2.2.5 Reporting and Transparency Uncertainty about the borrowing policies is perceived as a form of risk by market participants and results in a risk premium which is reflected as higher borrowing costs. In order to reduce the risk premium on public sector borrowing policies, it is essential that the financial markets should be kept informed about the borrowing policies. The increased level of predictability helps market participants to allocate their resources accordingly, reduces risk premium, and decreases the borrowing cost.

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The most visible aspect of the new debt management phenomena in Turkey after Law No. 4749 is transparency. Keeping the public informed about the way in which the debt is managed is important not only for achieving fiscal discipline but also in terms of accountability and the evaluation of performance. In order to provide this transparency and accountability in debt management, Public Debt Management Report has been prepared monthly and annually in line with the provisions of the PFDM Law. The annual report contains detailed information and analysis on the borrowing, guarantees, credits, and similar transactions of the Treasury—the institution which is authorized to carry out, on behalf of the State, transactions of a kind that lead to financial liabilities (Turkish Treasury 2003). The monthly bulletin features the results of budget execution, cash, borrowing, and stock transactions and projections in further detail. Treasury has been using the web page very efficiently for data dissemination. All sorts of borrowing and stock data are published generously on the web (www. treasury.gov.tr), and the market participants are keeping abreast of these data. For the sake of increasing transparency in debt management, next year’s domestic financing program is published 3 months prior to the end of year following the release of the Medium-Term Program on Treasury’s website. The financing program includes detailed data like domestic and foreign debt services, the amount and breakdown of expected non-borrowing financing, and anticipated domestic and foreign borrowing. The financing program outlines the borrowing strategy in general and helps Treasury to communicate with domestic and foreign investors about how much financing will be provided from the market. It is the most important roadmap for debt managers to follow in the coming year, and any deviation from the targets is questioned by the market participants. Besides the yearly financing program, in the beginning of each quarter, a more detailed domestic financing strategy program is published every 3 months. The detailed strategy starts with the monthly domestic debt service details and followed with financing program including the foreign debt service and expected financing breakdown between non-borrowing resources, domestic, and foreign borrowing for each and every 3 months. The program finally includes the securities to be issued and their features like type of bill, issuance type and auction, value, and redemption dates. Additionally, 2 business days prior to the auction date, the details about the auctions are disclosed on Treasury’s web page including the aforementioned data and coupon rate, etc. The pre-auction sales, auction results, and post-auction sales are made available as soon as possible on the same day. Finally, the monthly meeting of DGPF with PD banks is an important platform for both sides to exchange opinions. Since PD system was launched, PD banks find the chance to learn the future prospects of debt managers, and debt managers find chance to take market’s pulse in these meetings. The information shared minimizes the uncertainty for both parties and reduce the risk premium and borrowing cost.

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2.3 Turkey’s Debt Management Performance Overview Despite the fact that global financial crisis of 2008 and its aftermath resulted in large increases in public debt ratios to GDP, Turkey was able to keep its debt well below generally accepted threshold level and transformed public debt stock into a more resilient structure to economic shocks. With the fiscal discipline and efficient debt management implemented in recent years in Turkey, EU-defined debt stock has declined under EU-28 averages, net public debt stock has been reduced as percentage of GDP, ratio of interest expenditure to tax income has been decreased sharply, and significant progress has been achieved in terms of maturity and foreign exchange composition of debt stock. Debt-to-GDP ratio has reached its all-time record level in 2002 after the issuances for the bank rescue program. In a short period of time, the debt burden of Turkey improved, came below Maastricht Criteria level in 3 years, and eventually stabilized at a low level. Especially in pre-global financial crisis period, thanks to the steady economic growth and prudent fiscal policy, the debt level trended downwards. The downward trend in debt to GDP ratio was broken by the poor economic performance associated with budget performance (see Fig. 2.1.) in 2008–09 but continued afterward. The ratio was stable below 30% between 2014 and 2017 but climbed over 31% after the currency shock in 2018 but it is expected to get lower according to estimations (Fig. 2.2). Another important parameter of debt management performance is the burden of borrowing. But debt managers are generally expected to minimize debt servicing cost, the interest, considering the level of risk. Minimizing risk and reducing the cost, both were major achievements of Turkish debt management (Fig. 2.3).

Fig. 2.2 EU Defined General Government Debt of Turkey in 2002–2021. Source Ministry of Treasury and Finance, Budget Statement 2019

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Fig. 2.3 Interest Expenditure-to-GDP of Turkey in 2002–2017. Source Ministry of Treasury and Finance, Budget Statement 2019

The interest expenditure-to-GDP ratio has improved significantly since 2002. The ratio has reached 14.4% with the issuance of special-purpose bonds for duty loss receivables of state-owned banks and bank rescue operations. The effect of the debt management strategy worked through and the interest expenditure more than halved in 3 years. As the economic growth normalized after global financial crisis, the ratio fell below 5% and in 2017 it fell to all-time low level, 1.8%. The above mentioned outlook implies the fact that debt management strategy worked wonders, and Turkey has improved debt burden since the introduction of Law No. 4749. The debt level was removed from the list of chronic problems in a global environment where even the developed economies face high government indebtedness (Fig. 2.4). The interest rate outlook of the central government debt brings into sharp relief that Turkey deliberately transformed debt stock into a less interest rate sensitive structure. The weight of the fixed-rate stock has gradually increased over the last 15 years (Fig. 2.4). This trend gives the idea that one of the strategic benchmarks was relying heavily on fixed-rate borrowing, making lower amount of the stock vulnerable to interest rate shocks, and in return lowering the risk premium on government borrowing. This strategy together with the extending maturities also helped to lower the market risk. In 2017, the share of the floating rate stock has shrunk to one-third of its level in 2003 when the public debt risk management phenomenon was introduced in Turkey. The CPI-indexed stock also has a remarkable increasing trend especially after 2010 with price stability was achieved and one-digit inflation rates were spoken. In accordance with the strategy of minimizing the foreign exchange rate exposure of the government debt stock, the weight of the TL-denominated stock was raised and FX-denominated domestic borrowing was minimized. At its best level, less than 30% of stock was FX-denominated and the currency risk was mitigated (Fig. 2.5). Nevertheless, the depreciation of TL in recent years worked in favor of FX-denominated

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Fig. 2.4 Interest Structure of Central Government Debt of Turkey in 2003–2017. Source Ministry of Treasury and Finance

stock. Together with the increase in nominal volume of external borrowing, the revaluation with increasing FX rates brought the FX-denominated stock’s weight up to 40% in 2017.

2.3.1 Domestic Borrowing Historically, as it is the case for almost all countries, domestic borrowing has been the main source of financing for Turkey. The main investors of domestic issuances are banks, and thus the health of the banking system has direct effect on public borrowing. Turkish financial system was prone to crisis in the late 90s and the banking system failed in 2000 due to liquidity and in 2001 due to state-owned banks which were not indemnified for their duty losses. High public borrowing requirement caused banks to lend more to government instead of private sector. Short maturities, high inflation, and political instability were other factors of financial uncertainty. It is obvious that the debt management was a difficult task in this environment. One of the important reform areas directly effecting debt management was the financial sector regulations after 2001 crisis in Turkey. In reform period, the inadequate capitalized banks were liquidated and special-purpose bonds were issued to cover the state-owned banks’ duty to lose receivables. Additionally, as part of

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Fig. 2.5 Currency Structure of Central Government Debt of Turkey in 2003–2017. Source Ministry of Treasury and Finance

active debt management strategy, Treasury’s buy-back and switch auctions provided liquidity and helped to recover the open positions of the banking system. Besides the reform program, the primary dealer (PD) system was launched again in 2002 with lessons learned from the unsuccessful attempt in 2000. The primary dealership system is a mechanism to increase the efficiency and liquidity of the primary and secondary markets by guaranteeing a demand of securities issued. The system reduces the roll-over risk, expands the investor base, improves the price determination mechanism, and enhances the competitive climate. The mechanism is expected to serve to reduce the risk premiums, particularly in countries such as Turkey where risk premiums are high. The initial attempt started with 19 banks, whereas the number dropped to 10 in 2002 with certain selection criteria. Under the primary dealership scheme, a series of obligations have been imposed on the PD banks. The most important one is the minimum purchasing requirement of at least 3% of monthly bill/bond issuances and 5% in each 3-month period. With minimum purchase limit, every PD bank is obliged to purchase a certain portion of the debt instruments issued and certain amount of debt can always be guaranteed to be raised, in line with the number of banks in the system and the levels of their obligations. Another important liability designed to assist the development of the secondary markets is PD banks’ obligation to buy and sell or at least to quote price

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continuously for specific government securities in certain amounts in the secondary markets. Furthermore, within the framework of the active debt management strategy, Treasury fulfilled all necessary actions to the extent domestic and global market conditions allow. Buy-backs, switching operations, consumer price indexed, and long-term fixed coupon bonds are samples of innovations in aftermath of Law No. 4749. Associated with the steady economic growth and prudent fiscal stance, the debt management strategy yielded increased borrowing maturities, lowering borrowing costs (Fig. 2.6). In 2002–2004 period, average maturity of domestic borrowing was around 1 year, then it moved up to an average of nearly 4 years in 2011. The longest maturity was achieved in 2013 when Turkey gained its second investment grade from a well-known credit rating agency. The investment grades helped to increase Treasury’s access to the international financing easier and reduced the burden of borrowing. The share of the foreign residents in domestic borrowing is perceived as an important indicator of growth and debt management performance. In 2003, the share of the foreigners in domestic debt stock was 4.4% (Fig. 2.7). With the help of the reform program, the rate quickly went up to 13% in 2006 and reached twenties in 2012. Debt managers may perceive the share of foreign investors as a measure of reliability of their strategy and country’s economy. Despite part of the decrease in foreign investor

Fig. 2.6 Average Maturity of Domestic Borrowing (Months), Turkey in 2002–2018. Source Ministry of Treasury and Finance

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Fig. 2.7 Share of Foreign Residents in Domestic Debt Stock (%), Turkey in 2002–2018. Source Ministry of Treasury and Finance

share may also be attributed to the lower risk appetite to emerging markets due to lowering liquidity in international markets, debt managers should investigate and figure out the reason of decreasing confidence.

2.3.2 External Borrowing The external borrowing is not only a source of funding for expenditures; it also serves to finance the current account deficit for countries like Turkey which usually run current account deficits. Turkey’s external borrowing follows the path of its economic growth. There is an incremental trend in aftermath of crisis in 2001 with the establishment of creditworthiness in international markets (Fig. 2.8). Moreover, Turkey’s external borrowing has shifted from loans to bonds in the last 17 years. The share of the loans (includes the multilateral agencies, bilateral lenders, and others) was almost 60% of the total external debt. Thanks to economic performance and easier access to the international markets, more of the external borrowing was realized through bonds. The share of the bonds has reached more than three-fourths of the total external debt (Fig. 2.9). In the same period, the amount of loans has not only decreased in weight but also the total nominal financing with loans has also de-escalated. First reason for

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Fig. 2.8 Central Government External Debt Stock (Million USD). Source Ministry of Treasury and Finance

Fig. 2.9 Central Government External Debt Stock by Source of Funding (Million USD). Source Ministry of Treasury and Finance

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this structural change is the redemption of the IMF loan, and the second one is the change in strategy of budget financing rather than project financing.

2.3.3 Islamic Finance Instruments The motivation behind the issuance of Islamic finance instruments is to diversify the instruments and broaden the investor base. The introduction of the former forms of Islamic finance instruments in Turkey backs in 1980s. The securities were issued on the revenue collected from the bridge toll. The maturities were 3 years, and the coupon rate was determined as a percentage of the relevant term’s toll revenue. The demand was high and thus second round issuance was demanded and realized. As a country with Muslim majority country, there are citizens that have sensitivity and they refrain from investing in interest-bearing activities. In order to meet this demand, to foster domestic savings and to bring the idle savings into the economy in domestic market and also to attract the foreign Islamic funds into Turkey, the revenue indexed bonds (RIB) were issued for the first time in January 2009. The RIB was issued in the following years and ended in 2012 due to incompliance with Islamic rules. In the same year, a new instrument, lease certificates (Sukuk) were issued for the first time in both domestic and international markets. Lease certificates are in full compliance with Islamic rules and are defined as securities designed by the asset leasing companies in their own name and own behalf and for the account of and the benefit of certificate holders to provide the financing of assets that are taken over by special-purpose vehicles through sale or lease agreements and to give the holders of the security the entitlement to the revenues generated from these assets in proportion to the holders’ share. Turkey has actively been in Sukuk market and has been issuing regularly in domestic and international markets through direct placement method.

2.4 Conclusion Turkey has made great improvement in the management of the public debt since 2002. The framework for debt management was designed with the Public Finance and Debt Management Law in a broader sense rather than solely deficit financing approach. The average borrowing cost has diminished, while the average maturity of the borrowing was extended and debt stock is less sensitive to shocks. The improvements cannot be attributed only to debt management but it is quite obvious that the Treasury has done what it should since the beginning of the debt management reform started in 2002 with Law 4749. The gains of the reform era should be kept and further developed with a use of new debt management tools like derivatives, alternative financing instruments in

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new domestic or foreign markets. In this regard, recent issuance of gold and FXdenominated bonds in domestic market to enlarge the investor base and issuances in alternative markets like Samurai and Panda are positive developments. However, foreign exchange-denominated instruments have recently been offered in domestic market initially for retail investors. Although the sizes of these issuances are relatively low, the use of foreign exchange-denominated government bonds may arouse dollarization and increase the currency risk of the stock even without foreign financing. The use of these old–new instruments should be kept under control within the strategic benchmark framework. The wider use of Islamic financing instruments, especially to finance the investment projects, should be considered. The bond issuances linked to the proceeds of the projects will help to deepen the Islamic finance instrument market, and public offerings will help to increase domestic savings. For the sake of financing the current account deficit, the foreign market issuances might be increased. In this respect, the weight of project financing from abroad must be deployed more because the cost of public borrowing is relatively cheaper than the private sector’ cost of borrowing. Debt management should continue to be transparent in its actions and keep the market informed for the sake of efficient use of Turkey’s financial resources. The coverage of the debt management risk reporting should be enlarged to cover public– private partnerships, the financial sector assessment, and public corporations since these areas are potential risk areas for public debt with the lessons learnt in 2001 crisis. Finally, the fiscal policy is not supporting debt reduction as much as it used to in the 2000s; nevertheless, it is still over the border. The low level of indebtedness is generally perceived as a cushion for economic hard times because it creates room for a possible bailout. Thus in order to keep the debt level low, the policy of producing positive primary surplus should continue to be the main target of fiscal policy.

References Cangöz, C. & Balıbek, E. (2014). General Framework of Public Debt Management: New Trends and Reflections on Turkey. In C. Cangöz& E. Balıbek (Eds.), Treasury Operations in Turkey and Contemporary Sovereign Treasury Management (pp. 9–29). Ankara, Turkey. Cherif, R., Hasanov, F. (2012). Public Debt Dynamics: The Effects of Austerity, Inflation, and Growth Shocks. Washington, DC: International Monetary Fund. Eyraud L., Weber A. (2013). The Challenge of Debt Reduction during Fiscal Consolidation. Washington, DC: International Monetary Fund. Hartwig Lojsch, D., Rodríguez-Vives, M. and Slavik, M. (2011). The Size and Composition Of Government Debt In The Euro Area. Frankfurt: European Central Bank. International Monetary Fund. (2011). Fiscal Monitor: Addressing Fiscal Challenges to Reduce Economic Risks, September. International Monetary Fund. (2012). Fiscal Monitor: Balancing Fiscal Policy Risks, April. Turkish Treasury. (2003). Public Debt Management Report, April 2003. Ankara, Turkey.

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Williams M. (2013). Debt and Cash Management. In: Allen R., Hemming R., Potter B.H. (eds) The International Handbook of Public Financial Management. Palgrave Macmillan, London. IMF and World Bank. (2001). Guidelines for Public Debt Management. Washington, DC: International Monetary Fund and World Bank.

Mete Saat started his finance career in Banking School of Ziraat Bank. Following the completion of the theoretical banking and finance training, he was appointed to the Turkish Treasury as junior associate. He served in various debt management units in General Directorate of Public Finance for 10 years. He headed the SOE Annual Programs, Foreign Debt Operations and Budget Monitoring and Analysis Departments, respectively and he is currently heading the Cash Management Department in Ministry of Treasury and Finance. His expertise is on sovereign debt management, financial programming for state owned enterprises, public financial management and cash management. He holds a bachelor degree in business administration from Middle East Technical University. He completed his graduate study in public policy management in Heinz School of Carnegie Mellon University with highest distinction degree.

Chapter 3

The Role of Risk Management in Public Debt Management: The Case of Turkey Hakkı Karata¸s

3.1 Introduction Turkey has undertaken a significant public financial management reform process right after the 2001 financial crisis. Legally, this reform process is based on two main laws, Public Financial Management and Control (PFMC) Law (Law No: 5018) legislated in 2003 and Public Debt Management Law (Law No: 4749) legislated in 2002. The purpose of the PFMC law is to regulate structure and functioning of the public financial management, preparation and implementation of the public budgets, accounting and reporting of all financial transactions, and financial control in line with the policies and objectives covered in the development plans and programs, in order to ensure accountability, transparency and the effective, economic, and efficient collection, and utilization of public resources.1 In line with its purpose, this law brought significant improvements in the preparation process of the budget, in collecting revenues and making expenditures as well as introduced new concepts as financial control, internal and external audit, multi-year budgeting, strategic planning, and concepts such as transparency and accountability. The second law, which enhances public financial management framework in Turkey, is The Public Debt Management Law. It includes articles on domestic and external borrowing, contingent liabilities such as Treasury Guarantees and Debt Assumption Commitments in PPP projects, on-lending, management of treasury receivables, cash, debt, and risk management, and accounting principles of public debt. Specifically, the law defines Turkish Treasury as the sole borrowing authority, specifies the limits for new borrowings and Treasury guarantees, and defines the

1 PFMC

Law Article 1.

H. Karata¸s (B) Ministry of Treasury and Finance, Ankara, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_3

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procedural rules for domestic and external borrowing, guarantees issuance and undertakings, on-lent loans, collection of financial receivables. Moreover, it re-structures debt management organization and assures transparency and accountability in debt management. The law also identifies two main principles regarding the execution of debt and risk management2 : (i) To follow a sustainable, transparent, and accountable debt management policy that conforms to monetary and fiscal policies by considering macroeconomic balances; and (ii) To meet financing requirements at the lowest possible cost in the medium and long term, taking into account the risks, regarding costs as well as domestic and international market conditions. These two legislations formed the main basis for public financial management reform process implemented after 2001 financial crisis. The Public Debt Management Law provided for the first time the general principles and guidelines of debt management and incorporated risk management into debt management framework. Turkey reaped the benefits of this reform process in its public financial management in terms of reducing budget deficit, reducing debt levels as well as improving the structure of public debt. The aim of this paper is to highlight the role of risk management in public debt management with special emphasis on Turkish Treasury case. The second section of this paper provides the role and importance of risk management in public debt management. In section three, we explore general risk management framework implemented in Turkish Treasury with the public debt management law. In section four, we identify sources of risks in Turkish debt management and provide the tools and policies to overcome these risks. We conclude this chapter with our key findings and future policy alternatives that may be suggested for all public debt and risk managers.

3.2 The Role of Risk Management in Public Debt Management The main objective of public debt management is to find a balance regarding the tradeoff between cost and risk of borrowing. A debt manager who focuses only on reducing cost of borrowing may face significant risks which may jeopardize the declining costs when these risks materialize. Similarly, a debt manager who focuses on reducing risks may confront with high borrowing costs. To achieve their objective, debt managers need to have a view on the optimal debt portfolio. A risk management perspective incorporated in the debt management help debt managers to achieve their objectives by providing two main tools (Blommestein 2005). First, risk management framework provides a strategic benchmark policy. This benchmark policy requires debt managers to specify their risk tolerance and other portfolio preferences concerning the trade-off between cost and risk of borrowing. In other words, strategic benchmark provides guidance for the management of costs and risks. The second tool that risk management provides is the assessment of portfolio 2 Public

Debt Management Law Article 4.

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performance in relation to cost and risk. This performance assessment is carried out by doing sustainability and sensitivity analyses. A growing number of countries including Australia, Canada, Italy, New Zealand, Denmark, Ireland, Sweden, and United Kingdom started to take into account risk management in debt management especially after 1990s due to crises in debt markets (Silva et al. 2006). Specifically, most countries incorporated risk management in their debt management objectives. As a result, the middle-office (Risk management unit) has been at the center of most of the countries in managing their public debt. Accompanying this trend, Turkish Treasury also established a risk management unit in line with the new public debt management law. The law devoted a separate chapter titled “cash, debt and risk management” which shows the importance of integration of cash and debt management with risk management. Moreover, the risk management unit has been given the mandate of doing all the risk analyses and the mandate of implementing all the techniques and policies regarding risk management. In practice, the risk management unit in Turkish Treasury has two main roles. First, it uses all the risk management techniques to calculate sustainability of public debt. This role of the risk management requires extensive use of data to calculate all the risks including sustainability of debt stock, composition of debt stock, scenario analysis, and sensitivity analyses. The second role of the risk management function is to formulate medium-term borrowing strategy based on some strategic benchmarks. Through this role, risk management unit uses its calculations as an input in policymaking and provides a clear roadmap for front office departments. The two main roles of risk management, ensuring debt sustainability and providing strategic benchmark policies, are discussed below.

3.2.1 Debt Sustainability Analysis Debt sustainability is defined as the ability of a country to meet its debt obligations without requiring debt relief or accumulating arrears. These analyses usually involve making projections of future borrowings and some economic variables such as GDP growth, interest rate, FX rate, over a long term, and then using some ratios comparing debt stock as a share of GDP or budget revenues to assess debt repayment capacity (Guzman 2018). Debt Sustainability framework of Turkish Treasury is in line with IMF’s debt sustainability analysis framework (IMF 2014). According to this framework, there are three layers in debt sustainability analysis. First, risk management unit makes an in-depth analysis regarding current debt situation including maturity structure, composition structure, whether it has fixed or floating components, etc. The second layer of the debt sustainability framework includes identifying main vulnerabilities in the debt structure or in policy framework to introduce any policy corrections before any difficulty arises. The last layer of the framework includes examining debt-destabilizing policies when the debt is supposed to be in an unsustainable path.

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Based on this framework, the risk management unit first formulates a baseline scenario based on a set of macroeconomic variables, government’s projected policies, and assumptions which are clearly laid out. Once the baseline scenario is formulated, the risk management unit applies a series of sensitivity analyses to this baseline scenario and produces alternative scenarios. Lastly, the path of debt indicators is prepared and assessed in comparison with its past trend, with that of peer countries or with some upper limits. To give a concrete example, Turkish Treasury uses debt/GDP ratio in its sustainability analyses. When the Medium-Term Program (MTP) is published, the Treasury calculates debt/GDP ratio during the program by taking into account the macroeconomic framework envisioned in the MTP. This constitutes the baseline scenario in debt sustainability analysis. In the second stage, Treasury applies some shock scenarios to certain parameters like GDP growth, interest rates, FX rates, and inflation and recalculates the path of debt/GDP ratio and investigates whether it exceeds certain threshold levels determined by Debt and Risk Management Committee or levels of peer countries. In this stage, possible values of debt stock under various risk scenarios are estimated by using “Medium-Term Financing Program” and “Debt Management Simulation Model”. These models provide information regarding both realizations’ and projections’ figures regarding interest rate, FX composition, the maturity profile, and level of monthly financing requirement (Koc and Yavuz 2013). In the third stage of the analysis, risk management unit proposes policy alternatives, if there is a risk in terms of sustainability of debt.

3.2.2 Debt Management Strategy The second role of risk management in public debt management is setting debt management strategy based on the risk analysis carried out by risk managers. According to the first role of risk management, all risks inherent in debt management are carefully monitored and analyzed. The second role of risk management includes setting general policy framework to mitigate these risks by taking into account the cost of mitigating risks. Risk management performs this role by setting some strategic benchmarks in borrowing that help front offices in conducting auctions. This type of borrowing is defined as strategic borrowing in literature. Turkish Treasury has been implementing strategic borrowing since 2002 with the new public debt management law. In line with this policy, the risk management department first identifies the main sources of risks and quantifies these risks to be able to measure them. Once these risks are defined and quantified, risk management department suggests some strategic benchmarks either to mitigate or to keep these risks at manageable levels. Turkish Treasury has been implementing the following strategic benchmarks in public debt management to keep FX risk, interest rate, risk and liquidity risk under control:

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(i)

To borrow mainly in TL to keep FX risk under control. Through this benchmark policy, Treasury managed to decrease the share of FX debt in total debt stock from 46.4% in 2003 to 38.9% as of the end of 2017. (ii) To use fixed-rate instruments as the major source of TL borrowing and to decrease the share of debt stock with interest rate re-fixing period of less than 12 months. This strategy helped the Treasury to decrease interest rate risk. Thanks to this strategy decisively implemented since 2002, the share of floating rate debt decreased from 54.8% in 2003 to 34.9% in 2017. (iii) To increase the average maturity taking market conditions into account and to decrease the share of debt maturing within 12 months. This policy aimed to decrease refinancing risk. Thanks to this strategic benchmark, the average maturity of borrowing in domestic debt markets increased from 9.4 months in 2002 to 69.7 months as of August 2018. Moreover, the percentage of domestic debt maturing within 12 months decreased from 31.8% in 2007 to 13.2% in November 2018. (iv) To keep certain cash reserve in order to reduce the liquidity risk associated with cash and debt management.

3.3 Risk Management Framework in Turkish Treasury 3.3.1 General Framework of Risk Management The main objective of risk management in Treasury Debt management is to keep financing costs as low as possible given a certain tolerable risk level by taking market conditions into account. In line with this main objective, risk management uses the following methodology in controlling and managing risks. * Defining Risks: The first and the most important component of risk management is defining risks that Treasury faces in cash and debt management. In other words, risk management starts with the definition of risks. * Measuring Risks: After risks are defined, some metrics are used to quantify and measure these risks. Measuring risks would not only allow debt managers to monitor their risks but also allow evaluating policy alternatives. * Monitoring and Reporting Risks: After risks are quantified and measured through different methods these measures are monitored and reported regularly. This helps debt managers in Turkey to step in when the risk level approaches a certain threshold determined by debt management committee. * Controlling Risks: Risk taking is a natural behavior in debt management, and it may help in reducing financing costs when properly used. Hence, risks should be controlled by taking necessary risk-mitigating measures. The last component of the general framework of risk management in Turkey is controlling risks by implementing risk-mitigating policies. Otherwise, when risks are not controlled, they may produce undesirable results in debt management (Fig. 3.1).

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Fig. 3.1 Methodology of Risk Management in Turkish Treasury

3.3.2 Sources of Risks Either the risks inherent in debt and cash management may have a direct impact on Treasury liabilities or they may have an indirect impact on liabilities depending on the materialization of a contingent event. From risk management perspective, both types of risks are monitored and taken into account in risk analyses. In the following sub-sections, the main types of risks in cash and debt management of Treasury and the tools that are used to mitigate or control these risks are discussed.

3.3.2.1

Budgetary Risks

The budgetary risks are defined as any development that may reduce budget revenues, may increase budget expenditures, and hence deteriorate cash and debt dynamics of Treasury. In other words, any development or policy actions that may cause budget deficit to deviate from its targeted level are described as budgetary risks in cash and debt management. When the budget is approved by the parliament and promulgated, it includes estimated budget revenues and intended budget expenditures. Both these estimated revenues and expenditures are based on many assumptions. For instance, inflation, growth rate, FX rate, and tax rates are some of the variables used to estimate revenues. However, economic and financial conditions throughout the year may cause these and other related variables to divert from the estimations. Similarly, expenditures may increase due to change in economic outlook or due to policy changes of the government. These developments may cause tax revenues and expenditures to change from their target levels and hence lead to deterioration in cash and borrowing policies of Treasury.

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To mitigate risks from budgetary sources, Turkish Treasury uses a dynamic cash management framework. In this framework, the annual budget figures are converted to monthly and daily cash figures. By doing so, Treasury daily monitors cash revenues and expenditures which help Treasury management to step in when deemed necessary. Moreover, any policies that may have an impact on the budget are carefully analyzed from cash management perspectives, and the necessary measures are taken immediately.

3.3.2.2

Market Risks

Market risks are risks that may negatively affect cash and debt management of Treasury that may arise due to fluctuations in certain market variables such as FX and interest rate. Specifically, an increase in FX rates may cause FX debt payments to rise or an increase in interest rates may cause borrowing costs to rise. An increase in inflation rates may increase the debt payments due to inflation-linked securities. In all these three cases, the additional cost or the additional payments due to rise in these variables depend on the composition of debt stock. In other words, if there is no FX debt in the debt stock, then it would not be meaningful to fear from FX risk. Similarly, if there are no inflation-linked securities, inflation would not be a risk from debt management perspective. Thus, the risks that may arise from market conditions depend on the composition of debt stock. The crucial point in mitigating market risks is that there is a trade-off between cost and risk level. As risk rises, the cost of borrowing declines. On the contrary, to reduce risk level treasury should bear the cost of doing so. Reducing market risks require medium- to long-run perspective regarding the composition of debt stock. If the share of FX debt or the share of inflation-linked debt stock is too high, we need a medium-term perspective to reduce the share of these debt stocks in total debt stock. In Turkey, the share of FX debt in total debt stock was 46.4% in 2003 and Turkish Treasury managed to reduce it below 40% in 2017. Similarly, the share of floating rate debt stock has been reduced from 51.1% in 2003 to 24.7% at the end of 2018. The methodology that Turkish Treasury used to decrease these risky parts in total debt stock is called strategic benchmark policy. In strategic benchmark policy, risk management unit prepares some strategic benchmarks for front office units with regard to their financing in line with the general risk and cost targets. These benchmarks provide a forward-looking guidance for debt managers to transform the composition of debt stock and hence to reduce market risks that the debt stock is subject to. In addition to benchmark policy, Turkish Treasury also uses sensitivity, scenario, and sustainability analyses to monitor and report the magnitude of market risks that it faces. These analyses also help risk management unit to calculate risk and cost of each strategy that the risk management unit is suggesting to debt and risk management committee. The strategic benchmark policies are determined by debt and risk management committee by carefully analyzing all the costs and risks of each strategy.

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Contingent Liability Risks

Contingent liability is defined as a potential liability whose occurrence depends on a future potential event. The risks regarding these liabilities also depend on the occurrence of these events. Theoretically, if such an event does not occur, the risks from these liabilities are zero. There are two main sources of contingent liability risk for Turkish Treasury: (i) Treasury Repayment Guarantees and On-Lending and (ii) Debt Assumption Commitments for PPP projects. Treasury repayment guarantees are provided to public institutions, state banks, local governments, and development banks in Turkey for their external borrowings used in investment projects. Through this facility, these institutions are able to get cheap external funding for their investment projects. When these institutions fail to fulfill their obligations regarding their treasury guaranteed debt, Turkish Treasury steps in and makes the payment on behalf of these institutions. Hence, these guarantees are a source of contingent liability risk for Turkish Treasury. On-lending of external debt is a similar facility that is provided to the same institutions for their investment projects. The only difference is that in on-lending, Treasury signs the external loan contract with creditors and then re-lends this loan to the beneficiary institutions. On the contrary, in repayment guarantees the beneficiary institutions sign the external loan contract with the creditor and the Treasury only provides a guarantee for the beneficiary institution. From risk management perspective, the risk-mitigating tools are the same for both repayments guarantee and on-lending of external debt. The first policy tool that Turkish Treasury uses in mitigating risks arising from guarantees and on-lending is putting an annual limit for these facilities. This limit is calculated by taking into account the total risks of guarantee and on-lending stock. This limit is determined as 4.5 billion USD for 2019 fiscal year. The second risk-mitigating tool regarding these risks is collecting up to 1% guarantee/on-lending fee from beneficiary institutions. These fees are not recorded as revenues in the budget but accumulated in a separate account called Risk Account controlled and managed by Turkish Treasury. The reserves in this account are only used to cover undertakings of treasury guarantees so that these undertakings are not affecting our cash reserves. The third risk-mitigating tool is partial guarantee mechanism. Turkish Treasury provides guarantee up to a maximum of 95% of total liability. The fourth risk-mitigating tool is the external debt payment account that local governments have to open to benefit from Treasury guarantees or on-lending. This account is similar to Risk Account of Turkish Treasury. Local governments are obliged to open this account and accumulate some of the revenues from their investment projects in these accounts in order to fulfill their obligations. The last risk-mitigating tool in providing guarantees or on-lending loans is the credit rating model. By using this model, Turkish Treasury assigns credit ratings for each beneficiary institution and does not provide loans or guarantees to beneficiary institutions which do not exceed certain credit rating thresholds determined by Treasury.

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By using these risk-mitigating mechanisms, Turkey’s performance has been remarkable in managing risks from treasury guarantees. Although the stock of guaranteed debt increased significantly especially after 2006 onward and reached its peak level at 14 billion USD, the undertakings of Treasury declined from above 50% in 2002 to below 1%. The other source of contingent liability risk is the debt assumption commitments of Treasury for PPP projects to ease the financing of these projects. These projects are carried out by private sector (Project company) based on a contract with a public authority. Debt assumption mechanism initiates in the case of an early termination of the PPP contract between the public authority and Project Company. In case of an early termination, the Treasury assumes the remaining outstanding debt, and the assets are also transferred to the public authority. As in the case of Treasury guarantees, there are some risk mitigation policy tools within the risk management framework. First of all, there is an annual limit on budget as the case in Treasury guarantees. A ceiling has been introduced in the central government budget law in order to limit the debt assumption commitments for each fiscal year. This limit has been set to be 4.5 billion USD for 2019 fiscal year. Second, creditors have also been included in the risk sharing by limiting the debt assumption commitment to 85% of the outstanding debt in case of termination of the contract as a result of project company default. Third, there is also a cap for hedging costs payable by the Treasury in case of the early termination of the PPP contract, set at maximum of 10% of the senior loan. This cap has been introduced in order to limit the closing costs of the hedging instruments undertaken by the project company in order to contain exchange rate and/or interest rate risk. The debt assumption commitments have been provided for seven mega-projects which are shown in the following table. Some of these projects are still under construction, and some of them started to generate revenues (Table 3.1). These seven projects have been built by Build-Operate-Transfer (BOT) model. According to this model, private sector is responsible for financing, construction, operation for a certain pre-determined period and then transferring the project with its all assets at the end of operation phase. The private company does not cover total project cost via loans but also uses its own capital for construction. The government has two main roles in this process. First, the Treasury provides debt assumption commitment for the loans that are taken by private company. According to this commitment, when the project is subject to early termination, the Treasury steps in and makes the repayments of the loan. The second role of government in this process is that it gives demand guarantees in the operation phase of the project. For instance, when the demand for a highway is below a certain level, the gap is funded by transfers from budget. Hence, these projects have both direct fiscal risks that stem from demand guarantees and contingent liability risks that arise from debt assumption commitments of Treasury.

Table 3.1 Loans Subject to Debt Assumption Commitment Source Turkish Treasury

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Operational Risks

Operational risk management is rather a new risk category compared to other risk categories in cash and debt management of Turkey. Hence, it is the least understood one among all the other risk categories. Yet, the importance of operational risk should not be underestimated because when these risks are not properly managed they may lead to significant financial losses as the other risk categories do. Operational risk is usually defined as “the risk of loss (financial or non-financial) resulting from inadequate or failed internal processes, people, and systems, or from external events that impact a company’s ability to operate its ongoing business processes” (Tokaç and Williams 2013). Based on this definition, we argue that operational risks should have the following features to be managed properly. First, operational risks should be measured. Second, operational risks should be comprehensive meaning that they should cover all functional areas and all risk categories (compliance, fraud, IT, etc.) Third, operational risk management should be flexible so that it can be tailored to the needs of each entity. Lastly, it should include external events as well as internal ones, as these events may also incur significant losses. Turkish Treasury started to implement its operational risk framework in 2010 with the support of SIGMA, a joint initiative of OECD and EU. According to this framework, the aim of operational risk management in Turkish Treasury is to define operational risks, to measure them, to offer new control mechanisms, and to report operational risks. The general framework of operational risk management in Turkish Treasury is shown in the following diagram (Fig. 3.2). At the center of the operational risk, framework lays the risk profile matrix that includes all types of operational risks that Turkish Treasury faces in its cash and debt management. This matrix is constructed based on the basic definition of operational risk. Once these risks are identified, the probability of occurrence and the impact of each risk have been identified. After the risk profile table is completed, the risks are reported by all employees when they are materialized. At the last stage, employees also report new control mechanisms to prevent future occurrences of the risks they face. The main issue in definition of the operational risks is finding the sources of these risks. In Turkish Treasury, we identified six sources of operational risks: (i) business flows, (ii) coordination and communication, (iii) external factors, (iv) use of resources (human resources, technology), (v) information technologies, and (vi) legal infrastructure. After identifying the main sources of operational risks, we constructed a risk matrix that shows the probability of each risk and the impact of the risk which is shown below (Table 3.2). Through this matrix, all our potential risks are categorized based on their likelihood to occur and their impact when they occur. The risks that are high probability and that have high impacts are the most dangerous risks, and they need special treatment from Treasury.

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Fig. 3.2 General Framework of Operational Risk Management in Turkish Treasury. Source Turkish Treasury

When people face risk during a working day, they immediately record it in the risk profile table through web-based software specially designed for operational risk management. When they record the risks they face, they also report new control lists to prevent the future likelihood of occurrence of this particular risk. Moreover, when the risk is a new risk event and is not included in risk profile table, employees add this risk to the risk profile table so that the table is updated with new events and risks encountered. All the risks encountered are reported to managers every month. Moreover, the top five risks in terms of its frequency are reported to debt and risk management

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Table 3.2 Operational Risk Matrix Source Turkish Treasury Impact Level Very Low

Low

Medium

High

Very High

Very Low

Low

The Probability

Medium

High Very High

committee and special risk-mitigating tools and control mechanisms are designed and implemented for these risks.

3.4 Conclusion In this paper, we investigated the importance of risk management in public debt management and cash management in Turkish Treasury. The main sources of risk for Treasury in public debt management and cash management are fiscal risks, contingent liability risks, market risks, and operational risks. All these risk categories are managed in line with the same methodology. That is to say, for all risk categories, first risks are defined, measurement techniques are developed, and risk-mitigating tools are developed and reported. The general methodology in managing risks begins with identifying and defining risks. When risks are defined, they are measured so that they can be used in quantitative risk analyses such as scenario and sensitivity analysis. Then necessary risk mitigation tools are employed to control these risks so that they do not generate unbearable costs for Treasury. Turkish Treasury has benefited from its risk management practice in terms of changing the composition of its debt stock by applying appropriate strategic benchmark policies regarding cash and debt management. The most important lesson that can be drawn from Turkish Treasury experience is that risk management should be integrated with cash and debt management. Another

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lesson is that the risk management should be as comprehensive as possible meaning that it should take into account all risk categories and all these risk categories should be managed in an integrated framework. The risk management framework that Turkish Treasury adopted is integrated with debt management. However, in line with the literature and best practices, Turkish Treasury is aiming to switch from debt management to asset–liability management. That is to say, a balance sheet management approach that takes into account assets and liabilities of government is the next step in Turkish Treasury. This new approach is an effective tool in managing long-term risks in a holistic way (Koc 2014). Hence, the risk management framework should also be re-designed to be integrated with the new asset–liability management framework.

References Blommestesin, H. (2005). “Advances of Risk Management in Government Debt”, OECD Publishing, Paris. Guzman, M. (2018). “The Elements of Debt Sustainability Analysis”, Center For International Governance Innovation, CIGI Papers No: 196. IMF. (2014). “Revised Guidelines for Public Debt Management”, Policy Paper available at https:// www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Revised-Guidelines-for-PublicDebt-Management-PP4855 (Accessed on March 15th, 2019). Public Financial Management and Control Law No: 5018. Koc, F. (2014). “Sovereign Asset and Liability Management Framework For DMOs: What Do Country Experiences Suggest”, United Nations Conference on Trade and Development, UNCTAD. Koc, F. & Yavuz H. (2013). “Public Debt Sustainability: What Does Turkish Experience Suggest?” The Journal of European Theoretical and Applied Studies, Vol. 1 Issue 1, pp. 67–86. Public Debt Management Law No: 4749. https://www.mevzuat.gov.tr/Metin1.Aspx?MevzuatKod= 1.5.4749&MevzuatIliski=0&sourceXmlSearch=4749&Tur=1&Tertip=5&No=4749 (Accessed on March 15th , 2019). Secondary Legislation on Debt Assumption Commitments of Turkish Treasury. Secondary Legislation on Treasury Guarantees of Turkish Treasury. Secondary Legislation on Debt and Risk Management of Turkish Treasury. Silva, A.C.D., Cabral, R.S.V. & Baghdassarian, W. (2006). “Scope and the Fundamental Challenges to Public Debt Risk Management: The Brazilian DMO Experience”. Tokaç, H. & William, M. (2013). “Government Debt Management and Operational Risk: A Risk Management Framework and its Application in Turkey”, SIGMA Paper No: 50.

Hakkı Karata¸s graduated from Bo˘gazici Universirty Department of Economics in 2001 and then earned his MA degree in economics at the same university in 2003. He joined Turkish Treasury in 2004 and since then he worked at different positions and departments and gained experience in public policy making, establishing economic policies, restructuring public banks and financial sector and in strategic management and risk and debt management areas until 2010. Between 2010 and 2012, he attended Duke University Sanford School of Public Policy Master of International Development (MIDP) in the USA and got his second master degree. After returning back to Turkey in 2012, he was appointed as Department Head responsible for managing Treasury Receivables. In 2014, he has been appointed to his current position as Deputy Director General

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responsible for domestic debt management and cash management at Ministry of Treasury and Finance. At this position, he had also provided consultancy services to the WorldBank, Indian Government and Sudan Government on cash and debt management. He earned his Ph.D. degree in 2018 at Banking and Finance program in Ankara Yildirim Beyazit University, Ankara. His research areas include financial sector policies, public debt management, government borrowing, local government finance, risk management and public private partnership projects.

Chapter 4

Management of Contingent Liabilities in Turkey Sebnem ¸ Tosuno˘glu

4.1 Introduction Rise in off-budget government programs may cause fiscal instabilities. Evaluation of a country’s public fiscal performance includes a thorough consideration of fiscal risks associated with government budget (Polackova 1998, p. 9). Fiscal risks may arise in different ways and affect country’s estimated budget deficit or public debt levels, e.g., macroeconomic risks caused by growth, interest rates, or exchange rate changes. The impacts of the macroeconomic risks on public finance are widely known: Higher interest rates increase debt service; lower growth reduces tax revenues while increasing government spending. Additionally, unforeseen risks such as natural disasters, banking sector crises, or public guarantees should be taken into consideration. However, fiscal risks associated with explicit and implicit government liabilities are much less understood (Bova et al. 2018, p. 2). Fiscal risks can be classified into direct or contingent liabilities (CLs). Direct liabilities are foreseen liabilities due to certain payment terms. Traditional fiscal analysis tends to focus on governments’ direct liabilities. Contingent liabilities (CLs) are the liabilities of which time and amount could not be controlled by public authorities. IMF Public Sector Debt Statistics Guide defines CLs as the liabilities not being realized unless certain incidents occur in future (IMF 2014, p. 47). On a contractual basis, we can distinguish between explicit and implicit CLs. The explicit CLs entail obligations which have been set by a particular law or contract, whereas the implicit CLs involve a moral obligation or expected responsibility of the government which are not established by law or contract but are based on public expectations, political pressures, and the overall role of the state as society understands it (Bova et al. 2016, p. 5). Examples for explicit CLs are Treasury guarantees, government guarantees provided by various credits, export guarantees, CLs caused by public–private S. ¸ Tosuno˘glu (B) Anadolu University, Eski¸sehir, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_4

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partnership (PPP) projects, and public-sponsored insurance programs. On the other hand, implicit CLs generally cover government interventions during crises or natural disasters. Most of the time, undertaking the CLs is a result of a need for correcting market failure. Even if the government has reasonable grounds to undertake CLs, benefits of an intervention should exceed its costs (Cebotari 2008, pp. 9–12). CLs are one of the greatest sources of fiscal risk. Initially, these liabilities do not have public debt characteristics since they do not cause any undertaking. They are not shown in cash-based governmental accounting. In this accounting system, CLs are reflected in the records when the expenses occurred. In accrual-based accounting, probability calculations for occurrence can be challenging and this makes it hard to record accounting in advance (Hemming 2006, p. 40). Only if the risks are realized, CLs cause a payment obligation as they turn into public account. The timing and the amount of these liabilities are not completely known beforehand. Therefore, they may have negative impacts on government budget. The most important disadvantages of CLs are that they threaten long-term sustainability of government budget, and they affect budget transparency (Turan 2014, p. 6). Emergence of such a liability can cause significant risks in Treasury cash management and hence borrowing requirement. When these risks occur, public debt can increase significantly and they can trigger or worsen public financial crises. In order to prevent any possible budget inconsistencies, governments should take contingent and direct liabilities into consideration in their long-term policies. In recent years, many developing countries have shown significant increase in their CLs. Such developments and their potential negative effects have led governments to re-assess their CLs. Without assessing the CLs, it will not be possible to evaluate the causes and results of budget deficits, and understand whether the fiscal discipline is sustainable. There are different practices between countries in measuring CLs and announcing them to the public. The most important reason why the CLs are not easily measured or published in government fiscal statistics is that they have an inherent ambiguous character (Turan 2014, p. 7). Liberalization of global capital flows and the integration of international financial markets cause international economic crises to be more contagious. Past economic crises have shown that the effective government monitoring and managing of the CLs is very crucial. Especially, during crises, the emergence of CLs places a strong pressure on public finance (Das et al. 2002, p. 5). When a country starts to show economic vulnerabilities, the international capital outflows intensify and deepen the crisis and the public finance struggle to overcome it. Therefore, effective management of CLs is important for increasing the stability and predictability in public finance. Moreover, a growing number of privatizations have increased the government subventions granted to private sector projects while extending the interest for CLs. In order to decrease public investment spending and prepare a budget with less deficit, governments tend to support PPP projects that do not require instant cash flow (Polackova 1998, p. 1). However, during a financial crisis in an economy, implicit CLs as a result of PPPs can worsen the public finance balance. Aim of this study is to explain the contingent liabilities in Turkey. In the following section, this article will first examine the sources of contingent liabilities in Turkey

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and in the final section, this article will provide basic recommendations for managing contingent liabilities in Turkey.

4.2 Main Sources of Contingent Liabilities in Turkey In Turkey, a small amount of CLs monitored and published by different bodies of public administration. Ministry of Treasury and Finance manages Treasury guarantees1 , on-lent loan risks as well as contingent liabilities that stem from undertakings of the commitments for the debt of PPP projects and other implicit contingent liabilities (Bachemair 2016, p. 26). However, when performing a risk assessment related to CLs, it is necessary to assess both explicit and implicit CLs. Since implicit CLs are unforeseen due to their nature, it is generally not possible to assess them consistently (Currie 2002, p. 6). As in the case of Turkey, most common CLs are liabilities arising from Treasury guarantees (explicit CL), PPP projects (explicit CL), and insurance programs sponsored by the government (implicit CL) (Ülgentürk 2017, p. 8). In the following section of this study, three types of CLs in Turkey will be explained.

4.2.1 Treasury Guarantees and Credit Risk Management Treasury guarantees and on-lent loans are the most common explicit CLs in government debt management of many countries. State Treasuries provide guarantee to state institutions to maintain the economic growth, and to reduce investment costs by collateralizing their credibility in international financial markets. Thus, treasuries provide funds for the high-cost public investment projects, and they indirectly contribute to the public welfare. Since the emergence of a liability cannot be totally controlled by the government, the timing and the amount of Treasury guarantees are covered in CLs. On the other hand, on-lent loans are, in general, defined as government’s act of providing permission to an institution to use its own resources (Undersecretariat of Treasury 2009, p. 58). Law on Regulating Public Finance and Debt Management regulates the legislations for providing Treasury guarantees (Law no. 4749 issued on March 28 2002, amended on July 31, 2003). According to Law No. 4749, Treasury guarantees include Treasury repayment guarantee, Treasury investment guarantee, Treasury counter-guarantee, and Treasury country-guarantee. Among these guarantees, Treasury investment guarantee is mostly granted for PPP power plant projects 1990s (till 2004s). There are no examples of Treasury counter-guarantee and Treasury country-guarantee implementations yet. Among these guarantee types, the most used Treasury guarantee is the repayment guarantee. It guarantees external borrowing by 1 Treasury

guarantees include repayment guarantees, investment guarantees, credit guarantees, and debt assumptions of PPP projects. They are all examples of explicit CLs.

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public institutions, public banks, development and investment banks, municipalities and their affiliates, funds, and state-owned enterprises (SOE). These borrowings are used for public investment projects (Undersecretariat of Treasury 2017, p. 33). In Treasury repayment guarantees, if beneficiary (debtor) public institution fails to pay the debt, Treasury undertakes the related debt and beneficiary institution becomes indebted to the Treasury. Similarly, also in on-lent loans, in case of failing to pay the debt, beneficiary institution becomes indebted to the Treasury, and these repayments are considered as contingent assets for the Treasury. The case when beneficiary public institution fails to fulfil its debt obligations completely and timely is called as “a credit risk” in Treasury debt management. Institutions’ failure to fulfil their obligations puts the government under instant and substantial debt obligations in a short period. This leads to an additional burden on public borrowings (Bachmair 2016, p. 7). Due to the credit risk, it is required to minimize the potential cash requirements and manage the credit risks to determine the needs in advance. The government should take necessary measures to minimize possible unethical behaviors of the beneficiary when it provides credit guarantee (Cebotari 2008, p. 14). Taking necessary steps, which are called risk-mitigating mechanisms, in managing the regulative measures against credit risk is crucial in public debt management. Similar to international implementations, some regulative measures have been put into practice in Turkey for managing credit risks of Treasury repayment guarantees. For credit risk management, the most important regulation is the acceptance of “Law on Regulating Public Finance and Debt Management (Law No. 4749)” in 2002. This Law imposes limitations to Treasury guarantees and on-lent loans. These limits are determined in budget law on a yearly basis. Providing Treasury guarantee is bound to criteria based on the assessments related to financial structures of public institutions and their discharging performances. Before providing the guarantee, Treasury management primarily reviews the urgency of the investment and then it checks the previous guarantee performance of the related institution (Undersecretariat of Treasury 2011 p. 42). The second important regulation was about covering the payments of Treasury guarantees by the “Risk Account” established in 2003. Repayments by relevant organizations for the undertaken guarantees are the main resources of the Risk Account . If revenues do not cover the outcomes of the account, the government initiates budget transfers. However, such a need for a budget transfer to the Risk Account never occurred since 2009 (Undersecretariat of Treasury 2017, p. 34). The third regulation put into practice within the frame of credit risk management is to collect guarantee/on-lent fee from beneficiary institutions. These fees are determined as a maximum of 1% of the provided guarantee or on-lent amount. In addition, in accordance with Article 11 of Law No. 4749, metropolitan municipalities, municipalities, and their affiliates are obliged to establish an “External Debt Payment Account” (Undersecretariat of Treasury 2017, p. 21). External Debt Payment Account is an account that monitors these organizations’ repayment obligations for the credits obtained through Treasury guarantees. It is important to note that the main reason for such an implementation for municipalities is their high amount of debts transferred to Treasury in the past.

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Another method developed to manage the credit risks is the “Credits Rating Model”. Beneficiary organizations are given a credit score with credit ratings. With these credit scores, possibility of organizations’ failure to pay their debts is estimated. By reviewing credit scores distribution of Treasury-guaranteed and on-lent credit stocks over the years, positive developments on credit score distribution are observed. The rate of organizations having best credit scores in Treasury-guaranteed and on-lent external debt stocks raised from 36% in 2006 to 83% in 2016 (Undersecretariat of Treasury 2017, p. 40). Turkish government aims to improve fiscal discipline through credit risk implementations mentioned above. Treasury guaranteed external debt stock rose from USD 6.6 billion in 2009 to USD 13.8 billion in 2017. The Treasury guarantee for public banks’ credits was determinative in this rise. During the same period, local administrations’, SOEs’, and private banks’ Treasury guaranteed external debt stock have decreased. In 2016, the distribution of Treasury guaranteed external debt stock based on institutions reveals that the highest share belongs to the public banks with the rate of 60.2%. Following public banks, private development and investment banks have a share of 25.54%. The share of SOEs is 6.41%, of local administrations is 5.60%, and of centralized government administration is 2.43% (Undersecretariat of Treasury 2017, p. 33). It is obvious that there are significant reductions in shares of SOEs and local administrations within the scope of Treasury repayment guarantee compared to the past in Turkey. The limitation afore-mentioned has slowed down debt guarantees for these institutions and maintaining this discipline has reduced the Treasury debt stock of these institutions. Moreover, the Treasury followed a strategy not directly extending guarantees for local governments. Instead, Treasury extended guarantees for Iller Bank (Municipality Bank) for local governments’ projects. Although repayment guaranteed external debt stock rises in Turkey, a reduction in undertakings by Treasury guarantees is observed since 2003. While being 51.9% in 2002, this rate is regressed to 22.1% in 2009 and to 0.9% in 2017. Data related to Treasury guaranteed external debt stock and repayments of these debts are announced monthly as part of Public Debt Management Reports. Furthermore, undertaken ratio of Treasuryguaranteed credits is announced based on specific organizations. Consequently, the risks related to CLs arise from Treasury repayment guarantees are demonstrated transparently in Turkey (Turan 2014, pp. 22–23).

4.2.2 Contingent Liabilities Arising from PPPs Although there is no common definition for PPP projects, there are several descriptions made by different organizations. PPP projects are the financial models in which public and private sectors play roles at the same time. While in some definitions public and private sectors highlight management and organization structure, in other definitions improvement and development are highlighted. In PPP, risks and yields of the project are shared by public and private institutions (Brixi 2012, p. 34). Some PPP

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types are Build-Operate-Transfer (BOT), Build-Operate (BO), Build-Lease-Transfer (BLT), and Transfer of Operating Rights (TOR). In recent years, PPP model becomes popular for public service provision in both developed and developing countries. The main motivation is the need for public service provision and benefiting from private sector financing and management. While investment requirements are seen as important political instruments by the governments, they are seen as opportunities for high financial returns by the private sector. For the projects that require larger investments, transfer of foreign technology and resources contributes to the country’s economy significantly. On the other hand, smaller projects create new markets for domestic companies (Undersecretariat of Treasury 2012, p. 61). The most important outcomes of these projects from government’s perspective are their contribution to the employment, provision of public services, increasing the quality of public services to end-user, access to additional private financial sources for financing public infrastructure, and investment enhancing value-for-money. In addition to its advantages, there are also disadvantages in PPP projects; the greatest disadvantage of larger PPP projects is the requirement for high amount of funds and such a requirement leads to more complicated agreements between public and private institutions. It is also important to note that there are ongoing debates about the contributions of PPP projects to the economy and whether the resources are used efficiently. However, in the countries facing saving deficits, it is required to finance the larger investments in cooperation with the private sector. However, poorly selected projects could become an economic liability instead of improving the productivity. Although the PPP projects are financed by the private sector, they still lead to CLs for government budget through investment guarantees, income guarantees, exchange rate guarantees, debt assumption commitments (in case of a contract cancellation), supply guarantees, demand guarantees, and price guarantees. Such undertakings are serious sources of risk for the government (Sfakianakis and Laar 2012, p. 1). It is important to manage the risks caused by PPP projects. Sharing of the relevant risks is regulated through PPP contracts. The risks of PPP projects can be classified in various ways. The most common classification includes commercial risks, macroeconomic risks, and political risks, and these risks increase during financial crises (Burger et al. 2009, p. 9). Specifically, unexpected changes in macroeconomic conditions may have important effects on direct or indirect liabilities of PPP projects. As a result, CLs of the government increase significantly. In Turkey, PPP is preferred for high-cost investment projects since it decreases the utilization of large public resources in the investment period of the projects. PPP projects are also preferred for the employment of the project management skills of the private sector (Undersecretariat of Treasury 2012, p. 62). Many PPP projects in transportation, energy, health, and education sectors are currently completed and/or planned in Turkey. Unfortunately, there is no single governmental body responsible for assessing PPP projects in Turkey. Thus, each PPP project is assessed through a different legal perspective (Aslan and Duarte 2014, p. 27). Among the PPP implementations in

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Turkey, the legal infrastructure for the most common BOT model was established in (1994) with the Law No. 3996. Treasury investment guarantees are provided by the Law No. 4749. With the amendment to Article 8 of the Law No. 4749 in 2013, Treasury will grant debt assumption commitment in case of a contract cancellation in BOT projects having minimum value of TRY 1 billion and in BLT projects of the Ministry of Health having a minimum value of TRY 500 million. In SOE projects, it is not possible to grant Treasury debt assumption commitment. With a regulation issued in December 2014, public institutions were authorized to borrow by issuing Treasury guaranteed bond for their larger investment projects. However, instead of using this financing model based on borrowing, government prefers to finance the projects through PPP model. Thus, high costs are not shown in government budget but in private sector’s financial statements. Existence of different public institutions undertaking PPP projects under different legal regulations makes the CLs in public finance difficult to calculate. Therefore, total fiscal risks taken by the government should be monitored closely by a central governmental body. These risks need to be monitored in accordance with the international accounting standards (Ministry of Development 2014, p. 84). General Communique on Accounting Transactions for PPP projects was put into effect in 2015 in order to monitor PPP project investments and measure their effects on government budget. However, the actual records cover only the PPP projects of general public administration. PPP projects of SOEs are not currently monitored. Considering the importance of the PPP projects of SOEs, it could be noted that this gap draws serious attention (Presidency of Strategy and Budget 2018, pp. 42–43). There are 225 PPP projects having a total value of USD 61.7 billion implemented from 1986 to 2018 in Turkey (in 2018 prices). Total contract value of these projects is about USD 135 billion (Ministry of Development 2018, p. 20). City hospitals built with BLT model and planned as the largest health centers in Turkish health system began to serve in 2017 and have a big share among these projects. Totally, 32 city health centers are planned to be constructed by the Ministry of Health with PPP model. It is estimated that all planned hospitals to be opened until 2023 (Atasever 2018, p. 15). Experiences gained from city hospital projects should be assessed rigorously and carefully. The large investments for the projects in question also increase the amount of risks to be covered by public and private sectors, and this causes more complicated agreements regulating the risk shared between public and private sectors. According to the “2023 Vision of Turkey”, it is planned to launch many projects having a minimum investment value of USD 350 billion. However, external resources will be compulsory in supporting long-term investment projects since the internal resources are insufficient. It is estimated that most of these investments will be financed through PPP model. Considering the depression in global financial markets, private sector will most likely struggle in finding funds for PPP projects. In the future, financing the PPP projects will be more costly. This will increase contingent liability risks that arise from PPP projects in Turkey. Therefore, in the selection of PPP projects, the ones with strategic importance should have the priority. Increasing number of investment projects can be seen as a progress toward development goals.

