A Critical Review of Public Borrowing by Turkish Municipalities: 1960–2006

Abstract

This paper offers an analysis of municipal borrowing in Turkey during 1960–2006 in two sub-periods: 1960–79 and 1980–2006. These sub-periods are distinguished from each other as different regimes of capital accumulation, taking 1980 as the breaking point. In this framework, the capital accumulation model of the import substitution era of 1960–79 is assessed in the context of the national developmental state, while the financial capital accumulation regime in the post-1980 period is studied in the context of financial globalisation. The impacts of these two regimes on the debt structures of municipalities are compared using period-specific indices of indebtedness. It is found that indebtedness in real terms increased significantly in the post-1980 sub-period, which can be attributed to the adoption of the financial capital accumulation regime.

Acknowledgements

The author wishes to thank Sezai Temelli, Gulay Gunluk-Senesen and Adalet Bayramoglu-Alada for their careful reading of the manuscript and for constructive suggestions, and the anonymous referees for their useful comments.

Notes

¹ Until 1965, the borrowings in municipal budgets were classified under the title ‘borrow payments’ in the municipal revenues. After 1965, the item ‘debt payments’ began to appear under the title ‘capital formation and transfer expenditures’ in the municipal expenditures. As a result, the indebtedness data we used for this study are composed of the data which belongs to the borrow payments item in municipal revenues until 1965.

² There are three basic types of local authorities in Turkey: special provincial administrations, municipalities and villages. In the Constitution in article 127 with the title of local governments, it states that the establishment, duties and powers of local governments will be determined by law in accordance with subsidiarity principle; that central government has the power of administrative guardianship on local governments within the principles and procedures stated in the law with the aim of managing local governments in accordance with the principle of wholeness of local governments, providing unity in public duties, protecting the public benefit and meeting local needs as needed, and that revenue sources will be provided to the local governments in accordance with the rate of their duties. The revenues of local government units in Turkey depend on four main resources: (1) the source revenues of the local governments, such as local taxes, local duties, contribution shares in expenditures, fees etc; (2) the share local governments receive from central government budget revenues; (3) grants to local governments by central government; and (4) foreign and domestic borrowing, which has become one of the most important resources used by municipalities, especially metropolitan municipalities after 1990 in order to finance their investments (Kerimoglu et al., 2005, 6, 53–54, 68).

³ The conceptual framework for the evaluation of public indebtedness as an instrument for direct transfer of resources from the state to foreign or domestic private financial capital was discussed in detail in the author's paper (Yakar-Onal, 2003) entitled ‘Borrowing Process of Local Governments in Turkey: 1980–2000’, presented to the 18th Finance Symposium, which may be considered the initial stage of this study.

⁴ The USA actively gave its support for the transition to the import substitution policy in some countries including Turkey (Keyder, 1995, p. 199; 2004, p. 173).

⁵ Wallerstein (1998, pp. 109, 113) argues that national development, which is defined as ‘gaining on’ as an attainable target everywhere if the proper state policies are implemented, is a mechanism used by both grand ideologies of the 20th century for the political integration of peripheral countries, and its starting point was 1917.

⁶ Municipality Code No. 1580 was also promulgated in 1930. One of the primary issues regarding municipalities discussed in the third congress of the only political party of that period, the Republican People's Party, was about adopting ‘statist’ principles in terms of production and ‘municipalisation’ of many public services over time. As an extension of this statism and municipalisation approach of the period, negotiations were made in 1932 with the private companies providing the public services of electricity, water, transportation, etc: these companies were expropriated and then handed over to the municipalities after some legal regulations were enacted (Falay, 2002, p. 556).

⁷ The model of neoliberal approach regarding the local government banking becomes concrete in the World Bank projects. The World Bank foresees that the local government banks issuing loans from public resources should be eliminated, local governments should be liberalised on the issue of indebtedness, and local credit markets should be established. Local government reforms in Turkey started with World Bank's Çukurova Urban Development Project in 1986 and they were continued with the Municipal Services Project in 2006. Considering Iller Bank within the system of local governments and trying to restructure it as a part of local government reform, the neoliberal approach emphasises extending the authority of local governments parallel to their financial autonomy. In this framework, considering this unique structure of Iller Bank with its technical and financial support of local investments as the reason for the underdevelopment of local governments, the World Bank suggests that the project financing and technical support responsibilities of Iller Bank should be transformed into a financial agent operating according to market rules. These suggestions on the restructuring of Iller Bank, which were brought to the agenda claiming it would induce a more autonomous structure to the local government system, were to become concrete in the ‘Draft Statute About Iller Bank Corporate Company’, which was sent to the Prime Ministry on 1 December 2006. This draft sets up Iller Bank to be restructured, becoming free of its character as a public institution, running according to market conditions and conducting its operations in the local government banking sector with corporate company status. This draft includes some regulations such as having operations only in the banking sector, trading according to the rules of banking regulations and not taking a direct part in the execution of local investment projects (UCTEA Chamber of Survey and Cadastre Engineers, 2006, pp. 9, 20–21, 30, 42). The CEO of Iller Bank, Hidayet Atasoy also mentions that ‘they anticipated seeing the draft as a law, prepared it under the framework of restructuring, and objected to making the bank a corporate company. The work required for this to occur had already been completed to a great extent’ (http://www.ilbank.gov.tr, accessed 10 September 2007).

⁸ The intention was for the public sector not to be bound by any different practices than the private sector in order to prevent governments from taking shelter in public indebtedness, and it was expected that financing public deficits and increasing the role of the market mechanism would contribute to secure budgetary discipline and decrease excessive public deficits. This expectation, with its concern about an increase in indebtedness costs, was directed to the public authority in order to enforce it and to take the steps to decrease deficits by reviewing the expenditures again (Selcuk & Rantanen, 1996, pp. 71–2, 85).

⁹ The Conciliation Commission for Municipalities, established for the resolution of problems of assets-liabilities between municipalities and companies related to municipalities and public institutions, restructured the total debt of 14.3 billion YTL to 9.6 billion YTL for those who applied to the commission up until 30 June 2006 in order to benefit from the conciliation (Association for Local Government Research, Welfare and Education, http://www.yayed.org; accessed 14 January 2008).

¹⁰ See Kurtulus (2006, p. 15) for the concept of ‘operational surplus’ developed as one of the most important indicators of a lendable municipality.