Turkey: A Business and Investment Review (Business & Investment Review)

TURKEY: A Business and Investment Review

Consultant editors: Phillip Rosenblatt and Marat Terterov

Turkey Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published 2006 by GMB Publishing Ltd. © GMB Publishing Ltd., Rosenblatt & Company, and contributors Hardcopy ISBN 1-846730-06-6

E-report ISBN 1-846730-07-4

British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library

ii

Turkey

Contents About the editors About the authors Part One:

Economic and Institutional Considerations

1.1 An overview of the Turkish economy: outlook and current perspectives Dr Yılmaz Argüden, Chairman, ARGE Consulting 1.2 Turkey’s accession to the European Union Fadi Hakura, Chatham House

Part Two:

Investment, Finance and Business Development

2.1 Foreign direct investment Erdal Ekinci, Erdikler YMM Ltd 2.2 The Turkish banking sector Dilek Yardim, Chief Country Officer, Deutsche Bank Turkey 2.3 Within and beyond Turkey: Eurasian perspectives for international private equity investors Serkan Elden and Emre Erginler, 3 Seas Capital Partners 2.4 Real estate and property development in Turkey Sibel Pensoy, Real Estate Development Consultant 2.5 Marketing communications, the media landscape and the Turkish consumer Lawrence Du Pre, Medina Turgul DDB, Istanbul and Ece Sirin, Bee Consulting

Part Three: The Laws and Regulations for Business 3.1 An overview of tax system Erdal Ekinci, Erdikler YMM Ltd 3.2 Establishing a presence in Turkey Phillip Rosenblatt, Rosenblatt & Company 3.3 Major corporate structures Phillip Rosenblatt, Rosenblatt & Company 3.4 Employment and labour issues Phillip Rosenblatt, Rosenblatt & Company 3.5 Arbitration and dispute resolution Phillip Rosenblatt, Rosenblatt & Company 3.6 Intellectual property Phillip Rosenblatt, Rosenblatt & Company

v vii 1 3 11

19 21 27 41 49

59

73 75 83 87 93 99 103

iii

Turkey

About the editors Phillip Rosenblatt is an American trained international lawyer specializing in finance and major projects. He is the founding partner of Rosenblatt & Company. Prior to founding Rosenblatt & Company, he was a Partner of the Cairo office of Baker & McKenzie and a member of Baker & McKenzie’s Major Projects Group, where he was responsible for expanding the banking and finance practice and helped advise clients on project finance, syndicated lending and securitization projects. While with Baker & McKenzie, he spent three years at Baker & McKenzie’s Almaty, Kazakhstan office, starting from its inception, where he advised clients on their large scale energy, natural resources, industrial and banking projects in Central Asia. Prior to that, he was associated with Clifford Chance where he focused on projects in the former Soviet Union. He has been involved in project finance, joint venture and privatization work and has experience in structuring documenting and negotiating international transactions, including power, telecommunication, and natural resource projects. He is a member of the New York Bar Association, the American Bar Association, and the International Bar Association. He speaks fluent Russian and Turkish. Marat Terterov is a political scientist and a Ph.D. graduate from St Antony’s College, University of Oxford, as well as the editor/author of over a dozen major books addressing the business and foreign investment environment in countries of the former Soviet Union and the Middle East. He is currently an expert on Russian and CIS relations with the Persian Gulf at the Gulf Research Centre in Dubai, United Arab Emirates. During the last 7–8 years, Dr Terterov has been researching the political systems and economic reform programmes of a number of countries of the former Soviet Union and the Middle East as a USAID consultant, an independent book author, as well as Ph.D. scholar. The focus of his Doctoral dissertation was addressing the way in which the state continued to control privatized enterprises in Egypt, the first recorded study to address the topic in such detail. Further to this, he recently co-authored a major USAID policy study evaluating the impact of over a decade of privatization in Egypt on that country’s public policy framework for Carana Corporation, which advised the Egyptian government on economic reform during 1999–2002. However, the thrust of Dr Terterov’s recent work has been to research and edit a series of books on business and foreign investment in Georgia, Russia, Ukraine, Kazakhstan and other regions of the former Soviet Union all now published by GMB Publishing. Prior to his work with Carana and GMB, Dr Terterov was also a consultant to the British government’s export promotion agency and has advised British companies on the foreign investment climate in Uzbekistan, Kazakhstan and Kyrgyzstan (1998–2000). He has also advised the Egyptian Ministry of Foreign Affairs about the political ramifications of economic reform in the former Soviet Union

v

Turkey

(1998–99). He is a frequent speaker on the former Soviet Union at the Centre for International Briefing, Farnham Castle, Surrey, England, often briefing officials from the British Ministry of Defence on the political and economic environment in Central Asia. He is also the author of a number of academic articles on the Middle East and the former Soviet Union, which have mostly focused on issues such as Islamist political militancy in Egypt, political reform in Turkey, and democratization and state building in Central Asia. He is the holder of Chevening Scholarship (British Foreign Office) and received his tertiary education at the Universities of Oxford, Irvine (California) and New South Wales (Australia). Marat Terterov is an Australian citizen residing in Oxford, England, though he was born in Odessa, Ukraine in 1968 – then part of the Soviet Union.

vi

Turkey

About the authors Dr Yilmaz Argüden is a leading strategist, advisor, and board member of major public and private sector institutions. He is the Chairman of ARGE Consulting (www.arge.com), one of the most reputable management consulting firms in Turkey. ARGE has been recognized at the European Parliament as one of the best three companies ‘shaping the future’, with its commitment to corporate social responsibility. He is also an Adjunct Professor of Business Strategy at Bosphorus University and the MBA programme of Koç University and a columnist focusing on business and strategy issues. He is also Chairman of the Turkish – US Business Council and a Founding Board Member of TESEV, a leading Turkish think-tank. He led the Turkish Privatization Programme during its initial years and acted as the Chief Economic Advisor to the Prime Minister. He is a graduate of The RAND Graduate School and was selected as a Global Leader for Tomorrow, by the World Economic Forum. For further information see (www.arguden.net). In 1910, Deutsche Bank opened one of its first foreign branches in Istanbul, second only to London, underlying the extent of good relations between Germany and Turkey since the beginning of the 20th century. Unfortunately, this branch had to be closed after the WWII and replaced by a representative office, which was opened in 1954 and intermediated trade finance, cash management and project finance activities during Turkey’s years of development. In 1999, Deutsche Bank acquired its local banking subsidiary, which was originally established in 1988 as Turk Merchant Bank by Bankers Trust, NY. The investment banking franchise was transformed into a Deutsche Bank operation, and in the year 2000 started to provide banking services under the name of Deutsche Bank A.S. In line with the local growth strategy, the legacy investment banking licence of Deutsche Bank A.S. was upgraded to a full commercial banking licence in 2004, following the completion of approvals from the regulatory bodies. Under its current set-up, Deutsche Bank A.S. employs 50 people in its Istanbul branch, and provides wholesale banking services to its corporate and institutional clients. Global Banking and Transaction Services (eg Trade and Risk Services, Cash Management, Domestic Custody Services and Global Markets trading and sales desks) have dedicated on-site presence. In addition to its fully-owned subsidiary Deutsche Bank A.S., Deutsche Bank also fully owns Bender Securities, which is among the leading brokerage houses providing high quality services mainly to foreign institutional clients, and providing well-respected research coverage of Turkish companies. Deutsche Bank also owns Bebek Asset Management Company, which took over non-performing assets of the failed banks from the Savings Deposit Insurance Fund. Deutsche Bank AG’s Istanbul representative office is still active, acting as a point of contact for Deutsche Bank’s Private Wealth Management Services.

vii

Turkey

Dilek Yardim has been the CEO and Deputy-Chairperson of Deutsche Bank A.Ş. since 2001. She is also Board Member of Bebek Asset Management and Bender Securities. Dilek Yardim has a BA from the Bosphorus University Management School in Istanbul specializing in Finance and holds an MBA degree from the joint programme of Manchester Business School and University of Wales, Bangor. She has a certificate from Harvard Business School Executive Education programme. Yardim is a graduate of Austrian high school in Istanbul, fluent in English and German. Yardim is 42 years old, married and has two children. She is a member of Turkish Industrialist’s and Businessmen’s Association (TUSIAD) and Foreign Investor’s Association (YASED). Erdikler YMM Ltd is one of the leading consulting companies in Turkey. The company offers a wide range of tax consulting services focusing on tax laws and on the tax-related ramifications of laws, regulations, and administrative provisions pertaining to investment incentives, foreign direct investment, free zones and tax treaties. Under the scope of full certification services, on the other hand, the company examines the statutory books and records of accounts of the clients that it serves to determined whether or not they are in compliance with the requirements of tax law. The company’s president Mr Şaban Erdikler, who previously had served as the country managing partner of Arthur Andersen and Ernst & Young, is also the chairman of the Foreign Investors Association of Turkey (YASED), which is an organization working towards promoting Turkey as an attractive country for foreign investments and towards establishing a stable and better business environment. At present, Erdikler Ltd. is rendering tax consultancy and certification services to more than 200 international and local firms. Erdal Ekinci graduated from the Business Administration department of Bosphorus University. He started his career as a Tax, Legal and Business Advisory assistant at Arthur Andersen in 1997. He was promoted to tax manager position in 2001. After providing audit and consultancy services to various local and foreign companies, he transferred to Flokser Group as assistant general manager. Erdal Ekinci, returned to tax consultancy in 2004 and joined Erdikler Yeminli Mali Müşavirlik as a manager. Meanwhile, he graduated from Sabancı University, Executive MBA programme in 2004. He is also a Ph.D. student at the Department of Organization Studies and is preparing his dissertation, which examines Foreign Direct Investment in Turkey. Erdal Ekinci has taken part in numerous training programmes and seminars in the areas of audit and tax, both in Turkey and abroad. He has provided the following expertise to the clients of Arthur Andersen and Erdikler:  taken part in many restructuring projects;  provided restructuring and tax planning services to minimize the tax burden of various group companies;  performed tax audits for several local and international companies operating in various industries;  provided consulting services to significant holding firms in Turkey;  carried out many due diligence studies.

viii

Turkey

Fadi Hakura is the Turkey specialist at Chatham House. He has worked at the international law firm Eversheds LLP (Solicitors), the European Commission and the World Bank. Fadi wrote a practical guide on the commercial provisions of the EU-Turkey Customs Union. He is also a guest lecturer on Turkey’s EU accession process at the University College London and founder of Conkura, a management and legal consultancy specializing in the political, economic and legal issues in Turkey. He has been interviewed on Turkey by several international media outlets, including CNN, BBC, CNBC, Bloomberg Television, Reuters and the Guardian. He has also written in a number of leading Turkish newspapers. The advertising and communication specialists, Medina Turgul DDB are one of Turkey’s leading communication groups. The agency is based in the commercial capital of the country, Istanbul. Founded in 1993 by two figureheads of local industry, Jeffi Medina and Yavuz Turgul, the agency grew rapidly and was chosen by the worldwide DDB network as its partner in only its second year of operation. Within five years, the agency had reached a top five ranking in the market. The agency was the first Turkish agency to win a Cannes Lion at the advertising industry’s leading awards ceremony, in 2003. The agency President, Jeffi Medina is currently President of the Turkish Advertising Agency’s Association. Over the last three years, the agency has constantly been top three ranked in terms of creativity and is the agency to have won the most local marketing communication effectiveness awards (Effies). The agency owns one third of the leading media agency, OMD, a fellow partner in the Omnicom group of companies. The agency’s clients include a wide range of renowned multinational companies, as well as a full spectrum of local companies of differing sizes, but including the top three holding companies. Specific sector experience is very wide, spanning financial, automotive, retailing, foods, telecommunications, alcoholic drinks, fast food, personal products, white goods, electronics, transport and the media. The agency has recently celebrated 10 years of partnership with the DDB international network. Lawrence Du Pré is Group Vice President of Medina Turgul DDB. With 19 years of experience in the communications sector, he has worked at agencies of the three leading communications holding companies in both local and international roles. Prior to her role as a business consultant, Ece Sirin has worked for over 13 years across a wide spectrum of industries in senior marketing executive roles: Pizza Hut Pepsico FSI, SAS Service Partner, The Coca-Cola Company, Doğan Burda Rizzoli Group and Microsoft Corporation as Middle East and Africa Marketing Manager. She has expertise in branding and image as well as a multi-dimensional and connected approach to marketing and customer orientation. She brings strategic and innovative know-how through her experience in turnaround marketing projects across many industries. Her extensive front-line experience includes developing and implementing multi-million dollar initiatives as well as working creatively on low-budget programmes with high impact. She has gained deep insight into the complexity of business organizations and has built proven techniques to energize and mobilize different business units around major

ix

Turkey

game-changing initiatives. She is highly skilled in shifting good business ideas into a clear course of action, leading and inspiring teams. She re-launched Sprite to become the fastest growing soft drink in Turkey’s CSD market, and brought a new edge to marketing in publishing – turning HeyGirl and Elle Magazines into the highest circulation women’s magazines in Turkey. In her role as Marketing Manager for Middle East and Africa at Microsoft, she drove marketing from product marketing to an audience-centric focus, which included the successful launch of Windows XP across the region and the launch of Microsoft Image and reputation initiatives. In 2004, she founded Bee Consulting, together with Dr Amir Kfir from Adizes Institute, to transform major companies into efficient, market-driven organizations with new and innovative approaches. Ece launched ‘The Executive Studio’, Turkey’s first CEO collaboration and interactive learning platform with support from Mercedes-Benz and CNN Turk. She became chief consultant to Referans Newspaper, which is a new and very reputable financial newspaper from the Doğan group to establish Referans Business Services. Ece has also become a YPO resource. Bee specializes in strategy, marketing and change management. The company has access to a network of consultants representing a broad array of academic disciplines – anthropology, economics, finance and psychology – as well as professional experience within and outside Turkey. The diversity of training and backgrounds, combined with a deep understanding of the human systems that make up all organizations, gives Bee the experience to work with clients to address a wide spectrum of issues, especially those for which there is no straightforward solution or methodology. Bee’s engagements include organizational development and design, usually in combination with strategy, aimed at systemic change. Bee is often called in by senior leaders who may have worked with other consulting firms but who now seek a different perspective at a faster pace. Solutions are created with the active participation, full understanding and support of the managers who implement them. Bee is a not a conventional management consultant organization, writing reports and making recommendations on what they think clients ‘should’ do. Instead, they are change management experts, who work side-by-side with their clients to develop and implement needed changes. Clients include Fortune 500 companies and mid-market, family and owner-led businesses, medical centres and foundations within and outside Turkey. Representative clients in Turkey include STFA, JCB, Hyundai, Gaz-net, Mayadrom shopping malls and Maya Sports Centre, Anadolu Saglik Grubu - Johns Hopkins, Merck, Referans Newspaper, and Mercedes-Benz Türk. Sibel Pensoy has a BA in Business Administration from the Bosphorus University in Istanbul. She obtained an MBA degree, with an emphasis on finance and international business, from the John E. Anderson Graduate School of Management at the University of California in Los Angeles (UCLA) in 1990. Sibel began her career in finance at the Atlantic Richfield Company (ARCO), a Fortune 25 company, in California. She has worked in the Acquisition, Divestitures & Business Development and Financial Planning & Analysis Departments of the ARCO Transportation Company.

x

Turkey

She moved back to Istanbul in 1996, where she undertook her passion for real estate. She engaged in small-scale private residential development ventures in Istanbul. Sibel joined Yapı Kredi Koray Real Estate Investment Company as the Vice President in charge of Research, Development & Investments in 2000. She continued her career in real estate as the General Manager of Colliers Resco A.Ş., the affiliate of Colliers International in Turkey. At present, Sibel is an independent real estate development consultant and provides market research, project feasibility, valuation, highest and best use analysis, concept development consultancy services to domestic and international real estate investors. She currently advises Tekfen Construction’s Real Estate Development Group. Sibel also teaches the Real Estate Development Course at Bosphorus University’s Real Estate Management Certificate Programme. She is proficient in English, French and Spanish. 3 Seas Capital Partners is an Istanbul-based, Eurasia-focused investment advisory boutique, offering its services in Turkey, Central Asia, the Caspian Region and Emerging Europe. The Company provides corporate finance, strategic and investment advisory services to international and regional investors, companies and governments in the areas of private equity management, risk capital investments, mergers and acquisitions, corporate finance, exit management, project finance, international business and market development, corporate governance and development, restructuring, privatization, strategic and financial partnerships. 3 Seas Capital Partners is a strategic alliance partner of The International Network of M&A Partners (IMAP), which is an exclusive global partnership of leading Merger & Acquisition Advisory firms and an active member of the M&A CEE, which is the largest network of independent corporate finance houses in Central and Southern Eastern Europe. The firm currently represents several multinationals and institutional investors, as well as regional companies in their investment activities throughout Eurasia. Serkan Elden is Executive Chairman of 3 Seas Capital Partners, and has significant private equity, project and corporate finance and management, investment management, corporate governance and advisory experience in Turkey, the Caspian Region and Central Asia. As a Director of AIG’s private equity team in Eurasia, he has managed and led private equity investments of the AIG Silk Road Fund between 1998 and 2004, out of Almaty, Baku and Istanbul. Most notably, as a board representative of AIG Silk Road Fund, he has played a key role in the establishment of corporate governance, successful growth and the public offering of Burren Energy plc (UK), a Caspian oil and gas company, which was listed on the London Stock Exchange in 2003 and soon reached a market capitalization of approximately US$1.5 billion. He also participated in the successful management of the initial public offering of AIG’s sports marketing investment with Galatasaray to international investors in 2002. Prior to AIG, Mr Elden held senior investment management positions at the Central Asian-American Enterprise Fund, a US government sponsored investment fund, especially in the restructuring of several investments and the fund’s investment approach in Kazakhstan. In 1995, he also briefly advised the President of Central Asian Stock Exchange in Almaty, providing support in establishing strategies for the attraction of foreign investors to

xi

Turkey

Kazakhstan. Between 1996 and 2002, Mr Elden lived in Almaty and Baku and established and managed investment teams, effectively managing investments on the ground in Eurasia. Mr Elden speaks English, Turkish, Russian and Azeri. He holds an MBA degree from the University of North Carolina and a Bachelor of Science degree in Electronics Engineering from the University of Hacettepe. Since 2004, he has been a member of the Investment Experts Committee of the National Innovation Fund of the Republic of Kazakhstan and currently spends significant time in the Eurasia region. He is also a member of the Global Energy Group of IMAP and head the New Membership Committee of MACEE. Emre Erginler is President of 3 Seas Capital Partners and has more than eight years of experience in Private Equity, Mergers & Acquisitions, Corporate Finance and Investment Advisory in Eurasia. Prior to 3 Seas Capital Partners, he was an investment officer in AIG’s private equity team based in Turkey, covering the private equity and portfolio investments of AIG’s Blue Voyage Fund in Turkey. Mr Erginler currently heads the financial analysis team of 3 Seas Capital Partners. He also covers the financial oversight of 3 Seas Capital Partners’ venture participations. He speaks English, German and Turkish and holds an undergraduate degree in mechanical engineering from Syracuse University and an MBA from Rice University.

xii

Turkey

Part One Economic and Institutional Considerations

GMB Publishing

1

Turkey

1.1 An overview of the Turkish economy: outlook and current perspectives Dr Yilmaz Argüden, Chairman, ARGE Consulting Turkey is at the centre of an economic and political area known as ‘Eurasia’, where three regions of the world, Europe, the former Soviet Union and the Middle East intersect. The proximity to the Balkans and the rest of Europe as well as to the growing emerging markets in Central Asia, the Middle East, and North Africa creates unique business opportunities. The experience of numerous global firms confirms Turkey as a predominant investment location and export platform. Companies like Microsoft, CocaCola, GE, Procter & Gamble and Phillip Morris, as well as international investment institutions like the World Bank Group’s International Finance Corporation have already selected Turkey as a regional base. Turkey is fast becoming a production centre for Europe in diverse industries, but in particular in the automotive sector. Turkey is the leading investor in the Caucasian and Central Asian Turkic Republics. Due to her strong cultural and historic ties, Turkey provides privileged access and a perfect base to develop business with these countries. The international image of Turkey in terms of a destination for investment is generally shaped by the diverse market opportunities, both domestic and export-oriented, that Turkey offers. The potential of these markets covers over one billion consumers, including:

GMB Publishing

 a huge and growing domestic market (approximately 72 million);  high-income European markets (approximately 600 million);  emerging Russian, Caucasian and Central Asian markets (approximately 250 million);  diverse and expanding Middle Eastern and North African markets (approximately 160 million). Turkey’s potential has long been recognized by the international community, but its star has not been easy to rise due to a number of reasons. Political conflicts and instability created a sense of immobility, limiting the potential of the economy. Structural problems such as high inflation and real interest rates, high unemployment, unstable exchange rates, and income inequality that needed urgent attention were not adequately attended, delaying long-awaited economic and political reforms. Turkish history is marked with great successes that follow important crises. For example, the decimation of the Ottoman Empire after World War I was followed by the formation of the secular, democratic republic of Turkey by one of the greatest leaders in history, Atatürk. The serious economic crisis of the second half of the 1970s was followed by the economic reforms of Turgut Özal, which

3

Turkey

liberalized the Turkish economy. Similarly, the 2001 financial crisis turned out to be a blessing in disguise, despite the fact that Turkey had to pay the cost of such a shock for many years afterwards. In fact, the aftershock of the crisis was so strong that political choices were radically reviewed and politicians were forced to address a number of politically difficult structural reforms. Such hardship eventually paid off. After more than 40 years of struggle towards integration with the EU and 25 years with the rest of the world, Turkey has now embarked on a new level of development. Not only are the aftershocks of the economic crisis that hit the country hard in 2001 fading away, but also the country’s full potential has been brought to the attention of foreign investors, mainly thanks to the commencement of full membership negotiations with the EU and the success of an economic programme that has so far been yielding positive results. Such a blessing in disguise also triggered a serious change in the mentality of politicians and businessmen alike. Although the former had no alternative but to address politically difficult choices, the latter had to improvise in the face of an increasingly open and competitive economy. Producing cheaply was no longer sufficient. The business community also had to improve quality and create world brands, and in such tasks they are proving to be successful. Recently, Turkey has become one of the top countries to host European Quality Award winners, and Turkish brands are becoming household names in a wide range of countries. Other lessons were also learned. Until 2001, the Turkish business community generally preferred to maintain their interests within Turkey. After the crisis, they learned the hard way that diversifying their interest outside

4

Turkey would not only be acceptable, but was also a necessity if they really preferred to integrate into the global economy. Many Turkish companies are gaining ground against global companies in high growth markets such as Russia. In this setting, an important question still remains to be answered: has Turkey done enough to ensure that growth and stability are here to stay? Addressing such matters is almost always tricky. However, when one considers the current economic climate as well as the potential Turkey has to offer investors, it is fairly safe to argue that the usual concerns of the past do not fit into the picture of the future. To substantiate our arguments, it may be useful to begin our analysis by addressing the general economic situation in Turkey from a historical perspective.

