Memorandum submitted by the Turkish Embassy
BILATERAL INVESTMENT
OPPORTUNITIES
FDI inflows to Turkey have risen significantly
in the last years due to a couple of reasons. In addition to the
recovery of the Turkish economy from the economic crises in 2001
as a result of a successful economic reform program, a successful
privatization program as well as a highly successful reform program
to improve investment environment have contributed to the increase
of FDI flows to Turkey. Furthermore, the launch of accession negotiations
between Turkey and the EU in October 2005 has also affected FDI
inflows very positively.
FDI inflows which had an annual average of USD
853 million during 1995-2000 period, reached its record levels
of USD 9.8 billion and 20.2 USD billion in 2005 and 2006 respectively.
Chart 1: FDI Inflows in Turkey Between 1995 and 2006
According to the statistics, the UK ranked seventh
with a total of USD.
The UK ranked the sixth with a total FDI stock
of 1.323 million between 2002-07 in the list of countries with
investments in Turkey. Even though the total amount of FDI flows
from the UK to Turkey is very limited compared to other investor
countries, the interest of the British firms in Turkey has been
increasing in the last years thanks to the recovery of the Turkish
economy as well as the developments of Turkey's relations with
the EU.
Annual FDI inflows from the UK to Turkey have
steadily increased in the last few years, starting from only USD
8 million in 2002, reaching a record high level of USD 883 million
in 2006 (see chart 1). It should also be underlined that some
investment operations of British companies, such as the acquisition
of Telsim (cell-phone operator) by British Vodafone for USD 4.7
billion in 2006, has not been included in this calculation because
of the fact that the capital was transferred from the Netherlands.
Chart 2: Number of Companies Established in Turkey by the
UK Based Investors and FDI Inflows From the UK to Turkey
Source: Undersecretariat
of Treasury, Central Bank of the Republic of Turkey
As of end of 2006, there were 1,420 registered
companies with the British capital in Turkey, including giant
MNEs, such as HSBC, Vodafone, Imperial Tobacco, Shell, BP, and
Tesco among many others.
Today, with its dynamic economy, Turkey offers
many investment opportunities for the British investors. For example,
energy including electricity production and distribution, petroleum
refining, renewable energy, as well as petrochemicals, banking
and insurance, telecommunications, retail and real property development,
transportation including ports are amongst the most dynamic sectors
that foreign investors are interested in the last years (see Tables
1-2).
Table 1
TOP 5 FDI INFLOWS IN 2006
| Acquired Company
| Acquiring Company | Home Country of the Acquiring Company
| Ratio of Shares Taken Over (%) |
Foreign Direct Investment (USD Million) |
| Telsim | Vodafone | Netherlandsa
| 100.0 | 4.690 |
| Denizbank | Dexia Bank |
Belgium | 98.9 | 3.221c
|
| Finansbank | Nat Bank of Greece
| Greece | 80.4 | 2.774
|
| Türk Telekom | Ojer Telecom
| U.A.E | 40.6 | 1.500
|
| Petrol Ofisi | OMV | Australia
| 34.0 | 1.054 |
| Total | |
| | 13.239 |
Source: Undersecretariat of Treasury, Central Bank of the
Republic of Turkey
a In spite of being a UK based company, Vodafone's payment
is transferred through the Netherlands and therefore reflected
as shown above in the balance of payment statistics
Table 2
FDI INFLOWS TO TURKEY IN 2006 (BY SECTORAL DISTRIBUTION)
| Rank | Sector |
Capital | (%) |
| 1 | Financial Intermediation
| 7.002 | 39.3 |
| 2 | Communications & Transportation
| 6.624 | 37.2 |
| 3 | Manufacturing | 1.853
| 10.4 |
| 4 | Wholesale and Retail Trade
| 1.164 | 6.5 |
| 5 | Construction | 441
| 2.5 |
| 6 | Healthcare | 264
| 1.5 |
| 7 | Mining and Quarrying |
125 | 0.7 |
| 8 | Electricity, Gas and Water Supply
| 112 | 0.6 |
| 9 | Other Community, Social and Personal Service Activities
| 106 | 0.6 |
| 10 | Real Estate, Renting and Business Activities
| 88 | 0.5 |
| Other | 34
| 0.2 |
| Total (USD Million)
| 17.817 | 100.0
|
Source: Central Bank of the Republic of Turkey
Furthermore, Turkey's ambitious and very successful privatization
program offers great investment opportunities for the British
investors. Privatization implementations reached record high levels
in the last years, USD 8.2 billion in 2005 and 8 billion 2006,
4.1 billion in the first eight months of 2007 (see chart 2). Companies
in the privatization portfolio includes very important and profitable
companies, such as TEKEL (Tobacco, Tobacco Products, Salt and
Alcohol Enterprises Inc.), TEDAŞ (Turkish Electricity
Distribution Inc), Halkbank, and Turkish Airlines among many others.
