Negotiations with the European Commission (EC) on the country’s accession, which is scheduled for 2012, officially kicked off on October 3, and on November 9 the EC awarded Turkey the highly prized status of a functioning market economy.

“Turkey should be able to cope with competitive pressure and market forces within the union in the medium term, provided that it firmly maintains its stabilisation policy and takes further decisive steps towards structural reforms,” the commission said.


However, world media were quick to highlight Turkey’s lack of progress on other issues, especially human rights and political reform, in which it was deemed to have lost momentum.

The country will need to make a further cultural and political shift to get into the EU club. “When a nation enters the EU, it agrees to transfer part of its sovereignty,” Pierre Mirel, of the EU’s directorate-general for enlargement, told fDi in Istanbul earlier this year.

“Although Turkey may think it has been difficult to achieve this, in my view there will be much more to come,” he said.

Frame of mind

“Each chapter will be very hard and although now it may seem as if what lies ahead are mere technical difficulties, each phase can be emotionally and politically charged, leading to tensions in the society. Being in the EU is a frame of mind about co-operation and compromise over confrontation,” said Mr Mirel.

Only time will tell how quickly and easily (or not, as the case may be) Turkey will be able to make itself EU-compatible, and there are no guarantees – not even of eventual entry.

Whatever the future holds for the country, uniquely placed at the crossroads of Europe, Asia and the Middle East, some seismic shifts are already taking place. One such shift is in attitudes to foreign investment.

Destination Turkey

For perhaps the first time, Turkey is marketing itself aggressively as a destination for foreign investors and there is some healthy competition between international companies vying for the opportunity to invest. Privatisation has so far hauled in about $20bn and FDI could reach an annual figure of $10bn within the next five years, say economists.

“Turkey can provide sustainable growth for investors for the future and will not return to the kind of crisis seen in 2001, thanks to a wide range of reforms,” asserts Tezcan Yaramanci, chairman of the Foreign Economic Relations Board (DEiK). “Turkey was always an attractive place to do business but has had a mixture of challenges and advantages. Now the challenges are far less and the advantages are great.”

Giving the opening speech at a conference on FDI in Istanbul in November, minister of state Ali Babacan said that the government had become aware that the great advantage of increased FDI is that it presents at least a partial solution to Turkey’s unemployment problems. Greenfield investments in particular create true growth and jobs, he said.

From a previous average of $1bn in FDI per year, Turkey attracted $2.9bn in the first half of 2005, an increase of more than 50% on the annual total of $2.8bn for 2004, said Mr Babacan. (He noted that the large privatisation deals from the second half of 2005 were not included in these figures.)

“We need foreign investment to create jobs for 500,000-700,000 people entering the labour market. If we had not championed FDI, the successes we have so far achieved would not have been possible,” he added.

In the past three years, the number of new registered foreign companies had reached more than 6000 and the economy was growing at an annual rate of 6%-7%, he said.

Prime minister Recep Tayyip Erdogan, speaking at the same event, echoed these claims and rebuffed what he called the “political ideology” that in the past had created domestic resistance to FDI. “There are those that don’t want to understand or accept the [FDI] perspective, but we go on, never losing confidence. Turkey has pulled its politics and economy together in a very short time,” he said.

For example, Turkey lowered its interest rate by 56 points in three years to 14%, both Mr Erdogan and Mr Babacan said, while stressing there was still much to achieve in this respect. Turkey also has one of the strongest growth rates in the world and its gross national product (GNP) was up by 9.9% last year. Economists reckon the country’s growth is set to put it in fourth place globally, behind China, India and Russia.

“The debt burden and deficit have been drastically reduced compared with five years ago,” Mr Erdogan added.

FDI is crucial to maintaining this rate of growth, Andrew Vorkink, the World Bank’s Turkey country director, told the same conference. He also pointed out that there was always a risk of multinationals dominating. “Last year, Turkey registered 8.9% growth in GNP – local companies will not be able to maintain that kind of growth by themselves,” he said.