Economic growth Turkey has witnessed three major crises since 1994, and the 2001 financial crisis was one of the worst economic downturns Turkey has ever experienced. Although the average historical growth rates have been more than satisfactory, political instability, problems in foreign affairs, populist domestic policies and a major earthquake at an industrial centre have all contributed to these crises. Growth rates since 2001, on the other hand, have been the highest in the OECD area (see Figure 1.1.1 and Table 1.1.1). What is different from the past is the fact that in the period since 2001, Turkey has carried out some of the most impressive and longawaited structural reforms, which were recognized by the international community: the EU has agreed to open full membership negotiations with Turkey and the IMF declared Turkey a success story. It would not be

GMB Publishing

Turkey

2005

7.6 9.9

2004 2003

5.9 7.9

2002 -9.5

2001 2000

-20

6.3

1990-1999 Average

3.9

1980-1989 Average

4.0

-10

0 %

10

20

Figure 1.1.1 Economic growth, 1980 to 2005 (%) Source: State Planning Organization (SPO)

an exaggeration to suggest that in the absence of a force majeure, Turkey is set on the right track for economic growth of satisfactory levels. According to the economic programme, it is expected that the Turkish economy will continue to grow at an average of five per cent annually for the next two years. Furthermore, the long-term perspectives look even more promising. With Turkey’s annual population growth rate having fallen from over two per cent to roughly 1.5 per cent, it is on the verge of entering a ‘golden

demographic period’ similar to what East Asia experienced in the 1980s, where the productive working population is the largest relative to children and retirees, providing the potential for even more rapid income growth. This situation is likely to be a panacea for improving European competitiveness as well as Turkish competitiveness. The continuation of reforms to bring Turkey into full EU membership will not only increase the confidence in the Turkish potential and investments in Turkey, but is also likely to make Turkey indispensable

Table 1.1.1 GDP, 1980 to 2006 GDP growth (%)

GDP nominal (billion US$)

1980–89

4.0

—

1990–99

3.9

—

2000

6.3

202

2001

–9.5

145

2002

7.9

183

2003

5.8

238

2004

8.9

302

2005

7.6

361

2006(est)

5.0

381

Source: Turkstat, Treasury

GMB Publishing

5

Turkey

160 140

Index (1997=100)

120 100 80 60 40 20 0 1995

1996

1997

1998

1999

Public

2000

2001

Private

2002

2003

2004

2005

Total

Figure 1.1.2 Industrial production, 1995 to 2005 Source: Turkstat

for the EU. For example, with her renowned hospitality, quality of medical care and pleasant climate, Turkey is likely to become the Florida of the EU, in terms of caring for the old. Only a few emerging markets in the world have the potential of attracting investment both for export as well as for their domestic market. Turkey is in a privileged position to create a ‘virtuous investment cycle’, with a more competitive domestic business environment further strengthening Turkey as a platform for exports, and exports in turn stimulating firms to upgrade and better serve the domestic market. This is true not only for products, but also for the young managers. Young Turks are being employed by global firms throughout the world, with their professionalism and flexibility to deal with a wide range of circumstances. The Chairman of Pfizer suggests that the most important export of their Turkish operation is qualified managers/leaders.

Industrial production and capacity utilization Industrial production has shown a steady increase since 2001 (see Figure 1.1.2) and reached its highest ever level of 138 at the end of 2005, based on the 1997 index. Capacity utilization rates have demonstrated a similar pattern and have been hovering around the 80 per cent mark over the last year. Figures 1.1.2 and 1.1.3 on the levels of industrial production and capacity utilization, demonstrate increased levels of confidence in the markets. After all, capacity utilization rates are higher than the 1995 boom years’ levels and industrial production has skyrocketed by 20 points since the end of 2000, another boom year.

Foreign trade and current account deficit Turkish foreign trade has increased tremendously over the past

6

GMB Publishing

Turkey

100 90 80 70 60 50 40 30 20 10 0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 PUBLIC

PRIVATE

TOTAL

Figure 1.1.3 Capacity utilization, 1995 to 2005 (%)

decade, growing almost 20 per cent annually. According to WTO figures, Turkey ranks fifth in the world in terms of export growth. In fact, Turkey’s exports have more than doubled in the last three years, reaching an estimated US$72 billion for 2005. Its imports have also been growing at an impressive rate. The structure of imports remains concentrated in raw materials and other industrial inputs, suggesting that however high they may be at this stage, imports are merely supporting the export base. The only serious concern in the major economic indicators relates to the current account deficit, which is high

by any standards at its annual current level of US$22.8 billion as of the end of 2005. Historical data suggest that although the current account deficit is higher compared to last year, the rate at which it is growing is slowing and the possibility of financing it is definitely improving. Any correction to such a high figure carries its risks. The general attitude of the government towards financing the deficit is to keep calm, carry on with the IMF programme and the EU integration process and continue to improve the quality of financing over time.

Table 1.1.2 Foreign trade, 1980 to 2006 (US$ billions) 1980

1990

2000

2003

2004

2005

2006(est)

Exports

3

13

28

47

63

73

80

Imports

8

22

55

69

97

116

128

Source: Turkstat, SPO

GMB Publishing

7

Turkey

Exchange rates and introduction of the New Turkish Lira After a very strong devaluation in 2001, the New Turkish Lira (YTL) has been left to float freely – with minor interventions – and has become overvalued against major currencies by some 45 per cent, according to the exchange rate index at the end of 2005. Needless to say, such an overvaluation has its consequences on the exporting ability of the country. However, despite numerous outcries from the business community, the government insisted on freely floating the YTL. In order to create a psychological impact and to facilitate accounting, the present government introduced the YTL by removing six zeros off the currency. Such a change gave a boost to the positive expectations about the economy.

Inflation The level inflation has reached in recent years is another success story

in the economic programme (see Table 1.1.3). Despite numerous domestic and international pressures such as high oil prices, the steady decrease in inflation levels has not only boosted confidence in the domestic market, but also allowed all the players in the economy to be able to plan ahead, perhaps for the first time in the last 30 years. Turkish business people are very happy to have the high inflation nightmare out of their sight. However, working in an unstable economic environment for such a long time has definitely built their financial skills and sensitivity. For example, many global businesses chose to utilize their Turkish managers’ skills to deal with the Asian crises.

Interest rates Having suffered from substantial real interest rates and having to deal with the financial crises under such unfavourable conditions, the Turkish economy is now getting accustomed to the idea of relatively lower interest rates, another manifestation of confidence in the markets.

Table 1.1.3 Inflation, 2001 to 2006 (%) 2001

2002

2003

2004

2005

2006(est)

CPI

68

30

18

9

8

5

WPI

89

31

14

14

6

5

Source: Turkstat

Table 1.1.4 Interest rates, 2003 to 2006 2003

2004

2005

2006(est)

Government bonds

28

20

14

13

O/N borrowing

30

20

14

13

Source: Treasury

8

GMB Publishing

Turkey

Despite scepticism regarding its current level (some experts argue that they are very high compared to the inflation level), the risk elements are slowly disappearing, suggesting that in time, real interest rates, too, will reach a more comfortable level, reflecting the potential of the country (see Table 1.1.4).

next year at the very least. Tax collection is increasing and stabilizing at around 85 per cent of total revenues. Most importantly, the deficit is narrowing thanks to the positive economic outlook, reducing interest rates and thus risks.

Budgetary data For the first in its modern history, the Turkish government prepared and declared a three-year budget in line with the IMF targets (see Table 1.1.5). This development has definitely contributed to positive expectations in the market. It is important to underline a few facts about the fiscal discipline. Since the beginning of the economic programme, budgetary discipline has been maintained vigorously. Governments have been committed to the fiscal discipline and did not seek solutions in populist policies, which in the past have turned Turkey’s budget into a black hole. Secondly, and again in line with the discipline issue, targets have always been set at acceptable levels. It can be argued that expenditures have been kept under control, with interest payments stabilizing for the

Recent developments and targets for the future

As part of the economic reform programme, the Turkish government began a series of privatizations, some of which are in strategic industries. Out of the privatization programme, three transactions, namely Türk Telekom’s sale to Saudi Oger, Tüpras’ (petroleum refinery) sale to the Koç and Shell Consortium, and Erdemir’s (steel) sale to OYAK group of Turkey, attracted a great deal of attention from international investors, and this has been a milestone for growing confidence in the government’s economic programme. The privatization programme raised US$9.65 billion in 2005. It seems that the government’s persistent attempts in the privatization programme will continue in the future, creating further and profitable opportunities in the energy, telecoms,

Table 1.1.5 Consolidated budget, 2004 to 2006 (in billion YTL) 2004

2005

2006(est)

141

145

157

Interest payments

56

46

46

Excluding interest payments

85

99

111

111

131

144

90

113

125

30

15

13

Expenditure

Revenues Taxes Deficit Source: Treasury

GMB Publishing

9

Turkey

agribusiness, transport and real estate industries. As for relations with the IMF and other major financing institutions, Turkey has implemented most of the important structural reforms, giving the impression to the outside world that economic and monetary discipline are very important in order to maintain credibility, and that a stable economy and political system free of unnecessary turbulence are key to success. A similar portrait was depicted in relations with the EU. To the surprise of many supporters and sceptics alike, Turkey has successfully completed a series of political reforms and secured a new beginning with the EU in the form of initiating full membership negotiations. This prospect has placed Turkey in a highly desirable position in the eyes of foreign investors.

10

Concluding remarks In short, with her high growth potential, qualified workforce and managers, and the entrepreneurial spirit, Turkey provides an important potential market for global businesses. Furthermore, regional political stability can only be established on a sustainable basis if the economic development spreads throughout the region. The engine for growth in the Balkans, Caucuses, Central Asia, and the Middle East is likely to be Turkey. Perhaps most importantly, as an observer of the Turkish economy has put it, ‘Turkey will be the “viagra” for Europe’ by becoming the key agent to help improve European competitiveness.

GMB Publishing

Turkey

1.2 Turkey’s accession to the European Union Fadi Hakura, Chatham House

Background Turkey’s 42-year journey to join the European Union (EU) has been long and arduous. Starting with the initial association agreement with the (then) European Economic Community in 1963, it applied for EU membership in 1987, concluded a bilateral Customs Union in 1995 and opened accession negotiations on 3 October 2005. Accession will entail profound implications on foreign, socio-political and economic policies. Turkey will need to implement 100,000 pages of EU laws and standards (known as ‘acquis communautaire’ or ‘acquis’), undertake public sector restructuring and judicial modernization, curb corruption, streamline administrative procedures, and promote democratic values and minority entitlements. This acquis is subdivided into 35 ‘chapters’ or policy areas, covering everything from the environment to sectoral liberalization and heath and safety issues. Beyond the acquis, Turkey will be under intense pressure to improve relations with Greece and Greek Cyprus and follow an EU-friendly posture towards Iraq, the Middle East peace process and the Caucasus. The rhythm of the accession process will match the speed of implementation of

GMB Publishing

EU rules and obligations. In addition, Turkey will likely raise its standards to EU norms and strategies in areas not covered by accession, like health service delivery and the organization of urban transport systems. This chapter will discuss Turkey’s road to the EU by outlining and analyzing the:  mechanics and principles governing the EU accession process;  Turkish arguments in favour of accession;  potential obstacles to Turkey’s EU membership;  impact of accession on Turkey’s investment and business climate.

Mechanics and principles of the accession process On 3 October 2005, the EU Heads of State and Government approved a document entitled ‘Negotiating Framework with Turkey’, a blueprint for the conduct of Turkey’s accession process. For each chapter, the European Commission (the Commission) – the EU’s executive agency – will undertake chapter ‘screening’ with its Turkish counterparts to explain the relevant acquis, examine the level of compliance of Turkish laws with the

11

Turkey

acquis and identify the issues for the negotiations. Subsequent to the completion of a chapter-specific screening, the Commission will submit a ‘negotiating position’ to the EU Council of Ministers – composed of EU national government officials – for its unanimous endorsement. Such a position will specify ‘benchmarks’ or preconditions for the closure, and possibly the opening, of a chapter. Unlike the EU enlargement that welcomed Poland, Hungary and eight other Member States on 1 May 2004, Turkey must not merely promise to implement, but actually implement the chapterrelated acquis to the satisfaction of all the Member States and under intense EU monitoring. This means that Turkey’s institutional, administrative and judicial capacities must be substantially upgraded. A negotiating position will also stipulate ‘transitional periods’ for the implementation of the acquis in a particular chapter. These periods must be limited in scope and exceptional; only onerous EU rules such as environmental protection and employment standards can enjoy prolonged implementation periods after the date of Turkish membership. In such respects, the word ‘negotiations’ is clearly a misnomer since accession is not a give-and-take procedure of consensus politics but a one-way street. The candidate state has, essentially, to accept the entire package of EU obligations with minimal choice or discretion. Although the Negotiating Framework provides for 2014 as the earliest possible date for accession, it stipulates neither an irrevocable commitment nor a defined target date for accession; the process is ‘open-ended’ without any guarantees. These negotiations can be suspended at anytime if human rights violations are ‘serious and persistent’. EU Member States

12

must agree unanimously to open or close each individual chapter; thus each Member State has a right of veto over the entire process. The endproduct of the membership talks is the draft accession treaty, which must be ratified by national parliament or referendum. France and Austria have announced their intention to choose the latter option.

Pro-accession Turkish arguments Countless surveys of Turkish public opinion indicate that economic prosperity and social protection are primary drivers for popular enthusiasm for EU accession. Turkey has traditionally looked to Europe, during the Ottoman Empire and after the creation of the modern Turkish republic in 1923, for inspiration and ideas on political, economic and social reforms. EU accession would represent the manifestation of a centuries-old dream of European orientation. The EU has created wonders for Eastern and Central European countries as well as countries like Ireland and Spain, which experienced spectacular economic growth, due in large part, though not exclusively, to membership. Accession supplies a powerful template of laws, standards and values and an anchor for structural reforms to transform a country into a prospering, dynamic society. In fact, Turkish Prime Minister, Recep Tayyip Erdoğan, justified adhesion to the EU on the grounds that Turkey can no longer be ‘an isolated, closed society… [but] an open and transparent one, in touch with the rest of the world. Countries on their own do not mean much, do not represent much any more. They can achieve a lot more in solidarity with their friends’. In short, the

GMB Publishing

Turkey

bid by the Turkish Republic to join an exclusive club of rich and secular democracies is an autonomous decision to embrace modernity and globalization, and accelerate its existing convergence with Europe.

Potential obstacles to EU membership Cyprus The perennial Cyprus problem may bedevil the entire accession process. In July 2005, Turkey signed the protocol extending the Customs Union to the 10 new Member States, including Greek Cyprus. A declaration was appended proclaiming that this protocol does not amount to a direct or indirect recognition of Greek Cyprus by Turkey. In return, the EU issued a counter-declaration in September 2005, demanding full implementation of the Customs Union, including granting Greek Cypriot access to Turkish ports and airports. Turkey’s recognition of Greek Cyprus was a ‘necessary precondition’ of the accession process. The EU undertook to review Turkish implementation of the Customs Union in 2006; any shortcomings could affect the ‘overall progress’ of the negotiations. Even though the Cypriot issue seems insurmountable, Greek Cyprus and Greece understand clearly that derailing Turkish accession would be enormously detrimental to their strategic interests, which should temper their desires for blockage and disruption. It is possible that the increased interaction inherent in accession negotiations could facilitate prospects for a Cypriot settlement by the end of the accession process.

GMB Publishing

Human rights and cultural differences Turkey and the EU share differing concepts on nationalism. For Turkey, nationalism was vital in securing the country’s territorial cohesion from the clutches of colonialism and dismemberment. Conversely, rampant nationalism was responsible for World Wars I and II in Europe. The EU, therefore, emphasizes democracy, human rights and the minority question, while a nationalistic undercurrent in the Turkish population is wary that EU reforms could endanger national unity. A closely related question concerns the differing religious traditions between Turkey and the EU. Numerous EU politicians and opinion-makers cite such differences as a reason to scupper accession, fearing that Turkey’s cultural heritage would threaten the social fabric of Europe. Unsurprisingly, the lesser status of ‘privileged partnership’ was raised as an alternative to membership. Many Turco-sceptics acknowledge, nevertheless, the threat to vital European interests of a Turkey outside the EU framework. This glaring realization may ensure, to a large extent, that any misgivings underpinned by religious factors should minimize the ramifications of the cultural matrix on Turkish accession. Moreover, accession tends to generate an internal dynamic of progress and bargaining, and acts as platform to further the dialogue and activities on democracy and human rights. The Turkish population, in general, were highly supportive of the constitutional and legal overhaul of the last four years: the death penalty and security courts were abolished, minority entitlements expanded, civil and criminal codes reformed and civilian–military relations rebalanced.

13

Turkey

Population size, demographics and absorptive capacity Turkey’s population is currently 72 million people. By the time of accession in 2015–2020, it is expected to become 82–85 million, the most populous in the EU, entitling the acceding state to the largest voting block in the European Parliament and the Council of Ministers. This development feeds the trepidation of accession opponents, who are worried that the EU lacks the institutional and budgetary capacity to ‘absorb’ Turkey. To put it another way, the perception is that Turkey is too large and too ‘poor’ for the EU’s current institutional architecture to function efficiently. It is undeniable that the EU needs to reform its institutions and budget with or without Turkish membership. The EU was not designed to accommodate 25 Member States (soon to be 27 in 2007 or 2008). Given that accession is likely to take 10–15 years, it seems conceivable that during that time some form of revision to the EU system will be accomplished. Even the concept of a ‘two-speed Europe’ – with an inner core of Member States wishing for deeper integration and an outer core of countries wishing to limit participation only to the EU single market and willing to entertain transEuropean cooperation on specific issues – could, perhaps, become reality. This development may ease the entry of Turkey into the EU, considering how jealously it guards its national sovereignty. At the same time, as Turkey restructures its economy and public institutions, it should enjoy sustained economic growth and inflows of Foreign Direct Investment, which could significantly bridge the EU– Turkey wealth gap.

14

Agriculture, free movement of people and structural policies The Negotiating Framework specified that the agricultural subsidies, free movement of people and structural policy (ie regional aid) chapters may be subject to long-term restrictions or permanent derogations, which is contrary to the fundamental essence of the EU. This possibility was incorporated to assuage concerns of Turkey’s admission ‘bankrupting’ the EU budgets for agricultural subsidies and regional aid, due to Turkey’s expansive geography and extensive agricultural sector. Aggravating these concerns, is the relative wealth disparity between the EU and Turkey. Another concern is that Turkish people might ‘flood’ the EU labour markets if permitted unhindered movement under the EU legal provisions on free movement of people. The phantom of the ‘Polish plumber’ – Poles are still subject to French immigration restrictions – played a notable role in defeating the EU Constitutional Treaty in France in the referendum of 29 May 2005. Turkey’s differing religious configuration is supplying added sustenance to keep out the Turkish population from the European mainland. Turkey is against the inclusion of permanent derogations on the three chapters. Acceptance of them would deny it the tangible benefits of membership. One should note that the operative word for permanent derogations is ‘may’, implying that their likelihood is not a foregone conclusion. As accession is a process of 10–15 years, there are good prospects for a comprehensive change to the EU budget. ‘Rich’ Member States are ever more reluctant to contribute disproportionately to the budget. Agricultural and regional aid policies, consuming

GMB Publishing

Turkey

more than half of the budget, are anticipated to be restructured and pruned from existing levels. Thus, if and when Turkey joins the EU, it will not have the same access to funding as enjoyed by existing Member States. The same argument applies to the free movement of people issue. Many European countries are suffering from very low birth rates and the attendant rapid ageing of the population. Therefore, dependency ratios – the number of active workers for each retiree – is falling fast, with consequences on the financial viability of social security systems. Turkey is blessed with a healthy demographic profile, which could assist in slackening the decline of the EU’s workingage population. It is foreseeable that Europeans may view the mobility of the Turkish population as a necessity.

Veto power of EU Member States Each EU Member State must approve the opening and closing of every chapter during membership talks. Simply put, all Member States have a right to veto the accession process, which raises the possibility that Turcosceptical States may employ the veto power to halt or slow down Turkey’s EU perspective. Although the veto threat exists, there are three factors mitigating against its possible use. First, the EU is governed by consensus and promisekeeping; Turkey has been promised EU accession repeatedly since 1963. Veto is akin to a ‘nuclear option’, which no Member State desires to invoke save in exceptional circumstances. That largely explains why Austria, France and other Member States did not block the opening of negotiations on 3 October 2005. Second, Member States appear to appreciate the potentially grave geostrategic and economic effects of

GMB Publishing

derailing Turkish membership hopes. Such considerations have an impact on the probability of a veto by a Member State. Third, the European Commission as an external monitoring agency and arbiter should ensure objectivity and impartiality in the accession process. As long as Turkey maintains the momentum for reform, then this would make it more difficult for a Member State to utilize the veto.

The EU and Turkish public opinion For many years, there has been a widespread perception that elites have guided EU developments with little or no regard for public opinion, whether it be the adoption of the Euro or permitting the accession of 10 mainly Central and East European countries on 1 May 2004.The recent French and Dutch rejections of the EU Constitutional Treaty by referendum indicates that EU-related popular concerns can no longer be ignored. In Turkey, public opinion is also an increasingly important variable on public policy, in line with the democratization of Turkish society. One major issue that excites EU and Turkish opinion is Turkey’s EU membership. On the EU side, concerns focus on religious and cultural differences, the large population, the relative wealth disparity and expansive geography. Opinions polls suggest opposition to Turkish membership hovering between 70–90 percent in some Member States, like Austria, France and Germany. France and Austria have pledged to subject Turkey’s accession to a referendum after completion of the negotiations. The Turkish population, on the other hand, were not pleased with much of the tone of the EU debate on Turkey and the populist rhetoric uttered by some European politicians. In addition, nationalist sentiment

15

Turkey

believes that EU reforms could engender the fracturing and dismemberment of Turkey. Unsurprisingly, Turkish public support for membership has declined, from 70–75 per cent in 2004 to around 60 per cent in 2005.The support for EU membership may be further challenged, as the costs of complying with EU rules begin to bite, such as work and safety rules and environmental regulations. Deciphering popular opinion depends principally on public opinion polls demanding ‘yes/no’ answers to up-and-down questions on Turkish accession without any nuances. These are, necessarily, snapshots of opinion at a specific point in time, which do not foretell future opinion in 10–15 years when the accession process may be concluded. For instance, some opinion polls reveal that a majority of French and German people could contemplate Turkey’s entry to the EU provided it fulfils all the membership criteria. Moreover, there is much volatility in public opinion from one year to the next, as suggested by comparing year-on-year opinion poll results.

Impact of accession on investment and the business climate Turkey’s economy is undergoing rapid and accelerating change, buoyed by the structural and macroeconomic reforms unleashed since the economic crisis of 2001. These changes will be augmented by the EU accession process; three-quarters of the acquis is economics-related. Foreign investors commonly perceive accession as a critical anchor for economic reforms and investor confidence. This tends to encourage Foreign Direct Investment (FDI), solidify financing for the current account

16

deficit thereby stimulating prosperity, employment-creation and technology transfer. ‘Risk premiums’ or the gap between Turkish and US/European government bonds have narrowed substantially, in large measure to EU accession prospects. Furthermore, the new EU Member States of Central and Eastern Europe witnessed a steep climb in FDI following the opening of accession negotiations. A similar phenomenon has been observable in Turkey since the beginning of 2005, particularly in enhanced merger and acquisitions activity in the Turkish banking and finance sectors. Acquis implementation should also create further business opportunities for domestic and foreign market players. EU rules and regulations are expected to transform the commercial practices and policies that have cosseted much of the economy from competition. Public procurement is one example, where requisite EU laws impose stringent standards on transparency, non-discrimination and competitiveness so as to level the playing field. Consequently, the €35 billion procurement market may be exposed to fierce rivalry at all administrative levels, whether municipal, provincial or national. As the economy opens up, Turkish companies will likely adopt modern managerial and operational systems to withstand foreign competitors. In response to tough competition, the Turkish government and companies are anticipated to benchmark standards with foreign counterparts. For instance, the Turkish prime minister announced in 2005 the overhaul of personal and corporate taxes to entice FDI from low-tax European countries and legalize the informal economy. Public sector overhaul is an important feature of EU accession. Turkey is obliged to adopt programmes to curb corruption, enhance administrative efficiency and upgrade institutional

GMB Publishing

Turkey

and judicial capacities to implement the EU acquis. Linkage between the speed of accession negotiations and implementation of EU membership obligations will encourage Turkey to carry out institutional changes. These could result in unlocking and speeding up the forces of entrepreneurship and employment generation. Turkey’s favourable and growthfriendly demographic profile bodes well for its future economic wellbeing, if aided by a meaningful accession process. Its median age is only 26 years; the country is endowed with a young and dynamic population. Economists refer to this period as the

GMB Publishing

‘demographic window of opportunity’, whereby the active working-age population is enlarging relative to the ‘young’ inactive (fertility rates are heading lower) and ‘old’ inactive (fertility rates were recently high). Normally, the confluence of an appropriate policy mix – high savings and investment rates, an open market and a skilled workforce – this window is a recipe for a decades-long period of robust economic expansion. EU accession could further boost the benefits of the demographic window, which will last a generation as lower birth rates eventually lead to population ageing.

