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Cablegate: 20032 Investment Climate Statement for Turkey

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 13 ANKARA 004387

SIPDIS


STATE FOR EB/IFD/OIA
TREASURY FOR OASIA
DEPT PLEASE PASS USTR
FAS FOR ITP/THORBURN
USDOC FOR ITA/MAC/DDEFALCO


E.O. 12958: N/A
TAGS: EINV KTDB EFIN TU
SUBJECT: 20032 INVESTMENT CLIMATE STATEMENT FOR TURKEY


Ref: STATE 12849488106


The following is the 20032 Investment Climate Statement
for Turkey:


1. OPENNESS TO FOREIGN INVESTMENT


Turkey has been pursuing liberal and outward-oriented
economic policies since the mid-1980s. The Government
of Turkey (GOT) views foreign direct investment as vital
to the country's economic development and prosperity.
Accordingly, on paper Turkey has one of the most liberal
legal investment regimes for FDI in of the OECD. With
the exception of some sectors (see below), areas open to
the Turkish private sector are generally open to
foreign participation and investment. However, aAll
companies - regardless of nationality of ownership -
face a number of obstacles: political and macroeconomic
uncertainties, excessive bureaucracy, weaknesses in the
judicial system, high tax rates, weaknesses in corporate
governance, arbitrary decisions taken at the municipal
level, and frequent, sometimes unclear changes in the
legal and regulatory environment. As a result, FDI
inflows, at well below one percent of GDP over the last
decade, have been far below that of more investor-
friendly emerging markets as well as of Turkey's
potential. The GOT's far-reaching program of economic
and political reform agreed with the World Bank and IMF,
and motivated also by multilateral agreements and EU
accession, should address many of these problems.


Regulations governing foreign investment are, in
general, transparent. A 1954 law on foreign investment
(Law No. 6224) was substantially modified and
liberalized by a 1995 Decree (Decree No. 95/6990) and
associated communiqu. Draft lLegislation approved
bysubmitted to Parliament in June 20032 (Law 4875 on
Direct Foreign Investment) would further liberalized the
foreign direct investment regime by: eliminating
screening of foreign investors in favor of a
notification system; providing national treatment in
acquisition of real estate to foreign-owned entities
registered under Turkish law; and abolishing the
specific minimum capital requirement for foreign
investments (general capital requirements for all
companies contained in the Turkish Commercial Code will
continue to apply). However, implementing regulations
for the new law are not yet in place.


(The text of regulations governing foreign investment
and incentives can be obtained on the Internet at:
www.treasury.gov.tr/english/ybsweb A summary of these
regulations can be found at:
www.dtm.gov.tr/english/doing/iginvest/invest/ htm and
www.igeme.org.tr/introeng.htm


The General Directorate of Foreign Investments of the
Undersecretariat of the Treasury screens foreign
investments. Treasury has refused permission for a
number of small investments because the activity
involved was deemed to constitute retail trade rather
than investment, or because of security concerns about
the individual investors. Screening mechanisms are
routine and non-discriminatory, and have not generally
impeded serious investment. However, because domestic
investment proposals are not routinely screened, foreign
investors are not accorded national treatment in the pre-
establishment phase.


Turkish law included several additionalspecifies several
other requirements for foreign investors, all of which
were scrapped in the new foreign investment law. These
included: Real or legal persons resident abroad must
invest a minimum of USD 50,000 investment requirement to
establish a corporation, become partners in an existing
company, or open a branch office; the requirement to .
Foreign investors wishing to increase their capital must
seek permission from Treasury if the capital increase
would change the participation ratio between the foreign
investor and any local partners; and. Turkish companies
wereare required to register with Treasury any
licensing, management, or franchising agreements
concluded with foreign persons. Foreign investors
owning ten percent or more of a company established in
Turkey must inform Treasury of their participation in
any directors' or shareholders' meetings. Note: The
foregoing requirements would be dropped by the draft
foreign investment law.


Foreign investors are subject to restrictions on
establishment in certain sectors. Establishment in
financial services, including banking and insurance, and
in the petroleum sector requires special permission from
the GOT. The equity participation ratio of foreign
shareholders is restricted to 20 percent in
broadcasting, and 49 percent in aviation, value-added
telecommunication services, and maritime transportation.
However, companies receive full national treatment once
they are established. Establishment in financial
services, including banking and insurance, and in the
petroleum sector requires special permission from the
GOT for both domestic and foreign investors.


The GOT privatizes State Economic Enterprises through
block sales, public offerings, or a combination of both.
Foreign investors generally receive national treatment
in privatization programs. Turkish law allows foreign
investors to acquire up to 45 percent of Turk Telecom,
the monopoly provider of voice and other
telecommunications services, with the Turkish government
retain a single "golden" (blocking) share, in the
company's upcoming privatization.


