High Corporate Interest in Investor Advisory

UNCLAS SECTION 01 OF 03 ANKARA 001728

SIPDIS

DEPT FOR EB/OIA, EB/CBA AND EUR/SE
USTR FOR LERRION
TREASURY FOR OASIA - MILLS AND ADKINS
USDOC/ITA/MAC/DAVID DEFALCO
DEPT PASS EXIM FOR MARGARET KOSTIC

SENSITIVE

E.O. 12958: N/A
TAGS: EINV BEXP EMIN CASC TU
SUBJECT: High Corporate Interest in Investor Advisory
Council; Update on Newmont Sale and Other Investment Issues

Ref: (A) Ankara 1652 (B) Ankara 320
(C) Ankara 254 (D) Ankara 649
(E) Ankara 1300

Summary
--------------


1. (U) Foreign multinationals are showing considerable
interest in Turkey's Investor Advisory Council, which will
meet for the second time in April. Although Turkey has
taken a number of concrete steps to improve the investment
climate, and has enjoyed an increasingly positive
macroeconomic situation, there have also been some recent
negative developments, such as Newmont's decision to sell
its gold mine at Ovacik, and a court decision annulling the
right of foreigners to acquire land. End Summary.

Lots of Corporate Interest in Investor Advisory Council
-------------- --------------


2. (U) The Treasury Undersecretariat and World Bank expect
all or almost all of the 19 companies which sent top
management to the first Investor Advisory Council (IAC)
meeting in March 2004 to do so again at the second meeting
in late April. The Bank's Country Manager for Turkey told
us on March 16 that almost all firms had confirmed
attendance (including Ford, Newmont, Citibank, Daimler-
Chrysler, Pirelli, Toyota and others),and that other
companies which had not participated in 2004 expressed
interest in joining the IAC. However, the Country Manager
said this would not be possible since expanding the group
would make it hard to preserve the format of a closed-door
brainstorming session between companies and the Prime
Minister.


3. (U) The first IAC in Istanbul was attended by the Prime
Minister, top management of 19 multinationals and four
Turkish business associations, and representatives of the
World Bank and IMF. The IAC identified 13 priority areas
for investment climate reform in Turkey ranging from
intellectual property to administrative streamlining to
infrastructure improvements. The GOT recently issued a
report on laws, regulations, and other measures taken to
address these issues, available at
http://www.hazine.gov.tr/ybs/ydk_rapor_eng.pd f.


4. (U) Some of the progress highlighted in the report
includes:

-- Administrative Streamlining: Deadlines for government
entities to process Environmental Impact Assessments (EIS)
and mining permits have been introduced. The GOT is working
on draft legislation to create a "one-stop-shop" for
municipal permits;

-- Judicial System: The Justice Ministry is upgrading
technology through the "National Judicial Network Project"
to expedite the work of the judiciary. The Ministry is also
working on a new commercial code taking into account EU
directives on corporate law;

-- Tax Reform: The GOT has cut corporate tax rates to 30
percent, launched an incentive system targeting investment
in less developed provinces, and provided a tax break for
research and development expenses. Turkey continues to
negotiate double taxation agreements. Turkey now has 57
such agreements, with seven more at the approval stage and
17 under negotiation;

-- Customs efficiency is supported by automation, with some
50 percent of declarations now submitted electronically;

-- Other: The report described measures underway to improve
infrastructure, education, stimulate small and medium-sized
enterprises (SMEs),provide access to land through
industrial and technology zones (septel),conduct investment
promotion activities, and strengthen intellectual property
rights protection (ref A). Further information on many of
these reforms is available in post's Investment Climate
Statement (refs B and C) and other reftels.


5. (SBU) One of Treasury's Deputy Directors General for
Foreign Investment commented to us March 17 that although
virtually all the measures described in the report were
underway before March 2004, the IAC may have accelerated
completion of some items, such as the one related to
Environmental Impact Statements. He suggested, however,
that implementation is the key, and that it would be
interesting to see whether the deadlines now imposed on the
GOT bureaucracy to take decisions on EIS and other
licenses/permits do in fact take place within required
timeframes.


