Examination of Witnesses (Quesitons 1-19)
UKTI, BERR, FCO
26 FEBRUARY 2008
Q1 Chairman: Gentlemen and lady, welcome
to this first of our Committee's oral evidence sessions into the
prospects of Turkey joining the European Union and the consequences
for the UK and what we need to do to prepare for that possibility;
and what is happening at present in our relationship with trade
and investment relations with Turkey. So thank you very much indeed
for coming. Thank you also for the written evidence you have separately
and jointly provided to the Committee already; we are very grateful;
it has helped us form our thinking at an early stage. Can I begin,
as I always do, by asking you to introduce yourselves to understand
which one of you comes from which part of the machinery of government?
Mr McInnes: Good morning. Nick
McInnes, the Director of the International Group within UK Trade
and Investment.
Mr Dodd: Good morning. I am Peter
Dodd, the Director of the International Economics Team in the
Department for Business.
Ms Melrose: I am FCO, Dianna Melrose,
Head of the Enlargement and South East Europe Group, which obviously
includes Turkey.
Q2 Chairman: Thank you very much
indeed. Can I begin with a question I expect Mr Dodd will probably
want to answer? It is a broad-brush macroeconomic analysis of
the Turkish situation. Very high levels of growth in Turkey at
present, a vibrant economy; how much is that catching up for lost
time after the succession of economic crises and how much are
the underlying strengths in the Turkish economy?
Mr Dodd: The striking thing when
looking at the Turkish economy, even back to the periods of instability,
is that it is able to generate very high growth rates. Unfortunately
when things go less well it generates very sharp contractions
as well. What is striking, I think, looking at the last five years
or so, is that there have been positive, good strong levels of
growth and a time of also arriving at a more sustainable path
of economic progress. The fiscal situation has improved very strikingly
really through the efforts of the Government to maintain or to
keep a tight grip on public spending—not maybe so much very,
very deep reforms, but through relatively strong fiscal discipline.
The debt position is much more sustainable than it has been in
the past. I do not think they are completely out of the woods
yet, possibly in terms of market sentiment towards Turkey being
somewhat more vulnerable than some other economies. The exchange
rate position is certainly one with which they can weather difficult
circumstances much better than in the past. Clearly the trade
balance looks rather worrying as it has expanded quite significantly,
driven perhaps by high energy prices as much as anything else.
I think overall they have not caught up for the unfortunate years,
but they are very much moving towards a path which is good rates
of growth but sustainable—and the crucial thing is sustainability.
Q3 Chairman: So the fundamentals
are really quite good.
Mr Dodd: Much better than they
were.
Q4 Chairman: And inflation?
Mr Dodd: Inflation is not as low
as we would like and not as low as the IMF would like but it is
fundamentally completely different to the 20, 30 years of really
unacceptably high inflation from which Turkey suffered.
Q5 Chairman: Can you give us any
picture as to the engines of continuing reform and progress, and
particularly the whole EU accession process; is that an economic
factor as well in the development of the Turkish economy at present?
We have had the customs union with Turkey for a very long time
now. I have forgotten when it began; it is such a long time back.
Mr Dodd: 1995.
Q6 Chairman: About 13 years, so it
is a long time that that has been in place. And the IMF involvement
is ending, is it not, so will accession be a really important
driver of continuing reform?
Mr Dodd: I think there is a strong
linkage between the kind of issues which the accession process
covers and the domestic policy objectives of the Government. The
reform agenda, I think, is being increasingly internalised within
Turkey rather than being something which has been an involuntary
response to external pressures.
Q7 Chairman: The merits of reform
being seen on their own.
Mr Dodd: I believe so. It is not
the universally held view but I think there is a wider consensus
between Turkish politics than there has been in the past, and
I think this is extremely important in that it is only by internalising
the reform process that it can really be embedded and we have
to be very clear that the reform in Turkey would be a very considerable
challenge; there is a long way to go still. So embedding it into
domestic policy making is really critical.
Ms Melrose: May I add to that?
I think the accession process itself should be a key driver of
reform. The Turkish Government itself—Ali Babacan—has
said that the aim is to align Turkish law with the Acquis by 2013
and that should make it a much more business-friendly environment.
It would also involve reform of public administration, tax reform,
very many areas of concern to UK business.