The Turkish Parliament also passed legislation in June
2003 which should streamline the company registration
process (see Section 8 - Transparency of the Regulatory
System). Another new law on work permits for foreign
citizens which will take effect later in 2003 should
give the Labor and Social Security Ministry additional
authority in this area (see Section 5 - Performance
Requirements/Incentives).


This report was prepared in July 2003. To find the text
of regulations governing foreign investment and
incentives, please consult the Internet at:
www.treasury.gov.tr/english/ybsweb. A summary of these
regulations can be found at:
www.dtm.gov.tr/english/doing/iginvest/invest/ htm and
www.igeme.org.tr/introeng.htm.)


2. CONVERSION AND TRANSFER POLICIES


Turkish law guarantees the free transfer of profits,
fees and royalties, and repatriation of capital. This
guarantee is reflected in Turkey's Bilateral Investment
Treaty with the United States, which mandates
unrestricted and prompt transfer in a freely usable
currency at a legal market clearing rate for all funds
related to an investment. There is no difficulty in
obtaining foreign exchange. There are no limitations on
the inflow or outflow of funds for remittances.


3. EXPROPRIATION AND COMPENSATION


Under the 1990 Bilateral Investment Treaty with the
United States (codifying existing Turkish law),
expropriation can only occur in accordance with
international law and due process. Expropriations must
be for public purpose and non-discriminatory.
Compensation must be reasonably prompt, adequate, and
effective. Under the Bilateral Investment Treaty, U.S.
investors have full access to the local court system and
the ability to take the host government directly to
third party international binding arbitration to settle
investment disputes. There is also a provision for
state-to-state dispute settlement.


As a practical matter, the GOT occasionally expropriates
private property for public works or for State
Enterprise industrial projects. The GOT agency
expropriating the property negotiates and proposes a
purchase price. If the owners of the property do not
agree with the proposed price, they can go to court to
challenge the expropriation or ask for more
compensation.


4. DISPUTE SETTLEMENT


There are no outstanding expropriation or
nationalization cases. However, there are several
investment disputes between U.S. companies and Turkish
government bodies, particularly in the energy and
tourism sectors.. In one case, local authorities have
shut down an American-owned hotel and restaurant by
denying operating permission and residency permits,
apparently without legal basis. Claimant has reportedly
initiated four lawsuits against the provincial governor
and government agencies, but these cases have not yet
been decided by the courts. In the energy sector, the
Government of Turkey has not implemented a number of
contracts with U.S. firms for build-operate-transfer
(BOT) and transfer-of-operating-rights (TOR) power
projects. One company filed an international
arbitration case against the GOT in 2002. A 2002
Constitutional Court ruling requires the GOT to either
proceed with the projects according to the signed
contracts, or cancel them and compensate the companies
accordingly. The GOT has indicated it will seek a
negotiated settlement with those companies, but as of
mid-June, the GOT had not contacted any of the companies
to pursue a settlement.


Turkey's legal system provides means for enforcing
property and contractual rights. The court system is
overburdened, however, which sometimes resultsing in
slow decisions and judges lacking sufficient time to
grasp complex issues. The judicial system is also
perceived by the public and by business to be
susceptible to external political and commercial
influence to some degree. Judgments of foreign courts
need to be reconsidered by local courts before they are
accepted and enforced. Turkey has written and
consistently applied commercial and bankruptcy laws.
Monetary judgements are usually made in local currency,
but there are provisions for incorporating exchange rate
differentials in claims.


Turkey is a signatory of the Washington Convention, and
a member of the International Center for the Settlement
of Investment Disputes (ICSID), also known as the
Washington Convention, and is a signatory of the New
York Convention of 1958 on the recognition and
enforcement of foreign arbitral awards. Turkey ratified
the Convention of the Multinational Investment Guarantee
Agency (MIGA) in 1987.


The Turkish government accepts binding international
arbitration of investment disputes between foreign
investors and the state; this principle is included in
the U.S.-Turkish Bilateral Investment Treaty (BIT). For
many years, there was an exception for "concessions"
involving private (primarily foreign) investment in
public services. In 1999, the Parliament passed
amendments to the constitution allowing foreign
companies access to international arbitration for
concessionary contracts. In 2000, the Turkish
government completed implementing legislation for
arbitration. In 2001, the Parliament approved a law
further expanding the scope of international arbitration
in Turkish contracts. In practice, however, Turkish
courts have on at least one occasion failed to uphold an
international arbitration ruling involving private
companies.


5. PERFORMANCE REQUIREMENTS/INCENTIVES


Turkey is a party to the WTO Agreement on Trade Related
Investment Measures (TRIMS).