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However, it should be noted that management and organization of PPP projects are extremely important for the success of projects in question. In order to achieve successful results in PPP projects, structural regulations should be established, related analyzes should be performed correctly, priorities should be well determined, and eventually the process should be managed effectively. This situation requires a central coordination approach for PPP project management. In many countries having experience in PPP projects, a coordination center has been established. Today, a meaningful number of OECD countries have established a PPP management center and almost the same number of countries started to build a similar institutional infrastructure (Presidency of Strategy and Budget 2018, p. 39–41). PPP, as acknowledged at international level, is a complex model that requires high level of expertise and imposes high financial risks to the public sector. Therefore, public institutions should be coordinated by a superior body with relevant PPP expertise. Such an institution should be able to determine the national PPP policy by observing the country’s macro-financial balance and investment policies, and to create PPP strategy document as a roadmap for the future. PPP model should not be considered only as an alternative financing model for public investment programs. Governments generally hesitate to focus on the risks of these projects (Sfakianakis and Laar 2012, p. 10).

4.2.3 Government-Sponsored Insurance Programs Some of the government-sponsored insurance programs also include CLs. Some examples of these liabilities include deposit insurance programs, disaster risk insurance programs, and terror risk insurance programs financed by government (Ülgentürk 2017, s.10). These kinds of insurance programs are the liabilities determining government’s role in insurance policies, and they are determined under certain contracts. The coverage of CLs is much wider, e.g., subventions of banking sector during financial crises. During the period after crisis, government support for financial sector is a common practice. In many countries, subventions granted to reduce the negative effects of crisis cause significant increase in public debts. In order to restore the financial stability and ensure banks to regain their healthy fiscal structures, deposit guarantees cause significant fiscal burdens on government budget, especially in crisis periods. Government deposit insurance scheme is one of the most important examples in this category. Deposit insurances are for partially or completely assuring the losses of the holders of deposit accounts and participation fund account. Savings Deposit Insurance Fund (SDIF) holds the authority of insuring deposit accounts and participation fund accounts in Turkey. Deposits and participation funds in Turkish banks are covered up to TRY 100.000 by government insurance. Deposit insurance reserve of the SDIF has reached USD 7,498 million as of the end of 2017. This amount equals to 7.6% of the total insured deposits (SDIF 2017, p. 7). Depending on the impacts of the crises, it may be required to increase the deposit insurance reserves to

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reduce government risks. The SDIF develops risk management policies in consideration of deposit insurance strategies of investment as a part of the corporate risk management. The Fund’s reserve can be in any financial institution, whereas it can be exposed to credit risks, interest risks, liquidity risks, and operational risks. The Fund takes investment decisions within the limits specified by the Fund Board and the Financial Risk Committee with regard to the asset allocation and term structure in order to avoid such risks (SDIF 2017, p. 82). Furthermore, the banking sector financial crises cause various problems for SMEs. During such periods, SMEs’ access to financing could become difficult. In order to facilitate financing, governments grant credit guarantees for SMEs. The main purpose of Treasury-backed credit guarantee system is to increase SMEs’ access to financing. Such a support is important since SMEs struggle to reach long-term credits from banks. Treasury, by granting assurance to SMEs and by undertaking their risks, enables small- and medium-sized businesses to access more bank loans. Many countries offer credit guarantee support for many different purposes and groups such as certain sectors, regions, and age groups. The purpose of such support is to enhance employment, innovation, and efficiency (Honohan 2010, p. 1). Treasury-backed credit guarantee system in Turkey has launched in 2009. Treasury’s obligation to support credit guarantee companies was regulated by Article 20 of the Law No. 4749. Support funds provided to Credit Guarantee Fund (CGF) was determined as TRY 1 billion. (Cabinet decree No. 2009/15197). Treasury’s fund support was increased to TRY 2 billion in 2015 (CGF 2017, pp. 28–29). In the same year, total amount of guarantee granted by CGF was increased to TRY 20 billion. In 2017, support funds committed by Treasury again were increased to TRY 25 billion (Cabinet Decree No. 2017/9969), and total amount of guarantee granted by CGF was increased to TRY 250 billion. In addition, significant changes were made in the guarantee coverage. Guarantee rates were increased from 85 to 90% for SMEs, from 75 to 85% for non-SMEs, and from 85 to 100% for exporters. On the other hand, commission rate collected by CGF was decreased from 0.5–1.5 to 0.03% (BRSE 2018, p. 1). As of 2016, the amount of granted credit guarantee accounts for TRY 7.09 billion on the credit facilities amounting to TRY 9.86 billion. Residual credit risk and credit guarantee risk amount to TRY 5.61 billion and TRY 4.13 billion, respectively (Undersecretariat of Treasury 2017, p. 42). These supports contribute to beneficiaries to access financing significantly. CGF has contributed to the boost in economic activities with credit growth in 2017. As a result of the Treasury guarantee, banks are more willing to grant these credits. CGF credits granted with Treasury guarantee have positive effects on banks’ provision and capital adequacy (BRSE 2018, p. 10). According to data from March 2018, 83.5% of credits granted by CGF in Turkey are qualified as standard risky credits. 72.78% of these credits were used by SMEs, 83.36% of granted credits were paid in TRY, and 16.64% were paid in foreign currencies (CGF, In numbers 2018). Increase in the credits granted by the CGF and the Treasury is remarkable. This situation also increases the risks that are coverable by the support mechanisms. In order to reduce the risks arise from the Treasury-backed

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credit guarantee system, stability in the financial markets and a strong banking system are required. In these programs, government’s role should be defined clearly. While determining the scopes of these kinds of programs, debt management should always be considered (Ülgentürk 2017, p. 41). Another government-involved insurance program that could be considered as CLs is disaster risk insurance. Natural disasters have unfavorable effects which constitute high financial risks for governments. In disaster risk management, these insurances provide an alternative financing. However, the government should thoroughly analyze the risk covering capacity of the program before participating in this insurance system (Ülgentürk 2017, p. 37). Technical analyses should be done to estimate disaster risks and government’s capacity of risk covering. Government’s disaster risk plans are determined by government policies. Turkey is under risks of intense earthquake and flood disasters. Considering the high impacts of such disasters and insufficient number of relevant insurance mechanism, the government has decided to establish and support a comprehensive earthquake insurance system. In 2000, a mandatory earthquake insurance was put into practice covering all registered lands and buildings in urban areas in Turkey. Turkish Catastrophe Insurance Pool (TCIP) has a very wide area of application (World Bank 2011). TCIP is a public institution established for the purpose of issuing and managing mandatory earthquake insurance. TCIP is an exemplary practice for many countries with its risk-based pricing method (He and Faure 2017, p. 232). The total loss payment capacity of the institution is approximately at the level of TRY 17 billion. Within the scope of risk management, TCIP’s policy-based liabilities are regularly monitored, and reassurance protection limits are specified by considering the results obtained from earthquake damage models. TCIP’s general risk management program focuses mainly on the volatility of the financial markets and reduces the possible negative effects of these volatilities on TCIP’s financial performance (TCIP 2017, p. 96). Terror risk insurance can be shown as an example for government-sponsored insurance program that generates contingent liability. Since terror is acknowledged as a social problem, resulted damages should be covered by the government. Therefore, government compensates the losses of victims by the “Law on the Compensation of Damages Arising from Terrorism and Combating Terrorism”. Economic losses and losses of lives are compensated by this regulation. In order to benefit, event must be qualified as a terror act by the public authorities (Law Act no 5233, adopted on: 2004-07-17). Considering the fact that the private insurance companies are unwilling to issue insurance in regions where risks are higher, government’s role becomes more important. The Investor Compensation Center (ICC) under Capital Markets Board of Turkey and Agricultural Insurance Pool (AIP) can also be shown as examples for government-sponsored insurance programs that generate contingent liability. In order to cover the risks that threaten the agricultural sector and to implement the insurance system, “Agricultural Insurance Law No. 5363” has been put into effect in (2005). Government provides insurance premium support on behalf of farmers within the scope of this Law. Amount of government premium support is determined on a yearly basis according to product, risk, region, and business scale (AIP 2018).

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Within the frame of provisions stipulated by the Capital Market Law No. 6362, The Investor Compensation Center (ICC) was founded for the purpose of compensating the investors. When it is detected that the investor companies are unable to meet their liabilities, Capital Markets Board of Turkey will decide to compensate the investors (ICC 2018).

4.3 Conclusions and Recommendations CLs are the liabilities of which time and amount could not be controlled by public authorities. Traditional fiscal analysis tends to focus on governments’ direct liabilities. CLs are one of the greatest sources of fiscal risk. The most important disadvantages of CLs are that they threaten long-term sustainability of government budget and affect budget consistency. In recent years, significant increases are observed in CLs of many developing countries. Such developments and their potential negative effects have led governments to re-assess their CLs. The most important reason why the CLs are not easily shown and measured in government fiscal statistics is that they have an inherent ambiguous character. The most common CLs in Turkey include liabilities arising from Treasury guarantees, PPP projects, and insurance programs sponsored by the government. In Turkey, Treasury guarantees include Treasury repayment guarantees and investment guarantees. Undertaking of the commitments for the debt of PPP projects is another significant source of fiscal risk. In Treasury repayment guarantees and/or in on-lending of external loans to beneficiaries, if beneficiary (debtor) institution fails to pay the debt, Treasury undertakes the related debt. The case when beneficiary public institution fails to fulfil its debt obligations completely and timely is called as “a credit risk” in Treasury debt management. Some regulations, especially those parallel to the international implementations related to potential credit risks within the scope of Treasury repayment guarantees, have been put into practice in Turkey. Within this frame, the most important regulation is the acceptance of “Law on Regulating Public Finance and Debt Management (Law No. 4749)” in 2002. This Law imposes annual limitations to Treasury guarantees and on-lent loans in budget loans. The second important regulation was about covering the payments of Treasury guarantees and on-lent credits by the “Risk Account” established in 2003. Repayments by relevant organizations for the undertaken guarantees and for on-lent credits are the main resources of the Risk Account. The third regulation put into practice within the frame of credit risk management is to collect guarantee fee from beneficiary institutions. These fees are determined as maximum 1% of the provided guarantee amount. In addition, in accordance with Article 11 of Law No. 4749, metropolitan municipalities, municipalities, and their affiliates are obliged to establish an “External Debt Payment Account”. Another method developed to manage the credit risks is the “Credits Rating Model”. Beneficiary organizations are given a credit score with credit ratings. Data related to Treasury guaranteed external debt stock and repayments of these debts are announced on a monthly basis in Public Debt Management Reports in Turkey. Consequently,

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the risks related to CLs arise from Treasury repayment guarantees are demonstrated transparently in Turkey. It is important to note that efficient risk management provided within the scope of Treasury guarantees does not effectively exist for PPP projects. Although the PPP projects are financed by the private sector, they still lead to CLs for government budget through investment guarantees, income guarantees, exchange rate guarantees, debt assumption commitments (in case of a contract cancellation), supply guarantees, demand guarantees, and price guarantees. Such undertakings are serious sources of risk for the government. It is important to manage the risks caused by PPP projects. Unfortunately, there is no a single governmental body responsible for assessing PPP projects in Turkey. Existence of different public institutions undertaking PPP projects under different legal regulations makes the CLs in public finance difficult to calculate. Therefore, total fiscal risks taken by the government should be monitored closely by a central governmental body. These risks need to be monitored in accordance with the international accounting standards. In the future, financing the PPP projects will be more costly. This will increase contingent liability risks arise from PPP projects in Turkey. Therefore, in selection of PPP projects, the ones with strategic importance should have the priority. Some of the government-sponsored insurance programs also include explicit CLs. Some examples of these liabilities include deposit insurance programs, disaster risk insurance programs, and terror risk insurance programs financed by government. Government deposit insurance scheme is one of the most important examples in this category. Savings Deposit Insurance Fund (SDIF) holds the authority of insuring deposit accounts and participation fund accounts in Turkey. Furthermore, the banking sector financial crises cause various problems for SMEs. The main purpose of Treasury-backed credit guarantee system is to increase SMEs’ access to financing. Treasury-backed credit guarantee system in Turkey has been launched in 2009. Increase in the credits granted by CGF and Treasury is remarkable. This situation also increases the risks that are coverable by the support mechanisms. In order to reduce the risks arise from the Treasury-backed credit guarantee system, a stable financial market and a strong banking system are required. In these programs, government’s role should be defined clearly. Another government-involved insurance program that could be considered as CLs is disaster risk insurance. In 2000, mandatory earthquake insurance was put into practice covering all registered lands and buildings in urban areas in Turkey. TCIP has a very wide area of application. TCIP is an exemplary practice for many countries with its risk-based pricing method. Terror risk insurance can be shown as an example for government-sponsored insurance programs that generate contingent liability. Therefore, government compensates the losses of victims by the “Law on the Compensation of Damages Arising from Terrorism and Combating Terrorism”. Economic losses and losses of lives are compensated by this support. In Turkey, there are important fiscal risks associated with contingent liabilities. Estimation of these risks is a challenging task in Turkey since there are no generally accepted methods for assessing these risks. However, necessary precautions must be

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put into practice in order to deal with the possible problems that may arise from these risks.

References Aslan, C. Duarte, D. (2014). How do countries measure, manage, and monitor fiscal risks generated by public-private partnerships? Chile, Peru, South Africa, Turkey (English). Policy Research working paper; no. WPS 7041. Washington, DC: World Bank Group. Retrieved from http://documents.worldbank.org/curated/en/485861468307741430/How-do-countries-measuremanage-and-monitor-fiscal-risks-generated-by-public-private-partnerships-Chile-Peru-SouthAfrica-Turkey. Atasever, M. (Ed.). (2018). S¸ ehir hastaneleri ara¸stırması, Sa˘glık-Sen Yayınları- 46, Sasam Enstitüsü, Ankara. Retrieved from http://www.sasam.org.tr/category/yayinlar/raporlar/. Bachmair, F. F. (2016). Contingent liabilities risk management: a credit risk analysis framework for sovereign guarantees and on-lending—country experiences from Colombia, Indonesia, Sweden, and Turkey (English). Policy Research working paper; no. WPS 7538. Washington, DC: World Bank Group. Bova, E., Ruiz-Arranz, M., Toscani, F. G. et al. (2018). The impact of contingent liability realizations on public finances, Int Tax Public Finance, Springer US. P.1–37. Retrieved from https://doi.org/ 10.1007/s10797-018-9496-1. Brixi, H. P. (2012). Avoiding fiscal crisis, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 13(1), pages 27–52, January. Burger, P. Tyson, J. Karpowicz, I et al., (2009). The effects of the financial crisis on public-private partnerships, IMF Working Paper WP/09/144. Cebotari, A. (2008). Contingent liabilities; ıssues and practice,” IMF Working Papers 08/245, International Monetary Fund. Retrieved from https://www.imf.org/external/pubs/ft/wp/2008/ wp08245.pdf. Das, T. Bisen, A. Nair, M. R. et al., (2002). Contingent liability management a study on India, Commonwealth Secretariat, United Kingdom. He, Q. Faure, M. G., (2017). Regulation by catastrophe insurance for climate risks: a comparative study, Connecticut Insurance Law Journal, Vol. 24, No. 1, 2018. Retrieved from SSRN: https:// ssrn.com/abstract=3089498 or http://dx.doi.org/10.2139/ssrn.3089498. Hemming, R. (2006). Public-private-partnerships, government guarantees, and fiscal risk, Fiscal Affairs Department, International Monetary Fund. Retrieved from https://www.mfcr.cz/assets/ cs/media/2004_Public-Private-Partnerships-Government-Guarantees-and-Fiscal-Risk.pdf. Honohan, P. (2010). Partial credit guarantees: Principles and practice, Journal of Financial Stability, Volume 6, Issue 1, April 2010, Pages 1–9. International Monetary Fund (IMF). (2014). Public Sector Debt Statistics: Guide for Compilers and Users 2013. Retrieved from http://www.tffs.org/pdf/method/2013/psds2013.pdf. Ministry of Development. (2014). Onuncu kalkınma planı - kamu özel i¸sbirli˘gi modeli özel ihtisas komisyonu raporu. Ankara. Retrieved from http://www.sbb.gov.tr/wp-content/uploads/2018/10/ 10_KamuOzelIsbirligi.pdf. Ministry of Development. (2018). Dünyada ve Türkiye’de kamu özel i¸sbirli˘gi uygulamalarına ili¸skin geli¸smeler raporu 2017, Kalkınma Bakanlı˘gı yayın no: 2983. Retrieved from http://www.sbb.gov. tr/kamu-ozel-isbirliginde-gelismeler-yayinlar/. Polackova, H. (1998). Contingent government liabilities: a hidden risk for fiscal stability. Policy, Research working paper; no. WPS 1989. Washington, DC: World Bank. Retrieved from http://documents.worldbank.org/curated/en/976681468761673252/Contingentgovernment-liabilities-a-hidden-risk-for-fiscal-stability.

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Presidency of Strategy and Budget. (2018). 11. Kalkınma planı (2019–2023) kamu özel i¸sbirli˘gi özel ihtisas komisyonu ön raporu, Retrieved from http://onbirinciplan.gov.tr/oik-ve-calisma-grubulisteleri/kamu-ozel-isbirligi-uygulamalarinda-etkin-yonetim/on-rapor/. Sfakianakis, E. Laar, M. (2012). Assessing contingent liabilities in public-private partnerships (PPPs), MERIT Working Papers 030, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT). Retrieved from https:// collections.unu.edu/eserv/UNU:159/wp2012-030.pdf. Turan, N. (2014). Mali Seffaflık ¸ ve Kamu Mali ˙Istatistikleri Açısından Ko¸sullu Yükümlülüklere Bakı¸s, Sayı¸stay Dergisi, 25(95), 5–27. Undersecretariat of Treasury. (2009). Public debt management report (PDMR), Retrieved from https://ms.hmb.gov.tr/uploads/sites/2/2018/12/Public-Debt-Management-Report-2009.pdf. Undersecretariat of Treasury. (2011). Public debt management report (PDMR), Retrieved from https://ms.hmb.gov.tr/uploads/sites/2/2018/12/Public-Debt-Management-Report-2011.pdf. Undersecretariat of Treasury. (2012). Public debt management report (PDMR), Retrieved from https://ms.hmb.gov.tr/uploads/sites/2/2018/12/Public-Debt-Management-Report-2012.pdf. Undersecretariat of Treasury. (2017). Public debt management report (PDMR), Retrieved from https://ms.hmb.gov.tr/uploads/sites/2/2018/12/Public-Debt-Management-Report-2017.pdf. Ülgentürk, L. (2017). The role of public debt managers in contingent liability management, OECD Working Papers on Sovereign Borrowing and Public Debt Management, No. 8, OECD Publishing, Paris. Retrieved from http://dx.doi.org/10.1787/93469058-en. World Bank. (2011). Turkish catastrophe insurance pool: providing affordable earthquake risk insurance (English). Disaster risk financing and insurance case study. Washington, DC: World Bank Group. Retrieved from http://documents.worldbank.org/curated/en/853431468188946296/ Turkish-catastrophe-insurance-pool-providing-affordable-earthquake-risk-insurance. (AIP) Agricultural Insurance Pool. (2018). Retrieved from https://web.tarsim.gov.tr/havuz/ homePageEng. (BRSE) Banking Regulation and Supervision Agency. (2018). Retrieved from https://www.bddk. org.tr/ContentBddk/dokuman/duyuru_28.pdf. (CGF) Credit Guarantee Fund. (2017). Activity Report 2017, Retrieved from http://www.kgf.com. tr/index.php/en/information-center/activity-reports. (CGF) Credit Guarantee Fund. (2018). KGF in numbers, Retrieved from http://www.kgf.com.tr/ index.php/en/information-center/kgf-in-numbers. (ICC) The Investor Compensation Center. (2018). Retrieved from http://www.ytm.gov.tr. (SDIF) Savıngs Deposıt Insurance Fund. (2017). Annual report 2017, Retrieved from https://www. tmsf.org.tr/tr/Rapor/YillikRapor. (TCIP) Turkish Catastrophe Insurance Pool. (2017). Activity Report 2017, Retrieved from https:// www.dask.gov.tr/faaliyet-raporlari.html. Law no 3996. (1994). Law on the Build-Operate-Transfer. Retrieved from http://www.mevzuat.gov. tr/MevzuatMetin/1.5.3996.pdf. Law no 4749 (2002). Law on Regulating Public Finance and Debt Management. Retrieved from http://www.mevzuat.gov.tr/Metin.Aspx?MevzuatKod=1.5.4749&MevzuatIliski=0& sourceXmlSearch. Law no 5233. (2004). Law on the Compensation of Damages Arising from Terrorism and Combating Terrorism Retrieved from http://www.mevzuat.gov.tr/MevzuatMetin/3.5.20047955.pdf. Law no. 5363. (2005). Agricultural Insurance Law. Retrieved from http://www.resmigazete.gov.tr/ eskiler/2005/06/20050621-2.htm. Bova, E., & Ruiz-Arranz, M., Toscani, F., et al. (2016). The Fiscal Costs of Contingent Liabilities: A New Dataset. IMF Working Papers. 16–14. Retrieved from https://www.imf.org/en/Publications/ WP/Issues/2016/12/31/The-Fiscal-Costs-of-Contingent-Liabilities-A-New-Dataset-43685. Currie, Elizabeth. (2002). The potential role of government debt management offices in monitoring and managing contingent liabilities. Washington, DC: World Bank. http://documents.worldbank. org/curated/en/411851468339662761/The-potential-role-of-government-debt-managementoffices-in-monitoring-and-managingcontingent-liabilities.

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Sebnem ¸ Tosuno˘glu is Professor of Public Finance at Anadolu University, Faculty of Economics and Administrative Sciences. She is also head of the Public Finance Department. She received her Ph.D. degree in Public Finance Department at Anadolu University in 2004. Her research interests focus on public financial management, public debt, European Union financial system and budget, international public finance and Turkey’s tax policies. She has also authored books, book chapters and published national and international articles on mentioned fields. She also conducts courses on undergraduate, graduate and Ph.D. level in the field of public finance, fiscal policy, tax policy, public debt and debt management in Turkey.

Chapter 5

The Management of State-Owned Real Estate in Turkey Pınar Güven

5.1 Introduction In Turkey, the term “Treasury” refers to the sum of state’s cash assets and non-cash assets, namely, real assets. Although only the government’s cash sources are considered as treasury, non-cash sources in the form of real properties are actually one of the most important sources of finance in the state. However, the management of state-owned real estates cannot find its place in the agenda as much as budget, accounting, and auditing in the reforms made in the field of public financial management and control. In terms of public administration, although state-owned real estates are essentially the most important resource of a state, they are the least visible and least recognized systems in public management systems (Kaganova 2010/2011). Management of state-owned real estate is an area in each country where the problems are not completely solved most of the time (Kaganova 2010). Due to the nature of the real estate management, the use of real estate depends on the will of many public administrations and its use is based on the allocation principle. For this reason, the public administrations resist even in a simple reform effort like evacuating the unused properties. Public institutions are not willing to give back the allocated building even though they do not use it. Because of these difficulties, implementation of the state-owned real estate management reforms are limited to only a few European countries. When we look at the organization of the administrations responsible for the management of the real properties of the state, we mostly see that these administrations are under the countries’ ministries of finance. As a result of the reforms carried out in the real estate management in some countries such as Germany and Italy, we see that the management of the state-owned real estate has been transformed into more autonomous and private sector logic (Turan et al. 2012; Turan and Güven 2012). P. Güven (B) Ministry of Environment and Urbanization, Ankara, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_5

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Apart from this, the management of state-owned real estate is carried out by government institutions in countries such as France and Canada (Turan et al. 2013a; Turan and Yüksel 2013). When it comes to the administration of state-owned real estates, whether carried out with private sector perspective or government agencies, three basic functions could be mentioned. The first one is the acquisition of the ownership of new real estates for the needs of the government institutions, the second one is the management function which includes methods such as the use of the real estates for the purpose of income or their use by the public institutions, and the third one is the function of selling the unnecessary real estates. The way of implementing these three functions and the instruments used naturally differs from country to country (Kaganova and McKellar 2006). The greatest legacy that Turkey has taken from Ottoman Empire in the economic sense is state-owned real estates. The fact that the Ottoman land system was based on the state-owned property system rather than private property resulted in a large land stock of the state. This stock was transferred to the new state with the proclamation of the Republic. Also, the lands owned by the people displaced during the exchange period after the independence war were transferred to the state, and the amount of the state-owned property increased. At the time of the Ottoman Empire, the works related to the state-owned property were carried out by the revenue services, and in 1909 Emlak-i Emiriye Müdüriyeti (Directorate of Empire’s Property) was established as affiliated to the Ministry of Finance (MoF). After the establishment of the Republic, the name of this Directorate was changed to Emlak-i Milliye Müdürlü˘gü (National Property Directorate). With the Law No. 1452 issued in 1929, the name of this administration, which was attached to the MoF, was changed to Directorate of National Property and in 1942, it was ultimately changed to General Directorate of National Property (GDNP). In this respect, the administration, which was organized as national real estate chiefs in the provinces before, was organized as national real estate directorates in the provinces after 1942 (Karde¸s 2007). The General Directorate of National Property (GDNP) which was operating under the MoF until July 2018 was affiliated to the Ministry of Environment and Urbanization (MoEU) with the entry of the Presidential system into force. Even though most of the state-owned real estate have been disposed through an intensive selling process over the years, there are approximately 3 million parcels registered in the system even today. In terms of surface area, approximately 77% of the total area consists of forests. The rest contains agricultural areas, culturally or historically preserved areas and also the unused areas (MEGM 2018). Nevertheless, state-owned real estates often come into question in many important projects or when it comes to funding for the budget. GDNP receives positive opinion from many public institutions regarding the real estate to be traded before making a transaction with or without income generating. Because many ministries such as Ministry of Agriculture and Forestry, Ministry of Culture and Tourism, or Ministry of National Defense have authority on state properties related to their fields of duty, this situation reduces the efficiency and

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speed of transactions regarding the state real estate and prevents important reforms in this field. The transfer of the GDNP from MoF to the MoEU can be said to be the most important reform in the field of state real estate in the history of Turkish Republic. The most important benefit of being affiliated to the MoEU is giving the state’s real estate ownership to the same ministry, which has the authority of zone planning and land registry works. Besides, the Housing Development Administration (TOK˙I) is responsible for the construction of public buildings that are affiliated to MoEU as well, which took the ministry to a strong place in terms of being one roof to take decisions and execute faster. In this study, the management of the state-owned real estate will be addressed under the headings of acquisition, management, and disposal and by giving examples from some countries in Europe. The first part will examine applications in some European countries, and the second part will elaborate the activities related to acquisition, management, and disposal of real estates in Turkey.

5.2 Acquisition of State-Owned Real Estate The state needs movable and immovable property as well as personnel to perform public services (Gözler 2009). Without having movable and immovable property, it is not possible for the administration to perform the public services it undertakes (Balch 1994). For this reason, the most key resources of states are land and building properties (Zailan et al. 2001). Generally, public service places are provided by the use of existing resources, but in the case of insufficient resources, new buildings or lands are acquired. This is the real estate acquisition function of the state. In other words, the acquisition of a new real estate on behalf of the title deed for the use of services provided by the state is called acquisition. In fact, the real estate policy of the state is in the direction of disposing, not acquiring. However, with the expansion of the services provided like new roads or railway lines, dams, schools, hospitals, etc., the state continues to acquire new real estates for the construction of these structures. The real estates required to carry out public services are mostly acquired by means of expropriation, buying, or by donations of citizens. Even though leasing is not a direct acquisition method due to the fact that ownership of the property is not obtained, it has been widely used as a method of meeting the needs of public service buildings in recent years. Since it is not required to spend large sums from the state budget in the short term and the problems such as land supply and project drawing for the new building are eliminated this way, this method is seen attractive by the public administrations in terms of finding short-term solutions. Although the acquisition of real estate differs from country to country, in recent years especially in the direction of modern public administration, many of the European countries approach new real estate acquisition with caution and prefer the

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disposal of surplus real estate instead. In Turkey, a similar policy in the direction of disposals rather than acquisition is followed as well.

5.2.1 Country Practices in Acquisition of State-Owned Real Estate Governments responsible for the management of state-owned real estates in European countries are generally cautious about the acquisition of new properties for public services. Usually, they use the available buildings. However, it is preferable to build a new building when used buildings are too old or there is a policy to carry out the public services out of the city center. This is also the reflection of the approach of providing the most services with the least cost, which is common in the understanding of new public administration in European countries. For example, in France, public buildings have moved to more suburban areas from the center of Paris where property prices are very high. Some of the revenues generated by selling existing buildings spent on construction of new buildings and some of these revenues were transferred to the ministry’s budget which was the user of the old one (Turan et al. 2013a). The idea of lowering costs is also valid for the buildings rented by the ministries. For this reason, ministries in Germany and France are obliged to get approval from the administration responsible for the state real estates when they intend to prefer rent and to lease within the monetary limits specified in the budget law (Turan et al. 2012, 2013a). One of the common features of France and Germany in real estate acquisition is that the administration responsible for the management of the state-owned real estate is authorized if a new construction is required for the ministries. This is a practice that makes the management power and cost planning of these administrations extremely effective. In this way, a management structure dominates both the knowledge of free land and the building construction costs. Also, the most effective and least-cost method among the methods of acquisition like public–private partnership, leasing, buying or constructing can be analyzed and the most optimal option is preferred. Particularly in Germany, the cost-effective method is generally preferred by the authorized administration and ministries comply with this decision (Turan et al. 2012). While strictly applied in Germany, also in France and Italy, ministries are obliged to obtain positive opinion of the administration in charge of real estate management when they will acquire the real estates they need. This positive opinion is given through cost and need analysis (Turan et al. 2013a, b; Turan and Güven 2012).

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5.2.2 State’s Real Estate Acquisition in Turkey According to the legislation in Turkey, there are many ways for the government to acquire a new real estate needed for the public services. The most common ones are expropriation, purchase, exchange, donation, real estate transfer through law or agreements, and purchase as a deduction for tax liability. Meeting the needs of the public building by renting is also one of the methods applied. However, the difference from the practice in countries such as Germany and France is that the public administrations do not have to take positive opinion from the GDNP before renting the real estate. In expropriation procedures, each administration pays the expropriation value from its own budget and executes the transactions themselves, but this new real estate is registered under the name of the treasury. For this reason, it is not a process that includes the GDNP. The exchange and purchase in return for tax liability, whose transactions don’t have intense volume but labor and time-consuming, are important for the GDNP (MEGM 2017). The Exchange of a real estate refers to the replacement of one real estate with an equivalent real estate which is necessary for public services. The purchase in return for tax liability is the transfer of a real estate of a public administration or a company to the Treasury in return for its tax debt. The main reason why these two processes are labor and time-intensive is that the processes take too much time and an agreement must be reached for the price. For example, first of all, this property which is to be purchased should be needed by public administrations in order to exchange with another property or purchase it for the tax debt. The title deeds of these real properties are examined in detail since they should not be a real estate that belongs to the state in the past. Afterward, the price determination process is started and generally, the contracting institutions think that the value of their own property is higher and for this reason the agreement process generally gets longer. Also, there are some real estates that have been transferred to the treasury as a result of the deaths of people who doesn’t have any heiress or the donations of real properties to the state by their own will. As well, the real properties of the citizens of countries such as Greece, Bulgaria, and Russia exchanged with Turkish citizens in the period after the proclamation of the Republic can be given as the examples of real estate transfer to the treasury by laws and agreements (Karde¸s 2007). In addition to the above, the public–private partnership (PPP) method used in the construction of big projects such as roads, bridges, city hospitals, and airports can be given as an example of the state’s real estate acquisition method. These projects, whose construction costs are financed by the long-term leasing of the right to operate, are fully transferred to the ownership of the state at the end of the contract period.

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5.3 Management of State-Owned Real Estate The first thing that comes to mind when it comes to the management of the stateowned of real estate is to leave the real estates to the use of public administrations in return for payment or free of charge. Short- or long-term leasing to the private sector or citizens in order to generate income from the existing real properties are the other ways of management. Also, effective use of office spaces and energy saving in buildings are the subjects of real estate management.

5.3.1 Country Practices in Management of State-Owned Real Estate The practice, which is common in many European countries on allocation, is the allocation of state-owned real estate to public administrations at a price. To comply with the contract they signed, public administrations use these buildings by transferring the appropriation allocated to their budgets for the buildings they use for the purpose of service. In France, for example, public institutions can use a certain area in return for the allocation on their budget but if the usage limit is exceeded, they have to compensate this usage with their own budget facilities (Turan et al. 2013a). In this way, it is aimed to prevent public administrations from using public buildings more than they need. Another benefit of the paid-allocation process is the fact that the non-cash sources used by the public administrations can be taken into consideration in performance measurements as well as the cash sources. For example, in addition to the budget source used by a hospital as cash, the cost of the building it serves is taken into consideration as well. Thus, this hospital’s patient performance per unit can be calculated accurately. In this sense, even though the paid-allocation contracts may be considered as transferring the money from one budget of the government to the other, it is a very important application in terms of accounting, accountability, and measurability criteria. Another application highlighting the real estate management, in countries such as Germany and France, is the application of effective use of office spaces. In this application, an average working area is determined for each staff, as well as for the highest administrative staff, and the necessary building areas are determined according to this estimation (Turan et al. 2012, 2013a). The aim is to minimize the areas used for services with the understanding that state institutions provide the most services with minimum cost. Although most strictly implemented in Germany, effective use of office spaces in many other European countries as well as efficient use of energy is among the issues that have high importance (Turan et al. 2012). Especially in France, as a result of the decrease in the number of public personnel, it has been determined that after the implementation of the office spaces standards, many public buildings have surpluses. For this reason, with the regulation made to

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encourage the disposal of these buildings, 30% share of the sales of the buildings they discharged was given to user public administrations (Turan et al. 2013a). A common approach that exists in many European countries is the utilization of buildings with energy efficiency and energy saving. For this reason, the latest technology and green products are used in both heating and cooling systems in public buildings constructed in recent years. Although these systems are high-cost systems for the beginning, they are the systems that pay for their long-term energy consumption and environmental impact. Energy consumption classes of buildings and greenhouse gas emission issues are among the prominent environmental issues, as well (Turan et al. 2012).

5.3.2 Management of State-Owned Real Estate in Turkey In Turkey, management of state-owned real estate can be defined as, with keeping the ownership under treasury, giving the right of use to the public institutions free of charge or leasing the real estate to private sector for short or long terms with the aim of generating revenue. For this reason, the management of state-owned real estates primarily covers allocation, leasing, and easement. If the same real estate is needed by public institutions and also there is a demand for income-generating activity, priority is given to the allocation process by giving priority to the public interest. Allocation is to leave the real estate required by public administrations to the use of that administration free of charge (Karde¸s 2007). Allocation transactions are the most voluminous items of the national real estate organization (MEGM 2018). Unlike the examples in Europe, the allocation application in Turkey is carried out free of charge and for indefinite period of time. In other words, the administrations do not pay any fee to use the buildings or lands and are not bound for any period. The most negative aspect of this situation is that the administrations also keep the real estates that they do not use actively for a long time. This causes many state-owned real estates to remain idle and prevents meeting the needs of other public administrations. In fact, the GDNP has the authority to cancel the allocation of unused real estates, but in practice it is not preferred to exercise this authority without obtaining the consent of the allocated administration. Another problem in the allocation process is that the administrations demand more area than they actually need. This situation is contrary to the principle of economic use of resources. However, the GDNP has recently taken various measures to prevent this problem. The first one is the general communiqué No. 384 issued by the GDNP. According to this, it is necessary for public administrations to carry out the need analysis in allocation requests and to determine the real estate area according to these analyses. If an institution does not follow this procedure and the demanded area is too high, GDNP has the authority to reject this demand. The second measure is the “Public Buildings Standards Guide” prepared by the MoEU and published as presidential circular (MoEU 2017). This document is a reflection of the practice of effective office space use in Europe. According to this guideline, an average office

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space is envisaged for each level of personnel and office standards are set to prevent waste of resources. Apart from the allocation process, another method of managing the state-owned real estates is the leasing/renting process. The real estates are rented for commercial purposes, afforestation, sports, fishing shelters, and for the cultivation of highly imported medicinal and aromatic plants and ornamental plants, which have been put into practice for increasing domestic production of plants such as lavender, rose, eucalyptus, and others. In fact, the agricultural land of the state is one of the important instruments used in guiding the agricultural policies of the state, and its potential to contribute to agriculture is open to increase. There is also a specific form of state’s real estate management in Turkey called “ecrimisil” which means charging a compensation for a land occupation. “Ecrimisil” means the compensation received from the user, regardless of whether the administration has suffered any damage, as a result of the identification of the unauthorized use of a state property (Karde¸s 2007). Although the understanding that “ecrimisil” is not a form of management prevails (Karde¸s 2007), the use of the lands by paying “ecrimisil” is quite common in practice. Although the state has the authority to evacuate this land, it is often allowed to use it by charging an “ecrimisil” in order to avoid from giving any harm to the user. Particularly, most of the state-owned agricultural land is used this way (Torun 2014–15). One of the most important steps taken to reduce this practice is a regulation made in May 2018 to facilitate the direct leasing of these agricultural lands to the users through half of the “ecrimisil” price. Another method of managing the real estate belonging to state is to establish easement rights on the real estates up to 49 years. According to the Civil Code, the easement right is the limited right that gives the authority to use or benefit from the property of someone else or both. Investments such as hotels, factories, and marinas are encouraged through the way of easement on state lands. Especially in the Mediterranean and Aegean regions, most of the hotels and marinas were built with this method. In this method, which saves the investors from the cost of land purchasing, it is aimed to construct and operate the facilities by private sector by taking small rents varying according to the investment purpose and small annual shares from the revenue after the completion of the investment. At the end of 49 years, investments must be transferred to state ownership, but investors have the right to purchase the completed investment and the land. With an arrangement for the tourism sector introduced in 2018, the existing facilities’ easement periods were extended up to 49 years paying a cost, thus enabling the renewal of the old facilities. Within the scope of the management of state-owned real estates, in the area of accounting, a similar practice to its European counterparts was implemented in Turkey. An arrangement has been made for the accounting of the state real estates by showing them in the financial statements. In this direction, public institutions recorded allocated real assets in the general accounting system and the GDNP completed the accounting of the remaining real assets on its inventory. The initial entries were made quickly on the basis of the tax value declared in the municipalities, and then the market values were entered into the system within one year. This practice is

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important in terms of both government accounting and considering the real estates as a public source in terms of measuring performance (MEGM 2017).

5.4 Disposal of State-Owned Real Estates Disposal of state-owned real estates refers to the sale of immovable property which is not needed by public administrations. In this context, real estate sales are performed more or less in real estate owner countries. Sale transaction can be composed of long processes such as permission from various boards like in France or Canada, while composing of short processes such as minister’s approval like in Germany or Turkey (Turan et al. 2012, 2013a; Turan and Yüksel 2013).

5.4.1 Country Practices in Disposal of State-Owned Real Estates In many European countries, there is a distinction among the state-owned real estates such as public property and private property of the state which comes from Roman law and the goods that can be subject to sale are the real estate which are classified as private property of the state (Peterson and Kaganova 2010). As in the case of France, in order to sell many of the real estates in the portfolio, the classes of many public real properties were changed into private property and selling these properties was made possible (Turan et al. 2013a). In many European countries, especially in England and Germany, employment in general government as a percentage of total employment has decreased over time (OECD 2017). This has led many public buildings to being used with missing capacity. The application of effective use of office spaces mentioned above emerged as a result of this situation. It has become a fundamental state real estate policy of these countries to gather the existing personnel and sell the vacated buildings to turn them into cash. This way, both the cost related to the usage expenses of the buildings decreased and the revenue were obtained from the sales (Turan et al. 2013). In Italy and Canada, the state’s real properties were sold not by the current situation but by enhancing the aim of use in the zoning plan or by increasing the construction capacity, in other words, by the method of property development (Turan and Güven 2012; Turan and Yüksel 2013). In the case of Canada, the real estate properties are sold to an organization that operates with the perspective of a private company, although it belongs to the state, and this organization improves projects on the real estates that they buy and sell them afterward (Kaganova 2011). These methods enable the real estate to be sold more profitable than its current situation (Turan et al. 2013).

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5.4.2 Disposal of State-Owned Real Estates in Turkey The disposal of real estate belonging to the state in Turkey is made in three ways: Sale, transfer, and abandonment process. Sales transaction refers to the sale of state’s real estates, either directly or through open or closed tenders. Transfer refers to the transfer of the real estate belonging to the state to certain institutions free of charge in accordance with certain laws, for example, to TOK˙I for the purpose of the land development, to municipalities to be used as a public market place, or to management companies for the establishment of organized industrial zones, which are mostly social transactions. Abandonment refers to the deletion of the title deed to be left to the public use of state lands allocated for purposes such as parks, roads, and terminals in the zoning plans as required by the zoning law. For this reason, many municipalities mostly allocate the state real estates for these purposes while making zoning plans. The sale method of state-owned real estates is based on the sale by open or closed tender procedure. Tenders are held in provincial directorates by making open or closed bids in accordance with the monetary values of the real estate within the changing monetary limits in the budget law every year. Municipalities are also given a revenue share from these sales. In recent years, however, more emphasis has been placed on direct sales to solve property ownership problems. The most important example of these direct sales is the sale of lands known as 2B by the public. 2B lands are mainly state’s forests that lost their forestry character due to the illegal constructions which cannot be demolished. The problem of ownership of 2B lands dates back to the 1960s. Although this problem was tried to be solved over the years, a successful regulation could not be implemented until 2010. The regulation made in 2010 allowed these lands to be sold at half of the market price and in instalments for up to 6 years (Torun 2013). The number of state real estates sold within the scope of this regulation which aims to solve the ownership problems between the state and citizens is quite high. At the end of 2018, 543 thousand real estates were sold to 769 thousand beneficiaries. The value of these sales is 11 billion  and the collected revenue is 8 billion  (Milli Emlak 2019). The income is directly transferred to the general budget accounts and used as a source. In order to contribute to the regional development areas, state real estates can be sold at tax based price which is lower than the market price in accordance with special laws. For example, for the purpose of building a small industrial site or a technology development zone, making a stock exchange, using as a free trade zone, building a housing estate, or investing 10 million USD to provide for at least 50 people employment, state real properties are sold at moderate prices. This shows that state-owned real properties can be used as a tool in the field of production and investment policies.

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5.5 Conclusion In Turkey, many of the public administrations have an influence on state-owned real estate due to being utiliser and having mandates, as well. The main authority in the field of state-owned real estate belongs to the GDNP, which had been under the MoF until July 2018 and was transferred to the MoEU within the new state structure. Although the GDNP is the general authority on the treasury properties, it is obligatory to obtain positive opinion from the relevant ministries before any real estate is subject to a transaction such as allocation, sale, rent, or easement. For example, in the field of forests and agricultural lands, the ministry of agriculture, and forestry, in the field of coastal areas the ministry of transport, in the field of cultural assets and tourism, the ministry of culture and tourism and for the military zones the national defense ministry should give the consent for making a transaction regarding a state real estate. On the one hand, this reduces the effectiveness of decision-making and implementation processes, while on the other hand, it makes it difficult for the GDNP to make single-handed and rapid decisions in real estate management. However, over the years various instruments were shaped by the legislation on the management of state real estates in Turkey to meet the needs of economy. Therefore, there is a wide range of legislation regulating the utilization of state-owned real estates in many fields from tourism, agriculture, industry to education, and health. For example, there are various methods such as selling to small industrial sites or shareholders, leasing for agricultural or commercial purposes, easement for livestock or organic farming purposes, and allocation for school or hospitals. With this wide range of instruments, tens of thousands of treasury properties have been used for many economical purposes; however, such methods have brought about negative situations such as being subject to complex and dispersed legislation (Turan et al. 2013b). In addition to the disorganization of the authority, since the real estate management is not among the priorities of the governments, there has not been a radical reform effort in this field so far. The most important change in the field of state-owned real estate management is the fact that the GDNP, which is the general responsible administration in state’s real estate management, has been removed from the MoF and attached to the MoEU. The Ministry’s existing planning authority was merged with the ownership of state’s real estate due to the transfer of GDNP and authority of construction of public buildings with incorporation of TOK˙I. Thus, three main authorities as right of ownership, planning, and construction of state real estates were gathered under a single roof. This way, an important step has been taken toward a strong state-owned real estate management in Turkey.

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References Balch, W.F. (1994). The Integrated Approach to Property and Facilities Management. Facilities. Vol. 12, No. 1: 17–22. Gözler, K. (2009). ˙Idare Hukuku. pp 815. Bursa, Türkiye: Ekin Yayınları. Kaganova, O. & McKellar, J. (2006). Managing Government Property Assets: International Experiences. (pp. 2). Kaganova, O. (2010). Government Management of Land and Property Assets: Justification for Engagement by the Global Development Community. Urban Institute Center on International Development and Governance. Kaganova, O. (2010/2011). Government Property Assets in the Wake of the Dual Crisis in Public Finance and Real Estate: An Opportunity to Do Better Going Forward?. Real Estate Issues Vol. 35, No. 3. Kaganova, O. (2011). International Experiences on Government Land Development Companies: What Can Be Learned?. Urban Institute Center on International Develpment and Governence. IDG Working Paper No: 2011–01. Karde¸s, S. (2007). Milli Emlak. Ankara, Turkiye. Milli Emlak Genel Müdürlü˘gü. (2017). Faaliyet Raporu. Ankara, Türkiye. Milli Emlak Genel Müdürlü˘gü. (2018). Faaliyet Raporu. Ankara, Türkiye. Milli Emlak Genel Müdürlü˘gü. (2019). Milli Emlak Bülteni. Ankara, Türkiye. MoEU. (2017). Retrieved from: https://csb.gov.tr/kamu-binalari-standartlari-rehberi-yayinlandibakanlik-faaliyetleri-25289, 19.06.2019. OECD. (2017). Government at a Glance 2017, OECD Publishing, Paris, retrieved from: https://doi. org/10.1787/gov_glance-2017-en. Peterson, G. & Kaganova, O. (2010). Integrating Land Financing into Subnational Fiscal Management. The World Bank Poverty Reduction and Economic Management Network Economic Policy and Debt Department. Policy Research Working Paper 5409. Torun, S. (2013). 2B Yasası Beklentileri Kar¸sıladı mı? Deneti¸sim Dergisi, Sayı.12. Torun, S. (2014–15). Hazineye ait tarım arazileri satılıyor. Deneti¸sim Dergisi, Sayı.15. Turan, T. & Güven H. (2012) ˙Italya Ülke Raporu, Maliye Bakanlı˘gı, Milli Emlak Genel Müdürlü˘gü, Ara¸stırma ve Geli¸stirme Dairesi, (Sayı:2012/02). Turan, T., Kıral, P., & Saçlı, M.S. (2012) Federal Almanya Ülke Raporu, Maliye Bakanlı˘gı, Milli Emlak Genel Müdürlü˘gü, Ara¸stırma ve Geli¸stirme Dairesi, (Sayı:2012/01). Turan, T., Kıral, P., & Saçlı, M.S. (2013a) Fransa Ülke Raporu, Maliye Bakanlı˘gı, Milli Emlak Genel Müdürlü˘gü, Ara¸stırma ve Geli¸stirme Dairesi, (Sayı:2013/01). Turan, T., Kıral, P., & Saçlı, M.S. (2013b). Almanya’da Federal Devlete Ait Ta¸sınmazların Yönetiminin ˙Incelenmesi ve Türkiye’de Hazine Ta¸sınmazlarının Yönetimi ile Kar¸sıla¸stırılması, Sayı¸stay Dergisi, 88. Turan, T. & Yüksel M. (2013) Kanada Ülke Raporu, Maliye Bakanlı˘gı, Milli Emlak Genel Müdürlü˘gü, Ara¸stırma ve Geli¸stirme Dairesi, (Sayı: 2013/01). Zailan, M.I. (2001). The Management of Public Property in Malaysia. International Conference FIG Working Week 2001. 6–11 Mei 2001. Seoul, Korea.

Pınar Güven is the head of Research and Development Department in General Directorate of National Property, Ministry of Environment and Urbanisation. She graduated from Ankara University, Political Sciences Faculty, Labor Economics and Industrial Relations Department. She has 14 years’ experience in the field of state property management in Turkey. She has studies on the state property management in Germany and France. She attended many annual meetings on the Pure-net network, the European based network on state property management. She attended an

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IMF visit program in Tehran, Iran as an expert and speaker. She lastly attended the “technical deep dive: state property management” program in Tokyo, Japan. She has also worked as a contract manager in Central Finance and Contract Unit, Turkey in 2009–2010.

Part II

Intergovernmental Fiscal Relations Reforms

Chapter 6

Strategic Planning and Budgeting in Local Governments Hüseyin Güçlü Çiçek and Süleyman Dikmen

6.1 Introduction The strategic planning concept has emerged as an old strategy and activity, which is used to seize the enemy as in the military sense (Nutt and Backoff 1992: 56). It includes various permanent and temporal issues and aims to prolong the institution’s life and to provide welfare (Kaufmann 1993: 7). It has emerged primarily in the private sector and was adapted to public institutions later on. The core of strategic planning is to constitute strategies, which are related to the effect expected and certain results desired by an institution to allocate the sources, to set criteria and targets. Strategic planning is a systematic process designed to form a vision for the future of a society. It helps communities to have control of their future (Gordon 2005: 9). Strategic planning helps the usage of resources in a more effective manner. The institutions using their resources effectively own a strategic plan including a longterm vision where the institution practiced by degrees. In addition, the members of an organization could live together and develop a strategic plan, which means that they have relative unanimity about the future of the organization. Strategic targets taking place in the strategic plan are the strategic priorities of the institution. For instance, human sources plan shows the ways of dealing with significant problems of the staff or financial plan is related to creating revenues or expenditures (Francois 2014: 83). Owing to strategic planning, necessary changes are determined so that the institution could fulfill its goals better, effective programs are formed and perpetuated, the needs of the society are focused on, the effective use of sources is provided, it helps to H. G. Çiçek (B) · S. Dikmen Süleyman Demirel University, Isparta, Turkey e-mail: [email protected] S. Dikmen e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_6

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perform social communication and decision-making, paves the way for determining opportunities and targets, uncovers inner and outer threats, and the status and future of the institution could be predicted (Francois 2014: 85). Although the roots of strategic planning in public sector dates back to the late 1950s and early 1960s, the preparation and implementation of strategic planning by local governments is relatively new. It defines why local governments exists, to whom they serve, the benefits attained by the given service, and to serve a vision of the administration to its citizens. It is the design of a desired future state and creation of ways to reach it (Ackoff 1981: 62). As indicated by Bryson (2004), strategic planning is “a disciplined effort to produce fundamental decisions and actions that shape and guide what an organization (or other entity) is, what it does, and why it does it.” It is a useful tool to enhance effective local service delivery and to overcome local problems. However, to reveal the dynamics of local problems, it requires developing a local point of view. Strategic planning approach acts as pathfinder in terms of establishing the connection between the budget and the tasks that local governments want to carry out and reach at (Yılmaz et al. 2012: 97). In this study, strategic planning and budgeting which play a crucial role in public financial management reforms in Turkey have been investigated in terms of local governments. Strategic plans, performance programs, fiscal year budgets, annual reports, and problems and solutions of local governments have been analyzed. It has been considered what changes the presidency government system has made in the ministries controlling strategic plan, performance program, and activity report. In this context, after the introduction part, the second part of the study constitutes legal basis of strategic planning in local governments. The third part explains strategic planning and budgeting components in local governments. The fourth part deals with the problems in strategic planning process in local governments. The last part concludes and provides some policy recommendations.

6.2 Legal Basis of Strategic Planning in Local Governments Local governments are the organizations whose authority is limited to a specific geographical area. The types and functions of them vary according to the administrative, social, and legal structures of the countries. In Turkey, for instance, local governments consist of municipalities, special provincial administrations, and villages. The leading ones among these are municipalities both in terms of the services available and population. Three different types of municipalities exist. The biggest one of them is the metropolitan municipality. In Turkey, 83% of total population lives in metropolitan municipalities. More importantly, this rate reaches 93% when province, district, and town municipalities are taken into consideration (Türkiye Belediyeler Birli˘gi 2018 November 21). Strategic planning and budgeting system of municipalities in Turkey have been supported by a strong and prevalent legal basis since (2003). In this regard, legal process started with the decisions taken by High Planning Council (HPC) in the

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same year and essential regulations were made with Public Financial Management and Control Law (PFMC Law). After that, strategic planning was included in the relevant laws of local governments. In the decisions of High Planning Council, it was announced that State Planning Organization would prepare draft strategic planning procedures (as well as performance-based budgeting system) in all state organizations in the medium term in 2003.1 For the pilot process in local governments, Denizli Special Provincial Administration and Kayseri Metropolitan Municipality were chosen. In 2005, along with the Law No. 5436, strategy development units have been constituted in public administrations and these units have been commissioned with the coordination of the regulations on working procedures and principles of strategy development units and strategic planning studies. Arrangements oriented toward the regulations on performance programs to be prepared by public institutions, enacted in July 5, 2008 and on activity reports to be prepared by public institutions published in March 17, 2006 and performance program and activity reports which are the other elements of strategic management have been made. In the 3rd article of PFMC Law, strategic plan was defined as the plan that includes medium- and long-term objectives of the public administrations, as well as their basic principles and policies, their targets and priorities, performance criteria, and the methods and resource allocation techniques to meet the performance criteria. In the 9th article of PFMC Law, a special article was entitled as strategic planning and performance-based budgeting. According to this article, public administrations are to prepare strategic plans with participatory methods with the purpose of identifying mission and vision within the scope of development programs, policies determined by the President, relevant legislation, the basic principles they adopted, setting strategic aims and measurable targets, measuring their performance according to the pre-determined criteria, and observing and evaluating the process. Public administrations have to base their budget, program, and project-based resource allocation to their strategic plans, performance criteria, and annual objectives and targets criteria to ensure they provide quality services at an expected level. The procedures and principles regarding the identification of public administrations, which will be accountable for preparing strategic plan, determination of the calendar of strategic planning process, and linking the strategic plans to policies, development plan and programs, are determined by the President of Republic of Turkey. According to 10th article of the Law No. 5018, the Minister of Environment and Urbanization is responsible for the preparation as well as implementation of local governments’ strategic plans in accordance with development plan and annual programs and providing coordination and cooperation with other ministries.

1 The

State Planning Organization was reorganized in 2011 as the Ministry of Development. With the referendum on 16.04.2017 and the transition to the Presidential Government System, public administrations within the scope of central government were restructured. In this context, the Ministry of Development was abolished and the Strategy and Budget Directorate was established under the Presidency. The Strategy and Budget Directorate is responsible for the preparation of the development plan in coordination with the Ministry of Treasury and Finance and the compliance of the plans and programs prepared by the institutions.

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As an appendix to legislative regulation No. 5018, judges related to strategic plans in the organic laws of local governments have been included. Some articles about strategic planning were added to PFMC Law Metropolitan Municipalities Law No. 5216, Municipalities Law No. 5393, and Special Provincial Governments Law No. 5302. Under the sub-course of strategic plan and performance, the 41st article of Municipality Act No. 5393, dated July 3, 2005, states that the mayor submits a strategic plan suitable to the region as well as a development plan and program in 6 months as of local elections and an annual performance program before the New Year to the municipal council. Strategic plan is prepared in corporation with universities, trade associations, and non-governmental organizations and it goes in effect after being approved by the municipal council. It is not compulsory to make a strategic plan in the municipalities with a population of less than 50.000. Strategic plan and performance program form the basis for the budget planning and they are discussed and approved by the municipal council before the budget preparation starts. According to the 56th article of the Law No. 5393, which is related to annual report and the 4th sub-clause of 41st article of PFMC Law, the mayor prepares the annual report which displays the activities conducted in line with strategic plan and performance program, targets determined based on performance criteria, the achievement level of the targets, the reasons for the deviations as well as the debts of the municipality. The information and evaluations in question related to the subsidiaries, enterprises, and municipal partnerships are included in the annual report. The annual report is submitted to the municipal council in the meeting held in April. Additionally, a copy of the report is sent to the Ministry of Environment and Urbanization and then the report is announced to the public. Under the sub-course of strategic plan and performance, the 31st article of Special Provincial Administration Law No. 5302 dated February 22, 2005 states that the governor submits a strategic plan that is suitable to the region as well as a development plan and program in 6 months as of local elections and an annual performance program before the new fiscal year to the municipal council. Strategic plan is prepared in corporation with universities, trade associations, and non-governmental organizations and it goes in effect after being approved by the municipal council. Strategic plan and performance program form the basis for the budget planning and it is decreed that they are discussed and approved by the municipal council before budget preparation starts (Special Provincial Administration Law 2005, a. 31). As a result of the evaluation of activity report by local councils, administrators, who are given insufficiency, might be unseated by State Council’s decision. Insufficiency decision must be consistent, tangible, significant, and provable.

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6.3 Strategic Planning and Budgeting Components in Local Governments There are four basic components of strategic planning and budgeting in local governments. These components are strategic plan, performance program, fiscal year budget, and annual report.

6.3.1 Strategic Plan Municipalities with a population of more than 50.000 prepare a strategic plan in every 5 years at an institutional scale as a component of performance-based budgeting and prepare performance program, budgets, and annual reports every year in accordance with the strategic plan. Public administrations prioritize their activities foreseen under legal regulations in detail and prepare the activities by linking them to national development plan, annual program, and plans of other sectors (Özeren 2010: 275). As for the municipalities with a population of less than 50.000, it has been performed voluntarily (Yılmaz et al. 2012: 191). Although it is optional and they are lacking organizational capacity, some municipality mayors prefer to have a strategic plan with the help of various institutions because they believe in the positive contributions of strategic management approach to the organizations. The prepared plan is submitted to the approval of the mayor and then discussed in the committee and the municipal council. The strategic plan is the proper decree made by a majority of votes or a consensus in the municipal assembly. Ultimately, it is the mayor and his affiliated units to issue this decree. One of the most important points of the strategic planning process is the ability of the local governments to produce policies in line with their aims and targets of the country’s development plan and to link the strategies of the development plan with the policies of the municipalities. The services of the local governments are expected to be in line with government policy. The things that are required to be performed with the development plan on a sectoral basis are included in the planning of municipalities on a smaller scale. In the strategic planning process, internal and external stakeholder surveys, evaluation of these surveys, and SWOT analyses, which are conducted to identify weaknesses and strengths of the organization, are common methods. Plans should be precise and intelligible. Although the strategic plan is mostly in the form of a repetition of the known, it is important in terms of ensuring internal and external communication within the process and getting to know the institution better. In this case, while preparing the strategic plan, local governments with a political stance might set exaggerated, overly ambitious goals and targets far from measurability, and the plan can turn into a political propaganda tool. Therefore, the content shall not be only the process but also the plan, program, budget, and the activity reports that need improving.

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Public administrations prepare performance program, which include activities and projects they will carry out, resource needs for these activities, and projects as well as performance targets and indicators (PFMC Law, a. 9).

