Turkey FDI: Investment Climate Efforts Stall

UNCLAS SECTION 01 OF 02 ANKARA 006009

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E, EB/CBA AND EUR/SE
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TREASURY FOR OASIA - MILLS AND ADKINS
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DEPT PASS EXIM FOR PAUL TUMMINIA

SENSITIVE

E.O. 12958: N/A
TAGS: EINV TU
SUBJECT: Turkey FDI: Investment Climate Efforts Stall


Sensitive But Unclassified. Please handle accordingly.


1. (SBU) Summary. Government and private sector sources
agree there was little significant improvement in Turkey's
investment climate in 2004. Foreigners' real estate
purchases amounted for a large portion of an increase in FDI
recorded in Central Bank figures. Creation of a semi-
governmental investment promotion agency has been put on
hold due to a disagreement between the GOT and the private
sector. End Summary.

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Modest Rise in FDI Inflows
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2. (SBU) Econoff and Econ Specialist discussed investment
climate issues with Osman Emed, Deputy Director General for
Foreign Investment at the Turkish Treasury on October 19,
and with Naci Akin, Business Development Director of the
Turkish Union of Chambers and Commodity Exchanges (TOBB) on
October 1. Emed said that although investment statistics
may not fully capture FDI inflows, he had no information to
amplify the Central Bank's data showing some USD 1.8 billion
in inflows of FDI to Turkey this year. Emed said this
figure was considerably higher than last year's USD 844
million, but a large portion of this amount, as much as USD
1.0 billion according to the Central Bank data, appears be
going into purchases of Turkish real estate, rather than
employment-generating investments. He said there has been a
mini-boom in foreign company establishment, but so far,
little sign of long-term FDI inflows. In particular, a
large number of Chinese and Middle Eastern companies seem to
be putting feelers out to the Turkish market.

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Investment Climate Improvement Effort
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3. (SBU) Emed confirmed that the GOT's efforts to
systematically introduce reforms to the investment climate
have stalled. The official reform committees (known by
their Turkish acronym YOIKK) have met once in the last year,
and a lack of top-level focus has encouraged inertia in the
various Turkish bureaucracies, which would be affected by
reform. The GOT has not even begun work on a progress
report in investment climate reform promised at the March
2004 Investor Advisory Council meeting, chaired by the Prime
Minister. Emed attributed the drift on investment climate
primarily to the GOT's near-total focus on obtaining a date
for accession talks from the EU in December, and to the
conviction -- which he does not share -- that the prospect
of accession talks will by itself lead to an FDI boom in
Turkey.


4. (SBU) Emed noted the efforts to add a new subject to
the YOIKK process -- reform of company liquidation
procedures, which currently form a barrier to exit from the
market. Emed said the sectoral permit problem was also on
the agenda of the last YOIKK meeting, but remained
unresolved. The committee decided to ease the permit
application process by authorizing governors' offices in
each province to receive the applications and coordinate
with the related ministries. However, Emed thought this was
not a viable solution, since it added another step to the
permit process.

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Investment Promotion Agency Shelved
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5. (SBU) Emed told us that plans to establish an
investment promotion agency for Turkey had been put on hold
because the GOT could not come to terms with the private
sector on the composition of the board, as well as because
Turkey's various business chambers could not agree on the
financing sources for the agency. Rather than creating the
semi-autonomous agency the private sector preferred, TOBB's
Naci Akin told us that the GOT had insisted on a public
sector entity, financed by the state budget and subject to
what is perceived to be cumbersome public procurement
legislation. Emed suggested that forming a promotion agency
is secondary in importance to the overall investment climate
improvement effort.


6. (SBU) Separately, the chairman of the Foreign Investors
Association (YASED),Saban Erdikler, said the shelving of
the long-proposed agency was "a real disappointment." He
said that the government had agreed to fund more investment
promotion activities through the Treasury's Foreign
Investment Directorate, but that this was far from a
substitute for the knowledge and dynamism a public-private
organization could bring, as Ireland's or the Czech
Republic's experience with such organizations demonstrated.
He said the government had agreed to review the Treasury's
investment promotion performance in one year, after which
the proposal for a new agency could be reopened.

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Comment
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7. (SBU) The GOT's investment climate improvement efforts
had a limited positive effect on the FDI inflow to Turkey in
2004, and its expectations for 2005 heavily rely on
obtaining a date for accession talks with the EU in
December. Our message has been that the Turkey should not
take for granted that a favorable decision from the EU
followed by an FDI boom, but should continue to demonstrate
its commitment to reform in the investment climate and the
judicial system, in order to attract long-term, employment-
generating investments.

Edelman