Ownership Function and Strategic Management of State Owned Enterprises in Turkey

1. Ownership Function and Strategic Management of State Owned Enterprises in Turkey Ayşe YİĞİT 06.09.2011 ayse.yigit@hazine.gov.tr

2. Outline I. General Outlook for Turkish SOE System • SOEs in the Turkish economy • Classification of public enterprises • Major aspects of SOEs II. Setting the Strategic Objectives:Budgetary and Strategic Documents • General Investment and Financing Program for SOEs • Mid-Term Program for General Government Sector • Strategic Plans • 5 year Development Plans III. Responsibility for Achieving the Strategic Goals • Responsibilities and Limitations of the SOE Management • Efforts for new SOE legislation IV. Current Outlook and Future Expectations • Current Outlook: Problems and Opportunities • Vision and Future Prospects of Treasury in Terms of SOE Management

3. I. General Outlook for Turkish SOE System

4. SOEs in the Turkish Economy In the 1990s... • More than 60 different SOEs • Significant share in GDP and public investments • 660 thousand employees now reduced to... • 27 SOEs • A lower share in GDP and public investments • 186 thousand employees as a result of mergers and privatizations.

5. SOEs in the Turkish Economy Significant drop in gross sales...

6. SOEs in the Turkish Economy Lower share of public investments...

7. SOEs in the Turkish Economy Lower levels of employment

8. Classification of Public Enterprises

9. Some Major SOEs General Directorate of State Owned Enterprises Transportation Energy Agriculture Turkish Railways (TCDD) Electricity Production (EÜAŞ) Grain Board (TMO) Tea Company (ÇAYKUR) Turkish Post (PTT) Electricity Transmission (TEİAŞ) Agricultural Enterprises (TİGEM) Airport Authority (DHMİ) Natural Gas Distribution (BOTAŞ) Coastal Safety (KEGM) Oil Extraction (TPAO) State Supply Office (DMO) Hardcoal Mining (TTK) Arms Manufacturer (MKEK) Electricity Transmission (TKİ) Boron Mining (Eti Maden)

10. Major Aspects of SOEs • 100 % Treasury share (SOE), (Privatization Administration portfolio not accepted as SOE) • Ownership represented by Treasury • Subject to a special decree rather than Commercial Code • Capital injections and duty loss payments by Treasury • Investment approval: High Planning Council (secretariat performed by Ministry of Development) • Audit: Turkish Court of Accounts, inspection of certain issues by Treasury and line ministry • Similar personnel and procurement legislation with general government units • Members of board appointed by a joint decree (Line Minister, Prime Minister and President) • Approval of financial statements: Grand National Assembly

11. Major Aspects of SOEs Composition of the Board (SOEs) • Composed of 6 members one of whom is both chairman and the CEO • 5 of the members (including the chairman) are appointed upon the nomination of the line minister • 2 members must be selected from the deputy CEOs of the company upon the nomination of the line minister • 1 member is appointed upon the the nomination of the minister responsible from the Treasury Composition of the Board (Privatization Portfolio) • Appointed upon the nomination of Privatization Administration and consent of Prime Minister • Privatization Administration: Attached to Ministry of Finance

12. II. Setting the Strategic Objectives: Budgetary and Strategic Documents

13. General Investment and Financing Program for SOEs • Prepared in October by Treasury and Ministry of Development, • Privatization portfolio: Prepared by Treasury and MoD, Approved by Privatization Administration • A financial forecast of the next year, prepared for budgetary purposes • Council of ministers decree • Next year’s budget allocations of SOEs • Main elements of SOE policy • Financial targets (Sales, operational P/L, labor productivity etc.)

14. General Investment and Financing Program for SOEs • Compulsory framefork for SOE budgets • Recruitment caps • Procurement procedures & Outsourcing caps • Investment limits and programs • Budgetary transfers • Dividend payments • Some operational issues (i.e. price changes)

15. Mid-Term Program for General Government Sector • Under the responsibility and coordination of Ministry of Development • A basic evaluation of the budget and investment proposals of SOEs • Investment decisions made by Ministry of Development • Covers strategic issues: • Mainstream expectations and policies • Future investments and developments • Necessary financing

16. Mid-Term Program for General Government Sector • Framework for general investment and financing program • Mainly a financial forecast • Covers next three years, renewed every year • Prepared in May • Includes short term risks-exposures and plans • Council of ministers decree • Budgetary relations of SOEs with central government units, i.e. capital injections, duty loss payments, dividend payments etc.

17. Strategic Plans • Introduced in 2003, first prepared in 2009 • In line with mid-term programs and development plans • Under the responsibility of each government agency, • MoD acts as a check point for harmony with budgetary and strategic objectives • Aims to • Explicitly state a mission and vision • Create strategic priorities and measurable targets • Performance evaluation via predetermined indicators • Covers a 5 year period, can be modified after 2 years of implementation • Can be modified by a government agent in case of a change in management • Responsibility: The minister and upper management • Strategic document rather than a financial forecast

18. 5 YEAR DEVELOPMENT PLANS • Prepared since 1963 by Ministry of Development • 9th development plan covering 2007-2013 is in force • Primary area of focus: Strategies for economic sectors in the long run • Reflects the economic spirit of the era, i.e. import-substition, export-oriented, increasing competitiveness • May contain specific targets for SOEs like privatization, restructuring

19. III. Responsibility for Achieving Strategic Goals

20. Responsibility for Achieving Strategic Goals • Responsibilities and Limitations of the SOE Management • SOE Management • Limited with • Recruitment caps • Procurement procedures & outsourcing caps • Investment limits and programs set by Ministry of Development • Independent in other operations • Free in determining prices • Intervention in prices: Duty Loss • State covers loss and %10 forgone profit • General Manager • Chairman • Appointed by the nomination of line minister • Accountable to Grand National Assembly • No responsibility for SOE performance

21. Responsibility for Achieving Strategic Goals • Efforts for new SOE legislation • Preparation phase • Best international practices • Full responsibility to management • No interventions to management • Independent auditors • Performance evaluation • Sanctions for lack of performance • Determination of strategic objectives in coordination with SOE management • Ending multi tasking and ambiguity in administration • SOEs subject to commercial code • A pool of nominees for the board from private sector and public administration

22. IV. Current Outlook and Future Expectations

23. Current Outlook • Problems and Opportunities • Political intervention in pricing of energy SOEs • High theft/loss ratio and low collection rates in energy SOEs • Need for high infrastructure investments in the railways • Agricultural subsidies • High losses of SOEs which are important in local economies, inability to restructure • High cost and rigidity of employment • Liberalization of several markets, i.e. Postal sector, railways, energy distribution and production • Possibilities of coordination with private sector, public-private partneship projects (Airports, railway stations) • Outsourcing in tertiary services (cleaning, security) • Privatization

24. Vision and Future Prospects of Treasury in Terms of SOE Management • State’s new role in the economy: • A strong regulatory and supervisory role • No production & trade activity in the long run • Strengthened ownership of the State • Adoption of corporate government principles for public enterprises (best practices) • Creating more autonomous managerial environment • Clear distinction between financial and policy objectives • Linking appointment processes to institutional and executive performance