6.3.2 Performance Program Public administrations prepare performance program which covers activities and projects they will carry out and the resource needed for these activities and projects as well as performance targets and indicators (PFMC Law a. 9). For local governments, the Ministry of Environment and Urbanization informs the public within the first month of each fiscal year on the objectives, strategies, assets, obligations, and annual performance programs of their administrations (PFMC Law a. 9). A copy of administration activity reports prepared by local governments is sent to the Court of Accounts and the Ministry of Environment and Urbanization. The Ministry of Environment and Urbanization prepares the local governments’ general activity report, which includes its own evaluations as well on the basis of these reports. A copy of the report is sent to Court of Accounts and the Presidency. Performance program documents and annual reports are the documents that complete the strategic management cycle in Turkey. While annual objectives, indicators, and activities are determined with the performance program, annual reports are used to report the performance of the organization (Yılmaz and Erkan 2014: 6). The link between strategic plan and the budget is ensured via the performance program. The performance program is a program that provides a basis for the preparation of the administrative budget and the administrative activity report, which comprises the activities that the public administration should carry out in accordance with the strategic plan of the public administration, the resource needs of these activities, the performance targets and indicators. The performance program contains performance targets and indicators of the program period, activities to be carried out in order to achieve performance targets and their resource needs, and other financial and non-financial information related to the administration. It is prepared annually by the senior official at the administration level, with the participation of officials (Ankara Büyük¸sehir Belediyesi Ba¸skanlı˘gı 2017: 48). Municipal senior official is responsible to the municipal council, mayor, and local authority for preparing and implementing the activities and projects to be carried out by the local authority and the performance program including the resource needs, performance targets, and indicators. The performance program is a municipal council decision as in the strategic plan. This decision must be taken before the budget negotiations. During the preparation process of the performance program, guidance and coordination are carried out by the financial services unit and all information and data are collected here. The financial services unit performs performance program preparation activities for the relevant year in order to facilitate the work of the spending

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units. Under the coordination of financial services unit, it is prepared by the senior official along with the participation of cost units. The mayor then initiates the process through a notice or instruction to be sent to the cost units. Performance program has been prepared within a perspective of 3 years and it connects not only the need for source but also the revenues intended to obtain along with its sources into the program as well. Yet, as a result of the balance of resource and expenditure, the performance program is prepared annually, and the objectives and targets in strategic planning are prioritized for only 1 year. In the performance program, some information in the strategic plan (authority, duties and responsibilities, organizational structure, physical resources, human resources, etc.) is repeated, but the main policies and priorities in the strategic plan and objective are embodied and transformed into performance targets and indicators and activities. The activities and their costs (resource needs) are numerically included in the program. There are many units (science, public works, and urbanism, human resources and education, information processing, fire brigade, municipal police, press, transportation, social services, cultural and social affairs, environmental protection, etc.), which is proportional to local service diversity. Therefore, tens of strategic goals and targets as well as performance targets and indicators which are suitable for each unit are developed.

6.3.3 Fiscal Year Budget According to the Article 62 of Municipality Law No. 5393, the draft budget prepared by the mayor is submitted to the municipal council before the first day of September. Draft budget is also sent to the Ministry of Environment and Urbanization. The Ministry of Environment and Urbanization consolidates the budget estimates of the municipality and submits them to the Ministry of Finance for incorporation in the draft central government budget in accordance with the Law No. 5018 on Public Fiscal Management and Control. The executive committee submits the budget to the Municipality Council before the first day of November along with its evaluation after examination.2 The approved budget enters into force as of fiscal year. It is prepared and implemented as local government budget according to budget type and scope classifications given in Article 12 of PFMC Law. The municipal budget is a municipal council decision that allows collection of the revenues and expenditures and it also shows revenue and expenditure estimates in the fiscal year. With municipal council decree, the budget enters into force. Fiscal year budget is discussed and evaluated by considering strategic plan and performance programs as well as revenue and expense estimates for the next 2 years (Regulation on Budget and Accounting of Local Governments 2016, a. 5). The mayor asks the units to prepare their expenditure budgets in accordance with strategic plan and performance program by the end of 2 It

is presented to the Municipality Council before the first day of October at Metropolitan subprovincial municipality.

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June every year. While making expenditure estimates, strategic plan, performance program and targets, and principles in the investment program are taken into consideration. Moreover, the economic data and assumptions for the coming years of the central government are also used (Regulation on Budget and Accounting of Local Governments 2016, a. 22). Financial Services Department plays the most active role in the budget process with the authority granted by the law. The unit prepares a draft for the relevant fiscal year according to analytical budget classification and submits as a file to the government of municipality with the attachments. Financial Services Department turns the draft budget into a single draft expenditure budget by considering targets and principles mentioned in the budget technique and call in Municipality Law of PFMC. This department also collates the proposals given by the relevant departments. As for the revenue budget, the unit comes up with an estimate amount by considering the revenue and increase rates of the last years according to municipal revenue act. Revenue and expenditure budgets are linked equally. The municipal council examines the draft budget and finalizes it either with a consensus or a majority of votes. The last and the most authorized unit to discuss the draft budget is the municipal council. Strategic plan and performance program are concretized with fiscal year budget. Appropriations are determined for the activities. At this stage, a significant progress is made.

6.3.4 Annual Report The last compound of strategical planning process is annual reports. As a must in legislative regulation, local governments have to prepare annual reports as well. Via the regulations on activity reports to be prepared by public institutions which came into force in March 17, 2006, periods and other procedures and principles related to the preparation of local authorities’ activity reports, its submission to the related institutions and announcement to the public have been arranged. In the scope of these regulations, the annual reports have been classified as unit activity report, administration activity report, local governments’ general activity report, and general activity report. The Ministry of Environment and Urbanization prepares the general activity report of local governments on the basis of local governments’ activity reports, shares it with public, and sends it to the Court of Accounts and the Ministry of Treasury and Finance. The annual report of the local governments is prepared based on the achievements of the objectives and targets in the strategic program and performance program in the past year. Generally, the satisfactory sides of the activities are highlighted. It includes general information, mission, vision, authority, responsibilities, administrative information (physical structure, organizational structure, information and technological resources, human resources, services offered, management and internal resources), aims, targets, basic policies, and evaluations of the activities. The scope of these evaluations covers financial information (budget implementation results, explanations

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regarding basic financial tables, financial audit results, etc.), performance information (information on activities and projects, activities of municipal companies, table of performance results, etc.), and the analysis of organizational capacity (weaknesses and strengths). The overall content of the annual report is similar to performance program. The most important part of the annual report is the performance results. However, it is not a realistic approach to expect to perform each and every strategic aims and targets. Thus, the actualization rate of the targets of the local governments varies. Some targets remain far below the expected level while some of them might exceed the expected levels. An explanation is made for not-realized or cancelled services. Unusual events (seasonal factors, insufficient staff, cancellation of a bid, the problems stemming from the company that took the project or the issues of a corporate public organization) occurring throughout the year might result in deviations in performance targets. Or sometimes, a target might be ignored for the sake of other significant targets (projects) even though it is in the performance program.

6.4 The Problems in the Strategic Planning Process of Local Governments Since the emergence of the idea of preparing a strategic plan in Turkey in 2001, both local and central governments have faced a number of problems. It is possible to take basic problems into consideration faced by local governments in three groups. These problems are administrative, juridical, and structural.

6.4.1 Administrative Problems Local governments in Turkey have less financial and administrative autonomy compared to other countries. Although local governments have their own municipal councils, their power to take decisions is limited to certain issues. Owing to the hierarchical structure existing between central government and local governments, the solution of simple problems might even take a longer time. As the transference authority from central government to local governments has been slow in progress, the presentation of services to local people is slow as well. The success of strategic planning process is only possible by the administrators’ sense of ownership, the strategic plan in public institutions, and other staff and their inclusion into the process. Strategic planning is not under the responsibility of a person or a unit in the administration, but it is the duty of all staff. In all steps of strategic management process, administrators play a key role and strategic planning studies of public institutions have been shaped according to the leadership of the administrator (Songür 2008: 79). Significant duties are the responsibility of the administrator on strategic planning in local governments as well. The senior officials’ faith and support in the

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importance and benefit of strategic planning is an essential condition in adopting the approach of strategic planning. In the process of strategic management, as an information flow from top management to lower level is point in question, the adoption and sense of ownership of the process of strategic planning by the workers is also necessary (Grant 1995: 26). The strategic planning, which is not owned by the workers, leads to institutional resilience (Songür 2008: 78–79). In order to break corporate resilience, the manager should share his/her strategic plan approach with employees and ensure corporate ownership (Strateji ve Bütçe Ba¸skanlı˘gı 2018: 4). Without the faith and support of senior officials and employees, the strategic planning process in local governments is not possible to operate effectively and a positive result cannot be obtained. Differences in the perspective of the strategic planning approach among the institutions negatively affect the functioning of the process. Each institution looks at the process within the framework of its responsibilities and the whole strategic planning process is overlooked. This problem is also observed in local governments (Songür 2015: 68). In the process of preparing strategic plans in local governments, the mayor, strategy development board, strategy development unit, strategic planning team, and cost units are involved. The lack of coordination and harmony among these institutions causes problems in the functioning of the process. In addition, since the idea of strategic planning in local governments came into being in the early 2000s, although a significant level of knowledge accumulation and experience related to the issue in local governments exists, the information flow among local governments is not sufficient.

6.4.2 Juridical Problems Local governments face with some problems due to the fact that the legal infrastructure in strategic planning is not fully formed. There is no provision in the legislation on how to ensure the harmonization between the strategic plans should be prepared by the special provincial administration and the municipalities. While the legislation emphasizes the strategic plans to be compatible with development plans, it did not arrange how the inner hierarchy of the plan would be revealed (Yılmaz et al. 2012: 192). The strategic plan is also expected to be coordinated with the medium-term program; the medium-term fiscal plan; the government program; and other national, regional, and sectoral plans and programs. However, the high number of documents makes the integration between documents difficult (Songür 2015: 71). The strategic plans to be prepared at provincial level should be reviewed by the governor or other relevant organizations for their compliance with the development plans for the effective implementation of the services (Yılmaz et al. 2012: 192). Performance measurements are needed to evaluate the performance and accountability of local governments (Kloot 1999: 567). In order to perform performance measurements, all public administrations must legally determine performance indicators. However,

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identifying performance indicators is rather difficult for local governments. Municipality Law No. 5393 makes it difficult to monitor the performance of municipalities. Because the law has explained the establishment objectives of the municipalities without going into detail. As performance measurement refers to performance indicators, there is an inconsistency between indicators and performance values (Sakin 2018: 89).

6.4.3 Structural Problems Although the strategic planning process has been fully adopted by many managers, employees, and the legal regulations has been fully established, it is not possible to perform a successful strategic planning without solving the structural problems. Local governments perceive the strategic planning process as an administrative and legal obligation and forget what the real purpose is. They are only preparing a strategic plan to fulfill the legal and administrative requirement. However, the objectives of the local governments in preparing the strategic plan are to ensure fiscal discipline, to ensure the operative and effective distribution and use of resources, to determine the medium- and long-term goals and objectives, and to improve accountability. Public budgets are one of the main tools of strategic planning. In addition, the budgets show the public sector’s future revenue and expenditure estimates and their resources and implementation issues. As a result of the reforms in the field of public financial management, a result-oriented budgeting approach has been adopted from input-oriented budgeting approach. Performance-based budgeting requires resource allocation by taking strategic goals and targets into consideration. According to Article 9 of the PFMC No. 5018, public administrations prepare their budgets on a performance basis that is compatible with the mission, vision, and objectives of their strategic plans. According to Article 41 of the Municipal Law No. 5393, the strategic plan along with the performance program in the local governments is the basis for the preparation of the budget (Municipal Law 2005, a. 41). According to this provision, local governments are expected to establish the relation among strategic plan, performance program, and budget. However, in practice, it is seen that budgets are not prepared by taking advantage of strategic plan and performance programs. There is also no administrative structure to establish this relationship (Songür 2015: 71). It is not possible to achieve the expected benefits unless strategic planning is related to budgeting, performance management process and measurement (Poister and Streib 2005: 46–47). Another problem that local governments face in the strategic planning process is the lack of adequate functioning in the context of accountability for audit and control systems. Internal audit and internal control constitute one aspect of the reform in public financial management. It is expected that the internal control system will be subject to continuous monitoring and evaluation, given that control activities may be designed and because of the implementation shortcomings, it cannot provide

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complete assurance. This situation reveals the necessity and the role of internal audit activity. The internal control and internal audit activities, which are the two basic elements of the strategic management approach, have not been fully understood and internalized by the local governments. The establishment of an effective, systematic, standardized, and comprehensive internal control and internal audit system will increase the success of strategic planning. Pursuant to Article 12 of the Regulation on Procedures and Principles Regarding Strategic Planning in Public Administrations, public administrations other than local governments send their strategic plans to the Presidency Strategy and Budget Directorate for consideration. After the strategic plans are examined in terms of the issues mentioned in the regulation, they are sent back to the relevant public administration for review or they are finalized and published on the website of the administration. Needless to say, the exclusion of the strategic plans of the local governments from the evaluation of the Strategy and Budget Directorate has a negative effect on the quality of the plans. Since local governments have prepared a limited number of strategic plans so far, they did not have sufficient experience in preparing strategic plans. It is seen that the prepared strategic plans carry some structural deficiencies in their bodies. These deficiencies are also expressed by the Presidency Strategy and Budget Directorate (Songür 2015: 73–74). Local governments do not have enough human and financial resources to prepare a strategic plan. They face problems in the field of strategic planning and they are lacking experts on legislation, technical knowledge, and staff. Besides the lack of capacity to prepare the strategic plan, many municipalities do not have budget facilities to perform the anticipated targets in the strategic plan and they cannot allocate their resources according to the priorities in the strategic plan (Akdemir 2019: 37). Local governments should organize various trainings and seminars in order to prepare the strategic plans better, implement the system and explain the legislation, and provide continuity in training for better system settlement. On the other hand, there are no incentives in the strategic plan preparation units of local governments to encourage the continuity of the personnel policy and ensure that the personnel policy is sustainable. Mechanisms should be developed to encourage staff to work in local governments, specializing in strategic planning and with technical knowledge. Moreover, it is observed that local governments do not have sufficient desire to cooperate with other local governments and to work in coordination in order to gain the necessary experience.

6.5 Conclusion and Policy Recommendation The tasks undertaken by local governments have become increasingly diverse due to both population growth and rapid urbanization in Turkey. In order to increase the living standards to the extent of the expectations of local people (continuous, qualified, complete, fair, accessible, and quality service), high-cost infrastructure works (increasing urban transportation options), promotional activities, and socio-cultural activities have made the use of more public resources mandatory. The revenues of

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local governments become insufficient to meet the source needs required by increasing service demand. This situation has led to the risk threat for fiscal indiscipline and macro-economic stability by increasing budget deficit and debt stock on local level. Securing fiscal discipline and activity quests in expenditures have made the medium-term point of view mandatory in the use of public source. In this scope, a serial of reforms such as strategic planning, analytic budget classification, mediumterm expenditure reform, and budget system based on performance have been put into effect. With the increased importance of transparency and accountability, the strategic management process which constitutes the basis of what the public resource is and how it will be allocated has gained importance. With this understanding, it is aimed to set more realistic policies and determine priorities and reflect these on the budget. As a solution, strategic financial management model has been adopted since the beginning of 2000s. In this context, strategic planning process, components of this process, and problems faced by local governments on the level of local governments in Turkey have been examined in the study. Strategic planning, performance program, fiscal year budget, and annual report are the basic components of strategic management. They are prepared in accordance with the relevant laws and other regulations. However, local governments could not have the same success in the process of strategic planning. In addition to the differences in administrative and financial capacities of local governments for getting different results, local culture, working habits, and administrative structure are of great effect. In addition, training, experience, and perspective of the top managements of the local governments affect the process. Local culture, working habits, and administrative structure are reflected in the philosophy of strategic management. Strategic planning is either carried out in the form of desk work with a few people or in the form of working and coordination groups by taking stakeholders into consideration, and by involving all units in the process. Although local governments in Turkey have made significant progress in preparing a strategic plan, it is seen that they still face with a large number of problems. Some of these problems could be defined as follows: • The place and scope of the strategic plans within the planning hierarchy is legally uncertain. • There are deficiencies in the legislation on how strategic plans should be prepared and how they should be coordinated with other plans and programs. • Senior officials do not support the strategic planning process and employees do not want to support the process. • Some problems occur in the internal and inter-municipal cooperation and coordination of the municipality. • Due to the centralization, transfer of duties as well as powers to local governments is limited. • The main objective of strategic planning reform has been forgotten; a strategic plan has been prepared to meet only legal obligations.

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• The connection among strategic plan, performance program, and budget cannot be fully established and there is no administrative structure to establish this relationship. • In terms of accountability, internal control and internal audit systems may not be adequately operational. • Exclusion of the strategic plans of local governments from the assessment of the Strategy and Budget Directorate affects the quality of the plans negatively. • Local governments do not have sufficient knowledge and experience in preparing strategic plans. • The number of experts with technical knowledge on legislation is inadequate. Moving out of the problems experienced, the duties of municipalities on strategic planning should be as follows: • The scope of strategic plans must be clarified and widened by making changes in legislative regulation. Its relation with other plans and programs must be reviewed. • Strategic planning studies must be owned by the mayor and municipality councils and the participation of staff must be provided. The mayor should direct the strategic planning studies. • To provide the coordination in inter-municipalities, workshop and seminars should be arranged. Inter-municipalities’ exchange of information should be supported. • To facilitate and quicken the functions of planning, budgeting, and decisionmaking, local governments should be given subsidiarity in financial and administrative sense by softening strict centralist understanding. • Lacking of education and infrastructure oriented toward strategic planning in municipalities must be eliminated. • Importance must be attached to establish strategic plan, performance program, and budget relation. • An active, systematic, standard, and comprehensive internal control and internal audit system must be established. • In addition to strategic plans of central government and public economic enterprises; evaluation of strategic plans of local governments by the Strategy and Budget Directorate is going to increase the quality of plans as well.

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Jean-François, E. (2014). Financial sustainability for nonprofit organizations. New York: Springer Publishing Company. Kaufmann, J. (1993). Strategic planning and implementation (master’s thesis). Southwest Texas State University, Department of Political Science, Texas, USA. Kloot. L. (1999). Performance measurement and accountability in Victorian local government. International Journal of Public Sector Management, 12(7), 565–584. Municipal Law. (2005, 13 July). Official Gazette (No: 25874). Retrieved from: http://www.mevzuat. gov.tr/MevzuatMetin/1.5.5393.pdf. Nutt, P. C., & Backoff, R. W. (1992). Strategic management of public and third sector organizations: A handbook for leaders. San Francisco: Jossey-Bass Publishers. Özeren, S. (2010). ˙Il özel idarelerinde stratejik planlama: Denizli ˙Il Özel ˙Idaresi deneyimi. In N. Falay, A. Kesik, M. Çak, & M. Karaka¸s (Ed.), Türkiye’de yerel yönetimlerin sorunları ve gelece˘gi (pp. 273–288). Ankara: Seçkin Yayıncılık. Poister, T. H., & Streib, G. (2005). Elements of strategic planning and management in municipal government: Status after two decades. Public Administration Review, 65(1), 45–56. Public Financial Management and Control Act. (2003, 10 December). Official Gazette (No: 25326). Retrieved from: http://www.mevzuat.gov.tr/MevzuatMetin/1.5.5018.pdf. Regulation on Budget and Accounting of Local Governments. (2016, 27 May). Official Gazette (No: 29724 (repeat issue)). Retrieved from: http://www.resmigazete.gov.tr/eskiler/2016/05/ 20160527M1-1.htm. Sakin, U. (2018). Stratejik yönetimin kamuda uygulanması: Türkiye’de ya¸sanan on sorun. Strategic Public Management Journal, 4(7), 83–97. Songür, N. (2008). Belediyelerin stratejik planlama sürecindeki gereklilikleri yerine getirme durumları üzerine bir ara¸stırma. Ça˘gda¸s Yerel Yönetimler Dergisi, 17(4), 63–86. Songür, N. (2015). Türk kamu yönetiminde stratejik planlama ve uygulamalara ili¸skin genel bir de˘gerlendirme. Strategic Public Management Journal, 1(1), 56–78. Special Provincial Administration Act. (2005, 4 March). Official Gazette (No: 25745). Retrieved from: http://www.mevzuat.gov.tr/MevzuatMetin/1.5.5302.pdf. Strateji ve Bütçe Ba¸skanlı˘gı. (2018). Belediyeler için stratejik planlama rehberi. Ankara. Retrieved from: http://www.sp.gov.tr/upload/xSpKutuphane/files/sFlUO+Belediyeler_Icin_Stratejik_ Planlama_Rehber_Taslagi.pdf. Türkiye Belediyeler Birli˘gi. (2018, 21 November). Genel istatistikler. Retrieved from http://www. tbb.gov.tr/belediyelerimiz/istatistikler/genel-istatistikler/. Yılmaz, H. H., Emil, M. F., & Kerimo˘glu, B. (2012). Yerel yönetimler maliyesi (Temel ilkeler ile mevzuat ve uygulama açısından Türk yerel yönetim yapılanmasında mali yönetim ve kaynak kullanım sistemi). Ankara: Mali Hizmetler Derne˘gi Yayın No: 10. Yılmaz, H.H., & Erkan, V. (2014). Belediyelerde stratejik planlama: Ya¸sanan deneyimin belirleyicili˘ginde önümüzdeki döneme ili¸skin öneriler. Türkiye Belediyeler Birli˘gi Dergisi, Ocak, 58–69.

Hüseyin Güçlü Çiçek works as an Assoc. Prof. in the Department of Public Finance, Süleyman Demirel University. In 2000, he graduated from the Department of Business Administration Faculty of Political Sciences, Ankara University. In 2005, he received his Master’s degree from the Department of Public Finance, Süleyman Demirel University. In 2010, he completed his Ph.D. in Public Finance at Dokuz Eylül University. His researches focus on government budgeting, local finance, public debt policy, fiscal policy and taxation, international tax law. Çiçek has authored and contributed to numerous book chapters, articles, and reports on these fields of research. Besides the undergraduate- and graduate-levels of lectures given and the advisories for the theses, he has taken in charge in various units of the University; has performed deanery of the student affairs and vice-chairmanship of the department. Assoc. Prof. Çiçek who is the owner of 2012 “encouragement award” of Süleyman Demirel University in the field of Social Sciences maintains his contributions to public and private institutions besides refereeing journals.

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Süleyman Dikmen is an Asst. Prof. in the Department of Public Finance, Süleyman Demirel University. He received his joint Ph.D. degree from the Departments of Public Finance, Süleyman Demirel University and Afyon Kocatepe University in 2018. He study budgeting and financial management. His researches focus on fiscal transparency, local finance, legislative budget oversight and the role of parliament in the budget process.

Chapter 7

The Implications of the Latest Administrative Reforms About Intergovernmental Transfers Zeynep Burcu Bulut-Çevik

7.1 Introduction Intergovernmental fiscal transfer is a fundamental item of intergovernmental fiscal system and a significant revenue source for subnational governments. It is formed in order to annihilate vertical and horizontal imbalances and regulate the interjurisdictional spillovers. Vertical and horizontal fiscal imbalances occur due to the disparity between revenue and expenditure. There are various reasons behind these imbalances. The most prevalent reason of vertical imbalance is the insufficient level of revenue-generating system in a locality, whereas horizontal imbalances are observed mostly because of unequal distribution of revenue bases or natural resources. And intergovernmental transfer is the most common method to correct these imbalances in both developed and developing countries. Furthermore, interjurisdictional spillovers take place, when some local public services have benefits or costs beyond the borders of that locality. This will end up with inefficient level of public good provision. Central government supports local governments with transfers to address such problems of inefficiency. Although intergovernmental transfers are necessary for balancing the local fiscal system, there may be some problems related to fiscal discipline such as moral hazard problem. This problem arises from the view of local governments to the transfers as insurance against negative shocks. In addition, local governments perceive transfers as a rescue mechanism from their poor decisions. In other words, they believe that central government will support them from the consequences of their poor policy actions because of the potential impact to the whole economy. Hence, it is crucial to implement an effective transfer mechanism. Shah (1995, 2007) and Yılmaz (2003) state a list of properties of an ideal fiscal transfer design which provide efficiency and equity in local services; however, Ma Z. B. Bulut-Çevik (B) Ankara Yıldırım Beyazıt University, Ankara, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_7

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(1997) sum up these properties into four categories: (i) revenue adequacy: subnational governments should have enough resources to fulfill the needs of the citizens, (ii) local tax effort and expenditure control: fiscal discipline should be maintained by providing utmost tax collection effort and preventing deficits, (iii) equity: local fiscal capacity and citizen’s needs should be taken into account, (iv) transparency and stability: local governments should be able to make accurate forecast and long-lasting plans about their budget management. In this study, we will investigate the latest administrative reforms, Law No. 5779 and Law No. 6360, in terms of these criteria. There has been extensive literature about the latest administrative reforms related to transfers, Law No. 5779 and Law No. 6360. This literature can be categorized into four groups: discussions, specific municipality focus, questionnaires, and quantitative analysis. In the first group of these studies, analysis about the progress of intergovernmental fiscal system is covered through discussing the law amendments and their possible impacts. For instance, Ulusoy and Akdemir (2009) evaluate the Turkish intergovernmental fiscal system by comparing the Law No. 5779 to previous applications and also discuss positive and negative sides of this change. They conclude that despite a variety of effective modifications, Law No. 5779 still needs some adjustments. Secondly, some studies focus on the impacts of Law No. 5779 or Law No. 6360 in a specific municipality by interpreting the statistics of that municipality. Thirdly, the effects of the law amendments onto the public services are investigated through questionnaires. For instance, Biriciko˘glu and Yalnızo˘glu (2018) concentrate on the impact of Law No. 6360 to Kocaeli metropolitan municipality from the view of efficiency of public services by evaluating the answers of the questionnaire done in Kocaeli. Their findings show that the population share affects the public services adversely due to the changing population throughout the year in Kocaeli. In addition, they state that rural application of Law No. 6360 is not sufficient for Kocaeli municipality. Lastly, there are very few studies that investigate the developments of transfer schedule quantitatively. Most of them prefer descriptive analysis method to evaluate the changes. For instance, Arıkbo˘ga (2015) analyzes the Law No. 6360 by calculating the general budget tax revenue shares of each metropolitan municipality and compares them with Law No. 5779. She also computes per capita shares of each municipality before and after Law No. 6360 for 1-year period. She finds out that newly announced 14 metropolitan municipalities in Law No. 6360 are better off while 16 existing metropolitan municipalities are worse off in terms of per capita shares although the total share distributed to 30 metropolitan municipalities increases. She also observes the same conclusions by using nominal level of transfers for each municipality. The main aims of this study are to compare Law No. 6360 with the earlier applications of intergovernmental transfers and to discuss whether it satisfies the properties of an ideal intergovernmental transfer mechanism or not through descriptive analysis. The studies in the literature prefer nominal levels of transfers in their comparison analysis; however, it will generate misleading results due to inflation. In this study, real annual changes and GDP shares of transfers are chosen.

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Another contribution is showing the time series pattern of metropolitan/nonmetropolitan municipality shares. In the literature, the studies focus on a specific period due to the lack of data. In this study, the share of each municipality is calculated according to the law starting from 2010 to 2017. This time period enables us to make a comparison between Law No. 5779 and Law No. 6360 and to examine whether this law revision makes a significant change in equity and efficiency principles or not. The discussion and the results show that Law No. 5779 is a significant development for the intergovernmental transfer system from the transparency, stability, and simplicity perspectives. However, changing to Law No. 6360 does not make a substantial difference to the system. In Law No. 6360, the number of metropolitan municipalities increases to 30 from 16.1 In nominal terms, transfer amounts increase for all municipality types, but this rise change for each municipality in terms of shares, since Gross Domestic Product (GDP) and General Budget Tax Revenue (GBTR) also increase. The GDP shares and GBTR shares alter in favor of the 16 existing metropolitan municipalities. Moreover, the shares of newly announced metropolitan municipalities decrease substantially, but for the non-metropolitan municipalities, the shares decline slightly. In the next section, the intergovernmental fiscal transfer system of Turkey is explained with particular emphasis on the latest reforms related to the intergovernmental fiscal relations: Law No. 5779 and Law No. 6360. Third section evaluates the effects of latest reforms to municipalities quantitatively. These quantitative findings are assessed in the final section with concluding remarks.

7.2 The Intergovernmental Fiscal System in Turkey The design of the intergovernmental fiscal relations has long been discussed in the literature; however, the country-specific properties prevent having a common way of arranging these relations. A key issue is to determine the functions and financial management of the different tiers of governments under the concern of efficient and equitable provision of public services. According to the article 123 of Turkish Constitution, the establishment and duties of the state can be administered both centrally and locally where the duties of local governments are declared in the Article 127 of the Constitution. In accordance with the Article 127, local governments are defined as public legal entities, where the needs of the people living in city, municipality, or villages should be fulfilled. The 1 During Law No. 5779, 16 metropolitan municipalities were Ankara, Istanbul, Izmir, Kocaeli, Bursa,

Konya, Mersin, Antalya, Adana, Kayseri, Gaziantep, Diyarbakir, Samsun, Erzurum, Eskisehir, and Sakarya. They will be called “existing metropolitan municipalities” throughout this study. In Law No. 6360, 30 metropolitan municipalities are 16 existing metropolitan municipalities and Aydın, Balıkesir, Denizli, Hatay, Malatya, Manisa, Kahramanmara¸s, Mardin, Mu˘gla, Ordu, Tekirda˘g, Trabzon, Sanlıurfa, ¸ and Van. These 14 municipalities will be called “newly announced metropolitan municipalities” throughout this study.

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duties, authorities, and establishment fundamentals of local governments are managed within the local governing principle by the law. Although local governments of Turkey have no power either on legislation or on imposing/revocation a tax, they have authority to collect some local taxes. So unlike some countries with federal structure, local governments of Turkey do not have autonomy politically. According to the European Charter of Local Self-Government, accepted in 1992 by the cabinet, the revenue source of local governments will be provided under the duties and necessities of local governments in order to use them within their jurisdiction (Article 9). In the same article, the protection of financially weak local governments, eliminating the unequal distribution among localities and the fair redistribution of the funds, is mentioned. The revenue source of local governments of Turkey is composed of own source of revenue, the tax revenue share of general budget tax revenue, grants, and borrowing. The ratios of revenue source components may differ among metropolitan and non-metropolitan municipalities.2 However, for both types of municipalities, own revenue sources are limited and only composed of some local taxes and fees such as environment tax, announcement and advertisement tax, communication tax, etc. This makes local governments dependent on the transfers distributed by the central government. The intergovernmental transfer system of Turkey is mostly reorganized after 1981 with a series of laws, such as Law No. 2380, Law No. 5779, and Law No. 6360. According to Law No. 2380, 5% of GBTR is distributed to the municipalities and 1% of GBTR is given to the special provincial administration. 80% of these shares are allocated depending on the latest population of these local public entities and the rest is shared in line with the decisions of Ministry of Interior.3 Until 2008, Law No. 2380 is implemented for the transfer system between local governments and central government, then a drastic change has occurred with Law No. 5779. Law No. 2380 takes into account only population in transfer shares; however, Law No. 5779 also considers the rural information, geographic size, and development level and provides a detailed sharing system (see Fig. 7.1). Other difference is that the transfer shares differ between the different levels of municipalities4 in Law No. 5779. The concept of metropolitan and non-metropolitan municipality is firstly introduced in 1984, starting with the introduction of three metropolitan municipalities (Arıkbo˘ga 2013). According to Law No. 5779, 1.15% of general budget tax revenue (GBTR) is given to the Special Provincial Administrations and it is allocated according to the population, geographic size, number of villages, rural population, and development index among these administrations. Non-metropolitan municipalities take 2.85% share of 2 In

2017, average ratio of own source revenue to budget revenue is 9.14% for metropolitans and 10.34% for non-metropolitans. 3 Official Gazette, Issue Number: 17242 and Date: February 5, 1981. 4 Metropolitan municipality, non-metropolitan municipality, district municipality. Non-metropolitan municipality is used for the city (provincial) municipality, which is not considered as metropolitan municipality by the law.

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Fig. 7.1 Intergovernmental Transfer System Schedule—Law No. 5779

GBTR and this share is distributed in line with the population and development index of these provinces. Furthermore, 2.5%of GBTR is supplied to the district municipalities in metropolitan areas and 10% of this share is given to the water and sewerage administration, whereas the rest share is given to that district municipality directly and to the related Metropolitan Municipality (See Fig. 7.1 for specific percentages). Law No. 5779 also assigns a direct Metropolitan Municipality share, 5%of GBTR. In this revenue, as the law states, petroleum and natural gas products over special consumption tax, which is nearly 12–13% of GBTR, are excluded for a 5-year period. Then with Law No. 6360, this item becomes permanent. The number of the metropolitan municipalities was 16 as of 2014, but following the Law No. 6360, which is accepted in 2012 but implemented after local elections in 2014, it has increased to 30, whereas the number of special provincial administration decreases. Due to these changes of numbers, the share of the metropolitan municipalities increases to 6%of GBTR and the share of special provincial administration decreases to 0.5% of GBTR. The decrease in the number of non-metropolitan municipalities brings the reduction of the non-metropolitan municipality share to 1.5%of GBTR (see Fig. 7.2 for detailed shares). The numbers and the shares are not the only changes by this law, but also the boundaries of metropolitan municipalities have changed to the provincial administrative boundaries.

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Fig. 7.2 Intergovernmental Transfer System Schedule—Law No. 6360

7.3 Evaluation of Changes in Metropolitan/Non-Metropolitan Municipalities The main difference between two recent laws related to intergovernmental transfer structure of Turkey, Law. No. 5779 and Law No. 6360, arises with the numbers of different levels of municipalities and their shares. During Law No. 5779, there were only 16 metropolitan municipalities, but with this law, it has increased to 30 municipalities whose shares increase to 6%of GBTR as stated before. However, it is not clear that whether these increases affect the shares of each municipality positively or not, since the number of municipalities and their shares increase simultaneously. In the literature, there are various studies related to understanding and assessment of the changes in the intergovernmental transfer system structure in Turkey, but very few studies that evaluate these changes quantitatively. As explained before, Arıkbo˘ga (2015) suggests that the changes with Law No. 6360 are in favor of the newly announced metropolitan municipalities from the view of per capita and level results. On the other hand, Aydın (2017) claims that the new system does not make a significant difference other than complicating the calculations of the transfers, although there is an increase in the share of metropolitan municipalities and in the per capita terms for special provincial administration. However, most of the studies use nominal level changes to compare the effect of Law No. 6360. In this study, we will concentrate on real annual changes and GDP shares of transfers for each metropolitan

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municipality since inflation is an important and significant macroeconomic variable in Turkey. Average GDP shares of metropolitan transfers are calculated for the years starting from 2010 till 2017 in Fig. 7.3. Since Law No. 6360 starts to be implemented in 2014 after elections, time horizon of pre Law No. 6360 spans the years before 2014 and post Law No. 6360 includes the years after 2014.5 Intergovernmental transfers GDP shares of almost all 16 metropolitan municipalities except Ankara, Izmir, and Istanbul increase after Law No. 6360 (see Fig. 7.3). In particular, the increases in the shares of Kocaeli, Erzurum, and Konya are substantially higher than other municipalities. There are two joint fundamental reasons for these substantial increases in Erzurum and Konya. The first one is the inclusion of geographic size in distributing the transfers among metropolitan municipalities. Secondly, the definition of the boundary of metropolitan municipality has changed to provincial administrative boundary. And since according to the data of General Directorate of Mapping, Konya has the highest

Fig. 7.3 Average Metropolitan Intergovernmental Transfer Shares per GDP (%, 2010–2017). Source Authors’ calculations, Ministry of Finance, Turkish Statistical Institute, General Directorate of Mapping 5 The value of the year 2014 is excluded. Since the Law No. 6360 starts to be implemented in March

2014, including this year to any one of the categories will be wrong, so it is omitted in this study.

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acreage and Erzurum has the third highest acreage, and their shares increase with a significant amount. On the other hand, according to the average real annual changes, direct metropolitan transfers of 16 municipalities decrease significantly after Law No. 6360 compared to pre Law No. 6360 period (see Fig. 7.4). Although the increment in annual changes continues, increase rate decreases considerably. When GDP shares of 16 metropolitan municipalities and real annual changes are not interpreted individually but jointly, it can be interpreted as the increase in the share from 5 to 6% is partly dominated by the increase in the number of metropolitan municipalities. However, the latter increase is not an expected conclusion, which is the decrease in the GDP shares of transfers in these 16 metropolitan municipalities. Furthermore, except Tekirda˘g, average GDP shares of newly announced metropolitans decrease after Law No. 6360 compared to previous period (See Fig. 7.5). It is an unexpected result, since these municipalities were non-metropolitan municipalities and took only transfers from

Fig. 7.4 Average Real Annual Change of Metropolitan Intergovernmental Transfer Shares (%, 2010–2017). Source Authors’ calculations, Ministry of Finance, Turkish Statistical Institute, General Directorate of Mapping

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Fig. 7.5 Average Metropolitan Intergovernmental Transfer Shares per GDP (%, 2010–2017). Source Authors’ calculations, Ministry of Finance, Turkish Statistical Institute, General Directorate of Mapping, Ministry of Development

2.85% share of GBTR during Law No. 5779. However, had become metropolitan municipalities, they take transfers not only from 6% share of GBTR but also from the district municipalities share. This unexpected result may also be justified by looking at their final net shares of all types of municipalities. In 2013, there were only 16 metropolitan municipalities

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Table 7.1 Net GBTR Shares by municipality types GBTR sharesa

16 existing metropolitan municipalities (%)

14 newly announced metropolitan municipalities (%)

Non-metropolitan municipalities (%)

2013

4.985

1.29

1.56

2017

5.38

1.15

1.50

a These

shares are approximately calculated by the author. The year 2013 represents the pre Law No. 6360 period and the year 2017 represents the post Law No. 6360 period for this table

and their direct share was 5% of GBTR, excluding petroleum and natural gas products over special consumption tax revenue, which formed 13.8% of all tax revenue. Had excluded this amount, the net share would be 4.31% of GBTR. These municipalities also got transfers from their district municipalities. When transfers of metropolitan municipalities from district municipalities were included, the final share became 4.985%6 of GBTR. On the other hand, the share of non-metropolitan municipalities was 2.85% of GBTR which is their only transfer share coming from central government, according to Law No. 5779. As of 2013, 14 newly announced metropolitan municipalities had nearly 45.4% of transfers, which means they got nearly 1.29% of GBTR, whereas other non-metropolitan municipalities had approximately 1.56% of GBTR (See Table 7.1). According to Law No. 6360, 30 metropolitan municipalities, 16 existing and 14 newly announced, get 5.3%7 of GBTR directly and 1.238 % of GBTR through district municipalities in metropolitan areas share. Within these transfers, nearly 82.4% is allocated to 16 existing municipalities and 17.6% to 14 newly announced metropolitan municipalities, which make the shares as 5.38% of GBTR for existing ones and 1.15% of GBTR for newly announced ones (see Table 7.1). As a result, as you can see, there is a significant decrease in newly announced metropolitan municipalities and a slight decrease in non-metropolitan municipalities. On the other hand, the transfer shares of 16 existing metropolitan municipalities increase substantially, which supports previous figures. Some studies argue that the preamble of Law No. 6360 is based on the aim of reducing the share of metropolitan municipalities due to the equalization concern of the central government. They also argue that the public services of nonmetropolitan municipalities are financed by the revenue of metropolitan municipalities. However, these findings show the contrary. The gap of the intergovernmental 6 According

to Law No. 5779, 2.5% of GBTR is allocated to district municipalities in metropolitan areas and had given 10% to the Water and Sewerage Institution and 30% of the rest is distributed to its metropolitan municipality (see Fig. 7.1). So it is calculated as 4.31% + [2.5% × (90% × 30%)] = 4.985% of GBTR. 7 Since tax revenue for petroleum and natural gas products over special consumption composes 11.85% of all tax revenue in 2017, the metropolitan share will become 5.3% of GBTR. 8 According to Law No. 6360, 4.5% of GBTR is allocated to district municipalities in metropolitan areas and had given 9% to the water and sewerage institution and 30% of the rest is distributed to its metropolitan municipality (see Fig. 7.1). So it is calculated as 4.5% × (91% × 30%) = 1.23%.

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shares between metropolitan and non-metropolitan municipalities widens in favor of metropolitan municipalities. Newly announced metropolitan municipalities are the worst municipalities, which makes a significant inequality among metropolitans. The Law No. 6360 changes the border structure of each municipality. This change with geographic size inclusion in calculations affects the metropolitan municipalities the most. Central government may plan compensating this jurisdiction enlargement by increasing the transfer shares; however, this does not explain the decrease in the share of newly announced metropolitans. Figure 7.6 also shows the time series pattern of average GDP shares of municipalities according to their types. Before Law No. 6360, both non-metropolitans and newly announced metropolitans exhibit a steady movement; after Law No. 6360, non-metropolitans follow the same pattern, but newly announced metropolitans display a sharp decrease and then continue their steady move. On the other hand, the share of 16 existing metropolitan municipalities

Fig. 7.6 Average GDP Share of Intergovernmental Transfers (year 2014 is excluded). Source Authors’ calculations

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fluctuates throughout the years (see Fig. 7.6). This can be explained by the changing population of metropolitans. Population still strictly dominates the distribution schedule of transfers and so changes in population significantly affect the transfer amounts.

7.4 Assessments and Open Issues Assessing the latest reforms related to intergovernmental transfers needs extensive and careful analysis. In this part of the study, administrative reforms related to intergovernmental transfers will be investigated from the perspectives of equity and efficiency features. It is obvious that implementation of Law No. 5779 is the structural break in distribution of intergovernmental transfers. Because before this law, most of the transfers is only distributed according to the population and the allocation authority of the rest belongs to the Ministry of Interior. The latter expression blocks the transparency property, which is listed as important characteristics of an effective transfer system with stability (Yılmaz 2003). Transparency and stability provide local governments to make long-term plans about their revenue and expenditure more accurately in their budget (Ma 1997). Furthermore, Yılmaz (2003) argues that the best way to satisfy some degree of stability and transparency features is to assign fixed percentages of total revenues to be transferred. So, Law No. 5779 and Law No. 6360 meet stability and transparency features by applying fixed percentages with a detailed schedule. Stability and transparency criteria are closely related to simplicity property. If the transfer system is not easy to understand and apply, localities will fail in their budget management. This failure may have serious consequences, in particular, countries, such as Turkey, where local governments are highly dependent on intergovernmental transfers coming from central government. From the perspective of simplicity, Law No. 6360 gives clear instructions about the shares of each kind of municipality; however, applying these into data is a bit complicated. Because in each calculation of share, different kinds of indicators such as development index, numbers of villages, geographic size, etc. taken from different institutions are used and some percentage calculations are not straightforward.9 In addition, district municipalities in metropolitan areas give 10% share to water and sewerage administration from their population share; however, this statement is not included in Law No. 6360 but in water and sewerage administration establishment law of metropolitan regions. This omission with some complex calculations shades the simplicity and transparency properties. Furthermore, in practice, this administration also gets 10% from the geographic size share of district municipalities in metropolitan areas; however, the law does not support this transaction. Because the establishment law tells that water and sewerage administration takes 10% from the population share of the district municipalities in metropolitan areas. 9 For

instance, Article 5, Item 2 in Law No. 6360.

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The amount of intergovernmental transfers is more than four times higher than the own source revenue of municipalities after Law No. 6360 and nearly four times during Law No. 5779.10 In addition, the ratio of own source revenue over subnational revenue decreases from 11.2% to 9.9% in 2017.11 These ratios show the insufficient tax collection and the dependence of local governments to the intergovernmental transfer, which is known as moral hazard problem (Akın et.al. 2016). This finding shows that the transfer mechanism has some shortcomings and fails to generate incentives of tax collection effort. Another highlighting observation related to both Law No. 5779 and Law No. 6360 is that not all municipalities utilize from the same fixed share of GBTR but it is differentiated according to the types of municipalities. This serves in favor of equity principle because local fiscal needs and capacities are not similar for each municipality. For instance, due to the high population density, cosmopolitan, and cultural structure of Ankara, local needs such as infrastructure, transportation, construction, etc. are very much diversified compared to Yozgat, a non-metropolitan area. On the other hand, the revenue-generating capacity12 is higher in metropolitan areas than in non-metropolitans. One reason is the high population in metropolitans, and secondly there are not so diversified local public services in non-metropolitan areas as in metropolitans. Lastly, the income level of most of the residents in nonmetropolitan areas is not as high as the residents living in metropolitan areas. Hence, central government should set the balance between these opposing facts since equity principle is defined as distributing transfers directly in line with the local fiscal needs and adversely with the local fiscal capacity (Ma 1997). In Turkey, intergovernmental transfers are distributed according to three main municipality types: metropolitan municipalities, district municipalities in metropolitan areas, and non-metropolitan municipalities (see Figs. 7.1 and 7.2). Central government collects most of the taxes including income tax, value added tax, etc. and forms a revenue pool for local governments. Since metropolitan municipalities are the main contributors of this pool, they get the highest share from it, but it is not as high as their contribution. Because their revenue-generating capacity is also high and according to equity principle transfer should be allocated inversely related to the revenue-generating capacity. Therefore, Law No. 5779 and Law No. 6360 present consistent intergovernmental transfer schedules with equity principle. The important question is whether changing from Law No. 5779 to Law No. 6360 make significant changes from the perspectives of equity and efficiency? Main changes are the shares of municipalities, the number of metropolitan municipalities 10 From 2010 to 2014 (excluding 2014), total own source revenue is 28,268,771,000 TL and total amount of intergovernmental transfers is 106,925,032,000 TL; whereas from 2014 to 2017 (excluding 2014), total own source revenue is 36,334,536,000 TL and total amount of intergovernmental transfers is 159,791,981,000 TL (Source: Ministry of Finance). 11 Total subnational revenue is 133,766,501,000 TL in 2017 and 109,374,491,000TL in 2016. Total amount of intergovernmental transfers is 60,627,230,000 TL in 2017 and 52,599,648,400 TL in 2016. (Source Ministry of Finance). 12 In the literature, some scholars such as Martinez-Vazquez and Boex (1997a, b) and Yılmaz (2003) define this term as fiscal capacity.

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with border definition, removal of villages, and the inclusion of geographic size into the transfer schedule as explained in the previous section. It will not be wrong to say that the structure of the schedule does not change much (see Figs. 7.1 and 7.2) and there is no significant change in stability, transparency, or simplicity properties. Furthermore, during Law No. 5779, the authorities only announce the exact amounts of transfers distributed to the metropolitan municipalities, but after Law No. 6360, they stop announcing them which harms the transparency property further. From the equity principle perspective, the question can change to who gets the most benefit or who is harmed the most from this change? According to the figures, 16 existing metropolitans benefit the most, whereas 14 newly announced metropolitans are harmed in terms of shares. The rest municipalities are approximately unaffected. The increase in these 16 metropolitans is partly consistent with one of the preambles of Law No. 6360, which is centralizing the public services in metropolitan areas with the aim of increasing efficiency, coordination, and quality in services by increasing the jurisdictions of these metropolitans. On the other hand, although the jurisdiction area also increases in newly announced metropolitans, they are worse off with Law No. 6360. This differentiation harms the equity principle.

7.5 Concluding Remarks The necessity of intergovernmental transfers arises with the inequality of revenue and expenditure in different tiers of government and externalities generated by the localities. However, ideal design of transfer mechanism is crucial for preventing the moral hazard problem. The ideal design should have some properties such as equity and efficiency. This study evaluates the latest transfer reforms from the perspectives of equity and efficiency by analyzing the shares of each municipality. Law No. 5779 is the first complicated detailed intergovernmental transfer system that aims at increasing the performance of the municipalities and decreasing the externalities in Turkey. After Law No 5779, Law No. 6360 is constructed and implemented in 2014. However, this change does not change the mechanism significantly and no efficiency increase is observed. Law No. 6360 has a more complex structure compared to Law No. 5779. Since the borders of the municipalities change, geographic size is included in this schedule, which is a fair modification. On the other hand, the shares of each municipality show some issues. For instance, there is a high inequality among the shares of newly announced and existing metropolitans after Law No. 6360. Furthermore, newly announced metropolitans are worse off with this law. During Law No. 5779, newly announced metropolitans receive 1.29% of GBTR, whereas after Law No. 6360, they get 1.15% of GBTR. Nevertheless, 16 existing metropolitans continue having the greatest share among all municipality types. GDP shares of them support this finding. This difference damages the equity principle. However, Bird and Smart (2001) claim that the most important criteria of intergovernmental transfers are not who distributes them or who gets them but the effect of this change into the economy. This analysis merits further study.

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References Akin, Z., Bulut-Cevik, Z.B. & Neyapti, B. (2016). Does Fiscal Decentralization Promote Fiscal Discipline?”, Emerging Markets, Finance and Trade, 52 (3), 690–705. Arıkbo˘ga, E. (2013). Geçmi¸sten Gelece˘ge Büyük¸sehir Belediye Modeli. Yerel Politikalar, 1(3): 48–96. Arıkbo˘ga, Ü. (2015). Türkiye’de Büyüksehir Belediyesi Transfer Sistemi ve 6360 Sayılı Kanunun Etkileri (The Metropolitan Municipality Transfer System in Turkey and the Effects of Law ˙ I.B.F. ˙ No.6360).Marmara Üniversitesi, I. Dergisi, 37(2): 1–39. Aydin, A. (2017). Intergovernmental Fiscal Transfers and Turkey’s Implementation: Amendments in Fiscal Transfer System in Law No. 6360. In M Celen, O. Zulkufoglu & E. Robak (Eds.), The Political Economy of Public Finance (pp. 143–168). Ijopec Publication Limited. Bird, R. & Smart, M. (2001). Intergovernmental Fiscal Transfers: Some Lessons from International Experience. Symposium on Intergovernmental Transfers in Asian Countries: Issues and Practices, Asian Tax and Public Policy Program, Hitosubashi University, Tokyo, February 2001. Biriciko˘glu, H. & Yalnızo˘glu, Y. (2018). 6360 Sayılı Kanun’un Etkinlik-Verimlilik ile Hizmette Yerellik ˙Ilkeleri Açısından De˘gerlendirilmesi: Kocaali ˙Ilçesinde Yapılan Bir Ara¸stırma. Journal of Administrative Sciences, 16(32), 255–284. Ma, J. (1997). Intergovernmental Fiscal Transfers in Nine Countries. Macroeconomic Management and Policy Division, Economic Development Institute, The World Bank. Martinez-Vazquez, J. & Boex, J.L.F. (1997a). Fiscal Capacity: An Overview of Concepts and Measurement Issues and their Applicability in the Russian Federation. International Studies Program Working Paper 97–3, Andrew Young School of Policy Studies, Georgia State University. Martinez-Vazquez, J. & Boex J.L.F. (1997b). An Analysis of Alternative Measures of Fiscal Capacity for the Regions of the Russian Federation. International Studies Program Working Paper 97–4, Andrew Young School of Policy Studies, Georgia State University. Shah, A. (1995). Theory and Practice of Intergovernmental Transfers. Reforming China’s Public Finances, 215–234. Shah, A. (2007). A Practitioner’s Guide to Intergovernmental Fiscal Transfers. In R. Boadway & A. Shah (Eds.) Intergovernmental Fiscal Transfers: Principles and Practice (pp. 1–51). The World Bank. Ulusoy A. & Akdemir T. (2009). Yönetimlerarası Transferler: Teori ve Türkiye Uygulaması. In N. Falay, A. Kesik & M. Çak (Eds.) Türkiye’de Yerel Yönetimlerin Sorunları ve Gelece˘gi. (pp. 113– 141) Seçkin Yayıncılık. Yilmaz, S. (2003). Intergovernmental transfers: Concepts and Policy Issues. Joint Conference of World Bank Institute and Korea Development Institute, Seoul, Korea.

Zeynep Burcu Bulut-Çevik is an Assistant Professor in the Department of Public Finance at Ankara Yildirim Beyazit University. Prior to this post, Dr. Bulut-Cevik was a Research Assistant at the Department of Economics, Middle East Technical University, where she received her Ph.D in 2016. Her dissertation area of research was in the fields of mathematical economics and public economics with particular emphasis on fiscal decentralization, redistribution and intergovernmental transfers. During her Ph.D education, she was a visiting scholar at the Department of Economics, University of Pennsylvania (UPenn) for a year. She completed her M.S. in Economics from Bilkent University. She applied time series econometrics to the real estate market of Turkey in her Master’s thesis. Dr. Bulut-Cevik has authored various articles and reports in the field of public economics, applied time-series econometrics and mathematical economics.

Chapter 8

Revenue Decentralization and the Soft Budget Constraint Problem in Intergovernmental Fiscal Relations: The Case of Turkey Tekin Akdemir and Birol Karakurt

8.1 Introduction The soft budget is a concept that was first introduced by Kornai to illuminate the paternalistic behavior of the socialist economies (see Kornai 1986, p. 3; Kornai et al. 2003, p. 1095). Following the seminal work of Kornai, the concept of soft budget constraint (hereafter SBC) was used to describe the mismanagement of state-owned enterprises managers. Using the SBC problem, Kornai (1979, 1980) alludes a situation in which a state-owned enterprise managed to survive even though it made persistent losses (Vahabi 2001, p. 157.).1 If it expect that in the case of financial difficulties and fiscal distress it will be bailed out by the central government, the expectation of additional resources, in turn, results in opportunistic behavior (Plekhanov 2005, p. 1; Vigneault 2005, p. 1). Therefore, the SBC problem may lead to strong incentives for these institutions to overspend and acting inefficiently. Though Kornai (1979, 1986) introduced the SBC problem in the context of the socialist system, it can be seen in other organizations, as well. Indeed, the SBC problem is associated with the paternalistic role of government. The inefficiencies emanating from the SBC arise because the central government cannot commit to a hard budget when state-owned enterprises have financial difficulties and they need 1 Sometimes single bailout is referred to as a soft budget syndrome. However, recurrent practice of rescuing from bailout is adopted as a soft budget syndrome not a single occurrence of it (Kornai 2001, p. 1574). The SBC problem occurs if one or more supporting organizations are ready to cover all or part of the deficit (Kornai, et al. 2003, p. 1101).

T. Akdemir (B) Department of Public Finance, Ankara Yıldırım Beyazıt University, Ankara, Turkey e-mail: [email protected]; [email protected] B. Karakurt Department of Public Finance, Karadeniz Technical University, Trabzon, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_8

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to be bailed out of their debt. As with state-owned enterprises, local governments face the same problems, the central government’s inability to commit not to bail out local governments affects their incentives (Rodden 2005, p. 5; Janus 2009, p. 265; Ter-Minassian 2015, p. 438). If local governments anticipate that they will have a bailout from the central government, they may take a position to spend more and/or tax less (Baskaran et al. 2013, p. 47). Today, there are several explanations for the origins and nature of the SBC problem. However, these explanations are traditionally associated with state-owned enterprises. Unlike this conventional wisdom, this paper attempts to treat the SBC problem in the context of intergovernmental fiscal relations. The factors that lead to the SBC problem at the local government level are different from those of the state-owned enterprises (Kook 2010, p. 1). However, they are beyond the scope of this study. So this paper proposes to highlight the SBC problem in the context of intergovernmental fiscal relations. When discussing the SBC problem in the context of intergovernmental fiscal relations, the arising fundamental question would be that what exactly a SBC problem constitutes? When seeking an answer to this question, the available literature emphasize that there must be at least three identifying elements in a SBC problem. As summarized by Bordignon (2004: 4), these three elements are given below: First, there have to be at least two separate agents or organizations with at least partly contrasting objectives and instruments…. Second, there has to be a dynamic structure to the problem…. Third, this behavior on the part of the central level must be expected by the local government.

Today, although hard budget constraint is a fundamental requirement for conducting sound fiscal policy, many countries face the SBC problem. And this problem may stem from different reasons at different times. Based on theoretical and empirical case studies, the main causes leading to the SBCs problem can be assessed under various titles. As revealed from previous several studies (e.g., Ter-Minassian 2015, p. 438 and 439; UCLG 2010, p. 81; Vigneault 2005, pp. 3–7), nature of the political process, easy borrowing, lack of revenue autonomy, high transfer dependency, unclear expenditure assignments, and lack of transparency bring about SBC problem in intergovernmental relations context. In the following, detailed descriptions of these problems will be discussed. As indicated above, several factors can cause the SBC problem. One of them results from the nature of the political process. When important local public services are underprovided in a fiscally distressed region, these services will not be available to people living in that region. Whereas all citizens have a right to equal access to public services in their country, regardless of their income or living area. Therefore, under provision of these local public services may be regarded as inequitable and thus unacceptable and this may lead to mounting pressure on the central government to assist such a region (Akai and Sato 2009, p. 2). By the end of this process, since the central government cannot stand this political pressure, it is forced to assist the local governments. In this case, the benevolent behavior of central government may cause the SBC problem.

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The second reason for the SBC problem is easy borrowing. Today the most important source of local government borrowing is state-owned financial institutions. These financial intermediaries lend money to the local governments under more favorable terms than any other institutions. Although this situation enables local governments to lower their borrowing cost, it also induces inefficient borrowing and investment decisions. Namely, when local governments face a lower price for borrowing they have a tendency to take inefficient spending and borrowing decisions. Repayment of local debts which is borrowed from centrally sponsored financial intermediaries is poor and the loan process tends to become politicized (Yusuf 1999, p. 119). As a result of the explained inefficient borrowing process, debt stock of local governments steadily increases. If the local public debts keep rising, they reach a point where they can never be sustained. Due to increasing interest payments, local governments reduce the funds they allocate to some local services. In this case, some delays occur in provision of local services, which may lead to public disorder. To avoid public disorder, central government bails out local governments. The anticipation of such bailouts is likely to result in the SBC problem, leading local governments to spend well beyond their means (Weingast 2000, p. 8). The third reason for why intergovernmental fiscal relations lead to the SBC problem is lack of revenue autonomy. According to the widely accepted view in the local public finance literature, expenditure decentralization can increase the efficiency of local service delivery. However, many of the taxes cannot be easily administered efficiently at the local government level (McLure and Martínez-Vázquez 2000, p. 3). As central governments commonly allocated much less important revenues than their own revenues to the local government, local governments have limited autonomy in determining the basis and rates of their taxes. So, the transfer of expenditure responsibilities to local governments has not been matched with their revenue sources. Hence, local governments have generally not able to organize their revenues to offset their increased expenditures. To finance this fiscal gap, they have made an endeavor to obtain a further fiscal subsidy from the central government. This leads to the SBC problem. Another reason for why intergovernmental fiscal relations lead to the SBC problem is fiscal subsidy. Today, local governments’ tax revenues are insufficient to cover local government expenditures in many countries. So, intergovernmental transfers or borrowing are preferred to meet revenue deficiencies. Since excessive local government borrowing can undermine macroeconomic stability, many countries use intergovernmental fiscal transfers not only for financing fiscal gap but also for achieving their macroeconomic purposes. And consequently, intergovernmental transfers have become a dominant financial source for local governments in many countries (Wildasin 2010, p. 67). Today many governments prefer intergovernmental transfers in solving problems arising from decentralization.2 For example, when local public services create 2 Economic rationale for transfers can be listed as follows: closing fiscal gap, compensating vertical

and horizontal inequality, eliminating jurisdictional spillovers and enhancing minimum/standard levels of service delivery (Shah 2002, pp. 28 and 29).