Turkey provides a variety of investment incentives to
both domestic and foreign investors, though these were
scaled back in 2003. These include corporate tax
exemptions, with up to 40100 percent of specified
investment expenses - 200 percent for investments over
USD 250 million - deductible from future taxable profits
for investments about 5 billion TL (an incentive
certificate is not required for this exemption). In
addition, there are: ; exemptions from value-added taxes
for machinery and equipment purchased locally or
imported for the investment; duty-free import of
machinery and equipment (though not raw materials or
intermediate goods) to be used in the investment; and
soft loans for research and development. Investment
incentives are defined in a May 2003 Finance Ministry
decree. clearly specified in regulations (a government
decree issued March 25, 1998, and a related communiqu
dated May 6, 1998 Feb 18, 2001).


In order to take advantage of investment incentives, an
investor must obtain an "incentive certificate" from the
Treasury. The size of the incentive depends upon the
geographic location, sector, and value of the
investment. Investment incentives are greater in the
less-developed "priority" and "normal" areas or sectors,
and eligibility depends on a minimum value. According to
the current incentive regime, a minimum fixed investment
of TL200 billion. (approximately USD 120,000 in July
2002) is required for priority regions, TL 400 billion
(approximately USD 240,000 in July 2002) for normal
regions and 600 billion TL (approximately USD 360,000 in
July 2002) for developed regions. (For more
information on the Turkish incentive system, please
visit: www.investinturkey.gov.tr/incentives.htm).


The GOT has introduced several special investment
incentives for the eastern and southeastern regions.
For example, new investments made in these provinces
before the end of 2000 are exempt from corporate and
income taxes for five years, investors can receive
substantial discounts on electricity payments, and state-
owned banks will provide reduced rate loans for
industrial or employment producing investments.The GOT
is considering further tax and social insurance premium
reductions for businesses investing in provinces with
per capita income below USD 1,500.


There are no performance requirements imposed as a
condition for establishing, maintaining, or expanding an
investment. There are no requirements that investors
purchase from local sources or export a certain
percentage of output. However, domestic or foreign
investors who commit to realizing USD 10,000 of exports
upon completion of the investment may be exempt from
certain fees and taxes, such as those related to land
registration or company establishment. Investors'
access to foreign exchange has no relation to exports.


There are no requirements that nationals own shares in
foreign investments, that the shares of foreign equity
be reduced over time, or that the investor transfer
technology on certain terms.


There are no government imposed conditions on permission
to invest, including location in specific geographical
areas, specific percentage of local content - for goods
or services - or local equity, import substitution,
export requirements or targets, employment of host
country nationals, technology transfer, or local
financing.


The GOT does not request that investors disclose
proprietary information, other than publicly available
information, as part of the regulatory approval process.
Enterprises with foreign capital must send their
activity report, submitted to the general assembly of
shareholders, auditor's report, and balance sheets to
the Treasury's Foreign Investment Directorate every year
by May.


With the exceptions noted under "Openness to Foreign
Investment", Turkey grants all rights, incentives,
exemptions and privileges available to national capital
and business to foreign capital and business, on a MFN
basis. American and other foreign firms can participate
in government-financed and/or subsidized research and
development programs on a national treatment basis.


With one exception noted under "Dispute Settlement",
vVisa, residence, or work permit requirements have not
generally inhibited foreign investors. Expatriates may
be assigned as managers or technical staff. We are
aware of one case in the tourism sector in which denial
of a residence permit has hindered operations for a
foreign investor. A 2003 law (no. 4817) on work
authorizations for foreign nationals should give the
Ministry of Labor and Social Security more authority
over work permits. Implementing regulations are to be
issued later this year.


Turkey has a liberal foreign trade regime. There are no
discriminatory or preferential export or import policies
directly affecting foreign investors. Turkey harmonized
its export incentive regime with the European Union in
1995, prior to the start of the Customs Union. Turkey
currently offers a number of export incentives,
including credits through the Turkish Eximbank, energy
incentives, and research and development incentives.
Cash incentives for exporters have been eliminated.
Foreign investors can participate in these export
incentive programs on a national treatment basis. More
information on Turkey's trade regime can be found at
www.foreigntrade.gov.tr.


Military procurement generally requires an offset
provision in tender specifications when the estimated
value of the imported goods and/or services exceeds five
million dollars. Turkish procedures provide little
incentive for U.S. companies to satisfy offset
requirements (the obligation to invest or buy Turkish
exports as a condition of winning defense contracts) by
investing in non-defense industries.


6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT


Foreign and domestic private entities have the right to
freely establish and own business enterprises and engage
in all forms of remunerative activity. As noted above,
restrictions exist in the establishment of firms in
certain sectors where the share of foreign ownership is
limited to 20 percent in broadcasting and up to 49
percent in aviation, maritime transportation, and value-
added telecommunication services. Certain activities
are reserved for GOT owned enterprises. For example, by
law, Turk Telekom has a monopoly until December 31, 2003
on providing basic telephone services. Beyond these
areas, private entities may freely establish, acquire,
and dispose of interests in business enterprises, and
foreign participation is permitted up to 100 percent.


