US embassy cable - 05ISTANBUL692

UNCLAS SECTION 01 OF 03 ISTANBUL 000692 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV, ECON, EFIN, TU, Istanbul 
SUBJECT: INVESTMENT ADVISORY COUNCIL PRAISES TURKEY'S 
PROGRESS BUT ASKS FOR MORE 
 
REF: ANKARA 1728 
 
This message is sensitive but unclassified-- not for internet 
distribution.  This message was coordinated with Embassy 
Ankara. 
 
1. (SBU) Summary: Turkey's second annual Investment Advisory 
Council Meeting on April 29 in Istanbul brought recognition 
of the economic and political strides Turkey has made over 
the past year, including most notably macroeconomic stability 
and a date for beginning of accession negotiations with the 
EU.  Participants also noted that progress had been 
registered on a number of the action items they identified 
last year, but stressed the urgency of further action, given 
the likelihood that the EU process will increase FDI flows to 
Turkey.  In essence arguing that Turkey's macroeconomic 
progress should now be matched on the micro side, they urged 
tax reform to create a simpler and more stable tax regime, 
stronger corporate governance, continued reduction of 
administrative barriers, progress on privatization, and legal 
and social security reform, among others.  With such actions, 
they predicted, FDI inflows will grow even more quickly than 
they have over the past year.  As in 2004, the meeting 
attracted extensive interest from major multinational 
corporations, with a range of participants from European, 
Japanese, and American companies.  End Summary. 
 
2. (SBU) Multinational Giants: The April 29 conference 
brought together leading international CEOs, mostly from the 
European subsidiaries of major multinationals, with GOT 
economic decision-makers, including Prime Minister Erdogan, 
State Minister Babacan and others.  The nineteen CEO's 
present at the conference represented firms from 11 countries 
with a total turnover of nearly 900 billion USD.    Most 
already have extensive operations in Turkey.  Sectors 
represented included finance (BNP Paribas, Citigroup, 
Unicredit), automotive (Daimler Chrysler, Fiat SpA, Ford, 
Hyundai and Toyota), and metals (Corus and Iscar).  Other 
participants included Metro (retailing), Newmont Mining, 
Unilever, Siemens, and Pirelli-Telecom Italia.  In addition 
to the foreign business invitees, President Rato of the IMF 
and Vice President Vorkink of the World Bank also 
participated.  Attendance was rounded out by leading Turkish 
NGOs, including the Foreign Investors' Association (YASED), 
Union of Chambers and Commodity Exchanges of Turkey (TOBB), 
Exporters' Assembly (TIM), and Turkish Industrialists' and 
Businessmen's Association (TUSIAD).  (Comment: Interestingly, 
the IAC is dominated by "old economy" companies, particularly 
automakers.  The lack of "new economy" firms (software, 
pharmaceuticals, biotechnology, etc.) suggests some 
divergence between the corporate visions and priorities 
reflected in the IAC and many of those which are the subject 
of our bilateral commercial and economic advocacy, especially 
on intellectual property rights issues.  End Comment.) 
 
3. (SBU) Familiar Messages: As reflected in the communique 
issued at the end of the meeting, participants expressed high 
praise for Turkey's achievements over the past year, 
particularly in securing a date for the start of EU accession 
negotiations and in ensuring macroeconomic stability.  They 
also noted progress in addressing some of the 13 priority 
areas they had identified last year (reftel).  In particular, 
they cited government steps to reduce administrative barriers 
to investment, to encourage research and development by 
increasing incentives and government funding, to improve the 
supply chain for small and medium enterprises (SME), to 
invest in education and skill development, and not just to 
legislate but to implement legislation to protect 
intellectual property rights. 
 
4. (SBU) Much to do: Notwithstanding these positive messages, 
the council also cited the increased urgency of tackling a 
broader range of issues, given the likelihood that increased 
investment will accompany the EU accession process.  They 
reiterated a litany of issues that are also frequently cited 
by local corporations, pointing especially to the need for 
tax reform to create a simpler, more stable, and 
EU-consistent tax regime, the need for improved corporate 
governance, continued reduction of administrative barriers, 
"decisive" continuation of privatization, legal reform, 
energy sector liberalization, social security reform, 
continued R and D investment, and increased investment 
marketing efforts.  They also urged the government not to use 
the council as simply an annual action forcing event, but to 
take advantage of its expertise on an "ongoing basis." 
 
