VZCZCXRO2738
PP RUEHDA
DE RUEHAK #6734/01 3561511
ZNR UUUUU ZZH
P 221511Z DEC 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 0410
INFO RUCPDOC/USDOC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHIT/AMCONSUL ISTANBUL PRIORITY 1844
RUEHDA/AMCONSUL ADANA PRIORITY 1461

UNCLAS SECTION 01 OF 03 ANKARA 006734 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV BEXP KIPR TU
SUBJECT:  TURKEY FDI: GROWING BUT GREENFIELD LAGS 
 
REF: A) ANKARA 5625 B) ISTANBUL 2095 
 
¶1.  Summary:  (SBU) Foreign direct investment (FDI) in Turkey has 
increased dramatically in the last two years, but greenfield 
investment still lags far behind.  Analysts cite the need for 
judicial reform, Turkey's large informal economy, high employment 
taxes and costs, the large indirect tax burden, the need for 
educational reform, weaker protection of IPR, and a perceived 
judicial and regulatory bias for domestic companies as factors 
holding back Greenfield investment.  Turkey has made a number of 
improvements and is pursuing several structural reforms to address 
these deterrents to investment.  High levels of FDI, including 
job-creating and technology-transferring greenfield investments, are 
necessary if Turkey is going to achieve the high investment rates 
that will be needed over the next decade for living standards to 
catch-up and converge with EU levels.  End summary. 
 
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FDI INCREASING DRAMATICALLY BUT GREENFIELD LAGGING 
--------------------------------------------- ----- 
 
¶2.  (SBU) Foreign direct investment (FDI) in Turkey continues to 
increase dramatically.  In stark contrast to cumulative investment 
of only $17 billion for the previous fifteen years, Turkey received 
a total of $9.7 billion in FDI inflows in 2005 alone. This trend has 
continued in 2006, with $15.3 billion in inflows in the first ten 
months.  Political stability, economic growth and reductions in 
bureaucratic red tape are the main attractors of new investment. 
Analysts cite Turkey's much lower inflation rate, recently-acquired 
EU accession country status, attractive demographics and 
opportunities in particular sectors, such as banking, telecoms and 
retail, as well as the abolition of investment screening in 2003. 
Turkey's privatization program also created opportunities for 
foreign direct investors, notably the $6.5 billion privatization of 
the state telecoms company, Turk Telekom. 
 
¶3.  (SBU) But very little of this new FDI (only $1.7 billion in 
2005) has come in the form of investment in new plant and equipment, 
as most goes to privatizations and mergers and acquisitions.  This 
lack of greenfield investment is of increasing concern to economists 
and government officials, who fear the economy is missing out on the 
job creation and technology transfer that comes with it.  Economy 
Minister Babacan and other senior officials are aware of this 
deficiency and say they hope to attract more greenfield investment, 
especially in growing sectors like energy and information 
technology. 
 
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INVESTMENT-STIMULATING REFORMS PROPOSED 
--------------------------------------- 
 
¶4.  (SBU) Several factors account for the small amount of Greenfield 
investment in Turkey:  an inefficient judicial system, a large 
unrecorded economy, high employment taxes and costs, a large 
indirect tax burden (such as taxes on telecom, fuel, and electricity 
consumption), and a need for educational reforms to spur research 
and innovation.  In response to the need for judicial reforms, the 
GOT has proposed or is in the process of implementing a number of 
measures that it hopes will improve the speed and reliability of 
judicial administration.  These include an e-justice initiative that 
should significantly speed the processing of commercial cases. 
Another improvement is ongoing training, with EU support, for judges 
and prosecutors to familiarize them with modern commercial issues 
such as IPR protection.  In addition to this training, the EU, the 
World Bank, and the U.S. are supporting improved access to justice 
for foreign investors, including legal aid and Alternative Dispute 
Resolution mechanisms.  The GOT has also proposed the creation of an 
intermediary level of regional appeals courts and is building new 
courthouses to ease overcrowding. 
 
¶5.  (SBU) The government also plans to reform Turkey's antiquated 
Commercial Code, which was created in 1957.  The new Code aims to 
simplify rules for company formation (which will ease shareholder 
and capital requirements), simplify merger procedures, provide 
clearer definition of responsibilities of Boards of Directors, 
create independent audit requirements, and link Turkish accounting 
standards to International Accounting Standards. 
 
¶6.  (SBU) In order to truly attract FDI, Turkey must tackle the 
persistent problem of its informal economy.  Currently, 
approximately 53 percent of Turkey's workforce is in the informal 
economy, creating unfair competition for those companies that choose 
to follow the rules and register their workers.  At a recent OECD 
Global Conference on Investment (ref B), Turkey World Bank Country 
Director, Andrew Vorkink called this phenomenon "the cancer of the 
informal economy."  In his opinion, the only way for Turkey to bring 
more companies and workers into the formal economy is through fiscal 
reforms that incentivize companies to register their workers.  The 
Bank is currently in consultations with the government on a package 
 
ANKARA 00006734  002 OF 003 
 
 
of labor market reforms, including reducing high payroll taxes and 
severance costs. These reforms would result in attracting more 
Greenfield investment by evening the playing field between foreign 
and domestic firms. 
 