6. (SBU) Turning to the formal reform process, the Treasury
official commented that the Coordination Council for the
Improvement of the Investment Environment (YOIKK) continues
to add value in several areas, such as devising ways to
modernize the company liquidation regime and new work on
SMEs. However, he opined that, unless State Minister
Babacan can set aside time to chair YOIKK meetings on a
monthly basis, reform will continue to proceed slowly.
Note: To our knowledge, YOIKK has met only twice over the
last year. End Note.

Other Investment-Related Developments
--------------


7. (U) Court Decision on Foreign Property Ownership: On
March 14, the Constitutional Court rendered a decision in a
case brought by the opposition CHP, which calls into
question a law allowing foreigners to buy real estate in
Turkey. The decision does not affect past sales to
foreigners, and will include a three month grace period
following publication in the State Gazette before it is
implemented. The Court has not yet published the rationale
for its decision, and thus it is not clear what legislative
amendments will be needed. Given that sale of real estate
has accounted for the bulk of Turkey's meager FDI in 2004,
the GOT is likely to propose a legislative fix once the
Court's rationale is clear.


8. (U) Limits on Foreign Media Ownership Eased: To help the
State Deposit Insurance Fund (SDIF) sell companies in
receivership, particularly former Uzan Group assets,
Parliament passed a law in March lifting some restrictions
of foreign ownership in Turkish broadcasters. Foreigners
will be able to buy up to 100 percent of national radio and
television broadcasters, but may not own a majority stake in
more than one quarter of all national broadcasters. Foreign
investment will not be allowed in regional or local
broadcasters. The law is now pending the President's
approval. According to press reports, the opposition CHP
may challenge the law in the courts.

9. (U) Newmont Sells Ovacik Mine: Newmont sold its Ovacik
gold mine near Bergama to a subsidiary of Koza Davetiye
A.S., a Turkish company, reportedly for USD 45 million. The
Ovacik mine, which had been one of the largest U.S.
investments in Turkey, was the object of numerous lawsuits
and protests related to environmental concerns during the
term of Newmont's ownership as well as under the management
of Eurogold, its previous owner. Newmont also experienced
numerous difficulties in permitting, which led to a shutdown
of the mine in August 2004. Commenting on the sale in an
interview with a Turkish energy journal, Newmont's General
Director Sabri Karahan implied that a Turkish mining company
is likely to be more successful than a foreign company in
obtaining permits in Turkey.


10. (SBU) Sugar Law Amendments: As reported ref E, the GOT
is considering legislation on Turkey's sugar and high
fructose corn syrup (HFCS) quota system which would provide
an amnesty to companies, including Ulker's Cola Turka,
rumored to have invested in unauthorized corn syrup
production. This could disadvantage Coca Cola and Pepsi,
whose applications to do the same were turned down, as well
as Cargill, which has operated within the quotas laid down
by the Sugar Law for years. The Ambassador raised the
problem in a recent letter to State Minister Babacan. Pepsi
has also written to the Prime Minister to raise these
concerns.


11. (SBU) Motorola Files for Arbitration: Motorola advised
us that it had filed for arbitration against the GOT with
the International Center for the Settlement of Investment
Disputes (ICSID) in October 2004 in the Telsim case.
Motorola contends that the GOT's claim to priority over
other Telsim creditors and its blockage of any Telsim
payments to Motorola amounts to expropriation of Motorola's
secured debt.


12. (U) Corruption: In recent publications, both the
Economist and Transparency International underlined the
continuing problem of corruption in Turkish economic life.
Post plans to report further on this issue septel.

Comment
--------------


13. (SBU) An increasingly stable economy with strong growth
likely to continue (despite the remaining macroeconomic
vulnerabilities),the prospect of EU membership following
the December 17 summit, and positive sentiment toward
emerging markets globally (at least until recently) are all
generating business interest in Turkey, as illustrated by
the fact that more companies are taking an interest in the
IAC. The fact that they are interested, despite the
underwhelming GOT follow-up on last year's IAC, suggests
that the desire to stay on the right side of the GOT may be
one of the main reasons for attending. As noted in the IAC
Progress Report and reftels, the GOT is taking some steps to
improve the investment climate, which may help explain a
rise in FDI inflows, albeit from a small base. However, the
GOT needs to move beyond producing legislation to ensuring
that investor-friendly measures are implemented on the
ground. Only in this way can Turkey achieve its long-run
potential in attracting large amounts of FDI and avoid more
Newmont-like sales by frustrated outside investors.
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