17

Turkey

Part Two Investment, Finance and Business Development

GMB Publishing

19

Turkey

2.1 Foreign direct investment Erdal Ekinci, Erdikler YMM Ltd

Introduction Turkey has the potential of becoming an attractive destination for global investors. Turkey has a large and dynamic market and a significant potential for a skilled labour force. The well-developed private sector of the country and its geographical proximity to the markets in Europe, Caucasus, Middle East and North Africa, are significant factors that affect the investment decisions of multinational corporations. In spite of these opportunities, the average volume of FDI that has entered into Turkey since 1990, is around one billion dollars per year. Obviously, the political and economic instability to which the country has become exposed during the last two decades, have played an important role in the existing shortfall. However, the rapid and significant economic growth, combined with the political stability achieved during recent years, has offered Turkey the chance to realize its potential in the oncoming years. At the beginning of the 1980s, Turkey implemented an economic development strategy, namely an export-oriented strategy due to the weaknesses of the import substitution policies. Concurrent with this strategy, a liberalization process in the foreign trade and finance sector was initiated for the purposes of controlling inflation, closing of foreign financing deficits and achieving an economic system that was more open

GMB Publishing

to international capital, and that was focused on free markets. This reform process has radically changed all aspects of the environment that determine economic policies. The first section of this chapter deals with the process of trade liberalization in Turkey, while the second section deals with the process of financial liberalization in the country. The effects of the liberalization process in economic life on the investment environment in Turkey, the risks associated with operating in this environment, as well as the existing opportunities offered to foreign investors, will be discussed in the final section.

The process of trade liberalization The principal economic development strategy of Turkey was based on import substitution policies until the 1980s. However, following the petroleum crisis in 1979, and the crisis in the balance of payments, the 1980s witnessed the replacement of the import substitution strategy with an export-oriented growth strategy. In line with this strategy, the 24 January 1980 Resolutions were announced. Within the framework of these resolutions, to encourage export-based economic growth, numerous exportrelated subsidies were developed, exporters were provided with tax

21

Turkey

refunds and were subsidized through allocation of cash resources from nonbudgetary funds, and the exchange rate of the Turkish Lira was allowed to depreciate against foreign currencies. During this period, governments have granted preferential and subsidized export loans to exporters, and goods that were imported for utilization in the manufacturing of exported goods were exempt from import duties. In addition to export incentives and subsidies, the Law Concerning Free Trade Zones was also enacted during the same period, to increase investments and export-oriented production. Free trade zones were considered as areas outside the customs borders, and were exempted from taxes, duties, charges and the scope of applicability of the provisions of the customs legislation and foreign exchange legislation. Within the same process, in order to increase the competitiveness of industry and to ensure the liberalization of foreign trade, Turkey has amended its import policies, abolished the limitations imposed on quantities and reduced the applicable rates of import duties. Meanwhile, pursuant to the Ankara Treaty signed in 1963, Turkey has participated in a customs union with the European Union (EU) since 1 January 1996 and, accordingly, Turkey has abolished all applicable duties and other payments (the so-called ‘fund’ contributions) as well as restrictions on quantity, that were imposed on merchandise imported from EU and EFTA countries.

The process of financial liberalization The first major stage in the financial liberalization process was accomplished through the abolition of the

22

limitations and controls imposed on interest rates; and subsequently, the required regulations for the liberalization of the purchase and sale of foreign exchange were put into effect. The Capital Market Law was enacted for the purposes of ensuring the regulation, support and supervision of the capital markets in Turkey and the safeguarding of the rights of investors through capital markets that operate in a reliable, transparent and stabilized manner, and within this framework, the Capital Market Board was established in 1982. Meanwhile, the Turkish Central Bank initiated open market transactions in 1987. Through the enactment of Resolution No. 32 concerning the transition into convertibility, full liberalization was granted to the transfer of all types of currency between Turkey and other countries. Concurrent with these developments, to finance the budget, the government passed a decision concerning the implementation of a short-term borrowing system as a replacement for taxes and long-term foreign credits. During this restructuring process, government bonds and securities exchange markets were also established in Turkey. Upon the opening of the Istanbul Stock Exchange (ISE), which was founded in 1986 with a view to regulating Turkey’s financial markets in line with the international system. By 1991, Turkey became integrated into global financial markets.

The investment environment in Turkey In 1954, Turkey implemented the most liberal Foreign Capital Law of the period, through the enactment of Law Number 6224. Taking into consideration the Foreign Capital Framework Decrees that were put into

GMB Publishing

Turkey

effect, together with the liberalization policies and the amendments introduced in foreign exchange legislation from the beginning of the1980s, it can be asserted that Turkey is now among the countries that have adopted the most liberal legislation regarding foreign capital. Since 1980, the framework decrees have been subject to amendments, in 1986 and in 1992. The process of liberalization continued during the subsequent years and certain important amendments were introduced in the foreign capital legislation. After the enactment of the Foreign Capital Framework Decree No. 95/6990 in 1995 and the Foreign Capital Framework Decree No. 4875 that was put into effect in 2003, provided that it does not constitute a monopoly or a private concession, investors are allowed to operate in the production of all types of goods and services in any area that is permitted to the Turkish private sector. Through this law, the previous obligations for permission to establish foreign companies, and the restrictions imposed on foreign capital, such as minimum investment limits, have been repealed. Again, through Law numbered 4884 that was put into effect in 2003, the legal procedures pertaining to the establishment of companies pursuant to the law and the amendments in the articles of associations of companies have been reduced to a minimum level. Hence, within the framework of current legislation:  foreign investors have been granted the liberty to realize investments in Turkey;  foreign investors are subject to equal treatment with local investors;  there is no restriction on the share of the foreign partner;  FDI shall not be expropriated or nationalized unless such remedy

GMB Publishing

is deemed as necessary for the benefits of the country, and unless the required provisions are duly paid to foreign investors. The payments to be extended in consideration of the net profits generated from the operations and transactions of foreign investors in Turkey, dividends, sales, liquidation and indemnification totals, the payments relating to licences, management and other similar agreements, and the payments relating to the principal and interests of foreign credits, are allowed to be transferred abroad without any restrictions, through banks and special finance institutions. Legal entities established or participated in by foreign investors in Turkey are allowed to acquire ownership rights and limited rights to real property located in areas that allow for acquisition by Turkish citizens. For the purposes of resolving disputes arising from investment agreements subject to private law, and disputes relating to investment matters arising from concession protocols and agreements for public services concluded with the administration, in addition to the competent and authorized courts in the concerned jurisdiction, foreign investors may also apply to national or international arbitration or other mechanisms of dispute resolution, provided that the conditions set forth in the relevant legislation are fulfilled, and provided that an agreement is reached among the parties regarding the matter concerned. The non-cash capital is appraised in accordance with the relevant provisions of the Turkish Commercial Code. In cases when the marketable securities of the companies established in foreign countries are used as investment instruments, the appraisal procedures executed by the competent authorities duly authorized for appraisal as per the legislation of the

23

Turkey

country of origin, or by the appraisal commissions to be assigned by the competent courts of the country of origin, or by international appraisal organizations, shall be taken as the basis for such valuation. A work permit is granted by the Ministry of Labour and Social Security to the personnel of foreign nationality to be recruited by companies, branches and enterprises that are established within the framework of the Foreign Capital Law.

FDI performance of Turkey Unfortunately, Turkey has not been able to achieve the level of success that it aspired to from the standpoint of foreign direct investments. During the period between 1954 and 1980, the number of foreign corporations that realized FDI in Turkey was 78, and the investment total was only US$35 million. During the period between 1980 and 2004, FDI in Turkey was realized at a net total of US$20,713 million. The volume of FDI realized in Turkey during 2005, was much higher compared to previous years. With the exception of the investments that can be attributed to the privatization process, the FDI realized during the first eight months of 2005 amounted to US$2,900 million.

Main reasons underlying Turkey’s low FDI performance The economic and political instability experienced in Turkey during recent decades is the main reason for Turkey’s inability to reach its targets relating to foreign investments. The country’s failure to implement the economic resolutions on a full scale and the frequent amendments to the existing regulations, have obstructed

24

foreign investors from making forecasts and developing long-term plans. The existence of an unrecorded economy in the country and the bureaucratic procedures that foreign investors are obliged to complete, as well as the bureaucratic nature of procedures that apply to both the domestic and foreign investor, are also among the negative factors that affect FDI in Turkey. In spite of the regulations introduced in the legislation on intellectual and industrial property, Turkey is still way behind international standards in the application of these regulations, which creates a negative impression for the foreign investors. Meanwhile, another subject matter that we consider equally important is the fact that an investment promotion agency had not been founded in Turkey until now. Countries who are rivals of Turkey have surpassed the stage of implementation of the policies and the incentives that are required for attracting more investments, and with the help of their investment agencies that have been founded and managed effectively on the basis of the concept of professionalism, have succeeded in attracting foreign investments at a level much higher than Turkey. It is beyond doubt that the Investment Support and Promotion Agency of Turkey, whose establishment in June 2006 was long overdue, will significantly contribute to the perception of Turkey as a centre of attraction for investments for international corporations.

Main attractions of Turkey for foreign investors Turkey is located at the point where East meets West, and is therefore in a very strategic position. The fact that the country serves as a bridge between Asia and Europe makes Turkey an

GMB Publishing

Turkey

attractive spot for foreign investors who aim to develop their markets in the Middle East, Caucasus and the Turkic Republics. With a population of more than 70 million, most of whom are young people, and its increasing purchasing power, Turkey offers a dynamic and rapidly growing market for foreign investors. Turkey’s potential for a skilled labour force, together with the communications and other infrastructure services offered by the country, is at a level that can fulfil the demands of foreign investors. Turkey’s integration into the customs union with the EU in 1996 and the beginning of negotiations concerning Turkey’s full accession to EU membership as of October 2005, have created the anticipation that following the completion of the process of improvement and harmonization with the acquis communautaire within the process of full accession to EU membership, medium-term and long-term foreign capital investments in Turkey may increase.

Incentives provided to investors There are some incentives offered to those investors who wish to invest in Turkey. Some of these incentives are of a general nature, some are regional, some are granted to exporters, and some are sector specific. Unfortunately, there no major tax incentives or tax holidays provided to investors.

General incentives The general incentives that can be granted to investments within the framework of the Decree Concerning Government Subsidies in Investments are as follows:  Exemption on customs duties and mass housing fund: The importa-

GMB Publishing

tion of machinery and equipment, within the scope of an incentive certificate, are exempted from customs duties and mass housing fund contributions.  Exemption on value added tax: VAT exemption is applied on machinery and equipment (imported or locally purchased) to be delivered to investors who own incentive certificates.  Exemption on taxes, duties and charges: Provided that investors undertake to realize exports, several documents and transactions shall be exempted from stamp duties and charges.  Credit allocation: Provided that a prior written approval is received from the Undersecretariat of the Treasury, investment and operation credits can be allocated to R&D investments, investments concerning the protection of the environment, investments realized in the priority zones in technology determined by the Scientific and Technological Supreme Commission, Scientific and Technological Research Council (TÜBİTAK), and investments relating to regional development. To be eligible for benefiting from support incentives, the relevant investments should be supported by an incentive certificate.

Regional incentives Incentives provided for undeveloped regions There are a number of incentives introduced for investments in the 49 least developed regions in Turkey that offer employment opportunities to at least 30 individuals. (These incentives are not applicable in areas where foreign investments are densely

25

Turkey

concentrated, such as Istanbul, Ankara and Izmir.) The incentives include cancellation of 80 per cent of salary withholding tax liability, payment of 80 per cent of social security employer premiums by the Treasury, allocation of free land and energy support. Tax-related incentives in the Technological Development Zones Investors operating in Technological Development Zones are eligible for income tax and corporate income tax exemptions on their earnings from their R&D-related and software products. VAT exemption is also available for such deliveries and services. The salaries of personnel who work in these zones are exempt from salary income tax withholdings. Government subsidies for operations conducted abroad by technical consulting and contracting firms In order to increase the volume of export of goods and services, activities organized in Turkey and abroad by technical consulting and contracting firms, groups of firms, sector-specific firms, fair organizers and the organizers of seminars and conferences, are subsidized within the scope of specific rates and amounts. Incentives for investments and entrepreneurial activities in the area of culture In order to protect the cultural assets and the cultural heritage of the country, to maintain the functionality of such assets, and to ensure that such assets contribute to the economy of the country, various tax-related and financial incentives are provided to certain designated investments and entrepreneurial activities realized in the area of culture.

26

Export-oriented state investments To accomplish the social and economic objectives in conformity with the export-based growth model adopted by Turkey after 1980, several incentives are provided to enterprises engaged in export activities, provided that certain conditions are duly fulfilled.

Free trade zones The free trade zones that were established in Turkey following the enactment of the Law Concerning Free Trade Zones in 1985, were considered as areas beyond the customs borders; and the companies and branches operating in the concerned free zones were exempt from taxes, duties and charges, as well as from the provisions of the customs legislation and foreign exchange legislation. However, through the enactment of Law No. 5084 in 2004, the exemptions on taxes, duties and charges granted to free zones were abolished. Those who were granted operating licences prior to the date of effectiveness of the said Law, have been granted the right to benefit from the exemptions on taxes, duties and charges until 31 December 2008, provided that the period of entitlement remains limited to the period of validity of the licence. Meanwhile, a different application has been envisaged for the enterprises in the free zones who are engaged in manufacturing activities. Accordingly, of the companies/branches who have received licences to operate in free zones, those that are engaged in manufacturing activities shall be exempt from income and corporation tax until Turkey’s full membership in the EU is accomplished. At present, there are 21 free trade zones operating in Turkey and the annual trade volume in these zones amounts to US$15 billion. The total number of personnel employed in these zones is around 36,000.

GMB Publishing

Turkey

2.2 The Turkish banking sector Dilek Yardim, Chief Country Officer, Deutsche Bank Turkey

Introduction The Turkish banking sector has undergone massive restructuring and consolidation in the last couple of years, supported by Turkey’s successfully implemented IMF-backed disinflation and economic stability programme, following the financial turmoil the country experienced in early 2001. The process was painful and involved the restructuring of loans, recapitalization of balance sheets, implementation of strict regulation and control mechanisms and risk management systems; but the banking sector has started reaping the fruits, together with the economy at large. Although the number of banks decreased from 85 to 47; the banking sector’s total assets grew by 145 per cent between September 2001 and September 2005, reaching US$270 billion and corresponding to 78 per cent of GDP. This level of banking asset penetration is still well below comparable countries. The total market capitalization of banks has skyrocketed from a mere US$8.7 billion in November 2001, growing by six times to reach US$50.6 billion in November 2005. This figure excludes the total US$8.6 billion market capitalization of two banks that eventually went public. Among these, the state-owned Vakifbank, which floated 25 per cent of its shares in November 2005, was six

GMB Publishing

times oversubscribed, signalling a demand for Turkish banking assets. Aside from an environment of political and economic stability and disinflation, this phenomenon is also attributable to an increasing interest by foreign banks in entering the Turkish banking sector. Several acquisitions and strategic partnerships have taken place in the last 12 months alone, and some other banks are already in negotiations with potential foreign partners. The asset share of foreign shareholders in the Turkish banking sector (excluding publicly held shares held by foreigners for investment purposes) has reached 12.7 per cent, up from three per cent a year ago, and is expected to increase further. The factors behind this motivation are Turkey’s growth potential, its demographic structure, EU-accession prospects, low penetration of certain attractive banking products (like mortgage loans), and an established innovative banking culture with a highly-skilled and experienced workforce, coupled with a technologically advanced infrastructure.

History At the time modern Turkey was established in 1923, the formal financial system comprised 35 banks, of which 22 were Turkish owned and 13 were foreign, with a total of 439 branches.

27

Turkey

The majority of the foreign banks dealt with foreign trade and foreign companies operating in Turkey, and their involvement with Turkish firms was limited. On the other hand, Turkish-owned banks were mostly small local banks and were too weak to support the newly emerging industry and commerce. During the first years of the Republic, the government encouraged the development of a national banking system through a liberal approach with no restrictions for entry. The Central Bank of Turkey was established in 1930. Following the economic depression of the 1930s, Turkey adopted a stateled development strategy. In line with this strategy, large state banks, which still exist today, were established. Until 1980, the Turkish financial system developed under an umbrella of monetary and regulatory policies aimed at supporting the stateorchestrated development strategy. Particularly after the early 1960s, the commercial bank dominated financial system became an instrument of planned industrialization policies and operated under a framework characterized by controlled interest rates, a directed credit programme, high reserve requirements and other restrictions on financial intermediation, as well as restricted entry. Interest rate controls led to nonprice competition in the form of branch network building by banks already in the system. This situation and restrictive entry policies, coupled with the exit of a significant number of banks between 1960 and 1980, gave rise to a concentrated market dominated by public and private banks owned by industrial groups with excessively large branch networks and high overhead costs. In contrast, the years since 1980 have seen a major trend toward liberalization of financial markets in

28

Turkey. Starting in June 1980, as part of a far reaching stabilization and structural adjustment programme, the government implemented financial liberalization and deregulation measures aimed at developing an efficient and competitive financial system that would support and facilitate the functioning of a liberal economy. To that end, reforms eliminated interest rate controls, eased the entry of new financial institutions, both bank and non-bank, and allowed new types of instruments. There were also policy measures to develop equity and bond markets. Although there were occasional setbacks and policy reversals in terms of interest rate controls, and a banking crisis in 1982, reforms have led to major changes in the sector. Relaxation of regulatory barriers has attracted a significant number of banks into the system, both Turkish and foreign. Reforms were also successful in halting the decline in financial intermediation observed prior to 1980 and contributed to financial deepening and stock market revitalization. At the same time, there was greater product diversification and an improvement in the quality of financial services. Moreover, the Turkish banking system became more integrated with the external financial world and improved its financial technology and human capital.

Liberalization and internationalization in banking (1980s) In an environment of liberalization, the 1980s witnessed continuous legal, structural and institutional changes and developments in the Turkish banking sector. During these years, a series of reforms was adopted to promote financial market development. The main aim of these reforms was to

GMB Publishing

Turkey

increase the efficiency of the financial system by fostering competition among banks. Some of these reforms included the establishment of the Interbank Money Market (which is administrated by the Central Bank), the introduction of new tools for the regulation of liquidity, and legal arrangements to promote the development of capital markets. These reforms enabled banks to offer new services by using new instruments in addition to their ordinary banking activities. Turkish banks increasingly began operating in international markets, dealing with instruments like swaps and forward agreements. The use of new financial techniques, such as leasing and factoring, has also deepened the system. New entrants to the banking system were permitted and foreign banks were encouraged to operate in Turkey. Turkish banks intensified their business relations abroad, either by purchasing banks in foreign countries or by opening branches and representative offices. The liberalization of foreign exchange regulations increased foreign exchange transactions in the banks. In 1987, external auditing policies for banks were implemented in accordance with internationally accepted accounting principles. In addition, legal and institutional arrangements were introduced to foster the development of the capital markets. As a result, banks began to provide additional services such as consultancy and trading in securities, underwriting, fund management, establishing mutual funds and financial consultation. Besides diversifying their services, banks improved their technological infrastructure by extensive use of computer systems, began employing more qualified human resources, and, at the same time, put an emphasis on training programmes. 1990 witnessed the beginning of electronic banking in Turkey.

GMB Publishing

Crises in the sector (2001) The recent twin economic crises experienced by Turkey in November 2000 and February 2001 illustrated, in a rather dramatic fashion, the strong correspondence between a poorly functioning and under-regulated banking system, on the one hand, and the sudden outbreak of macroeconomic crises on the other. Indeed, the Turkish experience shows that both public and private banks can contribute significantly to the outbreak of economic crises. These financial crises progressively highlighted the importance of a sound and well-functioning banking sector for macroeconomic stability and sustainable economic growth. In the late 1990s, the sector was marred by several problems: a politicized regulatory structure and weak enforcement; pervasive connected lending practices; profitability maintained only thanks to Treasury bill mark to market and trading gains; intensive borrowing requirements of cash-starved state banks; and inadequately capitalized small banks. The December 1999 IMF-supported disinflation programme sought to address Turkey’s chronic macroeconomic instability, including a growing public debt problem, at a time when the situation had become largely unsustainable. The programme was aimed at reducing inflation using an exchange rate anchor. However, it sought to balance the programme’s risks associated with the exchange rates by incorporating an ‘exit strategy’ to the peg and supporting it by an ambitious package of structural reforms and a sizeable fiscal adjustment. As for the banking sector, the programme strategy was to reform the sector gradually, with above normal profits in the first year of the programme used for partial

29

Turkey

recapitalization of the sector. At the heart of this transformation was a new Banking Act, which called for the establishment of an independent Banking Regulatory and Supervisory Agency (BRSA) to take over the supervisory and regulatory functions of the Treasury. However, risks were badly aggravated and the programme came under attack in November 2000 and collapsed a few months later, with the Turkish Lira left to float in February. The banking sector was in a very weak financial position in the aftermath of the crisis. The collapse subsequently led to a forced consolidation and a massive injection of public funds into the sector. The cost of restructuring amounted to over US$50 billion or some 35 per cent of 2001 GDP, including a relatively small amount of funds injected by the private sector itself. The good news is that this painful process of collapse and recovery has led to two major improvements: the sector has now become much leaner and the regulatory structure has become almost fully aligned with international standards.

The recent restructuring programme The May 2001 Restructuring Programme, formulated and executed by the BRSA in consultation with the IMF World Bank, took a four-faceted approach to banking rehabilitation: it sought to restructure state banks, resolve banks taken over by the Savings Deposit and Insurance Fund (SDIF), strengthen the financial structure of private banks and further improve the regulatory and supervisory framework. Financial restructuring of state banks was completed, and correspondingly they began to make profits. Similarly, with the requirements of modern banking and international competition, significant steps have

30

been taken within the framework of operational restructuring. The number of state bank branches, which was 2,494 as of December 2000, was reduced to 2,236 as of December 2004; and the number of personnel, which was 61,601, was reduced to 39,454. Twenty-one banks were taken over by the SDIF between 1997 and 2003. Of these, 13 banks were merged; five banks were sold to domestic and foreign investors; and the licences of two banks were revoked. As of today, there is only one bank, Bayindirbank (now renamed Birlesik Fon Bankasi), that remains under the administration of the SDIF, acting as the intermediary for the resolution of the outstanding assets and liabilities of banks that have been taken over. Within the programme’s scope, primary steps were taken towards strengthening the capital structures of private banks with their own resources and limiting market risks. Twenty-five private banks were subjected to a three-phase audit process. Cash capital increases, correction of provisions set aside for non-performing loans, positive changes engendered in market risk and valuation of securities were taken into account during these evaluations. Any of the banks’ resulting capital requirements were to be provided either by their shareholders and/or by the allocation of subordinated loans given by the SDIF upon BRSA decisions. Following recapitalization and supported by the improvement in profitability, the private banks’ average capital adequacy ratio was recorded at 28.2 per cent as of December 2004. Concurrently with the financial and operational restructuring of the banking sector, significant progress has been made in legal and institutional regulations. Within this context, regulations were issued to prevent risk concentration in loans, limit participation of banks in non-bank financial

GMB Publishing

Turkey

institutions and ensure preparation and disclosure of the banks’ balance sheets in compliance with international accounting standards. Among many other structural reforms, banking reform was intended to upgrade and modernize the current rules and, more generally, covered the following banking related areas: capital adequacy, foreign exchange exposure, internal control and risk management, deposit guarantee schemes, accounting standards for financial disclosure purposes, prudential reporting and loan loss provisions. Inflation declined further while growth accelerated. The 9.9 per cent economic growth rate in 2004 was considerably above both the programme target and Turkey’s longterm average growth rate. Per capita income increased above US$4,000 for the first time in Turkey. Inflation in consumer prices decreased to single digits after three decades. Fiscal discipline in the public sector was strictly maintained. The ratios of both the public sector deficit and outstanding public debt to GDP declined. Real interest rates decreased considerably, while the maturity of public sector borrowing was extended. Sustained economic performance also had a positive effect on the financial sector, leading to further improvement in banking sector performance. Confidence in the financial sector and banking system and international credit worthiness of Turkish banks increased. Financial institutions operated in a healthier environment as a result of money market stability, growth in economical activity, recovery in the competitive conditions of operating banks due to a suspension of activities on the part of financially weaker banks, and the efforts of banks to strengthen their financial structure and shareholders’ equity. The growth in demand for Turkish Lira denominated financial

GMB Publishing

instruments continued. Some of the basic risks were brought down to more manageable levels due to the fall in inflation and interest rates, as well as the improvement in foreign currency positions. Demand for both corporate and consumer loans rose notably due to the fact that the pressure from the public sector on financial markets decreased. As a result of better expectations, demand for loans from both corporations and ordinary customers continued. Interest margins decreased substantially due to ongoing intensive competition in the banking system. As a result of the restructuring programme, the banking sector entered a consolidation process. The significance of state-owned and SDIF banks in the system has declined. Financial risks in the banking sector have been reduced to manageable levels. The sector’s capital structure has been strengthened. The sector has reentered a growth period. The profitability performance of private banks has improved and state-owned banks have started to generate profit. One of the most important developments in 2004 concerning the banking system was the removal of full insurance on saving deposits; the insurance coverage on saving deposits was limited to YTL50,000. Some positive steps were taken for the reduction of burdens, which were increasing the costs of the banks’ intermediary activities. Stamp tax and duties on loans and transactions yielding foreign exchange income were removed. The banking system made serious efforts to develop risk management, reduce its operational costs, and increase the quality of financial services within the framework of prudential regulations and banking principles.