Mr Vorkink was among those who pointed out that there was much still to do: a strong legal system, a stable framework to protect property rights and further taxation reforms are fundamental, he said, as is a continuing reduction in corruption.

Mr Babacan claimed that bureaucracy had been officially declared enemy number one. “It now takes just one-and-a-half days to set up a new company, whereas previously it took two-and-a-half months. Such changes have come about by working with potential investors and non-governmental organisations to see what reforms they needed and then acting on them,” he said.

“Over the last three years, Turkey has undergone a change, not only in its economy but in the culture and mentality of our country.”

Different climate

Saban Erdikler, chairman of the Foreign Investors Association (YASED), agreed with Mr Vorkink. “Turkey has a climate very different from that of a few years ago. Investors are getting good support from the government. However, priority must be given to continuing reforms in the justice and welfare systems and in the reduction of taxes, although corporate tax on direct investment has been reduced to 10%, which has definitely helped,” he said.

A good example of legislative reform was the recently passed new banking law, which will enable banks to transfer burdensome pension schemes to the state pension sector and contains a number of other reforms sought by foreign investors. Other recent legislative changes in relation to FDI have finally put foreign and local investors on an equal footing.

There has also been progress on legislation concerning free zones, according to Ayhan Izmirli, deputy general manager of ESBAS, the operating company for the Aegean Free Zone (AFZ). “A new development law will come out regulating the different zones and development agencies,” he reports.

“In EU accession studies, it has emerged that we need a new development agency to control the incentives. To this end, we have been working with peers in Ireland, Hungary, France and Belgium. Prior to this, Turkey developed its highly successful zones alone; now it will do so in conjunction with the EU,” he explains. “There are some issues to be ironed out over income tax incentives in the zones, but production incentives will remain in place.”

Overseas companies that are already investing in Turkey say the general drive for reform is paying off. A recently published YASED report, Foreign Investment Association 2005 Barometer, which surveyed the views of foreign firms doing business in Turkey, showed that 72% of investors believe that the economic environment is improving for FDI.

YASED’s Mr Erdikler says that projected aims are for Turkey to attract $10bn in investments in the next five years and $15bn in the five years after that. “According to our studies, these targets are rather modest. If Turkey can realise what it is capable of, it will surpass these figures,” he adds.

Big sell-off

A massive privatisation programme is well advanced and includes the sale of a 51% stake in oil refiner Tupras. It fetched $4.14bn and went to a consortium set up by Turkish conglomerate Koç and the Shell group. More privatisations are afoot, including in electricity, sugar factories and tobacco companies.

Turkey’s Electricity Generation Corporation (EUAS) will be sold in regional groups next year, while the sale of the distribution side, TEDAS, is due to be launched in December.

Metin Kilci, head of the Privatisation Administration (PA), says: “We will start selling the generation side of electric utilities after we have made some firm steps with the distribution [TEDAS] sell-off. If we can make good progress with TEDAS sales, then we will sell at least three portfolios from EUAS in the first quarter of 2006.”

The government is reportedly in the process of launching a tender to sell off 24 sugar companies and a number of luxury hotels.

All is not plain sailing, however. Multibillion-dollar tobacco player Tekel failed in a previous tender effort to attract any bidders. That was mainly due to an unstable tax environment on tobacco, according to industry sources.

An important market signal and a key turning-point in the country’s attitude to both privatisations and foreign capital was a recent Turkish Supreme Administrative Court decision. It squashed an attempt by unionists to scupper the PA’s sale of 55% of Türk Telekom, the country’s major fixed-line and mobile phone company, to Saudi Oger Telecom.

The deal was touch and go for a while, as the country’s unions reacted strongly against a Middle Eastern company buying a national mobile company. In the past, similar court filings have overturned large privatisation efforts.

On this occasion, the unionists claimed that the privatisation was not transparent and that the company was being sold off too cheaply. However, the world’s telecoms sector disagreed, taking the view that the price Saudi Oger paid was far too high. A senior PA official told fDi that he thought the price was well over the market value.

Atilla Yesilada, an outspoken and well-known economist and TV presenter, says he believes that if the buyer had not been Saudi Oger, Türk Telekom’s purchase would never have reached the Supreme Court.

