House of Commons - Business and Enterprise

Select Committee on Business and Enterprise Seventh Report

4 Opportunities & barriers

66. As in our recent inquiries into trade with Brazil, India and Eastern Europe, we were told regularly both in Turkey and in evidence that the UK is 'losing out' to EU competitors in the race for business. In the case of Turkey there is a widespread view that Germany and France, and to a lesser extent Italy, are more successful in taking advantage of the opportunities that Turkey offers. However, it is difficult to establish this with certainty from the data provided in evidence to this inquiry. As noted above, France and Germany have seen their share of trade with Turkey decline as has the UK, but the proportionate fall for Germany from 2002 to 2006 was greater than the UK's, although the UK's fall was greater than that for France.

67. The TBBC said the decline in the UK's position was due in part to tradition and in part to priorities.[178] Turkey is not a "traditional" market for UK businesses, and it does not benefit from the historical links that both Germany and France have with Turkey. The CBI supported this view: "Turkey has not been seen as a classic slam-dunk British market in the way that some others have", which they saw as being due to "information availability, familiarity with the market and also a trade-off against opportunities elsewhere in the world."[179] Unfamiliarity breeds uncertainty, as "something new brings with it unknown risks".[180] One example, also noted by the TBBC, is the unusual requirement for companies to register with the local chamber of commerce in Turkey.[181] We were concerned to hear views expressed in Turkey that the UK is losing out to its competitors in Turkey—although we have not seen conclusive data to support this—just as we have previously seen the UK losing out to competitors in India and Brazil. The Germans and the French have certainly benefited from historical links with Turkey, and are more accustomed to doing business there. However, it was abundantly clear from our visit that Turkey is very open to doing business with the UK, not least because of the UK's unwavering support for Turkish membership of the EU. As this report outlines, there are numerous opportunities available in Turkey. These opportunities are not risk-free, but businesses could benefit greatly from pursuing them.

68. BERR told us that, despite the difficulties, around 10% of foreign-owned businesses in Turkey are British-owned, with some 1,420 registered companies with UK capital in Turkey.[182] There are certainly some large, high-profile UK companies operating in Turkey, including Vodafone, Tesco, Diageo, Thames Water, HSBC, Cadbury Schweppes, and Imperial Tobacco.[183] The CBI also noted Aviva, BP, Shell and Unilever,[184] and the TBBC noted Marks & Spencer, Argos, John Lewis, Matalan, Next, Sainsbury's, Morrison's, Dagenham and Harvey Nichols.[185] In February British American Tobacco bought Tekel, the state-owned cigarette manufacturer, for £874 million ($1.72 billion).[186] UKTI suggested that significant investments by such companies in the past few years suggested a "growing interest on the part of UK companies in investing in Turkey."[187] The presence of a number of large and highprofile British companies operating in Turkey, and the growing investment interest, should encourage other companies considering this market. As noted above, it may be a market more suitable for medium to large companies, but opportunities exist across the board.

69. The evidence from BERR and the CBI detail the opportunities and barriers in Turkey.[188] The remainder of this chapter summarises these, and looks at some specific sectors and issues.

70. Turkey is not a 'low cost' producer in the vein of India or China, but as the British Chamber of Commerce in Turkey (BCCT) said it is certainly "lower than the UK cost".[189] It therefore "makes sense for British companies to move part of their manufacturing from the UK to Turkey, retaining Research and Development, marketing and head office functions in the UK."[190] The BCCT also noted that buying into Turkish competitors was a good way to address the competition from the Turkish market, especially "when one takes into account the fact that most Turkish SMEs are under capitalised."[191] UKTI's website notes that: "Turkey is rapidly becoming an 'operation and production hub' for multinational companies."[192]

Sectors of interest

71. The Trade and Industry Committee's 2001 Report on Turkey highlighted a range of sectors: healthcare, construction, engineering, environment, infrastructure, automotive components, security, and food processing and packaging.[193]

72. The evidence for this inquiry demonstrated a similarly wide range of sectors of interest. Among them were:

environment,
water and wastewater,
agriculture, and
mass transport (ports).