31

Turkey

The banking sector today Since 2002, banks have been operating in a considerably less risky environment. The decline in inflation (7.6 per cent at the time of writing) and strong demand for YTL stimulated the competition and restructuring of the balance sheets. Changes in regulations, which meet international criteria (notably EU directives), strengthened supervision, improved consumer confidence, and intensified the interest of foreign investors. Also, with the announced Basel II road map and improving risk management, the banking system is stronger, with a positive outlook. However the financial sector remains small compared to international standards and has a low degree of penetration. The number of banks in Turkey was 47 as of September 2005 (see Table 2.2.1). Of these, 34 are commercial banks, while the remaining 13 are non-deposit taking investment and development banks. Of the commercial banks, 17 are private, three are state-owned, one is owned by the SDIF (fund) and 13 are foreign banks (ABN Amro, Arap Turk Bank, Banca di Roma, Citibank, Deutsche Bank, HSBC, Fortis Bank, Habib Bank, Bank Mellat, JP Morgan Chase, Société Générale, Bank Europa and West LB). As of September 2005, the total number of branches was 6,164 with a total of 131,012 employees. The total number of credit cards also increased by nine per cent to 29.1 million and POS machines increased 20 per cent to 1.1 million. The banking system’s total assets grew 38 per cent year on year to US$270 billion as of September 2005 (US$229 billion at 2004 year-end). The share of banks’ assets in GDP increased to 78 per cent in September 2005 (71 per cent at 2004 year-end).

32

The three state-owned banks (Ziraat Bank, Halk Bank and Vakifbank) together control one third of the banking system’s assets (31 per cent). They had a slightly reduced 38 per cent share in total deposits from 39 per cent, while their share in total loans increased from 19 per cent to 20 per cent. Private banks, on the other hand, made up a slightly higher 59 per cent of total banking assets. Their share in total deposits reached 57 per cent, while the share in total loans decreased slightly by one per cent to 67 per cent. Significant concentration in the banking system remains, where the five largest banks (two state banks: Ziraat, Vakif and three private banks: Isbank, Akbank, Garanti Bank) make up 62 per cent of the system’s assets, 65 per cent of total deposits and 55 per cent of total loans. On the other hand, the 10 largest banks make up 85 per cent of total banking assets, 89 per cent of total deposits and 78 per cent of total loans. The banks’ balance sheet structures continue to change in favour of increased loan books and decreasing government securities portfolios. The share of securities portfolios on banks’ balance sheets followed a decreasing trend, whereby total securities fell by one per cent to 39 per cent as at September 2005. Liquid assets were flat at 14 per cent, while loan books increased from 33 per cent at the end of 2004 to 37 per cent, mainly driven by the increase in housing and car loans, credit card and other consumer loans largely in local currency (YTL). Consumer loans comprised a higher 23 per cent of total bank loans (up from 16 per cent at end-2004). Loan to assets ratios were higher for private banks (43 per cent), state banks (24 per cent) and foreign banks (50 per cent).

GMB Publishing

Turkey

Table 2.2.1 Ranking of banks in Turkey in terms of assets (as at 30 September 2005) Banks

Total assets US$ million

Number of branches

Number of personnel

1

Turkiye Cumhuriyeti Ziraat Bankasi A.S.

44,530

1,146

20,499

2

Turkiye Is Bankasi A.S.

41,314

869

16,910

3

Akbank T.A.S.

36,160

654

11,119

4

Turkiye Garanti Bankasi A.S.

24,033

418

10,352

5

Turkiye Vakiflar Bankasi T.A.O.

21,249

302

7,151

6

Turkiye Halk Bankasi A.S.

19,376

592

10,671

7

Yapi ve Kredi Bankasi A.S.

17,151

405

10,303

8

Kocbank A.S.

10,452

172

3,653

9

Finans Bank A.S.

8,064

194

6,181

10 Denizbank A.S.

6,401

219

4,842

11 Oyak Bank A.S.

5,741

306

4,428

12 HSBC Bank A.S.

5,487

159

3,918

13 Turk Dis Ticaret Bankasi A.S. (Fortis)

4,942

175

3,967

14 Turk Ekonomi Bankasi A.S.

3,364

101

2,456

15 Turk Eximbank

2,828

2

358

16 Iller Bankasi

2,609

1

2,596

17 Sekerbank T.A.S.

2,368

201

3,448

18 Turkiye Sinai Kalkinma Bankasi A.S.

2,245

2

290

19 Citibank A.S.

1,775

24

1,532

20 Anadolubank A.S.

1,561

63

1,191

21 Bayindirbank A.S.

1,407

1

402

22 Tekstil Bankasi A.S.

1,157

40

1,075

23 Alternatif Bank A.S.

1,017

25

596

24 Deutsche Bank A.S.

568

1

43

25 Turkiye Kalkinma Bankasi A.S.

486

1

712

26 ABN AMRO Bank N.V.

479

1

125

27 WestLB AG

467

1

50

28 Tekfenbank A.S.

442

30

555

29 BankEuropa Bankasi A.S.

415

12

246

30 JPMorgan Chase Bank N.A.

361

1

36

31 Calyon Bank Turk A.S.

358

1

39

32 MNG Bank A.S.

325

10

268

33 IMKB Takas ve Saklama Bankasi A.S.

298

1

222

GMB Publishing

33

Turkey

34 Turkish Bank A.S.

273

13

190

35 Société Générale (SA)

252

1

54

36 Arap Turk Bankasi A.S.

249

3

182

37 Bank Mellat

145

3

50

38 C Kredi ve Kalkinma Bankasi A.S.

143

3

48

39 Nurol Yatirim Bankasi A.S.

75

3

42

40 GSD Yatirim Bankasi A.S.

55

1

28

41 Calik Yatirim Bankasi A.S.

49

1

30

42 Diler Yatirim Bankasi A.S.

44

1

19

43 Banca di Roma S.P.A.

42

1

29

44 Adabank A.S.

34

1

70

45 Habib Bank Limited

22

1

16

46 Taib Yatirim Bank A.S.

5

1

9

47 Tat Yatirim Bankasi A.S.

3

1

11

270,820

6,164

131,012

Total

As at September 2005, total banking deposits increased 22 per cent, where YTL deposits grew 38 per cent compared to three per cent growth in FX deposits. The share of YTL deposits (US$104.5 billion) in total deposits increased to 39 per cent, whereas the share of FX deposits (US$67.6 billion) decreased by five per cent to 25 per cent of total deposits. Balance sheet maturity remained largely short-term. Fifty-five per cent of total assets and 81 per cent of total liabilities had maturities of less than one year. Despite gradual improvement, deposits still have short-term maturity. The average maturity of deposits was three months. Shareholders’ equity grew 19 per cent, reaching US$35.3 billion, an increase of 19 per cent year on year. Total shareholders’ equity to total assets ratio was slightly reduced to 13 per cent as at September 2005. The share of FX-denominated items in the balance sheet is still high, albeit shrinking recently. FX assets stood at 34 per cent of total assets (down from

34

39 per cent at the end of 2004), whilst FX-denominated liabilities decreased to 37 per cent as at September 2005 (down from 42 per cent at the end of 2004). Thirty-one per cent of FXdenominated assets are in Euros and 67 per cent in US dollars, while 32 per cent of FX-denominated liabilities are in Euros and 65 per cent in US dollars. The short Euro FX position in the banks and long FX positions in US dollars have significantly narrowed, while the total FX open position has become smaller, ie down from US$5.2 billion at the end of 2004 to US$9.4 billion at September 2005. The banking sector’s net income as at September 2005 was US$3.13 billion with a 1.1 per cent return on assets and 8.6 per cent return on equity. Table 2.2.2 shows the comparison of Turkish banks with international ones.

GMB Publishing

Turkey

Table 2.2.2 Comparisons with international banks World average

EU

Emerging markets

Turkey

Banks assets as per cent of GDP*

112

173

78

72

Capital markets

230

233

84

86

86

74

47

29

144

159

37

57

state

56

60

23

57

private

88

99

15

0

342

406

162

158

Shares Bills and bonds

Total * as at 2003

Banking system outlook The following developments are foreseen to take place in the Turkish banking system, provided that a stable macroeconomic environment in Turkey is sustained:  larger and deeper financial markets;  lengthening in the maturities of funding/deposits;  greater lending to the private sector;  sufficient earnings to feed capital;  decline in margins with widening business activity;  positive atmosphere for foreign investors;  intense competition;  improvements in transparency and accounting rules for better financial systems;  better risk management.

Regulations Banks are subject to the Banking Act in their international activities and to the Capital Markets Act in capital markets activities.

GMB Publishing

As a result of recent regulations and reporting requirements, auditing and transparency has improved. Prudential regulations on related party loans, the FX position and equity participation, and provisioning have tightened. The supervision also incorporated market risk.

Regulatory bodies of the banking system Central Bank of the Republic of Turkey (CBT) The CBT was opened officially on 1 January 1932. The Bank’s basic aim is to support the country’s economic development, regulate money markets, take measures necessary to protect the value of the Turkish currency, maintain price stability and oversee the interbank and FX money markets and make use of open market operations. The CBT became independent in 2001.

Undersecretariat of the Treasury The Treasury’s main functions include the coordination of economic

35

Turkey

policies with the government and other related institutions, performing public finance, monitoring the activities of State Economic Enterprises and being a financial creditor in lending their allowances through their annual investment and expenditure programmes, enforcing regulations on the borrowing/lending policies of the country, employing procedures for grants and for other capital flows, enforcing regulations and monitoring the banking, insurance and financial sectors and enforcing regulations on investment incentives for domestic and foreign capital.

Capital Markets Board of Turkey (CMB) The Capital Markets Board of Turkey (CMB) is the independent regulatory and supervisory authority in charge of the securities markets in Turkey. Empowered by the Capital Markets Law (CML), which was enacted in 1981, the CMB has been adopting detailed regulations to oversee and develop capital markets, instruments and institutions, for the past 19 years in Turkey.

Banking Regulation and Supervisory Board (BRSA) Established with the amendment introduced to the Banks Act by Law No. 4491 dated December 1999, the BRSA is an independent public legal entity with administrative and financial autonomy. Its main function is to ensure the application of the Banking Act and other relevant acts, protect depositors, and ensure that banks and financial institutions can operate with market discipline, in a healthy, efficient and globally competitive manner – thus, contributing to the country’s

36

achievement of long-term economic growth and stability.

Savings Deposit and Insurance Fund (SDIF) The SDIF was established in 1983 to insure savings deposits in banks. Initially, it was administrated by the Central Bank of Turkey. In 1994, the SDIF’s duties were expanded and it was charged with strengthening and restructuring the financial conditions of banks when necessary (providing a formal mechanism for resolving failed banks).

The new banking law The law’s scope has been enlarged to cover financial holding companies, the Banks Association of Turkey, BRSA, SDIF and their activities. Highlights of the new law are as follows:  Regulatory capital for the establishment of a bank is currently YTL30 million for credit institutions (about US$15 million) and YTL20 million for development and investment banks.  There are no discretionary regulations for foreign banks operating in Turkey.  In parallel to international principles, the provisions relating to corporate governance principles are set out.  On-site supervision and audit activities are integrated.  A risk-based approach is applied in bank supervision.  All activities including IT systems are subject to an auditing process.  Loan definition is broadened (suretyships, guarantees, receivables incurred from reserve

GMB Publishing

Turkey

re-purchasing transactions, financial leasing receivables).

Foreign interest in the Turkish banking sector The number of foreign banks increased during the 1980s, reaching 23 in 1990, thanks to the liberalization policies implemented by the government to attract capital. However, despite their number, their weight in the banking sector remained very limited until 2005. Factors like economic uncertainties, chronic inflation, high public sector borrowing requirements and high interest rates, delays in required reforms and fierce competition from local banks prevented foreign banks from aggressively growing their presence in Turkey. During the 1990s, foreign banks predominantly chose to operate with single or select branches, serving mainly large corporate clients and multinationals, and providing selective project financing, apart from the profitable business of financing the growing public deficit. The share of foreign banks in total sector assets remained at around the three to four per cent levels throughout the years between 1980 and 2004. However, in the past few years, there has been a revival in interest by

foreign banks to enter the Turkish market, thanks to a sustained environment of political and economic stability, together with the possibility of EU accession. In 2001, one of the failed mid-sized banks, Demirbank, was acquired from the SDIF by HSBC. Another foreign acquisition from the SDIF was the small-sized Sitebank by BCP in 2002. In 2003, UniCredito acquired 50 per cent of Koc Financial Services, the owner of Kocbank. Also, supported by increasing profitability and ample liquidity, as well as narrowing margins in their home markets, foreign banks directed their attention to Turkey in 2005. Within the scope of this new wave of foreign banks, the transactions shown in Table 2.2.3 took place in 2005. This interest can be attributed to the following facts:  Turkey’s increasingly young population and demographic structure;  macroeconomic stability;  GDP growth expectations;  the EU accession process; foreign trade  increasing volumes;  a better regulated and strengthened banking system;  low household debt levels;  increasing investments levels and the need for financing;

Table 2.2.3 Transactions in the banking sector in 2005 Target

Acquiring bank

Garanti Bank

GE

25.5

Yapi Kredi

Koc-UniCredito

28.7

Disbank

Fortis

93.2

TEB

BNP

42.5

C Bank

Hapoalim

57.5

GMB Publishing

Share acquired (%)

37

Turkey

 growing foreign direct investment in all sectors;  new banking products (particularly mortgage loans and credit cards);  availability of a skilled workforce and a technologically advanced infrastructure.

The new mortgage law A new mortgage law is expected to be adopted in the near future and should to make housing finance cheaper and more widely available. The draft law, which was prepared by the Capital Markets Board of Turkey (CMB), was submitted to Parliament in late November 2005. Banks are preparing themselves for the new law, and accordingly reduced interest rates for housing loans in a bid to seize as large a piece of the home buyers’ market as possible. As of December 2005, monthly interest rates for home loans stood at between 0.99 per cent and 1.25 per cent, compared with an average of 2.5 per cent in 2004 (although they have recently shot up to two per cent per month due to a recent devaluation). While currently Turkey is experiencing a real estate boom, the effects of the new mortgage law could take some time to materialize. Moreover, a healthy and stable Turkish economy, continued customer confidence and confidence in the new legislation, further reductions in interest rates and bringing in foreign capital will be crucial for the development of a viable mortgage financing system.

Conclusion The Turkish banking sector has been through a successful restructuring and consolidation phase. The hidden

38

drawbacks of problem loans, holdings of fixed assets and non-financial subsidiaries and lack of capital have been uncovered and remedied. The risks were contained, together with the establishment of measurement and control mechanisms, and stricter regulations. During this process, a number of banks merged, acquired or had to be taken over by the SDIF. However, the difficult times are over; and at this stage it can be said with a fair degree of confidence that the Turkish banking sector is quite healthy and well capitalized. In addition, the sector stands to benefit the most from a growing economy, with a huge increase in consumer demand and investment appetite. The volume of consumer loans and the number of credit cards have been expanding rapidly, together with an increase in corporate and commercial loans, particularly from the yet untapped small- and medium-sized enterprises (SME) segment. Another phenomenon that is expected to shape the competition going forward, is the surge in housing loans, the volume of which rose from virtually zero to US$8–9 billion in less than one year, thanks to decreasing interest rates, and is expected to reach 8–10 per cent of GDP, in line with comparable countries. There are also other product segments yet untapped by the markets. They include, among others, futures and derivative products, which are still under-utilized despite the recently established exchange; and a corporate bond market, which does not exist at present. Apart from these, the penetration of Turkish banking is still low, with total assets reaching only 78 per cent of GDP; and a branch penetration of only 8.5 branches per 100,000 people, as compared to 50 branches in EU-15 countries.

GMB Publishing

Turkey

These opportunities in economic growth, new products and banking penetration, together with the vision of EU-accession, has attracted significant interest from foreign banks that want to secure a position in this promising market. Several acquisitions and strategic partnerships have taken place, and others are expected to be in the pipeline. In addition, privatization of state banks as well as greenfield investments by existing or new foreign players may also come to the agenda. The Turkish banking sector needs to maintain a healthy and steady growth and fulfil its intermediation role, in order to fuel the sustainable growth Turkey needs to achieve. Like other emerging countries, Turkey needs foreign capital to support this growth. Nevertheless, despite an increasing presence of foreign banks, Turkey has a long history of banking, with years of accumulated expertise, local knowhow and innovation. The sector has an advanced technical infrastructure and highly-skilled human resources. Therefore, as opposed to some fears that the local banking sector will be

GMB Publishing

dominated by foreigners, like in some Eastern European or Latin American countries, there is market consensus that the foreign share of assets under control is unlikely to exceed 30–35 per cent. However, foreign banks will certainly contribute to wider access to long-term financing, increase in competition and faster adaptation to global banking standards.

Sources BRSA Annual Report 2004. Banking in Turkey, Basin Yayin Enformasyon Genel Mudurlugu. The Turkish Banking Sector Challenges and Outlook in Transition to EU Membership, Alfred Steinherr, Ali Tukel and Murat Ucer. Turkish Economy and Turkish Banking System in 2004, Banks Association of Turkey. Financial Sector and Banking System in Turkey, March 2005, Banks Association of Turkey. The Effects of Financial Liberalization and New Bank Entry on Market Structure and Competition in Turkey, Cevdet Denizer, September 1997.

39

Turkey

2.3 Within and beyond Turkey: Eurasian perspectives for international private equity investors Serkan Elden and Emre Erginler, 3 Seas Capital Partners

Corporate Turkey’s painful development road Turkey, with approximately 40 per cent of it population below the age of 19, 40 per cent between the ages 19 and 44 and 20 per cent above the age of 44, represents the demographic characteristics of a very dynamic entrepreneurial culture. An OECD study suggests that smalland medium-sized enterprises (SMEs) constitute approximately 99.5 per cent of total establishments (estimated to be more than 400,000), 61.8 per cent of the employment force and 27.3 per cent of the total value-added in the manufacturing sector in Turkey. As an indication of the scale of operation of SMEs, the Annual 1000-List of the Istanbul Chamber of Industry gives us a good guide: in 2004, the 1000th corporation had sales of US$17.8 million. The great majority of Turkish SMEs, staying below this level of revenues, are family businesses that are still being managed by family members. Large-scale companies and holding companies, on the other hand, play an important role in the economy, holding a majority of the investments in a variety of sectors in the country. There is a growing trend in

GMB Publishing

management hand-over, from family members to mostly Western-educated and experienced professionals in Turkish family-owned conglomerates, while the family members remain at the board level and are mostly involved in the strategic level of the management of such holding companies. Turkish corporations traditionally preferred diversification to focusing and specialization in offering services and products for a variety of reasons, the main one being the volatile economic circumstances, which required them to create hedged business portfolios to sustain an overall stake in economic activity at all times. Especially after the 2001 crises, which severely affected corporate Turkey, rationalization and focusing gradually became a more popular approach. In particular, professional managers who assumed high-level positions in key corporations, started encouraging the more traditional owners towards newage thinking and better corporate governance. These corporations tend to adapt themselves to changing business environments very quickly, compared to their Western peers seeking a slice of the Turkish business pie. With the recent dynamism such professionals added to these corporations, the empowered Turkish

41

Turkey

conglomerates are able to identify and tap business opportunities quickly. The Turkish economy has mainly shifted to a service economy base over the last two decades, primarily driven by the development of the financial sector in the country. As of 2004, 65 per cent of GNP was generated by the service sector, followed by the industrial and agricultural sectors. The Turkish financial sector is dominated by the banks. As at June 2005, there were 48 banks in the country with total assets and total lending of US$250 billion and US$93 billion respectively. Along with the banks, there are five special finance institutions, with total assets and total lending of US$6 billion and US$4 billion respectively, as at 2004. There are 97 factoring companies, with total assets and total factoring receivables of US$3.5 billion and US$2.9 billion respectively, as at June 2005. Turkish corporations fulfil their financing needs mostly through banks. However, the terms of bank financing became worse for Turkish corporations especially for the SMEs, due to the scarcity of available financing sources in the country, high inflation rates (until recently), as well as the role of the government as the main borrower in the whole banking system. For a long period until very recently, the banks required significant collateral for the credits they extended and high interest rates, as well as the right to demand repayment of the loans any time they required. The default interest rates reached ridiculous levels as high as 100 per cent at some points. Thus, many corporations suffered from the weak structure of the banking system and were, for all practical purposes, bankrupt, when Turkey experienced the economic downturns of the 2000 and 2001 crises. The bankruptcy of these corporations triggered the bankruptcy of many banks, resulting in significant

42

non-performing loans in the system in the post 2001-crisis period. Turkish company owners have gone through an education process in equity-based transactions since the first initial public offerings (IPOs), after the establishment of the Istanbul Stock Exchange (the ISE), in 1986. Currently, 364 corporations are actively traded on the ISE. Equity-based financing became more attractive to corporate owners, once they saw successful IPOs placed in the system. Certainly, the attractiveness of the IPO comes from the fact that the owners retain the majority control of their companies, while raising necessary capital for their financing needs at very attractive valuations. Throughout the history of the IPOs, the investment advisers and the underwriters of the IPOs, to a large extent, contributed to the higher valuation expectations of the Turkish owners by implementing overpriced IPOs during the early years of the capital markets development in the country. The second step in the education process for corporate owners began with the increasing interest in direct investments in the country by foreign strategic investors, mainly since the early 1990s. The owners recognized the importance of strategic partners that contribute to the further growth of their companies, both by transfer of know-how as well as by opening up additional export channels for their companies. Generally, successful strategic partnerships have further encouraged more corporate owners to look for strategic foreign partners in their businesses.

GMB Publishing

Turkey

Is private equity good for Turkish owners – and viceversa? Turkish corporate owners reached the 2000s with little exposure to what financial partnership meant. Starting from the mid-1990s, the market began to talk about ‘risk capital’ with the issuance of the Venture Capital Decree by the Capital Markets Board in 1993. For a long time, the market did not distinguish between the concept of ‘risk capital’ vis-à-vis ‘listed equity capital’. The education process for private equity or risk capital was also distracted by bad news in the very few private equity deals struck in the early days of the market. There is a general perception in the market that private equity firms, although remaining as the minority owners, required such rights that would govern the company as a majority. In addition, there is an established belief that private equity firms gave much lower valuations compared to what the owners would get from an IPO or a strategic sale. On top of this, the poor quality and arrogance of fund managers in the private equity firms, who did not respect cultural dynamics, destroyed the development of the private equity market, discouraging the owners from even considering private equity as an alternative tool for financing. Such owners, rightly or wrongly, became irritated at giving up corporate governance rights to such fund managers, who created mistrust in a partnership – a failuredriver of a private equity case from the beginning. Driven by this, the market did not see a full cycle of private equity ownership and the added value of the private equity investors in the companies; hence, acknowledgement of private equity’s contribution to a

GMB Publishing

company’s value and hence a company owner’s net worth was yet to be seen. For a variety of reasons Turkey’s track record of attracting private equity investments is very poor. In the last 10 years, total private equity investment in Turkish companies did not exceed US$250 million. This is especially disturbing when countries like Bulgaria and Hungary, the economies of which are significantly smaller than that of Turkey, attracted €216 million and €122 million, respectively, in private equity investments in 2004. Despite this background, Turkey’s private equity/risk capital experience and history does not reflect the country’s real potential for such investments. Here, we would like to provide an evaluation of the Turkish market from a wider Eurasian perspective, given the fact that Turkey’s service sector and management talent are not only assets for the country’s economy, but also an asset base for private equity investors to tap the significant regional opportunities around Turkey. Our experience in evaluating, making, managing and exiting investments for and with international private equity and risk capital investors suggests that the following key fundamentals are important pillars of decision-making, once the potential deal passes the investor’s initial investment criteria tests successfully:      

quality of partners; growth story; entry valuation; management quality; good corporate governance; exit opportunities.

We would like to evaluate the Turkish private equity and risk capital opportunity in this context.