However, non-resident investors in companies with
foreign capital must seek permission from the Treasury
prior to selling part or all of their shares to real or
legal persons resident in Turkey. Treasury approval is
not required for sales to other foreigners or for sales
of securities or capital market instruments through a
financial intermediary. Note: This restriction would
be removed by the draft foreign investment law currently
before parliament.


Competitive equality is the standard applied to private
enterprises in competition with public enterprises with
respect to access to markets, credit, and other business
operations. Turkey is adopting the EU's competition
policy; a Competition Board was established in 1997 to
implement the 1994 competition (anti-monopoly) law.


7. PROTECTION OF PROPERTY RIGHTS


Secured interests in property, both chattel and real are
recognized and enforced. There is a recognized and
reliable system of recording such security interests.
For example, there is a land registry office where real
estate is registered. Turkey's legal system protects
and facilitates acquisition and disposal of property
rights, including land, buildings, and mortgages,
although some parties have complained that the courts
are slow in rendering decisions and that they are
susceptible to external influence (see "Dispute
Settlement").


In 1995, the Turkish Parliament approved new patent,
trademark and copyright laws in connection with
preparations for Turkey's customs union with the EU.
Turkey also acceded to a number of multilateral
intellectual property rights (IPR) conventions,
including the 1971 Paris Act of the Berne Copyright
Convention. In 2001, the Parliament enacted amendments
to the copyright law, which provide retroactive
protection, expand the list of protected items and
include deterrent penalties against piracy. These
amendments brought Turkey into compliance with the WTO
Agreement on Trade Related Aspects of Intellectual
Property Rights (TRIPS) in most areas. In recognition
of Turkey's progress in the IPR area, USTR removed
Turkey from its Special 301 Priority Watch List and
placed the country on its Watch List in 2002, where it
remains in 2003.1.


Although iIntellectual property holders have praised
Turkey's 2001new legislation as a significant
improvement in the legal regime, implementing
regulations in the area of broadcasting include an
arbitration provision which could lead to compulsory
licensing of musical and possibly other works. In the
software area, piracy rates have come down in recent
years following an anti-piracy campaign and a directive
to legalize software used in government bodies.
However, piracy rates for recorded music remain
persistently high. Trademark holders contend that there
is widespread and often sophisticated counterfeiting of
their marks in Turkey.


Turkey's 1995 patent law replaced a law originally
passed in 1879. New trademark, industrial design, and
geographic indicator laws were passed at the same time,
completely revamping Turkey's foundation for industrial
property protection. Turkey also adhered to a number of
international conventions in 1995, including the
Stockholm Act of the Paris Convention, the Patent
Cooperation Treaty, and the Strasbourg Agreement. The
Turkish Patent Institute (TPI) was established in 1994
as an independent legal entity (Law No. 4004, June 16,
1994) under the Ministry of Industry and Trade. TPI's
mission is to support technological development in
Turkey, establish and protect intellectual property
rights and provide public information on intellectual
property rights. Currently, TPI is understaffed to
affect countrywide protection.


In accordance with the 1995 patent law and Turkey's
agreement with the EU, patent protection for
pharmaceuticals began on January 1, 1999. Turkey has
been accepting patent applications since 1996 in
compliance with the TRIPS agreement "mailbox"
provisions. The patent law does not, however, contain
interim protection for pharmaceuticals in the R&D
"pipeline." Lack of data exclusivity protection, which
is required by the TRIPS agreement, is the key IPR
concern for research-based pharmaceuticals companies.


8. TRANSPARENCY OF THE REGULATORY SYSTEM


The GOT has adopted policies and laws, which in
principle should foster competition and transparency.
However, foreign companies in several sectors claim that
regulations are sometimes applied in a nontransparent
manner. In 2002, the GOT published a report on
transparency and good governance in Turkey's public
sector and established an interagency steering committee
to implement it. The plan calls for: greater public
access to information from the government and public
sector entities; financial disclosure by elected public
officials; and decentralization of most public services.


The government in principle follows competitive bidding
procedures. In 20032, Law 4734 on Public Procurement
entered into force. The Turkey's Parliament approved
amendments to the state procurement law law, which
established a board to oversee public tenders, and
lowered the minimum bidding threshold at which foreign
companies can participate in state tenders. However,
the law restricts preferences for local bidders to
Turkish citizens and legal entities established by them.
The public procurement law may be further amended in the
future.


In general, labor, health and safety laws and policies
do not distort or impede investment, although legal
restrictions on discharging employees may provide a
disincentive to labor-intensive activity in the formal
economy. Certain tax policies distort investment
decisions. High Turkish taxation of cola drinks
discourage investment in this sector. Generous tax
preferences for free zones provide a stimulus to
investment in these zones, perhaps at the expense of
investment elsewhere in Turkey. These preferences may
be trimmed under legislation currently under
considerationNew free zones law being drafted could
consider limiting tax-free status of these zones.