These four sectors were identified as UKTI's priority sectors for 2008/09, which means they will receive about three-quarters of the total resource available. In addition, UKTI considers the following as 'opportunity sectors', where one major event is to be held annually:

mass transport (airports),
financial and legal services,
ICT, and education and training.[194]

UKTI officials also highlighted the power sector,[195] while the Trade Minister also emphasised education and training.[196]

73. The CBI identified many priorities, most falling within the sectors listed above, with some additions such as police and security and agribusiness.[197] They also noted "considerable funding from the EU" for general infrastructure.[198] TBBC produced a similarly broad list, which highlighted infrastructure and retailing as opportunity sectors,[199] and also foresaw opportunities in retail and financial banking as Turkey opened up those sectors, as well as opportunities arising from EU funded projects such as in consultancy.[200]

74. The customs union is currently limited to goods; there are sectors where accession will make a real difference, such as services trade. Accession will open other parts of the Turkish economy, for example, giving equal access to procurement contracts. A BERR official noted services as a "big area" missing from the customs union.[201] The UK service sector is extremely strong and a clear area of comparative advantage. Although recent economic reforms in Turkey have seen some progress made, for example in freedom to invest in the country, services sectors in Turkey remain heavily protected. Full liberalisation of trade in services is likely to be of great benefit to UK companies.

75. The Trade Minister highlighted the importance of the defence and security sector, following the shift in responsibility for exports in that sector to UKTI from the Ministry of Defence's Defence Export Services Organisation (DESO) in April 2008. He said the UK does "not anywhere near punch our weight in selling defence equipment to Turkey", and that exports of around £40 million last year "should be increased substantially."[202] The strategic partnership document refers to a memorandum of understanding between DESO and the relevant Turkish authorities,[203] although it is unclear whether this is proposed or signed and we seek clarification on this point.

76. The sheer range of opportunity sectors raised in evidence and during our visit demonstrates the ripeness of the Turkish market for British business. We welcome the regular reassessment of UKTI priorities in the market, and agree that the priority and opportunity sectors chosen broadly reflect the evidence we have received. We expect sectors that are not prioritised, but where significant opportunities exist, will continue to benefit from the general support and information awareness functions of UKTI. In general we would support an expansion of the priority markets in Turkey, but accept that this would require additional resources.

ENERGY

77. Although Turkey itself is heavily dependent on imported energy from Russia and Iran, it has great potential as an energy hub or gateway for the EU, not least because of its strategic position, bordering eight other countries in the region.[204] The CBI noted that Turkey is close to 71% of the world's proven gas and 73% of oil resources, and a "natural hub between several vital energy suppliers and energy consumers."[205] BERR emphasised the "potentially large role" for Turkey in future EU energy security, "since it borders some of the richest hydrocarbon territories in the world and is already a key transit state for gas into the EU."[206] However, as one analyst has noted, Turkey:

has occasionally been undermining its own claim of being an energy bridge by making exaggerated demands. Turkey is still hesitant about accepting a transit regime, because of lingering ideas at some quarters that Turkey, rather than becoming a major transit hub for Europe should opt for a role as a seller of energy bought at lesser value on its eastern frontiers.[207]

78. The UK-Turkey strategic partnership includes support for "Turkey's ambition to be a global energy hub, through an enhanced UK/Turkey Energy dialogue" and sharing "best practice on issues surrounding energy market liberalisation".[208] The Trade Minister told us security of energy supply was "one of the reasons why I am very, very keen that Turkey joins the European Union as quickly as possible".[209]

79. As the Turkish British Chambers of Commerce and Industry told us, accession "would provide a stable market framework within which EU companies can transit gas to customers in the EU at competitive prices" and "could help improve access to these resources and their safe transportation into the rest of the EU by further securing the sections of the routes which transit Turkey."[210] As there are difficulties in opening the energy chapter of the accession negotiations (as noted above in paragraph 38), the alternative of the Energy Community Treaty, which extends energy-related elements of the acquis to non-EU countries particularly in the Balkans,[211] has been suggested. However, it is likely Turkey would prefer the energy chapter to be opened and progressed.[212]

