US embassy cable - 05ANKARA1728

UNCLAS SECTION 01 OF 03 ANKARA 001728 
 
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, BEXP, EMIN, CASC, TU 
SUBJECT:  High Corporate Interest in Investor Advisory 
Council; Update on Newmont Sale and Other Investment Issues 
 
Ref: (A) Ankara 1652 (B) Ankara 320 
(C) Ankara 254 (D) Ankara 649 
(E) Ankara 1300 
 
Summary 
------- 
 
1. (U) Foreign multinationals are showing considerable 
interest in Turkey's Investor Advisory Council, which will 
meet for the second time in April.  Although Turkey has 
taken a number of concrete steps to improve the investment 
climate, and has enjoyed an increasingly positive 
macroeconomic situation, there have also been some recent 
negative developments, such as Newmont's decision to sell 
its gold mine at Ovacik, and a court decision annulling the 
right of foreigners to acquire land.  End Summary. 
 
Lots of Corporate Interest in Investor Advisory Council 
--------------------------------------------- ---------- 
 
2. (U) The Treasury Undersecretariat and World Bank expect 
all or almost all of the 19 companies which sent top 
management to the first Investor Advisory Council (IAC) 
meeting in March 2004 to do so again at the second meeting 
in late April.  The Bank's Country Manager for Turkey told 
us on March 16 that almost all firms had confirmed 
attendance (including Ford, Newmont, Citibank, Daimler- 
Chrysler, Pirelli, Toyota and others), and that other 
companies which had not participated in 2004 expressed 
interest in joining the IAC.  However, the Country Manager 
said this would not be possible since expanding the group 
would make it hard to preserve the format of a closed-door 
brainstorming session between companies and the Prime 
Minister. 
 
3. (U) The first IAC in Istanbul was attended by the Prime 
Minister, top management of 19 multinationals and four 
Turkish business associations, and representatives of the 
World Bank and IMF.  The IAC identified 13 priority areas 
for investment climate reform in Turkey ranging from 
intellectual property to administrative streamlining to 
infrastructure improvements.  The GOT recently issued a 
report on laws, regulations, and other measures taken to 
address these issues, available at 
http://www.hazine.gov.tr/ybs/ydk_rapor_eng.pd f. 
 
4. (U) Some of the progress highlighted in the report 
includes: 
 
-- Administrative Streamlining:  Deadlines for government 
entities to process Environmental Impact Assessments (EIS) 
and mining permits have been introduced.  The GOT is working 
on draft legislation to create a "one-stop-shop" for 
municipal permits; 
 
-- Judicial System:  The Justice Ministry is upgrading 
technology through the "National Judicial Network Project" 
to expedite the work of the judiciary.  The Ministry is also 
working on a new commercial code taking into account EU 
directives on corporate law; 
 
-- Tax Reform:  The GOT has cut corporate tax rates to 30 
percent, launched an incentive system targeting investment 
in less developed provinces, and provided a tax break for 
research and development expenses.  Turkey continues to 
negotiate double taxation agreements.  Turkey now has 57 
such agreements, with seven more at the approval stage and 
17 under negotiation; 
 
-- Customs efficiency is supported by automation, with some 
50 percent of declarations now submitted electronically; 
 
-- Other:  The report described measures underway to improve 
infrastructure, education, stimulate small and medium-sized 
enterprises (SMEs), provide access to land through 
industrial and technology zones (septel), conduct investment 
promotion activities, and strengthen intellectual property 
rights protection (ref A).  Further information on many of 
these reforms is available in post's Investment Climate 
Statement (refs B and C) and other reftels. 
 
5. (SBU) One of Treasury's Deputy Directors General for 
Foreign Investment commented to us March 17 that although 
virtually all the measures described in the report were 
underway before March 2004, the IAC may have accelerated 
completion of some items, such as the one related to 
Environmental Impact Statements.  He suggested, however, 
that implementation is the key, and that it would be 
interesting to see whether the deadlines now imposed on the 
GOT bureaucracy to take decisions on EIS and other 
licenses/permits do in fact take place within required 
timeframes. 
 
6. (SBU) Turning to the formal reform process, the Treasury 
official commented that the Coordination Council for the 
Improvement of the Investment Environment (YOIKK) continues 
to add value in several areas, such as devising ways to 
modernize the company liquidation regime and new work on 
SMEs.  However, he opined that, unless State Minister 
Babacan can set aside time to chair YOIKK meetings on a 
monthly basis, reform will continue to proceed slowly. 
Note:  To our knowledge, YOIKK has met only twice over the 
last year.  End Note. 
 
