US embassy cable - 03ANKARA4547

UNCLAS SECTION 01 OF 03 ANKARA 004547 
 
SIPDIS 
 
 
STATE FOR EB/IFD/OIA 
TREASURY FOR OASIA 
DEPT PLEASE PASS USTR 
FAS FOR ITP/THORBURN 
USDOC FOR ITA/MAC/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: EINV, KTDB, EFIN, TU 
SUBJECT:  2003 INVESTMENT CLIMATE STATEMENT FOR TURKEY - 
PART I 
 
Ref: STATE 128494 
 
 
The following is the first of four cables transmitting 
the 2003 Investment Climate Statement for Turkey: 
 
 
1.  OPENNESS TO FOREIGN INVESTMENT 
 
 
The Government of Turkey (GOT) views foreign direct 
investment as vital to the country's economic 
development and prosperity.  Accordingly, Turkey has one 
of the most liberal legal regimes for FDI in the OECD. 
With the exception of some sectors (see below), areas 
open to the Turkish private sector are generally open to 
foreign participation and investment.  However, all 
companies - regardless of nationality of ownership - 
face a number of obstacles:  high inflation, political 
and macroeconomic uncertainties, excessive bureaucracy, 
weaknesses in the judicial system, high and 
inconsistently collected taxes, weaknesses in corporate 
governance, arbitrary decisions taken at the municipal 
level, and frequent, sometimes unclear changes in the 
legal and regulatory environment.  As a result, FDI 
inflows, at well below one percent of GDP over the last 
decade, have been far below that of more investor- 
friendly emerging markets as well as of Turkey's 
potential.  The GOT's far-reaching program of economic 
and political reform agreed with the World Bank and IMF, 
and motivated also by multilateral agreements and EU 
accession, should address many of these problems, if 
fully and effectively implemented. 
 
 
Regulations governing foreign investment are, in 
general, transparent.  A 1954 law on foreign investment 
(Law No. 6224) was substantially modified and 
liberalized by a 1995 Decree (Decree No. 95/6990) and 
associated communiqu.  Legislation approved by 
Parliament in June 2003 (Law 4875 on Direct Foreign 
Investment) further liberalized the foreign direct 
investment regime by:  eliminating screening of foreign 
investors in favor of a notification system; providing 
national treatment in acquisition of real estate to 
foreign-owned entities registered under Turkish law; and 
abolishing the specific minimum capital requirement for 
foreign investments (general capital requirements for 
all companies contained in the Turkish Commercial Code 
will continue to apply).  However, implementing 
regulations for the new law are not yet in place. 
 
 
The June 2003 law also scrapped several additional 
requirements, including  a minimum USD 50,000 investment 
requirement to establish a corporation, become partners 
in an existing company, or open a branch office; the 
requirement to seek permission from Treasury if the 
capital increase would change the participation ratio 
between the foreign investor and any local partners; and 
Turkish companies were required to register with 
Treasury any licensing, management, or franchising 
agreements concluded with foreign persons. 
 
 
Foreign investors are subject to restrictions on 
establishment in certain sectors. The equity 
participation ratio of foreign shareholders is 
restricted to 20 percent in broadcasting, and 49 percent 
in aviation, value-added telecommunication services, and 
maritime transportation.  However, companies receive 
full national treatment once they are established. 
Establishment in financial services, including banking 
and insurance, and in the petroleum sector requires 
special permission from the GOT for both domestic and 
foreign investors. 
 
 
The GOT privatizes State Economic Enterprises through 
block sales, public offerings, or a combination of both. 
Foreign investors generally receive national treatment 
in privatization programs. Turkish law allows foreign 
investors to acquire up to 45 percent of Turk Telecom, 
the monopoly provider of voice and other 
telecommunications services, with the Turkish government 
retain a single "golden" (blocking) share, in the 
company's upcoming privatization. 
 