43

Turkey

Quality in partnerships Private equity investors seek quality in partnerships. Turkey has a deep history of a private sector. The pace of progress in the quality of the country’s average corporation is significant. Turkish companies, from the conglomerates to the middle and small company level, are improving their quality in terms of executive knowhow, professionalism, technology, human resources, corporate ethics and, most importantly, ownership quality. The good examples of Turkish companies benefiting from offering a ‘quality partnership’ to financial investors and establishing value for their companies both in their listed securities and in their private placements, are educating the market. Anadolu Group and their flagship companies under the Efes Beverage Group, with their approach to offering ‘quality partnership’ in their ventures with financial investors, have created a landmark example for Turkish companies. Since the mid-1990s, Efes Beverage Group companies have raised a significant amount of capital from private equity and portfolio investors and developed businesses both in Turkey and Eurasia, and created repeating partnerships with such investors in several placements because of their quality approach to partnership.

Entry valuation Private equity seeks reasonable entry valuation, which has traditionally been one of the major barriers to the increase of private equity activity in Turkey. Traditionally, the expectations of Turkish owners and management of the value of their businesses have been quite irrational. In a majority of the cases we have seen in terms of discussions between private equity investors and company owners, the

44

company owners had difficulty in understanding or accepting why the private equity investor would need to earn returns of twice their capital invested over a three to five-year period or why such investors could not provide valuations at Western trading multiples when buying into their firms. Family business owners have had a ‘sentimental ownership attachment premium’ they added to the valuation expectations, which was also driven partly by the cost of keeping a business alive in a volatile market over the years. Coupled with the misguidance of incompetent investment advisers, who did not assist in educating the owners for years, the market suffered for a long time from irrational valuation expectations of owners. As the owners get educated, as they face more competitive dynamics and as the quality of independent investment advice increases, they are forced to accept market-driven valuation dynamics, hence, valuation expectations become more realistic. We believe the 2001 crisis and the post-crisis period have significantly rationalized the majority of owners in their approach to valuing their businesses.

Growth story Private equity seeks a high growth story. Capturing the appropriate growth story has been a traditional problem with Turkish businesses. Lack of growth prospects were either driven by lack of necessary capital, bad management of opportunities, expensive financing in volatile market conditions or simply by lack of vision of the owners. In addition to the domestic growth prospects, some Turkish companies have successfully identified growth opportunities outside of Turkey, in markets where the Turkish entrepreneurial approach and cultural proximities helped them to

GMB Publishing

Turkey

capture interesting growth perspectives for their companies. Our earlier example of Efes Beverage Group (EBG) is a very good one for this approach. Starting from the mid1990s, the EBG began investing significantly in the high growth markets of Eurasia, such as the Russian Federation, Kazakhstan and Azerbaijan. In only a 10-year period, the EBG not only captured significant diversification of its revenues from various countries in the region, but also resolved the classical growth problem of a Turkish company by attaining sustainable high growth of their revenues and profitability, which in turn increased valuations for its companies much faster than its peers.

Good management Private equity values good management. The family-driven management structures of many Turkish companies have long been a stumbling block to the attractiveness of Turkish companies for private equity investors. Over the last 20 years, several factors have improved the quality of management in the country. The US or European educated Turkish professionals returned to the system, some with experience and some with Western perspectives on business management. Several Turkish companies provided international experience opportunities for their management in the fast developing difficult markets of Eurasia. The entry of several multinational companies into the market with management development programmes started feeding the market with trained executives. Hence, professional managers started penetrating the top levels of family-owned businesses. The challenging issue yet to be dealt with is establishing the necessary performance measurement hierarchies from the shareholder down to

GMB Publishing

the management levels to separate the ‘shareholder hat’ from the ‘management hat’ and to enable the boards of the companies to make necessary changes in management if need be, even if the manager to be eliminated is one of the shareholders. Turkish owners are gradually warming to the idea of leaving management, with the trade-offs that the financial investors would/should bring in know-how and outside expertise to further the development of their businesses.

Good corporate governance Private equity demands good corporate governance. Most family-managed Turkish businesses have traditionally avoided establishing properly operating boards for their businesses. These businesses have long ignored proper tax management and basic business budgeting and planning, which would add value to their long-term corporate management processes. Many of the companies preferred to create an untraceable chain of relationships between companies owned by the family or their related parties. Management titles remained on business cards with no practical distribution of powers and responsibilities among the managers. All of this created unacceptable corporate governance practices for private equity investors. The development of capital markets introduced the notion of good corporate governance practices to Turkish companies. The slow and antiquated Turkish legal system and its challenge of adapting itself to the fast growing needs of Turkish companies is still a stumbling block in the development of good corporate governance in the Turkish market. The expectation is that, if the Turkish legal system reacted to corporate governance crimes in a faster and more substantial way, Turkish owners would then not try to take advantage of the ‘grey’ areas of

45

Turkey

the Turkish legal system to substantially abuse the interests of minority investors. Nevertheless, the new Turkish Commercial Code, expected to come into force in 2006, and the regulatory/ legal reforms made in the context of the EU integration process, may pave the way to resolving some of the fundamental problems in dealing with the corporate governance related issues of Turkish companies.

Exit route Private equity also needs an exit route. For many years, Turkish owners wanted to treat financial investors as ‘life-time’ partners. It is only recently that the owners started to consider the reality of giving the financial investors an exit route. Our experience in bringing the Turkish owners to a thinking pattern which allows the financial investors to negotiate a ‘Drag Along Right’ in a sale or a ‘Put Option’ or an ‘IPO Initiation Right’ in their Term Sheets, is mixed. Some owners literally kill the private equity deals because they resist giving exit rights, with the blind-thinking that the financial investors need to take the risk of staying in as partners as much as they themselves do. In the last couple of years, we have also started seeing an increasing number of owners who tend to appreciate the exit need of financial investors. While Turkish owners still tend to be afraid of Put Options, the IPO Initiation Right seems to be a more secure route, which they tend to accept as a last resort in their negotiations if they were to give an exit right to the investors. The Drag Along Right for majority sale is still a very difficult concept for most Turkish owners to digest, as it implies loss of control over their businesses. In the cases we have seen, the owners tend to put clear conditions to the triggering of such Drag Along

46

Rights. We believe that the market will need more ‘successful cases’ and less twisted horror stories on ‘exercised put options under default’ so that owners would feel more comfortable when getting into these agreements about creating an exit route for investors. The good news at the end of the day is twofold:  The Istanbul Stock Exchange is a functioning real platform for exits; and  Turkey is now a more attractive place for foreign direct investment, ie it is attracting more strategic investors who can buy out financial investors’ positions along with the owners’ stakes, hence creating an attractive exit for both. The more Turkish owners see that financial investors have real valueadded in their sale to a strategic investor, the more they will be convinced that ‘a Drag Along Right’ is not necessarily a bad thing for them.

What is there for private equity investors in and beyond Turkey? An outsider would certainly come to the conclusion that there is a serious systematic problem in Turkey from a private equity investor’s viewpoint, when the GDP percentage of private equity investments in Turkish companies is almost zero, while it reaches 1.11 per cent in neighbouring Bulgaria, for example. We have already analysed the weaknesses of Turkish companies from a private equity perspective. We have also pointed out that the trends are indicative towards more appropriate conditions for private equity

GMB Publishing

Turkey

investments in the coming years. While most Turkish companies seek private equity capital for expansion needs, we are also seeing more rationalization and restructuring especially in holding companies, which is bound to create more spin-offs or asset sales. Management buy-outs and ins (MBOs/MBIs) are still distant music to the ears, but as the Turkish banking system improves and foreign banks’ penetration into the system strengthens the capitalization levels of the banks, leverage availability for MBOs/ MBIs will surface more and more. Non-performing loan sales or restructuring of the loan stock of the banks are currently creating the most attractive private equity opportunities in the country. There is also more in Turkey than Turkish investment opportunities for international private equity investors, that is, the ‘Eurasian Growth Opportunity’. Turkey, with its developed service sector and its talented financial analysts and management capabilities, offers an interesting opportunity to private equity investors to tap the high growth markets of Central Asia and the Caspian region, using Turkeybased investment and management talent. Turkey also offers good exit opportunities for private equity investments in Central Asia and the Caspian region, with its international offshore stock exchange specifically designed for such companies’ listings

under the Istanbul Stock Exchange – a resource not properly utilized to date. Private equity investors could capture a very unique combination of the high-growth markets of Central Asia and the Caspian region with the sophisticated and educated management talent of Turkey and Turkish corporations, hence creating more attractive private equity situations with proper exit mechanisms in the much developed Turkish capital markets compared to those of the Caspian region. Table 2.3.1 compares growth forecasts between Turkey and a number of leading Eurasian economies. Some of the most successful companies in Russia, Central Asia and the Caspian region are international expansions of Turkish companies. CocaCola has explored the steppes of Central Asia with Efes’ management capabilities, while the 5,000 year-old Georgian wine culture is bottled in Turkish Sisecam’s glass bottles. Russians had their first taste of supermarket shopping in Koc’s Ramstores. The people in Azerbaijan and Kazakhstan first explored the value of sending SMSs and using the mobile internet with the services of Turkishmanaged GSM companies of TeliaSonera and Turkcell. Kazakhstan’s fast developing airline benefits from experienced Turkish commercial aviation talent. Unilever distributes its products throughout the difficult territory of Kazakhstan, with a Turkishled Kazakhstan-based logistics and distribution company.

Table 2.3.1 EIU real GDP growth estimates (%) 2004

2005e

2006f

2007f

Azerbaijan

10.2

20.0

25.0

12.0

Kazakhstan

9.4

9.3

8.9

7.6

Turkey

8.9

4.8

3.7

5.5

Russia

7.2

6.2

5.6

4.8

Source: Economic Intelligence Unit

GMB Publishing

47

Turkey

We have participated in the initiation and management of AIG’s Silk Road Fund, making and managing private equity investments and bringing them to successful exits for several years. Baku-Tbilisi-Ceyhan Pipeline and the new oil and gas corridor are opening new and large-scale dimensions for private equity investors in the east–west corridor of Eurasia. All of this together offers a unique opportunity for international private equity investors: tapping Eurasian growth with Turkish management and investment talent and Turkish insight for successful private equity investments.

48

Several institutional investors, such as Soros, AIG and Capital International, have explored this route and experienced the benefits of this opportunity in their private equity experience to date. We believe that the growth potential of Eurasia and Turkey’s track record in tapping this opportunity with its management and investment talent, provides ample justification for private equity investors to consider Turkey, within and beyond, as a primary destination for their investments. Private equity could find its way into the ‘New Silk Road’ initiative through Turkey.

GMB Publishing

Turkey

2.4 Real estate and property development in Turkey Sibel Pensoy, Real Estate Development Consultant

Introduction Real estate is one of the most dynamic and promising sectors in Turkey. The economic and political stability, economic growth, social reforms, the decline in inflation and interest rates, the start of discussions with the EU all made 2004 a break-through year, which awakened the real estate industry from its deep recession. Istanbul, Turkey’s economic, trade, industry, culture, history, art and tourism capital, is the locomotive of the real estate industry in Turkey. Istanbul has the largest population growth rate, urbanization rate and migration rate in Turkey and provides 35 per cent of the country’s GDP. The city’s population has risen from 5.7 million in 1985 to 10 million in 2000. The current population is estimated at 13–14 million. Istanbul has been designated as the ‘Prime Real Estate Investment Destination’ in a survey by the Urban Land Institute and PricewaterhouseCoopers. Istanbul commands the highest prices in residential and commercial real estate in Turkey.

Residential real estate According to research by McKinsey Global Institute, there was a need for

GMB Publishing

490,000 new residences per annum in Turkey in 2005. This number is estimated to be 600,000 in 2010 and 800,000 in 2015. Taking into account that Istanbul has 15 per cent of Turkey’s population, we can confidently state that there was need for 75,000 new residences in Istanbul in 2005. This number is derived from population growth only and excludes up-grade and investment demand. The demand for new housing is expected to be 120,000 in 2015. Fifty-five per cent of the total housing stock in Turkey is comprised of illegal dwellings. The rate of residential ownership, including legal and illegal residential units, is around 60 per cent. Sixty per cent of existing residential stock is over 20 years old and 40 per cent of residences need repair and reconstruction to prevent earthquake damage. Until the 1990s, residential demand in Istanbul and other major cities was mainly geared towards urban residential areas. This demand led to the overcrowding of available urban land and caused a significant increase in urban residential prices. As a result, demand partly shifted to suburban projects during the 1990s, and the 1999 Marmara earthquake magnified this shift. In the last five years, real estate investment trusts and major developers began developing more affordable

49

Turkey

BLACK SEA

Maslak Etiler Zipcirlikuyu-Şişli Taksim-Besiktuş

Kavacik

Levent Altunizade

Airport Kozvataği

MARMARA SEA

Figure 2.4.1 The business districts in Istanbul

multi-family housing, emphasizing shared community life and social and recreational amenities. Residential property prices have experienced an unprecedented increase of 50 per cent in Istanbul since the second half of 2004. Prices in suburban developments vary from US$800/m2 to US$1,800/m2. New condominium projects in the city are offered for sale at prices ranging between US$1,500/ m2 and US$3,500/m2, while high-rise residences sell for US$3,000/m2 to US$4,500/m2. Gated communities with views and prestigious inner city concepts can reach sale prices of up to US$7,000/m2. The high level of demand for residential real estate, coupled with a shortage of ‘quality’ supply is expected to drive residential real estate prices in Istanbul to the levels of major metropolitan cities around the world. The customary agency fee in residential real estate transactions is three per cent, although can be negotiated

50

down to one per cent as the purchase value increases.

Office market The Turkish office market started to show signs of recovery after 2004. Istanbul, where major domestic and multinational companies have their headquarters, is the locomotive of the office market in Turkey. The A class office market in Istanbul is spread across nine business districts, with three located on the Asian side, and six on the European side (see Figure 2.4.1). The Central Business Districts (CBDs) on the European side are: Etiler, Levent, Taksim, Maslak, Gayrettepe-Şişli-Zincirlikuyu and the Airport. The CBDs on the Asian side are: Kavacik, Altunizade and Kozyataği. The CBDs have mainly moved from the South of the city to the northern parts of Istanbul.

GMB Publishing

Turkey

US$/m2/month

20 16

16

16

12

15 11

11

9

12 10

10 8

8

8

8

9

8

8

7

6

6

4 0 Levent

Etiler

Taksim

Maslak

G.Tepe-Şişli Airport Zincirlikuyu

Altunizade

Kavac k Kozyatag

A Class

Source: Colliers Resco

B Class

Figure 2.4.2 Average regional rents in 2004

100 80 66

60

60 %

51

43

40 21

20

26

7

17

12

0 Levent

Etiler

Source: Colliers Resco

Taksim

19

58 45 45

39

23 16

19

Maslak G.Tepe-Şişli Airport Zincirlikuyu

15 Altunizade

Kavac k Kozyatag

A Class

B Class

Figure 2.4.3 Average regional vacancy rates in 2004

Rents, stock, new supply and vacancy rates greatly vary among these CBDs. Etiler and Levent on the European side typically command the highest rents and the lowest vacancy rates for A class offices (see Figures 2.4.2 and 2.4.3). The total stock of speculatively developed A class office buildings in Istanbul is approximately 1,300,000m2, with 70 per cent of the stock located on the European side. The total stock of A and B class offices is approximately 1,700,000m2. Prime rent averages in Istanbul’s inner city prestigious CBDs such as Levent stood at US$18/m2/month for A class offices and at US$11/m2/

GMB Publishing

month for B class offices in 2005 (see Figure 2.4.4). Rents on the European side tend to exceed rents in the CBDs on the Asian side by 30–40 per cent. Yields are stable at 10 per cent for A class offices and range from eight to 10 per cent for B class offices (see Figure 2.4.5). The vacancy rate on the European side for A class office space averages 16.4 per cent, while this stands at 26.2 per cent for B class offices. Vacancy rates on the Asian side for A and B class offices are 23.7 per cent and 28 per cent respectively. Typical office leases are for between three and five years, with an option to renew for a one year or longer period. An annual indexation based on the

51

Turkey

Rents in €/sq m/month at year end 30 25 20 15 10 5 0 1997

1998

1999

2000

2001

2002

2003

2004

Istanbul Source: DTZ Research

Figure 2.4.4 Prime office rents, 1997 to 2004

% at year end 14 12 10 8 6 4 2 0 1997

1998

1999

2000

2001

2002

2003

2004

Istanbul Source: DTZ Research

Figure 2.4.5 Prime office yields, 1997 to 2004

cost of living index is used for Turkish Lira leases. Monthly management fees range around eight to12 per cent of the rent. Agency fees for office leases are between 10 and12 per cent of the annual rent, and payable by the tenant. A value added tax rate of 18 per cent applies to rent if the landlord is a corporation. If the landlord is a real per-

52

son, a withholding tax of 22 per cent is in effect in addition to the rent. A large number of A class office projects are underway in Istanbul and there is a strong demand from major domestic and multinational companies. While most A class offices were delivered on a shell-and-core basis prior to 2001, the competition for new office projects has led more and more

GMB Publishing

Turkey

Figure 2.4.6 The distribution of shopping centres in Turkey Source: Alkas Consultancy

new office space to be delivered with raised floors and suspended ceilings. We expect rents to remain stable in the short term.

Retail market The retail market is the fastest growing segment in the real estate industry, with an annual volume of US$50 billion. With 70 per cent of Turkey’s 74 million population under the age 35 with a steadily rising purchasing power, the retail sector has the highest growth potential in the Turkish real estate industry. The first shopping centre opened in Istanbul in 1988. With the fast development of shopping centres in the city in the 1990s, high street retail began to lose its appeal. Efforts by the municipalities, as well as a new set of regulations, revived high street retail in the 2000s. According to data gathered by Alkas Consulting, there are currently 99 active shopping centres in Turkey, of which 33 are located in Istanbul and 66 elseswhere in Turkey. Of the 33

GMB Publishing

shopping centers in Istanbul, 26 are located on the European side and seven on the Asian side. The shopping centres in Anatolia are concentrated in Ankara (12), Izmir (10), Antalya (7), Bursa (4), Izmit (4), Adana (3) and Konya (3). The total gross leasable area (GLA) of shopping centres in Turkey in 2005 was 1,900,000m2, of which 42 per cent is in Istanbul (see Figure 2.4.7) and 58 per cent in major cities in Anatolia. Forty-nine new shopping centres are under construction (28 in Istanbul and 21 in Anatolia), while 78 more (37 in Istanbul and 41 in Anatolia) are in the process of planning and project development. With the completion of the projects planned and under construction, the Turkish retail sector will comprise 226 shopping centres, of which 43 per cent will be located in Istanbul. Shopping centres enjoy a very high demand from family-oriented middle and upper class consumer groups. The majority of shopping centres in Turkey are hypermarket driven or regional. Migros-Tansa and CarrefourSA groups have 38 per cent of the total market share.

53

Turkey

800.000 700.000 600.000 500.000 400.000 300.000 200.000

2005

2004

2003

2002

2001

2000

1999

1998

1997

1995 1996

1994

1993

1992

1991

1990

0

1998 1989

100.000

*By end of March, 2005

Source: Kuzey Bati Worldwide Real Estate Figure 2.4.7 Distribution of cumulative gross leasable area (GLA) of shopping centres in Istanbul, 1988–2005 (m2)

The retail industry has seen significant investments from major European retail chains and developers since 2004. Tesco entered the market in 2004 with the acquisition of Kipa. CarrefourSA acquired the Gima and Endi supermarket chains. MDC (AMAmstelland MDC) formed a joint venture with Turkmall to invest €1.2 billion in the retail industry over the next five years. Corio Group acquired 46.9 per cent of Akmerkez – one of the most profitable shopping centres in Istanbul – for a net initial yield of 9.8 per cent. The German retail group, ECE in joint venture with General Growth Properties of the US, has been very active in Turkey and owns and/or manages seven shopping centres. IKEA opened its first store in 2005 and will open its second store in Izmir in 2006. Debenhams and Harvey Nichols will enter the market in 2006. We expect to observe an ever increasing level of investment from international, especially European, retail chains and developers in the retail market, due to the expectation of Turkey’s EU membership and its

54

demographic characteristics. While the population of Europe grew by 33 per cent in the 1950–2000 period, Turkey’s population grew by 218 per cent. Europe expects a population decline of 10.3 per cent between 2000 and 2050, while Turkey’s population growth for the same period is estimated at 43 per cent. Yet, Turkey lags far behind European countries in shopping centre stock per inhabitant (see Figure 2.4.8). Despite the ever increasing number of shopping centres in major cities, high street retail remains popular. High street retail units typically occupy the ground floors of residential and office buildings, and are mostly located on streets with high pedestrian traffic and social attractions. The most popular high street retail locations in Istanbul are Nişantai and İstiklal Street on the European side and Bağdat Street on the Asian side. Average rents in Istanbul shopping centres vary between US$50/m2/ month to US$80/m2/month for small and medium-size units and between

GMB Publishing

Turkey

400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 Netherlands

Spain

France

Italy

Poland

stock m2 per 1,000 inh

Czech Republic

Hungary

Greece

Turkey

pipeline m2 per 1,000 inh

Figure 2.4.8 Retail market shopping centre stock and in the pipeline

Rents in €/sq m/month at year end 80

60

40

20

0 1997

1998

1999

2000

2001

2002

2003

2004

Istanbul Source: DTZ Research

Figure 2.4.9 Prime retail rents, 1997 to 2004

US$80/m2/month to US$100/m2/month for food court units. Average high street retail rents are between US$60/m2/month to US$160/m2/month in the popular İstiklal Street and Nişantaşi. Figure 2.4.9 shows prime retail rates between 1997 and 2004.

GMB Publishing

Occupancy rates in shopping centres are at 95–100 per cent. We expect the retail sector to be the fastest growing segment of the real estate industry in the medium term. Organized retailers have a 38 per cent market share in the retail market, while the market share of

55

Turkey

traditional retailers is 62 per cent. Over the next five years, we expect organized retailers to reach a market share of 55 per cent in the retail market.

Purchase of real estate by foreign entities Turkish coastal real estate is facing an ever increasing level of interest from European nationals. According to the Land Registry Office, 43,255 foreign individuals and entities now own real estate in Turkey. A total of 10.9 million square metres of land has been acquired by foreign entities in the 2003 to 2005 period. The new legislation, which defines the conditions for the sale of real estate in Turkey to foreigners, was enacted in December 2005. The new legislation outlines the restrictions that will apply to the purchase of real estate by foreign individuals and legal entities in Turkey. Foreigners can only buy real estate for residential and office use within the boundaries of the municipalities, in areas where the zoning development plan has been completed. Real estate in the Military Restriction and Safety Zones can not be sold, transferred or rented to foreign entities. The new legislation requires the Ministry of Defence to determine a list of such zones within a three month period. The Council of Ministers will then finalize the list of restricted zones to safeguard national and strategic interests and to preserve cultural heritage. All real estate purchases by foreign entities are subject to the Reciprocity Agreements with their respective countries. Buyers should make sure that their country has signed a Reciprocity Agreement with Turkey.

56

The new legislation restricts the size of real estate to be acquired by foreign entities to a maximum of 25,000m2; this limit can be extended up to 300,000m2 by the special permission of the Council of Ministers, provided that the size of the real estate to be acquired by foreign entities does not exceed 0.5 per cent of the total area of the city.

Mortgage financing The radical decline in inflation and interest rates has led to a tremendous demand for housing credits extended by banks since 2004. Despite the fact that the housing credits doubled in size in the first six months of 2005 to US$1.8 billion, the total housing credit stock is only one per cent of GNP, whereas this ratio is, on the average, 53 per cent in the United States and 40 per cent in the EU. The Capital Markets Board is in the process of finalizing the legislation to establish primary and secondary mortgage markets in Turkey. Turkish Lira-based housing credits have recently been available for one per cent fixed interest per month for up to 30 years. The legislation will allow financial institutions to issue variable rate mortgages over extended maturities. The creation of a mortgage market is expected to boost tremendously the demand for residential real estate. We expect the legislation for mortgage financing to be effective in the last quarter of 2006.

Property taxes Property taxes are paid annually in two installments on the purchase value declared at the Land Registry Office. Property values are subject to

GMB Publishing

Turkey

a yearly revaluation determined by the government. Annual tax rates are: 0.3 per cent for land, 0.2 per cent for buildings and 0.1 per cent for residences and undeveloped land (fields). Tax rates are double in the metropolitan areas within cities. All property transactions are subject to a 1.5 per cent property transfer tax, payable by each the buyer and the seller. Sale of real estate owned by legal entities is also subject to VAT. The VAT rate applicable to residential properties under 150m2 is one per cent, while the VAT for residences larger than 150m2 is 18 per cent. Capital gains obtained from the sale of real estate is subject to income tax.