5. (SBU) YASED Reacts: Among local participants in the 
meeting was the Foreign Investment Association (YASED), whose 
chairman, Saban Erdikler, offered a mostly upbeat assessment. 
 In contrast to his past criticism of the government for its 
slowness in acting on the inaugural council's 
recommendations, he termed progress "satisfactory" and said 
he would give the government a passing grade of 6/10.  He 
opined that foreign participants in the council would be even 
more generous.  (Note: Other sources have been less 
charitable.  One leading business paper failed the 
government, giving it a lackluster 4.8/10.  End Note.)  While 
conceding the need for extensive tax reform, he ascribed much 
of Turkey's image problem among potential investors to faulty 
information, arguing that while most perceive it to be more 
difficult to establish a company here than elsewhere in the 
OECD, actually it is easier.  In a subsequent meeting, YASED 
Secretary General Mustafa Alper explained Erdikler's scoring 
 
SIPDIS 
rationale, conceding that 6 was on the high end, but arguing 
that a lower score would have shortchanged the government's 
"good faith" efforts, even if it would have accurately 
reflected continuing bureaucratic impediments to investment. 
 
6. (U) Alper shared with Econoff YASED's own assessment of 
progress on the inaugural council's recommendations, which 
provides added detail to the second Council's own 
recommendations.  Among the items singled out are the 
following, which were also highlighted (more positively) in a 
government report before the conference (reftel): 
 
-- Administrative streamlining:   Progress achieved in 
speeding up Environmental Impact Statements (EIS) and plans 
for "one-stop-shop" for municipal permits, but thus far with 
"limited" positive effect.  Also stressed the need for 
simplification of procedures on sectoral issues. 
 
-- Judicial System: Noted that further steps are needed to 
build on the "National Judiciary Network Project" and the new 
commercial code. 
 
-- Tax Reform: Again judged the positive direct effect of 
improvements to have been limited, and argues that rates 
remain too high. 
 
-- Customs Efficiency: Noted improvements, but presses for 
lower duties and simpler processes. 
 
-- Land: Noted that many investors come up against difficulty 
in securing land with appropriate permissions for their 
planned projects.  In addition, development plans are 
continuously altered, harming predictability. 
 
Alper also noted that YASED and other NGOs will collaborate 
with the GOT in a follow-up mechanism designed to ensure that 
the councils lead to sustained progress in addressing the 
issues the companies identified and are not simply an annual 
extravaganza. 
 
7. (SBU) Insider's View: Local representatives of 
participating companies generally expressed a positive view 
of the council and its outcome.  Turan Aydin, a Turkish 
contact at Mitsui Corporation, whose European CEO Yasuo 
Hayashi participated in the council, noted that they had gone 
into the meeting with three principle complaints-- the 
difficulty of securing work permits for foreign workers in 
Turkey (Hayashi's admission he had illegal workers in his 
company as a result sparked extensive headlines), the 
weakness of corporate governance in Turkey, which has made it 
difficult for Mitsui to judge potential partners, and the 
Turkish environment's lack of administrative or regulatory 
predictability.  Tax concessions or other privileges are 
often arbitrarily withdrawn after a short period, he noted, 
so that Mitsui has difficulty forecasting the environment it 
will face in the future.  As a result, much more important 
than the provision of incentives is some sort of guarantee 
that what a company sees when it enters Turkey is what it 
will continue to experience for a predictable period.  As an 
aside, Aydin noted that Hayashi had privately recommended to 
Prime Minister Erdogan that the government revisit its 
incentive schemes, perhaps by targeting particular areas for 
specific sectors. 
 
8. (SBU) Comment: As with most such meetings, the Council 
offered a "feel good" opportunity for the government to tout 
its accomplishments, while also permitting participants to 
raise (privately) not just their general concerns but also 
the specific issues that have hampered their operations.  It 
also marked the start of a concerted GOT public relations 
offensive on the economy, aimed at showcasing Turkey's 
newfound macroeconomic stability.  By chance or design, the 
IAC was followed in quick succession by Istanbul's hosting of 
the annual Asian Development Bank (ADB) meeting, a visit by 
German Chancellor Gerhard Schroeder and an enormous German 
business delegation, Forum Istanbul (an international 
gathering that assesses Turkey's prospects over the next 20 
years) and the Turkish-Arab Economic Forum.  With recent and 
prospective foreign investments in telecoms and other areas, 
Turkey is on track to garner as much as USD 8 billion in FDI 
this year, as much as the last several years combined. 
 
9. (SBU) Comment continued: As the Council showed, much work 
remains to be accomplished in terms of structural reform, but 
for the first time in a generation Turkey has achieved 
macroeconomic conditions that have inspired foreign investors 
to take a second look.  The potential problem is that the PM 
and others in the GOT will interpret high profile business 
accolades for the GOT's success in advancing the EU accession 
process and macroeconomic stability as an indication that 
investment climate and other structural reforms are no longer 
as urgent as they once were.  End Comment. 
ARNETT