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spillover benefits, providing these services brings benefit not only for local citizens but it also provides external benefits for non-residents. In the absence of central government supports, local governments ignore the spillover benefits of their expenditures and may provide these services in an inefficient way. In order to maximize positive externalities, the central governments are required to use intergovernmental transfers (Wildasin 1997, pp. 3–7). So, the design of the intergovernmental transfer system is of great importance for efficiency and equity of local public service delivery and the fiscal health of local governments (Yılmaz and Bindebir 2003, p. 1). If local governments rely on intergovernmental transfers in financing their expenditures, local politicians will have strong incentives to act in an opportunistic manner. In this way, they transfer some part of the financial burden associated with local provision of services to higher levels (Vigneault 2005, p. 2; Ben-Bassat et al. 2016, p. 58). In this case, the marginal social cost of taxation is not taken into account properly when making decisions on expenditure by local government and these authorities tend to overspend. Therefore, it can be said that the level of revenue decentralization and the structure of the revenues allocated to local governments are a matter for the emergence of the SBC problem. Another factor that causes the SBC problem is the unclear assignment of expenditure responsibilities. When there is no clarity with respect to the roles and responsibilities of different levels of government, there might be an ambiguity about which governmental level is responsible for carrying out which service. These uncertainties may increase the risk of duplications (O’Connell and Wetzel 2003). In the event of duplications, local governments may have a tendency toward the inefficient or inadequate provision of local public services. While some local public services couldn’t be provided enough, excessive spending might occur for some services. Through this process, inefficient use of local resources will be encouraged and local authorities may start over-spending which may harm the fiscal discipline. The tendency of local officials to overspend triggers local fiscal indiscipline. In this case, local fiscal indiscipline becomes a national concern and central government provides financial support to local governments. In addition to the aforementioned reasons, the lack of transparency also generates the SBC problem. At the local government level, it may end up with incentives for riskier behaviors. Today, there is a consensus as to the importance of transparency which prevents risky behaviors of localities. The more budget transparency ensures greater accountability, and more accountability can improve fiscal discipline. If the transparency is not enough, inefficient spending and revenue decisions may occur at the local level, and it becomes difficult to ensure the accountability of local politicians. To provide the accountability of local governments, more public access to the information about the process of local fiscal decision-making and implementation process must be required.3 3 According to International Budget Partnership papers, more transparent countries, after controlling

for various economic variables, have higher credit ratings and lower spreads. Furthermore, for countries with similar credit ratings, higher transparency is associated with lower spreads (Hameed 2011).

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This study aims at descriptively explaining the SBC problem in the context of intergovernmental relations framework for Turkey as well as revenue decentralization process that is an important factor in the emergence of the SBC problem. Against this background, we first focus on theoretical explanations about the SBC problem. Second, we give an overview of the Turkish local public administration structure. And then, we look into revenue decentralization process in Turkey. After that, we assess the issues leading to the SBC problem in the Turkish central and local government relations. Finally, we conclude and provide some policy recommendations.

8.2 A Brief Overview of the Structure of the Turkish Local Public Administration Turkey is a unitary state. Public services are performed by the central government, field organization of central government, local governments, and functionally organized decentralized authorities such as universities and state-owned enterprises. Although functionally organized decentralized authorities serve one public service across Turkey without any geographical limitations, local governments serve more than one public services to meet the common local needs of their residents. Notwithstanding local governments offer many important services for the social life, they are relatively new in comparison to many examples in the world. In other words, while the origins of local administrations in the western countries have a long history, Turkish local government tradition is not an old one. It is usually claimed that there were no modern local government units in the Ottoman Empire until the era of Tanzimat (Batırel 1991, p. 174).4 Local government units were established gradually following Tanzimat reforms put into practice especially after 1854 (Nadaro˘glu and Kele¸s 1991, p. 7 and 58). While municipalities and special provincial administrations were established during this era, they exerted to provide public services to the local people without having sufficient administrative and financial autonomy. They had no legal authority. Hence, before the Republican era, municipalities had been unable to go beyond being an advisory body of government in Turkey. Following the foundation of the Republic of Turkey in 1923, the local government system was reorganized once and French local government system was taken as the basis of the system. The first local government law related to villages was enacted in 1924 which was pursued by the Municipality Law in 1930. The Municipality Law (Law no. 1580) delineated the duties and responsibilities of the local administrations in detail (Ersoy 1999, p 3). During the early years of the Republican era, local governments were seen as extension units of the central government (Palabiyik and Yava¸s 2006). It would not be wrong to say that the local government practices in this era were a legacy of the strong centralist state tradition, deeply entrenched by the idea and practice of the 4 At the early stage of the Ottoman Empire, religious communities and foundations were performing

community functions and running special-purpose administration (Batırel 1991, p. 174).

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Ottoman State during its 600 years of history (Koker 1995, p. 53; Sa˘gba¸s et al. 2005, p. 3). While the revenue-creating capacities of local administrations were increased with the legal arrangements taking effect until the 1950s, no significant changes were made in the organizational structures of these administrations. However, with the transition to the multi-party era, some steps were taken to ensure that the local government bodies were elected in a more democratic way. For example, in 1948, the execution of both the mayor and the governorship duty by the governor was lasted in Ankara. In 1963, with Law no. 307, the practice of electing the mayor from among the members of the municipal council was ended. Thus, the method of electing the mayor directly by the people was adopted (Ulusoy and Akdemir 2019, p. 261). While no important regulation concerning local governments was made until the beginning of the 1980s. A number of important arrangements were implemented through the Constitution of the Republic of Turkey and law on metropolitan municipalities in 1984. With these arrangements, the structure of local governments and their relationship with the Central Government were arranged as well as metropolitan municipalities were established and they were entrusted with important tasks. Finally, two big municipal amalgamation amendments (with Law no. 5747 and Law no. 6360) were put into practice in the first 10 years of the 2000s. With these amendments, local government units have been reshaped (while some units were abolished, some of them were united) and their structure, duties, and authorities have been redefined. While the number of municipalities was reduced approximately by 10% with the Law no. 5747, the number of municipalities decreased by over 50% following the enactment of Law no. 6360 adopted in 2012. Furthermore, metropolitan municipalities were established in 13 provinces and the existence of special provincial administrations and villages (except for forest villages) was terminated in the provinces where metropolitan municipalities were established. Law no. 6360 which constituted the current structure of local governments has led to significant improvements in the local government scale along with the decrease in the number of local administrations. Today, the Turkish local government system has been organized as special provincial administrations, municipalities, and villages. Special provincial administrations are established at the provincial level to provide for the common local needs of the citizens living within the provincial borders. Except for provinces with metropolitan municipalities, these administrations have functions and responsibilities both inside and outside the municipal boundaries. As to municipalities, they provide public services in different areas depending on their status. They constitute the basic level of government.5 While all municipalities are established to meet the common needs of their inhabitants, there are two main forms of municipalities which are settled 5 The

establishment of municipalities in Turkey is conditioned to the minimum population requirement. Municipality may be established in a settlement with a population of 5,000 or more (for metropolitan municipalities 750.000). It is mandatory to establish a municipality at a provincial center or a district center. In any settlement with a population of 5,000 or more formed as a result of new housing settlements, a municipality may be established by a joint decree on a proposal from the Ministry of Interior.

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by law no. 5216 and 5393. While metropolitan municipalities and metropolitan district municipalities are established on the basis of Law no 5216, provincial, district, and town municipalities are established on the basis of Law no 5393. Compared to municipalities instituted by Law no. 5393, metropolitan municipalities have been established to provide larger scale public services and the duty area of metropolitan municipalities is larger than other municipalities. So they have more power, revenue, and responsibility. That is to say, while metropolitan municipalities operate at provincial level, other municipalities provide municipal services to the inhabitants who live only in urban areas within provincial boundaries (Tosun and Yilmaz 2010, p. 73). The last local government units are villages. The settlements with a population lower than 2000 are named as a village. Villages are traditional and the oldest settlements which provide public services especially in rural areas. Although villages served a large number of public services especially in rural areas in the past, nowadays most of the rural public services are provided by special provincial administrations and provincial organization of central government. As of 2019, there exist 51 special provincial administrations, 1389 municipalities,6 and 18289 villages in Turkey. All the abovementioned local authorities are constitutional institutions having public legal personality (corporate status). Each local government unit has a council as a decision-making body, which has to be elected by the local citizens in accordance with the principles and procedures set forth in the relevant laws. They have also executive committees. These bodies consist of the mayor (for municipalities), governor (for special provincial administrations), and executive committees (for both of them). Mayor and governor are the head of the relevant local government units and the representative of the legal entity. While the mayor in municipalities is directly elected by the local people, the governor in special provincial administrations is appointed by the central government. As for executive committee members, they are elected by indirect elections. All local government units have a representative character, and they form an autonomous tier in the political and administrative structure of the country. In addition, they have an administrative and financial autonomy (Nadaro˘glu and Kele¸s 1991, p. 56).

8.3 Revenue Decentralization in Turkey The discussions on fiscal decentralization, which emerged in the public finance literature in the 1950s, have remarkably steered the central government–local government relations. Many authors (such as Shah 1991; Bird 2000; Bahl 2008; Boadway 2018) tried to answer the question of how to design intergovernmental relations for more efficient delivery of public services in their studies. In these studies, while they emphasized the importance of local governments in ensuring resource allocation efficiency, they also stated that these administrations cannot have the same effect 6 It consists of 30 metropolitan municipalities, 51 provincial municipalities, 519 metropolitan district

municipalities, 403 district municipalities, and 386 town municipalities (Ministry of Interior 2019).

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in revenue management. With the impact of the discussions in the literature, while the reforms have been implemented toward further expenditure decentralization in many countries, revenue decentralization has been relatively limited. Although revenue decentralization is generally expressed as the ratio of local governments’ own revenues to general government revenues, it is realized by an increase in transfer revenues rather than an increase in own-source revenues in practice. So, the link between tax revenues and expenditures is weakened. This caused accountability and efficiency problems at the local government level. In other words, the problems that stemmed from the level and structure of revenue decentralization have been significantly influential in the emergence of the SBC problems. Therefore, this part of the study elaborates the process of revenue decentralization in Turkey which is followed by the SBC problems in intergovernmental relations. In Turkey, the first arrangements on local government revenues were made during the era of the Ottoman Empire. In this context, the first revenues were allocated to municipalities in 1855. They were the fee on animals and cars to cover the costs of building sidewalks and a fee collected from the owners of buildings and business places which are on both sides of the roads being constructed. However, in that time, the municipal administration had not been widespread throughout the country and the revenues allocated to the Istanbul municipality were insufficient to meet basic needs (Ulusoy and Akdemir 2019, pp. 259 and 260). With the establishment of the Municipality of Altıncı Daire (6th Department), new revenue resources such as sanitation and lighting fee, building maintenance and license fees, building construction fee, all sorts of measuring and weighing devices fee, profit tax, contract tax, tax imposed on newly constructed roads and sewers, borrowing, and central government transfers were generated for this municipality. In the Republican Era, although it was expected to undertake the important tasks for local governments, in particular, to eliminate the destruction caused by World War I, revenues assigned to them were not enough to perform their tasks or duties. In this period, local government revenues were made up of revenues which were set by the Municipal Tax and Duties Law no. 423 Village Law no. 442 and Municipality Law no. 1580 (Ülkmen 1960). With Law no. 423 in 1924, 25% of tax revenues obtained from taxing buildings have been envisaged for municipalities. And they levied a surtax on dividend tax. In addition, with the pre-condition of not exceeding limits suggested in the related law, it has been planned to impose a tax on buildings in accordance with their market value and a lightning tax which is equal to half of building tax. Furthermore, 10% of the lottery bonuses have been allocated to municipalities. By 1948, the tax revenues were entirely allocated to local governments, without having systematic and consistent principles. The shares of local governments in tax revenues have been collected by the central government. What’s more, local government revenues were mainly composed of shares and/or other transfers allocated to them from general budget revenues. During this period, the duties and responsibilities of local governments were also simply listed in the law. The rapid urbanization process started in the early 1950s in Turkey resulted in the migration from rural areas to urban one. This was especially the case for bigger cities.

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Domestic migration to urban areas not only increased the demand for local public services (such as infrastructure, water and sanitation, and public transportation) in urban areas but also caused financial problems for local governments. On the other hand, due to the size of the resources and revenue-generating capacity of big cities, the importance of local governments in terms of public finance was also increased. For this reason, the financing and management problems of Turkish local governments have always remained on the agenda and have received a renewed interest of the economists as well as policymakers since 1950. Municipal revenues were reorganized in 1948 with the Law no. 5237 and municipalities had an opportunity of generating income under this law for a long time. With this law, not only the revenues allocated to municipalities increased, but also these revenues were quite dispersed. In other words, the revenues allocated to local governments by Law no. 5237 comprised the municipalities’ shares from central government tax revenues. These revenues include revenues that come from 5% the income tax; 15% from the customs duty; 5% from the monopoly goods income; 25% from the building tax income; and 20% from the road tax, duties, and user charges collected by the municipalities (such as sanitation and lighting duty, animal slaughter duty, measuring and weighing devices duty, brokerage duty, entertainment duty, announcement and advertisement duty, buildings license, and inspection charge/fee.) Municipal shares received from concessionary enterprise income (i.e., shares coming from electricity and gas, from telephone installation and calls, and from tickets on suburban lines), contributions to expenditures, revenues obtained through enterprises, lease revenues, and fines (World Bank 1972, p. 34). Although significant changes were made in municipal revenues by Law no. 5237, municipal revenues largely comprised of shares given to them from general government revenues. Briefly, it can be said that during the 1948–1980 period, the municipal revenues were made of scattered, uncertain, and inadequate resources. These revenues were determined mainly by the Law no. 5237 on Municipal Revenues, the Law no. 1580 on Municipalities, and laws that allocate shares to municipalities from other revenue sources. Although the revenue decentralization process has a history of more than 100 years, main reforms were made after the 1980s. In the early 1980s, two new regulations (Law no. 2380 and 2464) concerning municipal revenues were put into force. That is to say, while nearly 80 unproductive, varied, and scattered revenue were allocated to the local governments through Law no. 5237 and other legislation, local government revenues embodied in a more systematic way through the Law no. 2380 and 2464 (Nadaro˘glu 1994, p. 223). In this context, while, on the one hand, the shares of the municipalities from various taxes were pooled, 6% of general budget tax revenue collections was redistributed among local governments on the basis of the population by Law no. 2380 (Ersoy 1999, p. 87). On the other hand, municipalities’ own revenue sources were increased by Law no. 2464. Furthermore, municipal taxes and fees were reorganized with the expansion of their scopes and converted into a more systematic way through Law no. 2464. Although Law no. 2464 allocated a wide range of local taxes and charges to the municipalities, these revenues accounted for a small percentage of

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local governments’ total revenues (Council of Europe 2011). Moreover, since the tariff of municipal taxes and fees mainly consisted of fixed terms, the revenues of municipalities from these sources were gradually eroded. Based on the authority granted by the constitution which states that “special administrative arrangements may be introduced by law for larger urban centers” (The 1982 Constitution of the Republic of Turkey, Article 127), metropolitan municipalities were established in 1984. In the aftermath of establishment of metropolitan municipalities in 1984, 5% of the general budget tax revenues collected within the metropolitan municipality borders were allocated to these administrations. Property tax, which was included, in general, budget revenues between 1970 and 85, was reallocated to local governments in 1986. In 1993, with an article added to the Law on Municipal Revenues no. 2464, Environmental Cleaning Tax put into force and municipalities had an opportunity to obtain additional income. In the first decades of the 2000s, a comprehensive reform program was introduced in Turkey. Although new responsibilities were assigned to local governments, main revenue sources continued to remain within the authority of central government so that local governments could finance their new responsibilities, shares given to municipalities and special provincial administrations from general budget revenues have been increased. The shares given to local governments from the general budget tax revenues were rearranged in 2008 with Law no. 5779. With this law, although the share of local governments in the general budget tax revenues decreased, the total amount allocated to them increased as the amount that was the basis for the calculation of the share changed. While, previously, a certain proportion of the special consumption tax revenues exempted from the distribution of shares, with the new regulation, the shares are calculated on the net amount remaining after deducting tax returns. The formulas that allocate general budget tax revenues to the local governments were also changed. In this context, new criteria such as rural population, surface area, number of villages, and development index were added to the formula for the shares of special provincial administrations. The distribution criteria for the share of the municipalities were also rearranged to take into account the surface area and development index. However, these criteria neither did meet the local governments’ income capacity nor expenditure needs. In 2012, the Law no. 6360 was enacted. With this law, substantial regulations regarding the metropolitan municipalities were introduced. While the number of municipalities, villages, and special provincial administrations have drastically reduced. The jurisdiction size and scope of the metropolitan municipalities have also expanded. On the financing side, the share of metropolitan municipalities from general budget tax revenues was increased from 5 to 6% (Yılmaz and Güner 2017, pp. 231 and 232). Besides, the proportions of shares allocated to the local governments from the general budget tax revenues were rearranged. Within this scope, while the shares of the provincial and sub-municipalities’ tax revenues were reduced, the share of metropolitan district municipalities was increased. With the effect of this regulation, the share of central government transfers in local governments’ total revenues gradually increased.

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In sum, inefficient and scattered revenues were allocated to local governments before 1980. However, after 1980, this problem was substantially resolved. While, on the one hand, local government revenues were eroded by inflation; on the other hand, these revenues failed to meet the increasing demand for local services. In the 2000s, both local government revenues and expenditures were rearranged. After all, the revenues of local administrations were increased in the following two decades. However, these increases were realized through transfers rather than own revenues. So recently there has been an increasing reliance on intergovernmental transfers especially tax shares for local government financing. These developments in the local revenue structure resulted in an increased imbalance in local government fiscal position and they became the source of the SBC problem by making local government units dependent on central government transfers.

8.4 Soft Budget Constraint Problem in Intergovernmental Fiscal Relations in Turkey As also stated earlier, Turkey has a centralized government structure that is inherited from the Ottoman Empire. So, the initial organizational structure of intergovernmental fiscal relations of Turkey reflects the Ottoman tradition. With the proclamation of the Republic, the local government system was reorganized once again. But, in the early years of the Republic, local governments carried out its activities as an administrative extension of the central government. Both political preferences and conditions of that period had an influence on establishing such a structure. While municipal responsibilities were classified as compulsory and voluntary ones, compulsory responsibilities were also subjected to a second classification which was based on municipal revenues. Since monetary limits were determined as lump sum, they became negligible due to inflation. For this reason, those responsibilities that could be voluntary depending on income levels of municipalities eventually became mandatory for all municipalities. Thus, those municipalities that had no sufficient financial power were not able to fulfill their tasks (Uyar 2004). In the first 10 years of the Republic, Municipal Tax and Duties Law no. 423 and Municipality Law no. 1580 were enacted. Since municipal revenues assigned with Law no. 423 weren’t sufficient, the municipal bank was found to meet the financing needs of municipalities, in 1933. In accordance with rapid population growth and increasing urbanization, financing needs of municipalities increased. Despite a few small and relatively insignificant efforts aimed at increasing revenues of municipalities, various arrangements were also enacted to reduce municipal revenues (Ülkmen 1960, p. 354). Despite these negative developments in the field of municipal revenues, municipal bank became an institution that mediated the transfer of resources rather than providing additional revenue to municipalities. Although there have been some reform attempts aiming at strengthening local fiscal capacity and democracy, they had rarely been put into effect up to 1950s. The

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first fundamental step in the design of a system of intergovernmental fiscal relations was taken after World War II. In 1948, revenues of municipalities had a legal basis with the enactment of Law no. 5237. By this law, although some additional revenues were assigned to municipalities, municipal revenues were formed by shares taken from various taxes, and small as well as insignificant duties and fees. So additional revenue needs of municipalities were not exactly met by the central government. Due to the dynamic economic and social environment, the demand for municipal services increased steadily during the 1960–1980 period which ended up with a hike in expenditure responsibilities. However, the local revenues did not increase, contrary to expectations. In this time period, inflation, which increases to as high as 100%, eroded the scattered and non-productive revenue system of special provincial administrations and municipalities. Special provincial administrations and municipalities had a scattered and non-productive revenue system, and no reorganization was made in order to make up for the erosion caused by inflation which from time to time increased to 100% (Nadaro˘glu and Kele¸s 1991, pp. 61 and 62).7 During this period, administrative tutelage was used as a means of ensuring and maintaining fiscal discipline. This practice became relatively successful in achieving fiscal discipline in special provincial administrations, but due to the deterioration in the financial structure of municipalities, the increase in budget deficits and debt stocks of these administrations could not be prevented. Since the municipal budget deficits became unsustainable, central government either abandoned a significant part of municipal debts or extended their maturity through various consolidation acts which almost became periodic. These policies temporarily provided monetary relief to local governments, whereas they provoke delays in the necessary reforms related to local government revenue. Additionally, since certain parts of municipal debts were undertaken by the central government, they placed a burden on the central government budget balance. After the 1980 military coup, Turkey took a further step toward decentralization to strengthen its democracy and to build more efficient and well-functioning local government system. In 1981, with the implementation of Law no. 2464, problems derived from disarrangement in the legislation were significantly addressed. In addition, through Law no. 2380, which was implemented in 1981, a share from general budget tax revenues was given to municipalities and special provincial administrations. Although this law increased local government transfer revenues, regional imbalances arosed since the population was used as the single criteria in the transfer. In 1984, metropolitan municipalities were created based on the legal power given 7 In

the system which was in effect until 1981, local government revenues consisted of certain shares given from central government taxes to local governments. According to that system, special provincial administrations used to receive (1) 22% out of the fuel oil production tax, (2) 3% out of motor vehicles tax and traffıc fines, (3) 3% out of the sales of forestry products, (4) 35% out of the property tax. On the other hand, the municipalities used to receive (1) 5% of the income and corporations tax, (2) 15% out of the customs tax (this is an additional tax on the customs tax), (3) 2% out of the net revenues of monopoly commodities, (4) 8% out of the fuel oil production tax, (5) 11% out of the motor vehicles tax and traffic fines, (6) 45% out of the property tax (Nadaro˘glu and Kele¸s 1991, p. 62).

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by the Turkish Constitution, to serve areas with larger population (Palabıyık and Yava¸s 2006, pp. 695–701). With the enactment of the mentioned law, metropolitan municipalities were established in those cities which contained more than one district within municipal borders. With Law no. 3030, 5% of the total general budget tax revenues collected within the boundaries of a metropolitan municipality and 30% of the allocation made to district municipalities within such metropolitan municipality from the total collection of the general budget tax revenues were allocated to such metropolitan municipalities (General Directorate of Local Authorities 2011, p. 60 and 67). Even if all these measures provide temporarily fiscal relief, funding needs of local governments have increased continuously in the second half of 1980. In 1993, with the implementation of sanitation tax, additional revenues were allocated to municipalities. During this period, although the central government allocated additional revenues to local governments, it could not fulfill the financial requirements of local governments due to the increasing demand for local services. Restriction on local governments’ autonomy to set their own tax bases, rates, and reliefs remained. In order to restore the fiscal discipline, central government has implemented a series of measures intended for the restructuring of local governments since the early 2000s. In the first half of the 2000s, the duties and powers of local governments were reorganized by municipal law, metropolitan municipality law, and special provincial administration law. However, in line with these changes about local duties, the shares transferred from the general budget revenues to local governments were rearranged in 2007. While the amount subject to distribution of shares increased, the distribution criteria were diversified to include new criteria such as rural population, surface area, and development level. Two big municipal amalgamation amendments were implemented in the first 10 years of the 2000s. In 2008, the number of municipalities was reduced by approximately 10% by Law no. 5747. In addition to the mentioned arrangements, the Law no. 6360 of December 2012 established metropolitan municipalities in 13 provinces, as well, and the existence of special provincial administrations and villages (except for forest villages) was terminated in the provinces where metropolitan municipalities were established. While some units were abolished, some of them were united. Thus, the number of local governments was decreased by more than 50%. Law no. 6360 reshaped the revenue-sharing arrangements. In line with this new structure, the shares received by local governments from general budget tax revenues were revised. With this arrangement, while the share of metropolitan municipalities received from general budget tax revenues increased, the share of non-metropolitan provincial municipalities and special provincial administrations decreased (in parallel with the decrease in the population living within the boundaries of these administrations). In the last four decades, despite regulations aimed at increasing the revenue and institutional capacities of the local governments, their fiscal balance has worsened steadily with the exception of a few years. Since local governments used their assigned revenues inefficiently, their funding needs continued to increase. So, local revenues have not been sufficient to finance local expenditure (Fig. 8.1).

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4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975

Budget Balance

Local Government Expenditures/GDP)

Local Government Revenues/GDP

Fig. 8.1 Local Government Revenue and Expenditure, 1975–2017, As a Percentage of GDP. Source Authors’ calculations based on the figures provided from Presidency Strategy and Budget Statistics

The implementation of all these laws has led to significant changes in local governments’ revenues and responsibilities. But despite all these reform attempts, additional funding needs of Turkish local government continued to increase. Since local governments have no autonomy to impose a new tax or to alter their tax rates, they often preferred to use borrowing methods. But they did not perform effective debt management. Using local debts received by local governments to finance current expenses rather than financing infrastructure investment made it difficult to refinance local debt and also increased the debt burden of future generations. Due to the inefficient use of borrowed funds, the debt stock of local government has gradually increased. As shown in Fig. 8.2, while the debt stock of local governments was US$ 21 billion in 2006, it increased to US$ 30 billion in 2017. Strict restrictions on foreign borrowing imposed by financial legislation urged many local government units to borrow from domestic sources and to postpone debt obligations through fiduciary accounts. Due to the limited use of external debt and the exchange rate effect, the value of the total debt stock of local governments in US$ increased by only 50%, while the value of debt stock in domestic currency increased by 250% (see Fig. 8.2). Expenditure arrears and the possibility of borrowing from Iller Bank reduced the interest rate of small municipalities that they have limited fiscal capacity and/or weak credibility. Although they mitigated the adverse effect of serving public debt on public good provision for small municipalities, easy borrowing obtained by small municipalities from the Iller Bank made more difficult to the borrowing of municipalities having high credibility (strong fiscal capacity) from the Iller Bank (Kalamov and Staal 2016, p. 671). Moreover, expenditure arrears caused an economic loss of creditors due to the outstanding obligations of the municipalities. While this led to an increase in debt service payment of local government, it also caused a reduction in resources

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100 90 80 70 60 50 40 30 20 10 0

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Bank Credits

Debts to Public authories

External Debts

Expenditure Arrears

Other

Total Debt/GDP (%)

Fig. 8.2 Total Local Government Debt and Its Components, 2006–2017, As a Percentage of Total Government Debt. Source Authors’ calculations based on figures provided from General Directorate of Accounting Statistics

used for financing of ordinary services of local governments. This situation not only has led to delay in local public services but also has resulted in increased spending pressure on the central government budget due to central government preventions taken for avoiding the delays of local public services. So that local government could properly serve their services, central government do netting local government debts through consolidation law in the last 50 years. As can be seen in Table 8.1, between 1965 and 2011, the total debt of municipalities Table 8.1 The restructured debt by consolidation or cancellation laws Date

Law no.

Restructured debt (US$)

July 16, 1965

691

205.888,9

February 28, 1971

1376

156.341,8

May 22, 1975

1902

273.759.608,7

February 28, 1978

2143

n.a.

January 31, 1984

2974

127.536.311,3

July 11, 1992

3836

613.574.426,8

March 28, 2002

4749

53.646.123,4

July 10, 2004– December 31, 2005

5393

3.685.056.483

February 13, 2011

6111

Restructured debt in total in the period 1965–2011

842.230.003,6 5.596.165.188

Source Gathered from various sources, see Kazan (2011, pp. 123 and 128); Kele¸s (1994, p. 344); tbmm.gov.tr; www.hmb.gov.tr

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over US$ 5.5 billion was subjected to arbitration and cancellation. In addition to the consolidation and cancellation practices, the overdue debts of local governments to the treasury amounting to 3 billion TL were restructured with the Law no. 6736, 7020, and 7143 enacted in 2016, 2017, and 2018. Netting local debts accompanied by large dependency on intergovernmental transfer gave some local governments an opportunity to leverage their inefficient expenditures. Since all local governments missed the opportunity to abandon the debt, these practices have led to disparities between local governments and some local governments, especially metropolitan municipalities, chose not to repay their debts by acting strategically. Those local governments were able to finance their spending from the central government sources. Before the first half of the 2000s, administrative tutelage was used as a means of ensuring and maintaining local fiscal discipline.8 Besides, centralized financing and control procedures such as central government approval of new loans of local government and the balanced budget requirement facilitated the prevention of fiscal indiscipline at the local government level. However, central government has rarely implemented those rules due to electoral incentives. In short, political favoritism and central government interventions have encouraged opportunistic behavior and some local governments have incentives to overspend. As a result of unsustainable action of local governments, while, on the one hand, central governments’ budget deficit increased; on the other hand, the aforementioned reasons triggered the severity of economic crises. Local fiscal indiscipline was not only the result of insufficient revenue or inefficient spending but also the functioning of financial management. Despite the reforms made in the early 2000s, accounting and reporting of local government operations remained incomplete (IMF 2000). Although some obligations were promulgated for the dissemination of information by the public financial management law, most of the local government units did not feel any obligation to disseminate information and illuminate the local people (Canan 2004, p. 3). Particularly, the lack of transparency has made difficult ensuring the local politicians’ accountability. Since legislative arrangements have not been fully implemented, internalization of transparency has not occurred. So, local governments have the ability to use different methods to hide their debt or deficits. For example, most local governments managed to stay within legal debt ceiling by using budgeting gimmicks such as putting off payments or using temporary money for recurring expenses, rather than by using efficient debt and cash management strategies. As well as the achievement of staying in the debt limit, there also exist some similar practices in staff expenses. Today, there are legal limits on staff expenses, but most of the local governments abide by the rules of the local government laws through some budget gimmicks or legal practices such as the use of contracting-out methods for local public service delivery. Such that deviations from budget estimates and increased expenditure on goods and services purchases can assert this tendency. Since local government revenue is insufficient to meet their

8 Approval

or prepermission of the Ministry of Interior is needed for budgets, borrowings, pricing of services of municipalities, and also for grants and transfers to municipalities.

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expenditure responsibilities, the government used its fiscal space to increase transfers to municipalities and provinces by enacting two important laws after the second half of the 2000s. With this legal arrangement, local governments’ revenue was increased and their financial structure was empowered. However, implementation of the reforms also increased the share of central government revenue transferred to local governments. On the other hand, while more money was being transferred to the new revenue-sharing system, no commensurate changes were made in expenditure assignment. That is to say that, finance did not follow expenditure. As/inasmuch as local governments’ new sources didn’t match additional responsibilities, implementation of this reform end up with larger central government budget deficit (IMF 2008, p. 28). Today, there has been a (strong) reliance (to a large extent) on intergovernmental transfers especially with regard to tax sharing. The shares received from general budget tax revenue and the donations and grants constitute 90% of total revenues in special provincial administrations, 75% in metropolitan municipalities, 60% in provincial municipalities, and close to 50% in district and town municipalities. In particular, the regulations made by Law no. 5779 and 6360 increased the dependence of provincial municipalities and metropolitan municipalities on intergovernmental transfers (Figs. 8.3, 8.4, 8.5 and 8.6.). In brief, although a slight trend toward revenue decentralization is observed in the past 40 years, local governments in Turkey do not have the ability to improve their own revenues (Akın 2001, p. 1). As expenditure responsibilities are mainly financed through revenue-sharing system, local governments do not fully internalize the cost 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Tax and fee revenues

Capital revenues

Enterprise and Property Revenues

Other revenues

Received Donaons and Aids

Share of general budget tax revenue

Fig. 8.3 Composition of Special Provincial Administrations Revenue (As a Total Share)

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100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Tax and fee revenues

Capital revenues

Enterprise and Property Revenues

Other revenues

Received Donaons and Aids

Share of general budget tax revenue

Fig. 8.4 Composition of District of Town Municipalities Revenue (as a Total Share)

100.00 90.00 80.00 70.00 60.00 50.00

40.00 30.00 20.00 10.00 0.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Tax and fee revenues

Capital revenues

Enterprise and Property Revenues

Other revenues

Received Donaons and Aids

Share of general budget tax revenue

Fig. 8.5 Composition of Metropolitan Municipalities Revenue (As a Total Share)

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100.00 90.00 80.00

70.00 60.00

50.00 40.00

30.00 20.00 10.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Tax and fee revenues

Capital revenues

Enterprise and Property Revenues

Other revenues

Received Donaons and Aids

Share of general budget tax revenue

Fig. 8.6 Composition of Provincial Municipalities Revenue (As a Total Share). Source Authors’ calculations based on the figures provided from General Directorate of Accounting Statistics

of local public services. So, the efficiency gains to be achieved from decentralization that is at the heart of fiscal decentralization strategies will not be captured completely. Local government units always have a tendency to over-spending in proportion to their tax effort (Escolano et al. 2012, p. 3). Since local governments do not have the authority to determine the base and rate of local taxes, they find it difficult to adjust their revenues in response to the financial crisis, and consequently they expected to be bailed out by the central government. Local government units that are dependent on intergovernmental transfers in terms of their financial sources have made local government bodies less responsible and accountable to local citizens and their preferences. This also makes investment planning more difficult and thereby some delays and even failures occurred in local service provision (OECD 2008, p. 213).

8.5 Conclusion and Policy Recomendations Both the financing and management problems of the Turkish local governments have always remained on the agenda since 1950. In Turkey, as a rule, local governments do not have the autonomy to impose taxes or to determine the bases or rates of existing taxes. The shares from general budget tax revenues constitute the most important revenue sources for local governments. Although the ratio of local governments’

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revenue to GDP has steadily increased in the past 40 years, it would not be wrong to say that local governments’ own revenues are still limited. Nonetheless, the local governments still remain to the transfers provided by the central government. An increase in the share of intergovernmental transfers in total revenues has been detrimental to the development of the sense of financial responsibility and accountability which otherwise would have been developed through establishing relationship between local government revenues and expenditures, and it has also led to the existence of a transfer-dependent revenue structure of local governments without making any effort to increase their revenue capacity. Tax revenues and duties allocated to local governments were insufficient to meet even basic needs, and small-scale municipalities or those facing excessive debt burdens had difficulty in making wage and salary payments for their employees from time to time. In addition, due to the fact that the tariffs of taxes and duties based on fixed tariffs were not updated regularly, these revenues were eroded against inflation. Local taxes and duties have been allocated in a standard manner without taking into account the institutional structures, economic development level, scale size, and geographical characteristics. Therefore, some of the taxes and duties allocated to local governments by the legislation have not even covered the costs of tax collection, let alone be an important revenue source for rural or urban local governments. Moreover, due to institutional capacity shortcomings, notably small-scale municipalities could not efficiently collect the revenues allocated to them by Law no. 2464. Although there are some regulations in place in order to enhance/ensure fiscal discipline at the local government level, these regulations did not provide the expected impact on local governments’ fiscal position in practice. Thus, although it is a necessity to achieve budget balance at the local level and to take the budget revenues as a basis for achieving such balance, the budget balance has apparently been achieved by inflating it with optimistic local revenue forecasts. Therefore, budgets which were initially prepared as balanced were closed with a deficit at the end of the year. Although legal restrictions were imposed on the debts of local governments for the establishment of fiscal discipline, local governments were able to borrow far above their financial capacities through items and exceptional provisions not included in the calculation of the debt limit. For example, according to Law no. 5393, the external borrowing of municipalities and issuance of bonds to domestic markets were limited to the financing of the projects included in the investment program, whereas such a restriction (other than issuing bond) was not applied in domestic borrowing. Although the amount of total (domestic plus foreign) debt stock, including interest of the municipality and its affiliates and the companies whose capital of more than 50% is held by them, is subject to a limitation in relation to the latest finalized budget revenues; as for the infrastructure investments requiring advanced technology and a large amount of pecuniary resource, borrowings for projects that are accepted by the President are excluded from this limitation. Moreover, liabilities used in the calculation of the debt limit (amounts registered in fiduciary accounts) do not include all obligations of local governments. This has caused many municipalities to face a heavy debt burden, although they may seem legally problem-free. The lack of implementation of regulations to ensure fiscal transparency at the local government level

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has limited the ability of these governments to use necessary mechanisms to ensure democratic accountability and increase accountability, as an audit tool. The revenue-based factors above, which led to the SBC problem at the local government level, triggered fiscal indiscipline along with the problems arising from the allocation of expenditures and made the local government budget deficits and debt stock two major problems for local governments. Although many arrangements have been made in the field of local government finance in the past 40 years, revenue and expenditure reforms at local government level have not been handled together and revenue allocation has not been accompanied by expenditure allocation. While allocating duties to local governments, disparities arising from population and geographical structure are not taken into consideration and optional and mandatory segregation of duties is not made. This has led the municipalities to be assigned the same duties regardless of their revenue potential and expenditure needs. The lack of optional mandatory segregation of duties in municipalities has increased inefficient resource usage. Hence, although money is spent on the festival, basic infrastructure services and salary payments were disrupted. Since local government revenues were not consistent with the expenditure allocation, both municipal revenues and expenditures did not provide the expected contribution to the establishment of accountability. Moreover, there were conflicts in the allocation of expenditure at the local level, and more than one authority was responsible for the same task. While this sometimes led to over-spending, sometimes it led to disruptions in local services, as the responsibility for spending was attributed to another administration. Although every effort was made to allocate the budget appropriations within the medium- and long-term plans in order to ensure efficient resource allocation at the local level, the lack of financial and institutional capacity of many local government units to implement the strategic plans made it difficult to establish the budget plan relationship and allocate expenditures according to strategic priorities. Today, the problems arising from both the revenue structure of local governments and inefficiencies in spending management make it difficult to establish fiscal discipline at the local level, and the budget deficits and borrowings of these administrations have gradually become a risk for macroeconomic stability. In particular, in the years when faced unsustainable budget deficits and debt stock, additional resources were provided to local governments, and the debts of these administrations were written off or restructured from time to time through cancellation and consolidation-like practices. Ultimately, this led to the budget deficit and debt stock of the local governments turn into central government budget deficit and debt. In the past 20 years, the increase in the share of local governments’ revenues and expenditures in the national economy has increased the importance of the regulations for establishing fiscal discipline at the local level. The present study discusses the causes of SBC problem in intergovernmental relations and in this context, it is concluded that some regulations should be made for the establishment of fiscal discipline at the local level, in the light of the existing literature and country experiences. Mentioned regulations can be listed as follows. As Kornai stated (2001, p. 1575), the first step toward hardening the budget constraint is to introduce the legislation that imposes fiscal discipline. In Turkey, there

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are some restrictions on local government borrowing. However, these restrictions are not enough for ensuring and maintaining the local fiscal discipline. In order to establish a more sound fiscal management system for local governments, these restrictions could be strengthened through the introduction of additional restrictions such as limiting debt service costs to municipal revenue or explicit bailout procedures. More strict rules should be put into practice to collect the debts of the municipalities to the public, and the deductions made from the shares they receive from the general budget tax revenues should not be interrupted. Inefficiencies caused by the cancellation and consolidation-like practices in the local financial management and resource allocation mechanism should be prevented, local governments under excessive debt burden should be prevented from borrowing, inefficiently using the resources they have borrowed and discharging these debts later. Transparency can help local governments to overcome the SBC problem. Today, there has been a consensus on the transparency. Accordingly, the more budget transparency is, the greater accountability is. So, it is high likely that further accountability will contribute to the fiscal discipline of local governments. However, it is obvious that this process cannot happen automatically. In Turkey, there are many regulations in place to ensure transparency. However, it is difficult to say that these regulations are directly reflected in practice. Local governments’ borrowing from domestic sources should be made in more clear terms. Moreover, further information is required for treasury guarantees issued on the debt of these organizations. Therefore, in order to provide fiscal transparency as an instrument of accountability, further measures are needed to be put into practice to increase the applicability of legal arrangements on transparency. To boost the accountability of local governments and obtain aforementioned results, more public access to information on the process of local fiscal policy, local government debts, local public procurement process, relations between local government authorities, locally owned enterprises, and locally owned enterprises’ operations may well be required (Hameed 2011). Although abovementioned fiscal rules (numerical or non-numerical) are useful, they are not sufficient per se to ensure local governments’ long-term fiscal health. Local governments must also limit borrowing used to alleviate operating budget deficits and finance capital projects (Garrett 2011).9 Over and above this, rules aiming at realizing ex-ante budget balance should be substituted by ex-post budget balance. For this purpose, the rules on the ex-post balance of local government budget should be implemented and the mechanisms to ensure compliance with them should be put into force. To ensure fiscal discipline and to increase efficiency in decentralized functions, both fiscal responsibility and accountability should be the main component of intergovernmental fiscal relations. For the former, responsibilities for local government

9 Because

of the fact that states with no statutory debt limit, or with a limit easily surpassed by legislative action, have less of an incentive to halt deficit spending and debt issuance. This is true at the national level as well. Here “fiscal health” simply refers to the lack of budget crises or generally balanced budgets year after year (Garrett 2011).

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spending should be clearly linked with their own resources. As indicated in theoretical explanations regarding local government finance, better matching sub-national spending and revenues enhance the local authorities’ accountability. If local governments’ expenditures are fully financed through local tax revenue generation, this will encourage the local officials’ accountability. In the event of a stronger link between tax and expenditure at the local level, this may encourage local inhabitants to call their officials to account for their tax and spending decisions. At this point, beyond expanding local tax autonomy, the improvement of municipal tax administration is also equally important. To this end, improving the effectiveness of institutional arrangements should be a priority for local government administrations. The dependency of local governments on the transfers provided by central government should be lowered and fiscal responsibility should be fostered by strengthening the local government’s own revenue sources. It should not be forgotten that the purpose of transfers is not to finance particular governmental activities but rather to contribute to an effective provision of services to the local citizens. Ability to use of intergovernmental transfers as a means of efficient local service delivery requires consideration of both local governments’ revenue capacity and expenditure needs when designing transfers. So, the intergovernmental transfers should be based on standard financial requirements and standard financial revenues. Additionally, transfers should be implemented as an open and transparent manner as much as possible. In this sense, fiscal coordination between central and local governments should be strengthened, and conservative budget forecasts should be encouraged for these governments. For this purpose, the establishment of a commission on intergovernmental fiscal relations can be beneficial. Regulations affecting the financial structure of local governments should be enacted by the approval of the abovementioned commission and coordination between local fiscal policies and national policies should also be ensured through this commission. To avoid inefficiencies in the provision of local public services, duplications in service delivery should be removed by making only one level of government responsible for the public services delivery. For this aim, responsibilities should be clarified as much as possible to limit the overlap between both different levels of government and the same level of governments. Additionally, some expenditure assignments should be reshaped to reduce overlap and improve the efficiency of service delivery at the local government level. Besides, the tasks and competences of a local government should be differentiated according to their scale. Furthermore, voluntary–compulsory service separation should be made in all local government units, and local government resources should be allocated in accordance with strategic priorities by local policy or decision-makers.

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Rodden, J. (2005). And the last shall be first: federalism and soft budget constraints in Germany. Unpublished paper. Department of Political Science, Massachusetts Institute of Technology. Sagbas, I., Sen, H., & Kar, M. (2005). Fiscal decentralisation, the size of the public sector, and economic growth in Turkey. Environment and Planning C: Government and Policy, 23(1), 3–19. https://doi.org/10.1068/c0421 (Accessed on May 8th, 2019). Shah, A., & Mundial, B. (1991). Perspectives on the design of intergovernmental fiscal relations. Country Economics Department, World Bank. Shah, A. (2002), Intergovernmental Transfers and Grants, in: Decentralization Briefing Notes (Ed: Jennie Litvack and Jessica Seddon), Washington, D.C.: World Bank Institute, pp. 27–31. Ter-Minassian, T. (2015). Promoting responsible and sustainable fiscal decentralization. In E. Ahmad & G. Brosio (Eds), Handbook of multilevel finance (pp. 437–457). Cheltenham, UK: Edward Elgar Publishing. Tosun, M. S., & Yilmaz, S. (2010). Decentralization, economic development, and growth in Turkish provinces. Emerging Markets Finance and Trade, 46(4), 71–91. https://doi.org/10.2753/ REE1540-496X460405 (Accessed on March 15th, 2019). ˙ Ulusoy, A., & Akdemir, T. (2019), Mahalli Idareler (11. Baskı). Ankara: Seçkin Yayıncılık. Uyar, H. (2004). Türkiye’de ve dünyada yerel yönetimler: Kısa bir tarihçe. Aydınlanma 1923, 51(51), 31–38. UCLG (2010). Local government finance: The challenges of the 21st century. Second Global Report on Decentralization and Local Democracy. ˙ Ülkmen, ˙I.H. (1960), Mahalli Idareler Maliyesi, Ankara Üniversitesi SBF Yayınları, Yayın No:22, Ankara: Ajans Türk Matbaası. Vigneault, M. (2005). Intergovernmental fiscal relations and the soft budget constraint problem. Working Paper IIGR (No: 2005/2). Vahabi, M. (2001). The soft budget constraint: a theoretical clarification. Recherches Économiques de Louvain/Louvain Economic Review, 67(2), 157–195. Weingast, B. (2000). The theory of comparative federalism and the emergence of economic liberalization in Mexico, China and India. Unpublished paper. Wildasin, D. E. (1997). Externalities and bailouts: hard and soft budget constraints in intergovernmental fiscal relations. World Bank Policy Research Working Papers (No: 1843). https://doi.org/ 10.1596/1813-9450-1843. Wildasin, D. E. (2010). Intergovernmental transfers to local governments. in Gregory K. Ingram and Yu-Hung Hong (eds.), Municipal Revenue and Land Policies (pp. 47–76), (Cambridge: Lincoln Institute of Land Policy. World Bank. (1972). Appraisal of a project for the preparation of an integrated urban program for Istanbul. Special Projects Series (No: 12). Retrieved from http://documents.worldbank.org/ curated/en/902771468172151288/Turkey-Istanbul-Urban-Development-Project. Yilmaz, S., & Bindebir, S. (2003). Intergovernmental transfers: Concepts and policy issues. World Bank Institute and Korea Development Institute. Yilmaz, S., & Güner, A. (2017). Impact of recent changes on local government discretion and accountability in Turkey. Marmara Journal of Economics, 1(2), 229–250. https://doi.org/10. 24954/mjecon.2017.12. Yusuf, S. (Ed) (1999). Entering the 21st century. World development report 1999/2000 (22). Washington, DC: World Bank Publications.

Tekin Akdemir is Professor of Public Finance at the Ankara Yıldırım Beyazıt University, Faculty of Political Sciences. Before this post he was an Associate Professor at the Erciyes University. Professor Akdemir is also a member of the Turkish Tax Council. He received his PhD in public finance department at the Institute of Social Sciences, Dokuz Eylul University in 2006. His research focuses on budgeting and financial management, government cash and debt management, and local govenment finance. Professor Akdemir has authored and contributed to numerous

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books, book chapters, articles, and reports on intergovernmental finance, public financial management, and public debt and cash management. In addition to his academic research and expertise in the management and provision of technical assistance, Professor Akdemir has considerable experience in the development and delivery of academic courses and professional training programs in the areas of public sector finance, (fiscal) decentralization and government budgeting and financial management issues. Birol Karakurt is Professor of Public Finance at the Karadeniz Technical University, Faculty of Economics and Administrative Sciences. Dr. Karakurt received his MSc degree in Public Finance at the University of Karadeniz Technical, University and holds a PhD (Econ) from the same university in 2006. His research focuses on Fiscal Policy, Public Economics and Budget discipline and debt management. Prof. Karakurt has authored and contributed to numerous book chapters, articles, and reports on fiscal policy, budget discipline and public debt and cash management

Chapter 9

Fiscal Decentralization and Macroeconomic Management in Turkey Asuman Çukur

9.1 Introduction There is a broad interest in fiscal decentralization around the world. Indeed research shows that as many as 80% of countries are going through some degree of decentralization (Manor 1999; Vazquez et al. 2017). Popularity around decentralization is due to its potential benefits. These benefits include efficient use of resources and welfare gains as well as increasing accountability and participation, and strengthening democracies. But there are considerable differences in the way that fiscal decentralization is implemented among various countries. As a result, outcomes of fiscal decentralization also differed among countries which intensified the debate on fiscal decentralization between supporters and skeptics. Decentralization and its impacts in Turkey, where fiscal decentralization is relatively new phenomenon comparing to developed countries, have also been getting increasing attention both in scientific inquiry and policy discussions. Even though there is a vast literature on the impact of fiscal decentralization on politics as well as economics, the literature on the impact of fiscal decentralization on macroeconomic management is relatively scarce. The impact of fiscal decentralization on macroeconomic management has become one of the major concerns lately. There is a growing interest on this issue including empirical studies after 2000. Since many countries experience with different degree of fiscal decentralization, the impact of fiscal decentralization on macroeconomic management also differs. This chapter reviews the impact of fiscal decentralization on the macroeconomic management in Turkey where the related research is limited. In the first part, theoretical bases of fiscal decentralization is discussed covering both ideas in favor of fiscal decentralization and the ideas against it. Then, the literature on the impact of fiscal decentralization on macroeconomic management is reviewed, covering empirical A. Çukur (B) Public Finance Department, Ankara Yıldırım Beyazıt University, Ankara, Turkey e-mail: [email protected]; [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_9

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studies on the relationship between fiscal decentralization and macroeconomic management in detail. In the third part, the local governance and fiscal decentralization in Turkey, and the impact of fiscal decentralization on macroeconomic management in Turkey are reviewed in this contex.

9.2 Theoretical Framework for Fiscal Decentralization Developed and developing countries whether the government is central or federal both utilizes fiscal decentralization for better public services and for efficient allocation of resources. World Bank (2019) defines fiscal decentralization as “the transfers of expenditure responsibilities and revenue assignments to lower level of governments.” Fiscal decentralization is generally measured by the ratio between subnational expenditures or revenues to national expenditures or revenues. This term is also referred as fiscal federalism in federally governed countries where subnational governments have power to legislate. Even though underlying applications or regulations of fiscal decentralization show differences across countries, the overall impact of fiscal decentralization on macroeconomic management in Turkey is the main focus of this review in light of current perspectives and findings. Public sector has many different responsibilities. Main responsibilities of government are traditionally divided into three functions which are also called Musgrave’s trilogy. They are allocation function, distribution function, and stabilization function of government (Musgrave 1959). Allocative efficiency is the main concern of allocation function which involves government actions in the delivery of public goods and services. Distribution function, on the other hand, involves government actions in desirable distribution of income and wealth in a society and stabilization function involves government actions in securing economic stability. When fulfilling these different tasks public finance theory suggests that some of them are best performed when it is left to the central government while others are best performed when it is decentralized (Musgrave 1959; Oates 1972, 1999). There is a broad consensus on stabilization and distribution functions to be best performed by central government while the allocation function is considered to be best performed by local governments, mainly because local governments know best for the needs of local people (Musgrave 1959; Oates 1972, 1999). Theory of fiscal decentralization is divided into two kinds of literature, namely, first-generation or traditional fiscal federalism theories and second-generation fiscal federalism theories. These two theories are considered complementary rather than being rival (Weingast 2009). According to the first-generation fiscal federalism theories, fiscal decentralization results in public provision of goods and services to be more efficiently provided by local governments (Musgrave 1959; Oates 1972, 1999). There are couple of mechanism that has been suggested for this efficient resource allocation. Main mechanism is that local governments know their residents’ needs and preferences better than the central government, and therefore they can provide public goods and services according to local citizen needs in a timely manner which

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increases efficiency (Oates 1999). Another suggested mechanism is that fiscal decentralization results in efficient level of public resource distribution and also citizen mobility “vote with their feet” fosters decentralized local governments to be more efficient (Tiebout 1956). One other suggested mechanism is fiscal decentralization can reduce the size of government and therefore controls leviathan (Brennan and Buchanan 1980; Jin and Zou 2002; Marlow 1988; Martinez et al. 2018). Also, it has been suggested that fiscal decentralization promotes accountability (Oates 1972; Sow and Razamefiha 2015, Tiebout 1956). Finally, it has been suggested that centralized countries have less incentive to create fiscal institutions to control the system than decentralized countries (Shah 2006). Mainly the first generation of fiscal decentralization theories focuses on the welfare gains from fiscal decentralization as a result of efficient use of resources which has been treated as an automatic processes. As Ter-Minassian (2015) pointed out, this traditional fiscal federalism theories assumed benevolent government and thus not take into account the role of fiscal institutions and political decision-making on the fiscal decentralization processes. These criticisms gave birth to second-generation fiscal federalism theories (Qian and Weingast 1997). The second-generation fiscal federalism theories emphasize the role of “incentives created by fiscal and political institutions” (Weingast 2013, p. 1), as well as “stability of institutions and their capacity to be self-enforcing” (Oates 2005, p. 368). Also second-generation fiscal federalism theories point out to the interrelation between fiscal system performance and democracy (Weingast 2009). While these two theories argue the benefits of fiscal decentralization, counterarguments are raised by some researchers calling attention to potential dangers of fiscal decentralization where fiscal decentralization may not lead to ideal results. Even though many mechanisms are suggested for the benefits of fiscal decentralization, disagreement still exist between supporters and skeptics of fiscal decentralization. Main arguments of supporters of fiscal decentralization are improved efficiency, improved development, improved governance, and poverty reduction. On the other hand, skeptics argue that if there are not set rules and institutions, fiscal decentralization may not result in efficiency and can cause problems especially for the macroeconomic management of the country. They warn against the implicit and explicit assumptions of fiscal decentralization and they caution about the perils of fiscal decentralization on macroeconomic management (Prud’homme 1995; Tanzi 1996; Ter-Minassian 1997). As Tanzi (1996, p. 295) points out how “taxing ability, tax-sharing arrangements, performance of national and subnational bureaucracies, quality of public expenditure management system and institutions” determine the success or failure of fiscal decentralization. Prud’homme (1995) calls attention to negative effects of decentralization and compares decentralization to “a potent drug that can heal or harm” (p. 201). He raises many concerns over the dangers of fiscal decentralization like negative impacts of fiscal decentralization on the macroeconomic stability, fragile assumptions of efficiency under fiscal decentralization that might not hold for developing countries, and corruption at the local level are some of them. Similar concerns are also raised by Tanzi (1996), he states challenges to fiscal decentralization as corruption, different interests of local bureaucracies, public

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expenditure management system which should be competent enough to make realistic predictions about the revenues, and excessive expenditures of local governments. Indeed fiscal decentralization experiences of many countries yield quite different results. Such as controlling leviathan has been argued as one of the benefits of fiscal decentralization but evidence is not clear. However, Anderson andVan denberg (Anderson and Van den Berg 1998) fail to confirm any significant relationship between government size and decentralization just like Oates (1985), Qiao et al. (2018) find negative relationship between fiscal decentralization and government size just like Marlow (1988). But Roden (2003) finds that if decentralization is funded through intergovernmental transfers, it increases government size. Similarly, Baskaran (2011) explores the association between fiscal decentralization, ideology, and government size and finds out that fiscal decentralization increases government size regardless of ideology but this increase is larger in left-wing governments. On the other hand, Jin and Zou (2002) find that spending decentralization causes larger government size while revenue decentralization causes smaller government size. Although some countries successfully implemented fiscal decentralization like Germany, USA, and Indonesia, fiscal decentralization in some countries did not result in success like Brazil and Argentina (Prud’homme 1995; Tanzi 1996). Evidence points out that fiscal decentralization increases social welfare under certain conditions. In fact fiscal decentralization to increase efficiency especially in developing countries, “transparency, and fair local election, high quality of public servants, checks and balance, and availability of basic infrastructures” are found to be key component of successful fiscal decentralization (Sujarwoto 2017, p. 8).