Furthermore, toll motorways and bridges, ports, lignite and hydroelectric
generation plants are also amongst the assets that are going to
be privitized in the coming years.
Chart 2
PRIVATIZATION IMPLEMENTATIONS BY YEARS
Source: Privatization Administration
DIFFICULTIES FACED
BY UK BUSINESSES
WISHING TO
FORGE INVESTMENT
LINKS WITH
TURKEY
Even though we have no specific information as regards difficulties
faced by UK Businesses wishing to forge investment links with
Turkey, it should be underlined that except a few economic activities
such as fishing, radio and TV broadcasting, and domestic sea and
air transportation, all foreign investors are treated equally
as regards establishment of, and conduct or operate a business
in Turkey according to Foreign Direct Investment Law, No. 4875.
Foreign investors are free to set up their own company in Turkey
through trade registries in provinces without taking any permission.
In order to improve the general investment environment in
Turkey, "Coordination Council for the Improvement of the
Investment Environment (YOIKK)" was established in 2001
as a coordinating body with a mandate to identify and remove regulatory
and administrative barriers facing private investment. Having
decision makers of relevant ministries and heads of NGOs representing
private sector on board, this Council has proved to be a good
example of collaboration between the government and business community
to improve business environment.
Despite the initial emphasis on foreign direct investment,
the YOIKK program aims "to streamline the investment environment
and attract more private direct domestic and foreign investment"
from the outset. The YOIKK program sets out an action plan with
a focus on 11 key reform areas: Company Registration; Employment
of Foreigners; Sector Licenses; Taxation and State Aid; Customs
and Technical Standards; Land Access and Site Development; Intellectual
Property Protection; Foreign Direct Investment Legislation; Investment
Promotion; the Promotion of Small and Medium-sized Enterprises;
and Corporate Governance. The YOIKK process therefore has not
been limited narrowly to foreign investment but has been assisting
in improving the business and investment environment for private
domestic investors as well. So far, the activities of the YOIKK
have been quite successful. The Government has taken several steps
in compliance with the recommendations of Council and enacted
20 laws, including a very liberal Foreign Direct Investment Law
and Company Registration Law among others.
One of the key elements of the YOIKK Program was the Foreign
Direct Investment Law. The Law was drafted by taking into consideration
international best practices and the recommendations of the diagnostic
study assessing the foreign direct investment legislation. The
objective was to have a legal framework, which would be in conformity
with the current international standards. The new foreign direct
investment regime became effective on 17 June 2003 by the publication
of "the Foreign Direct Investment Law No 4875" in the
Official Gazette. The FDI Law not only provides best international
standards, such as equal treatment, guarantee to transfer proceeds
and right to employ key expatriate personnel, but also repeals
prior approval procedures for foreign investors and minimum capital
requirements to invest in Turkey.
Key features of the Foreign Direct Investment Law include:
— Freedom to invest for foreign investors by dropping
all former FDI-related screeing, approval, share transfer and
minimum capital requirements.
— A policy shift from ex-ante control to a promotion
and facilitation approach with minimal ex-post monitoring.
— Upgrading to accepted international standards
for definitions of "foreign investor" (broadened to
include Turkish nationals resident abroad and international organizations)
and "foreign direct investment".
— Reassurance of existing guarantees with regard
to foreign investors' rights, such as national treatment, guarantee
of free tranfers, access to real estate, protection against expropriation,
resort to international arbitration, employment of expatriates
as key personnel.
According to the Law, foreign direct investment is considered
as:
— both establishing a new company or a branch of
a foreign company; and
— share acquisitions not by means of capital markets
or share acquisitions through capital markets where the foreign
investor owns 10 % or more of the shares or voting power.
Within this scope, all kind of economical assets are accepted
as sources for foreign direct investment such as stocks and bonds
of foreign companies (other than government bonds), revenues,
financial claims or any other investment related rights of financial
value as well as all the economical assets mentioned in former
law 6224.
With the new foreign investment regime, the company registration
procedures, which were previously taking almost two and a half
months and requiring excessive documentation and approvals from
several authorities, have been simplified and streamlined.