80. Turkey is not only important as a potential transit route for oil and gas from further afield. The Minster also saw opportunities for industry in the domestic energy sector, such as in Turkey's nuclear programme where 5,000MW of plants are to be built by 2020 and some tenders will be finalised by September, which he saw as a good fit for UK engineering consultancy services.[213] There could also be opportunities in the planned privatisation of the electricity generation network, and in assisting Turkey with low carbon emission economic development through technology exchange.[214]

81. The energy sector clearly offers many opportunities, ranging from those offered by the domestic market to plans for international transit into the EU. The UK has much expertise to offer in this sector. We recommend that the Government pushes for the energy chapter of the accession talks to be opened this year, and to be rapidly progressed.

EDUCATION AND TRAINING

82. Although education and training is an opportunity rather than a priority sector for UKTI in Turkey, the TBBC and CBI both noted Turkish enthusiasm for stronger education links with the UK, and this was borne out by our visit.[215] The Trade Minister also saw growing demand for UK professional qualifications and training as Turkey's economy expands.[216] The British Council noted that the

increase in wealth and living standards for a small but significant element of the Turkish population has allowed a growing number of Turkish parents to take more responsibility for the education of their children through private school education, extra tuition and overseas study.[217]

It also noted "a huge demand on a higher education system which is already significantly over-subscribed": in 2007, of 1.5 million applicants, fewer than 500,000 received places.[218] The British Council also noted that an increase in demand for UK offerings in vocational education and training was likely.[219]

83. The aims of the UK-Turkey Strategic Partnership features include improving educational ties, more university partnerships, the establishing of a 'British University in Turkey', more Turkish chairs at UK universities, student exchange programmes, and helping Turkey to adjust vocational education and training to its economic needs.[220] We are pleased that the Minister saw a British University in Turkey as "an excellent idea […] a fabulous advertisement for what we do".[221] We were also encouraged to hear that the Minster would be meeting the new UKTI/university working group before his visit.[222]

84. We strongly support UKTI's recognition of education and training as an opportunity market in Turkey, particularly given the enthusiasm for greater cooperation on education and training expressed during our visit. We hope that interest generated from the opportunity market designation by UKTI this year can lead to education and training becoming a fully-fledged priority sector for Turkey in 2009/10. We believe that the British University in Turkey initiative, which had the full support of the Trade Minister, should be pursued, as this could act as an effective signal for other UK entrants into the Turkish market.

85. The British Council noted that although Turkish demand for UK higher education has grown by 50% over the last three years, there are fewer than 2,400 undergraduate and postgraduate students from Turkey studying in the UK.[223] The UK-Turkey strategic partnership also advocates encouraging more Turkish students to come to the UK for their studies. The TBBC outlined a major issue, raised with us on numerous occasions during our visit to Turkey, that Turkish students:

are currently treated as non-EU members and therefore charged fees for non-EU student status. The Turks believe that obviously they would like us in the path to accession to waive the non-EU part of the fee that is charged students when they come to Britain and attend British educational institutions.[224]

86. Clearly, one solution to this problem is for Turkey to become a full EU member and thereby benefit from EU rates. However, accession is some years away. When we raised this issue with the Trade Minister, he committed himself to taking up the case in Government for either extending the EU rate to candidate countries, or providing some other form of preferential scheme, noting existing preferential treatment for Turkey in landing fees and flight taxation.[225] We are encouraged by the Minister's positive reaction to our suggestion of a reduction in costs for Turkish students coming to the UK based on Turkey's EU candidate country status, which would increase the attractiveness of United Kingdom higher education and send a powerful message of the importance we attach to Turkish membership of the EU. Investing in education links, at both individual and institutional level, should increase and affirm the bilateral ties between the countries, and be to the long term benefit of the UK. We recognise, however, that reducing fee income from students from specific countries may have a disincentive effect on university admissions policies and so a perverse outcome. We also emphasise the need for greater activity by UK higher education institutions in Turkey. The Government should develop a clear strategy to ensure that the mutual benefit to both countries of deepening education links is fully realised.