On paper, Turkey's foreign investment regime is liberal.
However, pParticularly beyond the establishment phase,
bureaucratic "red tape" has been remains a significant
barrier to companies, both foreign and domesticproblem.
Parliament passed Law 4884 in June 2003 which should
simplify company establishment procedures. The law
repeals the permit requirement from the Industry and
Commerce Ministry for certain firms, institutes a single
company registration form and enables individuals to
register their companies through local commercial
registry offices of the Turkish Union of Chambers and
Commodity Exchanges. The goal is to enable registration
to be completed in as little as one day and to encourage
electronic sharing of documents. Turkish government
agencies are expected to issue implementing regulations
needed to bring the law into force. The government is
also considering other imeasures mplementing an action
plan designed to streamline procedures for establishing
and operating a business in Turkey, based on
recommendations made in a World Bank-funded study on
administrative barriers to investment.


9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT


Turkey's financial system and policies facilitate the
free flow of financial resources. The private sector
has access to a variety of credit instruments. Legal,
regulatory and accounting systems are transparent and
consistent with international norms.


There is a regulatory system established to encourage
and facilitate portfolio investments, though it needs
improvements in transparency, accounting, and
enforcement provisions to bring it up to EU and US
standards. The Istanbul Stock Exchange (ISE), formed in
1986, is becoming one of the major players among
emerging markets. As of midend-2001, 3102 companies
were listed on the exchange. However, Turkey has yet to
develop other capital markets. The Capital Markets
Board is responsible for overseeing the activities of
capital markets, including activities of the ISE- quoted
companies, and securitiesy and investment houses.


Commercial credit in Turkey is allocated according to
market terms. However, because of high local borrowing
costs (real interest rates can exceed 25 percent), short
repayment periods, and limited liquidity condition
during the current economic crisis, both foreign and
local investors frequently seek credit from
international markets to finance their activities. As
of September July 20031, there were 512 commercial banks
(including 1714 foreign banks) and 16 14 development or
investment banks operating in Turkey. Total sectoral
assets were approximately USD 130.111.8 billion, or
about 75 percent of GNP, as of July September 20031
according to data from the Banking Regulation and
Supervision Board. of Turkey. The threefour state-owned
commercial banks and the top six privately capitalized
banks hold approximately 69 percent of total assets.


The parliament passed a new bank regulatory law in June
1999, which was amended in December 1999 and May 2001.
The law created an independent agency, the Banking and
Regulation and Supervision Agency (BRSA), headed by a
board whose seven members would be appointed by the
cabinet for six-year terms. The law's provisions also
toughen conditions for establishing new banks or
branches, set credit limits to protect bank solvency,
and strengthen regulatory and sanctioning powers,
including authorizing the board to merge weak banks with
stronger ones.


The BRSA was established in August 2000 to monitor and
supervise Turkey's banks under the new law. The Central
Bank transferred to it the State Deposit Insurance Fund.
Since 1997 the SDIF has taken over 21, banks,
includingtogether with the Imar Bankasi which was , a
bank owned by the Uzan Group, taken over on July 4,
2003., which had supervisory control of seven private
insolvent banks. In October 2000, the BRSA declared
another three banks insolvent and put them under the
Deposit Insurance Fund. During the November 2000
financial crisis, Demirbank, one of Turkey's ten largest
banks, became insolvent and was taken over by the
Deposit Insurance Fund. BRSA took over another two
banks in February 2001 and five more in July 2001,
bringing the total number of banks under its control to
19. The Government of Turkey has recapitalized the
private banks under its control, and is committed to
either selling or liquidating them by year-end 2002.
The process still continues for Pamukbank, Turkey's
sixth largest private bank. A Bbanking auditing and
recapitalization program in the first half of 2002
resulted in increased transparency, and better
accounting for non-performing loans, and the takeover of
Pamukbank, Turkey's sixth largest private bank. The
Bank Capital Restructuring program of the BRSA led to
more transparency in banks financial statements as a
result of application of athe 3-stage auditing process,
and application of international standards.


The BRSA is proceeding to issue new regulation limiting
the extent of connected lending (between a bank and
related corporate entities), modernizing banks'
accounting practices, and requiring frequent BRSA on-
site monitoring.


One of the most significant achievements of the reform
program has been to restructure the state banks, which
continue to control more than one-half of Turkish
banking assets. The government liquidated one state
bank (Emlak Bank), is trying to privatize another (Vakif
Bank), and has significantly downsized (Ziraat Bankasi
and Halkbank). Also, it largely eliminated state bank
duty losses - unreimbursed subsidized loans from these
banks - which had created an enormous financial hole
that helped bring about the most recent financial crisis


The Turkish private sector is dominated by a number of
large holding companies, whose upper management is
controlled by prominent families. Most large businesses
continue to float publicly only a minority portion of
company shares in order to limit outside interference in
company management. Hostile takeovers are unknown in
Turkey. There has been no attempt at a hostile takeover
by either international or domestic parties in recent
memory.