9.3 Macroeconomic Impacts of Fiscal Decentralization As fiscal decentralization increases around the world, there is also growing literature on the impact of fiscal decentralization on macroeconomic management. Macroeconomic stabilization policies include monetary and fiscal policies. The goals of monetary and fiscal policies can be said as price stability, high rate of economic growth, and full employment. These two policies have been used to keep economy healthy and stable. While monetary policy mainly uses money supply and interest rates to keep the economy stable, fiscal policy uses taxes and expenditures. In fiscally decentralized countries, fiscal policy is managed by both central and local governments while monetary policy is under the responsibility of central bank. Traditionally stabilization function which refers to macroeconomic management is the duty of the central government. Overall some have concerns regarding the impact of decentralization on macroeconomic management (Prud’homme 1995; Tanzi 1996; Ter-Minassian 1997), others discuss the positive impacts of fiscal decentralization like increasing economic growth as a result of increasing efficiency (Oates 1993), decreasing public size (Martinez et al. 2018), and increasing accountability (Bojanik 2018; Shah 1998). In

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fact, it has been suggested that subnational government’s involvement in macroeconomic management at least partially can strengthen overall macroeconomic stability (Rodden and Wibles 2002; Shah 1998). Shah (2008) looks for an answer to which fiscal system whether centralized or decentralized creates more risks for macroeconomic management and stability. He finds out that fiscally decentralized systems rather than centralized fiscal system present more potential to advance macroeconomic management. He links the success of fiscal decentralization to well-designed fiscal and monetary institutions which increases fiscal coordination between central and local governments. He emphasizes the importance of these fiscal and monetary institutions to overcome unfavorable impacts of fiscal decentralization and challenges to macroeconomic management. Therefore, he argues that the outcome of monetary and fiscal policy management as well as accountability is better under decentralization than centrally governed countries because they have more incentives to create these institutions. Similarly, Roden and Wibbles (2002) find that decentralization is beneficial for macroeconomic management. They also point out a striking difference of the results of fiscal decentralization on macroeconomic management among countries and they attribute this difference to level of decentralization as well as political and fiscal institutions. But there is also great deal of skepticism whether decentralization will succeed in achieving these goals. Among the main concerns raised over the impacts of fiscal decentralization on macroeconomic management in a country are coordination problems, incurring large debts by local governments, tax assignment, and sharing of tax bases (Tanzi 1996, 2002; Ter-Minassian 1997, 2015). The coordination problem between central government and the local government is one of the issues that has been raised about the relationship between macroeconomic management and fiscal decentralization (Tanzi 1996; Ter-Minassian 1997). As Tanzi (2002) points out when central government is following contractionary policies, expansionary policies followed by local governments can result in large debts especially when they are subject to soft budget constraint. Tax assignment between central and local governments can also cause stability problem in a country. As Tanzi points out (1996), if major tax bases have been assigned to local governments availability of tax bases diminishes for central government which causes problems especially when central government needed to increase taxes just like the experiences of Russia, Brazil, and India. Tax-sharing scheme between central and local governments is essential in terms of the incentives it creates. The loss of central government as a result of this scheme then can limit its ability to intervene in macroeconomic instabilities. Soft budget constraint on local governments also argued to create challenges for macroeconomic management. While hard budget constraint limits spending over revenues, soft budget refers to absence of this limitation. Therefore, soft budget system allows local governments to exceed their budgetary limitations. So one of the dangers of expenditure decentralization without revenue decentralization especially when local governments are subject to soft budget constraint is high expenditures of local governments which results in high debt levels. These debts are expected to be paid by central government bailout or borrowing more. Therefore, high debt level

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of the local governments jeopardizes the financial sustainability of the country by adding to total debt of public sector. As central government bails the debts out, this bailout creates further incentives to overspend and has adverse effect on macroeconomic stability of the country (Ong 2011; Ter-Minassian 2015). Because of this fiscal bailouts, the debt burden of the country increases which circumcises fiscal space. This is what happened in Argentina and Mexico, as frequently given examples of failed fiscal decentralization (Mendoza 2013; Prud’homme 1995; Tanzi 1996; Ter-Minassian and Jimenez 2011). Fiscal decentralization in Argentina characterized by high provincial expenditures and limited or low provincial revenues which is what Perloff (1985) called as fiscal perversity. The deficit in this case is financed by intergovernmental transfers or local borrowing. Just like Argentina, Mexico also has the similar problem of high local expenditures, low local revenues and deficit is financed through intergovernmental transfers or local borrowing (Compean 2008; Mendoza 2013). When local government deficit is financed through intergovernmental transfers or borrowing, it causes inflationary pressures and it negatively impacts government’s ability to manage macroeconomic stability in the country (Prud’homme 1995; Ter-Minassian 2015). On the other hand, when local governments are subject to hard budget constraint, they cannot overspend and incur huge debts, and therefore negative effect of their actions on the macroeconomic management will be limited. Many studies illustrate the importance of establishing hard budget constraint at the local level (Oates 2005; Ter-Minassian 2015; Weingast 2009). As Oates (2005) points out “successful system of fiscal federalism must be able to sustain itself overtime” (p. 368). Increasing revenue-raising capacity of the local governments as well as controlling borrowing of the local governments can improve the macroeconomic management in a country (Ter-Minassian 2015). Sustainable growth is one of the most important goals of macroeconomic management. As Oates (1993) pointed out there is no formalized theory between decentralization and economic growth. However, he discusses the possible relationship through efficient allocation of resources. According to him as decentralization causes public goods and services to be tailored according to local citizens’ needs, this will result in the regions specific needs like infrastructures and human capital which in turn accelerates economic growth. There have been many studies to test the so-called economic growth effect of fiscal decentralization. Fiscal decentralization claimed to increase economic growth through increase in efficiency in a country. Firstly, Oates finds that as centralization increases per capita income decreases and government size increases (1985). Other studies also find positive relationship between fiscal decentralization and economic growth (Ebel and Yilmaz 2002; Thiessen 2005), but still others fail to obtain the similar result (Baskaran and Feld 2012; Davoodi and Zoo 1998; Rodriguez-pose and Ezcurra 2010). Indeed some suggests that the benefits of fiscal decentralization come with high stage of economic development (Bahl and Lin, 1992 cited in Oates 1999, p. 1142). But evidence on this claim is not clear. Such as Vazquez and Mcnab (2006) find a negative relationship between fiscal decentralization and economic growth in developed countries while the relationship was positive for developing countries. The relationship between expenditure decentralization and revenue decentralization with growth

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is also studied. Similarly, the results are inconclusive. Even though some studies find that while expenditure decentralization diminishes and revenue decentralization increases growth (Gemmell et al. 2013; Rodriguez-Pose and Kroijer 2009), other studies fail to obtain the similar results (Baskaran and Feld 2012; Boldman 2011). Moreover, there are also concerns over the impact of corruption and regional imbalance on this relationship. It has been argued that fiscal decentralization may increase corruption which causes inefficiencies and diminishes economic growth (Prud’homme 1995; Tanzi 1996). But some studies find otherwise where fiscal decentralization is high and the corruption is low (Arikan 2004). Regional imbalances can be another problem. Fiscal decentralization carries a risk of causing a regional imbalance because of efficiency and equity trade-off. Even though decentralization may allocate resources more efficiently, as a result more equal distribution of resources across regions can suffer which will impair regional convergence (Rodriquez-Pose and Ezcurra 2010; Vazquez et al. 2017). Price stability has been used as another important indicator to examine the link between fiscal decentralization on macroeconomic management. Most economists agreed that the main reason for inflation is excessive increase in money supply. Recently, the relationship between fiscal decentralization and price stability on macroeconomic management has emerged as a new research area. Among the possible channels that fiscal decentralization can threaten the price stability are inflationary pressures from increasing debt level especially when the debt causes monetization and multiplier effects of local government expenditures (Ter-Minassian 1997). If subnational government’s expenditures have larger multiplier effect then it can increase demand when may be central government is trying to reduce it (Ter-Minassian 1997). Many theoretical explanations are offered for the relation between fiscal decentralization and price stability like commitment theory, collective action theory, and continuity theory (Suzana and Kiril 2014; Triesman 2000). According to commitment theory which predicts that fiscal decentralization decreases inflation, inflation is the result of policymakers’ lack of incentives to keep the money growth stable (Suzana and Kiril 2014; Triesman 2000). With decentralization decision-making dissipates which reduces inflation according to this theory. Collective action theory explains this relationship different than the commitment theory. According to this theory, price stability is an underprovided public good and as fiscal decentralization increases incentives to keep prices stable decreases because the benefits of high public spending are local while the cost as inflation is central (Suzana and Kiril 2014; Triesman 2000). Continuity theory, on the other hand, argues that fiscal decentralization does not cause an increase or decrease in inflation rather it locks inflation meaning whether the inflation rate is high or low, fiscal decentralization makes it hard to change (Suzana and Kiril 2014; Triesman 2000). Similar to continuity theory, Oates (2005) points out that without having any power on monetary policy decentralized local governments’ influence on inflation and employment expected to be scant. The literature on decentralization and price stability seems to support all these three theories. Some studies find support for commitment theory so that fiscal decentralization leads to low inflation (King and Ma 2001; Suzana and Kiril 2014; Suzana and Goran 2015), especially for revenue decentralization (Baskaran 2012; Neyapti

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2004). Others find a support for collective action theory so that fiscal decentralization leads to high inflation (Feltenstein and Iwata 2005; Vazquez and Mcnab 2006). Still others find a support for continuity theory and did not find a clear connection between decentralization and price stability (Thornton 2007; Treisman 2000). Evidence suggests that expenditure decentralization and revenue decentralization impact inflation differently. Roden and Wibbles (2002) argued that structure of fiscal decentralization matters regarding the association between fiscal decentralization and inflation. According to their findings as local governments become more dependent on transfers from central government inflation rises. They find that if fiscal management is not rigid, this can cause high inflation in decentralized countries as in Brazil, Argentina, and Russia while prudent fiscal management stabilizes inflation as in USA, Germany (Roden and Wibbles 2002). On the other hand, studies find that revenue decentralization results in low inflation (Baskaran 2012, Neyapti 2004). Regarding the relationship between inflation and fiscal decentralization, studies also find that one of the determinants of this relationship is central bank independence (King and Ma 2001, Neyapti 2004; Roden and Wibbles 2002). With soft budget constraints, debt management becomes a critical part of the fiscal decentralization. Fiscal decentralization without fiscal discipline can cause many problems for central government and constrains its ability to conduct macroeconomic stability (Ter-Minassian 1997). Today many countries exercise different levels of expenditure and revenue decentralization. If spending decentralization is not matched with revenue decentralization it can cause excessive debt accumulation which increases national debt level. The impact of overspending on the stabilization function of central governments is troublesome. Ter-Minassian (1997) points out the challenges to macroeconomic management especially in the absence of hard budget constraint. If fiscal decentralization tends to be more on the side of expenditures rather than matching expenditures with revenues, then this promotes excessive spending by local governments which in turn causes large budget deficits. Financing of this deficit undermines monetary policy and limits central government ability to manage macroeconomy. Therefore, many researchers emphasize the importance of limits on deficit of subnational government. Empirical studies between fiscal decentralization and budget deficit are not conclusive. De Mello (2000) finds coordination problems cause increase in budget deficits under decentralization. Not only budget deficit increases according to De Mello (2001), but also fiscal dependency results in higher borrowing costs for local governments. Fornasari, Webb, and Zou (2000) find that rising subnational governments’ expenditures and deficits rise national expenditures and deficits. Indeed some studies have find that for fiscal and monetary management in developing countries unitary system works better than federalism (Dillinger and Webb 1999; Roden andWibbles 2002; Wibbles 2000). Federal political structures have been shown as the main reason for this conclusion so according to this view federalism can undermine fiscal and monetary policies for the political success. As a result, decentralized governments can exceed their budget and run into excessive debts adding stress to macroeconomic management of the country. On the other hand, some studies find that fiscal decentralization decreases budget deficit. Such as Neyapti (2010) finds

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that both expenditure and revenue decentralization decrease budget deficits, while Peralias, Romero-Avira, and Usabiaga (2013) find that in relatively corrupt countries fiscal decentralization leads to responsible fiscal management. High indebtedness of local governments constrains central government to carry out stabilization function effectively by increasing central government deficit. In order for local governments to match their expenditures they need to raise enough taxes but, in general, major taxes are assigned to central government for efficiency concerns. Therefore, local governments in many cases depend on the transfers from central government. Coordination between central and local government becomes vital. If local governments are not on the same page with central government then especially macroeconomic management suffers. Such as if government tries to increase taxes to curb spending or to raise revenue, local governments should reflect similar policies. If local governments spend more when central government wants to curb spending, then macroeconomic stability suffers. In sum, the efficiency of the fiscal decentralization differs across countries based on both types of the fiscal decentralization such as expenditure or revenue decentralization and the characteristics of the fiscal decentralization such as application of soft budget versus hard budget constraints models along with the level of development of the country.

9.4 Local Governance and Fiscal Decentralization in Turkey Fiscal decentralization in Turkey is relatively new phenomenon comparing to developed countries. Turkey is a unitary state and taxation authority in Turkey belongs to central government. Turkish local governments have limited power on taxes, therefore decentralization in Turkey can be considered under the administrative (expenditure) decentralization as most taxes raised centrally and local governments perform the tasks which are set by law. Currently, Turkish local governments have high expenditures with increasing debt level and high dependency on intergovernmental transfers with low level of own revenues. Turkey has experienced greater fiscal decentralization in the last two decades. Fundamental changes have been made to local government system which accelerated decentralization in Turkey after 2000. Turkey abolished many outdated local government laws after 2000 to develop a contemporary form of local government (Bayraktar 2012, Tosun and Yilmaz 2010). These reforms are made with a number of laws which have reconstructed the local governments in Turkey. Among these laws, Metropolitan Municipality law (No 5216) in 2004, Special Provincial Administration law (No 5302) in 2005, and Municipality Law (No 5393) in 2005 were enacted for the purpose of “effective, strong, autonomous, transparent, and accountable local governments, with an optimal level of institutions, participation, and ability to satisfy the needs of the citizens” (Parlak et al. 2008, p. 32). Especially, with two new laws

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in 2008 and 2012 (law no. 5747, “Forming Districts within the Metropolitan Municipalities and Amending Some Laws” and law no. 6360, “Establishment of Fourteen Metropolitan Municipalities and Twenty-seven Districts and Amendments at Certain Law and Decree Laws”), Turkish local government system was reshaped again. The law no. 6360 was a major revision from administration to resource allocation in Turkish local government system. The number of metropolitan municipalities increased to 30, while “37% of special provincial administration, 55% of municipalities and 49% of villages have been abolished” (Akman et al. 2015, p. 120). These local government reforms in Turkey are in line with first-generation fiscal decentralization theories (Musgrave 1959; Oates 1972, 1999) which emphasizes the welfare gains from fiscal decentralization and treats it as an automatic process. Yilmaz and Guner (2013) consider the Turkish local government reforms before 2010 as “the first generation reforms aiming more political, administrative and fiscal discretion to local governments along the principles of democratic decentralization and strengthening accountability” (p. 125) and reforms after 2010 as “the second generation reforms which are focused on the economies of scale” (Yilmaz and Guner 2017, p. 230). Local government reforms in Turkey did not take into account the role of “incentives created by fiscal and political institutions” (Weingast 2013, p. 1) which is emphasized by the second-generation fiscal decentralization theories. Overall, Yilmaz and Guner (2017) conclude that success of first-generation reforms in Turkey is limited and local government reforms are ineffective in terms of creating incentive structures to enhance accountability in Turkey. Therefore, we can expect new reforms based on these results to address the shortcomings in Turkish local government system. Turkey has three different types of local governments which are special provincial administrations, municipalities, and villages (TBB 2019). Special provincial administration (SPA) in Turkey operates like “intermediate-level local government units” (Tosun and Yilmaz 2010, p. 73). According to Union of Municipality of Turkey, duties of SPAs are “physical infrastructure for education, healthcare and sports as well as the infrastructure for rural settlements and agricultural production across the provinces” (TBB 2019). Municipalities in Turkey are divided into metropolitan municipalities and non-metropolitan municipalities (TBB 2019). Local governments in metropolitan areas consist of metropolitan municipalities (population over 750.000) and metropolitan district municipalities, while non-metropolitan municipalities consist of provincial municipalities, district municipalities, and town municipalities (TBB 2019). According to Turkish Interior Ministry (2019), Turkey currently has 30 metropolitan municipalities with 519 metropolitan district municipalities, 51 provincial municipalities, 403 district municipalities, 386 town municipalities, and 18285 villages. Turkish municipalities have mandatory and optional tasks which are set by laws. Mandatory tasks of municipalities consist of land development, water and sewer waste management, cemeteries, firefighting and likewise duties, however, social services and social aid, to reduce poverty and social problems are optional tasks of local governments in Turkey (TBB 2019).

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Local governments in Turkey serve to the majority of Turkish population with diverse needs in metropolitan cities and provinces. Turkish population is concentrated in urban areas. Karagoz (2015) finds as average local government expenditure increases, migration also increases in that city in Turkey. This citizen mobility supports Tiebout’s theory (“vote with their feet”) in Turkey. Population living in cities and district municipalities in Turkey constituted 92.3% of the total population of which 77% lived in metropolitan cities while only 7.7% of the population lived in rural areas in 2018 (TUIK 2019). Due to high concentration of population in urban areas such as in Istanbul (15.067724 people in 2018; TUIK 2019), demand for local government services keeps increasing which leads to increase in local government expenditures in Turkey.

9.5 The Impact of Fiscal Decentralization on Macroeconomic Management in Turkey Even though population living in urban areas has been increasing, the share of local government budget did not increase at the similar rate. For example, only 24% of total population lived in urban areas in 1930 which increased to 76.7% in 1998, the share of municipality budget increased only from 10% to 12.86%, respectively (Bayraktar and Massicard 2012). Similar patterns have been observed for the period after 2000. Local government expenditures increased at the rate of 15.7% while local government revenue increasing rate was only 11.3% leading to large deficit in the budget in 2015 (Kazan 2017). Overall, Turkish local governments have high expenditures compared to their revenues, leading to high budget deficit with high borrowing requirements. Local government expenditures and revenues in Turkey have increased over the years but it remains low compared to OECD averages. The local government expenditure as a percentage of GDP in 1980 was 1.1% which was increased to 1.8% in 1995, to 3.5% in 2000, and to 3.1% in 2005 (Presidential Budget and Strategy Directorate 2018). Total Turkish local government expenditure of 4.65% of GDP in 2016 is well below the average OECD level of 16.2% for the same year (OECD 2018). Similarly, the local government revenue as a percentage of GDP in 1980 was 1.1% which is increased to 2.4% in 1995, to 3.2% in 2000, and to 3.1% in 2005 (Presidential Budget and Strategy Directorate 2018). Nevertheless, as it is seen from Table 9.1, total Turkish local public revenue of 4.19% of GDP in 2016 is well below the average OECD level of 15.9% for the same year (OECD 2018). Still, local government expenditures as a percentage of GDP in Turkey varied between 2009 and 2018 going as high as 4.96% in 2018 and as low as 4.12% in 2014. Similarly, local government revenues as a percentage of GDP in Turkey varied between 2009 and 2018 going as high as 4.62% in 2010 and as low as 4.18% in 2015 (Table 9.1).

4.83

4.25

Expenditures

Revenues

4.62

4.50

2010 4.55

4.38

2011 4.41

4.41

2012 4.61

4.84

2013 4.26

4.12

2014 4.18

4.26

2015

4.19

4.65

2016

4.31

4.87

2017

Source Calculated by the author from data on www.muhasebat.gov.tr (Ministry of Finance General Directorate of Public Accounts) and TUIK

2009

Years

Table 9.1 Local Government Expenditures and Revenues as a percentage of GDP

4.27

4.96

2018

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Table 9.2 Local Government Expenditures as a percentage of Total Government Expenditures Years

2011

2012

2013

2014

2015

2016

2017

2018

Fiscal expenditure decentralization

13.08

12.97

14.25

12.59

12.95

13.40

15.14

15.02

Source Calculated by the author from data on www.muhasebat.gov.tr (Ministry of Finance General Directorate of Public Accounts)

When we compare Turkish local government expenditures as a percentage of GDP (4.65%) in 2016 to unitary countries local government expenditures, the level is still low. For example, total local government expenditure as a percentage of GDP in 2016 accounts for 34.8% in Denmark, 22.4%, in Finland, 11.1% in France, 14.3% in Italy, and 13.9% in Korea (OECD 2018). Similarly, comparing to Turkish local government revenues as a percentage of GDP (4.19%) in 2016 to unitary countries local government revenues, the level is still low. For example, total local government revenue as a percentage of GDP in 2016 accounts for 35.2% in Denmark, 22% in Finland, 11.3% in France, 14.5% in Italy, and 14.3% in Korea (OECD 2018). When we look at the budget share, the degree of fiscal decentralization in Turkey has been increasing but it is still considered as low compared to OECD countries. The degree of fiscal decentralization measured by the ratio between local government expenditures to total government expenditures increased after 2000 in line with local government reforms in Turkey. Fiscal expenditure decentralization in Turkey was 6% in 1982 which was increased to 11% in 1990 and it remained stable during 1990s (Sagbas, Kar and Sen 2005). As it is seen from Table 9.2, fiscal expenditure decentralization in Turkey after 2000 kept increasing which reached to 13.08% in 2011, to 14.25% in 2013, to 12.95% in 2015, and to 15.02% in 2018. Currently, fiscal expenditure decentralization in Turkey is around 15% in 2018 which still is lower than 2016 rates of 65% in Denmark, 43.1% in Korea, 28.9% in Italy, and 31.3% in Poland (OECD 2018). The revenue sources of local governments are intergovernmental transfers, their own revenues and borrowing. Currently, first revenue sources, fiscal transfers from general budget tax revenues to local governments in Turkey, are implemented according to Law no. 6360. Socioeconomic factors like population, geography, and development index are taken into account for the goal of fiscal equalization when making these fiscal transfers to local governments. According to this law, SPAs are distributed 0.5% of general budget tax revenues while tax revenues to municipalities are distributed according to rules below: 1. Metropolitan municipalities are distributed 6% of the general budget tax revenues by the central government and 30% transfers from metropolitan district municipalities’ grants. 2. Metropolitan district municipalities are distributed 4.5% of the general budget tax revenues of which 30% is given to the respective metropolitan municipalities.

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Table 9.3 Total Local Government Revenues as a percentage of Total Government Revenues Years

2011

2012

2013

2014

2015

2016

2017

2018

Total local government revenues

14.11

13.70

14.09

13.36

13.07

12.724

14.264

14.12

Source Calculated by the author from data on www.muhasebat.gov.tr (Ministry of Finance General Directorate of Public Accounts)

3. Non-metropolitan municipalities are distributed 1.5% of the general budget tax revenues. Second revenue sources are own revenues of municipalities which consist of taxes like property tax, sanitation tax, advertisement tax, communication tax, entertainment tax and electricity and coal gas consumption tax, charges, contribution to investment expenditures, service fees, and other revenues (TBB 2019). Third revenue source of Turkish local governments is borrowing. Local governments in Turkey can borrow loans and issue bonds based on the article number 68 of municipality law no. 5393 and public finance and debt management law no. 4749. Local government revenues comparing to their expenditures stayed low in Turkey. Even though local government revenues increased, their expenditures increased more than their revenues causing debt and fiscal discipline problems in local governments in Turkey. As Table 9.3 indicates, the total local government revenues as a percentage of total government revenues including transfers and own revenues in Turkey between 2011 and 2018 account for 13 to 14%. Intergovernmental transfers in many countries are an important source of local government revenues. In Turkey, 12% of general budget tax revenues are distributed to municipalities which forms 52% of municipal revenues in 2017 (Gungor 2018). Intergovernmental transfer to municipal revenues is 30% in France (Siverekli 2015), 55% in Italy, 14% in Japan, and 18% in Denmark (Pricewaterhouse Coopers, 2000, cited in Cetinkaya and Demirbas 2010). Indeed Ulusoy and Akdemir (2009) find that grants to local governments in Turkey is 41.75% bigger than the OECD averages during 2000–2003 period. Intergovernmental transfers have an important role in regional development. Intergovernmental transfers to local governments might have correcting effects on regional development disparities. However, the efficient allocation of resources as a result of decentralization might also disrupt regional convergence (Rodriquez-Pose and Ezcurra 2010; Vazquez et al. 2017). Because of regional development disparities, developed cities attract more people which in turn increases local service burden and local expenditures of municipalities. Evidence suggests average local government expenditure among municipalities in Turkey differ greatly. Such as Karagoz (2015) finds that while average local government expenditure per capita in Kocaeli was 1332.34 Turkish Lira in 2012, average local government expenditure per capita in Kars was only 512.37 Turkish Lira in 2012. To support these points, Guzel and Yilmaz (2018) find evidence of increasing inequalities among regions in spite of the intergovernmental transfers, pointing the horizontal imbalances in Turkey.

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Share of Turkish local government revenue types in 2015 consists of 71.8% conditional and non-conditional transfers plus subsidies, 12.9% taxes, 11% tariffs and fees, 2.4% property income, and 1.9% social contributions (OECD 2018). Researches indicate that the rate of the transfers in local government revenues in Turkey increased steadily. The rate of intergovernmental transfers in municipal revenues was 47.4% in 1995 which increased to 52.4% in 2004 (Turkoglu 2009). While the percentage of intergovernmental transfers in municipal revenues was 50% in 2008, it increased to 56% in 2014 averaging as 52% between 2008 and 2014 (Arikboga 2016). According to 2017 general activity report of local governments (2018), the percentage of intergovernmental transfers in municipal revenues was 63.97% in 2017 while the percentage of intergovernmental transfers in metropolitan municipalities’ revenues was 78.57% in 2017. Metropolitan municipalities in Turkey rely more on the intergovernmental transfers. While the percentage of intergovernmental transfers in metropolitan municipal revenues was 64% in 2008, it increased to 67% in 2014 averaging as 65% between 2008 and 2014 (Arikboga 2016). So studies indicate that Turkish local governments are heavily dependent on the intergovernmental transfers, and higher transfer to metropolitan municipalities also adversely impacts horizontal imbalances among Turkish local governments as discussed earlier. One of the major problems in local government finances in Turkey is insufficient own revenue generation capacity of local governments which makes them more dependent on the intergovernmental transfers. Even though total own revenues of local governments have been increasing overall, the share of own revenues in the total revenues of local governments has been decreasing. While the percentage of own revenues in all municipal revenues was 50% in 2008, it decreased to 44% in 2014 averaging as 48% between 2008 and 2014 (Arikboga 2016). Own revenues of local governments decreased further to 36.92% in 2016 (Yilmaz and Guner 2017). Metropolitan municipalities also have weak own revenue-raising capacity. While the percentage of own revenues in metropolitan municipality revenues was 36% in 2008, it decreased to 33% in 2014 averaging as 35% between 2008 and 2014 (Arikboga 2016). Similar to Argentina and Brazil, Turkey’s fiscal decentralization is characterized by high provincial expenditures and limited or low provincial revenues which is what Perloff (1985) called as fiscal perversity. Own revenue-raising capacity is very important part of the success of fiscal decentralization. Expenditure decentralization without revenue decentralization can bring different risks as discussed earlier (Mendoza 2013; Prud’homme 1995; Tanzi 1996). Especially expenditure decentralization coupled with soft budget constraint can increase the budget deficit and debt level of local governments endangering macroeconomic management in a country (Ter-Minassian 2015). There is a severe imbalance between expenditures and revenues of local governments, creating big fiscal discipline problem in Turkish local governments. As a result of expenditure increase more than revenue increase, we see a deterioration in Turkish local government budget deficit and debt levels. Based on the Turkish Ministry of Treasury and Finance data, Local government budget deficit is increased 46.1% from 2017 to 2018. Especially budget deficit of Turkish metropolitan municipalities is increasing. Debt level of Istanbul, the biggest metropolitan municipality in Turkey,

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increased %347 from 2013 to 2017 (Humar 2019). 48% of average deficit belonged to metropolitan municipalities during 2007–2009 while the share of district municipalities was 43% and the share of provincial municipalities was 9% (Yilmaz 2013). Budget deficit leads to increase in borrowing and debt stock of local governments in Turkey. The level of indebtedness of local governments varies across countries. Total local government debt level as a percentage of GDP is 10.8% in Denmark and Italy in 2016, and 4.2% in Korea and Estonia in 2016, while it is 3.1% of GDP in Turkey in 2015 (OECD 2018). Even though the percentage is relatively low in Turkey, local government debts in Turkey account for 9.8% of public debt which is higher than OECD local government averages of 7.4% in 2016 (OECD 2018). Local governments heavily used borrowing as a source of revenue in Turkey. Share of the borrowing in municipal revenues was 5.4% during 1980–1985 which increased to 21.1% during 1996–2000 (Kazan 2011). Indeed “high investment needs coupled with the lack of fiscal discipline, insufficient income sources, high interest payments and the negative impact of increasing population on the total municipal costs caused a rise in the debt stock of several municipalities in Turkey” (Kurtulus 2006, p. 138). Because of excessive borrowing practices of Turkish local governments during 1990s, borrowing limits have been regulated by number of laws. Local governments can borrow externally and domestically according to the municipality law no. 5393 and public finance and debt management law no. 4749 in Turkey. As long as borrowing does not exceed 10% of their revaluated amount of latest budget revenues of the municipalities, they are free to borrow domestically without any consent, borrowing above this amount is only possible by a resolution of the simple majority of the municipal council and with the consent from Turkish Ministry of Environment and Urbanization. Also, local governments’ total debt stock cannot exceed revaluated amount of the latest final budget revenues, but metropolitan municipalities are allowed to borrow one and a half times of this amount. Municipalities can borrow foreign loans only for financing of projects included in the municipality’s investment program and consultancy of undersecretariat of treasury is required in this case. Local governments in Turkey can also obtain long-term funds by issuing municipal bonds but this has not been utilized successfully in Turkey (Bıcakcı and Ozgul 2017). Although various restrictions have been imposed in municipal legislation on borrowing, there are no regulations governing debt repayments and procedures to be applied to municipalities if no repayment is made (Kazan 2019). Currently, laws don’t allow local governments to go bankrupt and legally it is very difficult to attach liens to assets of local governments in Turkey. Turkey needs to establish debt financing rules just in case if municipalities don’t pay their debt (Liu 2009). The composition of Turkish local government debt stock was predominantly external debts before 2000 and predominantly domestic debts after 2000. The share of domestic debt in total local government debt was 39.1% in 1994, 36.5% in 1995, 72.6% in 2000, 91.4% in 2005, and 87.3% in 2009 while the share of external debt in total local government debt was 60.9% in 1994, 63.5% in 1995, 27.4% in 2000, 8.6% in 2005, and 12.7% in 2009 (Kazan 2011). The rate of Treasury guaranteed external loans of local governments increased exponentially during 1990s mostly due

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to legal shortcomings. Turkish local governments accumulated serious amounts of unsustainable debts before 2000 causing a severe burden on Treasury. Debts of local governments restructured twice in 2002 and 2005 in Turkey (Liu 2009). The restructuring, deleting, and postponing of Turkish local governments’ debts encouraged local governments to borrow more. Increasing borrowing also increased the interest expenditures of local governments which was 30.2% on average during 2001–2005 and unpaid interest has become the largest part of the debt stock of local governments which in turn increased the budget deficit (Kazan 2011). High debts and budget deficits of local governments decrease fiscal space and adversely impact the provision of local services. Therefore, fiscal management of local borrowing in Turkey is very important to assure debt sustainability. Increase in local debts is a risk for macroeconomic stability in any country due to raise in public debt level and public budget deficits. As studies point out increase in local governments budget deficit increases public sector budget deficits (Dillenger and Webb, 1999). This is what happened in Turkey, local governments accounted for 3.3% of national deficits in Turkey between 1992 and 1999 (Kazan 2011). As a result of higher budget deficit, macroeconomic imbalances further deteriorated in Turkey. With the changes in law, treasury guaranteed debt level of Turkish local governments decreased substantially. Currently, only 11 million USD out of 106 million USD of local government debts have been under treasury guarantee in 2017 (Table 9.4). Although treasury guaranteed loans decreased to 24.56% in 2000, 5.01% in 2005, and 3.8% in 2009 (Kazan 2011), domestic debt level increased exponentially, as discussed previously which is also subject to central government involvement. The source of debt has also been changing in which commercial banks are becoming major source of borrowing (Gumus and Yereli 2016). Local government debts to commercial bank were 12.8 billion Turkish Lira in 2014 which increased to 25.3 billion Turkish Lira in 2017 (Kazan 2019). Majority of local government debt stock belongs to municipalities in Turkey. Debt stock of municipalities in total local government debts was 96.94% in 2010 which increased to 97.96% in 2015 (Yilmaz and Guner 2017). Metropolitan municipalities have the highest debt ratio in municipal debt stock ranging from 59.59% in 2010 to 54.94% in 2015 (Yilmaz and Guner 2017). Since Turkish local governments are borrowing more from commercial banks, we can expect their interest load to be high which increases expenditure levels of local governments and potentially can cause more budget deficit. The characteristics of domestic debt is also a concern for sustainability which can cause macroeconomic issues if this borrowing goes out of control. Decentralization focusing only on expenditures creates “fiscal populism” through irresponsible expenditures by local governments (Perloff 1985; Tanzi 1996). Along with efficiency, accountability, and transparency, fiscal autonomy is the key element of fiscal decentralization. But in Turkish decentralization experience, fiscal autonomy has been overlooked. Local government reforms in Turkey failed to increase the own revenue capacity of local governments which left them more dependent on intergovernmental transfers and borrowing. Both Kazan (2017) and Yuksel (2016) have reached the similar conclusion, stating that law no. 6360 which increased the rate of the intergovernmental transfers to local governments without making any

109

116

57

173

2010

105

47

152

2011

95

41

136

2012

Source 2018 Public Debt Management Report, Treasury Undersecretary, July 2018

Paid by Local Governments

50

159

Total debt

Paid by Treasury

2009

Million USD

Table 9.4 Repayment of Treasury Guaranteed Loans of Local Government

100

32

132

2013

107

32

139

2014

103

28

130

2015

109

27

137

2016

96

11

106

2017

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legal change in their own revenue capacity, only increased the fiscal dependency of local governments in Turkey. Becoming more dependent on intergovernmental transfers is rather a feature of recentralization and a way from decentralization. Local government borrowings for their infrastructure investments are acceptable practice around the world since the benefits spread over time. Tosun, Uz and Yilmaz (2016) suggest golden rule of borrowing in Turkish local governments due to high investment requirements of local governments. Thus, borrowing for certain investment projects like capital investments can benefit local governments and might increase the welfare of the citizens. On the other hand, the increasing debt level “deteriorates credibility of the country as well as lowers the well-being of future generations” (Ulusoy and Akdemir 2009, p. 266). Borrowing can be an important financial tool for capital investments of local governments in Turkey as long as it is used responsibly. Indeed “borrowing almost encouraged” as a result of current revenue structures of Turkish local governments (Bıcakcı and Ozgul 2017, p. 118), where large infrastructure investment requirements coupled with the characteristics of the financing at the local level, makes borrowing inevitable. There are limited studies to assess the impact of fiscal decentralization on macroeconomic management in Turkey. Empirical evidence on the relationship between Turkish fiscal decentralization and economic growth is inconclusive. Sagbas, Sen and Kar (2005) analyzed the relationship between fiscal decentralization and economic growth in Turkey over the period of 1982 to 2000. Their results show that fiscal decentralization has a negative effect on economic growth in Turkey. According to authors, high current spending of Turkish local governments (like 33% of personnel expenditures in 2000) as well as high dependency of local governments to intergovernmental transfers might play a role in this negative relationship by inhibiting the development of local accountability in Turkey. Their findings are in line with the literature. Overall findings indicate strong relationship between economic growth and revenue decentralization, but the relationship is either negative or very low for expenditure decentralization (Gemmell et al. 2013). Sagbas, Sen and Kar (2005) also tested the leviathan hypothesis using the same data set. They did not find evidence to support the leviathan hypothesis in Turkey. They concluded that fiscal decentralization in Turkey did not decrease the size of the government. The result is similar to research (Roden 2003) that if major source of local governments are from intergovernmental transfers, government size increases. They explain these findings with limited discretion of Turkish local governments. However, Neyapti (2005) analyzed the impact of fiscal decentralization on socioeconomic factors in Turkey from 1995 to 1998 and finds a positive relationship between economic growth and expenditure decentralization in Turkey. Neyapti (2005) concludes that expenditure decentralization is positively related to level and growth rate of output in Turkey during given time. A recent study conducted by Tosun and Yilmaz (2010) also investigated the relationship between fiscal decentralization and regional economic growth in Turkey between 1976 and 2001 through utilizing cross section and panel data approaches in their analysis. They find a negative relationship of fiscal decentralization on regional economic growth in Turkey. They find increasing number of municipalities inversely

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related to economic growth during this period. Yuksel (2014) studied the similar relationship during 1990–2006. However, he finds a positive and significant effect of fiscal decentralization on provincial economic growth but the impact was very low. Based on the World Bank and OECD data, Esener (2019) analyzed the impact of fiscal decentralization on economic growth and reverse causality in 18 countries including Turkey. He did not find any significant relation from fiscal decentralization to economic growth as well as from economic growth to fiscal decentralization in Turkey. According to him, low level of fiscal decentralization is the real culprit behind this result. The differences among these studies might be related to time period they cover as well as methodological differences. Also, frequent administrative regulation changes especially after 2000 as discussed earlier in detail might hinder to examine the effects of decentralization. Thus, new studies should be conducted to get a conclusive result in this area. Although there are a number of studies on the impact of fiscal decentralization on economic growth in Turkey, studies covering the impact of fiscal decentralization on other macroeconomic indicators like price stability and debt and deficit are very scarce. Especially, local governments in Turkey spend more than their revenues and borrow heavily which is expected to have boosting effect on total expenditures as discussed earlier. Therefore, studies related to the impact of fiscal decentralization on price stability are crucial in terms of assessing the effects of fıscal decentralization on macroeconomic management. The current local governments’ debt level can result in more macroeconomic instability particularly when central government follows the contractionary policies. There is a wealth of literature on the problem of excessive subnational government debts undermining macroeconomic management of central government in other countries (Bomfim and Shah 1994; Dillinger and Webb 1999; Ong 2011; Ter-Minassian 2015). If debt level of local governments in Turkey goes out of control, it has the potential to compromise monetary policy in Turkey. There is an increasing risk of unsustainable local government debt burden which can turn into debt crisis in Turkey just like 1990s. As it is found, local governments were able to repay only 61.7% of their treasury guaranteed loans between 2002 and 2012 (Karabacak Nacar 2013) which have led local governments heavily indebted to treasury. Indeed “in 2013 the total receivables of treasury from local governments including overdue debt plus treasury receivables not yet due adds to twice the amount of own revenues of local governments in 2012” (Karabacak Nacar 2013, p. 136). Domestic debt of local governments adding to national debt level either will increase the borrowing requirements of treasury or will increase monetization in the country. Excessive borrowings of local governments in Turkey is a potential risk in inducing debt crisis. This is what happened in Brazil (Dillinger and Webb 1999). Therefore, making necessary adjustments to increase local government own revenue capacity as well as sustainable debt levels has crucial importance for Turkey. High dependency of intergovernmental transfers can cause inefficient use of resources even waste of resources which increases debt level and fiscal perversity especially when central government postpones, deletes, or restructures the local government debts which in turn can cause moral hazard in local governments (Akdemir 2011).

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9.6 Conclusion Fiscal decentralization can be an attractive policy option for increasing social welfare. As evidence suggests, under certain circumstances it does increase social welfare, and therefore design of fiscal decentralization is very important in any country. Fiscal decentralization in Turkey poses many challenges especially for the macroeconomic management. Turkish fiscal decentralization is characterized by high local government expenditures with limited local government own revenues which causes local governments to heavily depend on the intergovernmental transfers and borrowings to fulfill their responsibilities. Thus, fiscal decentralization in Turkey can be considered as an expenditure decentralization rather than revenue decentralization. As detailed in this chapter, this might cause instability, endangering macroeconomic management in Turkey. Increasing population also rises financial demands of local governments in Turkey. However, aggressive increase in local government borrowings along with already high and climbing intergovernmental transfers points out to risk of fiscal perversity in Turkish local governments. While external local government debt level decreases in Turkey, domestic debt level is rising unsustainably and many Turkish local governments are highly indebted. Even though treasury guaranteed loans are decreasing, unsustainable domestic debt level of Turkish local governments adds to the public debt and public budget deficits, sabotaging fiscal discipline and macroeconomic management. Besides, monetization of local government debts will create inflationary pressures in Turkey. Therefore, regulations should be made to refrain local governments from uncontrolled debt accumulation, whether external or domestic. Applying golden rule of borrowing or revising borrowing rules and limits might be considered. Postponing, deleting, or restructuring of local government debts increases moral hazard risks and decreases the accountability of local governments in Turkey. Nevertheless, there is a need to more empirical and systematic researches to discover these impacts thoroughly to reach solid conclusion. Local governments should be held accountable for the consequences of their financial actions. Soft budget constraint in Turkey leads to excessive spending of Turkish local governments, undermining fiscal discipline and causing high budget deficits. Ensuring fiscal discipline and enhancing accountability in Turkish local governments are crucial to overcome adverse impacts of fiscal decentralization on macroeconomic management in Turkey. To do this, increasing own revenue capacity of local governments in accordance with current conditions, applying hard budget constraint, and taking strict measures on borrowing rules and limits along with strengthening the coordination between central and local government in Turkey are important. Failure to address these issues increases risk of macroeconomic instability in Turkey.

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Asuman Çukur is an Assistant Professor of Public Finance at the Ankara Yıldırım Beyazıt University, Faculty of Political Sciences. Prior to this, Dr. Cukur earned her Master of Arts in Economics from University of Nebraska-Lincoln. Following her graduation she worked as a financial analyst at various insurance companies in USA. After returning to Turkey Dr. Cukur obtained a PhD in economics from Mugla University. Dr. Cukur has published research in public economics, public finance, health economics, poverty, and income inequality. Dr. Cukur is currently carrying out many research on the impact of fiscal decentralization, especially focusing on the relationship between fiscal decentralization and income inequality and fiscal decentralization and economic growth in Turkey.

Part III

Accounting, Financial Reporting and Auditing in Public Sector

Chapter 10

Public Sector Accounting Reform in Turkey: Moving Cash to Accrual Accounting Necdet Sıtkı Yakupçebio˘glu

10.1 Introduction Political events and wars in the first quarter of the twentieth century resulted in the disintegration of empires and kingdoms and foundation of new states instead of them, the Republic of Turkey was founded on the Anatolian territories of the Ottoman Empire. Since economic resources of the people living through the War of Independence were limited, it was obligatory to perform statist economic policies after the proclamation of the Republic. Therefore, the state, which was the biggest consumer for a long time, had a great influence on the national economy. Being the biggest actor in the economic life of the state led to the need of making legal regulations in economy. The most important one of these regulations is possibly Muhasebe-i Umumiye Kanunu (General Accounting Law) no 1050 dated 1927. This Law made arrangements on the organization of government budget and government accounting. Instructions on Treasury Account Procedures dated 1928 introduced journal system and accounts to be used in the government accounting. The second half of the century witnessed World War II. In the post-war period, states assumed important tasks for ensuring rapid improvement of socioeconomic life by healing war wounds; within this concept, the governments realized important activities on the management of the national economy by performed economic policies. Thus, the importance of the states within the national economies increased more and caused structural changes in the state activities. The improvements in the functions performed by states, the need of re-arranging social and economic life showed their effect in Turkey as well and led to changes in the government accounting system which had been applied until 1948. General Regulation on Government Accounting and Government Accounting Transaction Regulation were published. N. S. Yakupçebio˘glu (B) Ministry of Industry and Technology, Ankara, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_10

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Therefore, the diversity of obtained data increased thanks to new accounts in the system and document format was separately arranged by accounting transactions. In the period after 1960, continuously increasing, changing, and developing state activities promoted national public and private sector relations while bringing new international commercial and financial relations. Changing and developing international relations led to an increase in the need for information introduced by government accounting. In the period when the role of states in economies was relatively little, government accounting which was focused on budget implementing activities assumed the task of being resource of basic and reliable data on the public financial management due to simplicity and rarity of information required in terms of public financial management. This task caused change and development in government accounting, commitment and accrual accounts were added to our chart of accounts; the number of off-balance sheet accounts increased. In 1990, these two Regulations, which had been implemented since 1948, were merged under the name of Government Accounting Regulation. The aim of the change was to simplify the language of the legislation, increase the number of accounts, and facilitate the transactions. Moreover, considering technological developments, government accounting system had a structure which would enable accounting records, ledge, table, and documents to be arranged by computer. The beginning of the most radical change in Turkey goes back to the “Public Financial Management Project” which was signed between the Ministry of Finance and the International Bank for Reconstruction and Development (IBRD) in 1995 in terms of government accounting which could be basically defined as a system recording monetary transactions of the state, ensuring their control by budget targets and reporting financial condition as of certain dates and activity results as of financial periods. Within the project, a transition from cash basis to accrual basis was aimed in time, and accrual basis was adopted by Accounting Regulation on General Budget Agencies and Annexed Budget Administrations dated 2004. Accordingly, obtaining correct, reliable, timely, necessary, and sufficient data became easier for making decisions and estimations. Government accounting system has become an indispensable factor in meeting accountability and ensuring financial transparency while contributing to decision making processes of decision makers and public resource managers in national economies. The study aims to introduce the developments in government accounting in a historical perspective in Turkey. In this context, firstly principles which were adopted in government accounting field after the foundation of the Republic of Turkey, and then transition to accrual-based government accounting will be analyzed. Finally, accrual-based government accounting records and financial reports on this basis will be included.

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10.2 Historical Development of Government Accounting in Turkey After the Foundation of the Republic In Turkey, government accounting system was based on the General Accounting Law No. 1050, which was dated 1927 and applied until 2003 and considered as the financial constitution. It determined the basic rules of the government accounting and budget. According to this law, as the purpose of government accounting in Turkey is to realize the income and expenses of the government accounting in Turkey within the framework of an account plan where the income and expenses of the government are harmonized with the budget applications (Sevim et al. 2008, pp. 2465–2479). But government accounting system determined by that law was not included in monitoring of the state’s assets and it was considered one of the important shortcomings. However, important changes had been experienced in the government accounting in nearly seven decades, recording method was not been changed. But, in 1994, economic crisis caused to researching new approach in aspect of financial management in Turkey. In this context, Expenditure Management System of Public Financial Management Project was signed in 1995. In the scope of that Project, the study which would compose new budget classification that was suitable to international standards and developed a new accounting system which supported that classification was commenced. In 2001, the works were started for transition into accrual-based accounting. In 2004, with the new regulation the assets and liabilities were started being monitored accordingly. After Law No. 5018 was issued, the accrual-based accounting has been officially accepted and started being applied. In this context, it will be more useful to consider the developments in the nearly eighty-year period until the transition to accrual base accounting.

10.2.1 Period from 1923 to 1948 The year of 1918 witnessed the end of World War I and against the occupation, the War of Independence was started in 1919 in the Anatolia, the Turkish Grand National Assembly (TGNA) was founded in 1920, and the First Government of the Assembly independent from the Ottoman Government was appointed. However, the First Government had to take military and political decisions mostly since the era coincided with national struggle years. Accordingly, the arrangements which were put into effect during war by the Empire in both economic and social life were continued to be implemented. After the War of Independence was won, the Republic of Turkey founded in 1923 did not abandon present financial legislation instantly and used financial legislation and financial management structure of the Imperial era for a few years (Yakupçebio˘glu 2013, p. 376). So, in this period the government accounting system was based on dual recording procedure and since bookkeepers could not comprehend dual recording well there were some disruptions

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in implantation; thus it became impossible to receive accounts from bookkeepers (Sa˘gcı 1956, p. 196). The Constitution of 1924, which was ratified following the proclamation of the Republic and the first Constitution of the Republic of Turkey, determined state organization, fundamental rights, and rules to be applied in financial subjects such as taxes, budget, and final account, also the budget right was arranged by all means. Following new Constitution, works for adapting government accounting to the current conditions were started. The first amendment was made in 1925, “Esas Defteri” (Main Book) was formed in order to show all account activities in one page, and a system similar to the American procedure (ledger journal) was started to be used in District Subdivision of Treasuries, Division, and Army Corps accountings (Çolak and Da˘g 2009, p. 19). In this period both organizational and legislative changes were experienced in terms of government accounting. On one hand General Accounting Law No. 1050, which would be in force for decades, was introduced, and Muhasebat Umum Müdürlü˘gü (carrying out the tasks of present General Directorate of Public Accounts and Financial Control) was founded as three central units of the Ministry of Finance on the other hand. Although the efforts for improving government accounting system started by little changes at the first years of the Republic, they resulted in such a radical change as putting General Accounting Law No. 1050 into effect on May 26, 1927. After the foundation of the Republic, it is accepted that the ground of government accounting in Turkey is this Law (Sahin ¸ 1982, p. 7). As a matter of fact, the Law had been the legal ground of the government accounting system of Turkey for seventy-six years in the force. General Accounting Law regulated the provisions about collecting state revenues, making government expenses, and preparing final accounts and determining responsible ones of mentioned works. In other words, the Law presented main principles of the budget, determined authorities and duties of accrual departments, accrual officers and bookkeepers, and took revenues and expenses of the state under control. The law was accepted as the financial constitution for the period during which the law remained in force. After the law was published in 1927, Instructions on Treasury Account Procedures was published in 1928 (Çetinkaya and Yıldırım 2006, p. 63). The regulation reduced the number of some accounts by repealing some accounts and merging some others and changed operation ways of some accounts (Sa˘gcı 1956, p. 196). Accordingly, it is accepted that the Regulation merged dual recording system and cameral accounting system and formed a system specific to itself (Feyzio˘glu 1966, p. 345). As a matter of fact, since appropriation and commitment operations of budget, and revenue and expense accruals were excluded from the accounting, “cameral accounting system” was adopted (Kaplan 1992, p. 9). The Regulation not only ensured the qualification of cameral accounting to the government accounting by its improvements but also allowed taking advantages of dual recording by operating accounts reciprocally. However, the system criticized and amended in 1948 since it had contradictions in terms of accounting principles and could not present revenue and expense results clearly, did not reflect actual financial

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situation of the Treasury and consignment accounts included different accounts due to their characters. Although Instructions on Treasury Account Procedures dated 1928 had brought many innovations to the government accounting system, it was criticized strongly for 20 years during which it was in force.

10.2.2 Period from 1948 to 1990 It would be more appropriate to divide this period into 1948–1953 and 1953–1990. Because activities related to calculation of the national income and resource of national income, and estimation and appreciation of changes in national income in advance were started, therefore, expectations in government accounting increased in Turkey in this period. New arrangements aimed to show that to what extent public accounting system and financial policy were conducted without impairing the increase of national income, and general politic objectives to be expected with the increase of national income were achieved (Yakupçebio˘glu 2013, p.379).

10.2.3 Between 1948 and 1953 Criticisms and experiences obtained during the implementation of the Instructions commenced a long term work, consequently, General Regulation on Government Accounting and Government Accounting Transaction Regulation were prepared. Accordingly, the mentioned Regulation entered into force on January 1, 1948. Difference of new accounting system from sui generis classification journal was that new accounting system depended on dual recording procedure and recorded some unrecorded securities into account (Sa˘gcı 1956, p. 197). The Regulation, which determined the basics of government accounting system implemented in Turkey until 1960, adopted journal voucher instead of classification journal in the Regulation dated 1928 and made radical changes in subsidiary books (Di¸sli 2004, p. 14). Some of the asset accounts being traded complexly in each other in classification journal procedure were separated according to their qualification; on the other hand securities such as “External Debts, Subsidiaries, Revolving Funds, Contractor Bonds, Treasury Sureties, Stocks and Bonds, Treasury Gold in Safe and Banks” which were not included in public accounts and governed by special records completely out of the accounting system. Although applicable Regulation was a budget accounting depending on dual recording procedure, it was not free from tracks of classification journal, accordingly, did not establish an accounting system recording and detecting all accounts about the budget. In other words, the system was separated from cameral accounting generally but adhered to the cameral system by leaving some operations such as

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appropriation, commitment, and revenue and expense accruals out of the accounting (Ataç et al. 2004, p. 143). Although General Regulation on Government Accounting brought many innovations, it was criticized on the grounds that it could not form integrity between budget accounts and government’s assets (Ataç et al. 2004, p. 144). Other criticisms of foreign and Turkish experts about the Regulation were as follows (Sa˘gcı 1956, p. 198): • Objectives and qualification of used accounts were not clear, • Sometimes by not mentioning closing way of accounts and not being able to determine reserve account, one-sided recording was used in keeping accounts, therefore, it did not comply with rules of dual recording, • Chart of accounts were created without considering the necessity of recording activities of operation into account under technical basics and without determining the relation between features of miscellaneous operations and classification according to the results. Due to the criticisms, after partial pilot implementation which brought annex and amendments in the General Regulation on Government Accounting and prepared as a result of work in government accounting, Annex and Amendments to General Regulation on Government Accounting entered into force in May, 1953. The most important feature of Annex and Amendments was that the system on actual collection or payment grounds was abandoned and accrual basis adopting the record of debits and credits were started to be used instead (Tarhan 1962, p. 55). The dominant view in the preparation of new Regulation dated 1953 was to determine what a perfect government accounting system had to offer firstly and then to ensure its realization in accordance with applicable legislation and within the boundaries of possibilities. The first condition of the system built by the Regulation was the obligation of depending activities of the government, features of relevant operations and obtained results on a basis reflecting clearly and completely. The second subject considered as important in terms of the regulation was to ensure conformity of the system to requirements of both budget accounting and property accounting and establish a connection between these two accountings. Accordingly, on one hand accounts were characterized in detail and classified in terms of budget estimation, budget, balance sheet accounts, and off-balance sheet accounts; on the other hand, these accounts were grouped according to various funds forming the subject of budget accounting. In other words, ordinary budget, investment budget, special revenues, borrowing, and payments, each one of which was accepted as a single title, were evaluated separately (Sa˘gcı 1956, p. 199). Accounts were separated under four main groups according to applicable new system. The grouping aimed to shape government activities without being under the effect of classic account classifications. Within the scope, • Budget estimation accounts recorded estimations and allocations composing basics of the activity, • Budget accounts recorded realized activity,

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• Balance sheet accounts recorded rights and liabilities of the state as a result of the activity, • Off-balance sheet accounts recorded activity information and they followed subsequent changes. Although the improvements seen in this period raised the idea that balance sheet of the government could be issued since accounts could be kept fast and accurately, it was not realized. As a matter of fact, Law No. 1050 restricted the framework about management and accounting of government’s asset and prepared provisions about securities and cash accounting, and accountants responsible from them separately. In fact, the Law left great amount of government securities out of control. Similar situation was valid for real estates. Some of assets were recorded as provisions of the law for recording and following real estates were imperfect, and value changes of recorded ones in time could not be indicated in records (Yakupçebio˘glu 2013, p, 381). Therefore, it was agreed that a final decision had to be taken on principles of recording securities and real estates in accounts, and that assets to be capitalized by taking inventory had to be determined, classified, and their acquisition, purchase and replacement values had to be detected, and their amortization processes had to be determined.

10.2.4 Between 1953 and 1990 This period lasted for approximately 40 years, and the Regulation dated 1953 was amended during the period and it was agreed that these amendments made the system complicated. The Regulation dated 1953 was amended and appended in 1974, 1975, 1977, 1981, 1986, 1987, and 1989. These amendments were made so as to include commitment and accrual accounts and increase the number of accounts by adding off-balance sheet accounts (Taflan 2008, p. 28). Entering Account Regulation of Revolving Fund Accounting into force on February 15, 1968 was another improvement seen in the period. Revolving fund institution was introduced into the Turkish financial system in the most comprehensive way via Law No. 1050. However, it remained insufficient in subsequent years due to the increase of government activities and variety of services (Kartalcı 2012, p. 111). Reform works for developing government accounting system were commenced and assistance was received from foreign experts in these works in 1970s. Report “Proposal on Central Accounting System” prepared by Julian F. Cannon and submitted in June 1971 was an important example for the works in this framework. Mentioned report foresaw that submitted central account system was to be practiced within the scope of General Directorate of Public Accounts and accounting units under the control of the General Directorate. Also, it was stated that works for conducting central reporting and accounting operations by using electronic IT devices would be beneficial (Güler and Gülçiçek 2006, p. 64).

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A large-scale project under the name of improvement project for government accounting was commenced in June 1975. It was ruled that the project to be conducted by the Ministry of Finance would be financed by United Nations Development Program and state funds. After the first preparatory works, it was agreed that a foreign accounting consultant would be beneficial for the project and an intense education program had to be prepared. Financial difficulties in 1975 and 1976 delayed commencement of the project (Yakupçebio˘glu 2013, p. 381). An accounting expert was appointed in order to work in the project by the IMF with the approval of the Ministry of Finance in 1977, and a senior consultant participated in the project group in the same year. Although the works continued, the project was able to be approved by the Decree of the Council of Ministers dated February 28, 1979 referring to Article 3 and 5 of the Law dated May 31, 1963 and numbered 244 on Making, Enacting, and Publishing International Agreements, and Entitling the Council of Ministers for Making Some of the Agreements. The project has continued until now by the approvals of Ministers since it is beneficial (Yakupçebio˘glu 2013, p. 382).

10.2.5 The Period from 1990 to 2004 and Transition Works to Accrual-Based Government Accounting During the period 1990–2004, there had been a significant improvement on system of public financial management in Turkey. It was inevitable that this enormous development had an impact on the structure of the public budget and the public account. Even though the big part of studies on public accounting system had been nearly completed in the late of the period, the public accounting system was under the transition process for requirements of the new aspects of the system in the beginning of the period. The various regulations on government accounting with all their annexes and variances have been repealed by/after combining these regulations under a specific unique regulation. These regulations had been repealed since they did not provide integrity on relationship between budget accounts and asset accounts although they offer procedures and principles about assets account and period-end transactions. They also had a lack of ability to secure to set the accounting system desired and became quite complex with different regulations which were made for upgrading the system. In consequence, it should be noted that these upgrading regulations were built to reach the aims illustrated below (Çolak and Da˘g 2009, p. 21). • Suiting government account to modifying legislation, • Combining the records of transactions and entries in a single regulation, • Setting to structure for providing a facility to compose ledges, tables, and documents in a computer system,

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• Reduction of the accounting records and simplification the transactions, • Clarifying the definition based on previous regulations. The regulation brought the methods for practicing the cash-based budget implementation in general and annexed budget administrations. Besides, it had provisions about obligations and did not generate cash like liabilities, investments, assets such as lending and off-budget capital formation and recording accrued income. Additionally, the Regulation also allowed for keeping the accounts open for a month to complete the transactions realized in previous fiscal year by not closing accounts on December 31 which is the end of the fiscal year. Assessing the Regulation with these features, it is accepted that the entering methods of government accounting accredited for general and annexed budget administrations is a method between modified cash basis and modified accrual basis. The Regulation passed in 1990 has contributed to simplification of the current accounting system instead of bringing new aspects. As a result of the political progress experienced in the same period, socialist regime was drawn to an end and management methods of countries changed. Afterward these changes, competitive market tendency showed an increase, management system leaned to private sector system and process. Therefore, private sector accounting practicing had begun to influence the government accounting system. On the other word, the government accounting system was under the influence of the commercial accounting. This development caused conversion to accrual basis recording methods from the cash basis. Both changes in the World and experienced 1994 crisis caused to researching a new approach an aspect of the financial management in Turkey. Especially, technical and political factors which affect budgeting system negatively played an important role in the emergence of new financial management and auditing apprehension requirement. On the date of October 10, 1995 project agreement which aimed to solve “Expenditure Management” system of Public Financial Management Project was signed between the Turkish Republic Ministry of Finance and International Bank for Reconstruction and Development (IBRD). In the scope of that Project, the study which would compose new budget classification that was suitable to international standards and developed a new accounting system which supported that classification was commenced. In accordance with that Project a budget classification which was related to determine the place of state in the national economy came to order. While the system called Analytical Budget Classification (ABC) was being designed, adherence to generally accepted standards. In parallel with the state budget system studies, works in the field of public accounting were tried to be provided. In the same year, a working group was formed within the Ministry of Finance (General Directorate of Public Accounts) in order to establish an accrual-based accounting system that had common standards and would be applied in the public administrations which were in scope of general administration. General Directorate of Public Accounts conducted transition works to accrualbased accounting while the General Directorate of Budget and Fiscal Control conducted new budget classification works. General Directorate of Public Accounts

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formed a working group in order to develop an accrual-based accounting system in public administrations under the general government in 1995. The working group formed by General Directorate of Public Accounts determined five stages for building accrual-based accounting and reporting system covering general government. These stages are as follows (Kerimo˘glu 2002, p. 98,99): • Build an accounting information system which allows producing information in desired detail and time, • Prepare legal infrastructure which is consistent with international standards and can be implemented to units under the general government, • Create a consolidated and comparable chart of accounts which is classified as conformable to reporting needs of accounts, • Test new accounting system and complete training works, and • Implement. The first concrete output of the accounting stage of the project studies Revolving Fund Business Accounting Regulation was issued on June 13, 1999. The Regulation determined the principles and procedures of accounting records in the general budget entities and annexed budget administrations owned revolving fund enterprises. Thus, accounting systems applied in different institutions had become a single (Gül¸sen et al. 2007, p. 10). The Ministry of Finance carried out studies of accrual-based government accounting on the one hand, made an effort to the creation of data processing infrastructure due to the difficulty of execution of these new accounting system studies without automation on the other hand. The Ministry of Finance launched a web-based project of automation of the accounting offices called “say2000i” in 1999. Aims of the project are as follows (Teker 2013, p. 355): • Transferring all of approximately 1.500 accounting offices which make expenses and collect revenues of the government throughout the country to automation in a short time, • Monitoring accounting information of the government daily, • Introducing efficient decision support mechanisms to economy management, • Collecting personnel and salary information of all public officers in a central database and calculating salaries from the center, • Monitoring health expenses through a central database, • Satisfying office automation and last legislation following the needs of accounting offices and improving work and service quality in accounting offices. As a result of the project, accounting units automated and established a network that allows in constant communication to accounting units with each other and the General Directorate of Public Accounts. After the completion of the training on the use of the system and transfer transactions in accounting units, tracking of State accounts’ online on a daily basis began on April 2002 (Öz 2007, p. 64). Thus, the results of the public accounts and budget implementation could be given the support to decision-making management of the economy (Aktan 2006, p. 11). In addition, say2000i project computerized accounting transactions and provided consolidation

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of government accounts in the virtual environment. So, say2000i makes significant impetus reform efforts in the field of government accounting. Initiated projects in the field of public financial management and government accounting continue in full swing, this time Turkey faced of economic crisis in 2001. After, the 2001 economic crisis, measures were taken to ensure the stability of the attack by beating the structural reforms implemented, as well as government institutions and activities of all financial transactions of redefinition and understanding provided by the budget and accounting systems. In order to ensure this, ABC and accrual-based accounting were implemented as a pilot with the selected institutions in the state budget for the year 2002. In 2003, the practice spread to all of the general and annexed budget institutions and organizations continued piloting a selected unit of those. Emergence of the desired results of this pilot application has been an important factor to make a decision about transition to accrual-based accounting in public administrations from 2004 (Ministry of Finance, General Directorate of Public Accounts 2003). Both transferring of financial resources which provided by IMF under the loan agreements signed between Turkey and IMF in times of crisis as well as European Union negotiations process which began after 1999 Helsinki summit where Turkey gained candidate status, criteria that must be fulfilled on public financial management always presented as a prerequisite to Turkey. In this case, it accelerated the conclusion of the Public Financial Management Project and Public Financial Management and Control Law No 5018 and it was adopted on December 10, 2003 and published in the Official Gazette dated December 24, 2003. The Public Financial Management and Control Law No 5018 came into force instead of the Law No 1050, and brought a drastic change in the public financial management system. The Law allows accountability and drawing the limits of the financial system correctly. In addition to these, Law enables the creation of government accounting system and financial statistics according to international standards and regulates the principles of preparation, implementation, and conclusion of central government’s budget. Law targets the contemporary principles of financial management like as an effective, economic and efficient use of public resources, transparency, accountability, accrual-based government accounting, analytical budget, and internal control system. Perhaps the most important innovation which brought by Law No 5018 in the field of government accounting is an accounting system that is in compliance with international accounting and reporting standards. Determining the scope of the public financial management System of National Accounts (SNA) 1993, the European System of National and Regional Accounts (ESA) 1995 and the Government Finance Statistics (GFS) 2001 was based; the definition of general government sector of these systems has been adopted in scope of the public financial management. It is decided that pilot implementation of new accounting system brought by this Law all the institutions under the general government. The law decreed that accounting records and transactions for all general government units except state-owned companies are standard and base on an accrual-based accounting.