Turkey as a gateway

87. The Trade and Industry Committee's 2001 Report noted that when Turkey becomes an EU member "it will be uniquely placed to channel trade from the Caucasus countries to Europe."[226] As the energy sector demonstrates, Turkey has a "huge potential to serve as a gateway to Central Asia and the Middle East".[227] However, there is mixed evidence about the extent of that potential. The Europe Minister has said we "should look to Turkey to act as an economic bridge to Central Asia and the Middle East".[228] The Trade Minster also said Turkey could have a "role to play" as the EU's "most eastern hub".[229] UKTI's main webpage for Turkey highlights its capacity as a "Springboard to Central Asia & Northern Middle East".[230] However, an FCO official said Turkey "has a very strong interaction with the economies of Central Asia but its links into the Middle East really are not as strong".[231] BERR's evidence noted "contradictory" material and "little specific empirical evidence" that Turkey is the best gateway to wider region markets.[232]

88. Despite the conflicting views from UK Government bodies about the importance of Turkey as a gateway, Turkish entrepreneurs have invested an estimated $5 billion in the Central Asian Republics,[233] while Turkey has won $45 billion of contracts in Russia and Central Asia over the last five years.[234] Multi-national companies are also increasingly using Turkey as a base for their operations in the Central Asia region (examples including Coca Cola, Microsoft, JP Morgan Chase and General Electric).[235] Witnesses saw Turkey as a "very important regional export hub"[236] to the Middle East and Central European countries, with potential for British companies to "form joint ventures and other arrangements" to bring their expertise to the wider region.[237] The Turkish British Chambers of Commerce and Industry saw Turkey's

proximity to and bilateral trade relations with the new emerging markets in the Middle East, Caucasian republics and Central Asia create unique business opportunities. Turkey is one of the leading investors in Caucasian and Central Asian Turkic Republics. Its strong cultural and historic ties, provides Turkey with privileged access and a strong base to develop business with to these countries.[238]

A UKTI official noted that the inter-governmental forum would be looking at the UK and Turkey working together in third markets.[239]

89. While there are differing views about the scale of Turkey's potential as a gateway to other countries in the Middle East and Central Asia, there are certainly links between Turkey and the wider region. Businesses and investors looking at Turkey should consider the potential wider opportunities in these areas that basing themselves in or investing in Turkey may bring. We are pleased that the inter-governmental forum is going to look at co-operation in these third markets.

Barriers and issues in the Turkish market

90. The Trade and Industry Committee's 2001 Report highlighted trade difficulties arising over wines and spirits and intellectual property (textbooks in particular, a complaint reiterated on our recent visit to Turkey). It is clear from our inquiry that neither of these issues has been resolved. Indeed, we came across a widespread feeling that there were "too many disputes and too many disputes outstanding" in Turkey.[240] Two British companies, Diageo[241] and European Nickel,[242] are even considering whether to continue their activities in Turkey because of disputes over duties in the former case, and very lengthy administrative delays over permits in the latter.

91. UKTI accept that Turkey "can be a difficult market".[243] Even though the customs union means that formal barriers, such as tariffs, are generally low, there are a range of other barriers which raise real difficulties in trading with Turkey.[244] We should note, though, that in the main these barriers are more of an irritant rather than a block. As the CBI said:

It does not necessarily mean that you cannot find a way to deal with them or that you cannot continue to do good business, but it is not optimal and I think it is important to continually focus on issues that are problematic.[245]

The British Chambers of Commerce in Turkey noted that the "discrepancies and irritating obstacles" with the customs union can ordinarily "be overcome with diligence and patience", although in some cases—including alcoholic drinks imports—"high level intervention can be required."[246]

CUSTOMS UNION-RELATED ISSUES

92. There is a clear feeling that trade barriers persist which are incompatible with the commitments Turkey has entered into—not only through the customs union with the EU, but also with the World Trade Organisation (WTO). The CBI saw "inconsistent and unpredictable application of rules" by customs and court officials,[247] and was also critical of Turkey's technical barriers to trade, especially on food, notably beef, and drink.[248] They said that "both the European Commission and Member States should be taking all avenues possible to ensure that [customs union] obligations are met."[249]