¶7.  (SBU) A recent OECD report stated that Turkey's overall 
corporate governance outlook is positive because the authorities 
have already adopted, or are introducing, high quality corporate 
governance standards (including audit standards) and because 
transparency has improved significantly.  The report cautions, 
however, that it is important for Turkey to improve further in the 
areas of control and disclosure of related party transactions and 
self-dealing, the protection of minority shareholders, and the role 
of the board in overseeing not only management but also controlling 
shareholders. 
 
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NEW ORGANIZATIONS PUSHING FOR IMPROVED INVESTMENT 
--------------------------------------------- ---- 
 
¶8.  (SBU)  Multinational companies operating in Turkey also point to 
Turkey's less than stellar track record for protecting International 
Property Rights (IPR) as a deterrent to new Greenfield investment. 
In response to continuing concerns about trademark violating 
products currently in the Turkish market or transiting through 
Turkey, 13 Turkish and multinational companies, including Nestle and 
Pfizer, have begun cooperating in the "Trademark Protection 
Counterfeiting Initiative."  The group advertises the cost of fakes 
and is pushing for a new law protecting brands.  They estimate that 
the total value of the fake market in Turkey is approximately $2.6 
billion. 
 
¶9.  (SBU) Until recently, Turkey also lacked a central point of 
contact from which interested foreign investors could receive 
information and assistance in establishing a business.  In response 
to this, the GOT recently created a new "Investment Promotion 
Agency" within the Prime Minister's Office.  The agency's main 
objectives will be to "handhold" new investors throughout the 
establishment process and solve problems that arise after 
establishment.  It will advocate within the government for reforms 
that promote investment, and it will also work to raise public 
awareness of the benefits of investment.  Turkey's Treasury 
Undersecretariat has also developed a user friendly investment 
website that provides users with information about investing in 
Turkey (including detailed regional information) and links to the 
various agencies from whom potential investors will need to receive 
information. 
 
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NORMAL PROGRESS OR BEHIND THE CURVE? 
------------------------------------ 
 
¶10.  (SBU) Economic officers from the Ankara's diplomatic corps 
discussed Turkey's economic future at a recent working lunch.  They 
asked Memduh Akcay, Director General for Foreign Economic Relations 
at the Treasury Undersecretariat, why Turkey has not seen more 
Greenfield investment.  Akcay argued that Turkey is following the 
pattern of most developing nations and that it is normal to see 
mergers and acquisitions come first in a stabilizing market, 
followed by true Greenfield investment as the economy matures. 
Christian Keller, Deputy IMF representative in Ankara, agreed with 
Akcay and expressed the IMF's pleasure with the recent increase in 
investment inflows to Turkey. 
 
------------------------------------ 
WHY SO LITTLE GREENFIELD INVESTMENT? 
------------------------------------ 
 
¶12.  (SBU) Comment:  While Turkey's overall investment climate is 
improving, the government cannot relax reform efforts if it hopes to 
attract substantial greenfield investment to Turkey.  Turkey needs 
such investment to create jobs for its unemployed and underemployed 
workforce and to ease the hardships created by recent losses 
experienced in the textile and agricultural sectors.  The hardships 
faced by such Greenfield investors as Cargill (ref A), and 
continuing IPR issues could also discourage U.S. investors from 
giving Turkey serious consideration as a viable place to invest.  In 
addition, while technical reforms are crucial, a change in the 
overall system to reform Turkey's educational system (in order to 
prepare workers for high-tech jobs) and stymie the problematic 
informal economy is needed to attract foreign companies to Turkey. 
 
¶13. (SBU) Comment cont'd:  The track record of foreign 
multinationals in all but a few cases preferring to enter the market 
by partnering with a local blue chip suggests foreign companies are 
yet to be convinced they will get a fair shake from Turkey's 
judiciary or other authorities.  It is clear that a core group of 
government and private-sector officials are working to implement the 
changes needed to realize the administration's goals of increased 
 
ANKARA 00006734  003 OF 003 
 
 
investment.  What is also clear, however, is that Turkey's 
traditional distrust of foreign companies, desire to protect its 
domestic markets, bureaucratic and nontransparent judicial system 
and inability to reduce its informal sector have discouraged foreign 
investors from coming here.  The government has made positive steps, 
but it must continue to do so in order to attract the 8-10% annual 
investment rates that the World Bank and others estimate are 
necessary to raise per capita income and keep it operating as a 
player in the global economy.  End comment. 
Wilson