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After receiving successful results of the pilot implementation, “General Government Accounting Regulation” was published in the Official Gazette on November 19, 2003 by the Council of Ministers Decision dated October 16, 2003 and 2003/6334 no. That Regulation is about accounting and reporting standards and framework account charts which will be used by the units included in the overall management. However, the date of entry of this Regulation’s into force was postponed until the entry into force of regulations in accordance with Law No. 5018. In 2004 on the other hand, Budget Law prepared completely on the basis of ABC and Regulation on Accounting for General and Annexed Budget Institutions depended on accrual-based was put into force officially. (Official Gazette No. 25379 published on February 20, 2004). In accordance with Article 463 of this Regulation, the Government Accounting Regulation which had been implemented for 14 years was repealed. These deficiencies of the Regulation repealed can be listed as follows: (Duman 2004, p. 8) • There was no accounting chart of accounts which was suitable for combining common accounting and reporting standards including general government and results. Accordingly, there was not an accounting unity in public institutions, • Accounting system focused on budget implementation, • Accounting systems depended on cash basis with a few exceptions, thus sufficient data was not produced, • Accounts were not classified according to accounting and reporting logic in prepared chart of accounts, • Government accounting was not sustainable with a few exceptions. Action and budget implementations remained in relative period, • Actually, government accounting systems were not suitable for financial reporting producing result, • Government’s asset was not recorded in accounting and could not be reported, • The scope of the accounting systems was limited. Detailed information could not be produced. Semi-financial operations were generally out of the accounting. The accounting system established by Regulation on Accounting for General and Annexed Budget Institutions, included the movable and immovable goods, domestic and external debt. It included all of the resources that were used in the production of public services and favorable to produce financial data used to make administrative decisions with monthly and annual financial statements, income and expenses comparison and analysis. It also allowed to reporting expenditures provided by tax revenues and to estimate the costs of public services. In the Regulation, accounts are classified and detailed according to the nature of them and in accordance with universally accepted principles. The new accounting system has made it possible to produce detailed information. This new accounting system established under the provisions of Regulation excepted to record the financial transactions on cash basis for the budget process and accrual basis for the rest of the financial processes. Accordingly, revenues or expenses in the chart of accounts framework which was prepared in synchronization

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with the IMF’s GFS 2001 Manual of the general government public administrations’ became subject to accounting records regardless of whether they accrued at that time or not. Through the implementation of accrual-based accounting in each of the public administration and the general government as a whole, revenues and costs incurred as a result of the activities would be exposed. Thus, the general government’s operating costs could be identified. These costs would be able to give an idea about the performance of those officials responsible for public administration. Financial reports would be prepared based on the data in the accounting records and statistical methodologies within the framework of integrity, reliability, usefulness, validity, and accessibility principles in accordance with international standards. The general purpose of financial reports to provide comprehensive information about the financial position, performance, and cash flows of an economic unit to users who were charged in deciding the allocation of resources. Another innovation in the field of public accounting is founding of Government Accounting Standards Board which works under the Ministry of Finance.

10.3 Period Afterwards 2004 and Implementing of the Accrual-Based Government Accounting In 2006, all articles of Law No. 5018 was put into force. Another innovation brought with the Public Financial Administration and Control Law is, as stated in article 49, the formation of a Government Accounting Standards Board, and its employment under the body of the Ministry of Finance. The Ministry of Finance, General Directorate of Public Accounts took a decision to adopt and implement International Public Sector Accounting Standards (IPSAS) which were prepared and issued by the International Federation of Accountants (IFAC). In this context, IPSAS documents were translated and examined and then the Draft Texts for Government Accounting Standard were started being prepared. Until the end of the 2018, thirty standards have been issued. As the state accounting standards were published, amendments were made in order to comply with the General Government Accounting Regulations and Central Government Accounting Regulation that came into force after Law No. 5018. Especially in 2015, significant changes were made. The changes made in 2018 were relatively limited.

10.3.1 Accrual-Based Accounting Registration methods in government accounting systems are based on two basic methods, cash and accrual basis. The method of cash-based registration has adopted

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the recording of the expenditures of the state accounting systems when the expenditures made by the budgets are paid and the revenues that finance these expenditures are also collected. When this budget-oriented registration system has not been able to provide the data needed by public financial management over time, the efforts to improve the registration methods have resulted in the use of full accrual-based registration method (Teker 2013, pp. 353–372). In the accrual-based recording method financial transactions and events are recorded when they occur regardless of when the cash flows will occur. Therefore, in order to account the expense in the accrual-based registration method, it is not required that the payment be made for the accounting of the income and the collection of the expense. In other words, according to accrual basis, an economic value is recorded when created, converted, exchanged, transferred, and canceled (Government Financial Statistic Manual 2014, p. 49). In the selection of the method of registration to be applied in the state accounting, the cash-based operation at one end and the other end is carried out on a plane with the full accrual basis. The results of the studies carried out to address the shortcomings of the cash basis between these two extremes are the modified (partially modified) cash-adjusted and partially (modified) methods of accrual basis. However, in addition to these four recording methods, there are also opinions that accept the existence of a commitment-based recording method as a fifth method (Reed and Swain 1997, p. 44).

10.3.2 The Innovations of the Accrual-Based Government Accounting The most important innovation brought by the state accounting system is accountability and transparency. Accountability is clearly defined as the responsibility of explaining and reporting is a basic tool that serves this. Corporate financial reporting provided by the accrual-based accounting system and the accountability function can be fulfilled. Financial transparency is one of the most important means of accountability of the state. A transparent system provides clear information to users about what is used, how it is used. Therefore, it can be said that these factors realized with the accrual-based accounting system increased the confidence in public management and provided efficiency and effectiveness in the use of resources. When the changes in the state property in the years are not stated in the accounts, the situation of the goods cannot be known, the state goods which are not in the accounts, the state’s borrowing potential is hidden and the real size of the state can’t be determined. These deficiencies in the cash-based accounting system have been eliminated and the material and intangible assets have been added to the account plan. Therefore, the assets that are currently embezzled by the state can be followed up by the accounting system currently in use and the increase and decrease in the state assets can be seen clearly. One of the tools that serve this purpose is also depreciation. When the size

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of fixed capital assets of states is taken into consideration, the importance of depreciation is obvious. With the accrual-based accounting, the depreciation for tangible and intangible assets has started to be calculated so that the decrease in the values of these assets is reflected in the financial statements. The accrual-based government accounting system of Turkey rather keeps the record of the expenses and revenues of the economic transactions made by the government. Thus, it is wrong to think that cash based in the government accounting system has been completely abandoned. The current system uses a mix of cash and accrual principles to record accounting transactions. In terms of budget transactions (for example, payment of salary, collection of tax revenue etc.) are recorded on cash basis. Otherwise, in terms of operations which are not related on budget transactions are recorded on an accrual basis. In order to establish the connection between the two systems and to produce accounting reports, cash basis and budget reports based on accrual basis, reflection accounts are used. Expenses on an accrual basis are recognized when a government debt is incurred and income is accrued. With this registration method, information on the state, its assets and obligations is complete timely registration. Both the budget results and the operating results were obtained from the accounting data and the real debt and the real receivable were clearly seen. With the introduction of the accrual-based accounting system, the income and expense of the state can be seen as clear and accurate. With the arrangements made, government accounting has become capable of performing the functions expected from accounting. Accounting unity was provided in the public sector and accounts of accountants became collectible in a center. The monitoring of state assets and liabilities in state accounting represents a major reform and is a major step toward ensuring transparency.

10.3.3 The Difficulties of the Government Accounting Turkey has experienced comprehensive changes in the government accounting system after 2004. Of course, time is needed for such radical changes to reach the expected goals. While awareness increased compared to the first years of transition to accrual-based government accounting, institutional conservatism decreased, and although the regulations in secondary legislation were very close to international standards, it is still a fact that government accounting faces some difficulties. These challenges can be grouped under the following three main headings.

10.3.3.1

Diversity of the Public Institutions

One of the major challenges for the state accounting practice in Turkey is the diversity of public institutions. This diversity directly affects the budget structures of the institutions, chart of accounts and the financial reports they issue. The most important issue here is actually financial reports. The main difficulty in consolidation stems

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from the definition of the reporting unit in the government accounting legislation. Since the reporting unit differs in some financial statements, elimination of transactions between these reporting units also causes difficulties in the consolidation phase. For example, a single cash flow statement is organized for all administrations within the scope of the general budget, which belongs to the treasury and finance ministry. However, all public administrations other than the general budget may issue their own cash flow statements. In other words, different institutional structures cause different accounts and different financial statements and hence consolidation difficulties.

10.3.3.2

Error in the Perception of Government Accounting

In Turkey, government accounting has not had the attention it deserves until end of the 90 s. In other words, accounting has been neglected in the public sector. Nevertheless, the first thing that comes to mind about accounting in the public sector is the cash and bank account, the accounting record receipt; and the public sector’s priority is still budgetary data. However, Turkey began to use loans from international institutions such as the IMF, lived due to the economic crisis in 1994 and 1999, the Helsinki Summit of EU candidate country wins, it was under an obligation to conduct a comparable reporting according to international standards. International account systems such as GFSM 2001 and ESA 95 have a significant share in the fulfillment of this obligation. Thanks to those account systems such the public sector has recently started to understand that only a small part of the budget has formed the accounting department and should only be seen as a series of financial transactions followed in accounting system (Sevim et al. 2008, pp. 2465–2479). Although this understanding has made an important step, it cannot be said that it has reached the desired stage.

10.3.3.3

Insufficient of People Trained in Government Accounting

After the 1980s, the private sector has shown a significant improvement in Turkey. The collapse of socialist regimes in the world and the crossing of capital in the period coincides with this period.This situation increased the interest in private sector accounting and decreased the interest in government accounting. Although this interest has started to increase with the transition to accrual-based government accounting in Turkey, it will take a considerable time to reach the desired level. Because the state accounting awareness in the academic field is very new. As a lesson, government accounting is still a subject under the heading of public finance in many universities, whose scope is very general. Therefore, the duty of education in the field of government accounting is carried out by the Ministry of Treasury and Finance, which is responsible for making the necessary arrangements. This situation causes to inadequacy of the number of qualified people in the field of government accounting. The public university collaboration tool can be used to address this lack. In fact, this method will be realized by transferring the knowledge of the personnel of the

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Ministry of Treasury and Finance specialized in the field of state accounting to academicians in universities. This will increase the awareness of government accounting in the academic environment. In the continuation of the process, academic knowledge in accounting will start to contribute to government accounting practices. The continuation of this cooperation is an important requirement for developments in the field of government accounting.

10.4 Conclusion After the establishment of the Republic of Turkey in 1923, statist economic policies were adopted because of conditions of the country. As a result, the state had become biggest consumer in the economic life. Thus financial regulations had been put into force as soon as possible. However, the real turning point in terms of the organization of state accounting was the General Accounting Law no. 1050 dated 1927. Considering the fact that the principles adopted by the Law were in force for 76 years, it is clear that how appropriate provisions are involved. With the regulations that had been enacted after the Law state not only accounting principles were adopted but also organizational structure of state accounting formed. The data presented by the state accounting changed in conformity with changes in the world due to activities carried out by states varied. These changes led to constant criticism in concerning deficiencies of accounting regulations in Turkey. The criticisms were taken into account by governments; government accounting field studies had been conducted in order to achieve a permanent change for the better. Today it would not be wrong to say that the efforts continue within this framework of this objective. However, the most important modifications in state accounting were in scope of a project named as the “Public Financial Management Project” which was subject of an agreement signed by the Ministry of Finance and the International Bank for Reconstruction and Development (IBRD). New understanding emerged in terms of public financial management with this agreement signed after the 1994 economic crisis in Turkey. Here, of course, the importance of relations with international organizations should not be ignored. Indeed, the economic data is important in dealing with these organizations. For example in order to receive credit from the IMF and the EU, these organizations should be ensured about economic criteria that had been determined by them previously. Therefore, to obtain accurate and timely data on the national economy carries a lot of weight. In this context, say2000i project has been implemented allowing to follow-up the state accounts electronically in realtime. Efforts continued by adopting accepted accounting practices by organizations such as the IMF, United Nations and European Union. In other words, accrual-based accounting system has been implemented while accounting system based on a cash basis was abandoned. One of the most important objectives of Law No. 5018, which is the legal basis of an accrual accounting system and the most concrete output of the project in

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question, is to ensure financial transparency. It is only possible to provide financial transparency and accountability which is another important concept while ensuring correct, timely, comparable and accessible financial statements. For this reason, “Regulation on Accounting for General and Annexed Budget Institutions” which has been put into force in 2004 is very important. Indeed, with this Regulation all kinds of state assets and obligations, revenues and expenses had been able to get recorded. Financial statements that determined in it allowed obtaining the data used to make administrative decisions. Although some amendments have done in this Regulation since 2004, these were just consisted of issues such as the chart of accounts or coverage. In other words, changes have been done so far have been undertaken by the Ministry of Treasury and Finance. However, they are mostly been at a legal level and could not be carried to the academic field. It is clear that the Turkish Government Accounting, which has a deep-rooted past and which is capable of showing the financial risks that cause crises to the economy management in a timely and clear manner, can make much more significant gains if it is supported scientifically by academic studies. When accrualbased government accounting is supported by scientific approaches and technological developments, the expected targets will be reached in a shorter time.

References Aktan, H.B. (2006). Türk Kamu Mali Yönetiminde Saydamlık. Vergi Dünyası Dergisi. 298, (11–14). Ataç, E., Co¸skun, G., & Mo˘gol, T. (2004). Devlet Bütçesi. Eski¸sehir, Turkey: Anadolu Üniversitesi Yayınları. ˙ Çolak, H.B., & Da˘g, Ö. (2009). Mahalli Idareler Muhasebesi. Ankara, Turkey:Güncel Mevzuatı Ara¸stırma ve E˘gitim Derne˘gi. Çetinkaya, Ö., & Yıldırım, Z. (2006). Devlet Muhasebesi; Teori ve Uygulama. Bursa, Turkey:Ekin Kitabevi. Di¸sli, M. (2004). Tahakkuk Esaslı Devlet Muhasebesi. Ankara, Turkey: Muhasebat Kontrolörleri Derne˘gi. Duman, Ö. (2004). Devlet Muhasebesinde Reform Çalısmaları. Vergi Dünyası Dergisi. 275, (7–13). Feyzio˘glu, B.N. (1966). Milli Muhasebe ve Milli Bütçeye Dair Tetkikler; Milli Muhasebe ve Devlet Muhasebesi. Vol. I, ˙Istanbul, Turkey. General Directorate of Public Accounts. (2003). Tahakkuk Esaslı Devlet Muhasebesi Pilot Uygulama Sonuçları. Ankara, Turkey. Government Financial Statistic Manual, IMF. (2014). Retrieved on 06.02.2019 from https://www. imf.org/external/Pubs/FT/GFS/Manual/2014/gfsfinal.pdf. Güler, S. & Gülçiçek, M. (2006). Ülkemizde Devlet Muhasebesinin Tarihi Geli¸simi. Kamu Hesaplarına Uzman Bakı¸s Dergisi. 1, (55–71). Gül¸sen, H., Karaarslan, E., Kızılkaya, E., Hastürk, M., Kerimo˘glu, B., & Kulaksız, H. (2007). ˙ ˙ Merkezi Yönetim Kapsamındaki Kamu Idareleri Için Devlet Muhasebesi. Ankara, Turkey. Muhasebat Kontrolörleri Derne˘gi. Kaplan, E. (1992). Devlet Muhasebesi Ders Notları. ˙Izmir, Turkey. Kartalcı, K. (2012). Döner Sermaye ˙I¸sletmelerinin Yeniden Yapılandırılması. Akademik Yakla¸sımlar Dergisi. 3(1), (106–129). Kerimo˘glu, B. (2002). Devlet Muhasebesinde Reform Çalı¸smaları. Mali Kılavuz Dergisi. 17, (87– 101).

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˙ Ilgili ˙ Öz, A.E. (2007). Devlet Muhasebesi Ile Yeni Yasal Düzenlemeler ve Tekdüzen Muhasebe ˙ Uyumla¸stırma Çalı¸smalarının Incelenmesi ˙ Sistemi Ile ve De˘gerlendirilmesi. Master’s Thesis. Ankara, Turkey. Reed, B.J, & Swain, J.W. (1997). Public Finance Administration. U.S.A. SAGE Publications. Sa˘gcı, G. (1956). Modern Bütçe ve Muhasebe Telâkkileri Muvacehesinde Türk Devlet Muhasebesinin Durumu. Maliye Ara¸stırma Merkezi Konferansları Dergisi. 2, (187–202). Sevim, S., ¸ Bozdo˘gan, T., & Topakkaya, A. (2008). Developments on Public Sector Accounting In Turkey; -From the Beginning of the Republican Era Until Present-, 12. World Congress of Accounting Historians (WCAH), Vol. III, (pp. 2465–2479) ˙Istanbul, Turkey. ˙I. (1982). Devlet Muhasebesi Ders Notları. Bolu, Turkey. Sahin, ¸ Taflan Gür, S. ¸ (2008). Tahakkuk Esaslı Devlet Muhasebesinin Bilgi Sistemi Olarak De˘gerlendirilmesi ve Bir Uygulama. Master’s Thesis. Erzurum, Turkey. Tarhan, T. (1962). Türkiye’de Devlet Muhasebesi ve Muzaaf Usul. Maliye Ara¸stırma Merkezi Konferansları Dergisi. 8, (51–61). Teker, O. (2013). Development of Turkish Government Accounting (2003–2013). III. International Conference on Luca Pacioli Accounting History and III. Balkans and Middle East Countries Conference on Accounting and Accounting History, Vol. I, (pp. 353–372), ˙Istanbul, Turkey. Yakupçebio˘glu, N.S. (2013). Republic Era The Turkish Government Accounting System (1923– 2004). III. International Conference on Luca Pacioli Accounting History and III. Balkans and Middle East Countries Conference on Accounting and Accounting History, Vol. I, (pp. 373–388), ˙Istanbul, Turkey.

Necdet Sıtkı Yakupçebio˘glu works as the Head of Budget, Final Account and Reporting Department at the Ministry of Industry and Technology/Strategy Development Department. Prior to this position, he worked as a state accounting specialist and finance expert in the former Ministry of Finance. In the period when he fulfilled these duties, he took part in the preparatory work of government accounting regulations. He also trained in state accounting education programs organized by the Ministry of Finance. He holds a master’s degree in accounting. His PhD study on examining the state of application of accounting standards in Turkey is continuing.

Chapter 11

The Adoption and Implementation of International Public Sector Accounting Standards in Turkey Ali Topakkaya and Nazire Kont

11.1 Introduction In recent years, significant developments have been experienced in the field of international accounting standards. Compliance with international accounting standards provides some advantages. It is very important to ensure comparability both within countries and within entities, and to address similar transactions in similar terms. In this respect, this compliance also fulfills the objectives and the requirements of reporting. In this study, first of all, the overview of Turkish public accounting reform and how the Public Accounting Standards Board is formed, its structure, duties, working process, how public accounting standards are determined, and the future works will be explained. Information about works on harmonization of IPSASs and accounting legislation will then be provided. Finally the benefits and challenges of IPSASs will be addressed. Firstly, it would be useful to mention on International Public Sector Accounting Standards Board (IPSASB) which sets accounting standards for public. In 1996, the Public Sector Committee (PSC) of the International Federation of Accountants (IFAC) engaged in the development of international public sector accounting standards (IPSAS). In just 15 years, the accounting standards elaborated by the PSC, which was renamed in 2004 to IPSASB, has become an undeniable reference for national standard-setters and public organizations looking to improve their accounting system or develop their own standards (Rocher 2020, p. 1). IPSASB, which covers the public sector, prepares and publishes accrual and cashbased accounting standards. There are 42 accrual-based accounting standards (with repealed standards), 1 cash-based accounting standard, and 1 The Conceptual Framework and 3 Recommended Practice Guidelines published until now. “The accrual IPSASs are based on the International Financial Reporting Standards (IFRSs), issued A. Topakkaya (B) · N. Kont Ministry of Treasury and Finance, Ankara, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_11

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by the International Standards Board (IASB) where the requirements of those Standards are applicable to the public sector. They also deal with public sector-specific financial reporting issues that are not dealt with in IFRSs.” (IPSAS Handbook 2018, p. 1).

11.2 Public Accounting and Public Accounting Standards Board Under this heading, the legal and institutional framework, creation, structure and tasks of the Board, the process of setting public accounting standards, and works on accounting standards of the Board will be explained.

11.2.1 Institutional and Legal Framework As shown in Fig. 11.1, the accounting system in Turkey is accrual based. Before addressing an overview of the Turkish public accounting reform, it would be useful to mention the Public Financial Management and Control Law (PFMC), Law No. 5018.

Fig. 11.1 Map of Countries Accounting Bases for Annual Financial Statements in 2015. Orijinal Source OECD and IMF staff estimates, based on public information, including Blöndal and Moretti (2016) and Eurostat (2014) Source Cavanagh, J. Flynn, S. and Moretti, D (2016, p. 2) IMF, Implementing Accrual Accounting in the Public Sector

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With the entry into force of this Law as a requirement of accrual-based accounting, it began to be booked when an economic value was produced, transformed, exchanged, transferred, or terminated. In addition, this Law specifies that public revenues and expenses shall be presented in the accounts of the fiscal year of their accrual and budget revenues shall be recognized in the year of collection and budget expenses in the year of payment (The Ministry of Treasury and Finance 2003). On the other hand, the budget is cash-based and this Law stated that the budgets of the administrations within the scope of general government shall be prepared and implemented in the form of central government budget, social security institution budgets, and local administration budgets. The budget is based on four levels as institutional, functional, financial, and economic classification within the framework of Analytical Budget Classification. Budget revenues and expenses are monitored in separate accounts (reflection accounts). In this way, the reconciliation between the accrual-based accounting transactions and the cash-based budget transactions is ensured. In the financial system, important developmental stages have been observed regarding accounting standards as shown below. Figure 11.2 shows the development of public accounting reforms in Turkey from 1995 to today. Between 1995 and 2003, Public financial management project was initiated. In 2002, computer technology was used effectively. Between 2003 and 2006, The Public Financial Management and Control Law was published and fully implemented. Under this Law, Public Accounting Standards Board was established within the Ministry of Treasury and Finance. In 2015 and 2018, secondary regulations in accounting were renewed according to accounting standards. Details of these regulations will be included in the “works on harmonization of IPSASs and accounting legislation” section.

Fig. 11.2 Overview of the Turkish Public Accounting Reform. Source Mengülo˘gul, (2018)

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The PFMC, Law No. 5018 is published in December 2003, and fully implemented in 2006. This Law replaced the General Accounting Law No. 1050. The purpose of this Law is to regulate the structure and functioning of the public financial management, the preparation and implementation of the public budgets, the accounting and reporting of all financial transactions, and financial control in line with the politics and objectives covered in the development plans and programs, in order to ensure accountability, transparency and the effective, economic and efficient collection and utilization of public resources (The Ministry of Treasury and Finance 2003). This Law contains many articles from the determination of accounting standards to financial statistics.

11.2.2 Public Accounting Standards Board (DMSK) Under this heading, information will be given about the Public Accounting Standards Board (DMSK in Turkish acronym), which plays an important role in setting public accounting standards. Then the role of the Public Oversight Accounting and Auditing Standards Authority (KGK in Turkish acronym), which sets accounting and/or reporting standards in the private sector, in setting public accounting standards will be explained.

11.2.2.1

Creation and Structure of the DMSK

The DMSK was established by the PFMC law. Article 49 of the PFMC Law specify that the accounting and reporting standards to be implemented by the administrations within the scope of the general government, shall be set forth by the Public Accounting Standards Board to be established with the participation of the representatives of the Court of Accounts, the Ministry of Treasury and Finance, and the other related organizations in accordance with the international standards within the organization of the Ministry of Treasury and Finance (The Ministry of Treasury and Finance 2003). As shown in Fig. 11.3, the Board consists of 9 members; including 4 members from the Ministry of Treasury and Finance, one member from the Court of Accounts, the Directorate of Strategy and Budget, the Ministry of Interior, the Social Security Institution and the Council of Higher Education. In accordance with this Law, DMSK was established with the approval of the Ministry Authority on June 12, 2006 and the first meeting was held on June 23, 2006.

11.2.2.2

Tasks of the DMSK

Under the PFMC Law, these standards shall be published in the Official Gazette and the structure, working procedures, and principles as well as other issues shall be stipulated by a regulation to be issued by the Ministry of Treasury and Finance

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Fig. 11.3 The process of setting Public Accounting Standards

(The Ministry of Treasury and Finance 2003). In this framework, “The Regulation on the Structure and Working Procedures and Principles of the Public Accounting Standards Board” was published. According to this regulation, the tasks of DMSK are (The Ministry of Treasury and Finance 2018a). – To determine accounting and reporting standards, – To organize meetings, conferences, symposiums, and seminars and to prepare publications in order to ensure the establishment of accounting awareness in public administrations. – To prepare regulatory procedures for the purpose of informing and directing the public administrations that will implement the standards and to submit them to the Ministry of Treasury and Finance for publication, – To conduct research, examination, and analysis on issues related to their duties; for this purpose, to request the necessary information, documents and reports from the administrations within the scope of general government, – To evaluate and analyze the information and documents gathered as a result of research and examination and to conclude them by setting standards, – To examine, evaluate, and decide on applications to the Ministry about standards.

11.2.2.3

Working Process of the DMSK

One of the issues to be considered is also how these standards are determined. In line with the decision taken at the meeting of the Board dated December 27, 2006, a Working Commission has been established within the General Directorate of Public Accounts and Financial Control for the adaptation and adoption of IPSASs to Turkish public financial management. In this framework, Public Accounting Standard Drafts

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Table 11.1 Published Public Accounting Standards (DMSs)

are prepared and presented to the Board by the Working Commission. The Board meets twice a month. The prepared drafts become the final standard in the Board and are published in the Official Gazette as “Public Accounting Standard” (DMS in Turkish acronym) (see Fig. 11.3). These standards are translations of IPSASs with minor revisions and have the same standard number (http://www.dmsk.gov.tr/).

11.2.2.4

Future Works

Since 2008, The Board has issued 30 DMSs (see Table 11.1). The Board is currently working on “The Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities” prepared by the Working Commission. Assignments are made from other related institutions or organizations according to the subject of the standard discussed in the Working Commission. IPSAS 39-Employee Benefits Draft has been completed by the Working Commission. In the future, standards to be worked by the Working Commission are IPSAS 34-Separate Financial Statements, IPSAS 35Consolidated Financial Statements, IPSAS 36-Investments in Associates and Joint Ventures, IPSAS 37-Joint Arrangements, IPSAS 38-Disclosure of Interests in Other Entities, IPSAS 40-Public Sector Combinations, IPSAS 41-Financial Instruments, and IPSAS 42-Social Benefits. Other important institution associated with the accounting standards in Turkey is KGK and it also determines the accounting (like DMSK) and auditing standards. “Turkey has adopted International Financial Reporting Standards (IFRSs) for the financial statements of all public interest entities. Listed companies, intermediary

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institutions, and portfolio management companies were permitted to use IFRSs as of 2003 (voluntarily), and have been required to use IFRSs since 2005 (mandatory). All banks and financial institutions have been required to use IFRSs since 2006. IFRSs are incorporated into laws and regulations as Turkish Accounting Standards (TASs) and Turkish Financial Reporting Standards (TFRSs). TASs and TFRSs are fully compliant with the IFRSs issued by the IASB, and they are published in the Official Gazette as communiqués” (KGK 2018, pp. 10–20). As mentioned before, public accounting standards are determined based on IPSASs. On the other hand, the KGK determines the accounting and reporting standards on the basis of IAS and IFRS. In this context, in the preparation stage of the government accounting standards, TASs and TFRSs are also taken into consideration. Although there are terminological differences between public sector accounting standards and private sector accounting standards, they have mostly the same accounting approaches in relation to the same subject.

11.3 Works on Harmonization of IPSASS and Accounting Legislation In the Turkey, DMSs play a key role in the determining and guiding accounting policies. The scope of DMSs is general management, consisting of central government, local administrations, and social security institution. However, the commencement of the production of consolidated financial statements will expand the scope within the framework of the control approach. Accounting and reporting requirements of public administrations are determined within the framework of these standards and standards are interpreted in finding solutions to problems encountered. According to PFCM Law; the form, period, and types of the reports to be prepared with the framework chart of accounts to be applied by the public administrations within the scope of general government shall be determined by the Ministry of Treasury and Finance within the frame of the accounting and reporting standards determined by the Board (The Ministry of Treasury and Finance 2003). After the DMSs are published in the Official Gazette, regulatory provisions in standards are added to the General Government Accounting Regulation (GGAR), the Central Government Accounting Regulation, and other related regulations. The purpose of GGAR is to determine the principles and procedures for public administrations within the scope of general government for (The Ministry of Treasury and Finance 2018a): • Ensuring transparency, accountability, and uniformity in the account and record order, • Preventing unregistered transactions, • Recognizing of activities in a healthy and reliable manner, • Timely preparation and publication of financial statements.

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GGAR conforms to DMS 1 in terms of purpose of financial statements, comparative information, main principles, structure and content and offsetting, as well as the basic definitions of assets, liabilities, revenue, and expense. The chapters of the GGAR are the basic concepts of accounting, principles, implementation of public accounting standards, financial reporting, changes in accounting policies and basic errors, the accounting period and period-end transactions, responsibility of managers, qualifications of officers, auditing of accounting system, and chart of accounts. Substance over form, prudence, materiality, consistency, neutrality, social responsibility, cost basis, measurement with money, going concern, documentation, periodicity and complete disclosure are currently the basic concepts of accounting. Chart of accounts was created for assets, liabilities, revenue, expense, and net assets/equity, as well as budget reflection accounts and off-balance sheet accounts/memorandum items. Under GGAR, apart from the assets, resources, revenue and expense accounts of public administrations, off-balance sheet accounts or memorandum items are used: (i) for the transactions that accounting has the task of providing information and monitoring, (ii) for the transactions to be collected under the accounting discipline (iii) for the transactions related to future probable rights and obligations (The Ministry of Treasury and Finance 2018b). In addition, a straight-line method is applied for noncurrent assets according to Communiqué on Amortization and Depreciation (The Ministry of Treasury and Finance 2015). Under the Central Government Accounting Regulation, the cost of inventories is assigned by using the First-In, First-Out (FIFO) (The Ministry of Treasury and Finance 2018c). Biological assets are also recognized as current and non-current assets in the accounting system. Since 2015, based on the published standards, fundamental amendments have been made in secondary regulations (such as General Government Accounting Regulation, Central Government Accounting Regulation, and Communiqué on Accounting Transactions of Public Private Partnership Practices). In 2015, “Communiqué on Accounting Transactions of Public Private Partnership Practices (PPP)” is also one of the important amendments. Within the framework of the related Communiqué, PPP models are defined. PPP models are presented in the financial statements in accordance with DMS 32-Service Concession Arrangements and DMS 13-Leases. Thus assets, liabilities, provisions, contingent liabilities, guarantees, commitments, and debt assumptions related to PPP models have begun to be monitored in the accounting system. In 2017, “Harmonization of IPSASs and General Government Accounting Legislation Project” was initiated with the financial support of the World Bank by The General Directorate of Public Accounts and Financial Control of the Ministry of Treasury and Finance. Within the scope of this project, the project team was created at the General Directorate of Public Accounts and Financial Control and workshops were conducted. Expectations on the project were (The Ministry of Treasury and Finance 2017) • Public private partnership model (especially), • Recording and valuation of public immovable, • Preparation of public tables and consolidation and scope of general budget,

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Research and development activities, Amortization and depreciation, Provision for suspected receivables and social security provisions, Budget standard and tax standard, Underground resources, Contingent liabilities.

Together with the workshops, the mentioned regulations were changed in order to harmonize the accounting legislation with international accounting standards in 2018. In February 2019, the guide for preparation of the financial statement is published by the General Directorate of Public Accounts and Financial Control. When we look at 2018 and before, in general, we can summarize compliance of the GGAR with the IPSASs as follows; however, some regulations exist prior to the publication of standards (Table 11.2). In addition to the above legislative amendments, it would also be useful to mention the EU funded “Technical Assistance for Enhanced Capacity for Public Sector Accounting Standards (PSAS) Project” carried out by the General Directorate of Public Accounts and Financial Control. The project, which started in 2019, includes many activities such as preparing drafts, organizing workshops, acquiring information about private sector practices, and organizing seminars to raise awareness of public sector accounting standards. In May 2019, two workshops were organized within the framework of the project and the project is still ongoing.

11.4 The Challenges and Benefits of IPSASs When we look at the recognition criteria in IPSAS, recognition criteria are met, if it is probable that future economic benefits or service potential associated with the item will flow to the entity and value of the item can be measured reliably. The presentation of a transaction or event in financial statements is not sufficient. If this transaction or event cannot be measured reliably, it should be disclosure in the notes. In other words, accrual accounting means not only recording economic or other events, but also demonstrating an understanding of the use of estimation methods that are part of accounting, including the possibility of resource inflows and resource outflows, which include economic benefit or service potential. In addition the systematic monitoring of contingent assets and contingent liabilities is also an important part of full accrual accounting. The adoption of IPSASs may provide some benefits. According to the Association of Chartered Certified Accountants (ACCA) benefits of IPSASs adoption are greater accountability and transparency, better decision-making, improved efficiency, data consistency and application, sound financial management, professionalization and access to talent, broader economic and social advantages, government stability, and international comparability (ACCA 2017). Alternative methods/options are used to facilitate the implementation of some standards in the public sector. With the benefit-cost analysis, it will be useful to

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Table 11.2 Public Accounting Standards (GGAR with IPSASs) (This table has been prepared based on DMSs (http://www.dmsk.gov.tr/), GGAR (The Ministry of Treasury and Finance 2018b) Central Government Accounting Regulation, (The Ministry of Treasury and Finance 2018c)) Public accounting standards (DMSs)

General Government Accounting Regulation (GGAR)

DMS 1-Presentation of financial statements

• GGAR conforms to DMS 1 in terms of the information to be presented either on the face of the Statement of Financial Position or in the notes. A complete set of financial statements comprises – A Statement of Financial Position – A Statement of Financial Performance – A Statement of Changes in Net Assets/Equity – Cash Flow Statements – A Statement of Comparison of Budget and Actual Amounts – Notes, comprising a summary of significant accounting policies and other explanatory notes • In addition to these statements, each entity is also allowed to produce financial statements according to their needs

DMS 2-Cash flow statements

• The inclusion of Cash Flow Statement in the financial statement set

DMS 3-Accounting policies, changes in accounting estimates and errors

• The definition and the disclosures of accounting policies and basic errors • The correction of prior period errors by adjusting the opening balance of the net value

DMS 4-The effects of changes in foreign exchange rates

• The definition of foreign currency transactions • The recording of gains or losses arising from foreign exchange rates as surplus or deficit • The disclosure of foreign exchange rates

DMS 5-Borrowing costs

• Borrowing costs are expensed

DMS 6-Consolidated and separate financial statements

• The production of consolidated financial statements within the framework of control approach*

DMS 7-Investments in associates and DMS 8-interests in joint ventures

• The recognition of capitals invested (for revolving funds, institutions producing goods and services and financial institutions) in the fixed asset accounts (Under Central Government Regulation, financial fixed assets are accounted for using the equity method. According to this method, financial fixed assets are recorded with the cost value at the date of acquisition. After the date of acquisition, the public institution share of the changes in the equity of the entity that the public institution invests is corrected.) (continued)

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Table 11.2 (continued) DMS 9-Revenue from exchange transactions

• The definition of revenue • The measurement of revenue (sale of goods and rendering of services)

DMS 10-Financial reporting in hyperinflationary economies

• The adjustment of inflation

DMS 12-Inventories

• The recognition of inventories • The measurement of inventories at the lower of cost and net realizable value* • The recognition of provisions when there is a significant reduction in physical and economic value of stocks or a decrease in market prices of stocks (due to natural disasters such as fire, earthquake, flood-breakdown-decay, break, crack, rust, technological developments, and similar changes or for other reasons)

DMS 13-Leases

• The definition and recognition of financial leasing, and disclosures of financial statement notes and operating leases

DMS 14-Events after the reporting date

• The inclusion of adjusting events after the reporting date

DMS 16-Investment property

• The definition and recognition of investment property

DMS 17-Property, Plant and Equipment (PPE)

• The recognition of lands, buildings, PPE, vehicles, roads, machinery, furniture, office equipment, etc. in accounting system • The complementary parts and add-ons of the tangible assets • Accounting for land and buildings separately* • PPE acquired through non-exchange transactions • Internally generated PPE • The recognition of repairs and maintenance costs of the item of PPE as deficit • The allocation of the depreciated assets over their useful life by the straight-line method • Review of amortization period • Derecognition of tangible assets

DMS 19-Provisions, contingent liabilities and contingent assets

• The disclosure and monitoring of contingent liabilities, assets and guarantees and the valuation of contingent liabilities and assets

DMS 20-Related party disclosures

• The disclosure of fees and other benefits provided to senior executives outside of their primary duty (continued)

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Table 11.2 (continued) DMS 21-Impairment of non-cash-generating assets DMS 26-Impairment of cash-generating assets

• For impairment, the inclusion of recoverable service amount*, recoverable amount*, and value in use*

DMS 22-Disclosure of financial information about the general government sector

• Financial information related to general management sector is prepared based on Government Financial Statistics Manual 2014 and is sent to IMF

DMS 23-Revenue from non-exchange transactions (Taxes and Transfers)

• The measurement of the taxes at fair value. (An accrual record is usually made for tax receivables and tax receivables are reported. For some taxes, the taxable event and collection of tax occurs at the same time.) • Conditions on transferred assets

DMS 24-Presentation of budget information in financial statements

• The inclusion of Statement of Comparison of Budget and Actual Amounts

DMS 31-Intangible assets

• The recognition of licenses, patents, software, etc., in the accounting system • The inclusion of “Intangible assets such as copyrights, licenses” to the definition of non-financial assets • Internally generated intangible assets • The intangible assets acquired through non-exchange transactions • The capitalization of development costs of intangible assets • The allocation of the amortized assets over their useful life by the straight-line method • Derecognition of intangible assets • The recognition of costs incurred in using or redeploying an intangible asset as deficit

DMS 32-Service concession arrangements: grantor

• The definition, recognition, and disclosures of service concession arrangements

*These regulations shall enter into force on 1/1/2020

present the information that users need. However, the reporting of countries may differ. For example, the implementation of the threshold value approach for the concept of materiality or the confidentiality of certain operations or activities such as national security are some of the factors that cause reporting differences. In addition, the concept of service potential in the IPSASs (and also in the DMSs, but not in the IFRSs), is of utmost importance, since the purpose of the public sector, is to provide benefits to citizens rather than to obtain profit. Under IPSASs, service potential corresponds to assets that indirectly provide cash flow and it is important in the implementation of standards related to impairment. On the other hand, there may be some problems in the implementation of IPSASs are the differences of standards with legislation, the limited application of some standards due to the emphasis on service

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potential in public sector, and the challenges in measuring due to irregularities in cash flows. In terms of the development and improvement of IPSASs, the current project topics of IPSASB are as follows: social benefits, financial instruments, leases, revenue & non-exchange expenses, public sector measurement, public sector specific financial instruments, heritage and infrastructure assets (Carruthers and Stanford 2018, p. 11). IPSAS 41-Financial Instruments and IPSAS 42-Social Benefits, which are the subjects of this project, became the final standard and published.

11.5 Conclusions So far, 30 Public Accounting Standards have been issued by the DMSK. “The Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities” is also planned to be published this year. Within the framework of IPSAS, most standards have been published and added to the regulations. To summarize, the regulations made to comply with IPSASs are as follows: – – – – – – – – – – – – – – – –

PPP implementations, The adjustment of inflation, Basic financial statements/Consolidated financial statements, Disclosures, Land and buildings are accounted for separately, Impairment of Cash-Generating Assets and Non-Cash-Generating Assets, Valuation of inventories, Provisions, contingent liabilities and contingent assets, Related party, Revenue from exchange transactions, Accounting policies and errors, Financial and operating leases, Events After the Reporting Date, Research & Development costs, Internally generetad intangible assets and property, plant, and equipment, The intangible assets and property, plant and equipment acquired through nonexchange transactions, – Conditions on transferred assets. All the above-mentioned works have contributed to the achievement of the reforms and have increased the level of reform in Turkey. The compliance with IPSAS will enable the preparation of the financial statements based on DMS (or IPSAS). Requirements for benefits expected from standards are face-to-face interviews with public administrations, informing public administrations about the standards in advance and raising awareness by providing trainings on standards. Although IPSASs are harmonized with legislation, each standard should be supported with application guidelines to address the difficulties encountered in implementation.

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As a result, the determining of differences in accounting practices by making a difference analysis and the convergence of the financial legislation to the international accounting standards is part of the adaptation process. After the necessary works are completed, it is necessary to carry this compliance to Information Technology (IT) systems. The Ministry of Treasury and Finance is currently responsible for the transition to a new Integrated Financial Management Information System (IFMIS). Based on the findings above, we can say that Turkey has made significant progress in the development of public sector accounting. The transition to accrual-based accounting system, the production of financial statements, the elimination of deficiencies in financial reporting, and the innovation of IT systems are just a few of the advances. With the historical development of public accounting, accounting maturity reached approximately 90% as a result of focusing on international standards and updating the legislation. The objective is full compliance with IPSASs, and it is clear that the harmonization of public accounting legislation with international standards will continue in the coming years, due to reasons such as updating the IPSASs or publishing new standards.

References Carruthers, I., & Stanford, J. (2018, March 1). IPSASB Update, IPSASB Chair John Stanford IPSASB Technical Director OECD Paris 1st March 2018. 30.12.2018. Retrieved from https:// www.slideshare.net/OECD-GOV/session-1-ian-carruthers-and-john-stanford-ipsasb. Cavanagh, J. Flynn, S. and Moretti, D. (2016, September). Implementing Accrual Accounting in the Public Sector, IMF. 22.04.2019. Retrieved from https://www.imf.org/external/pubs/ft/tnm/2016/ tnm1606.pdf. http://www.dmsk.gov.tr/ International Public Sector Accounting Standards Board. (2018). Handbook of International Public Sector Accounting pronouncements 2018 volume 1, IFAC. 24.12.2018 Retrieved from https:// www.ifac.org/publications-resources/2018-handbook-international-public-sector-accountingpronouncements. Mengülo˘gul, H.Y. (2018, March). Turkish public accounting reform & harmonization of international standards.26.11.2018. Retrieved from http://www.dmsk.gov.tr/upload/Turkish% 20Public%20Accounting%20Reform21%2002%202018.pdf. Public Oversight, Accounting and Auditing Standards Authority (KGK). (2018, January). Public Oversight, Accounting and Auditing Standards Authority of Turkey. 26.11.2018. Retrieved fromhttp://www.kgk.gov.tr/Portalv2Uploads/files/Duyurular/v2/Diger/Booklet%20%20Ocak%202018.pdf. Rocher, S. (2020, May 5). The beginning of International Public Accounting Standard setting: a short history,. Retrieved from https://nanopdf.com/download/1-the-beginning-of-internationalpublic-accounting_pdf The Association of Chartered Certified Accountants-ACCA. (2017, October). IPSAS implementation: current status and challenges 29.11.2018. Retrieved from https://www.accaglobal.com/ content/dam/ACCA_Global/Technical/pubsect/pi-IPSAS-implementation-current-status-andchallenges.pdf. The Ministry of Treasury and Finance. (2003). 5018 sayılı Kamu Mali Yönetimi ve Kontrol Kanunu. The Public Financial Management and Control Law No. 5018. 24.12.2018 Retrieved from http:// www.mevzuat.gov.tr/MevzuatMetin/1.5.5018.pdf.

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The Ministry of Treasury and Finance. (2015). Amortisman ve Tükenme Payı Tebli˘gi (Communiqué on Amortization and Depreciation.) 26.12.2018. Retrieved from https://www.mevzuat.gov.tr/ Metin.Aspx?MevzuatKod=9.5.21208&MevzuatIliski=0&sourceXmlSearch=amortisman. The Ministry of Treasury and Finance. (2017). Harmonization of IPSASs and Turkish Legislation on General Government Accounting Workshop, 23, 24 and 25 August 2017. The Ministry of Treasury and Finance. (2018a). Devlet Muhasebesi Standartları Kurulunun Yapısı ve Çalı¸sma Usul ve Esasları Hakkında Yönetmelik (The Regulation on the Structure and Working Procedures and Principles of the Public Accounting Standards Board). 27.11.2018. Retrieved fromhttp://www.mevzuat.gov.tr/Metin.Aspx?MevzuatKod=7.5.8137&MevzuatIliski= 0&sourceXmlSearch=devlet%20muhasebesi%20standartlar%C4%B1%20kurulu. The Ministry of Treasury and Finance. (2018b). Genel Yönetim Muhasebe Yönetmeli˘gi. General Government Accounting Regulation. 27.11.2018. Retrieved from http://www.mevzuat.gov.tr/ Metin.Aspx?MevzuatKod=3.5.20147052&MevzuatIliski=0&sourceXmlSearch=genel yönetim muhasebe. The Ministry of Treasury and Finance. (2018c). Merkezi Yönetim Muhasebe Yönetmeli˘gi (Central Government Accounting Regulation).26.12.2018. Retrieved from https://www.mevzuat.gov.tr/ Metin.Aspx?MevzuatKod=7.5.20357&MevzuatIliski=0&sourceXmlSearch=Merkezi Yönetim Muhasebe Yönetmeli˘gi.

Ali Topakkaya is Treasury and Finance Expert at the General Directorate of Public Accounts and Financial Control of the Ministry of Treasury and Finance. Before this task he was an officer at the Revenue Administration. Topakkaya took part in the establishment of the Department of Government Accounting Standards within of the Ministry of Treasury and Finance in 2007. Since 2007, Topakkaya is working at the Department of Government Accounting Standards. He did consultancy on many thesis. Topakkaya has many years of experience in government accounting and national standards as well as international standards. He has provided presentation, article and training on government accounting standards. Nazire Kont is Treasury and Finance Expert at the General Directorate of Public Accounts and Financial Control of the Ministry of Treasury and Finance. Since 2014, Kont is working at the Department of Government Accounting Standards within of this Ministry. In 2015, Kont wrote up a thesis on “The Harmonization of Government Accounting Standards with Accounting Regulations (2006–2014)”. Her study interests focus on the implementation of the government accounting standards and international accounting standards.

Chapter 12

Public Internal Audit Reforms in Turkey: Structure, System, and Roles Halis Kıral

12.1 Introduction The biggest changeover relating to public finance management and control system in Turkey took place with the Public Financial Management and Control Law No. 5018 (the Law), which was enacted on December 10, 2003 to align Turkey’s public financial management and control (PFMC) system with international standards and European Union (EU) norms. In the early 2000s, it was stated by the EU that significant differences existed between Turkey’s traditional public management and control structures and the criteria applied by the EU and especially that steps needed to be taken regarding transparency, accountability, and fiscal transparency. It was also underlined that the functions of the Ministry of Finance and the Court of Accounts had to be changed and modern internal audit was lacking. Accordingly, the management and auditing system was restructured with the Law, replacing the General Accounting Law No. 1050, which had been in force for nearly 80 years. The management and audit system of the public was transformed with the aforementioned Law which takes into consideration the international standards and the EU acquis, as well as principles such as managerial responsibility within the framework of procurement and usage of public resources in an effective, economic and efficient manner, accountability, financial transparency, efficiency, productivity, and economy. The Law is based on the Public Internal Financial Control (PIFC) model, which is a standard practice for the members of the EU. The PIFC Model proposes the restructuring of the management and control approach on the basis of the principles of effective, economic, and efficient use of the resources allocated to reach the determined targets, and on the basis of understanding of accountability and fiscal transparency by considering strategic priorities (Kartal 2013). This Model consists of three components, the first of which is an internal control system based on managerial H. Kıral (B) Social Sciences University of Ankara, Ankara, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_12

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responsibility, the second is a functionally independent and decentralized internal audit, and central harmonization units that determine the methods and standards in these two areas. Within this scope, the Law designated as the central harmonization unit, the Internal Audit Coordination Board (IACB) in the field of internal audit, and the Ministry of Treasury and Finance in the field of internal control. The public internal audit system was put into practice when the IACB became operational in 2004 and published the public internal auditing standards and professional codes of ethics in 2006 and appointed the first internal auditors in the same year. The internal audit in Turkey is designed in a decentralized structure and is performed by authorized personnel within each administration. Accordingly, the internal audit function is carried out by internal auditors, who report to the top manager of the relevant administration, in public administrations within the scope of central administration, universities, and municipalities. The adoption of public internal audit system as part of a new public financial management approach is a very important step for Turkey, whose inspection tradition dates back to the pre-republic era. However, in order for the public internal audit system to perform the expected functions efficiently, as in every radical reform, it depends on whether a large number of harmonious and fundamental reforms are implemented, giving priority to the structure, system, and roles. For this purpose, this paper will approach internal audit reforms in Turkey, the existing situation and suggestions from the perspective of structures, systems, and roles. In this context, in part 2, “Structure”, PIFC structure, and the IACB will be examined. In part 3, “System”, the main focus will be on the internal audit system and the two other systems which have a direct impact on the effectiveness of the first, namely external audit and inspection will also be discussed. In part 4, the roles under the internal audit system, including that of the top manager, head of the internal audit unit, and internal auditors will be examined. In the last section, conclusions and evaluations will be provided.

12.2 Structure In this section, we firstly focus on the PIFC structure developed by the European Commission in the restructuring of public internal control and internal audit environments of candidate countries. Then we evaluate the central harmonization structure in the public internal audit in Turkey as one of the three components of the PIFC structure in order to guide the reform process in the public internal audit.

12.2.1 Public Internal Financial Control Structure In the mid-1990s, two main models of internal control prevailed in the EU member states, yet there were no specific regulations in the EU acquis on public internal

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control and the practice varied significantly from country to country. These two models are called the Southern Model (Continental European Model) and the Northern Model (Anglo-Saxon Model). The Southern Model can be defined as a centralized traditional model based on ex-ante controls and ex-post financial audits (inspection) of the Ministry of Finance. The Southern Model lost its importance toward the 2000s due to non-compliance with international standards. Many countries using this Model, such as France, Belgium, Portugal, Spain, and Greece, have reformed or taken steps to improve managerial accountability and internal audit, to separate internal audit from inspection, and to give ex-ante control to the manager’s responsibility (Yurdakul 2014). Managerial responsibility, which is based on managers’ responsibility for financial decisions, expenditure, and internal control systems, is taken as a basis in the Northern Model. In this Model, there is no central authority responsible for financial inspection, and assurance on financial decisions and expenditures as well as internal control is provided to management by the internal audit function. The Northern European Model, which was implemented in the UK, Netherlands, Denmark, and the Baltic countries, was also used in the European Commission in the reform process in the 2000s (De Koning 2007; Arcagök and Yörük 2004). Although there is no mandatory EU legislation for candidate countries in the field of public internal control, the Commission developed the concept of Public Internal Financial Control (PIFC) based on the Northern Model in the restructuring of public internal control environments of candidate countries. Thus, candidate countries are expected to align their public internal control systems with international standards and EU’s best practices (EC 2006). PIFC has three components, the first of which is an internal control system based on managerial responsibility, the second one is functionally independent internal audit and the third is central harmonization units that determine the methods and standards in these two areas. After being officially recognized as an EU candidate country during the Helsinki Summit in 1999, Turkey initiated efforts toward harmonization of existing legislative regulations in the area of PFMC with the EU legislation. In this context, with the adoption of PFMC Law No. 5018, the PIFC model based on the Northern Model was adopted. The law is based on “management responsibility” in the PFMC system and adopts a decentralized approach. Thus, control and internal audit in the financial management process will be carried out by internal auditors within each administration and external audit will be carried out by the Turkish Court of Accounts (TCA). However, the inspection function was not referred to in the PFMC system. As the third component of PIFC, the task of central harmonization of the public financial management and internal control system was assigned to the General Directorate of Budget and Financial Control of the Ministry of Treasury and Finance and the task of central harmonization of internal audit was assigned to the Internal Audit Coordination Board (IACB) established in 2004. The IACB is the most fundamental structure designed to guide the reform process in the field of public internal audit. Thus, internal audit, which was introduced to the PFMC system in Turkey with Law No. 5018, aims to ensure that all public institutions operate in harmony.

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12.2.2 Central Harmonization Structure: Internal Audit Coordination Board While recognizing the necessity of internal audit and codes of practice with Law No. 5018 in Turkey, the problem of the standard implementation of the internal audit function to municipalities, universities, ministries from different scales and sizes has been raised. As a matter of fact, although the European Commission does not have strict legislation on the internal audit center harmonization structure in EU accession process, it wants the candidate countries to produce a solution within the framework of international standards and EU’s best practices (Ba¸spınar 2006). In Law No. 5018, the IACB, which provides the central harmonization and monitoring function in the field of internal audit, is assigned with duties such as setting auditing and reporting standards, preparing audit manuals and the quality assurance and development program, conducting training and certification services of internal auditors, and conducting external evaluation of internal audit units. The IACB, which is responsible for carrying out all these duties, is established under the structure that it is directly affiliated to the Minister of Treasury and Finance. The Board consists of 7 members from different institutions selected for 4 years. The IACB is designed as a Board that is composed of members from senior public officials and academicians. The Board meets when it is required. The fact that the IACB has members from different institutions in an inter-ministerial structure is important in terms of having the support of different public institutions in the adoption of internal audit. However, the fact that the membership of the Board is a secondary duty besides the main roles of those elected as members and that the members do not come from the internal audit profession has been frequently criticized (Gürdal and Çıplak 2010; Gökalp 2013; Bozkurt 2014). As a solution to the latter criticism, the new Board, which took office in December 2019, is composed of professionals working in the field of internal audit and academics researching in this field. The existence of a central harmonization unit, which operates at a sufficient and effective level, constitutes the assurance of the healthy establishment and operation of the internal audit system in public administrations (Ba¸spınar 2006). Therefore, the IACB must have a strong organizational structure in order for internal auditing activities to be carried out independently in different institutions, from municipalities to ministries, and to have high added value to the institution, and internal auditors to perform their duties competently and impartially. However, looking at the current situation of the Board, this strong organizational structure seems to be far from reach. It has been emphasized that the administrative structure of the Board is insufficient and the organizational structure should be strengthened in the Turkey Progress Reports issued by the European Commission (EC 2015, 2016), the IACB Strategy Papers (IACB 2007, 2010b, 2013b, 2016a), and all IACB Public Internal Audit General Reports for the period 2008–2017 (IACB 2009, 2010a, 2011, 2012, 2013a, 2014a, 2015, 2016b, 2017, 2018a). In addition to national and international reports, scientific studies on public internal audit also suggest that the Board’s administrative capacity is insufficient (Gürkan 2009; Güner 2009; Gökalp 2013; Özdemir 2015; Bayrakçı and Demirel 2017).

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Finally, in the survey conducted by the IACB with the participation of all public internal auditors, 90% of the participating internal auditors stated that increasing the institutional capacity of the IACB would increase the effectiveness of the internal audit activity (IACB 2018b). The effective implementation of public internal audit activities in all institutions in a compatible manner is possible with the guidance of a strong central harmonization unit. The most important point to be considered when deciding the structure of the central harmonization unit is to decide the degree of “centralization” (Diamond 2013). Countries can decide the degree of centralization in the field of PFMC, ranging from a decentralized structure to a central structure where all internal auditors operate under a single center, such as the Ministry of Finance. Once the degree of centralization has been decided and the system is operational, it is important to decide which of the failing aspects of the public internal audit system stem from the degree of centralization and to make the necessary changes. As a matter of fact, a recent transition from a decentralized internal audit system to a central internal audit system took place in the UK, where the Government Internal Audit Agency (GIAA) was established on April 1, 2015, by bringing together the internal audit units of central government institutions under one roof (Kıral and Hatipoglu 2019). The most important reason for the transition is that internal auditing differs from institution to institution in terms of planning, execution, and reporting; there is no consistent training program designed to ensure the professional development of public internal auditors, and internal audit is not always successful in attracting high-quality people to the profession (NAO 2012). In Turkey, with the adoption of Law No. 5018 in 2003, a decentralized structure was preferred in public internal auditing, and no changes have been made after that date in terms of both the degree of centralization and tools used by the central harmonization function. In this regard, changes in the central harmonization structure, considering the findings and evaluations that the administrative capacity of the IACB is insufficient, will increase the compliance and quality of services provided and the effectiveness of public internal audit function among the internal audit units. What is important at this point is to decide to what extent the structure, system, and roles are the source of the problem and part of the solution. If one of the sources of solution for the more effective functioning of the public internal audit system is “centralization”, which represents the “structure”, the scale of “centralization” should be decided by evaluating the expected effects of the change on the “systems and roles” in this field.