Mr Dodd: It is interesting just
how wide the Acquis are for countries wishing to apply to join
the EU, covering such large chunks of the economy and giving,
as it were, a kind of flight path into reform. It is a very, very
substantial effort for any economy to undertake and we should
not underestimate the enormous breadth of things which have to
be done. But I think it is very useful and it provides a whole
series of clear states where it can be identified how the reform
process is going.
Q8 Mr Clapham: My first question
is on the friendliness of the business environment. What are the
more unfriendly features at the current time of the Turkish business
environment?
Mr McInnes: If I may answer that
question? Obviously Turkey offers very significant potential for
UK companies but, as you have alluded, it is also regarded in
many ways as a difficult market for UK companies and part of the
reason for that stems from some of the barriers in business that
still remain. Also, I think that one of the areas where we are
certainly looking and welcoming the Select Committee inquiry's
interest in relations with Turkey is the long list of trade disputes
that still remain with Turkey, and certainly this is a priority
for us at UKTI to try and address this under our new strategy.
Q9 Mr Clapham: Coming to your new
strategy, you now tend to focus more on the emerging markets.
Just how has this changed the trade support for Turkey?
Mr McInnes: The designation of
Turkey as a high growth emerging market has led to both a strengthening
of the resource devoted to Turkey—overall we have increased
the number of our team actually in the market from 15 to 20 people.
We have created a dedicated inward investment team in Istanbul.
We have strengthened the resource in Ankara that specifically
focused on government relations, so tackling some of the barriers
to business; and we have also strengthened our team in Izmir,
so we have increased the staff from 15 to 20 people in the market.
Q10 Mr Clapham: Would it be fair
to say that Turkey's ranking has increased within the high growth
markets programme?
Mr McInnes: Very much so. The
very fact of its designation as a high growth market means that
it assumes a higher profile within UKTI's activities, and that
is not only reflected in the strengthening of resource but also
in terms of the high profile we are giving it in terms of activity.
Q11 Mr Clapham: From what you have
said, and given that the team has increased from a 15 to 20 resource,
activity in Turkey seems to be one of, should we say, getting
some priority over some of the other countries with which we are
involved?
Mr McInnes: Specifically in terms
of the high growth markets?
Q12 Mr Clapham: Yes.
Mr McInnes: In terms of the decisions
on resource they were very much taken on the basis of what we
felt was necessary, talking to business to deliver the strategies
for those particular high growth markets. So in some cases the
strengthening of resource has been greater—and I am thinking
particularly of China and India—but in other cases it has
been less. So in terms of high growth markets like South Africa
and Saudi Arabia there has actually been very little increase
in the resource in market but we are still obviously giving greater
profiles to those markets. We have always said that we would keep
the level of resource in our high growth markets and elsewhere
under review but we were obviously very conscious in the process
to only provide what resource we felt was necessary, given that
that resource had to be freed up from elsewhere within the network.
Q13 Chairman: Just a cheap shot,
if I may, before I bring in Mr Bailey. Your website information
seems to be three and a half years out of date; is there a reason
for that?
Mr McInnes: It is a fair point
and I think that we are actually in the process of revamping the
websites for all our high growth markets. I fear that in the process
that has led to a little bit of neglect in terms of the Turkey
market; in fact, one of the side benefits, if you like, of this
inquiry already is that given your focus we have actually already
updated it in advance of the revamp, but it is a fair point!
Q14 Chairman: There you are; it proves
the power of Select Committees! This is probably to you, Ms Melrose,
just a factual question—the FCO Public Diplomacy Pilot;
I could not work out what this was.
Ms Melrose: Specifically in the
context of Turkey?
Q15 Chairman: And also what other countries
are benefiting from it, to put it in context for me?
Ms Melrose: The Public Diplomacy
Pilot covers a number of countries, but specifically which are
covered I would have to write with an answer.
Mr McInnes: If I could make a
few comments because obviously in terms of Turkey the Public Diplomacy
Pilot very much has its objective business objectives in terms
of both promoting the UK as an investment location, promoting
the strengths of the UK—business environment strengths and
innovation in the UK—promoting the strengths of the City
of London and the financial services sector more generally; also
promoting the legal structure; and more generally professional
development and business management. So the objectives of the
Public Diplomacy Project in Turkey are very much in line with
UKTI's objectives for the market.