There are no laws or regulations that specifically
authorize private firms to adopt articles of
incorporation or association to limit or prohibit
foreign investment, participation, or control. Neither
is there any attempt by the private sector or government
to restrict foreign participation in industry standard-
setting consortia or organizations.


10. POLITICAL VIOLENCE


The general security situation throughout Turkey is
stable, but sporadic incidents involving terrorist
groups have occurred. The Turkish government is
committed to eliminating terrorist groups such as the
Kurdistan Workers' Party (PKK - now renamed Kadek) and
various leftist and fundamentalist groups. Although
these groups have not completely disbanded, their
operational capabilities have greatly diminished. These
groups have used terrorist activity to make political
statements, particularly in Istanbul and other urban
areas of Turkey. In 2000 and 2001, terrorists targeting
Turkish officials and various civilian facilities, such
as fast food restaurants, in Istanbul were responsible
for the deaths and injuries of several dozen people. In
2002 and 2003, civilian venues such as fast food
restaurants have been the targets of minor bomb attacks.
Operation Iraqi Freedom triggered largely peaceful
demonstrations in most major Turkish cities, but a
series of bombings also occurred in several of Turkey's
larger cities. The PKK retains a residual presence in
certain parts of southeastern Turkey, where two
provinces remain under a state-of-emergency, and several
are deemed "sensitive" by the GOT.


Although the Turkish government takes air safety very
seriously and maintains strict controls, particularly on
international flights, hijacking attempts have occurred
as recently as 2001, when a flight attendant was killed
during a hijacking by Chechen terrorists. There have
been two hostage-taking incidents at luxury hotels in
Istanbul in the past year, both staged by pro-Chechen
terrorists and resolved without casualties.


11. CORRUPTION


CORRUPTION IS PERCEIVED TO BE A MAJOR PROBLEM IN
TURKEY BY PRIVATE ENTERPRISE AND THE PUBLIC AT
LARGE. THE TURKISH GOVERNMENT CONDUCTED TWO
SIGNIFICANT ANTI-CORRUPTION OPERATIONS IN 2001,
ONE IN THE ENERGY MINISTRY AND THE OTHER IN THE
PUBLIC WORKS MINISTRY. SEVERAL INDIVIDUALS WERE
CHARGED WITH CORRUPTION AND WRONGDOING IN
GOVERNMENT CONTRACT TENDERS. THE OPERATIONS
RESULTED IN THE RESIGNATION OF BOTH MINISTERS AND
THE ARREST OF MANY HIGH-LEVEL OFFICIALS.
PARLIAMENT CONTINUES TO PROBE CORRUPTION IN THE
ENERGY MINISTRY AND OTHER GOVERNMENT BODIES.


Corruption appears to be most problematic in public
procurement, with frequent allegations that contracts
are awarded on the basis of personal and political
relationships of businesspersons and government
officials. The judicial system is also perceived to be
susceptible to external political and commercial
influence to some degree.


Turkish legislation outlaws bribery and some
prosecutions of government officials for corruption have
taken place, but enforcement is uneven.


Turkey has ratified the OECD antibribery convention, and
but has not yet passed the relevant implementing
legislation in January 2003 to which would explicitly
provide that bribes of foreign officials, as well as
domestic, are illegal and not tax deductible. Bribes
cannot be deducted from taxes as a business expense.


The Turkish government became a party to three
conventions of the Council of Europe in 2001: the
Strasbourg Convention on Laundering, Search, Seizure and
Confiscation of the Proceeds from Crime; the Criminal
Law on Corruption; and the Civil Law on Corruption. By
becoming a party to these conventions, the Turkish
government agreed to define corruption as a predicate
offense for money laundering and to address private
sector corruption, as well as public sector corruption,
as a crime. The Turkish government has signed the UN
Convention against Transnational Organized Crime in 2001
and has submitted a draft proposal to become a party to
the UN Convention Against Corruption.


U.S. firms have sometimes alleged that corruption, or at
a minimum nontransparent practices, have been a barrier
to direct foreign investment. American companies
operating in Turkey have complained about contributions
to the community solicited, with varying degrees of
pressure, by municipal or local authorities.


The Prime Ministry's Inspection BoardDepartment, which
advises a new Corruption Investigations Committee, is
responsible for investigating major corruption cases.
Nearly every state agency has its own inspector corps
responsible for investigating internal corruption. The
National Assembly can establish investigative
commissions to examine corruption allegations concerning
Cabinet Ministers for the Prime Minister; a majority
vote in the parliament is needed to send these cases to
the Ssupreme Ccourt for further action.


Transparency International has an affiliated NGO in
Istanbul.