12.3 System The public internal audit system, which is developed by the central harmonization structure in Turkey, will be discussed primarily. This will be followed by an evaluation of the other systems—i.e., external audit and inspection—that determine the effectiveness of public internal auditing.

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12.3.1 Public Internal Audit System The internal audit system in Turkey, which has a decentralized structure, is carried out by the internal auditors reporting to the top manager of the relevant administration in public administrations within the scope of central government (including universities) and municipalities. Therefore, the scope of public internal audit has been designed to cover institutions within the scope of centralized administration, excluding regulatory and supervisory authorities and state-owned enterprises. The scope of internal audit in terms of human resources, which is stated in Article 63 of Law No. 5018 is limited with the provision “internal audit is performed by internal auditors”. Law No. 5018 stipulates that the internal auditors shall perform their duties in accordance with the internationally accepted audit standards determined by the IACB. Pursuant to this regulation, Public Internal Audit Standards was determined by IACB based on the Institute of Internal Auditors’ (IIA) International Standards for the Professional Practice of Internal Auditing (2011) and then, it was updated in 2016 taking into account the change in IIA Standards and took its final form. When these standards are examined, it is seen that some of the concepts in the IIA Standards, which apply mostly to private sector organizations, are limited in terms of their adaptation to the public sector. Public internal auditing in Turkey therefore remains within the framework set by the IIA on public internal auditing standards, and unlike other countries that have adopted a restricted approach, elaborates this framework with the large number of guidelines published.. The first of these guidelines is the Public Internal Audit Manual, published in 2013 in consideration of the country’s public administration culture, which includes the general internal audit methodology and internal audit processes (˙IDKK 2013c). In order to ensure a standardized conduct of internal audit activities and to increase the compliance of internal audit units with the Public Internal Audit Standards, Public Internal Audit Software (˙IçDen) has been developed. ˙IçDen aims to ensure that the processes of planning, conducting, reporting, and monitoring of internal audit activities are carried out through the software and in compliance with the Public Internal Audit Manual. This software is used in all administrations that have an established internal audit unit. With the usage of ˙IçDen, the aim is to ensure that internal auditors conduct risk-based internal audit and related monitoring activities more effectively. An important step is the publication of manuals on performance auditing and information technology auditing, the two types of audits with the highest added value of internal auditing. The first of these Manuals is the Public Information Technology Audit Manual which was published in 2014 (IACB 2014b). The Performance Audit Manual for public internal auditors published in 2016 is the first performance audit manual in the world prepared with the internal audit perspective (IACB 2016c). “Internal Audit Quality and Assurance Program” was updated by the Board and “Public Internal Audit Quality Assurance and Improvement Manual” was published

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in 2016 in order to strengthen the public internal audit system in line with participatory management approach and international good practices, and to assure and continuously improve the quality of the internal audit activity (IACB 2016d). The assurance of the compliance of internal audit activities with the Standards is the internal assessment carried out by the internal audit units and the external assessment carried out at least once in every 5 years by a team of qualified and independent external assessment experts from outside of the administration. With Law No. 5018, the external assessment task is assigned to the IACB. In this context, external assessment activities were initiated in 2012 and 2013 and the external assessment of the internal audit activities of 26 large-scale public administrations was completed (IACB 2013a, 2014a, 2015, 2016b, 2017). However, this activity could not be continued in the following years due to the lack of administrative capacity of the IACB. Therefore, there is no clear information on the extent to which internal audit units operate in accordance with the Standards. On the other hand, despite the Public Information Technology Audit Manual (2014) and the Performance Audit Manual for public internal auditors (2016), the audits in these fields are not yet performed at the desired level. Among all internal audit types, performance audit and IT audit are performed at the level of 1% (IACB 2017). This low level indicates that it is important to bring internal auditors to this level of competence as well as to publish manuals on audit types with high level of technical competence, especially IT audit and performance audit. In this context, on-the-job trainings are very important especially in the internal audit profession where continuous professional development is important. As a matter of fact, internal auditors should be subjected to minimum 100 h of professional training every 3 years and it was stipulated that 30 h of this period shall be given by the Ministry of Treasury and Finance under the coordination of IACB (Article 65 of Law No. 5018). However, in-service trainings that were held every year until 2016 with the participation of all public internal auditors were not organized after 2016. Furthermore, an amendment was made to Law no. 5018 on July 2, 2018, and the statement “made by the Ministry of Treasury and Finance” in the article regulating public internal audit training programs has been removed from the Law. This has led to uncertainty as to which institution(s) will conduct the vocational training of public internal auditors. In the survey conducted by the IACB for all public internal auditors, only 45% of the participating internal auditors express that the IACB is effectively performing its central harmonization function. However, it was found that 65% of the internal auditors participating in the survey were satisfied with the ˙IçDen software developed by the IACB, 80% of them were satisfied with manuals, and 80% of them were satisfied with vocational training opportunities (IACB 2018b). Therefore, despite the shortcomings in the central harmonization structure in general due to insufficient administrative capacity, it can be said that the level of satisfaction with the manuals and trainings issued by the IACB is high. This general introduction of the public internal audit system will be followed by a discussion on external audit and inspection, the two systems which have a direct impact on the effectiveness of the internal audit system. The cooperation and coordination between the internal audit and the external audit and the clarity of

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the separation of duties between the internal audit and the inspection determine the effectiveness of the internal audit system.

12.3.2 External Audit System The main function of internal audit is to provide internal assurance and consultancy services on internal control, risk management, and governance processes. Internal audit differs from the external audit which is responsible to the legislative power and provides an independent opinion on the financial statements of public institutions and the effectiveness of their activities due to its internal function (Diamond 2013). Therefore, due to their complementary functions, the cooperation and coordination between internal audit and external audit is extremely important in terms of public financial management. The TCA determines the existence or effectiveness of internal audit in institutions with the help of various questions, including appointments of internal auditor staff within the scope of monitoring component of internal control, the functional independence of internal audit, and whether internal audit reports issued by the management of the organization fulfill the rules on form and content. Especially in institutions that have not yet appointed an internal auditor, this is immediately mentioned in the audit reports of the TCA and this raises awareness of the necessity of appointing an internal auditor in these institutions. In order for this awareness to contribute to the independence and effectiveness of internal audit activities, coordination and cooperation between external audit and internal audit should be regular and continuous (Gösterici 2006). However, it is seen that the cooperation and coordination between the TCA and the internal audit units is still far from the level of a good practice example. As a matter of fact, in the survey conducted among public internal auditors, only 37% of the internal auditors responding to the survey considered the coordination and cooperation with the TCA to be sufficient (IACB 2018b). When international practices are examined in terms of cooperation and coordination between the TCA and internal audit, it is seen that efforts to develop audit techniques and methods and to establish a common terminology in audit practices contribute significantly to the cooperation process. Indeed, the Netherlands, the Czech Republic, Poland, Portugal, Romania, Slovenia, Lithuania, and Estonia are carrying out such collaborative work. In addition, the advisory jurisdiction of the TCA and the IACB on the identification of common risky and high value-added audit areas throughout the country and the inclusion of these areas into the audit programs of the internal audit units by IACB will increase the level of cooperation and coordination between the TCA and internal audit.

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12.3.3 Inspection One of the challenges in terms of the effectiveness of the internal audit system in practice stems from the lack of clarity of the distinction between roles and responsibilities between inspection and internal audit. Inspection is required but it is quite different from the internal audit defined within the framework of international standards and good practices. Internal audit is an assurance and consulting activity aimed at adding value to management. Inspection is an ex-post financial control activity that usually reports to a central institution and is responsible for investigating major failures and imposing sanctions on responsible persons and institutions. Inspection, which is an investigation activity, should reveal serious system weaknesses and personal violations (Vrolijk 2010). In Turkey, internal audit is primarily regulated by Law No. 5018 and its practice, including many topics common to all internal auditors such as the duties and powers of internal auditors, establishment of internal audit units and appointment of internal auditors, and the scope of internal audit are enacted through subsequent regulations and tertiary legislation. Although Law No. 5018 provides a clear definition of internal audit, internal audit units are not included in the organization laws of the institutions. This creates an uncertainty about the position of internal audit units within the administrative structure. On the flip side, inspection units are included in the organization laws of the institutions although there is no definition of inspection in any law, and the duties of the inspection units of the relevant institution are generally described as “conducting evaluations, audits and investigations in relation to all kinds of activities and transactions”. Therefore, uncertainties about the position of internal audit units in the organizational structure on the one hand, and uncertainties regarding the duties and roles of the inspection on the other hand lead to a conflict of duties and roles between the inspection and internal audit. Other reasons for the conflict of duties between the inspection and the internal audit can be briefly categorized as follows: 1. Lack of legislation and implementation standards among inspection units and a shift in their audit scope in a way to overlap with internal audit, covering areas such as consultancy, information technology, and performance audit in some institutions; 2. Internal audit units still carrying out compliance audits significantly; 3. Existing internal auditors (72%) have audit-oriented professional experience (such as inspector, controller, and auditor) (IACB 2018b). The lack of delineation between the roles and powers of internal audit and inspection results in the perception and confusion of these two functions as alternatives. In fact, these two audit elements are not alternatives to each other, but complementary functions (Gürkan 2009). In the existing structure, inspection boards are affiliated to the political authority in accordance with the principle of political responsibility, while internal audit units are affiliated to the administrative authority within the

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framework of management responsibility. With the lack of the abovementioned limits between the two roles, there remains a duality in the auditing structure in public administrations (Yılmaz 2011). The European Commission pointed out, in Turkey Progress Reports, the necessity of differentiating between internal audit and inspection in Turkey. Accordingly, the reports highlighted EC’s expectations from Turkey to make arrangements in order to clarify the role of internal auditors and thus prevent potential overlaps between internal audit and inspection (EC 2015, 2016). The assessment reports of the OECD-SIGMA on Turkey, which also contribute to the European Commission’s annual Progress Reports, underline the risk of overlap between the two functions in terms of their roles and responsibilities (OECD-SIGMA 2014, 2015). The administrative structure of an institution and the duties of its units used to be regulated by the organization laws of the institution, however, with the transition to the Presidential System, they are now regulated by Presidential Decrees. In order to increase the awareness and ownership of internal audit, internal audit should be included in the organization law and decrees of institutions. Inclusion of internal audit in organization laws/decrees is also seen as a critical success factor for internal auditors. As a matter of fact, 88% of public internal auditors in Turkey believe that the organization laws should be regulated in order for internal audit activity to add value to the organization (IACB 2018b). In order to prevent conflicts in the practice of internal audit and inspection and to increase the effectiveness of internal audit, in addition to the fact that internal audit units are included in the organization laws of the institutions, it is necessary to provide a clear definition of inspection and there is also a need for a legal arrangement to define internal audit as an activity within the scope of internal audit units’ assigned position. However, the draft laws prepared on this subject have not been enacted yet.

12.4 Roles No matter how well the structures and systems are designed, their implementation relies heavily on the human element defined in the system. For this purpose, the extent to which roles defined in the system are fulfilled is a critical success factor. Considering that internal audit activities are carried out by the internal auditors reporting to the top manager of the relevant administration and that the Chief Audit Executive (CAE) is the person responsible for managing the internal audit function within the organization in accordance with the Standards and regulations, the most important roles defined in the internal audit system are the top manager, head of internal audit, and internal auditors.

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12.4.1 Top Manager In Law No. 5018, different duties of the top executives ranging from deciding on the strategic plans and budgets of their administrations to ensuring the efficient and economic acquisition and use of the resources, and supervising and monitoring the functioning of the PFMC system are determined within the framework of accountability. The same Law provides that the top executives will fulfill these responsibilities through internal auditors as well as authorizing officers and the financial services unit of the organization. Therefore, internal audit is one of the most important sources of the top manager in the new public administration approach shaped within the framework of managerial accountability. The Law no. 5018 and secondary legislation gave senior managers a wide range of initiatives to use internal audit resources. Their initiatives include appointing internal auditors, approving the 3-year audit plan and annual audit program, and approving and distributing the audit reports. In addition to the powers listed in the primary legislation, top executives also have the responsibilities mentioned in the Regulation on the Working Procedures and Principles of Internal Auditors. According to this regulation, the top managers are responsible to ensure that • internal audit activities are performed independently, • other units provide the necessary support to internal auditors in the performance of the audits, • the findings in the internal audit reports are implemented, • professional competence of internal auditors is improved. Top executives fulfill their internal audit responsibilities to the extent that they benefit from the internal audit resources effectively. Otherwise, within the scope of accountability to the top manager, a function, which should provide assurance (with performance audit) as to whether the “discretionary power” is exercised appropriately within the framework of effective, economic, and efficiency measures of corporate resources, can also be ineffective by the senior manager’s discretion (Nohutçu and Çimsir 2016: 200). The most important factor in the provision of an effective internal audit function that adds value to the organization is expressed by the public internal auditors where it is supported by the senior management. As a matter of fact, 68% of the public internal auditors who responded to the survey conducted by the IACB among all public internal auditors stated that the most important element for the effectiveness of the internal audit activity was “top management support”, however, only 56%1 of the respondents think that they have received support from their top manager (IACB 2018b). 1 Public

internal auditors specify the factors that are important on the effectiveness of internal audit activity as follows: 1- Top management support (68%) 2- Functional independence (17%) 3Continuous Professional Development (5%) 4- Administrative and Budgetary Structuring (%5) 5Central Harmonization (4%) (˙IDKK 2018b).

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An important indicator showing the effectiveness of internal audit and the support of the senior manager is the frequency and ease of communication of the internal auditors with the senior manager. According to the results of the IACB Survey, 74% of the internal auditors stated that they could meet with the senior management after submitting the report and 14% said they could not meet at all. While 53% of the public internal auditors reported that they could meet with the senior management when they requested it, 24% reported that they rarely or never meet (IACB 2018b). The survey results show that at least one-quarter of all public internal auditors have almost no communication with the head of the administration. At the same rate, internal auditors believe that top executives do not support internal audit activities. Given the critical role of top managers in the conduct of public internal audit activities, these high ratios appear to be an important problem for the effectiveness of internal audit activities in some public administrations. The fact that internal audit is attached to the top manager makes the effectiveness of the audit dependent on the objectivity of these authorities (Yurtsever 2009). In this respect, it is very important for the internal audit activities to be promoted to the senior management, particularly in institutions where there is a periodical turnover of senior managers such as local administrations and universities. It will also be useful if the IACB organizes events and workshops on the added value of internal audit for senior executives of the institutions.

12.4.2 Chief Audit Executive (CAE) The CAE is the person responsible for managing the internal audit function within the organization in accordance with the Standards and legislations and regulations. In the public administrations with three or more internal auditors appointed by the IACB, general assent was given to establish internal audit unit presidencies. In such public administrations, one of the internal auditors is appointed as the CAE with the approval of the top manager. The CAE is responsible for the following duties set out in the Regulation on the Working Procedures and Principles of Internal Auditors in order to effectively manage the internal audit activity: • Managing the internal audit unit in accordance with the legislation, auditing, and reporting standards; • Preparing the internal audit charter, internal audit plan, and internal audit program and submitting it to the approval of the top manager; • Assigning the internal auditors to their duties; • Monitoring audit results;

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• Observing the quality of internal audit activity and to establish a quality assurance and development program for this purpose, monitoring the performance of internal auditors; • Ensuring that internal auditors regularly improve their knowledge and skills in accordance with the on-the-job training program; • Taking the necessary measures and inform the top manager when independence or impartiality of internal auditors is compromised or violated. Although these important duties of the CAE are laid down in the regulations, the qualifications and competencies required to perform such duties are not defined. In other words, there is no qualification criterion for the appointment of the CAE. While internal auditors who can perform audit supervision, performance audit, and IT audit are based on certificate ratings, there is no certificate, seniority, or competency requirement for internal auditors to be appointed as the CAE. Moreover, since there is no defined CAE position, no separate payment is made to the internal auditors acting as the CAE in return for this duty. In summary, effectiveness of internal audit may be increased by creating separate positions for the CAEs in public institutions, establishing the qualifications and competencies required from the internal auditors to be appointed to this position, and providing additional remunerations to the staff members who are appointed to these positions to reflect their powers and responsibilities.

12.4.3 Internal Auditors The Law No. 5018 provides that “internal audit is performed by internal auditors”. The regulations regarding the qualifications and appointment of internal auditors are also included in the same Law. Accordingly, it is regulated that those who have worked in public administrations for at least 5 years as audit staff or at least 8 years in fields designated by IACB (such as experts and research assistants) may be an internal audit candidate and the candidates shall be subjected to internal audit training under the coordination of IACB, and a public internal auditor certificate will be given to those who have successfully completed this training. In order for the certified internal auditor candidate to be appointed as an internal auditor in any public institution, the proposal of the top managers in the ministries and affiliated administrations and the approval of the top managers in the other administrations is required. Thus, the appointment of a public internal auditor in Turkey remains totally at the discretion of senior managers. As can be seen in Table 12.1, internal auditor positions were created in 383 public institutions including ministries, universities, and local administrations and 256 of these institutions appointed at least 1 internal auditor. Therefore, nearly in one-third of the institutions where internal auditor positions were created, top managers have not yet appointed internal auditors. In addition, as of 2019, 2,075 internal auditors were assigned to 383 public institutions. The number of internal auditors actively

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Table 12.1 Internal auditor appointments Years

Allocated posts

Appointed internal auditors

Occupancy rate (%)

Number of Units Allocated with IA positions

Number of Units that filled the positions

Rate of institutions with IAs (%)

2008

1369

789

58

261

206

79

2009

1369

768

56

261

207

79

2010

1369

774

57

261

210

80

2011

1371

730

53

264

207

78

2012

2077

767

37

402

208

52

2013

2093

873

41

390

233

60

2014

2072

966

47

383

252

66

2015

2075

960

46

383

253

66

2016

2075

906

44

383

255

67

2018

2075

896

43

383

256

67

Source Based on the data of Public Internal Audit General Reports (IACB 2009, s. 43,44, 2010a, s. 53, 2011, s. 53, 2012, s. 53,54, 2013a, s. 41–42, 2014a, s. 37,38, 2017, s. 29, 2018a, s. 35)

employed in these institutions is 896 and this number is 43% of the assigned auditor positions. As can be seen from the table, the number of internal auditors assigned has generally been between 700 and 900 and staff occupancy rates are between 40 and 60%, although there has been an increase in the number of staff allocated since the date of the first internal auditor appointments. In Table 12.2, the public institutions allocated staff as of 2018 and the status of appointing internal auditors to these positions are seen on the basis of management types. What is remarkable in the table is that almost half of the 200 local Table 12.2 Status table for 2018 internal auditor appointments (on the basis of administration) Administrations

Allocated posts

Appointed Internal auditors

Occupancy rate (%)

Number of units allocated with IA positions

Number of units that filled the positions

Rate of institutions with IAs (%)

General budget

695

269

39

45

32

71

Special budget

607

345

57

136

111

82

Local administration

733

243

33

200

89

45

40

39

98

2

2

100

2075

896

44

383

256

67

Social Security Institution (SSI) Total

Source IACB 2018a

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administrations in which the position has been established have not yet appointed any internal auditors. In addition, considering the fact that 243 internal auditors are actually employed in 89 local administrations that appoint internal auditors, the average number of internal auditors is less than three. Therefore, in the majority of these administrations, internal audit activities are carried out by one or two internal auditors without establishing an internal audit unit. An important arrangement made to resolve the problem of the slow progress of internal auditor appointments is the addition of provisional Article 21 to Law No. 5018, which took place in April, 2013. The aim of this article is to close the internal auditor gap in areas requiring technical expertise in public administrations and to accelerate the appointment of internal auditors by giving the opportunity to faculty members, physicians, dentists, pharmacists, veterinarians, biologists, legal counsels, Treasury lawyers, lawyers, and engineers to move to internal auditor positions until December 31, 2014, on condition that they have worked in public administrations for a certain period of time and fulfill other conditions specified on the Law. The transition from technically qualified staff to internal auditing will enable internal audit to audit all financial and non-financial areas more effectively (A˘gdeniz 2015). In this context, as of the end of 2014, the number of internal auditors working in public institutions reached from 873 to 966 with the appointment of internal auditors in 2013 and 2014, with the effect of the provisional Article 21. In addition, the number of institutions that appointed internal auditors increased from 207 to 233, and internal auditing activities started in 26 institutions which had not appointed any internal auditor before. Internal auditors, who are appointed and have taken office, are subject to a certificate rating system starting from (A-1) level to (A-4) level. Public internal auditor certificates are evaluated in accordance with the internal audit duties carried out, the trainings they receive, the activities they participate in, educational activities, scientific articles, and if the required score is obtained, they can upgrade the level of their certificate. This system serves the purpose of encouraging the continuous professional development of internal auditors as well as ensuring that the internal auditors perform duties only in the areas in which they are competent. For this purpose, performance auditing and supervision of audit activities are carried out primarily by internal auditors with A-3 and A-4 certification level. Although the certificate rating system is a well-established example of performance-based remuneration as a basis for continuous professional development, certificate ratings are not taken into account in determining the personal benefits of internal auditors.

12.5 Conclusion In Turkey, with the PFMC Law No. 5018, both management and audit processes and its paradigm have been rearranged in line with global trends and international standards. This paradigm shift has brought about fundamental changes in public financial management and control. It would not be fair to assume that this change

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could be achieved in a very short time and with minor legal changes. Such a radical transformation would be only possible if the structures and roles in the system act as a whole and in harmony. The most fundamental structure designed to ensure the harmonious functioning of internal audit in all public institutions and to guide the reform process in this field is the IACB, which is the internal audit central harmonization unit. Despite its lack of institutional capacity, since its establishment in 2006, the IACB have managed to adopt regulations and communiqués related to public internal auditing, publish guidelines on the general processes of auditing and types of audits such as performance and information technologies (including central harmonization function), introduce the Public Internal Audit Software, which covers all stages of internal audit, to public internal auditors, and provide regular vocational trainings for public internal auditors every year until 2016. Since 2008, when the first internal auditor appointments were made, the internal auditor staff occupancy rates have varied between 40 and 60%; the ratio of institutions which have not yet appointed an internal auditor despite being equipped with the necessary positions is between 20 and 50%. Only with the introduction of the provisional Article 21 which paves the way for technical staff like lawyers, engineers, and doctors to become internal auditors, a significant leap was observed in 2013 and 2014. Therefore, there are still important steps that need to be taken in terms of the added value that internal audit provides to institutions and senior management awareness. In Turkey, the maturity level of public internal audit system may be increased, by raising further awareness among senior managers on internal audit on one hand and enhancing the competency of internal auditors on the other. In order to achieve this, in addition to a strong central harmonization unit, cooperation and coordination between the internal audit and the supreme audit institution, i.e., Court of Accounts should be increased and the overlap between the duties and roles of the internal audit and the inspection should be prevented. Especially in institutions such as universities and municipalities where management changes periodically, the level of awareness of senior managers about the necessity of internal audit is not at the desired level yet. As examples of good practice increase in these institutions, the awareness of top managers will increase. In a world where information, business practices, and risks are constantly changing, internal auditing can create value through continuous professional development. Public internal audit in Turkey has a strong foundation with both detailed guidelines and internal audit software. At this point, the most important area that needs to be developed should be the development of internal auditor competencies, especially in the field of performance auditing and information technologies. Considering that information systems become an indispensable part of all business processes and cyber risks pose a major threat to corporations, having more internal auditors capable of performing information technology audits will increase the added value of internal auditing. Enhancing the competencies of internal auditors in the field of information technologies will also prevent the overlap of duties and roles between internal audit and

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inspection, which is an important problem for internal auditing. This situation will inevitably continue as long as the internal audit is focused on compliance and financial audit. As internal audit units shift their focus to performance audits and IT audits, the duty overlap between the inspection and internal audit will spontaneously cease over time. Even if the overlap of duties ends in practice, the fact that internal audit is not included in the organization laws of institutions while inspection is will cause further discussions on the position of internal audit units against inspection. The situation in Turkey may be summarized as follows: there is internal audit with clearly defined functions and boundaries but its position within the institution is still uncertain, and there is also an inspection function whose role and limits are unclear but its place in the organization is certain. Therefore, efficiency of internal auditing will increase once the internal audit units are included in the organization laws of the institutions, have a separate budget, position of CAE is created, the qualifications and competencies required for the internal auditors to be appointed to this staff are laid down, and legal arrangements are made to make a separate payment to the internal auditors acting as heads of internal audit units. Another subject, which is as important as the separation of the duties and roles of internal audit and inspection, is developing coordination and cooperation between the TCA and internal audit units since such a cooperation and coordination in Turkey is still far from being at the level of a good practice. The observations and findings of the TCA regarding the existence or effectiveness of internal auditing in institutions increase the awareness of senior management on the matter, and they are important triggers for appointing internal auditors or increasing effectiveness of internal auditing. A strong central harmonization structure will ensure senior management awareness, continuous professional development, separation of duties and roles between internal audit and inspection, and effective coordination and cooperation between internal audit and the TCA. To this end, strengthening the institutional capacity of the IACB and furnishing it with better tools for coordination and guidance across the country will be the most important development to improve the internal audit system in Turkey. This structural change will be possible by changing the extent of “centralization” as in the examples such as the establishment of the Government Internal Audit Agency (GIAA) in the UK in 2015 and the transition from a decentralized internal audit system to a central internal audit system. As emphasized in the IACB reports, Turkey Progress Reports issued by European Commission and academic studies, the draft laws on the restructuring of the IACB have not been enacted to date, although it has a critical importance to ensure the functional independence and effectiveness of internal audit.

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Halis Kıral is an assistant professor at the Social Sciences University of Ankara in Turkey. He is also Head of Audit and Risk Management Department and Director of Center for Audit and Risk Management (ASBÜDRM) at the ASBU. He was a visiting scholar in Duke Center for International Development (DCID) for the 2017–2018 academic year. He has also worked in the Ministry of Finance of Turkey as a state budget expert, public finance expert, head of the department of Central Harmonization for Internal Audit, and head of the Budget Policy Department. As the Head of Central Harmonization Unit for Internal Audit, he led several projects including developing Public Internal Audit Software (˙IçDen©) for public internal auditors and publishing Public Internal Audit Manual, Information Technology Audit Manual, Quality Assurance and Improve-

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ment Manual and Performance Audit Manual for Public Internal Auditors. He wrote a number of articles, books and book chapters on topics such as public finance, public financial management and control, specifically internal audit and risk management, and applied economics. Currently, he is also working on impact analysis, monitoring and evaluation.

Chapter 13

Reforms of Turkish Court of Accounts ˙ Elif Ay¸se Sahin ¸ Ipek

13.1 Introduction Establishment of supreme audit institutions worldwide dates back to 1750–1800s, along with the adoption of parliamentary democracy and passing of the budget power fully to the parliament (Ça˘gan 1985, p. 199; Demirba¸s 2001, p. 5). In this respect, regarding the use of budget power, which is the most important instrument of national sovereignty in the parliament, a specialized organization was required to supervise the executive body on behalf of the parliament, which led to the emergence of supreme audit institutions (Feyzio˘glu 1987, p. 23). While national supreme audit institutions initially supervised the compliance of public revenues and expenditures with the laws and other relevant legislation, the scope of this type of audit which is referred to as the traditional audit was expanded and began to audit and publish the financial statements of the public institutions whose methods and techniques had been renewed; there was shift from traditional audit to the financial audit. Since the second half of the 1970s, performance auditing has become legal in many countries, particularly in developed countries (Co¸skun 1998, pp. 87, 88). Today, new role of parliaments in budget process has turned into policy-making rather than control. Such transformation involves approaching the financial management with a program perspective in order to increase efficiency in public resource allocation, directing resources to higher priority and more efficient activities and projects, and good information to achieve all of these issues (Ba˘glı 2011, p. 45). Despite different organizational structures, it is clear that the supreme audit institutions have developed in parallel with this change and need. ˙Ipek (B) E. A. Sahin ¸ Faculty of Economic and Administrative Sciences, Department of Public Finance, ˙Izmir Kâtip Çelebi University, ˙Izmir, Turkey e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2020 T. Akdemir and H. Kıral (eds.), Public Financial Management Reforms in Turkey: Progress and Challenges, Volume 2, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-981-15-4226-8_13

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˙Ipek E. A. Sahin ¸

Radical changes made in Turkey’s financial management system with a view to increase the parliament’s budget power was also reflected to the Turkish Court of Accounts (TCA) as the supreme audit institution. The subject of this study is the evaluation of the change process experienced by the Turkish Court of Accounts. In order to make such an evaluation, firstly, the historical development process of the TCA is included from the day of its establishment, and then the change it has experienced in the historical development process is evaluated.

13.2 Historical Development of the Turkish Court of Accounts 13.2.1 Pre-republic Period TCA roots back to the Ottoman Empire. When the supreme audit institutions emerged in the west, Ottoman Court of Accounts was established in 1862 under the name of Divan-i Ali-i Muhasebat within the framework of the reform movements, referred to as “Islahat Hareketleri” in the Ottoman Empire, (Akyel and Ba¸s 2010, p. 377). According to the regulation published on 29 April 1865, 3 years after the establishment of the TCA, the president, and members of the TCA are appointed by the sultan and can resume their duties unless they resign or the position is legally made vacant. According to the regulation, the TCA was composed of two chambers, one of which was Finance and the other was Proceedings and assumed audit and jurisdiction (Karaka¸s 2005, p. 54). TCA emerged as a constitutional institution 14 years later. Accordingly, TCA was referred to in the articles 105, 106, and 1071 under the title of Divan-I Muhasebat (Court of Accounts) in “Umuru Maliye (Financial Affairs)” section of Kanun-i Esasi (Basic Law of Ottoman Empire) of 23 December 1876, the first constitution, which initiated the first constitutional period with a parliament established by a constitution. In this period, establishment and functioning of the TCA were defined by Decree on the Establishment and Duties of Divan-ı Muhasebat (Court of Accounts) drafted in 1879 in accordance with article 107 of Kanun-i Esasi (Aksoy et al. 2008, p. 8). According to the decree, the TCA has the mandate to perform financial audits, to prosecute and to decide on those responsible. With this decree, the TCA consists of 12 members, 1 prosecutor, 1 chief clerk, 10 auditors, and 10 assistant auditors. It is divided into two chambers: Finance and Proceedings. The decree granted judicial independence to the president and members and emphasized that the TCA could not 1 Article

105 of Kanun-i Esasi the Court of Accounts is assigned to examine the accounts of those responsible for taking and consuming the state assets and to present the brief examination results and its opinions to Heyet-i Mebusan (Chamber of Deputies in Ottoman Empire) in the form of annual reports, and to submit quarterly reports to the Sultan about the financial situation by means of the President of the TCA. Articles 106 and 107 thereof governed number, appointment, guarantees of the President and members as well as some other issues (Köse 2007, p. 228).

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be affiliated to any ministry and acted independently (Akgündüz 2018, p. 103). Upon convening for the last time, Divan-ı Muhasebat was liquidated on 28 October 1922 (Aksoy et al. 2008, p. 8).

13.2.2 Court of Accounts in 1924, 1962, and 1982 Constitutions Sometime after the opening of the Grand National Assembly of Turkey (GNAT) in Ankara, an office affiliated to the Ministry of Finance was established to control the spending documents against the appropriations, but it worked for a very short period of time. In 1922, it was envisaged that a committee would be selected within the Parliament and that the budget would be audited by such committee until TCA was established. This committee, consisting of three members for the Ministries of National Defence and Finance and one for each of the other ministries, has been assigned to report to the Parliament on a quarterly basis for the collection of government revenues and government spending, and has carried out the task of auditing of the budget for more than one year. When the National Assembly decided to renew the elections in 1923, the duty of the supervisory committee came to an end. However, despite the decision of the National Assembly to renew the elections, a TCA was established by the Government in 1923 to serve within the framework of the former legislation, since Divan Kararnamesi (Court Decree) was not abolished which was previously issued with regard to the duties of the committee auditing the budget and an appropriation was already allocated to the TCA. Mentioned TCA served for approximately seven months until the Parliament convened at the end of the elections and a TCA was founded by a law (Akgündüz 2018, p. 121, 122). A time after the parliamentary elections were held and the Assembly convened, it was considered inconvenient that the TCA Board was appointed by the Government. ˙ Thus, on 24 November 1923, Divan-ı Muhasebatın Suret-i Intihabına Dair Kanun (Election Procedures of Court of Accounts) Law no. 374 was issued and the TCA was re-established in the Republic period. With this Law, only the establishment of the TCA and the election, appointment, and guarantees of the president and members were set out; reference was made to the former legislation for matters relating to the functioning of the TCA and its auditing duties. The most important feature introduced by the law is that the president and members of TCA were elected from among the individuals outside the Parliament by means of secret vote in the Parliament, which granted the TCA the status of an independent organization (Akgündüz 2018, p. 123). In this period, Te¸skilat-ı Esasiye Kanunu (Constitution of the Ottoman Empire) of 21 January 1921 no. 85 which was a framework constitution and consisting of 24 articles did not addressed the TCA. However, the TCA was governed in Articles 100 and 1012 under the sixth section titled “Miscellaneous” of the Constitution of 2 According

to article 100 of the Constitution of 1924 “A Court of Accounts shall be established as affiliated to Turkish Grand National Assembly to audit government revenues and expenditures in

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1924, which is the first constitution of the Republic. The Constitution of 1924, which does not give any jurisdiction power to the TCA, has determined the audit area of the TCA very broadly, i.e., all revenues and expenditures of the state. However, the TCA has actually exercised its jurisdiction power vested by its law of establishment (Ta¸sır 2017: 84, 85). In early Republican period, ex ante visa organizations were founded in 28 places of Turkey. In 1927, Muhasebe-i Umumiye Kanunu (General Accounting Law No. 1050) was published and since the provisions of the law regarding the auditing foreseen that the accounts shall be examined only at the central organization and ex ante visa shall only be applied to the central accounts, decentralized visa organizations of the TCA were abolished as of that date. Due to the abolition of the decentralized visa organizations of TCA and putting the services together under the central organization, the number of chambers of the TCA, which was three at that time, were increased to four in 1931, and one chairman and three members were added to the staff. (Akgündüz 2018, p. 127). Law No. 374 was repealed by Court of Accounts Law (Divan-ı Muhasebat Kanunu) No. 2514, which entered into force in 1934 (Önder and Türko˘glu 2012, p. 200). According to the Law; TCA is a delegation which is affiliated to the GNAT and which is responsible for auditing the Government’s all revenues and expenditures as well as its assets and accounts on the behalf of the Parliament, and examining and judging the accounts of those who receive, spend, manage, and maintain the state property. According to the Law, the TCA continued its duties of auditing, judging, and visa duties as well as other duties arising from laws (Aksoy et al. 2008, p. 8). According to the Law No. 2514, TCA is composed of a president, chairman and members as well as a general secretary. A prosecutor elected by the Ministry of Finance as the representative of the Treasury is also included in the TCA. The number of chambers is four according to its establishment law. According to the Law, the president and members of the TCA shall be elected from among the candidates jointly nominated by the Budget, TCA and Finance Committees, by the majority of the Parliament through secret voting, provided that they meet the qualifications stated in the Law. The replacement of the president and members is only possible upon the decision of the Parliament. In addition to its other duties, the General Assembly of the TCA has also been assigned the duty and authority to review the decisions made by the TCA chambers. When it comes to the 1961 Constitution, it is seen that the TCA is addressed in Article 1273 of the “Execution” section of the Constitution. Although TCA is addressed in Execution section of 1961 Constitution, it has assigned judiciary duty to TCA (Ta¸sır 2017, p. 85). Until 1967, the establishment and functioning of the TCA line with a special law”; according to article 101 thereof, “TCS shall submit statement of general conformity within six months at the latest from the date when relevant final account law is presented to the GNAT”. 3 Mentioned Article 127 states, “The TCA is responsible for inspecting all revenues and expenditures as well as assets of the general and annexed-budget administrations on behalf of the Parliament and finalizing the accounts and transactions of those responsible and performing examination, auditing and judgments duties assigned by laws.

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was governed in accordance with the Law no. 2514 and the Law no. 5999, which was enacted in 1953 as annexed to Law no. 2514. Law no. 2514 was abolished in 1967 together with all its annexes upon enactment of the Court of Accounts Law no. 832. The changes to the establishment and operation of the TCA introduced by the Court of Accounts Law No.832 are as follows (Akgündüz 2018, p. 135); (i) The number of chambers was increased from four to eight, (ii) A separate Board of Appeals was established in TCA for appealing the decisions of the TCA Chambers, (iii) the criteria sought for the TCA president, heads of departments, members, and those who will be hired for auditing profession, their selection, or appointment procedures were subject to new principles. (iv) A more efficient audit procedure is envisaged by assigning the duty to examine whether the appropriations allocated to budgets are spent on the intended service, (v) Registration of the spending contracts of the administrations and institutions which are subject to TCA audit were made widespread throughout the country; and thus, it was ensured that the large amounts of investment expenditures were examined in compliance with the laws during undertaking period, (vi) the mandate was given to examine the records of the transactions, assets, work, and services of the institutions and administrations, both on-the-spot and on every aspect of the case, and thus it was enabled to check compliance of the service provided with the documents, (vii) the mandate was given to notify the parliament about the laws, regulations and by-laws, which were found to be damaging the benefit of the Treasury, and (viii) the mandate was given and duty was assigned to examine the accounts and transactions, in terms of economy, finance, and management principles, of the institutions other than general budget and annexed budget administrations which have economic business qualifications in terms of their fields of operation, apart from statements of general conformity issued for general and annexed budget organizations. TCA has started to serve in this direction through the annual account results of these institutions, especially through their consolidated balance sheets. With the law no. 1260 of 21.05.1970, ex ante visa process was abolished and short-term review groups were established through which monthly audits of the central accounts were ensured. Visa of cadres and appropriations and registration of contracts were included in the new duties of the TCA (Köse 2007, p. 215).

Establishment, functioning, audit procedures of TCA, and duties and powers, rights and obligations, qualifications and appointments of its members, other personnel affairs and guarantees of the President and members shall be governed by law. Procedures for the auditing, on behalf of the GNAT, of state property owned by the Armed Forces shall be regulated by law in accordance with the principles of confidentiality required by national defence services.”

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In contrast to the preference of the 1961 Constitution, the 1982 Constitution4 preferred to govern the TCA under the title of “Judiciary” as a constitutional institution. On the other hand, the Constitution of 1982 stated that administrative judiciary cannot be applied to against the decisions of TCA and granted superiority to the decisions of the Council of State in case of disputes arising between the decisions of the Council of State and of the TCA on tax and similar financial obligations and duties (Ta¸sır 2017, p. 93).

13.2.3 TCA in the New Approach of Law No. 5018 With the impact of the EU accession process, public administration reforms gained momentum in the 2000s and public financial management was reconsidered within the scope of the reform efforts initiated. Within this framework, public financial management and auditing was revised with the Public Financial Management and Control Law No. 5018, which was enacted on 10 December 2003 and entered into force on 1 January 2006 with all its provisions. With the PFMC Law No. 5018, the implementation of the fund was terminated, and all government revenues, expenditures and debt were fully covered by the budget and be subject to legislative audit. This way, the TCA took a step toward an audit approach focusing on the whole financial structure of the institution, instead of focusing on single transactions, and toward a transformation into a structure generating more comprehensive reports (www.sayistay.gov.tr). Article 68 of the PFMC Law No. 5018 titled “External Auditing” includes the purpose and types of the TCA audit, the liability to report to the Parliament, and the task of taking final decision on the accounts; Article 69 thereof refers to TCA audit. In addition, Article 42 of the PFMC Law No. 5018 assigned the TCA the duty of evaluating the accountability reports, Article 43 thereof assigned the duty 4 TCA (amended provision: general and annexed-budget administrations) shall inspect all revenues,

expenditures and assets of the public administrations within the scope of central government budget and social security institutions on behalf of the GNAT and finalize the accounts and transactions of those responsible, and carry out the duties of examination, auditing and finalizing assigned by laws. The relevant parties may make a one-time request for the final decisions of the TCA to be revised within fifteen days of the written notification date. These decisions cannot be referred to the administrative judicial system. The decisions of the Council of State shall be taken as basis in case of any dispute between the Council of State’s and TCA’s decisions on taxes, similar financial obligations and duties. (Additional third paragraph: 29/10/ 2005–5428/ 2 art.) The auditing and finalization of accounts and transactions of local administrations shall be performed by TCA. Establishment, functioning, audit procedures of TCA, and duties and powers, rights and obligations, qualifications and appointments of its members, other personnel affairs and guarantees of the President and members shall be governed by law. Procedures for the auditing, on behalf of the GNAT, of state property owned by the Armed Forces shall be regulated by law in accordance with the principles of confidentiality required by national defence services (Abolished paragraph: 7/5/2004–5170/ art.10)” (1982 Constitution/art.160).

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of preparing general conformity statements, and Article 54 assigned the duty of evaluating financial statistics and reporting its results to the Parliament. In the framework of these arrangements of the PFMC Law no. 5018, the audit area of the TCA was expanded, the obligation to report to the GNAT was increased, and it was become mandatory to conduct and report the audit within the framework of current guidelines including contemporary audit approaches in line with international standards. The PFMC Law No. 5018 made it compulsory to make some amendments to the Constitution, and in this respect, some amendments were made to some articles of the Constitution on 29 October 2005, including Article 160 on the TCA. With the constitutional amendment, the audit area of the TCA has been expanded to include social security institutions, the constitutional basis has been constituted for the auditing mandate on local governments, and many institutions and organizations that had been previously excluded from the special laws were taken under the audit scope of the TCA. Within the framework of the changes regarding the area and scope of TCA audits made to the Constitution and PFMC Law No. 5018, it became a necessity to change the Court of Accounts Law No. 832 and to reorganize its organizational structure. Efforts to that end started in 2003; the new TCA Law drafted by the TCA could not be submitted to the Parliament (Candan 2007, p. 222), yet the TCA Draft Law prepared later was submitted to the Parliament in February 2005 (T. C. Sayı¸stay Ba¸skanlı˘gı 2008, p. 8). However, the draft law was enacted in 2010. With the new TCA Law No. 6085 enacted in 2010 (Özekicio˘glu 2017, p. 614); (i) The audit area of the TCA has been enlarged and all administrations utilizing public resources, even if they are off the budget, were included in the scope of the audit. In addition, auditing of public economic enterprises was included in the audit area of the TCA with the Law no. 6085; (i) President of TCA is obliged to provide the Parliament with information by means of reports, (ii) publicizing the TCA audit reports became compulsory. However, following shifting to the presidential system after the referendum upon the adoption of the Law on the Amendment of the Constitution of Republic of Turkey No. 6771 of 21.01.2017 in Parliament, some changes were made for establishment of responsibility in financial management system. In this context, some amendments5 have been made to the relevant articles of 1982 Constitution and of the PFMC Law No. 5018; however, there has been no change in the arrangement of the TCA in the Constitution.

5 Mentioned changes will be addressed under the sub-headings of the following section, to the extent

limited by the scope of this study.

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13.3 An Evaluation of External Audit Reform Since the day it was founded, the TCA has undergone various changes, especially in terms of the audit area and its types. What is intended with this change, in terms of financial management, is to increase the efficiency of the parliament in exercising the power of the purse. The changes it has undergone in this respect should be evaluated according to certain criteria. Regarding the practices in Turkey, the driving force of reforms in financial management system has mostly been the efforts aiming at alignment with the EU acquis. The issues related to the TCA are included in the Financial Control section of the National Programme for the Adoption of the EU Acquis. External audit is addressed under the titles of “Legislation Amendment to Improve External Audit in line with EU and International Standards” and “Strengthening Audit Capacity of the TCA ” (T. C. Dı¸si¸sleri Bakanlı˘gı 2018). Regarding the first title, compliance of the Law No. 6085 with international auditing standards set forth by INTOSAI is important. In this respect, it is important to evaluate the Lima Declaration, which is determined by INTOSAI and which sets the framework for the financial, functional, and administrative independence of the Supreme Audit Institutions, and the Mexico Declaration covering the principles determining the independence of the Supreme Audit Institutions, in terms of their compliance with international auditing standards for regularity and performance auditing. Regarding the second title, it is important to evaluate the changes in the organizational structure that determines the audit capacity of the TCA, the change in the number of auditors and the use of information technologies. The EU Commission uses the evaluation criteria set out by SIGMA to assess the candidate countries’ supreme audit institutions and monitor the progress. In this framework, the evaluation criteria are: (i) whether the supreme audit institutions have the mandate to audit all public resources, institutions, and initiatives, (ii) whether the audits cover regularity and performance audits to the extent of INTOSAI audit standards, (iii) independence of the supreme audit institution, and (iv) adoption and implementation of international auditing standards by supreme audit institution in line with the EU requirements. To that end, this section evaluates the changes undergone by external audit in Turkey and legal arrangements made in Turkey for the purpose of compliance with generally accepted international standards, under the following titles: (i) independence of TCA, (ii) changes in TCA’s audit area, (iii) changes in the TCA’s function, (iv) changes in the scope of relations of the TCA with the Parliament, and v) changes in institutional capacity of TCA.

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13.3.1 Independence of TCA The definition of independence of external audit is included in declarations published by INTOSAI. While the Lima Declaration adopted in 1977 defines the principle of methodological and professional audit independence, Mexico Declaration adopted in 2007 defines external audit independence within the framework of eight principles. The main purpose of the Lima Declaration is to make an independent audit system functional and in this Declaration, the types of independence are institutional independence, functional independence, and financial independence (INTOSAI 1977). The purpose of the Mexico Declaration is to establish the independence of supreme audit institutions. Based on Lima Declaration, eight principles are defined in Mexico Declaration, which are necessary for a proper audit (INTOSAI 2001). These principles include; (i) providing statutory guarantee for and actually implementing independence, (ii) providing external audit institutions with necessary and sufficient human and financial resources, and the executive not directing or having no control over managing such resources; (iii) setting out in the legislation due conditions and procedures for appointment of the presidents and members of supreme audit institutions and guarantees for resuming their duties, (iv) ensuring their independence to be able to perform their duties effectively, regarding selection of audit subjects, planning and audit methods; (v) ensuring free and unrestricted access of external auditors to all the documents and information they may need at any time, (vi) reporting the results of the work at least once a year, (vii) determining the contents and timing of the audit reports, having the freedom to publish and disseminate the reports, and (viii) ensuring that supreme audit institutions have an independent monitoring system to guarantee that audited entities comply with their observations and recommendations and that they are taking corrective actions (INTOSAI 2001). When the independence of TCA is evaluated in this framework (Çiçek et al. 2014, p. 337–346): (i) The independence of the TCA is guaranteed by the Constitution and the TCA Law (Article 3). However, the TCA’s relationship with the executive, legislative, and judiciary is not explicitly defined in the constitution or laws in a way to include legal provisions, (ii) Despite the fact that the TCA was accepted as a general budget institution according to the PFMC Law no. 5018, the budget of the TCA is directly sent to GNAT, with one copy being submitted to the Turkish Presidency, according to Article 62 of the TCA Law. The TCA is able to manage its own budget without the intervention or control of the executive body, (iii) In accordance with the Articles 13 and 16 of the TCA Law, the appointment of the president and members of the TCA are addressed and it shall be guaranteed that any dismissal from the office is made by a process independent from the executive, (iv) Article 35 of the TCA Law stipulates that the TCA and the auditors will carry out auditing activities independently and impartially and that the TCA cannot be instructed about the planning, programming, and execution of the audit engagement, (v) The auditors are authorized with free, timely and unrestricted access to all the information and documents they may need to perform their responsibilities properly as stated in Article 6 of the TCA Law, (vi) The TCA is assigned with the duty of

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auditing and judicial duties in accordance with the constitutional framework and the duty of reporting was also added by the laws. In this context, according to Article 2 of the TCA Law, the TCA prepares three types of reports: the audit report, the TCA report and the report as the basis for judgement, and (vii) The requirement of submitting the reports by the Court of Accounts to the relevant authority is clearly emphasized in Articles 38, 39, 40, 41, and 42 of the TCA Law. The issue of freedom of publication and dissemination of TCA reports after they are submitted to the relevant authority is governmed in Article 44 of the TCA Law. In accordance with this provision, the Presidency of TCA publicizes the TCA reports on its website, (viii) The TCA Law has stated, as a principle, that the TCA will conduct regularity and performance audits; Article 10 of the TCA Audit By-law governs that the TCA will conduct monitoring to evaluate the extent to which audit recommendations are implemented by the audited entities.

13.3.2 Change in the Audit Area of TCA Unlike the Constitution of 1924, which gives the TCA the mandate and duty to audit all government revenues and expenditures; Constitution of 1961 and, until the new financial management understanding provided for by the PFMC Law no. 5018, the Constitution of 1982 gave the mandate of auditing general and annexed budget administrations. In the meantime, auditing of special provincial administrations and municipalities were made possible under the provisions of the TCA Law. Accordingly, for many years, the State Economic Enterprises, privatization procedures of the Privatization Authority, some of the extra-budgetary funds, the companies and associations established by the local administrations and the service organizations, the social facilities belonging to the administrations with general and annexed budget, associations, foundations, unions, and similar status organizations, were remained out of the audit scope of the TCA, and therefore, out of audit scope the parliament. The TCA Law no. 6085 made it possible to expand the audit area of the TCA and to make it widespread to all areas where public resources are used. The audit area of the TCA is regulated in Article 4 of the Law no. 6085. According to the mentioned provision (1) Turkish Court of Accounts shall audit; (a) Public administrations within the scope of the central government budget and social security institutions, local governments, joint stock companies established by special laws and with more than 50% of its capital directly or indirectly owned by the public sector and other public administrations (with the exception of professional organizations having a public status), (b) Provided that the public share is no less than 50%, all types of administrations, organizations, institutions, associations, enterprises, and companies affiliated to, or founded by the administrations listed in point (a), or those

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of which the above-mentioned administrations are directly or indirectly partners; (c) All types of domestic and foreign borrowing, lending, repayments, utilization of foreign grants received, giving grants, Treasury guarantees, Treasury receivables, cash management and other matters related to these, all transfers of resources and their utilization and the utilization of domestic and foreign resources and funds, including European Union funds; (d) All public accounts, including private accounts, funds, resources, and activities regardless of whether these are included in the public administrations’ budget. The companies, their subsidiaries, and affiliates with less than 50% of their capital is owned by the public sector, either directly or indirectly, and which are subject to independent audit as stipulated by the relevant legislation, out of those stated in the first two paragraphs are audited by taking as basis the independent audit reports to be issued and sent to the TCA in accordance with the relevant legislation. (2) Turkish Court of Accounts shall also audit the accounts and transactions of international institutions and organizations within the framework of the principles set out in the relevant treaty or agreement, (3) Audit of public institutions, organizations and partnerships within the scope of Article 2 of Law No. 3346 on Regulating the Audit of State Economic Enterprises and Funds by the Turkish Grand National Assembly, dated 02 April 1987, shall be performed within the framework of the procedures and principles indicated in this Law and other laws”. Furthermore, Article 55 of the Law on the Establishment and Duties of the Constitutional Court No. 6216; the Court receives assistance from the TCA so as to supervise the acquisition of property of political parties and the legality of the revenues and expenditures thereof. Political parties shall send to the Presidency of the Constitutional Court in compliance with the Code No. 2820, approved samples of each of the consolidated final account and the final accounts of the party headquarters and the provincial organization which includes the subordinate districts no later than the end of June. The Court sends such documents that have been sent to it for examination to the Presidency of the TCA. Reports concerning the examination that has been carried out by the TCA shall be sent to the Court for ruling. Moreover, in accordance with articles 26 and 47 of the TCA Law No 6085, the TCA audits development agencies taking into account the generally accepted international audit standards and prepares Development Agencies General Evaluation Report.

6 According

to Article 2 of the Law no. 6085, “Public administration means all administrations, organisations, institutions, associations, enterprises, subsidiaries and companies, regardless of whether they are subject to the provisions of public or private law.” 7 Article 2 of the Law no. 6085 stipulates that the TCA shall audit “joint stock companies established by special laws and some part of whose capital directly or indirectly owned by the public sector and other public administrations”.

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The TCA may conduct audits within the framework of audit requests received from the GNAT. With the Law No. 4963 enacted in 2003, Additional Article 12 has been inserted to the TCA Law and the TCA has been vested with the authority to audit the accounts and transactions of all public administrations including privatization, incentives, borrowing, and loans, regardless of whether they are subject to audit, as well as to audit, in accordance with the same procedure, the accounts, and transactions of all institutions, organizations, funds, enterprises, corporations, cooperatives, unions, foundations, and associations and other similar organizations within the framework of making use of the public resources and facilities, upon the request of GNAT. It is stipulated that the audit results will be submitted to the presidency of the GNAT for consideration in the relevant commissions. Between 2003 and 2010, six audit requests were received from the GNAT.8 TCA Law no. 6085 also includes a similar arrangement. However, with the adoption of Law on Establishment of Turkish Wealth Fund Management Company and Amendments in Certain Laws on 19 August 2016, one more extra-budgetary fund named Wealth Fund was established in public financial management system and a company titled Turkey Wealth Fund Management Inc. was established. Turkey Wealth Fund was excluded from TCA audit. However, although the TCA does not audit this fund and its sub-funds and companies, it was announced that the companies transferred to the fund would continue to be audited (Çetinkaya 2017, p. 407). 8 These

requests are; (i) examining the companies/affiliates and enterprises with financial statements large enough to be considered in evaluation out of those 30% of whose capital is, separately or jointly, held by the foundations, associations and funds established under the organization of public administrations; partnership structures, sources of revenue and the relations of these resources with the foundations, associations, funds and the public administrations established under their organization, the connections of their expenditures with their own managers and foundations, associations, funds and the public officers working in public administrations established under their organization, the amount of dividends received in exchange for the funds transferred by foundations, associations and funds established within the organization of public administrations, those liquidated and to be liquidated, material public loss resulting from the inefficient use of the public resources transferred; (ii) examining the allocation of real estates by the public, the conditions and utilisation of these allocations, the transfer to the third party, if any, the conditions of such transfers and the determination of the public loss, if any, arising from such transactions; (iii) examining legal compliance of leasing, operating and making use in other ways the Pension Fund hotels and other real estate and purchase-sale relations between the Pension Fund and Emeksan Foundation and the companies owned by the mentioned Foundation; (iv) audit request by Parliamentary Research Committee which is formed with the aim of investigation of and taking necessary actions against Arbitrary Management, Out-of-purpose Use of Public Resources and Biased Personnel Hiring; (v) Determining the whether the rights allocated to the irrigation associations and irrigation cooperatives are used efficiently and in compliance with the legislation after the water distribution, use, maintenance and repair of the irrigation companies belonging to the General Directorate of State Hydraulic Works (DS˙I) are transferred to the irrigation associations and irrigation cooperatives, as well as the performance regarding such services; (vi) Due to the security of Aksaz Naval Base Command, the request for an audit regarding ending the evacuation of the Büyükkaraa˘gaç Neighbourhood of Sultaniye Village, Köyce˘giz District, Mu˘gla, within the scope of a second-degree land military prohibited zone (Sayı¸stay, 2005: 27; Sayı¸stay 2006: 40; Sayı¸stay 2008: 48; Sayı¸stay, 2010: 50).

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13.3.3 Change in Functions of TCA The main tasks of the TCA, as determined by the 1982 Constitution, are to conduct audits on behalf of the legislature and to take final decision on the accounts, i.e., judgement. In addition, the duties of the TCA are listed in the TCA Law No. 6085. Accordingly, the TCA audits the financial operations, decisions, and transactions of public administrations within the framework of the accountability and provides accurate, timely information and reports to the legislature about the results. The TCA audits whether the accounts and transactions of the public administrations within the scope of general government are in compliance with the laws and other legal arrangements regarding their revenues, expenditures, and assets; it also finalizes the issues regarding the accounts and transactions of those responsible for causing public loss. It also submits the statement of general conformity to the legislature within the period laid down by the law. It also carries out the duties of examination, auditing, and finalization assigned by other laws. Therefore, the TCA has auditing, reporting, and judicial functions within the scope of both the Constitutional provisions and the TCA Law (Selen and Taytak 2017, p. 208).

13.3.3.1

Change in Auditing Function of the TCA

Visa process of the undertakings and the draft contracts executed by the Ministry of Finance and visa and registration procedures carried out by the TCA have been abolished, upon transferring financial management and control duties and powers to the public administrations until the end of 2005 and establishment of strategy development units under the scope of the PFMC Law no 5018. This way, it is intended to reduce ex ante transactions and accelerate the expenditure process. On the other hand, repealing the relevant provisions of the Law No. 832 and the continuation of the same approach in the TCA Law no 6085 allowed the TCA to focus on the ex post audit as the external audit body (Mutluer et al. 2015, pp. 34, 35). The audits performed by the TCA were rearranged as regularity and performance audits. Nevertheless, contrary to the fact that the TCA has attached importance to its judicial function since its foundation, and thus focuses on compliance auditing and individual transactions in these audits; the PFMC Law no. 5018 and the TCA Law no 6085 require shifting from auditing of individual transactions to institution-based audits. On the other hand, the TCA has started “subject-based auditing” as a pilot study for the subjects related to more than one public administration, apart from the routine audits carried out on public administrations’ accounts, according to the authority vested by the TCA Law no 6085 and aims to increase its auditing capacity on subjectbased audit. In this context; it performs audits on social benefits, revenues of the municipalities, and debt management, regarding municipalities, and on the financial

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structures and sustainability of revolving funds, regarding universities (T. C. Sayı¸stay Ba¸skanlı˘gı 2018b, pp. 52, 53).

A—Change in Regularity Audit Approach In the first paragraph of article 2 of the TCA law titled “Definitions”, subparagraph (b) states that regularity audit means financial audit and compliance audit; subparagraph (c) states that financial audit means the audit on reliability and accuracy of financial reports and statements in accordance with the results of the assessment of accounts and transactions of public administrations as well as their financial activities, financial management, and control systems; subparagraph (d) states that compliance audit means the audit pertaining to the examination of the compliance of accounts and transactions related to the revenues, expenditures, and assets of public administrations with laws and other legal arrangements. The TCA conducts these two types of audits together under the regularity audit framework and takes into account the Regularity Audit Guidelines when conducting such audits (Ceylan, 2018, p. 15). As a result of a regularity audit, Report to be Taken as Basis in Judicial Process is prepared on the public loss determined by the audit report on the annual financial transactions of the audited public administration, taking into account the audit findings (T. C. Sayı¸stay Ba¸skanlı˘gı 2018a, p. 131). However, compliance audit can be carried out independently of the financial audit. Compliance audit to be carried out independently of the financial audit is the examination of one or more of the issues in terms of compliance with the laws and other legal regulations. The subject of such compliance audit may be a certain transaction of spending, revenue or assets, or a specific project or activity. Audit requests from the GNAT are also evaluated within this scope (T. C. Sayı¸stay Ba¸skanlı˘gı 2018a, p. 10). Sub-paragraph (b) of article 2 in the TCA Law no. 6085 stipulates that regularity audit shall be carried out through giving opinion on the reliability and accuracy of financial reports and statements of public administrations, by evaluating all kinds of supporting and necessary documents. ISSAI 1003-Glossary of Terms to the INTOSAI Financial Audit Guidelines lists the duties of supreme audit institutions regarding regularity audit.9 Considering both arrangements, the TCA makes efforts to carry out the duties stated in items (a), (c), (d), and (f) of ISSAI 1003. (Ceylan, 2018, p. 16). In this respect, it can be said that the

9 According

to ISSAI 100, regularity audit embraces: (a) Attestation of financial accountability of accountable entities, involving examination and evaluation of financial records and expression of opinions on financial statements; (b) Attestation of financial accountability of the government administration as a whole; (c) Audit of financial systems and transactions including an evaluation of compliance with applicable statutes and regulations; (d) Audit of internal control and internal audit functions; (e) Audit of the probity and propriety of administrative decisions taken within the audited entity; and (f) Reporting of any other matters arising from or relating to the audit that the Supreme Audit Institutions considers should be disclosed. (ISSAI 1003- Glossary of Terms to the INTOSAI Financial Audit Guidelines).

