INVESTMENT ADVISORY COUNCIL PRAISES TURKEY'S

UNCLAS SECTION 01 OF 03 ISTANBUL 000692

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EINV ECON EFIN TU
SUBJECT: INVESTMENT ADVISORY COUNCIL PRAISES TURKEY'S
PROGRESS BUT ASKS FOR MORE

REF: ANKARA 1728

This message is sensitive but unclassified-- not for internet
distribution. This message was coordinated with Embassy
Ankara.


1. (SBU) Summary: Turkey's second annual Investment Advisory
Council Meeting on April 29 in Istanbul brought recognition
of the economic and political strides Turkey has made over
the past year, including most notably macroeconomic stability
and a date for beginning of accession negotiations with the
EU. Participants also noted that progress had been
registered on a number of the action items they identified
last year, but stressed the urgency of further action, given
the likelihood that the EU process will increase FDI flows to
Turkey. In essence arguing that Turkey's macroeconomic
progress should now be matched on the micro side, they urged
tax reform to create a simpler and more stable tax regime,
stronger corporate governance, continued reduction of
administrative barriers, progress on privatization, and legal
and social security reform, among others. With such actions,
they predicted, FDI inflows will grow even more quickly than
they have over the past year. As in 2004, the meeting
attracted extensive interest from major multinational
corporations, with a range of participants from European,
Japanese, and American companies. End Summary.


2. (SBU) Multinational Giants: The April 29 conference
brought together leading international CEOs, mostly from the
European subsidiaries of major multinationals, with GOT
economic decision-makers, including Prime Minister Erdogan,
State Minister Babacan and others. The nineteen CEO's
present at the conference represented firms from 11 countries
with a total turnover of nearly 900 billion USD. Most
already have extensive operations in Turkey. Sectors
represented included finance (BNP Paribas, Citigroup,
Unicredit),automotive (Daimler Chrysler, Fiat SpA, Ford,
Hyundai and Toyota),and metals (Corus and Iscar). Other
participants included Metro (retailing),Newmont Mining,
Unilever, Siemens, and Pirelli-Telecom Italia. In addition
to the foreign business invitees, President Rato of the IMF
and Vice President Vorkink of the World Bank also
participated. Attendance was rounded out by leading Turkish
NGOs, including the Foreign Investors' Association (YASED),
Union of Chambers and Commodity Exchanges of Turkey (TOBB),
Exporters' Assembly (TIM),and Turkish Industrialists' and
Businessmen's Association (TUSIAD). (Comment: Interestingly,
the IAC is dominated by "old economy" companies, particularly
automakers. The lack of "new economy" firms (software,
pharmaceuticals, biotechnology, etc.) suggests some
divergence between the corporate visions and priorities
reflected in the IAC and many of those which are the subject
of our bilateral commercial and economic advocacy, especially
on intellectual property rights issues. End Comment.)


3. (SBU) Familiar Messages: As reflected in the communique
issued at the end of the meeting, participants expressed high
praise for Turkey's achievements over the past year,
particularly in securing a date for the start of EU accession
negotiations and in ensuring macroeconomic stability. They
also noted progress in addressing some of the 13 priority
areas they had identified last year (reftel). In particular,
they cited government steps to reduce administrative barriers
to investment, to encourage research and development by
increasing incentives and government funding, to improve the
supply chain for small and medium enterprises (SME),to
invest in education and skill development, and not just to
legislate but to implement legislation to protect
intellectual property rights.


4. (SBU) Much to do: Notwithstanding these positive messages,
the council also cited the increased urgency of tackling a
broader range of issues, given the likelihood that increased
investment will accompany the EU accession process. They
reiterated a litany of issues that are also frequently cited
by local corporations, pointing especially to the need for
tax reform to create a simpler, more stable, and
EU-consistent tax regime, the need for improved corporate
governance, continued reduction of administrative barriers,
"decisive" continuation of privatization, legal reform,
energy sector liberalization, social security reform,
continued R and D investment, and increased investment
marketing efforts. They also urged the government not to use
the council as simply an annual action forcing event, but to
take advantage of its expertise on an "ongoing basis."


