Select Committee on Business and Enterprise Written Evidence


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 CompanyHome Country of the Acquiring Company Ratio of Shares Taken Over (%) Foreign Direct Investment (USD Million)
TelsimVodafoneNetherlandsa 100.04.690
DenizbankDexia Bank Belgium98.93.221c
FinansbankNat Bank of Greece Greece80.42.774
Türk TelekomOjer Telecom U.A.E40.61.500
Petrol OfisiOMVAustralia 34.01.054
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)
RankSector Capital(%)
1Financial Intermediation 7.00239.3
2Communications & Transportation 6.62437.2
3Manufacturing1.853 10.4
4Wholesale and Retail Trade 1.1646.5
5Construction441 2.5
6Healthcare264 1.5
7Mining and Quarrying 1250.7
8Electricity, Gas and Water Supply 1120.6
9Other Community, Social and Personal Service Activities 1060.6
10Real Estate, Renting and Business Activities 880.5
Other34 0.2
Total  (USD Million)
17.817100.0

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
20032004 20052006
Poland4.58912.890 9.60213.922
Hungary2.1374.657 7.5636.141
Czech Republic2.101 4.97411.6585.957
Total FDI Inflows8.827 22.52128.823 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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