Other Investment-Related Developments 
------------------------------------- 
 
7. (U) Court Decision on Foreign Property Ownership:  On 
March 14, the Constitutional Court rendered a decision in a 
case brought by the opposition CHP, which calls into 
question a law allowing foreigners to buy real estate in 
Turkey.  The decision does not affect past sales to 
foreigners, and will include a three month grace period 
following publication in the State Gazette before it is 
implemented.  The Court has not yet published the rationale 
for its decision, and thus it is not clear what legislative 
amendments will be needed.  Given that sale of real estate 
has accounted for the bulk of Turkey's meager FDI in 2004, 
the GOT is likely to propose a legislative fix once the 
Court's rationale is clear. 
 
8. (U) Limits on Foreign Media Ownership Eased:  To help the 
State Deposit Insurance Fund (SDIF) sell companies in 
receivership, particularly former Uzan Group assets, 
Parliament passed a law in March lifting some restrictions 
of foreign ownership in Turkish broadcasters.  Foreigners 
will be able to buy up to 100 percent of national radio and 
television broadcasters, but may not own a majority stake in 
more than one quarter of all national broadcasters.  Foreign 
investment will not be allowed in regional or local 
broadcasters.  The law is now pending the President's 
approval.  According to press reports, the opposition CHP 
may challenge the law in the courts. 
9. (U) Newmont Sells Ovacik Mine:  Newmont sold its Ovacik 
gold mine near Bergama to a subsidiary of Koza Davetiye 
A.S., a Turkish company, reportedly for USD 45 million.  The 
Ovacik mine, which had been one of the largest U.S. 
investments in Turkey, was the object of numerous lawsuits 
and protests related to environmental concerns during the 
term of Newmont's ownership as well as under the management 
of Eurogold, its previous owner.  Newmont also experienced 
numerous difficulties in permitting, which led to a shutdown 
of the mine in August 2004.  Commenting on the sale in an 
interview with a Turkish energy journal, Newmont's General 
Director Sabri Karahan implied that a Turkish mining company 
is likely to be more successful than a foreign company in 
obtaining permits in Turkey. 
 
10. (SBU) Sugar Law Amendments:  As reported ref E, the GOT 
is considering legislation on Turkey's sugar and high 
fructose corn syrup (HFCS) quota system which would provide 
an amnesty to companies, including Ulker's Cola Turka, 
rumored to have invested in unauthorized corn syrup 
production.  This could disadvantage Coca Cola and Pepsi, 
whose applications to do the same were turned down, as well 
as Cargill, which has operated within the quotas laid down 
by the Sugar Law for years.  The Ambassador raised the 
problem in a recent letter to State Minister Babacan.  Pepsi 
has also written to the Prime Minister to raise these 
concerns. 
 
11. (SBU) Motorola Files for Arbitration:  Motorola advised 
us that it had filed for arbitration against the GOT with 
the International Center for the Settlement of Investment 
Disputes (ICSID) in October 2004 in the Telsim case. 
Motorola contends that the GOT's claim to priority over 
other Telsim creditors and its blockage of any Telsim 
payments to Motorola amounts to expropriation of Motorola's 
secured debt. 
 
12. (U) Corruption:  In recent publications, both the 
Economist and Transparency International underlined the 
continuing problem of corruption in Turkish economic life. 
Post plans to report further on this issue septel. 
 
Comment 
------- 
 
13. (SBU) An increasingly stable economy with strong growth 
likely to continue (despite the remaining macroeconomic 
vulnerabilities), the prospect of EU membership following 
the December 17 summit, and positive sentiment toward 
emerging markets globally (at least until recently) are all 
generating business interest in Turkey, as illustrated by 
the fact that more companies are taking an interest in the 
IAC.  The fact that they are interested, despite the 
underwhelming GOT follow-up on last year's IAC, suggests 
that the desire to stay on the right side of the GOT may be 
one of the main reasons for attending.  As noted in the IAC 
Progress Report and reftels, the GOT is taking some steps to 
improve the investment climate, which may help explain a 
rise in FDI inflows, albeit from a small base.  However, the 
GOT needs to move beyond producing legislation to ensuring 
that investor-friendly measures are implemented on the 
ground.  Only in this way can Turkey achieve its long-run 
potential in attracting large amounts of FDI and avoid more 
Newmont-like sales by frustrated outside investors. 
Deutsch