Chairman: It is an interesting exercise
and it would be helpful to have a bit more detail about what is
actually involved. Perhaps we could have a note in writing after
this evidence session of what is actually going on, which would
be helpful. Adrian Bailey.
Q16 Mr Bailey: Mr McInnes, you mentioned
earlier that you have effectively invested more people in your
operation in Turkey, and you have also alluded to the obstacles
that there were with trade. How would you assess the progress
of the UKTI strategy in 2007/2008? What sort of measurement would
you have for determining that progress?
Mr McInnes: The first comment
I would make is that it is still very early days. Our starting
point obviously was the very significant potential that exists
within Turkey for UK trade and investment, but also the fact and
the recognition that it can be a difficult market and that there
are too many trade disputes. Overall the UK's share of the Turkish
market is less than our share of global trade and that has led
us, in terms of our strategy for Turkey, effectively to have a
two-pronged approach. First of all, there is the raising awareness
of the opportunities that exist within Turkey, and specifically
in relation to the sectors which we consider with business offer
the most opportunities, and we have done a number of things in
relation to that objective in terms of a series of road shows
in the UK. We have set up a regional champion network throughout
the UK with people specifically focused on Turkey; and a business
adviser has been appointed under the high growth market scheme
specifically on Turkey. So we have taken a number of initiatives
to raise awareness and that is starting to have some effect and
that is being reflected in the growing interest of UK companies
in Turkey and the take-up, for instance, of our missions to Turkey.
The second strand of the strategy is very much trying to address
the market access issues and the specific trade disputes. The
key element of this part of the strategy is the setting up of
a government to government forum and Andrew Cahn, the UKTI's Chief
Executive, on a recent trip to Turkey secured the Turkish agreement
to the setting up of this government to government forum, which
would meet hopefully for the first time when Lord Jones visits
Turkey later this year.
Mr Bailey: You have partly anticipated
my next question.
Chairman: And the question after that
as well!
Q17 Mr Bailey: I understand that
you can identify markets and you can try to demonstrate to businesses
at home the potential for those markets, but to a certain extent
getting more companies to trade with Turkey depends on the business
environment and working practices within Turkey, and is there
any way that you can measure progress in that respect?
Mr McInnes: Even before the strategy
was launched a role for UKTI and government was to lobby in support
of UK business where it was experiencing difficulties in operating
in the market, and that has obviously been a characteristic of
our work to date. The measurement of success clearly can only
be in terms of the resolution of those disputes and whether there
is an improvement in the overall operating environment.
Q18 Mr Bailey: What sort of developments
can we anticipate in 2008/2009?
Mr McInnes: First of all, just
picking up the comments of my colleagues that there is a real
commitment on the part of the Turkish Government to the reform
process, I think we can continue to expect the continuation of
that process. One element of that would be a continuation of the
privatisation programme. A number of state agencies have already
been privatised; the Turkish Government has a very ambitious programme
for this year which includes the privatisation of electricity
distribution and generation; it includes privatisation of the
Lottery; and also one of the state banks. So this is quite an
ambitious programme and I think we can expect progress on that
during the course of this year. Obviously in terms of our strategy
we see the government to government forum as providing a high
level vehicle for very much focusing on some of these more general
market access issues with a view to improving the environment,
and again were reinforced by the moves towards accession, which
will help that process.
Q19 Mr Bailey: Can you give us a
bit more information about Lord Jones' visit—what areas
he is likely to cover, who he is likely to meet, and for how long
he will be there?
Mr McInnes: I think it is very
early days in one sense. The visit is planned for September this
year. We are expecting the first meeting of the government to
government forum during his visit; and it is also quite likely
that the Turkish-British Business Council could also meet at that
time. In terms of the focus of the visit, in part that will depend
on the issues current at the time but it is quite likely that
Lord Jones will be accompanied by a business delegation on the
visit and obviously the issues that he will be raising will be
the issues that are very much relevant to British business, whether
it be both in terms of opportunities for British business and
lobbying in support of British companies, and also some of the
issues that we have been raising on a regular basis with the Turkish
Government. In terms of who he would expect to meet, I would certainly
expect him to meet the Minister of State for Foreign Trade, Minister
Tuzmen, and also the Minister for Economy, Minister Simsek.
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