Concluding remarks

emerging countries for real estate investments. With Turkey’s continued economic and political stability, as well as positive developments on the international arena, we expect real estate markets to remain popular for domestic and international investors in the coming years. Factors such as the continued growth in population, their increasing purchasing power, and the mortgage system will continue to trigger a high level of demand for residential and retail developments in Turkey. Istanbul has been and will continue to be the locomotive of the real estate industry in Turkey. We expect residential and retail markets in other Turkish cities to greatly benefit from the fast pace of the real estate development industry in the coming years.

To conclude, Turkey seems to be one of the best destinations among the

GMB Publishing

57

Turkey

2.5 Marketing communications, the media landscape and the Turkish consumer Lawrence Du Pré, Medina Turgul DDB, Istanbul and Ece Sirin, Bee Consulting

Introduction The story of marketing communications in Turkey is both old and quite recent. In contrast to neighbouring European Eastern bloc states, Turkey has long enjoyed a vibrant commercial culture and well-developed commercial media. The state may have played a central and often dominant role in both society and the economy for the six decades after the Republic’s founding in 1923, but the private sector was its ally rather than foe. The emergence of privately-owned local conglomerates was encouraged, and the holding companies that had grown to substantial dimensions by the 1960s and 1970s, remain today as the powerhouses of a much more diverse economy. Although the domestic economy was insular and heavily protected until the 1980s, it was never closed to foreign investment or foreign ownership. Multinational companies, such as Nestlé, have roots in Turkey that go back to Ottoman times, while Philips and others date from the early days of the Republic. Unilever was a little later into the market, but developed an enormous and successful opera-

GMB Publishing

tion in the decades after the Second World War. In short, the marketplace has always been cosmopolitan, with a significant multinational presence, local joint ventures with foreign companies and, incidentally, a healthy over-representation of Turkey’s ethnic and religious minorities in the country’s commercial life. The communications and service infrastructures that one would expect of a market economy were also present. The oldest advertising agencies can trace their roots back prior to the Second World War. However, while the foundations of the consumer economy and related industries may date from far earlier, the significance of the liberalization and opening-up of the economy after 1980 should not be underestimated. The private sector was set increasingly free of state regulation and the result was the emergence of a much more dynamic, faster-growing, industrialized, consumer-orientated economy, more open to and more connected by trade to the outer world and, in particular, to Europe and the United States. The modernization of marketing communications and the media itself dates from that decade. Today, Turkey offers highly-developed and

59

Turkey

competitive advertising and mass media marketplaces, which share the same characteristics and quality standards as those seen anywhere in Western Europe, a fact reflected by the presence of most of the leading international players in fields as diverse as sales tracking, consumer research and media buying.

Advertising market size and media profile The total net advertising market in Turkey is estimated at a value of US$1.6 billion for 2005 and has grown by more than 20 per cent since 2004. These figures represent the larger measured media. If we were to consider all forms of advertising investment, the figure is estimated at nearer US$2.2 billion. The whole advertising market has seen substantial growth since the dramatic economic crisis year of 2001, which saw a 7.5 per cent drop in GDP and most consumer goods markets falling by 20 per cent. In that year, the advertising market fell 45 per cent, leaving the total market size at little more than US$550 million. Turkey’s economic recovery has been rapid and sustained since that date and, as is usual in such circumstances, advertising revenues have grown ahead of the underlying GDP growth. With 8.2 per cent growth in 2004, and a further five per cent GDP growth expected for 2005, we have seen an advertising market growth rate of more than 15 per cent per year, a rate that we can expect to see sustained for the foreseeable future. While these growth rates look dramatic, it should be considered that Turkey remains an under-advertised market in relation to many other developed and developing economies. At little more than US$18 per head

60

per annum (compared to US$490 in the United States), as the Turkish consumers’ real income rises we can expect marketers to significantly raise their investment to reach a more affluent consumer. The ‘gap’ is substantial enough for it to be apparent simply by comparing economies. Turkey ranks as the 22nd economy worldwide, but 62nd in terms of advertising spend per capita. Looking at it another way, the Turkish advertising market accounts for 0.43 per cent of GDP. In most Western markets, the advertising sector accounts for between one and 1.5 per cent of total economic activity. In short, there is still room for tremendous growth in consumer communication. From where will it come? We can expect it to come from existing advertisers, but even more so from new entrants to the market and sectors that are experiencing fast growth, new investment and/or higher levels of competition. Foreign direct investment can be expected to further spur spending in sectors such as banking, financial services, telephony and consumer durables. There is also a whole class of local small and medium-sized companies who have achieved the scale to promote themselves nationally, or who plan to move from being sub-contracted manufacturers to builders of their own brands. In many sectors where the market leaders have been the only consistent advertisers, we can expect to see competitors needing to make their brands more visible to retain their market share. Figure 2.5.1 shows the growth in advertising spend between 1993 and 2005.

Turkish media profile Turning to the media itself, we see that television drives and dominates the market, accounting for 55 per cent

GMB Publishing

Turkey

Index % 1,800

100

64

97

128

148

144

140

161

84

109

134

1,600 1,400 1,200 1,000 800 600 400 200 0

658

419

635

844

973

945

924

1,058

551

715

879

1,308 1,692

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: Advertising Association/OMD estimates

2005

medina / turgul DDB

Figure 2.5.1 Net advertising spend, 1993 to 2005 (US$ millions)

of the total net value, followed by the press, radio and outdoor media (see Figure 2.5.2). The internet is growing very fast, but remains a marginal medium, accounting for less than one per cent of total advertising spend. This is due partly to poor telephone infrastructure and low penetration of PCs in the home. However, this situation is changing fast, with more than one million people being connected to broadband within the last 18 months. The pattern of advertisers’ investment is in marked contrast to the basic ability of each media to reach an audience (see Figure 2.5.3). Naturally enough, advertisers clearly attribute very different values to each media depending on its ability to involve and engage its audience. Nevertheless, the media owners’ ability to consolidate and market themselves to advertisers has been a factor in the relatively low share of media such as outdoor and radio. We see that as advertisers’ budgets have grown beyond the previous peak of 2000, TV has managed to capture a

GMB Publishing

larger share of that spend compared to other media, growing from a share of 43 per cent in 2000 to 55 in the 2005 half-year figures. This reflects not only the near-universal penetration of TV sets, at 98.6 per cent, but also the national addiction to the ‘magic box’, with the average viewer watching for 4.9 hours daily. Other comparative data puts TV viewership relatively lower, but still high in the international ranking (see Figure 2.5.4). Ownership of Turkish media is driven by large domestic holding companies with diversified (non-media) interests. The effects of this will be discussed in more detail later. Turkish media has very little foreign ownership. In this highly competitive sector, the leading Turkish media owners were able to develop strong positions before foreign investors started showing much interest. In addition, legal restrictions currently limit foreign ownership of media to a maximum of 25 per cent, making joint ventures a necessity that not all international media companies would welcome. Issues

61

Turkey

2004

2005 Half Year

€000

Share (%)

€000

Share (%)

TV

598

52.3

339.1

55.4

Print

426

37.2

220.9

36.1

Media

Newspaper Magazine

384

33.5

200.3

32.7

42

3.7

20.7

3.4

Outdoor

59

5.2

24.4

4.0

Radio

47

4.1

20.0

3.3

14

1.2

8.1

1.3

1.144

100

612.5

100

Cinema Total

Source Advertising Association: 2005 full year figures not released at time of printing

medina / turgul DDB

Figure 2.5.2 Estimated net advertising spending by main media, 2004 and 2005 (January to June)

TV

87.1

Radio

62.8

Outdoor

46

Newspaper

32.5

Cinema

18.9

Internet

14.6

Magazines-monthly

6.29

Magazines-weekly

1.91 0

10

20

30

40

50

60

70

80

90

100

medina / turgul DDB

Figure 2.5.3 Estimated reach by medium in 2005

of transparency and business ethics amongst some of the holding companies have understandably led foreign media investors to tread with caution to date. Nonetheless, there are examples of very successful local franchises of some foreign, mostly US, TV chan-

62

nels (CNN Turk, CNBCe) and numerous examples of licensed foreign magazine titles. The media ownership regulations are under review, but due to the ease with which foreign media ownership can be used as a nationalistic political tool, we are unlikely to

GMB Publishing

Turkey

Turkey ranks no. 4 across Europe in terms of television viewership. 300

4th 250

Minutes/day

200

150

100

Sweden

Norway

Austria

Denmark

Belgium

Switzerland

Holland

Ireland

Portugal

France

Germany

Russia

Spain

England

Czech

Greece

Turkey

Italy

Romania

0

Hungary

50

Source: WARC

medina / turgul DDB

Figure 2.5.4 Turkey’s and rest of Europe’s TV viewing

see change in the short term. An example of this is that although there were many interested parties in the sale of one of the leading national channels, Star TV, no serious bidders remained in the final round. The lack of large foreign interests does not mean that the advertiser has limited choice. On the contrary, since the first (illegal) private television and radio channels emerged in the mid-1980s, the pace of change has not slowed. There are 25 national terrestrial TV channels and a plethora of newly-emerging local and regional channels. Cable and satellite are also well established. Despite relatively low penetration, the multi-channel Digiturk satellite platform has a growing importance for advertisers wishing to reach more up-market homes with more selective viewing habits.

GMB Publishing

Radio represents a similar picture with 36 national channels, 82 regional and an estimated 557 local stations. Outdoor media represents an equally fragmented picture, with billboards, building sides, roofs, roadside sites and scaffolding creating visual signage clutter in the most sought-after locations. Fortunately, high quality illuminated bus stops and larger boards represent an opportunity for the advertiser wishing to buy a regional or national campaign from a single source. Cinema retains a position little changed in recent years, with a modest, seasonal audience reaching 150,000 to 200,000 consumers per week. Due to the investment in new complexes in smart city-centre malls, cinema retains its appeal for advertisers wishing to reach affluent and younger audiences.

63

Turkey

Print readership is low compared to other European countries. 90

13th

80 70 60 50 40 30 20

Source: WARC

Romania

Greece

Russia

Hungary

England

Turkey

Portugal

Spain

Italy

France

Belgium

Ireland

Holland

Austria

Switzerland

Germany

Norway

0

Sweden

10

medina / turgul DDB

Figure 2.5.5 Turkey’s print media readership compared with other European countries

While the market might be TV-led, with Turkish housewives viewing in the region of six hours of TV daily, the importance of printed media should not be underestimated. There are over 1,000 regional and local newspapers but six titles dominate the newspaper market and are considered the primary media for many advertisers in sectors such as automotive, finance, tourism and real estate. Newspapers are particularly effective at reaching men over the age of 25. Total net sales of nationally distributed newspapers are just above four million copies daily. Leading individual titles enjoy a readership touching on seven million. Even with readership estimated at three per title sold, this still amounts to a very limited press sector compared with Western markets (see Figure 2.5.5). The reasons for this are both historical and cultural, with a ‘social’ media like TV enjoying a natural advantage.

64

Educational standards have also played a role in limiting the appeal of the printed word to certain segments of society. This fact is even more evident in the magazine market. The leading weekly general interest and current affairs title enjoys little more than a 50,000 circulation, while leading women’s titles enjoy circulations in the region of 20,000 to 30,000. For mass circulation, the magazine supplements of newspapers are unrivalled. For reaching consumers with special interests and for up-market consumers, magazines offer advertisers a range of very well-produced, diverse and high-quality titles, and amongst the 1,000 plus titles, 70 leading titles prosper. The pattern of media ownership has added to the particularity of the Turkish media scene. Holding companies acquired mass media often as much for reasons of prestige and political influence as for commercial

GMB Publishing

Turkey

reasons. This has made the market more competitive and cluttered than the advertising revenue it generates would ever have justified. Today, four holding companies dominate the leading TV channels and printed media. Dogan media group enjoys a leading position, with its holdings across newspapers, radio, magazines and with two of the most viewed TV channels – one recently purchased from the state (sequestered from the bankrupt and politically ambitious Uzan family holding). Other leading players are the diversified industrial holding, the Cukurova Group, the equally diversified Doğus Group, and the Merkez Media Group. Of course, the ownership of the media has affected the approach to content and the dynamics of the whole marketplace. The leading terrestrial TV channels are almost indistinguishable in content and have singularly failed to distinguish their brands or style of programming. The market is a copycat one, in which successful programme formats are instantly imitated and celebrities move freely from one channel to another. The channel hopping consumer faces a TV environment with a similarly restless approach. After a long period in which a high percentage of the leading programming was imported, the last 10 years has seen the creation of very successful local programming tailored to local tastes, often of high production quality and in uniquely Turkish formats. The melodramatic traditional Turkish film has seen its modern day re-birth in the form of two-hour weekly soap operas, while leading Turkish singers have a media prominence as entertainers and talk show hosts, which would be the envy of the likes of both Oprah Winfrey or Madonna. The celebrity culture, whether derived from music or sport, is firmly established and is locally self-

GMB Publishing

sufficient. Figure 2.5.6 illustrates the most popular types of programmes.

Regulation In keeping with the cosmopolitan, secular and often contradictory nature of the country, there are relatively few restrictions on the content of programming and advertising. While less permissive than some European markets, there is no form of censorship equivalent to that in the Arab world, and plenty of US and European programming and advertising are directly adapted for Turkish audiences. Channels with more self-consciously conservative and Islamic values have been founded, but without enjoying national viewership popularity. For instance, the TGRT channel only enjoyed more viewership success once it followed the more liberal and mainstream presentation and programming approach of other channels. The government has generally taken a (perhaps excessively) laissezfaire attitude to advertising restrictions. Regulation has been improving in the last few years, resulting in a strictly applied code of practice aimed at protecting viewers and covering competitive claims, sectors that cannot be advertised on TV, product placement in programming, sponsorships etc. As part of the regulation initiative (RTUK), the previously unregulated and excessive volume of advertising minutes was restricted, improving the previously ad-cluttered viewership experience. The total advertising airtime has decreased by 32 per cent since the new regulations were introduced.

65

Turkey

TV games, football matches and Turkish serials are the top three types of programme in the top 100. Avg AMR (%)

# Programmes

16

45

14

40

12

35 30

10

25

8

20

6

15

4

Source: AGB Target : Total Individuals

Turkish Movies

Magazines

News

Foreign Movie

Sport programmes

Music/enter.

Turkish Serials

Sports Matches

Turkish Movies

Magazines

News

Foreign Movies

Sport programmes

Music/enter.

Turkish Serials

Sports Matches

0

TV Games

5

0

TV Games

10

2

medina / turgul DDB

Figure 2.5.6 Most popular TV programming, 2005

Leading advertisers The leading advertisers are in the food, cosmetics, beverages, finance and household cleaning sectors. Figure 2.5.7 shows advertising spend by sector. All sectors contain a mixture of strong domestic and internationally recognized brands. This healthy balance is consistent in sectors as diverse as finance, fast-moving consumer goods (FMCG) and retailing. Unilever is the leading advertiser and five out of the top 10 advertisers are multinational companies that would be familiar to US or Western European consumers. Turkish giants who have been experiencing very rapid growth in recent years include the Ulker group and the Koc holding company’s Arcelik brand (based on white goods), as well

66

as Vestel (consumer electronics). As a result of economic stability, lower inflation and interest rates, we would expect to see finance, the construction business, other durable goods and the restructuring retail sector gaining further prominence as advertisers. Figure 2.5.8 shows the leading advertisers. After years of relatively low foreign direct investment, the healthy economy and the prospect of EU entry have fuelled higher levels of foreign interest, but for a new advertiser, what are the costs of entry and what is the quality of support services they can expect? Turning first to costs, we see the benefits for the advertiser of a highly competitive media market. The cost of reaching the target audience through the Turkish media remains very low. Costs are cheaper than most developing countries, including Central and Eastern Europe, equating to

GMB Publishing

Turkey

2001

2003

2002

2004

2005

SECTOR

EXP.

NO

EXP.

NO

EXP.

NO

EXP.

NO

EXP.

NO

Food Cosmetics/Personal Care Drinks Finance Household Cleaning Household Durables Textile/Leather/Trousseau Press Automotive Comminications Furniture Construction/Real Estate Petroleum Prods Entertainment Informations Technology Retailing Heating & Cooling Systems Electronics Companies/Corporate Tourism

$561 $734 $343 $593 $471 $189 $262 $811 $339 $517 $148 $157 $85 $161 $105 $45 $44 $161 $266 $80

(4) (2) (7) (3) (6) (11) (10) (1) (8) (5) (15) (14) (17) (13) (16) (21) (22) (12) (9) (18)

$641 $1,040 $438 $683 $536 $247 $329 $941 $301 $763 $183 $300 $102 $182 $94 $34 $45 $78 $264 $88

(5) (1) (7) (4) (6) (12) (8) (2) (9) (3) (13) (10) (15) (14) (16) (23) (21) (19) (11) (17)

$1,084 $1,273 $604 $860 $485 $402 $581 $1,038 $529 $671 $248 $407 $128 $200 $135 $62 $83 $121 $378 $119

(2) (1) (6) (4) (9) (11) (7) (3) (8) (5) (13) (10) (16) (14) (15) (24) (21) (17) (12) (18)

$3,018 $2,583 $1,498 $1,339 $1,106 $1,166 $909 $1,306 $1,153 $1,188 $457 $488 $240 $279 $267 $177 $142 $183 $394 $173

(1) (2) (3) (4) (9) (7) (10) (5) (8) (6) (12) (11) (16) (14) (15) (18) (20) (17) (13) (19)

$11,632 $6,847 $5,155 $4,226 $4,202 $3,483 $3,356 $3,275 $3,137 $2,345 $2,038 $1,400 $1,086 $818 $758 $645 $510 $504 $450 $349

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20)

Source: OMD and Bilesim figures

medina / turgul DDB

Figure 2.5.7 Top 20 sectors’ annual spend, 2001–2005 (rate card prices)

approximately 10 per cent of Western European equivalents. This is especially true of television, which also offers the advertiser near universal household penetration. Turkish consumers watch an enormous amount of television. The previous overavailability of TV advertising minutes allowed advertisers to negotiate massive discounts off rate card prices. With the new restrictions on the supply of advertising airtime, combined with strong demand, we are seeing prices rising fast, from a very low base. The net effect is that the cost of advertising on television has risen by almost 100 per cent on average over the last 18 months. This trend is expected to continue and will raise the profitability of TV channels, while simultaneously advertisers may look harder for nonTV alternatives. Figure 2.5.9 shows media inflation.

GMB Publishing

Marketing service support When it comes to investing in the marketplace, what form of professional support can an advertiser rely on? As touched on previously, the market is sophisticated and well developed, with strong advertising and media agencies and the full range of marketing support services available in the marketplace, whether it be research agencies, promotional marketing, PR or graphics/packaging needs. English is widely spoken in the leading companies in all these industries. Turning first to media, circulation figures are independently monitored for print, while TV viewership is tracked by AGB using a 2,000 household people monitor, allowing highly accurate research data. Specialist independent media agencies offer a quality of technical expertise, planning and creativity in response to

67

Turkey

Advertiser (million USD)

2004

Change

2005

No

Exp.

Share %

No

Exp

Share %

%

$ 976

5%

1

3,443$

6%

253%

1

Unilever

1

2

Ülker

2

$919

5%

2

3,321$

6%

261%

3

P&G

3

$ 852

5%

3

2,432$

4%

185%

4

Benckiser A.S.

6

$ 441

2%

4

1,771$

3%

301%

5

Coca Cola

4

$ 570

3%

5

1,744$

3%

206%

6

Danone

11

$298

2%

6

1,402$

2%

371%

7

Arçelik A.S.

5

$ 460

2%

7

1,244$

2%

170%

8

Nestle

16

$ 196

1%

8

1,153$

2%

489%

9

Frito-Lay

13

$ 225

1%

9

1,047$

2%

366%

10

Eti

8

$ 367

2%

10

1,005$

2%

174%

11

Vestel

10

$ 306

2%

11

1,000$

2%

227%

12

İstikbal Mobilya

17

$ 194

1%

12

953$

2%

392%

13

Akbank

20

$ 160

1%

13

845$

1%

428%

14

Boytas Mobilya

23

$ 136

1%

14

744$

1%

449%

15

PBG

33

$ 103

1%

15

687$

1%

569%

15 advertiser total

$ 6,203

33%

40%

267%

General total

$18,625

$22,791 $57,654

210%

medina / turgul DDB

Figure 2.5.8 Top 15 advertisers, 2004–2005 (rate card prices)

marketing briefs that is the equivalent of any in Western markets, a fact which has also been recognized with awards at the leading festivals such as Cannes. The leading media agency is the Omnicom Group’s OMD, but other international networks such as WPP and Interpublic enjoy strong local positions. Turning to the creation of communication campaigns, Turkish agencies have enjoyed a creative renaissance since the crisis year of 2001. Historically, the quality of production and level of creativity had been well below the best international standards. However, as Turkish agencies became more international in outlook and have been better able to demonstrate the premium in campaign performance that better creativity can create,

68

the result has been more communication of premium quality. This increase in quality has been largely fuelled by the larger agencies and a couple of high profile local ‘hotshop’ creative agencies established over the last few years. This improved standard has also been recognized by the first creative awards won by Turkish agencies in major international competitions such as Cannes. The ranking of creative agencies in terms of billings or revenue is no longer available, but the main worldwide players in the industry enjoy similar positions in the Turkish market, with the Omnicom, WPP, Interpublic and Publicis agencies dominating the upper rankings. Ownership amongst these agencies is a mixed picture, but in many of the agencies substantial

GMB Publishing

Turkey

% inflation 40 30 20 10 0

tv

-10 newspaper -20 magazine

-30

radio

-40 -50 2000

2001

2002

Source: Bilesim Data, OMD Capitalise modelling

2003

2004

2005

2006

medina / turgul DDB

Figure 2.5.9 Media inflation: measurable media

ownership remains in local hands. In general, these agencies offer a very full range of communication services to their clients and the advertising agency partnership is central to the effectiveness of leading companies’ marketing initiatives.

A snapshot of the Turkish consumer In the 1980s and 1990s, having previously been deprived of a wide choice, the Turkish consumer devoured all things foreign, whatever the price premium. Since that time, a more astute, educated and price conscious consumer has emerged. At the same time, locally produced brands have improved in terms of product quality and the sophistication of their marketing and now provide stiff competition in many sectors. Today’s landscape is one in which there are no simple pre-

GMB Publishing

scriptions for quick success, but there is also huge potential for marketers to tap into a highly dynamic, open marketplace. There is, of course, no single Turkish consumer. The consumer market is as diverse as the country is large. Income differences and cultural gaps are equally wide, and growing. Twenty per cent of the population holds 83 per cent of the measured wealth. The spending power and economic engine of the country has traditionally been the Aegean region, with Istanbul at its core. The market for most consumer goods was traditionally considered to be made up of households that amounted to a little more than a third of the population and heavily concentrated in the west. When it came to more expensive consumer goods, the concentration of real wealth was even more radically limited and regional. At the very top end of the market, there has been less change, but lower down the social and

69

Turkey

income ladder new factors are now coming into play. As the country continues to urbanize and become wealthier, whole swathes of the population are entering more actively into the consumer society. The economic power and potential of Anatolia is making itself felt, as people migrate to larger cities and as companies start to better service the unfulfilled needs of consumers in smaller towns and remoter districts. The Turkish consumer’s real income (measured in purchasing power parity) has been growing fast and with it whole segments of society are being brought into the real consumer economy for the first time. They are moving from a cash economy and inflation mentality into one in which they are offered credit, which seems affordable for the first time. Bank credits grew by 82 per cent in 2005, and with this trend we now see consumers buying their own homes, furniture, white goods, cars and so forth. This is a market in which consumers at most levels of society have aimed to ‘stretch’ their limited spending power via installment and discount programmes, which have become a standard part of the credit card market and something the consumer expects all high-value and durable goods retailers to offer. This is a consumer, whether wealthy or poor, who is used to the hard bargaining of the open marketplace and will shop with great pleasure in pursuit of a good buy. This explains the sheer volume of promotionally-based marketing and advertising across most sectors. Alongside the highly price sensitive, rational consumer with a tight family budget, there is also the consumer willing to pay an enormous percentage of their net income for status items such as imported cars, high fashion clothes, jewellery and other accessories of pure personal display; and ironically it is often the same consumer! To unravel all

70

the mysteries of the local consumer’s mindset and the trends we see ahead would take more time than an introductory article of this length, but will reward the added effort.