 
The Turkish Parliament also passed legislation in June 
2003 which should streamline the company registration 
process (see Section 8 - Transparency of the Regulatory 
System).  Another new law on work permits for foreign 
citizens which will take effect later in 2003 should 
give the Labor and Social Security Ministry additional 
authority in this area (see Section 5 - Performance 
Requirements/Incentives). 
 
 
Turkish law and regulation concerning investment climate 
continues to evolve.  We recommend checking with 
appropriate Turkish government sources for current and 
detailed information in this area.  The following web 
site provides the text of regulations governing foreign 
investment and incentives: 
www.treasury.gov.tr/english/ybsweb.  A summary of these 
regulations can be found at: 
www.dtm.gov.tr/english/doing/iginvest/invest/ htm and 
www.igeme.org.tr/introeng.htm.) 
 
 
2.  CONVERSION AND TRANSFER POLICIES 
 
 
Turkish law guarantees the free transfer of profits, 
fees and royalties, and repatriation of capital.  This 
guarantee is reflected in Turkey's Bilateral Investment 
Treaty with the United States, which mandates 
unrestricted and prompt transfer in a freely usable 
currency at a legal market clearing rate for all funds 
related to an investment.  There is no difficulty in 
obtaining foreign exchange.  There are no limitations on 
the inflow or outflow of funds for remittances. 
 
 
3. EXPROPRIATION AND COMPENSATION 
 
 
Under the 1990 Bilateral Investment Treaty with the 
United States (codifying existing Turkish law), 
expropriation can only occur in accordance with 
international law and due process.  Expropriations must 
be for public purpose and non-discriminatory. 
Compensation must be reasonably prompt, adequate, and 
effective.  Under the Bilateral Investment Treaty, U.S. 
investors have full access to the local court system and 
the ability to take the host government directly to 
third party international binding arbitration to settle 
investment disputes.  There is also a provision for 
state-to-state dispute settlement. 
 
 
As a practical matter, the GOT occasionally expropriates 
private property for public works or for State 
Enterprise industrial projects.  The GOT agency 
expropriating the property negotiates and proposes a 
purchase price.  If the owners of the property do not 
agree with the proposed price, they can go to court to 
challenge the expropriation or ask for more 
compensation. 
 
 
4.  DISPUTE SETTLEMENT 
 
 
There are no outstanding expropriation or 
nationalization cases.  However, there are several 
investment disputes between U.S. companies and Turkish 
government bodies, particularly in the energy and 
tourism sectors. 
 
 
Turkey's legal system provides means for enforcing 
property and contractual rights. The court system is 
overburdened, however, which sometimes results in slow 
decisions and judges lacking sufficient time to grasp 
complex issues.  The judicial system is also perceived 
by the public and by business to be susceptible to 
external political and commercial influence to some 
degree.  Judgments of foreign courts need to be 
reconsidered by local courts before they are accepted 
and enforced.  Turkey has written and consistently 
applied commercial and bankruptcy laws.  Monetary 
judgements are usually made in local currency, but there 
are provisions for incorporating exchange rate 
differentials in claims. 
 
 
Turkey is a signatory of the Washington Convention, and 
a member of the International Center for the Settlement 
of Investment Disputes (ICSID), and is a signatory of 
the New York Convention of 1958 on the recognition and 
enforcement of foreign arbitral awards.  Turkey ratified 
the Convention of the Multinational Investment Guarantee 
Agency (MIGA) in 1987. 
 
 
The Turkish government accepts binding international 
arbitration of investment disputes between foreign 
investors and the state; this principle is included in 
the U.S.-Turkish Bilateral Investment Treaty (BIT).  For 
many years, there was an exception for "concessions" 
involving private (primarily foreign) investment in 
public services.  In 1999, the Parliament passed 
amendments to the constitution allowing foreign 
companies access to international arbitration for 
concessionary contracts.  In 2000, the Turkish 
government completed implementing legislation for 
arbitration.  In 2001, the Parliament approved a law 
further expanding the scope of international arbitration 
in Turkish contracts.  In practice, however, Turkish 
courts have on at least one occasion failed to uphold an 
international arbitration ruling involving private 
companies. 
Pearson