12. BILATERAL INVESTMENT AGREEMENTS


Since 1985, Turkey has been negotiating and signing
agreements for the reciprocal promotion and protection
of investments. Turkey has signed or initiated
negotiations on bilateral investment treaties with 65 79
countries. Forty-three six of these agreements are now
in force, including with the United States, United
Kingdom, Germany, the Netherlands, Belgium Luxembourg,
Denmark, Austria, Sweden, Switzerland, Spain, Hungary,
Poland, Romania, Tunisia, Kuwait, Bangladesh, China,
Japan, South Korea, Indonesia, Croatia, Cuba, the Czech
Republic, Estonia, Russian Federation, Kazakhstan,
Georgia, Tajikistan, Ukraine, Uzbekistan, Belarus,
Macedonia, Pakistan, Turkmenistan, Moldova, Kyrgyzstan,
Albania, Bulgaria, Argentina, Bosnia, Malaysia, Egypt,
Mongolia, Greece and Israel.


Turkey's bilateral investment treaty with the United
States came into effect on May 18, 1990. A bilateral
tax treaty between the two countries took effect on
January 1, 1998. Turkey has signed avoidance of double
taxation agreements with 59 countries; 39 of these are
in force.


13. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS


The Overseas Private Investment Corporation (OPIC)
offers a full range of programs in Turkey, including
political risk insurance for U.S. investors, under its
bilateral agreement with Turkey. OPIC is also active in
financing private investment projects implemented by
U.S. investors in Turkey. OPIC-supported direct equity
funds, including the $USD 150 million Southeast Europe
Equity Fund (SEEF) can make direct equity investments in
private sector projects in Turkey. In 1987, Turkey
became a member of the Multinational Investment
Guarantee Agency (MIGA).


The U.S. Government annually purchases approximately USD
11.319 million of local currency. Embassy purchases are
made at prevailing market rates, which fluctuate in
accordance with Turkey's free floating exchange rate
regime.


14. LABOR


The Turkish labor force numbers around 20.24 million
persons, with nearly 35 percent employed in agriculture.
With an official unemployment rate of 12.31.8 percent in
the first quarter of 20032 and an average school-leaving
age of 14, Turkey has an abundance of unskilled and semi-
skilled labor. However, there is a shortage of
qualified workers for highly automated high-tech
industries. Individual high-tech firms, both local and
foreign-owned, have generally conducted their own
training programs for such job categories. Vocational
training schools for some commercial and industrial
skills exist in Turkey at the high school level.
Traditional apprenticeship programs, both formal and
informal, are also common. Turkey's labor force has a
reputation for being hardworking, productive and
dependable.


Labor-management relations have been generally good in
recent years. Employers are obliged by law to negotiate
in good faith with unions that have been certified as
bargaining agents. Strikes are usually of short
duration and almost always peaceful. Since 1980 Turkey
has faced criticism by the International Labor
Organization (ILO), particularly for shortcomings in
enforcement of ILO Convention 98 (right to organize and
collective bargaining). In May 2001 the Turkish
Government and public sector workers reached agreement
on collective agreements through 2002. In 2003,
Parliament approved The government is currently
considering a Job Security Bill, which will ensure
consultation between employers and labor groups over job
cuts and safety standards while easing some restrictions
on private employers' ability to lay off staff. The
constitutional right to strike is restricted. In 1995
and 2001 constitutional amendments were passed which
allow "civil servants" (defined broadly as all employees
of the central government ministries, including
teachers) to form trade unions and to engage in limited
collective bargaining, but prohibits them from striking.
Workers in the free zones are prohibited from striking
for the first 10 years following establishment of a
company.


15. FOREIGN TRADE ZONES/FREE PORTS


Since passage of the Turkish law on free zones in 1985,
210 zones have been established (Defne - can you check #
of zones). The zones are open to a wide range of
activity, including manufacturing, storage, packaging,
trading, banking, and insurance. Foreign products enter
and leave the free zones without payment of any customs
or duties. Income generated in the zones is exempt from
corporate and individual income taxation and from the
value-added tax, but firms are required to make social
security contributions for their employees.
Additionally, standardization regulations in Turkey do
not apply to the activities in the free zones, unless
the products are imported into Turkey. In contrast to
most other free zones, sales to the Turkish domestic
market are allowed.


GGoods and revenues transported from the zones into
Turkey are subject to all relevant import regulations.
There are no restrictions on foreign firms operations in
the free zones. Indeed, the operator of one of Turkey's
most successful free zones located in Izmir is an
American firm.