5. (SBU) YASED Reacts: Among local participants in the
meeting was the Foreign Investment Association (YASED),whose
chairman, Saban Erdikler, offered a mostly upbeat assessment.
In contrast to his past criticism of the government for its
slowness in acting on the inaugural council's
recommendations, he termed progress "satisfactory" and said
he would give the government a passing grade of 6/10. He
opined that foreign participants in the council would be even
more generous. (Note: Other sources have been less
charitable. One leading business paper failed the
government, giving it a lackluster 4.8/10. End Note.) While
conceding the need for extensive tax reform, he ascribed much
of Turkey's image problem among potential investors to faulty
information, arguing that while most perceive it to be more
difficult to establish a company here than elsewhere in the
OECD, actually it is easier. In a subsequent meeting, YASED
Secretary General Mustafa Alper explained Erdikler's scoring

SIPDIS
rationale, conceding that 6 was on the high end, but arguing
that a lower score would have shortchanged the government's
"good faith" efforts, even if it would have accurately
reflected continuing bureaucratic impediments to investment.


6. (U) Alper shared with Econoff YASED's own assessment of
progress on the inaugural council's recommendations, which
provides added detail to the second Council's own
recommendations. Among the items singled out are the
following, which were also highlighted (more positively) in a
government report before the conference (reftel):

-- Administrative streamlining: Progress achieved in
speeding up Environmental Impact Statements (EIS) and plans
for "one-stop-shop" for municipal permits, but thus far with
"limited" positive effect. Also stressed the need for
simplification of procedures on sectoral issues.

-- Judicial System: Noted that further steps are needed to
build on the "National Judiciary Network Project" and the new
commercial code.

-- Tax Reform: Again judged the positive direct effect of
improvements to have been limited, and argues that rates
remain too high.

-- Customs Efficiency: Noted improvements, but presses for
lower duties and simpler processes.

-- Land: Noted that many investors come up against difficulty
in securing land with appropriate permissions for their
planned projects. In addition, development plans are
continuously altered, harming predictability.

Alper also noted that YASED and other NGOs will collaborate
with the GOT in a follow-up mechanism designed to ensure that
the councils lead to sustained progress in addressing the
issues the companies identified and are not simply an annual
extravaganza.


7. (SBU) Insider's View: Local representatives of
participating companies generally expressed a positive view
of the council and its outcome. Turan Aydin, a Turkish
contact at Mitsui Corporation, whose European CEO Yasuo
Hayashi participated in the council, noted that they had gone
into the meeting with three principle complaints-- the
difficulty of securing work permits for foreign workers in
Turkey (Hayashi's admission he had illegal workers in his
company as a result sparked extensive headlines),the
weakness of corporate governance in Turkey, which has made it
difficult for Mitsui to judge potential partners, and the
Turkish environment's lack of administrative or regulatory
predictability. Tax concessions or other privileges are
often arbitrarily withdrawn after a short period, he noted,
so that Mitsui has difficulty forecasting the environment it
will face in the future. As a result, much more important
than the provision of incentives is some sort of guarantee
that what a company sees when it enters Turkey is what it
will continue to experience for a predictable period. As an
aside, Aydin noted that Hayashi had privately recommended to
Prime Minister Erdogan that the government revisit its
incentive schemes, perhaps by targeting particular areas for
specific sectors.


8. (SBU) Comment: As with most such meetings, the Council
offered a "feel good" opportunity for the government to tout
its accomplishments, while also permitting participants to
raise (privately) not just their general concerns but also
the specific issues that have hampered their operations. It
also marked the start of a concerted GOT public relations
offensive on the economy, aimed at showcasing Turkey's
newfound macroeconomic stability. By chance or design, the
IAC was followed in quick succession by Istanbul's hosting of
the annual Asian Development Bank (ADB) meeting, a visit by
German Chancellor Gerhard Schroeder and an enormous German
business delegation, Forum Istanbul (an international
gathering that assesses Turkey's prospects over the next 20
years) and the Turkish-Arab Economic Forum. With recent and
prospective foreign investments in telecoms and other areas,
Turkey is on track to garner as much as USD 8 billion in FDI
this year, as much as the last several years combined.


9. (SBU) Comment continued: As the Council showed, much work
remains to be accomplished in terms of structural reform, but
for the first time in a generation Turkey has achieved
macroeconomic conditions that have inspired foreign investors
to take a second look. The potential problem is that the PM
and others in the GOT will interpret high profile business
accolades for the GOT's success in advancing the EU accession
process and macroeconomic stability as an indication that
investment climate and other structural reforms are no longer
as urgent as they once were. End Comment.
ARNETT