“The judiciary is full of communists and secularists that don’t like privatisation,” he claims. “Some people feared that in times of war they wouldn’t want our communication system owned by Arabs.”

But private companies are only too keen to attract foreign investors, as the banking sector has shown, Mr Yesilada says.

Investors welcome

Banking and financial services are among the sectors that appear most tempting to foreign investors. There has been considerable movement in Turkish retail banking via acquisitions. European banks, in particular, are clamouring for a piece of the action.

Turkey has many banks of all sizes, so in theory there is no shortage of targets. Some substantial deals have taken place in the past 18 months, with Italian, Dutch and French players all acquiring Turkish banks. International venture capitalists are also showing considerable interest.

General Electric (GE), one of the world's biggest serial investors, is in the process of finalising a deal to buy about 50% of Dogus Group’s $6bn-valued player Garanti Bank, via its GE Consumer Finance arm. The deal comprises an initial 25.5% stake, followed by another stake of up to 25% in a mandatory buyout process.

A spokesperson for Garanti says that the mandatory offer is expected to be made once all the approvals have been cleared at the end of December at the latest. It is understood that, although 44% is on freefloat, GE will not retain more than a 50% stake. Dogus Holding, which controls Garanti, found the deal attractive because it wants share ownership and management control. According to delegates at a roundtable held by M&A intelligence provider Mergermarket, this was one of the reasons GE outdid European banks in the battle for the purchase.

Akbank, a large listed and cash-rich Turkish bank, is also looking for a strategic investor, it emerged during the roundtable. Denizbank, another listed player, is also a target. It has around 10 potential bidders vying for a takeover, according to a source (Temasek, the Singapore venture capital player, is rumoured to be one of them).

Venture capital firms have watched GE’s Garanti acquisition with interest and believe that Turkey is a worthwhile market. Unlike banking players, venture capital firms often prefer not to have majority control, and this can make them an attractive alternative to sellers.

Delegates at the Mergermarket event considered Finansbank to be one of the most dynamic potential targets for foreign buyers. A spokesperson for Fiba Holding, Finansbank’s main shareholder, said it was willing to consider buyout approaches. Fiba Holding is understood to have appointed Morgan Stanley as adviser to oversee any potential sale, although Finansbank is in no hurry to sell, says Kerim Kamahali, senior vice-president of its international division.

Real estate boom

The real estate and industrial sectors could also prove promising. “Real estate represents a lucrative investment area,” says DEiK’s Mr Yaramanci. “FDI is still relatively rare in this sector, but we are expecting a real boom in the country thanks to the new mortgage law I expect the law to be on the statute books by next March at the latest and it will put Turkish real estate on a par with other international markets in that sector,” he adds. The construction sector is also predicted to profit dramatically from expected growth in mortgages.

“Industry remains a strong magnet for FDI and the price of labour still affords better profit margins in sectors such as automobiles and steel, in comparison to other countries,” Mr Yaramanci says. Turkey has massive plants for Ford, GM, Fiat, Mercedes and a number of other brands. Together with iron and steel they make up a large slice of the export market, with an expected foreign trade figure of $190bn this year.

Nonetheless, Turkey’s main strength is not cheap labour. “Turkey cannot and does not want to compete on the basis of being a place for cheap labour. Instead, we want to prioritise the medium and high-technology sectors,” says YASED’s Mr Erdikler.

He cites telecoms, tourism, mining and infrastructure as high priorities for investors. In tourism, for example, the country has 22 million visitors and draws an $18bn revenue figure from the sector.

Mr Yaramanci adds logistics to the list of attractive sectors for FDI. “From a geographical standpoint, as well as from a domestic point of view, logistics has a lot of potential in Turkey,” he says.

Since Turkey is the world’s 17th largest economy and has a capital the size of London, it is small wonder that industries such as logistics are growing. Moreover, given that the country is located right between the East and the West, while being well placed for links with both Russia and the Mediterranean, many businesses see it as a key location, says Mr Yaramanci.