Concluding remarks Turkish understanding of marketing and marketing communications is developing rapidly but there is plenty of room for further development. The development of business models that integrate CRM, better customer understanding through systematic research and more strategic marketing communications would all help Turkish business to build stronger brands. In a world in which marketing gurus talk about facilitating customer dialogues, the more common local approach is the salesman’s loud monologue. At a corporate level, we also see that an individualistic business culture makes strategic business partnerships and alliances relatively rare. This is also reflected in the approach to the community. While some of the leading Turkish conglomerates have strong consumer reputations and a history of charitable giving or community involvement, in general there has been a large corporate deficit in this area. The increasing awareness of this issue and the benefits it can bring has resulted in growing interest in developing such strategies, at least amongst larger companies. In summary, there is plenty of room for more strategic thinking, innovation and a more holistic approach to marketing. However, considering the stage of development of many Turkish corporations, this is quite understandable. For most local producers, the focus has been on short-term sales and establishing efficient organizations with better distribution channels and lower costs. The tendency of

GMB Publishing

Turkey

business owners has been to see investment in areas such as strategic consultancy, marketing, IT systems and investment in HR as expensive peripherals to their core business. The challenge for many businesses that have grown rapidly from being small or family businesses, is to develop the different skills required to operate on a larger scale. The lack of marketing know-how in many large local organizations is institutionalized by the presence of family and older

GMB Publishing

shareholders, who remain active decision-makers over professional managers. This has the tendency to slow down the adoption of more modern management techniques and new technologies. The age of many boards is a factor that often creates a traditional and risk-averse culture. The more dynamic companies, whether local or foreign entrants, may consequently face tremendous opportunities and competitive advantages in the Turkish market.

71

Turkey

Part Three The Laws and Regulations for Business

GMB Publishing

73

Turkey

3.1 An overview of tax system Erdal Ekinci, Erdikler YMM Ltd The liberalization process, adopted by Turkey since 1980, has introduced a significant increase in the rates of foreign debts and inflation. During the period that followed, the worldwide economic crises have substantially increased public debt, with the impact created by the economic model that was based on debt financing. In order to eliminate the instability created by these deficits in the budget, the tax burden imposed on taxpayers was increased, particularly from the standpoint of indirect taxation, which has resulted in the unavoidable rise of the unrecorded economy. The most important current problems facing the Turkish taxation system are the unrecorded economy and the high tax rates. (The unrecorded economy is generally observed in medium and smaller sized enterprises, rather than corporate entities that have a strong capital structure). The government is extremely enthusiastic about battling against the unrecorded economy and attracting more foreign direct investments into the country. The government is extremely enthusiastic about battling against unrecorded economy and attracting more foreign direct investments into the country. Within this framework, certain significant tax reforms have been finalized recently. In line with this objective, the corporation tax rate, which was 30 per cent, has been reduced to 20 per cent effective from 1 January 2006. Other recent changes in the legislation include

GMB Publishing

the adoption of OECD rules on thin capitalization and transfer pricing, and the introduction of Controlled Foreign Corporation (CFC) regulations.

Taxes on income Corporate income tax Tax payers Full (resident) taxpayers: corporations that have their legal or business headquarters located in Turkey are considered as resident corporations. Resident corporate tax payers are taxed on their worldwide income. Limited (non-resident) taxpayers: corporations that lack both legal headquarters and business headquarters in Turkey are considered as nonresident corporations and taxed solely upon the earnings and revenues they have acquired in Turkey. In order for the business (commercial) profits derived by a non-resident corporation to be taxable in Turkey, the profit in question should be derived either through a permanent establishment (PE), or through a permanent representative in Turkey. Many types of earnings and profits other than commercial profits generated by the non-resident corporations (independent professional fees, income derived from licences, knowhow and royalties, dividend and interest income, etc) are taxed through

75

Turkey

withholding, representing the final tax liability on such income.

Tax year As a general rule, the fiscal year of companies is the calendar year. However, provided that permission is received from the Ministry of Finance, any period that covers 12 months can be accepted as a fiscal year. In order to be granted permission for the implementation of a special fiscal year, the company in question should present a justifiable reason.

Determination of taxable income During the determination of the corporation tax base of companies, the following are accepted as deductible expenses:  general expenses;  travel expenses;  property taxes, stamp duties and various local taxes;  car rental expenses;  depreciation expenses;  research and development expenses;  approved grants and donations made to foundations, associations, schools, hospitals and to organizations conducting scientific research activities;  financial expenses;  issuance expenses for shares and bonds;  founding and pre-operating expenses;  merger, termination and liquidation expenses;  tax losses for the previous five years.

are distributed in a disguised manner, are treated as non-deductible expenses. Although expenses are deducted on an accrual basis according to Turkish tax legislation, provisions for severance pay are not tax deductible. Deduction is given on the actual payment. Turkey has adopted an inflation accounting system since 2004. Taxpayers will be required to apply inflation accounting only if the cumulative Wholesale Price Index increase reaches 100 per cent during the previous 36 months, and 10 per cent during the previous 12 months. Once inflation accounting becomes obligatory, it will be compulsory until both conditions disappear together.

Exemptions The following types of gains have been excluded from corporation tax:  dividends derived from resident corporations (provided that certain conditions are fulfilled, the dividends derived from non-resident corporations are also excluded from corporation tax);  portfolio income of mutual funds and trusts, Real Estate Investment Trusts (REITs) and venture capital investment trusts and funds, pension mutual funds, housing finance and asset finance funds;  75 per cent of capital gains from the sale of shares and real estate (see the details below under ‘capital gains’);  profits from construction works in foreign countries.

Tax penalties and delay interests, legal reserves, interests calculated and paid over shareholder’s equity and disguised capital, and the profits that

76

GMB Publishing

Turkey

Capital gains Turkish tax legislation does not contain separate provisions regulating the treatment of capital gains derived by corporations. The profits derived from the discharge of fixed assets, securities or immovable assets are subject to corporation tax at regular rates, in the same manner as all other taxable profits. However, there is a tax exemption for 75 per cent of capital gains from the sale of shares and real estate, based on certain conditions. There is a twoyear holding requirement for the shares and real estate that were sold, and a requirement to keep the gains for five years in the passive accounts of the company selling the shares or assets. This exemption is not applicable to those whose main business is the trading of marketable securities and immovable property.

Corporate tax rates Corporation tax has been reduced to 20 per cent from 30 per cent starting from 2006. This rate is applicable to types of profits generated by a company. Corporations are also obliged to pay an advance corporation tax during the year over the taxable profits that they have generated during each quarterly period. The advance corporation tax that is paid during the year is offset against the final corporation tax liability calculated at the end of each year. In cases when the advance corporation tax is higher than the final corporation tax liability calculated at year-end, the portion that has been paid in excess is refunded to the taxpayer. In cases when dividends are paid to the company shareholders, a dividend withholding tax at a rate of 10 per cent is applied. However, withholding tax

GMB Publishing

is not applied on the dividends that are distributed to a resident corporation, or to a Turkish branch (permanent establishment) of a non-resident corporation.

Taxation of dividend, interest and royalty payments made to a non-resident The following apply:  Dividends: Dividend payments are subject to 10 per cent dividend withholding tax. Foreign corporate entities do not have any filing requirements for the dividends received. Withholding is the final tax on the dividends received by a foreign corporate entity from a Turkish company. Dividends paid to a Turkish branch (permanent establishment) of a non-resident corporation are not subject to dividend withholding tax. Such dividends are exempt from corporate tax at the level of the Turkish branch. However, withholding tax at 10 per cent is applicable on the remittance of such amounts to headquarters.  Interest: Through the recent amendments made in the tax legislation effective from 1 January 2006, significant changes have been introduced on the taxation principles of income from marketable securities and other capital market instruments. The new regulations will remain in effect for a period of 10 years. According to the new regime, gains derived from securities and other capital market instruments shall be subject to a withholding tax at a rate of 15 per cent by the corporations who act as intermediaries in the acquisition of the gains. The principles

77

Turkey

of taxation shall vary, depending on the type of the underlying security, or the date of issuance or acquisition. Generally, interest from deposit accounts, interest from government bonds and treasury bills issued on or after 1 January 2006 shall become subject to withholding at a rate of 15 per cent. Capital gains from shares that are traded on the ISE and other capital markets instruments are also subject to 15 per cent withholding tax. However, through an amendment that will be in effect soon, this rate will be 0 per cent for interest derived by real persons and corporations resident abroad from government bonds and treasury bills and private sector bills issued on or after 1 January 2006.  Royalties: Royalties paid by corporations in Turkey to nonresident corporations are taxed through withholding. The applicable withholding rate for these payments is 22 per cent.  Tax Havens: The payments of whatever type extended to corporations that are resident in countries known as ‘tax havens’ are subject to withholding at a rate of 30 per cent. The list of countries included within the scope of tax havens will be determined and announced by the Council of Ministers. Even if they are extended to countries that are included among the list to be announced by the Council of Ministers, the payments relating to the principal, interest paid in consideration of the loans that are derived from finance institutions abroad as well as dividend payments and payments relating to insurance and reinsurance transactions, shall

78

be excluded from the scope of the withholding application. During the determination of the withholding rates applicable on dividend distribution, interest and royalties, the provisions of any double tax treaty signed between Turkey and the country where the recipient is resident, shall remain reserved.

Tax treaties Currently, Turkey has signed OECD model double tax treaties with 61 countries. A list of the countries with which Turkey has signed an OECD model double tax treaty, is provided in Table 3.1.1.

Depreciation Taxpayers are required to depreciate their fixed assets, on the basis of each depreciable fixed asset, through the application of the depreciation rates determined and announced by the Ministry of Finance. The applicable rates of depreciation vary, depending on the type of asset and the sector of the investor. The depreciation rates that are valid for certain major depreciable assets are as follows:  for factory buildings: four per cent;  for social buildings: two per cent;  for furniture and fixtures: 20 per cent;  for computers: 25 per cent;  for software: 33 per cent;  for cars: 20 per cent;  for goodwill: 20 per cent. Irrespective of the date of their purchase, depreciation can be set aside for fixed assets on the basis of the full year in the year of acquisition. However, for cars, depreciation must be calculated on a pro-rata basis for the year of their acquisition.

GMB Publishing

Turkey

There are two methods of depreciation, namely the straight line method and double declining method. Taxpayers may freely choose the method of depreciation that they apply to their fixed assets. A taxpayer who has chosen the double declining method, can subsequently switch to the straight line method, and taxpayers who have originally chosen the straight line method may subsequently switch to the double declining method. In exceptional circumstances, provided that prior written permission is received from the Ministry of Finance, taxpayers may set aside extraordinary depreciation.

Due dates Taxpayers are obliged to file their corporation tax returns by no later than the 25th day of the fourth month that follows the closing of the fiscal year. For taxpayers who adopt the calendar year as their fiscal year, this date corresponds to 25 April. Should an outstanding payable balance remain subsequent to the crediting of the advance corporation tax, this outstanding amount can be paid to the tax office up until the last day of the month on which the corporation tax return has been filed. Meanwhile, the advance corporation tax returns should be filed by the 10th day of the second month

Table 3.1.1 Countries that have signed a double taxation treaty with Turkey Albania

Iran

Saudi Arabia

Algeria

Israel

Singapore

Austria

Italy

Slovakia

Azerbaijan

Japan

Slovenia

Bangladesh

Jordan

South Korea

Belarus

Kazakhstan

Spain

Belgium

Kuwait

Sudan

Bulgaria

Kyrgyz Republic

Sweden

China

Latvia

Syria

Croatia

Lithuania

Tajikistan

Czech Republic

Luxembourg

Thailand

Denmark

Macedonia

Tunisia

Egypt

Malaysia

Turkish Republic of Northern Cyprus

Estonia

Moldova

Turkmenistan

Finland

Mongolia

UAE

France

Netherlands

Ukraine

Germany

Norway

United Kingdom

Greece

Pakistan

United States

Hungary

Poland

Uzbekistan

India

Romania

Indonesia

Russia

GMB Publishing

79

Turkey

following the closing of the quarterly period, and the advance corporation taxes should be paid by the 17th day of the same month.

Personal income taxes Sources of income In the Turkish taxation system, income has been defined as the net total of the gains and proceeds derived by real persons within one calendar year. According to this definition, the items that constitute income are as follows:       

commercial profits; agricultural profits; wages and salaries; independent professional fees; securities income; rental income; other gains and proceeds (including capital gains).

Tax payers Full (resident) taxpayers: those who are domiciled in Turkey and/or those who stay in Turkey for more than six months (including temporary absences) during one calendar year are considered to be residents in Turkey. Resident real persons are taxed over the total income and proceeds that they have generated all over the world. Limited (non-resident) taxpayers: persons who are not resident in Turkey

are considered as non-resident (limited) taxpayers and shall be taxed solely upon the earnings and revenues they have acquired in Turkey. Foreign employees: those who stay in Turkey on a temporary assignment for a specific business purpose are considered as non-resident for tax purposes, even if their stay exceeds six months.

Tax rates A progressive tax tariff, which is adjusted for inflation purposes every year, is applied. Tax rates do not differ for salaries and other types of income. The income tax tariff applied in 2006 is provided in Table 3.1.2.

Due dates For the annual income tax return, the due date for filing the return is by 15 March of the subsequent year. Taxes are due by the end of the same month. Salaries are taxed through withholding in Turkey. Employers are obliged to file a tax return for the withholdings for each month by the 20th of the subsequent month, and should make the payment by the 26th of the same month. Salary earners are not required to file an annual tax return unless they have salaries from more than one employer and/or other sources of income.

Table 3.1.2 Income tax tariff for the year 2006 Income tax brackets (YTL)

Tax rates for salary and other income (%)

0–7,000

15

7,000–18,000

20

18,000–40,000

27

40,000 plus

35

80

GMB Publishing

Turkey

Indirect taxes Value added tax (VAT) Despite some differences, the implementation of VAT in Turkey is similar to the EU VAT system. As a rule, all deliveries of goods and services in Turkey, as well as imports of goods and services, are subject to VAT. Export of goods, international transportation, military and diplomatic deliveries, delivery or import of new machinery and equipment made within the scope of investment allowance, banking and most financial services are the main exemptions from VAT. The general rate of VAT is 18 per cent. There are reduced rates applicable to certain products and services at eight per cent and one per cent. Certain staple food products, books and medical products are subject to eight per cent VAT, while financial leasing payments, deliveries of second-hand cars, magazines, newspapers and certain staple food products are subject to one per cent VAT. VAT is reported monthly. VAT paid over purchases (input VAT) is set off against the VAT charged to customers (output VAT). When the amount of output VAT is greater than the input VAT in a month, the difference shall be paid to the tax office by the close of the 26th day of the following month. If the input VAT is greater than the output VAT, the difference is not refunded to the taxpayer, but instead is carried forward to the following months to be set off against future VAT collections. However, input VAT corresponding to the exemptions, such as export of goods and services, and to those that are subject to reduced VAT rates, can be refunded to the taxpayer, subject to certain conditions.

GMB Publishing

Special consumption tax Special consumption tax (excise tax) was introduced in Turkey on 1 August 2002. The purpose of this tax is to put an end to the inconsistent applications relating to the 16 different taxes and charges levied on consumers, and to establish a single consumption tax structure in Turkey. The subject matter of consumption tax consists of certain specific products – various petroleum products, cars, helicopters, aircraft, alcoholic beverages, carbonated beverages, tobacco products, cosmetic products and durable consumer goods are among these goods. The rate varies depending on the nature of the product in question.

Banking and insurance transaction tax (BITT) The commission and the interest income derived by banks and the premiums derived by insurance firms are subject to a banking and insurance transactions tax (BITT) at a rate of five per cent. BITT is applied at a rate of one per cent on interbank transactions, and at 0.1 per cent at FX buying and selling transactions. Transactions that are subject to BITT are exempt from VAT.

Stamp duty Stamp duty is applied on legal documents that are drawn up in a written form, in a manner that will constitute written evidence. Contracts, notes payable, letters of guarantee are among the best known types of documents that are subject to stamp duty. Stamp duty can be either a lump sum or proportional. Every year, a lump sum fixed total is determined for the tax returns and balance sheets and

81

Turkey

P&L statements. Contracts become subject to stamp duty on a proportional basis if they contain a specific amount of money. Although the proportional rate depends on the nature and type of the written instrument, the general rate in application is 0.75 per cent. However, a ceiling amount is being determined every year, and the amount of stamp duty that is determined for a specific document subject to stamp duty, cannot exceed this limit. The stamp duty accrued within one period should be declared and paid through a monthly stamp duty declaration.

Wealth taxes Motor vehicle tax Motor vehicle tax is a tax that is required to be paid by the owners of motor vehicles annually. The amount

82

of tax varies depending on the type, characteristics and the age of the vehicle.

Real estate tax Buildings and land are subject to real estate tax. Its rate is 0.1 per cent for the assessed value of residences, 0.2 per cent for other buildings and 0.1–0.3 per cent for land. The tax is paid in two equal instalments. These rates are applied with a 100 per cent increase for real estate within the boundaries of large cities.

Gift and inheritance tax Gratuitous transfers by inheritance or by donations are subject to gift and inheritance tax. The tax rate differs (between one to 30 per cent) depending on the amount and nature of the transfer. Tax is due within three years, in six equal instalments.

GMB Publishing

Turkey

3.2 Establishing a presence in Turkey Phillip Rosenblatt, Rosenblatt & Company Companies entering a market for the first time often face a challenge in choosing the means of market entry. Many factors affect such a decision, including business objectives, tax implications and available legal structures. This chapter is intended to provide an outline of the general legal structures that are available in Turkey, and to discuss in more detail the different types of corporate legal entities used by foreign investors.

Agents and distributors In Turkey, as in many jurisdictions, there is a clear distinction between agents and distributors.

Agents Agents act in the name of a principal and negotiate and enter into sales transactions with the buyer. In return, the agent (whether a company or an individual) receives a commission or a fee. This relationship is regulated by the Turkish Commercial Code, and certain mandatory provisions of law apply to these relationships, particularly in respect of termination of indefinite term agency agreements. Authority to bind the principal is required to be registered by the agent in the Commercial Register and published in the Trade Registry Gazette. Unless otherwise agreed to in writing, both the agent and the principal are entitled to exclusivity in represen-

GMB Publishing

tation for the particular branch of industry in the locale of the agent. Agents may sue and can be sued on behalf of the principal, and are authorized to receive notices in connection with any agreements that the agent concludes or in respect of which it acts as intermediary. Any provisions to the contrary are void as a matter of law. An agent has a lien over the moveable goods of the principal. Where the goods are sold, the agent has certain rights to retain the monies received if the principal has not paid monies due to the agent. Agents also owe certain legal obligations to their principals, including obligations of notification, accounting and maintenance of assets, payment and, in certain cases, indemnification.

Distributors Distributors, on the other hand, purchase goods in their own name and resell them. Distributors do not have rights to bind the seller or act on its behalf. Distributorship arrangements are not specifically defined in the Turkish Commercial Code. As a result, general rules of Turkish commercial law apply. Rules applicable to agents will, at times, also apply to distributors.

Franchising Franchising, both international and domestic, has been used by businesses in Turkey for some time.

83

Turkey

International franchise agreements are no longer subject to registration with the Foreign Investment Directorate.

Licence, know-how, technical assistance and management agreements International licence, know-how, technical assistance and management agreements are no longer subject to registration with the Foreign Investment Directorate.

Competition law Turkish competition law will be relevant to the establishments of agency and distribution arrangements, as well as franchising. In each case, specific block exemptions modelled on EU competition law principles may apply, and will often shape the terms of such arrangements.

Liaison offices of foreign companies Liaison Offices, sometimes called Representative Offices, that do not engage in commercial activity can be opened by foreign companies looking to have a local presence in Turkey. A Liaison Office would typically act as an information bridge between the company and the Turkish market. The Liaison Office should not negotiate or sign contracts, collect payments or otherwise engage in commercial activities. Liaison Offices in Turkey are incorrectly thought to be exempt from all taxes. The exemption from profits and value added tax is not based on any specific legal provision, but rather on the basis that the Liaison Office, in fact, does not engage in commercial

84

activity. Beneficial tax exemptions apply to employees of Liaison Offices, which are not required to withhold personal income tax on the salaries of its employees if the salary payments are made in foreign currency and are not paid from Turkish sources. Social security payments, however, are required to be paid for employees of a Liaison Office. The social security payments for certain expatriate employees may be exempt if paid to their jurisdiction under bilateral international treaties. Liaison Offices are required to maintain books and records and make periodic filings. They are required to register with the tax authorities, but they are not required to register as payers of corporate income tax or value added tax. The Foreign Investment Directorate typically authorizes Liaison Offices of foreign companies for periods of up to three years. Liaison Offices can sponsor foreign personnel for work permits, subject to minimum levels of contribution to the Turkish economy.

Branches of foreign companies Foreign companies are permitted to operate in Turkey by establishing a Turkish branch of the foreign company. A branch is simply a local presence of a company that is authorized to engage in commercial activity. To register a branch, a foreign company is required to receive authorization from the Foreign Investment Directorate. Branches may engage in all forms of legal activity unless specifically regulated by law. However, branches are not treated as Turkish legal entities (which they are not) and are therefore disadvantaged in that they may be restricted from certain activities that require a Turkish corporate entity. Branches of foreign

GMB Publishing

Turkey

companies are subject to certain filings similar to those that apply to Liaison Offices of foreign companies. Such branches can also benefit from many of the incentives applicable to foreign investment made via a Turkish legal entity. Branches have, in the past, been commonly used by foreign banks in Turkey due to the regulatory advantages of this structure. While still used, branches are not common in either banking or other sectors. Branches are subject to corporate profits taxes on their Turkish source income as well as a withholding tax on their after-tax profits. As distinct from Turkish subsidiaries where withholding taxes are paid only upon the distribution of dividends, the payment of withholding taxes on after-tax profits of branches applies whether or not the profits are repatriated. In some instances, a branch can be a preferred vehicle for a foreign company’s Turkish operations. Competent tax advice should be sought before choosing this approach.

GMB Publishing

Turkish legal entities The most common forms of Turkish legal entities used by foreign investors are joint stock companies and limited companies. Joint stock companies are recognizable by the Turkish initials A.Ş., or the words Anonim Şirketi, after the company’s name. Limited liability companies are recognizable by the Turkish initials Ltd. Şti., or the words Limited Şirketi, after the company’s name. Other corporate entities recognized by the Commercial Code include ordinary partnerships (Adi Ortaklik), collectives (Kollektif Şirket), limited partnerships (Komandit Ortaklik) and sole proprietorships Sahis Şirketi, Özel Şirket), although most of these forms are rarely used by foreign investors. A more detailed description of joint stock companies and limited liability companies is set out in Chapter 3.3.

85

Turkey

3.3 Major corporate structures Phillip Rosenblatt, Rosenblatt & Company

Joint stock companies In Turkey, joint stock companies are commonly associated with large corporations, similar to the German A.G. or the French S.A. A joint stock company is the only entity permitted to issue shares or bonds that may be traded on stock exchanges. It is also the only entity that may have more than 50 shareholders. A joint stock company must maintain no fewer than five shareholders at all times. Joint stock companies involve more administrative overheads, more shareholders and directors and more public filings than limited companies or other legal forms. Joint stock companies, however, provide for greater ease of transfer of ownership, more certainty in limitations of liability of shareholders and provide for the clear separation of ownership and management. Joint stock companies are commonly used in joint ventures, despite some shortcomings.

Incorporation A joint stock company must be formed by no fewer than five founding shareholders and must maintain no fewer than five shareholders throughout its corporate life. A joint stock company may be formed to engage in any commercial aim that is not prohibited by law. The articles of association of a joint stock company must contain a description of it objects.

GMB Publishing

Capitalization The minimum capital for a joint stock company is YTL50,000, equivalent to between US$30,000 and US$35,000 as of July 2006. Since joint stock companies may have no less than five shareholders at all times, joint stock companies have not commonly been used to establish wholly-owned subsidiaries of foreign companies. Shares are divided into any number of common or preferred shares having a nominal value of not less than YTL1 or multiples of YTL1. (Older companies have until 2009 to adjust their shareholding to comply with the new higher nominal value requirements.) All shares of a class must have the same nominal value. Shares can be either common or preferred. Preferred shares can have preferences as to dividends, liquidation distributions or other matters. Certain preferential founder shares can also be issued. Common shares are required to have at least one vote; however, shares of certain classes may have more than one vote. Multiple classes of shares are not uncommon. They are often used to maintain voting control in the hands of founders, usually family groups. They are also commonly used in joint ventures. All shares must be inscribed shares unless the articles of association provide for bearer shares. Bearer shares may not be issued until full capital contributions for such shares are

87

Turkey

made. Certain form requirements apply to share certificates, if issued. Otherwise, share ownership is determined solely by reference to the share register. A company may not purchase its own shares except in certain limited circumstances.

