US embassy cable - 05ANKARA649

UNCLAS SECTION 01 OF 02 ANKARA 000649 
 
SIPDIS 
 
DEPT FOR EB/OIA, EB/CBA AND EUR/SE 
USTR FOR LERRION 
TREASURY FOR OASIA - MILLS AND ADKINS 
USDOC/ITA/MAC/DAVID DEFALCO 
DEPT PASS EXIM FOR MARGARET KOSTIC 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, TU 
SUBJECT:  Turkey FDI: Rising Investor Interest, But 
Investment Climate Reform Efforts Lagging 
 
Ref: (A) Ankara 446 (B) Ankara 320 and 254 
 
(C) 2004 Ankara 6009 
(D) Ankara 492 
(E) 2004 Ankara 6963 
 
Summary 
------- 
 
1. (SBU) Senior GOT officials are predicting a turnaround in 
FDI inflows to Turkey on the strength of the continuing 
recovery of the economy and the EU's decision to open 
accession talks late last year.  There does seem to be 
increasing interest in Turkey on the part of foreign 
investors, in part related to the privatization program. 
While the GOT has implemented some investment climate 
reforms and has resolved some problems facing individual 
U.S. companies, Turkey needs to do a great deal more in 
these areas to realize its FDI potential.  End Summary. 
 
Optimism on Foreign Investment 
------------------------------ 
 
2. (U) With a new IMF program, positive results on economic 
growth, inflation, interest rates in 2004, the successful 
redenomination of the lira, and not least the EU Summit 
decision to launch accession negotiations later in 2005, 
Turkish officials, as well as external observers, predict a 
significant increase in foreign direct investment inflows. 
State Minister Babacan and Deputy Prime Minister Sener have 
highlighted the GOT's goal of attracting USD 15 billion in 
FDI inflows for 2005-2007, in accordance with targets set in 
Turkey's pre-accession economic program.  The private sector 
is also making optimistic predictions, including a recent 
Ernst and Young report forecasting some USD 10 billion in 
mergers and acquisitions in Turkey for 2005.  The press 
reports a steady flow of foreign business delegations 
scouting out opportunities in Turkey. 
 
 3. (U) The GOT's privatization program, which targets a 
number of large enterprises (Turk Telecom, Tekel, Tupras, 
Erdemir and others) for sale this year (ref A), is 
responsible for some of the increased business interest in 
Turkey.  Each of these privatizations are attracting 
substantial foreign interest, including from U.S. companies 
(refs D and E).  Outside the privatization program, some 
large deals involving foreign investors, such as the sale of 
a majority stake in Yapi Kredi, Turkey's fourth biggest 
bank, to Koc Finansal, a partnership between Koc Holding and 
Italy's UniCredito, are already going forward. 
 
4. (U) 2004 FDI performance shows a rise in inflows, 
although not dramatic and still far short of Turkey's 
potential.  Turkey attracted USD 2.2 billion in the first 
eleven months of last year.  However, nearly USD one billion 
of this went into real estate purchases by foreigners.  The 
approximately USD 1.2 billion in non-real estate capital 
flows and loans in 2004 - tiny in relation to Turkey's USD 
300 billion economy - represents an increase over 2003's 
abysmal inflow of about USD 700 million but is not far from 
the trend established over the last ten to fifteen years. 
 
5. (SBU) The Secretary General of the Foreign Investors 
Association (YASED) recently told us that YASED is receiving 
a steady stream of business executives exploring 
opportunities in Turkey, but suggested that the GOT has not 
yet created the conditions for a breakthrough to 
dramatically higher levels of FDI.  He opined that Turkey 
may attract USD 2.5 to 3 billion in FDI, exclusive of 
investment in real estate and in privatized companies. 
While this would be a significant increase, it would amount 
to one percent or less of Turkish GDP, well below what 
successful emerging markets elsewhere have been able to 
attract. 
 
Investment Climate Reform Efforts 
--------------------------------- 
 
6. (U) Greater political and macroeconomic stability is 
creating a more predictable environment for Turkish and 
foreign business.  The GOT has made limited progress in 
investment-related reforms and in resolving high-profile 
disputes with large multinationals.  In 2003-2004, the GOT 
removed the screening requirement for foreign investors, 
streamlined the process of company establishment, introduced 
inflation accounting, amended mining legislation, relaxed 
restrictions on foreign investment in telecommunications, 
and facilitated copyright and trademark enforcement through 
a ban on street sales, among other reforms (refs B).  The 
GOT also resolved a long-running zoning problem which 
threatened to shut down a major Cargill investment near 
Bursa.  Tax reform is also on the agenda, with the GOT 
considering reductions in corporate tax rates to make Turkey 
a more attractive investment destination. 
 
7. (SBU) Despite these positive steps, existing investors 
continue to experience great difficulties in Turkey.  GOT 
policies in some areas - very limited data exclusivity 
protection for pharmaceutical test results, high taxation of 
cola products, among others - discourage FDI in these 
sectors.  However, inefficiency, lack of predictability and 
the widespread perception of corruption and favoritism in 
the judicial system seem to be an even greater problem for 
foreign companies. 
 
8. (SBU) The broader investment climate reform agenda seems 
to have lost momentum.  Turkey's formal investment climate 
reform bodies (Turkish acronym YOIKK) have managed only a 
few inconclusive meetings since 2003.  A Treasury 
Undersecretariat Deputy Director General (DDG) for Foreign 
Investment opined for us recently that, for senior GOT 
officials, the issue of EU accession has largely 
overshadowed investment climate reform.  Without high-level 
support, it is virtually impossible for the interagency 
groups in YOIKK to agree on streamlined sectoral permits and 
other needed reforms which challenge vested interests in the 
GOT bureaucracy. 
 
9. (SBU) The decision not to go forward with an independent 
investment promotion agency is also symptomatic of the drift 
in investment climate reform.  The agency was to be based on 
a public/private partnership, but the idea was abandoned 
because the GOT and Turkish business chambers could not 
agree on major questions of leadership and financing. 
Treasury's Foreign Investment General Directorate has been 
tasked with the investment promotion function but, according 
to the DDG, the Directorate has not received any 
supplemental funding for promotion activities.  The 
Directorate has not even been able to keep its web site up 
to date on changes in investment-related legislation or to 
provide current investment statistics in this medium, though 
the DDG told us that a contractor has been hired to overhaul 
the website and the Directorate is attempting to compile 
better data. 
 
10. (U) Conversely, Treasury's Acting Director General (DG) 
for Foreign Investment recently told us that the agency is 
working actively on the second Investor Advisory Council 
(IAC) meeting with CEOs of major multinationals in late 
April.  The first IAC, attended by the Prime Minister and a 
large group of CEOs in Istanbul in March 2004, generated 
recommendations on investment climate reform, and a GOT 
commitment to produce a progress report on these issues. 
The DG told us in late January that the progress report 
would be issued in the near future. 
 
Comment 
------- 
 
11. (SBU) Good economic data and the prospect of EU 
membership, though distant, satisfy some of the 
prerequisites for a turnaround in Turkey's FDI performance. 
We would expect FDI inflows to continue to increase over the 
next several years from their currently low base, 
particularly if the GOT manages to privatize at least some 
of the large companies in its portfolio.  However, 
continuing structural reforms, especially improvements in 
the legal system, are essential if Turkey is to realize its 
long-run FDI potential. 
EDELMAN