In addition to the YOIKK, Investment Advisory Council
of Turkey was established in 2004 to provide an assessment
of business climate from an international perspective for further
improvement of business environment. This Council is chaired by
the Prime Minister, and composed of Ministers in charge of investment
related issues, the CEOs of multinational companies with investments
in Turkey, high level representatives of International Organizations,
such as IMF, the World Bank and the European Investment Bank,
as well as the heads of leading Turkish Business Associations.
Since 2004, Investment Advisory Council convened once a year,
holding its last meeting on 11 June 2007. So far, concrete steps
were taken regarding the recommendations of the Council such as,
simplifying the tax regime; strengthening corporate governance;
reducing administrative and bureaucratic barriers; accelerating
the privatization program and; reforming the social security system.
The Turkish Government also established the Investment Support
and Promotion Agency of Turkey in 2006. The mandate of this agency
is to provide information about investment environment in Turkey
and act like an intermediary between foreign investor(s) and related
government agencies for the smooth establishment of businesses.
Furthermore, investors from the UK are able to resort to
international arbitration in case a dispute arises between them
and the administration thanks to Bilateral Investment Treaty signed
between Turkey and the United Kingdom in 1991.
As a result of the continuous efforts of the Turkish Government
to improve investment environment, Turkey jumped 34 places and
ranked 57 out of 178 countries in the rankings on the ease of
doing business according to Doing Business 2008 report
of the World Bank.
For more information on the rights of foreign investors please
refer to www.investinturkey.gov.tr
TURKEY'S
POTENTIAL AS
A GATEWAY
TO MARKETS
IN TO
THE CENTRAL
ASIAN REPUBLICS
With its unique geographic location as well as its cultural,
political, trade and economic relations both with the EU countries
and the countries of the former Soviet Union, Turkey has a potential
to serve as a gateway to markets of the Central Asian Republics.
It is a fact that except a few giant MNEs in the energy, foreign
investors are reluctant to enter to the markets of the Central
Asian Republics directly given the presence of high political
risks, lack of transparency and rule of law in the region.
In spite of all these negative aspects of the Central Asian
Republics, Turkish entrepreneurs, who had been used to make business
in a volatile economy, launched their operations in the region
following the break-up of the Soviet Union, first as traders and
then as investors. Today, it is estimated that the total investments
made in the region by the Turkish investors exceeds USD 5 billion.
Today, many MNEs choose Turkey as their base for their Central
Asian operations due to the fact that Turkey offers many advantage
for any type of investments, such as having a predictable investment
environment, a highly developed infrastructure and high quality
human resources. Coca Cola, Microsoft, JP Morgan Chase and General
Electric are amongst MNEs managing their activities in the region
from Turkey.
Additionally, Turkey's geographical proximity to the region
is supported by direct transportation links to the capitals of
the Central Asian Republics. Direct flights of Turkish Airlines
between Istanbul and the capitals of Central Asian Republics is
an important reason for many business people to choose Turkey
as their operation base. Furthermore, Turkey's wide web of Bilateral
Investment Treaties and Double Taxation Treaties with the countries
in the region provides required legal protection for investments
and prevents double taxation of returns.
ANY EXPECTED
CHANGES IN
THE ECONOMIC,
TRADE AND
INVESTMENT RELATIONSHIP
THAT MIGHT
RESULT FROM
THE ACCESSION
TO THE
EU
There is no doubt that Turkey's accession to the EU will
boost the economic, trade and investment relationship between
Turkey and other members of the EU. Especially, it is expected
that FDI inflows to Turkey will increase significantly after the
country becomes a full member of the Union.
So far, it is generally observed that FDI inflows to a new
member country increases following the accession. For example,
FDI inflows to Poland, the Czech Republic and Hungary have risen
significantly following their accession to the EU in 1 May 2004
(Please see table 1).
Table 1
FDI INFLOWS TO SELECTED EU MEMBER COUNTRIES
| | 2003 | 2004
| 2005 | 2006 |
| Poland | 4.589 | 12.890
| 9.602 | 13.922 |
| Hungary | 2.137 | 4.657
| 7.563 | 6.141 |
| Czech Republic | 2.101 |
4.974 | 11.658 | 5.957
|
| Total FDI Inflows | 8.827
| 22.521 | 28.823
| 26.020 |
Given that the size of the Turkish economy is bigger than
those of Poland, the Czech Republic and Hungary, as well as the
fact that the country has a huge potential to serve as a gateway
to Central Asia and the Middle East, we may expect that FDI inflows
to Turkey, which has already exceed USD 20 billion threshold,
will rise to a level higher than the level of FDI inflows for
the aforementioned countries in total.
1 November 2007
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