Transfer of shares Inscribed shares represented by share certificates are transferred by means of delivering endorsed share certificates to the transferee. Shares in nondocumentary form are transferred by means of a corresponding entry in the share register. Transfers of inscribed shares, however, are only effective as to the company when recorded in the share register. Bearer shares are transferred by delivery. Shares may be freely transferred and restrictions on the transfer of shares (including pre-emptive rights) are void as a matter of law, unless provided for in the articles of association. However, contractual restrictions on the transfer of shares can still be valid vis a vis the parties to such contracts with respect to damages. The shareholder of record is responsible for any unpaid contributions in respect of such shares, and a company may generally require guarantees of the unpaid contributions before registering a transfer of shares that have not been fully paid. During the first two years of a company’s existence, commencing from the registration, transfer restrictions apply to the shares of its founders acquired in return for inkind contributions.

Share register Inscribed shares are recorded in a share register maintained by the company (the board of directors is obliged to keep share register), or if the

88

company is traded on the stock exchange, its shares must be registered with a depository in dematerialized form kept by the Central Registry Agency (Merkezi Kayıt Kurulusu). The share register is required to contain certain information regarding inscribed shares and the shareholder of record.

Issuance of new shares Issuance of new shares requires approval of the General Meeting of Shareholders by simple majority vote. New shares may only be issued when all existing shares have been fully paid.

Legal reserve Joint stock companies are required to fund a general reserve account each year by contributing five per cent of annual net profits to the general reserve until the reserve reaches 20 per cent of the company’s capital. Certain additional amounts may be required to be contributed to the general reserve. The general reserve is intended to be used to absorb losses, support the company in difficult times and to fund certain employment-related expenses. A company’s articles of association may provide for additional reserves.

General meetings of shareholders The General Meeting of Shareholders is the highest body of a joint stock company. Ordinary General Meetings of Shareholders are held annually, within three months of the fiscal yearend. Additional Ordinary General Meetings can be called by companies that distribute dividends more than once a year. Extraordinary General Meetings of Shareholders may be called at any time by the Board of Directors, or, if deemed necessary, by the statutory auditors. Upon the justified written request of shareholders

GMB Publishing

Turkey

owning 10 per cent of the company’s capital, the Board of Directors is obliged to call an Extraordinary General Meeting, or, where an Ordinary General Meeting has already been called, include the requested items in the agenda of this meeting. Ordinary General Meetings of Shareholders are required to decide on all matters relating to: (or amendment  approval or rejection) of the financial statements of the company and proposed dividend distributions;  setting the remuneration of the directors and auditors, if not set in the articles of association;  re-election or replacement of directors and auditors whose terms have ended;  any other matters set out in the agenda. Matters not provided for in the agenda may not be raised. If all shares are present at a meeting, and no shareholder objects, any other issues may be raised and resolutions adopted. Unless otherwise provided for in the articles of association, a quorum of shareholders representing a minimum of 25 per cent of the share capital of the company is required for a General Meeting of Shareholders to be validly convened. For certain important matters to be decided, such as changes to the purpose of a company or liquidation, a higher quorum of two-thirds of the shares are required. If the initial scheduled General Meeting of Shareholders is not quorate, a second meeting is convened. There must be minimum of 15 days between the announcement of a rescheduled meeting and such meeting. This rescheduled meeting is deemed quorate irrespective of the number of shares present. Certain important matters require a quorum of half of

GMB Publishing

the shares to be present at such rescheduled meetings. Most resolutions at the General Meetings of Shareholders are taken by a simple majority of the votes present, unless higher majorities are provided for by the articles of association. However, certain matters, such as increasing shareholder obligations, require the unanimous approval of all shareholders.

Management A joint stock company is managed by its Board of Directors (Yönetim Kurulu). A minimum of three directors must be appointed. An even number of directors is permitted, and the articles of association indicate whether the chairman is granted a casting vote. Resolutions are taken by the majority of the directors present at the meeting. The Board of Directors, unless otherwise provided for by the articles of association, appoints officers of the company, such as the General Manager and Deputy General Managers, who are responsible for executive functions. Directors are required to be shareholders (or representatives of a shareholder, in the case of corporate shareholders). Directors are required to deposit a nominal number of shares with the company as security for potential liabilities. Directors are appointed for terms not to exceed three years, and they may be reelected for an unlimited number of terms, unless the articles of association provide otherwise. Directors are not required to be Turkish nationals or residents.

Statutory Auditor or Audit Committee Turkish joint stock companies have a Statutory Auditor or, if more than one individual performs this role, an Audit Committee. The number of members can either be indicated in the articles

89

Turkey

of association as a specified number or as a range. Should it be specified as a range, the General Meeting of Shareholders determines the number of members of the Audit Committee. Statutory Auditors or members of the Audit Committee are appointed for a period of one year at incorporation by the first General Meeting of Shareholders. Afterwards, they are appointed for terms of up to three years. The sole Statutory Auditor, or where there is an Audit Committee a majority of the members, must be Turkish citizens. Statutory Auditors or members of the Audit Committee cannot, at the same time, serve as members of Board of Directors or officers of the company.

Single member companies and holding companies Turkish law does not provide for single member companies. Joint stock companies require a minimum of five shareholders. While holding companies are common, Turkish law does not yet provide for consolidation of group accounts. The new draft Commercial Code anticipates single member joint stock companies.

Commercial registry Following the continental system, all business entities and entrepreneurs are registered with the Commercial Registry in the relevant locale. There are no restrictions of general application on who can be a director of a Turkish company.

Limited liability companies Turkish limited liability companies are commonly associated with smaller or closely held companies, similar to the German GmbH or the French

90

S.a.r.l. A limited liability company is not permitted to issue shares or bonds that may be traded on stock exchanges and may not have more than 50 participants. A limited liability company must maintain no fewer than two participants at all times. Limited liability companies involve less administrative overheads, fewer participants, no directors and fewer public filings than joint stock companies. Limited liability companies, however, are subject to statutory approval of transfer by a three-quarters majority of the capital of the company, more cumbersome share transfers and less separation of ownership from management. Limited liability companies are commonly used by foreign companies setting up Turkish subsidiaries.

Incorporation Similar to a joint stock company, a limited liability company is incorporated by no fewer than two founders, who execute the articles of association before a notary and make their initial capital contributions. Incorporation involves registration of the new limited liability company with the Commercial Registry.

Capitalization The minimum capital for a limited liability company is YTL5,000, equivalent to between US$30,000 and US$35,000 as of July 2006.

Transfer of shares Limited liability companies have participations (pay) rather than shares (hisse senetleri). Participations are not securities and are not printed, as shares would be, but rather are recorded in the company’s share register (pay defteri). The maximum number of participants in a limited liability company is 50, with two

GMB Publishing

Turkey

participants as a minimum. Transfer of participations may be restricted in the articles of association of a limited liability company, and statutory approval rights apply to transfers.

Share register Participations are required to have a nominal value of YTL25 or a multiple thereof. They are recorded in the company’s share register and reflected in the articles of association. Transfers are required to be certified by notarial deed.

Issuance of new shares Unless otherwise provided for by the articles of association or the participants, upon the increase of the share capital of a limited liability company, each participant has the right to subscribe to a portion of such increase that reflects its existing share in the company.

Legal reserve Limited liability companies are required to fund a general reserve account each year by contributing five per cent of annual net profits to the general reserve until the reserve reaches 20 per cent of the company’s capital. Certain additional amounts

GMB Publishing

may be required to be contributed to the general reserve. The general reserve is intended to be used to absorb losses, support the company in difficult times and to fund certain employment-related expenses. A company’s articles of association may provide for additional reserves.

Management A limited liability company does not have a Board of Directors, but rather is managed by one or more managers who act as the company’s executive and who may be, but are not required to be, participants. The manager or managers may be Turkish or foreign citizens.

Statutory auditor or audit committee If there are over 20 participants, a limited liability company is required to appoint a Statutory Auditor or an Audit Committee.

Single member companies Turkish law does not provide for single member companies. Limited liability companies must maintain a minimum of two participants. The new draft Commercial Code anticipates single member joint stock companies.

91

Turkey

3.4 Employment and labour issues Phillip Rosenblatt, Rosenblatt & Company

Introduction In recent years, Turkey has adopted amendments to its Labour Code, incorporating key changes to bring Turkish law into closer compliance with EU Directives in this area.

Applicability of the Turkish Labour Code The Turkish Labour Code governs employment relations within Turkey. The Labour Code has as its purpose the protection of employees as well as the establishment of a flexible labour market. The provisions of the Labour Code protecting employees are mandatory and any contractual provisions to the contrary are void. The Labour Code does not cover employment of certain small-scale agricultural employment, family-based craft work, domestic help and sportsrelated employment.

Types of employment The Labour Code recognizes both definite term and indefinite term employment. Unless otherwise agreed in a written employment contract, an employee is deemed to be a permanent employee. Indefinite term employees are granted specific rights as to notice and severance pay upon

GMB Publishing

termination other than termination for cause. The Labour Code also allows for substantially less stringent terms to apply to temporary employment, such employment is not permitted to extend for more than 30 days.

Full term and part time employment The Labour Code allows for the establishment of full time or part time employment. It also allows for seasonal or piece work.

Probation period At the time of employment, the employer may require a probation period of up to two months. This period may be extended to up to four months under a collective labour agreement.

Minimum wage The Minimum Wage Committee of the Ministry of Labour and Social Security sets the minimum wage at least once every two years. In practice, this is done every six months. The Minimum Wage Committee is composed of representatives of both government agencies and labour and employer unions.

93

Turkey

The minimum wage for adults for the calendar year 2006 and the related deductions are shown below. When the employer’s social security contributions and other employer premiums are added, the cost to the employer rises to YTL645.17. (In YTL) Minimum gross wage Social security premium (employee portion) Unemployment insurance fund Income tax withholding Stamp tax

531.00 74.34 5.31 67.70 3.19

Total deductibles

150.54

Net minimum wage

380.46

These amounts will be revised at the end of 2006 and apply for the next period, by convention a six month period.

Working week The maximum ordinary working week is 45 hours. The maximum work shift for any one day is 11 hours, not counting breaks. Where an employer establishes an ‘intensive working week’ the maximum ordinary working week limit can be exceeded during such periods provided that it is not exceeded, on average, over a two month period. This period may be extended to four months under collective labour agreements.

Holiday Paid holiday Employees who have worked for a minimum of one year are entitled to paid annual holiday. The one-year period includes any probation period.

94

Minimum paid annual holiday entitlements vary, based on seniority as follows:  1 to 5 (inclusive) years –14 days  5 to 15 years – 20 days  15 (included) years and over – 26 days An employer is required to keep records of paid holiday days granted to employees.

Public holidays Turkey has seven public holidays:  Feast of the Sacrifice (Kurban Bayramı), which falls on different days each year, based on the lunar calendar. The holiday starts at 1:00pm and lasts for four days. In 2006, it will fall at the end of December and January 2007. Since this holiday is based on a lunar calendar, it again falls towards the end of December 2007.  National Sovereignty and Children’s Day, which falls on 23 April;  Ataturk Commemoration, Youth and Sports Day, which falls on 19 May;  Victory Day, commemorating Turkey’s independence, which falls on 30 August;  Republic Day (Cumhuriyet Bayramı), which lasts for 35 hours, starting at 1:00pm on 28 October and continuing through 29 October;  Sugar Feast at the end of Ramadan (Ramazan Bayramı or Şeker Bayram), which falls on different days each year based on the lunar calendar. The holiday starts at 1:00pm and lasts for three days. In 2006, it will fall

GMB Publishing

Turkey

at the end of October. In 2007, it will fall in mid-October.  New Year’s Day, celebrated on 1 January.

Sick leave An employee is granted paid sick leave for up to three working days, not to exceed five days in any one month. The employer may require a health report. Where an employee is absent for periods of more than notice periods pursuant to the term of employment plus six weeks, the employer may terminate the employment. When an employee contracts an illness that is not curable or that has a negative effect on the workplace, as determined by the Health Council, the employer has a right to terminate the employment for cause.

Maternity leave Women are entitled to paid maternity leave of eight weeks before the birth and eight weeks after the birth, for a total period of 16 weeks. After the completion of paid maternity leave, where an employee prefers, she may have unpaid leave of up to six months. For multiple births, each pre-birth period is extended by two weeks. An expectant employee, if she likes, may work until three weeks before birth with the consent of a doctor. In this case, the period that she worked prior to birth is added to the maternity period after birth. During pregnancy, the employer is required to provide paid time off for periodic medical visits. Where doctor’s reports so indicate, the employer is required to provide the pregnant employee with lighter work.

GMB Publishing

Dismissal Termination by notice Either the employer or the employee may terminate an indefinite term employment agreement by giving the required notice. The applicable notice periods are based on the term of the employment, as follows. Where employers abuse their right to dismiss employees upon prior notice, for example if the employer dismisses the employee for joining a trade union or dismisses a whistleblower, in addition to any other rights the employee may have, the employee will be entitled to a compensatory payment of three times the mandatory notice period wages. Disobeying the notice period for termination requires compensation. An employer must show legally permissible grounds to terminate the indefinite employment agreement of an employee who has been employed for at least six months in workplaces employing at least 30 employees.

Income tax Individuals who ordinarily reside in Turkey for more than six months in any calendar year are generally considered resident in Turkey and are subject to the payment of personal income taxes on their Turkish and foreign source income. Foreigners who are in Turkey for a fixed term on a temporary mission may be deemed not to be residents even though they reside more than six months. However, they may still be subject to taxation on their Turkish source income.

95

Turkey

Social security Turkey has an established system of social insurance funded by employer and employee contributions. There are also mandatory pension and unemployment insurance funds. Turkey is party to a number of bilateral social security agreements as well as the multilateral European Social Security Agreement, which regulates the terms under which a social insurance system applies to foreigners from treaty states. The Social Insurance Law also provides for circumstances in which foreign individuals can choose to be covered by insurance plans of their home jurisdiction.

European Social Security Agreement Turkey is a party to the European Social Security Agreement. Persons working for an employer in one of the contracting states who are sent to work in another contracting state are considered subject to the legislation of the contracting state from which they are sent if their employment does not exceed 12 months and they are not sent to replace other similar employees who completed their term of employment in the receiving state.

Bilateral social security agreements Turkey also has bilateral social security agreements with a number of countries, including, Germany, Austria, Belgium, the United Kingdom, France, The Netherlands and Switzerland.

Social Insurance Law The Social Insurance Law requires mandatory insurance of individuals working in Turkey. The Turkish social insurance funds cover the following types of risk:  workplace injury and workrelated sickness;  illness;  maternity;  disability, old age and survivor’s pensions;  unemployment. Premium rates are shown in Table 3.4.1.

Table 3.4.1 Premium rates for social insurance (%) Employer Employee Government Workplace injury and work-related sickness (rates differ depending on the 1.5 – 7.5 – type of work danger)

–

Illness

6

5

–

Maternity

1

–

–

Disability, old age and survivor’s pension(for employees working underground or in mines, higher rates apply)

1

9

–

Unemployment

3

2

2

7.5

–

Social security support premium (for senior citizens who continue to work) 22.5

96

GMB Publishing

Turkey

Compensation in foreign currency Compensation is paid in the workplace or to a personal account of the employee. If the salary is determined in foreign currency, payment is to be made based on the value of the currency on the date of payment.

Unions and work councils Laws on labour unions and collective labour agreements, strikes and lockouts regulate the operation of labour unions, their representatives, collective labour agreements and industrial action in Turkey. Labour unions operate on a sector by sector basis and require minimum representation within the sector and the workplace to be recognized. Labour unions may not be established on the basis of a profession or a particular workplace. Employee representatives are accorded certain protection from dismissal. An employee is required to be a member of a union to be covered by a collective labour agreement.

Residence permits, work permits and work visas

work permit, work visa and residence permit. Work permits are issued by the Ministry of Labour and Social Security, generally upon the application by such individual’s Turkish employer. Special provisions for the prompt issue of work permits for key foreign personnel of companies with foreign investment and liaison offices have been adopted. Work permits are issued in respect of a particular employer. They do not permit the individual to work for any other employer in Turkey without a new application process. Upon receiving a work permit, a work visa is applied for at the consular section of the Turkish Embassy in the employee’s home jurisdiction. The employee is required to enter Turkey within 90 days and to apply for a work visa and within 30 days of entry, and apply for a residence permit at the local Police Headquarters. Receiving a work permit will permit the employee to bring along immediate family members, who will also be issued residence permits. Family members are not permitted to work in Turkey without separate work permits. Special more generous procedures have been adopted in connection with EU nationals. Individuals may apply for permanent residence status after having worked in Turkey for at least six years.

Foreigners wishing to reside and work in Turkey are required to obtain a

GMB Publishing

97

Turkey

3.5 Arbitration and dispute resolution Phillip Rosenblatt, Rosenblatt & Company

The Turkish court system The court system in Turkey is composed of two distinct sections:  the Judicial Courts;  the Administrative Courts. The Judicial Courts are divided into two sections:  the Civil Courts;  the Criminal Courts. Other special purpose courts, such as the Constitutional Court and Military Courts are usually less relevant for foreign investment.

Civil Courts Civil Courts have subject matter jurisdiction over all civil and commercial law matters, unless jurisdiction is specifically allocated to another court. Turkish Civil Courts cover family law, inheritance and labour law disputes. Civil Courts of first instance include the courts of general jurisdiction, which are located in each administrative district of Turkey, and special courts of first instance, such as employment courts, which specialize in specific types of civil law matters, or special enforcement review courts that specialize in summary judgement cases in those districts in which they are formed.

GMB Publishing

The appeal of civil cases is to the Civil Chambers of the Supreme Court and ultimately to the Supreme Court itself. The Supreme Court (Yargtay) is the highest court for all civil and criminal matters, but not for administrative or constitutional law matters.

Criminal Courts Criminal Courts have subject matter jurisdiction over all criminal matters, unless jurisdiction is specifically allocated to another court. Criminal Courts of first instance include courts of general jurisdiction in each administrative district in Turkey and special courts of first instance, such as state security courts and juvenile courts. The appeal of criminal cases is to the Criminal Chamber of the Supreme Court and, ultimately, to the Supreme Court itself.

Administrative Courts Administrative Courts have subject matter jurisdiction over all administrative matters, unless jurisdiction is specifically allocated to another court. Actions against administrative agencies relating to their administrative authority (but not commercial acts of those agencies) are reviewed by administrative courts. Tax disputes are a common area covered by the administrative courts. Disputes relating to the provision of public services by concessionaries are subject to the administrative courts, unless arbitration has

99

Turkey

been agreed. Recent amendments to the Constitution were required to enable jurisdiction of those disputes to be brought to arbitration, where agreed. The Council of State is the highest appeals court for administrative matters.

tion in disputes involving international elements.

The course of proceedings Court proceedings

Jurisdiction Jurisdictional issues Where it is unclear whether the matter is administrative or commercial in nature, a special court, the Court of Conflicts (outside the two court sections mentioned), determines jurisdiction. Where issues relate to constitutional law issues, the Constitutional Court has jurisdiction, as the highest court of the nation. It does not have jurisdiction over matters that do not have a constitutional issue in dispute. The Constitutional Court also hears cases brought against high officials in the executive branch of government who otherwise enjoy immunity while in office.

Choice of jurisdiction Contractual disputes involving a Turkish party may be subject to the jurisdiction of a foreign court selected by the parties, except where public policy or Turkish law require the matter to be heard by Turkish courts. Examples of mandatory jurisdiction are disputes involving the ownership of land, buildings and other immovable property located in Turkey. Turkish courts do not necessarily recognize the rights of the parties to exclude the jurisdiction of the Turkish Courts in other cases, even if public policy or mandatory statutory jurisdiction is not involved. Special rules of procedure are established by Turkish law to determine whether Turkish courts have jurisdic-

100

Court proceedings are generally commenced by a plaintiff filing a written statement of claim with the clerk of the relevant court and serving the claim against the defendant by process. Thereafter, the defendant submits a written response and, possibly, counterclaims. Discovery is limited in Turkish proceedings. Court cases are primarily based on a written record of the case and filings of the parties and not on the basis of oral arguments or testimony. After the filing of briefs, the court will hold a hearing (or a number of hearings if necessary) before deciding the case. Court cases are timeconsuming and may be delayed for significant periods of time.

Summary proceedings Summary of enforcement actions The Enforcement and Bankruptcy Law was amended on 30 July 2003 and 21 February 2004. Certain types of claims are subject to accelerated enforcement actions. For example, actions for the enforcement of a debt that are represented by a cheque, promissory note or an invoice may be filed with the enforcement offices and must be either denied by filing an objection within 10 days or the debt is deemed accepted and a judgement issued. If the debt is denied, the defendant is required to post a payment bond with the court, and if falsely denied, will be subject to a court penalty

GMB Publishing

Turkey

in favour of the plaintiff, which could amount to 40 per cent of the original claim.

Pre-judgement attachment The preliminary conditions for the demand of a pre-judgement attachment are as follows:  occurrence of debt that is not provided by pledge;  existence of a movable or immovable object and/or credit belonging to the debtor or third party. A pre-judgement attachment is valid where:  the debtor does not have a definite domicile;  the debtor hides his goods, himself or uses fraud in order to refrain from paying his debt. A pre-judgement attachment can only be implemented upon a decision of an authorized court.

Procedure, foreign commercial judgements can generally be enforced in Turkey under rules of comity where there is reciprocal recognition of Turkish court resolutions in that jurisdiction.

Enforcement of arbitral awards Turkey is a party to the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards. Subject to certain exceptions, foreign arbitral awards may be enforced in Turkey. The choice of dispute resolution forum by foreign parties who contract with a Turkish party should depend on specific factors affecting their particular transaction.

Treaties Turkey is party to a number of bilateral and multilateral international treaties.

Enforcement of foreign judgements Pursuant to the provisions of the Law on International Private Law and

GMB Publishing

101

Turkey

3.6 Intellectual property Phillip Rosenblatt, Rosenblatt & Company

Introduction Intellectual property has long been recognized in Turkey, with the earliest legislation dating back to the late 19th Century Ottoman laws, which were substantially supplemented by Turkish laws adopted in 1951. A modern set of intellectual property laws based on the EU model were adopted in 1995, in conjunction with Turkey’s entry into the EU Customs Union, following the establishment in 1994 of the Turkish Patent Institute as the authority to register patents, trade marks and all other intellectual property rights in Turkey. Turkey has since been updating its legislation to bring it into closer conformity with international standards. Turkey is party to a large number of international treaties in this area, including the Madrid Convention, the Nice Agreement, the Paris Convention and TRIPS.

Patents Turkish Patents are regulated by the Decree on the Protection of Patents. Under this decree, patents issued by the Turkish Patent Institute grant exclusive rights to exploit a patent for a period of up to 20 years. Recent changes extend patent protection to pharmaceutical and veterinary products.

GMB Publishing

Copyright Turkish copyright is regulated by the Literary and Artistic Works Law and the Cinema, Video and Musical Works Law. Under these laws, copyright protects the author for the author’s lifetime plus 70 years. Legal entities receive protection for their copyright for 70 years. Stringent penalties for violation of copyright have also been adopted in recent years.

Trade marks Trade marks and service marks are regulated by the Decree on the Protection of Trade Marks and Service Marks. Under this law, Turkey applies a ‘first to file rule’. Trade marks are granted for terms of 10 years and are renewable for an unlimited number of 10-year terms.

Industrial designs and models The Decree on the Protection of Industrial Designs regulates the protection of industrial designs and models in Turkey. Under this decree, industrial designs and models can be granted protection for a period of five years, renewable for up to a total of 25 years.

103

Turkey

Trade names The Turkish Commercial Code recognizes the exclusive right of a legal entity or an enterprise for the use of their trade name. Trade names are registered with the Commercial Registry in the location of the enterprise.

protection against unfair competition. Disclosures of trade secrets are deemed to breach good faith obligations and create unfair competition. Once disclosed, a trade secret can enter the public domain and can lose its protection. Where a party suffers damage due to the prohibited disclosure of a trade secret, such party can claim compensation.

Trade secrets The Turkish Commercial Code protects trade secrets as a means of

104

GMB Publishing