93. The alcoholic drinks case is a good case study of the kinds of problems being experienced in the customs union. The Scotch Whisky Association,[250] the Gin and Vodka Association of Great Britain,[251] and the CBI highlighted the issue.[252] In summary there are problems with certification, labelling standards, customs procedures and bureaucracy, and discriminatory duty and tax treatment, as well as a de facto import ban on "ready to drinks" (pre-mixed spirits) and difficulties in securing import licences. For the Gin and Vodka Association these problems had made Turkey a "most difficult and frustrating country in which to try and do business".[253]

94. The Scotch Whisky Association (SWA) urged an EU Trade Barrier Regulation complaint if necessary.[254] It noted some tentative progress in the removal of requirements for one import permit, but told us that "the most onerous part of the administrative requirements […] remains in place".[255] The CBI is supportive of the complaint under the Trade Barrier Regulation, and believes Turkish trade defence should be brought into line with EU norms.[256] The SWA notes that Turkey "does not welcome the prospect" of a TBR case.[257]

95. The difficulties being experienced over alcoholic drinks are longstanding, unhelpful and disproportionately damaging for bilateral economic relations. We appreciate the sensitivities involved for Turkey, but the evidence we have received indicates that Turkey may well be in breach of its customs union and WTO commitments. We hope that a combination of pressure from UKTI, fasttracking through the new inter-governmental forum, and the potential EU trade barrier complaint will help produce a resolution.

96. The European Commission identified "limited progress"[258] in the customs union chapter of the accession negotiations in its most recent annual assessment, highlighting deficiencies including, among other things, "free trade zones, customs duty relief, fight against counterfeit goods, and post clearance".[259] A BERR official said that the customs union was "certainly not perfect and it is certainly not complete,"[260] and also noted that the customs union dispute resolution system was "not ideal because it is slow",[261] requiring investigation, judgement, then Turkish authorities to implement that finding.[262] In their comments on the alcoholic drinks case, the SWA note that there was reluctance to use customs union dispute procedures because they were ineffective.[263] Difficulties in the customs union could be linked to the slow progress of accession talks. The Trade Minister said if the EU was "to accelerate the negotiations for membership there would be a bit more moral high ground when we then ask Turkey to comply with certain aspects of the Customs Union."[264]

97. It is unfortunate that the dispute resolution mechanisms for the EU-Turkey customs union have proved to be slow and inadequate. It seems reasonable to assume that the problems with the customs union would be eased if more progress was made in accession negotiations, but it is unlikely that any major changes can be expected in the shortterm, not least because of the blocking of related chapters due to the Cyprus issue. We hope that Turkey and Britain can work bilaterally to deal with these issues more speedily, and that the new inter-government Forum will be an avenue for this.

OTHER BARRIERS

98. There are also many 'behind the border' issues which have a damaging effect on trade. A UKTI official raised work permits, judicial system, taxation, bureaucracy, intellectual property rights and corruption as issues, although he also noted that these problems varied by sector.[265] The CBI raised ten areas for improvement: privatisation; the judicial system; attitudes to foreign investment; taxation; bureaucracy; corporate governance; financial market development; informal economy; training and vocational education; and research and development, innovation, and information and communication technology.[266] The CBI also raised "disguised unemployment" and "rigidities within the labour market" which "constrain the ability of companies to create jobs effectively" in oral evidence.[267]

99. These are detailed thoroughly in the oral evidence and written memoranda, in particular those from the CBI and from BERR. Some key points are highlighted below:

Legal & judicial system: there were widespread complaints that this was slow,[268] with long drawn out dispute procedures, inconsistent, not transparent and inefficient.[269] There was a widespread view, summed up by the CBI, that "the most important thing is to ensure that laws that are enacted are implemented fairly and uniformly."[270] A particular problem was highlighted in understanding of issues and implementation in regional courts,[271] as well as overlapping jurisdictions of different courts.[272]
Corruption and civil service "political control and patronage":[273] BERR saw "some challenges from corruption", and though it was difficult to "gauge exactly what the level of corruption is",[274] there had been some improvement but there was "no centralised strategy to tackle corruption".[275]
Bureaucracy: European Nickel raised the tortuous license and permit application procedures which they say have been costing them $1 million a month.[276]
Labour market inefficiency: a range of issues were raised during our visit, such as difficulties in obtaining work permits. Several witnesses during our visit noted rigidities in the labour market, (for example severance pay is around 20 months salary), rules giving priority to recently dismissed workers for vacancies, night and weekend work restrictions, and restrictions on temporary contracts.[277]

100. Given the potential problems outlined above, the CBI felt it was important for companies to have strong links with people who had knowledge of the market, and could represent them properly. They said that

local market representatives in countries like Turkey where things are not always easy does make sense. I think you have to be very careful how you pick your local representative; I think it has to make real business sense to do so; but in general terms it can be an asset to the business.[278]

The CBI also noted that "familiarisation with the administrative and regulatory set-ups is much easier if you do have a local representative".[279] The CBI also indicated that there was discrimination in Turkey between foreign and local companies. It noted that a new trade law was likely to be passed later this year which would end double taxation for foreign investors, increase transparency and competition, as well as making it easier to start up a company.[280] The CBI felt that this could "level some of the playing field", but warned that "a lot of the problems are not with the basic legislation but with the implementation."[281]

101. Despite the problems outlined above, a BERR official considered that in the last ten years Turkey:

has started to become a very different kind of economy from one where there were barriers on such a wide range of issues and so many restrictions that it was incredibly difficult for foreign firms to do any kind of business, to a position now which is not ideal by any manner of means but where there is at least an understanding of the need—at least within parts of government—to address many of these restrictions.[282]

102. We are positive about the opportunities in Turkey, but also mindful that there are significant barriers and difficulties. If, as we expect, Turkey continues to reform to meet the EU acquis we are confident progress will be made in resolving difficulties. This underscores the importance of rapid progress in the accession talks.

UK visas

103. We came across few issues that the Turkish side wanted to raise with the UK. Indeed TUSIAD, the Turkish equivalent of the CBI, said they did not have an office as one was not needed—the UK's liberal economy meant that few problems were encountered. The one issue raised was what the British Chambers of Commerce in Turkey called the "vexed Visa system".[283] They said that the introduction of biometric visas "will certainly lead to frustrations, despite a commitment to simplify applications, as it means the presence of the applicant at a visa centre, and this will not go down well with those Turkish businessmen who have little time".[284] The TBBC noted on the visa issue the "number of sometimes quite personal questions" about applicants' financial situations.[285] The Turkish Ministry of Industry and Trade mentioned this during our visit to Turkey. When we raised this with the Trade Minister, he said this was not an issue faced specifically by Turkish applicants.[286] He also noted the opening of five offices to deal with visa applications in Turkey (Ankara, Istanbul, Bursa, Gaziantep and Izmir) which he hoped would "also help speed it up."[287]

104. We agree with the British Chambers of Commerce in Turkey that the UK must ensure the concerns of visitors to this country are heard. The visa issues raised with us were not specific to Turkey, but we think it is important that the process should be as straightforward as possible. We welcome the opening of five new visa processing offices in Turkey.

178 Q151 Back

179 Q89 Back

180 Q160 Back

181 Q156 Back

182 Ev 57 (BERR) para 34 Back

183 Ev 130 (Turkish Embassy) , Ev 50 (BERR) para 2 & Ev 121 (TBCCI), which says 413 before June 2003. Back

184 Ev 100 (CBI) para 11 Back

185 Ev 124 (TBCCI) para 1.3.3 Back

186 "BAT buys Turkish cigarette firm", BBC News, 22 Feb 2008, and "BAT win reinforces Turkish presence", FT.com, 23 February 2008 Back

187 Q33 Back

188 Ev 80 (BERR) and Ev 100 (CBI) Back

189 Ev 136 (BCCT) Back