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TCA Law no 6085 complies with international audit standards, regarding regularity audit. Audits carried out by the TCA in Turkey has mainly focused individually on determining whether the public resources are used by accounting units in accordance with legal arrangements and have been finalized by existing judicial function. In other words, the TCA has conducted a legality audit on the basis of accounting units, not on the basis of the institution that focuses on identifying errors and defects on individual transactions on the expense axis, which has been concluded through judicial function. This left behind the duty of the TCA to conduct a financial audit to determine the problems of the financial system of the institutions and to report to the parliament (Mutluer et al. 2015, p. 124). The fact that both the PFMC Law. no 5018 and the TCA Law no. 6085 regulated the financial systems and controls at the level of the public administration enabled the TCA to conduct audits at the institutional level. The financial audit to be conducted on the basis of public administration allows to be informed about the entire public administration and to identify errors at the institutional level through evaluating all activities, transactions, decisions, and processes of the public administration as a whole. Thus, the TCA, as the most reliable source of information for the GNAT and the public, will be able to submit reports to the GNAT, on behalf of which it conducts audits, which include sufficient and reliable information and recommendations on the public administration and to inform the public about the audit conducted, by reporting the audit results at the institutional level (Ceylan, 2018, p 8, 9). On the other hand, the fact that the institutional audit approach is adopted will increase the efficiency of the audits to be carried out by the TCA on the revenues and assets. However, it is difficult to talk about a concrete improvement.

B—Change in Performance Audit Approach Like the Continental European Courts of Accounts which exercise judicial mandate, the TCA is relatively late in performance audits (Mutluer, et al. 2015, p. 121). As a matter of fact, the report prepared by the Administrative Advisory Board in 1971 expressed that the TCA should have been developed in such a way to conduct efficiency audit, and similar statements were intended to be included in the Constitution of 1982, but removed from the text by Advisory Committee. (Balyemez 2018, p. 283). Finally, an additional article10 was inserted to the TCA Law No. 832 by the Law No. 4149 of 26 June, 1996, and accordingly, legal ground was established for

10 Additional Article 10 of the Law is, “The TCA is authorized to examine the extent to which the institutions and organizations subject to audit use their resources in a productive, efficient and economic manner. Results of such examination are submitted to the Presidency of the Turkish Grand National Assembly by the First President of the Court of Accounts together with an evaluation report. These reports and other reports of a general nature provided for in this Law shall be debated in GNAT Plan and Budget Committee, and presented to General Assembly of the GNAT along with the recommendation of the Commission”.

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the TCA to conduct productivity, efficiency, and economy examination in the institutions and organizations which are subject to audit (Candan 2007, p. 214; Demirba¸s 2001, p. 194, 195). After the Law No. 4149 assigned the TCA with the task of conducting performance audit, theoretical training programs were organized in Turkey and two pilot audits were performed within the scope of bilateral cooperation project carried out by the UK National Audit Office in 1996 (Candan 2007, p. 216). In light of the experience gained from pilot experiences, the Performance Audit Group was established on 1 March 1999 to ensure that performance and risk audit activities are carried out in a planned, orderly, and coordinated manner (T.C. Sayı¸stay Ba¸skanlı˘gı 1999, p. 12, 13). The TCA conducted eleven performance audits11 together with pilot audits between 1996 and 2006 (T. C. Sayı¸stay Ba¸skanlı˘gı 2006, p. 38). Law No. 5018, which was enacted in 2003 and which came into force at the end of 2006 with all its provisions defines performance audit as, “Determining whether public resources are used effectively, economically and efficiently, measuring operational results and evaluating them in terms of performance.” In this framework, the TCA has started working on the audit system stipulated by the new financial management law within the framework of the provisions of the Law no. 832 since the new TCA Law was not enacted yet. Within the framework of relations with the EU, a Performance Audit Working Group was established for the second time within the scope of the Twinning Project on Strengthening the Audit Capacity of the TCA, covering the period 2005–2007, and “Performance Audit Manual” was drafted by the mentioned working group. The first stage pilot audits were completed and the second stage performance audit pilot studies were initiated in 2006 with the Participants of the Performance Audit Working Group and the Performance Audit Course and three pilot studies were conducted in this framework (T. C. Sayı¸stay Ba¸skanlı˘gı 2006, p. 70, 71). The performance audits, which were initiated since 2008, were conducted according to the Performance Audit Working Group Manual prepared in 1999 by the performance audit group (T. C. Sayı¸stay Ba¸skanlı˘gı 2009, p. 49). Four performance audits12 have been completed between 2006 and 2008. With the decision of the General Assembly of the TCA, it

11 These are; (i) Road maintenance, repair and maintenance activities of General Directorate of State Highways Highways (ii) Activities of museums affiliated to the Ministry of Culture, (iii) Fighting and Protecting Pollution Caused by Ships at Sea and Ports, (iv) Activities of Ministry of Public Works and Settlement after Marmara and Duzce Earthquake, (v) How Is ˙Istanbul Prepared against Earthquake, (vi) Supply and Use of Medicines and Treatment Materials in Hospitals affiliated to the Ministry of Health, (vii) Maintenance, Repair and Safety of Historical Artifacts under the responsibility of General Directorate of Foundations (viii) Actions for the Protection of Forests, (ix) Planning and Auditing of the Coastal Use, (x) Performance of Ongoing Activities in the framework of e-Transformation Turkey Project, (xi) Websites of Public Institutions in the context of shifting to E-Government Public Institutions in Transition (Sayı¸stay 2005: 25, 2006: 13, 2007: 46). 12 These are; (i) Efficiency of Fight Against Hospital Infections, (ii) Performance of Activities for Ensuring Traffic Safety, (iii) Coordination of Infrastructure Operations in Metropolitan Municipalities, (iv) Loans from the Projects Abroad (T. C. Sayı¸stay Ba¸skanlı˘gı 2006: 38, 2008: 46–47).

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was decided that the performance audit reports13 initiated in 2009 and completed in 2011 do not need to be referred to the GNAT. The Law No. 6085 which was likely to be enacted in 2010 and the approach of the legislature to the definition and content of the performance audit in the law had an impact on taking such a decision. Accordingly, performance audit is governed in the Law as, “it is realized by measuring the results of activities with respect to objectives and indicators determined by public administrations within the framework of accountability”.14 One year after the adoption of the TCA Law, the TCA Audit By-Law included “effectiveness, economy, efficiency audit” as the third audit type apart from regularity and performance audits. Article 4 of the mentioned By-Law defines the type of audit concerned as, “systematic auditing of whether public administrations manage their resources within the framework of effectiveness, economy and efficiency principles when carrying out their activities.” As a matter of fact, with the enactment of the Law No. 6085 in 2010, Performance Audit Manual, Efficiency Effectiveness Economy Manual was prepared together with other audit manuals, but not put into implementation (T. C. Sayı¸stay Ba¸skanlı˘gı 2012, p. 18). In 2012, the following provision on performance audit was inserted to Article 45 of the Law No 6353 Amending Certain Laws and Decrees15 and Article 35 of the Law no. 6085, “…. the audit report cannot be prepared as, not deemed suitable due to some reasons such as its necessity for managerial reasons, proportionality, effectiveness, economy, efficiency and similar reasons, in contrary to the fact that the decisions and work performed are in accordance with the legislation and the targets and indicators determined by the administration…” The Constitutional Court overturned the prohibition of an opinion on the issue of effectiveness, economy and efficiency. Therefore, there is no legal obstacle for the TCA to examine, evaluate, and report the public administrations in terms of effectiveness, economy, and efficiency (Balyemez 2018, p. 286) but they cannot make these evaluations within the framework of the current performance audit definition. As a matter of fact, the TCA published the “Performance Information Audit Manual” in 2013, along with other audit guides (T. C. Sayı¸stay Ba¸skanlı˘gı 2014a, p. 77). It is stated in the Manual that the performance information generated by the administrations will form the basis of the performance audit, and therefore, the expression “auditing of performance information” is preferred for the performance audit defined in Article 2 of Law No. 6085. Although the term “Performance Audit 13 These are; (i) Management of Drinking Water, (ii) Food Inspection, (iii) R&D Support Provided by TÜB˙ITAK to Academic Circles, (iv) Deriner Dam and Hydroelectric Power Plant, (v) Light Rail Transportation Systems, (vi) East Black Sea Coastal Highway Project (T. C. Sayı¸stay Ba¸skanlı˘gı 2006: 45, 46). 14 Accordingly, although the article which defines performance audit in the TCA Draft Law was adopted at the committee as, “..measurement and evaluation of the results of activities with respect to objectives and indicators determined by the administrations and inspecting whether the public resources are used effectively, efficiently and economically”, it was adopted at the General Assembly of the GNAT as, “… measurement of the results of activities with respect to objectives and indicators determined by the administrations”. 15 Official Gazette of 12/7/2012 no. 28351.

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Manual” was preferred in the second version of the Manual published in 2014, there has been no change in the general approach of the TCA (Demirba¸s and Engin 2016, p. 34, 35). Key Principles of Performance Audit issued by INTOSAI (2013, p. 2) defines performance audit as, “an independent, impartial and reliable inspection of whether public enterprises, systems, activities, programs or organizations are in compliance with the principles of economy, productivity and efficiency and whether there are areas for improvement”. Performance audit is concerned with analyzing and evaluating the performance of executive body programs or public services. It is a knowledge-based activity that requires analytical and creative competencies. Unlike traditional auditing, it focuses on activities rather than accounts, and is mainly related to intentions behind public interventions and economy, efficiency, and effectiveness (INTOSAI). Considering the arrangement regarding performance audit in TCA Law no. 6085, it is seen that the implementation is far from the international audit standards approach. This has been negatively reflected to the assessment of the European Commission about Turkey (EC 2012, p. 114, 2015, p. 92, 2016, p. 94, 2018, p. 99).

13.3.3.2

Change in Judicial Function

Judicial function of the TCA is a function related to the determination of illegal transactions of officials such as authorizing officer, realization officer, and accounting officer who are responsible for budget implementation and accordingly implementation of necessary penal sanctions. The judicial function of the TCA shall commence in the event of a controversial situation as a result of compliance audits. Compliance audit is the duty of the TCA since its establishment. What is different in the Law No. 6085 is not only the wrong transactions and practices in auditing, but also determination of public loss arising from faulty transactions and practices and the intention, flaw, or negligence of the officials causing public loss. This difference leads to a significant change in the framework of fiscal responsibility and legal sanctions in this field (Mutluer et al. 2015, p. 121). Public loss is a new concept entered into the financial management system by Law No. 5018. The law defines public loss as, “Public loss is bringing an obstacle to the increase or causing a decrease in the public resource as a result of a decision, transaction or action that violates the legislation and that stems from intention, flaw or negligence.” According to Article 7 of Law No. 6085, “Those responsible shall be obliged either separately or jointly to indemnify the public loss stated in writs created by establishing the causality between the loss and their decisions, transactions, or actions contrary to legislation.” According to this, the components of public loss are; (i) the existence of public officials, (ii) the existence of decisions, transactions or actions contrary to the legislation, (iii) the emergence of the violation of the legislation as a result of intention, flaw or negligence of the public officials, (iv) causing an obstacle to the increase or decrease in the public resource, and (v) the causal link.

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With the Law No. 5018, flawless responsibility was sifted to defective responsibility in order to compensate the public loss in terms of judgement by the TCA. In the framework of the Law no. 1050, the only condition for the financial liability is any general contradiction with the legislation; no other condition such as loss or flaw has been stipulated. (Demirel and Kele¸s 2010, p. 180) In the system established by the Law No. 1050, the accrual officers and accountants were held accountable to the TCA. On the other hand, accountants were held responsible for all accounts and transactions within a fiscal year in advance. Law No. 5018 introduced a new responsibility which investigates the flaws of the authorizing officers, realization officers and accounting officers. In this system, the responsibility of the head of administration is accepted if they take a direct role in the financial transaction process. With the new sense of responsibility adopted by Law No. 5018, judicial mandate of the TCA has become transaction-based. Accordingly, the judicial mandate of the TCA offices is limited to the public loss subject to the judicial report issued by the auditors (Geçgel 2014, p. 34–35). The actions that cause an obstacle or decrease in public loss are listed in Article 7116 of the Law No. 5018 and Article 617 of the By-law. The arrangements included in the By-law regarding this issue are more comprehensive. However, while the TCA ensures auditing of the public resources by expanding the audit area of the TCA, the provision of the Law regarding the judicial area of the TCA is concerned with “judgement of the accounts of public administrations within the scope of general government”. Although it is considered that shifting from perfect responsibility approach to defective responsibility approach regarding the determination and collection of public loss, expanding the scope of the responsible as the public officials involved in the financial transaction process is an important stage in terms of establishing authority– responsibility balance, for the purpose of understanding the public loss as a whole, 16 These are listed as, “When determining public loss; (a) Overpayment of the amount determined in return of the business, goods or services, (b) Making payment without receiving the goods or services, (c) Making overpayment or undue payment regarding the expenditures having the nature of transfer, (d) Having a work done or purchase goods or services at a price higher than its market price, (e) Assessment, accrual or collection of the administrative revenues in a way that is in conflict with the legislation, (f) (Abolished: 22/12/2005–5436/art. 10), (g) Making payment even though it is not stipulated by the relevant legislation”. 17 According to the By-Law; the following are taken as basis when determining public loss, “(i) Overpayment of the amount stated in the relevant legislation or determined in the documents foreseen in the relevant legislation such as decision, approval, contract, etc. in return of the business, goods or services, (ii) Making payment without receiving the goods or services, except for the cases stated in the relevant legislation, (iii) Making overpayment or undue payment regarding the expenditures having the nature of transfer, (iv) Having a work done or purchase goods or services by the commission or persons assigned by the relevant legislation at a price higher than its market price, (v) Leasing, allocation, management, use and disposal of assets belonging to public administrations not carried out in accordance with the legislation, (vi) Movables delivered to the officers getting damaged, (vii) Assessment, accrual or collection of the administrative revenues in a way that is in conflict with the legislation, (viii) failure to fulfil the obligations of the public administrations in compliance with the relevant legislation, resulting in additional financial burden for the public administration such as interest, compensations, delay fines, fines, ix) Making payment even though it is not stipulated by the relevant legislation”.

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the fact that auditing area and judicial area of the TCA are different, the scope of public officials listed in the Law as deemed responsible is narrow, the way to determine the degree of the flaw is not clear for the purpose of compensating the responsibility, ambiguities on how to establish casual connection are the problematic areas with regard to the judicial function of the TCA.

13.3.3.3

Change in Reporting Function

During the period when the Law No. 832 was in force, primary report the TCA has to submit to the GNAT was the statement of general conformity. These reports were the only reporting activities carried out regularly by the TCA. The reporting function stipulated in various articles18 of the Law No. 832 has not been felt in practice (Köse 2007, p. 246). The Law no. 6085 addresses the reports to be prepared by the TCA for the GNAT under three groups: Audit Reports, TCA Reports and Public Enterprises Reports. Audit reports prepared by headships of audit groups as a result of regularity and performance audit of public administrations shall be consolidated in respect of administrations, and a copy shall be sent to the relevant public administration by the Presidency of TCA. Heads of public administrations shall respond to audit reports within 30 days as of the date of receiving the reports (TCA Law no 6085/art. 38). Second part of the TCA Law no 6085 addresses TCA Reports. According to the arrangement, the reports prepared for all public administrations subject to the TCA audit shall be converted into a TCA report by the headships of audit groups by taking the opinion of the relevant Chamber of the TCA and the Board of Report Evaluation. These reports will be submitted simultaneously with the statement of general conformity and accountability reports general evaluation report to be discussed in the respective committees of the Parliament together with statement of general conformity. TCA reports are composed of external audit general evaluation report, accountability reports general evaluation report, financial statistics evaluation report, statement of general conformity,and other reports. The third part of the Law governs the Audit Report of the State Economic Enterprises. The External Audit General Evaluation Report is a report prepared to include the issues that are deemed important or general in the audit reports issued as a result of the 18 According the TCA Law no. 832, the TCA is assigned with the duty of submitting reports to the GNAT on; (i) the legal arrangements which appear to be jeopardising the interests of the Treasury in respect of meaning, application or consequences (art. 25), ii) Financial transactions, accounting procedures and revenue accrual systems (art. 28), (iii) The issues for which the ministers assume responsibility (art. 32), (iv) The transactions and accounts found, during the examinations and audits, to be in violation of the legislation, which are deemed necessary (art. 88), (v) State properties (art. 87), (vi) Results of the inspections of the accounts of the administrations and institutions kept by their accountants, except for the general budget and annexed-budget administrations (art. 87), (vii) Government debt and receivables (art. 55), (viii) Government revenues (art. 28), (ix) Other issues deemed necessary as a result of the examination of the transactions and accounts of the organisations subject to audit (art. 28), (x) Efficiency and effectiveness evaluation on the resources of the institutions and organisations subject to audit (additional art. 10).

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performance and regularity audits of the public administrations, general information about the audits conducted, and other issues deemed appropriate to be stated with regard to financial matters. The report is submitted to the GNAT by the President of the TCA together with the statement of general conformity (6085/art. 38). Accountability Reports General Evaluation Report is prepared by taking into account the external audit results of the information included in the accountability reports of the administrations sent by the public administrations to the TCA in the form stipulated by the PFMC Law No. 5018, General Accountability Report sent to the Presidency of Turkey to the TCA, Local Administrations General Accountability Report sent by the Ministry of Environment and Urbanization to the TCA, after evaluating their accuracy and reliability, and submitted to the GNAT (6085/art. 39). Financial Statistics Evaluation Report is prepared by evaluating the financial statistics prepared by the Ministry of Treasury and Finance in terms of the way they are prepared, publicized, their accuracy, reliability, and compliance with the predetermined standards. The evaluation report prepared for this purpose is sent to the GNAT and to the Ministry of Treasury and Finance. The Minister of Treasury and Finance shall take the necessary measures in accordance with the assessments stated in this report (6085/Article 40). Statement of General Conformity is a statement prepared by comparing the implementation results of the central government budget law stated in the draft Final Account Law with the results established on the basis of public administration accounts and by evaluating reliability and accuracy of the charts and documents in the annex of draft Final Account Law prepared by the presidency, and submitted to the GNAT (6085/md. 41). The Parliament discusses the final account draft law by mostly focusing on the points specified in the statement of general conformity, and thus the legislative audit is completed. The existence of a statement of general conformity is a constitutional requirement for the final account laws to be discussed by the GNAT, and it is compulsory to act in compliance with such statements. Because the statement of general conformity has an advisory function arising from its nature, and the result of this consultation process is not binding for the GNAT, which is the decision-making body (Ba˘glı 2011, p. 139–140). The other reports mean the reports prepared as a result of the audits and inspections, falling outside the scope of those stipulated in the TCA Law. These reports are also submitted to the GNAT. General Reports of Public Enterprises are the reports which collectively address, depending on the sector basis of all public enterprises, annual activity results, place in Turkey’s economy, employment status, financial status, business activities, investments, subsidiaries as well as general and common problems and which are submitted to the Parliament for discussion in the relevant committee (6085/art. 43). In addition to the reports listed here, the General Evaluation Report of the Development Agencies is presented to the GNAT by the TCA. In addition, according to the Article 45 of the Law no. 6085, the TCA submits, to the GNAT, the results of the audit conducted upon the request of the GNAT.

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13.3.4 Change in the Relations of the TCA with the Parliament As the TCA was established before the foundation of the parliament during the Ottoman Empire, the TCA was then obliged to submit to the Ministry of Finance the results of its examinations on all revenues and expenditures, accounting records, and other actions of the government. The TCA was able to report to the Parliament 14 years after its establishment. In the first years of the Republic, the TCA assumed the obligation to report to the Parliament every three months, and Divan-ı Muhasebat Komisyonu (Court of Accounts Committee), consisting of 20 members, was established to discuss the reports submitted. However, this commission, which was established to discuss the reports of the TCA, was abolished by the Rules of Procedure of the Parliament adopted in 1973 (Köse 2007, p. 234, 235). After the mentioned arrangement, it was possible to clarify the first evaluation body of the TCA reports in 1996. Accordingly, it is foreseen that with the Law No. 4149 of 1996, performance audit reports and other general reports will be discussed in the Plan and Budget Committee of the Parliament and submitted to the General Assembly of the GNAT with the proposal of the Committee; however, it could not be implemented (Köse 2007, p. 235). The TCA reports submitted to the GNAT helps both ensuring efficiency in public spending and the legislative body, which has the power of the purse, to efficiently audit the budget. In fact, we reach such a conclusion by considering the purposes of reporting in terms of the legislature, namely (i) providing reliable, impartial and consistent information to the parliamentarians in the processes of budget debates at committee and the general assembly and enactment of the budget; (ii) providing reliable, impartial and consistent information to the parliamentarians in the processes of debates on and enactment of final account law; (iii) creating data for the determination of the political responsibility of the ministers as a manifestation of the responsibility of accountability during legislative audits (parliamentary inquiry, general debate, etc.); and (iv) serving to ensuring efficiency in use of public resources. (Selen and Taytak 2017, p. 212) Accordingly, the power of the purse is fulfilled when the reports formed as a result of the audits conducted by the TCA are discussed in the GNAT. In this respect, although the reports are of great importance, too many reports are generated. It is not possible to examine such amount of reports in the GNAT and it raises the concern that report generation which is a secondary task become an essential duty for the TCA (A˘gcakaya and Yücel 2017, pp. 243, 244). In this context, the establishment of a strong audit committee in the GNAT (Polat 2012, p. 122; Söyler and Çolak 2012, p. 153; Usta 2011, p. 49) is usually recommended. Even though Article 1 of TCA Law no. 6085 stipulates that the principles and procedures for debating the TCA reports submitted to the GNAT and the audit results prepared in accordance with Article 70 thereof shall be set out in the Internal Rules of the GNAT, mentioned arrangement has not been made yet.

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The reports already produced by the TCA are debated by different authorities. Reports on the general government and general reports are debated in GNAT Plan and Budget Committee; Public Economic Enterprises Audit Reports are debated in GNAT Public Economic Enterprises Committee; reports prepared on the audits requested by the GNAT are debated in the relevant committee of the GNAT. The audit reports on local administrations are debated in local councils; financial audit reports of political parties are debated in the Constitutional Court. The reports taken as basis in judicial proceedings are debated in the TCA Chambers (Akyel 2016, p. 132). Within the framework of the 1982 Constitution and the PFMC Law No. 5018, the TCA shall submit its statement of general conformity for public administrations within the scope of central government to the GNAT within 75 days following the delivery of the final account draft law at the latest. Accountability reports of the administrations, general accountability report, external audit general evaluation report and the final account draft law are debated together with the central government budget draft law. However, these reports and the statement of general conformity are debated primarily in GNAT committees. The fact that the final account draft law and the statement of general conformity are submitted to the GNAT does not prevent the incomplete TCA audits and shall not be construed as the accounts are finalized (5018/42, 43). The time which the GNAT Plan and Budget Committee can allocate to the debate of the final account draft law and TCA reports can be realized in a very limited part of the 55-day period allocated to the Committee for budget debates. When the Commission’s analytical capacity constraint is taken into account, mentioned time restriction, the fragmented information contained in the report submitted by the TCA is a risk that makes it difficult for the Committee to evaluate budget implementation results.

13.3.5 Change in Institutional Capacity of the TCA 13.3.5.1

Change in Its Organizational Structure

The TCA has been organized according to the board type organization model since the day it was founded. Within the framework of the Law No. 832, judiciary and decision-making bodies are the Chambers, Board of Chambers, Board of Appeals, General Assembly, High Disciplinary Board, Board of Promotion and Discipline of Professional, and the Prosecution Office is included in the organizational structure as the representative of the Treasury. In this period, the first President of the TCA was the chief at the highest level and the Secretary-General is appointed to assist the president in administrative affairs. With the enactment of the TCA Law no 6085, the Deputy Presidencies and departments were established in the organization of the TCA, two new decision-making bodies, namely the board of report evaluation and the board of auditing, planning and coordination were established, and the Prosecution Office which represents the Ministry of Finance was reorganized as the Chief Prosecutor’s Office. (Mutluer et al.

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2015, p. 37). In this respect, differing from the Law no 832, the Presidency, Board of Report Evaluation and Board of Auditing, Planning and Coordination were added to the bodies of the TCA. According to Article 20 of the Law, the presidency is composed of the president, deputy presidents, and the heads of departments. The deputy presidency was established to coordinate the management and auditing performed by the General Secretariat within the framework of the Law No. 832. The heads of the departments are selected from among the members of the profession to assist the deputy presidents (Law no. 6085/art. 20, art. 22). Board of Report Evaluation is the last authority of the Court to submit an opinion on the reports that it is obliged to submit to the GNAT every year under the Law No. 5018 and the TCA Law. The Board of Auditing, Planning and Coordination was established to ensure that the TCA can conduct audits in accordance with international standards. However, the TCA does not have any provincial organization. However, according to Article 32 of the Law no. 6085, headships of audit groups can be established in the provinces upon the proposal of the President of the TCA and the decision of the General Assembly of the TCA, if deemed necessary (T. C. Sayı¸stay Ba¸skanlı˘gı 2013, 2014–18 Stratejik Plan, p. 9). As of 2000, the TCA which has a total of 1240 personnel, 469 of whom are auditors (T. C. Sayı¸stay Ba¸skanlı˘gı 2000: 55) continued its operations with 1302 personnel, 719 of whım are auditors. (Sayı¸stay 2010, p. 15) As of 2018, the TCA has 1422 personnel, namely 1 president, 2 deputy presidents, 8 heads of department, 44 members, 10 prosecutors, 783 auditors, 560 management personnel, and 14 contracted personnel (T. C. Sayı¸stay Ba¸skanlı˘gı 2018b: 38). According to the Article 6 of the TCA Law no 6085, specialists can be consulted to in cases which require special expertise, and experts can be consulted to during audits for the issues which require special knowledge, skills, or experience. Although the audit area of the TCA has expanded, yearly increase in the number of auditors has been evaluated as inadequate, the fact that information technology is being used more and more in audits is considered as a positive contribution in terms of audit efficiency.

13.3.5.2

Making Use of Information Technologies

There are currently portals available in the form of SayCAP, Saydap, and SayNET. SayCAP - TCA Audit Management System has been developed to meet the needs such as planning, documentation, approvals, access to information sources, archiving, quality control, communication, steering, and reporting serve to the automation, management, and reporting of audit processes, and is constantly updated and developed in accordance with the audit manuals and the decisions of the Board of Auditing, Planning and Coordination. Since the software is running on the servers of the TCA, it allows the audit teams to work together in a virtual manner. By means of Saydap—Computer-Aided Audit, centrally maintained accounting data are obtained from related institutions in electronic environment and made available to audit personnel. SayNET is a portal where workflow projects are published in order to ensure

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that the processes of the organization are monitored and reported electronically (T. C. Sayı¸stay Ba¸skanlı˘gı 2015, pp. 16, 17). However, the technical infrastructure and legislation required for the “Electronic Document Management System” will be completed soon. In the short term, this system will be completed and it will be possible to follow the preparation of digital documents in and out of the institution. On the other hand, end-to-end services are designed in the field of auditing and judicial activities, which are the main functions of the institution, and it is planned that all members of the judiciary, the auditors and those prosecuted will carry out all their operations and transactions through the information system. For this purpose, infrastructure is prepared for “Decision Support System” which will strengthen the decision mechanisms with the “Institutional Resource System” that will centralize the information for the management and auditing of the processes in all activities of the institution. The analyses required for the audit activities are currently carried out by the auditors using office programs. “TCA Business Intelligence Project” was launched in order to institutionalize these individual efforts. Mentioned project aims at; (i) converting individual analyses into corporate memory, (ii) ensuring data integrity, (iii) ensuring data security, (iv) protecting data confidentiality, (v) ensuring data consistency, and (vi) minimizing the errors that may occur regarding analyses (T. C. Sayı¸stay Ba¸skanlı˘gı 2018b, p. 21– 22). In this context, the work completed by the TCA is as follows (T. C. Sayı¸stay Ba¸skanlı˘gı 2018, p. 23, 52): (i)

Within the scope of institutional information system infrastructure work, 26 databases, which previously had a fragmented structure, were separated from the application servers and brought together in a central database server. (ii) The establishment, at the database level, of the analyses on the civil servant salary payments and accounting records taken from the Ministry of Finance is underway. In this context, computer-aided audit scenarios were prepared to enable technical and analytical analysis of accounting data of public administrations and the analysis of the data of the administrations issuing their payrolls on the Public Expenditure and Accounting Information System in such a way to include the compliance of their data in the e-payroll system with the legislation. (iii) “Municipal Data Transfer Module” which was developed to ensure that financial data requested from municipalities within the scope of audit activities can be sent electronically came into service. The mentioned module carries out preliminary data control, while the authorized personnel in the municipality send the data, and the pre-controlled data are transferred to the system servers via secure connection and brought into the relevant databases automatically. The data provided to the system are presented to the relevant auditors via SayData Module according to the audit areas of the user through SayCAP Audit Management Program. The infrastructure is for providing comprehensive analysis for both single municipalities and all municipalities as a whole. (iv) Module for Monitoring the Execution of the Writs aims at management of the services carried out by the chief prosecutor. As a result of its integration with the modules of judiciary, writs, and appellation modules, this module enables the

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follow-up of the execution of the writs and enable the respondent institutions to see their writs in electronic media and send their receipts of collection. For the next version, integration with ministries’ information systems is planned. (v) Considering the similarities of public administrations, regarding the public administrations with similar characteristics, the issues on which the auditing teams should conduct a common examination in light of previous year’s studies and current year findings were assigned in Audit Management Program (SayCAP) as a compulsory procedure and auditing started to be conducted interactively.

13.4 Conclusion Radical changes made in the financial management system in Turkey to improve the parliament’s budget power, the process of change experienced by the TCA, as the supreme audit institution, legal arrangements made in Turkey in terms of their compliance with generally accepted international standards were evaluated under the headings; (i) Independence of the TCA, (ii) Change in audit area of the TCA, (iii) Change in institutional capacity of the TCA, (iv) Change in the relations of the TCA with the GNAT, and (v) Change in the institutional capacity of the TCA. In this context, when evaluated in terms of the external audit independence in Turkey, independence has been attached importance at the constitutional level since the establishment of the TCA. However, it has been concluded that especially in terms of the 1982 Constitution and the TCA Law no. 6085, the arrangements made were harmonized with eight key principles on independence set out by INTOSAI in Mexico Declaration. Accordingly, TCA’s independence in Turkey were discussed at the constitutional level, and its administrative, financial and functional independence is addressed in the Law no 6085; the right of access to all information and documents of the TCA auditors are clearly defined in law, and the reporting of TCA to the parliament and the public is also governed in the Law. Another criterion for evaluating the process of change in the TCA is the audit area. The audit area of the TCA is important in terms of considering the audits by the TCA, as the supreme audit conducting audits on behalf of the parliament, equal to the audit area of the parliament. Considering the historical development process, the administrations using considerable amount of public resources except for general and annexed budget administrations, special provincial administrations and municipalities were taken out the audit area of the TCA after the constitution of 1924 until the enactment of PFMC Law no 5018; however, the fact that audit area of the TCA was broadened in a way to include the general government defined in PFMC Law no 5018 and all areas which use public resources with the enactment of TCA Law no 6085 shows that the recent arrangements have been aligned with the basic approach set forth in the INTOSAI Lima Declaration.

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When the functions undertaken by the TCA and its approach to carrying out such functions are evaluated, it is obvious that the TCA has assumed auditing, jurisdiction, and reporting functions since its establishment. However, there have been radical changes in these basic functions within the framework of Law No. 6085. In terms of the audit approach, institution-based audit approach has been adopted instead of auditing financial transactions individually. However, although the TCA has been conducting compliance audits for a long time, mentioned legal arrangements has enabled performing institution-based financial auditing in accordance with the international standards. The performance audit has turned into an audit where the TCA cannot comply with international auditing standards. Today, the TCA looks like the auditor of the performance information produced at the institutional level. Although this legal arrangement can be criticized for justifiable reasons in terms of complying with international standards, it shows that the performance audit required by the parliament from the TCA solely consists of the evaluation of the institutional performance information. When the reforms for focus on performance in financial management are considered as a whole and that Turkey is still passing through a learning process, the fact that the parliament assigns the TCA with the duty of auditing the quality of the performance information produced at institutional level may be construed as an aim to create motivation for accelerating such learning process. Considering the judicial function of the TCA, significant changes were also made in this function. In fact, since its establishment in Turkey, the TCA is an organization which also has judicial function. However, it is considered as an important factor in the establishment of the balance of authority–responsibility in financial management by abandoning the sense of perfect responsibility and shifting to defective responsibility in the determination of the public loss which is the basis of the is subject to TCA judiciary in the scope of the Law no 6085. However, efficiency of the TCA in carrying out this function is questionable. It is because of the audit area and jurisdiction of the TCA differing from each other in terms of the full comprehension of public loss in the relevant legislation; the narrow scope of public officials considered responsible in the Law, the lack of clarity in determining the degree of flaw for compensation of responsibility, and the existence of uncertainties about how to establish the causal link. When the TCA is evaluated in terms of its reporting function, it has been observed that it has assisted the parliament by means of a statement of general conformity for debates on the final account draft law, but has not been able to submit any other periodic reports. In this respect, the increase in number and scope of the periodic reports that the TCA is obliged to prepare and submit to the GNAT in accordance with the Law No. 6085 are is deemed to have the ability to increase the budget power of the GNAT. However, when the issue is evaluated in terms of the relations of the TCA with the GNAT, it was observed that the reporting function of the TCA did not create the desired effect due to the fact that the special committee structure and the process of the debates on these reports in the Parliament were not arranged. In the study, the TCA’s organizational structure and the tendency to make use of the information technology resources were taken into consideration while evaluating the change in the TCA’s institutional capacity. Since its establishment, the TCA

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has a board-like organizational structure and has been constituted as a centralized organization. However, the fact that it has new decision-making bodies introduced by Law No. 6085 is considered as a positive step for quality improvement of the audit and audit reports in its internal functioning. However, despite the expanding audit area, the lack of provincial organization and the fact that the number of auditors has not been increased in the expected rate is considered a disadvantage, but it is not considered as a major risk in terms of the relationship between the audit area and the audit capacity as long as it continues to make use of the information technology resources.

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Usta, E. (2011). Mali Reform Süreci ve 5018 Sayılı Kanunun Genel De˘gerlendirmesi. Kamu Mali Yönetimi Sempozyumu (25–27 Mart 2011) Bildiriler Kitabı (pp. 50–70). ˙Izmir, Türkiye: Ege Üniversitesi Yayını.

˙ Elif Ay¸se Sahin ¸ Ipek is an Associated Professor of Public Finance at ˙Izmir Katip Celebi University, Faculty of Economics and Administrative Sciences. She is also co-head of Public Finance Department. As of 2018, she started to work as head of Internal Audit and Independent Audit ˙Ipek received her PhD in public finance Department at the Institute of Social Sciences, Dr. Sahin ¸ department at the Institute of Social Sciences, Dokuz Eylul University in 2011. Her research focuses on public budgeting, public financial management and audit, strategic planning and per˙Ipek has authored and contributed to book chapters and articles formance management. Dr. Sahin ¸ on these research areas.

Discussions Tekin Akdemir and Halis Kıral

Public financial management (PFM) systems have undergone revolutionary reforms firstly in developed and then developing countries since the second half of the 1980s. The overall goals of these reforms were to improve macro fiscal management by focusing on transparency and accountability to achieve development goals, and to ensure better value for money. These reforms have been acknowledged as one of the key pillars of the new public management reform. They aimed at transforming budget-dependent bureaucratic governmental agencies to business-oriented agencies operating in a competitive environment (Zaman Mir and Shiraz Rahaman 2007). The accomplishment of the reforms has shown differences according to the economical and corporate development level of countries in general (Prakash and Cabezon 2008). The successful results of the reforms, which are put into effect with the impact of internal dynamics in developed countries, have led to the increased attention in developing countries towards the financial management reforms. Developing countries, just like developed countries, enhanced better value of money on one hand and implemented fiscal management reforms aimed at establishing fiscal discipline and macroeconomic stability on the other hand. However, unlike developed countries, these countries have implemented these policies with the contributions of donors and international organizations. Moreover, the financial reforms of developing countries were shaped by the intervention of international organizations. Like many other developing countries, the PFM reforms as part of this policy in order to ensure fiscal consolidation and macroeconomic stability was on the agenda in Turkey. Economic crises, especially since the second half of the 1990s, brought about a deterioration of the budgetary balances. While weakening fiscal position resulted in excessive deficit and high debt stock ratio, it also became a threat to macroeconomic stability. In order to establish fiscal discipline and ensure macroeconomic stability, Turkey has embarked on various reforms agenda in the post-2001 crisis period. These reforms were implemented as part of the IMF’s financial stability program.

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Within this scope, while arrangements were made to increase the efficiency in the budget process, multi-annual budgeting was started to ensure resource allocation efficiency. While public expenditures were tried to be controlled with a mediumterm perspective, expenditure reforms were supported by income reforms. These reforms, which were prepared from a very comprehensive perspective, were followed by arrangements for other components of financial management. Within this framework, while the public debt management law and cash and debt management were modernized, the financial capacity of local governments was increased with the arrangements that would enable further localization in intergovernmental relations. Reforms were made for accounting and financial reporting. Traditional cash-based government accounting was abandoned and accrual-based accounting system was introduced. In this way, more accurate and real-time financial statistics were produced both during the resource allocation process and during the budgetary audit. Pre-expenditure pre-visa procedures were replaced by pre-expenditure pre-financial control and post-expenditure internal audit as part of the fiscal management reforms, which includes comprehensive regulations for internal and external auditing that are actualized. While the audit area of the Court of Auditors has been extended to include state-owned enterprises, traditional compliance auditing has been diversified with other types of auditing, such as performance, information systems and information technology auditing. Thanks to these reforms, which led to the transformation of the financial management system, Turkey has recorded a significant success in managing its budget deficit and public debt from 2001 onwards. Specifically, central government budget deficit decreased from 11.6% as a share of GDP to 1.5% during the period between 2001–2017. Similarly, the EU defined general government debt as a share of GDP has been reduced from 72.1 to 28.3% during the same period. Turkey not only decreased its deficit and debt levels, but also improved the structure of its debt as a result of the risk management practices implemented in this period. To sum up, Turkey has overcome its traditional problems such as budget deficit and debt load with the PFM reform strategy put into effect after 1980. While significant increases in economic output have occurred (increasing efficiency in public resource allocation), the financing cost of the budget has declined thanks to modern techniques in cash and debt management. In the World Bank’s 2012 report (Golden Growth: Restoring the Luster of the European Economic Model), Turkey was elected as the reference country for the reduction of debt. Despite the successful applications relating to cash and debt management in Turkey, the contingent liabilities of the public, arising out of explicit or implicit guarantees, have made it obligatory for debt management to focus on more complex problems in recent years. While risk-oriented debt management techniques are used extensively to increase the efficiency of debt management, it also increased the liquidity of secondary markets by diversifying borrowing instruments. On the other hand, it aimed to reduce the financing need of the budget through arrangements such as leasing and sales related to the management of public properties.

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Although internal and external audit units routinely carry out their audit activities, improvements to be made in line with the findings in the audit reports have been implemented to a limited extent.

References Allen, R., Hemming, R., & Potter, B. H. (Eds.). (2013). Introduction: The meaning, content and objectives of public financial management. In The international handbook of public financial management (pp. 1–12). London: Palgrave Macmillan. Gill, I. S., & Raiser, M. (2012). Golden growth: Restoring the lustre of the European economic model. Washington, DC: The World Bank. Prakash, T., & Cabezon E., (2008). Public financial management and fiscal outcomes in sub-saharan african heavily-indebted poor countries (IMF Working Paper No. 08/217). Washington, DC: International Monetary Fund. Zaman Mir, M., & Shiraz Rahaman, A. (2007). Accounting and public sector reforms: A study of a continuously evolving governmental agency in Australia. Accounting, Auditing & Accountability Journal, 20(2), 237–268.

Index

A Accountability report, 238, 252, 253, 255 Accountants, 183, 191, 251 Accounting, 9, 11, 14, 25, 41, 58, 73, 78, 80, 136, 179–193, 197–207, 209, 210, 256, 257 Accounting information, 15, 186, 257 Accounting legislation, 192, 197, 199, 203– 205, 210 Accounting officer, 250, 251 Accounting principles, 41, 180, 193 Accounting reform, 199 Accounting units, 6, 183, 186, 247 Account plan, 179, 190 Accrual account, 178, 183, 193, 205 Accrual basis accounting, 58, 179, 185–187, 189–191, 193, 197, 199, 210 Accuracy, 28, 246, 253 Acquisition, 74–77, 183, 206, 223, 243 Activity report, 90–94, 96, 163 Administration activity report, 94, 96 Administrative reforms, 106, 116 Administrative tutelage, 132, 136 Allocation, 24, 65, 73, 78–80, 83, 116, 133, 141, 150, 154, 162, 182, 189, 207, 208 Analytical Budget Classification (ABC), 96, 101, 185, 187, 188, 199 Annexed-budget administrations, 237, 242 Association of Chartered Certified Accountants (ACCA), 205 Auction, 23, 29, 33, 44 Audit area, 220, 236, 239, 240, 242, 251, 256–260 Auditing standards, 202, 214, 218, 240, 259 Auditor, 234, 240, 241, 251, 256–260

Audit report, 220, 223, 239, 241–243, 246, 249, 252, 254, 255, 260 Autonomy, 4, 19, 97, 108, 122, 123, 125, 127, 133, 134, 139, 143, 165

B Bailout, 38, 122, 123, 142, 153, 154 Balance sheet accounts, 182, 183 Bank accounts, 3, 5–7, 11–13, 15, 28, 192 Board of Auditing, 255, 256 Board of report evaluation, 252, 255, 256 Bookkeepers, 179, 180 Borrowing costs, 17, 28, 29, 34, 37, 42, 47, 123, 156, 206 Borrowing requirement, 26, 28, 32, 58, 159, 168 Budget classification, 179, 185 Budget deficit, 23, 26, 42, 46, 57, 58, 101, 132, 136, 137, 141, 142, 156, 159, 163–165, 169 Budget execution, 17, 28, 29 Budgeting gimmicks, 136 Budgeting process, 96, 188, 233, 264 Budget management, 27, 106, 116 Budget process, 96, 188, 233, 264

C Cameral accounting, 180, 181 Cash accounting, 183 Cash amounts, 7, 12–14, 19 Cash balance, 6, 16, 28 Cash based accounting, 197 Cash flow, 4, 6, 12, 13, 16, 17, 28, 58, 189, 190, 208

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268 Cash flow statement, 192, 206 Cash forecasting, 4, 11, 12 Cash-generating assets, 208, 209 Cash management, 3–5, 7, 16, 18, 20, 22, 25, 27, 28, 46, 47, 53, 58, 136, 243 Cash outflows, 12, 17 Cash program, 11, 12, 15, 28 Cash resources, 3–5, 7, 11, 14–19 Cash transfer, 6, 12, 15 Central government, 3, 7, 26, 31, 32, 36, 96, 97, 102, 105, 108, 114–117, 121– 133, 135–137, 139, 140, 143, 150, 152–157, 161, 165, 168, 187, 203, 217, 218, 255 Central government budget, 3, 49, 95, 132, 135, 137, 141, 199, 242, 253, 255 Central harmonization unit(s), 214–217, 228 Certificate rating system, 227 Chart of accounts, 178, 182, 186, 188, 191, 194, 203, 204 Chief Audit Executive (CAE), 222, 224, 225, 229 Collections, 3, 6–8, 11–13, 23, 41, 95, 106, 117, 129, 133, 140, 182, 190, 191, 199, 200, 208, 235, 251, 258 Commitment theory, 155 Compliance audit, 221, 245, 246, 250, 259 Constitutional Court, 243, 249, 255 Constitution of 1982, 238, 242, 247 Contingent assets, 60, 205, 207, 209 Contingent liabilities, 41, 48, 49, 53, 57–59, 63, 66, 68, 204, 205, 207, 209 Contingent liability risk, 48 Continuity theory, 155, 156 Coordination problem, 153, 156 Corruption, 151, 155 Council of State, 238 Court of Accounts, 94, 96, 200, 213, 228, 234–237, 239, 242, 254 Credit risk, 60, 61, 65, 67 Current asset, 204

D Debt and Risk Management Committee (DRMC), 25, 28, 44, 47, 53 Debt assumption commitments, 41, 48–50, 62, 63, 68 Debt burden, 21, 22, 30, 31, 134, 140, 142, 154, 168 Debt capacity, 43 Debt crisis, 22, 23, 168 Debt financing, 164

Index Debt management, 17, 22–25, 28–30, 32, 34, 37, 38, 42–47, 51, 53, 54, 59–61, 66, 67, 134, 156, 162, 164, 245 Debt management strategy, 31, 33, 34, 44 Debt manager, 25, 29, 30, 34, 35, 42, 47 Debt service, 29, 57, 134, 142 Debt stock, 21–23, 25, 26, 30, 31, 34–37, 43–45, 47, 53, 61, 67, 101, 123, 132, 134, 140, 141, 164, 165 Debt structure, 43 Debt sustainability analysis, 43, 44 Debt sustainability framework, 43 Defective responsibility approach, 251 Development index, 108, 116, 130, 161 Direct liabilities, 57, 58, 67 Disaster risk insurance, 64, 66, 68 Disposal of state-owned real estates, 81, 82 Domestic borrowing, 23, 25, 31, 32, 34, 140 Donation, 75, 77, 137 Draft budget, 95, 96 Dual recording procedure, 179, 181

E Economic crises, 58, 136, 179, 187, 192, 193 Economic development, 140, 154 Economic growth, 21, 27, 30, 31, 34, 35, 59, 152, 154, 155, 167, 168 Effectiveness, 7, 83, 143, 190, 214, 217, 219–225, 229, 249, 250 Efficiency, 19, 33, 65, 74, 79, 105–107, 116– 118, 123, 124, 127, 128, 139, 142, 143, 150–152, 154, 155, 157, 165, 190, 205, 213, 223, 229, 233, 240, 247–250, 254, 256, 259 Equalization/fiscal equalization, 114, 161 Equity principle, 117, 118 European countries, 73, 75, 76, 78, 79, 81 Evaluation, 8, 19, 29, 57, 92–96, 99, 100, 102, 214, 216, 217, 221, 234, 240, 249, 252–255, 259 Ex-ante control, 215 Exchange, 25, 26, 29–31, 38, 49, 57, 62, 68, 74, 77, 82, 102, 134, 206, 209 Expenditure arrears, 134 Expenditure decentralization, 123, 128, 153, 154, 156, 161, 163, 167, 169 Expenditure management, 151, 152, 179, 185 Expenditure responsibilities, 123, 124, 132, 137, 150 Ex-post financial control, 221 Expropriation, 75, 77

Index External audit, 25, 41, 214, 215, 217, 219, 220, 238, 240, 241, 245, 252, 253, 255, 258 External borrowing, 24, 25, 32, 35, 41, 42, 48, 59, 140 External debt, 35, 48, 134, 164, 181, 188 External debt payment account, 48, 60, 67 F Final account, 180, 243, 253–255, 259 Financial audit, 97, 215, 229, 233, 234, 246, 247, 255, 259 Financial control, 41, 180, 200, 201, 204, 205, 215, 240 Financial crises, 21, 22, 26, 30, 31, 41, 42, 58, 62, 64, 65, 68, 139 Financial instruments, 202, 209 Financial management, 3, 23, 101, 107, 136, 142, 179, 185, 205, 215, 233, 234, 239, 240, 245, 246, 250, 258, 259 Financial report, 178, 189, 191, 246 Financial statements, 63, 80, 188, 191, 192, 194, 198, 202–210, 220, 233 Financial statistics evaluation report, 252, 253 Financial transactions, 41, 187, 188, 190, 192, 200, 246, 251, 259 Financial transparency, 178, 190, 194, 213 Financing program, 17, 29, 44 Fiscal consolidation, 27 Fiscal decentralization, 127, 139, 149–158, 161, 163, 165, 167–169 Fiscal discipline, 24–26, 29, 30, 58, 61, 99, 101, 105, 106, 124, 132, 133, 136, 140–142, 156, 162–164, 169 Fiscal federalism, 150, 151, 154 Fiscal gap, 123 Fiscal indiscipline, 101, 124, 136, 141 Fiscal management, 95, 142, 156, 157, 165 Fiscal needs, 117 Fiscal risk, 49, 53, 57, 58, 63, 67, 68 Fiscal space, 137, 154, 165 Fiscal transparency, 140, 142, 213 Fiscal year budgets, 90, 93, 95, 96, 101, 199 Functional independence, 220, 229, 241, 258 Fungibility, 5–8, 14, 16 G General Accounting Law No. 1050, 177, 179, 180, 193, 200, 213, 236 General and annexed budget administrations, 185, 186, 258

269 General budget, 3, 6–8, 10, 11, 17, 24, 82, 128, 130, 133, 178, 186, 192, 204, 226, 237, 241 General budget tax revenue, 106–110, 113, 114, 117, 118, 129, 130, 132, 133, 137, 139, 142, 161, 162 General conformity statements, 237, 239, 245, 252, 253, 255, 259 General Directorate of National Property (GDNP), 74, 75, 77, 79, 80, 83 General Directorate of Public Accounts, 160–162, 180, 183, 185–187, 189, 201, 204, 205 General evaluation report, 243, 252, 253 General Government Accounting Regulation, 14, 188, 189, 203–206 Geographic size, 108, 111, 115, 116, 118 Government accounting, 24, 81, 177–182, 184–188, 190–194, 203 Government accounting system, 177–181, 183, 185, 187–189, 191 Government’s asset, 164, 182, 183, 188 Government size, 152, 167

H Hard budget constraint, 122, 153, 154, 156, 157, 169 Horizontal imbalances, 105, 162, 163

I Implicit contingent liabilities/risks, 57–59 Information Technology (IT) audit, 218, 219, 221, 225, 228, 229 Inspection, 129, 214, 215, 217, 219–222, 228, 229, 250, 253 Intangible assets, 190, 191, 208, 209 Interest expenditure, 26, 27, 30, 31, 165 Interest rate, 18, 23, 26, 31, 43–45, 47, 49, 57, 134, 152 Interest revenue, 17–19 Intergovernmental fiscal relations, 107, 122, 123, 131, 132, 142, 143 Intergovernmental fiscal system, 105–107 Intergovernmental fiscal transfers, 105, 107, 123 Intergovernmental transfers, 105, 106, 110– 113, 115–118, 123, 124, 131, 136, 137, 139, 140, 143, 152, 154, 157, 161–163, 165, 167–169 Intergovernmental transfer system, 107– 110, 118, 124

270 Internal audit, 99, 100, 102, 213–225, 227– 229 Internal audit activities, 100, 217–220, 222– 225, 227 Internal Audit Coordination Board (IACB), 214–226, 228, 229 Internal auditors, 214–229 Internal audit reports, 220, 223 Internal audit units, 214, 216–222, 224, 229 Internal control, 99, 100, 102, 214, 215, 220 Internal control system, 99, 187, 213, 215 International accounting standards, 63, 68, 187, 197, 205, 210 International Federation of Accountants (IFAC), 189, 197 International Financial Reporting Standards (IFRSs), 197, 198, 202, 203, 208 International Organization of Supreme Audit Institutions (INTOSAI), 240, 241, 246, 250, 258 International Public Sector Accounting Standards (IPSAS), 189, 197–199, 201–206, 208–210 International standards, 179, 185–187, 189, 191, 192, 200, 210, 213, 215, 216, 218, 221, 227, 239, 240, 256, 258, 259 Investment guarantees, 59, 62, 63, 67, 68 Islamic finance instruments, 37, 38

J Judicial function, 245, 247, 250, 252, 259

L Lack of transparency, 122, 124, 136 Leasing, 37, 75–80, 83, 207 Lima Declaration, 240, 241, 258 Liquidity, 4, 17, 18, 27, 28, 32, 33, 35 Liquidity risk, 44, 45, 65 Local borrowing, 154, 165 Local debt, 123, 134, 136, 165 Local fiscal capacity, 106, 117, 131 Local government borrowing, 123, 142, 167, 169 Local government debt stock, 164, 165 Local government expenditure, 123, 155, 159–162, 169 Local government revenue, 128, 129, 131, 132, 136, 140, 141, 159, 161–163 Local government system, 125, 126, 131, 132, 157, 158

Index M Macroeconomic management, 149–157, 159, 163, 167–169 Macroeconomic risks, 57, 62 Macroeconomic stability, 123, 141, 151, 153, 154, 156, 157, 165 Managerial responsibility, 213–215 Market risks, 26, 31, 47, 53 Mexico Declaration, 240, 241, 258 Moral hazard problem, 105, 117, 118 Municipal amalgamation, 126, 133

N Net assets, 204, 206 New accounting system, 181, 186, 188 New Extended Treasury Single Account (New TSA), 4, 7–19 New financial management, 185, 242, 248 New TSA Bank Account (THKH), 13 New TSA Payables, 14 New TSA Receivables, 14 Northern Model (Anglo-Saxon Model), 215

O Off-balance sheet accounts, 178, 182, 183, 204 On-lent loans, 26, 42, 59, 60, 67 Operational risks, 51–53, 65

P Payment accounts, 6, 12, 13, 15 Perfect responsibility, 251, 259 Performance audit, 25, 219, 221, 223, 225, 229, 240, 242, 245, 247–250, 252, 254, 259 Performance audit manual, 218, 219, 248– 250 Performance Audit Working Group, 248 Performance-based budgeting, 25 Performance criteria, 91, 92 Performance indicators, 98, 99 Performance information, 97, 249, 259 Performance measurement (s), 78, 98, 99 Performance program, 90–97, 99, 101, 102 Performance targets, 94, 95, 97 Power of the purse, 240, 254 Price stability, 31, 152, 155, 156, 168 Primary balance, 26 Primary dealer/dealership, 33 Primary surplus, 26, 27, 38

Index Private sector, 32, 38, 49, 58, 61–63, 68, 73, 74, 78–80, 89, 178, 185, 192, 200, 203, 205, 218 Public Accounting Standards Board (DMSK), 197–201 Public administrations, 4, 7, 10, 19, 59, 63, 73, 75–79, 81, 83, 91, 93, 94, 98– 100, 125, 185–187, 189, 192, 201, 203, 204, 209, 214, 216, 218, 219, 222–225, 227, 238, 242–247, 249, 251–253, 255, 257, 258 Public buildings, 75–79, 81 Public Financial Management and Control Law (PFMC Law), 24, 27, 41, 91, 92, 94, 95, 187, 198–200, 213, 215, 227, 238, 239, 241, 242, 245, 247, 253, 255, 258 Public Financial Management (PFM), 3, 6, 15, 16, 19, 28, 41, 42, 73, 90, 99, 136, 178, 184, 185, 187, 190, 193, 199–201, 214, 215, 220, 227, 238, 244 Public Financing and Debt Management Law (PFDM Law), 10, 23, 24, 27, 29 Public internal auditing, 217, 218, 228 Public Internal Audit Software (˙IçDen), 218, 219, 228 Public internal audit standards, 218 Public internal audit system, 214, 217–219, 228 Public internal control, 214, 215 Public Internal Financial Control (PIFC), 25, 213–215 Public loss, 245, 246, 250, 251, 259 Public Oversight Accounting and Auditing Standards Authority (KGK), 200, 202, 203 Public Private Partnership (PPP), 24, 38, 41, 48, 49, 58, 59, 61–64, 67, 68, 76, 77, 204, 209

R Real estate, 74–83, 183 Real estate management, 73, 76, 78, 80, 83 Real properties, 73, 77, 78, 81, 82 Reflection accounts, 191, 199, 204 Regional imbalances, 132, 155 Regularity audit, 246, 247, 253 Resource allocation, 19, 91, 99, 127, 141, 142, 150, 158, 233 Revenue decentralization, 124, 125, 127– 129, 137, 152–157, 163, 167, 169

271 Revenue-generating capacity, 117, 129 Revenue management, 128 Revenue-raising capacity, 154, 163 Revenue sharing, 11, 18, 133, 137 Risk account, 48, 60, 67 Risk assessment, 59 Risk management, 22, 24–26, 31, 41–49, 51, 53, 54, 59, 60, 65, 66, 68, 220 Risk management unit, 25, 43, 44, 47 Risk-mitigating tool, 48, 53 Risk mitigation, 49, 53 Risk premium, 28, 29, 31, 33 S Secondary markets, 33, 34 Senior manager, 223–225, 228 Simplicity, 107, 116, 118, 178 Soft budget constraint, 121, 131, 153, 156, 157, 163, 169 Southern Model (Continental European Model), 215 Stability, 58, 64, 66, 101, 106, 107, 116, 118, 150, 151, 153, 187, 205 State-Owned Enterprise (SOE), 18, 60, 61, 63, 121, 122, 125, 218 State-owned real estates, 73–76, 78–83 Strategic benchmark policy, 42, 43, 47, 53 Strategic benchmarks, 25, 26, 28, 31, 38, 42–45, 47 Strategic management, 91, 93, 94, 97, 98, 100, 101 Strategic planning, 25, 41, 89–93, 95, 97– 102 Strategy development unit, 91, 98, 245 Supervision, 225, 227 Supreme audit institutions, 228, 233, 234, 240, 241, 246, 258 T Tax liability, 77 Tax revenues, 46, 57, 108, 114, 123, 128– 130, 140, 143, 161, 188, 191 Top manager, 214, 218, 222–225, 228 Traditional audit, 233 Transfer amount, 107, 116 Transfer schedule, 106, 118 Transparency, 4, 16, 19, 22, 24, 25, 28, 29, 41, 42, 58, 101, 106, 107, 116, 118, 124, 136, 142, 152, 165, 187, 190, 191, 200, 203, 205, 213 Treasury-backed credit guarantee system, 65, 66, 68

272 Treasury guarantees, 24, 26, 41, 48, 49, 57, 59–61, 65, 67, 68, 142, 165, 243 Treasury Internet Banking System (TIBS), 7, 15 Treasury repayment guarantees, 48, 59–61, 67, 68 Treasury Single Account (TSA), 3–11, 13– 20, 28 Turkish Court of Accounts (TCA), 215, 220, 229, 234–259 Turkish Court of Accounts (TCA), 241

Index Turkish public accounting reform, 197–199 Turkish Treasury, 23, 29, 41–44, 46–48, 51–54

V Vertical imbalances, 105

Z Zero balance, 11–13