16. FOREIGN DIRECT INVESTMENT STATISTICS


(Aysem - Please update entire section
According to Turkish Treasury data, as of April
November 2002, 5,938 6,311 foreign firms invested and
are operating in Turkey. Total authorized foreign
capital since 1980 was USD 31.9 34.0 billion, and
aggregate actual inflows reached USD 15.2 15.7 billion.
In 20012, EU countries accounted for 65.9 63.6 percent
of authorized new foreign investment, OECD countries
accounted for 90.2 90.4 percent, and Islamic countries
for 3.1 2.6 percent. Over the past two decades, France
(17.7 16.6 percent) has been the top source of foreign
investment, followed by the Netherlands (13.6 15.7
percent), Germany (12.8 12.7 percent) and the U.S. (11.6
percent) (Note: these figures are based on the amount
of authorized investment, not on actual capital
inflows). Because of the absence of a bilateral tax
treaty until 1998, much U.S.-origin capital has been
invested in Turkey through third-country subsidiaries.
By unofficial estimates the U.S. is actually the largest
source of foreign investment in Turkey.


In 20012, about 48.2 58.0 percent of authorized foreign
investment were in services, 45.9 39.8 percent in
manufacturing, and about 6.0 2.2 percent in mining and
agriculture combined. The sub-sectors with the greatest
amount of authorized foreign investment include banking
(18.9 10.3 percent); communications (10.9 percent);
trade (8.1 11.4 percent); food, beverage and tobacco
processing (5.3 11.9 percent); and insurance (7.7
percent) motor vehicles (6.5 percent); and electronics
and electrical machinery (1.5 percent). Between 1980
and November March 2002, 43.0 45.0 percent of actual
capital inflows were invested in services, 54.2 52.0
percent in manufacturing, 1.8 2.0 percent in
agriculture, and 0.98 1.0 percent in mining. The
finance, automotive and telecommunications food
industry, trade and finance sectors received the
highest share of increased foreign direct investment
permits in 20012002. British HSBC Bank's purchase of
Demirbank shares, Japanese Toyota S.A.'s investment in
the automotive sector, and investments made by Turkcell
with its Finnish partner Sonera Koc Financial Services
and Kent Food Products Industry participation
investments were the major foreign direct investment
activities in 20012.


Total Foreign Direct 1999 2000 2001
2002(*) 2003(*)
Investment Stock
USD millions 10,185 11,892 15,180
18,500 15,749 18,000 (*)
Sources: General Directorate of Foreign Investment
(*) U.S. Embassy estimate


Cumulative Total Foreign Direct Investment Permits
By country of origin, NovemberMarch 2002


Country Value ($mil.) Share


France 5,545.6 5,665 16.6 17.4
Netherlands 4,331.6 5,336 15.7 13.6
Germany 4,129.1 4,329 12.7 12.9
United States 3,710.2 3,929 11.6 11.6
United Kingdom 2,497.9 2,669 7.9 7.8
Switzerland 2,125.8 2,261 6.7 6.7
Italy 1,941.3 1,883 5.5 6.1
Japan 1,745.4 1,819 5.4 5.5
Belgium 385.6 485 1.4 1.2
Saudi Arabia 318.1 321 1.0 1.0
Others 5,142.1 5,308 15.6 16.1
Total 31,872.7 33.995 100.0


Source: General Directorate of Foreign Investment,
Treasury.


Foreign Direct Investment by Year (million USD)


FDI permissions


Year Cumulative Annual Actual No. Firms
Permits Permits Inflow


To: 1988 3,050 1,172
1989 4,562 1,512 855 1,525
1990 6,423 1,861 1,005 1,856
1991 8,390 1,967 1,041 2,123
1992 10,210 1,820 1,242 2,330
1993 12,274 2,063 1,016 2,554
1994 13,751 1,478 830 2,830
1995 16,690 2,938 1,127 3,163
1996 20,527 3,837 964 3,582
1997 22,205 1,678 1,032 4,068
1998 22,629 1,646 976 4,533
1999 24,319 1,701 817 4,950
2000 27,379 3,060 1,707 5,328
2001 30,118 2,739 3,288 5,841
2002 (*) 31,872 523 N/A 5,938
33,995 2,243 569 6,311
Source: General Directorate of Foreign Investment,; (*)
As of March November 2002.


Actual FDI Inflow as Percentage of Turkish GDP


Year FDI flow FDI flow/GDP
(USD mil.) (Pct.)


Up to 1988 3,229
1989 855 0.80
1990 1,005 0.67
1991 1,041 0.69
1992 1,242 0.78
1993 1,016 0.56
1994 830 0.64
1995 1,127 0.66
1996 964 0.53
1997 1,032 0.54
1998 976 0.49
1999 817 0.41
2000 1,719 0.85
2001 3,288 2.21
2002 569 0.48


Source: General Directorate of Foreign Investment, and
the State Planning Organization.


Turkey's FDI by Country (As of December 20021)


Country Amount (USD millions) Share


Netherlands 1,916.51,868.2 30.9
40.2
United Kingdom 519.4 523.1 8.9
10.9
Germany 440.6 532.7 8.8
9.2
Luxembourg 236.9 245.8 4.1
5.0
Russia 181.4 163.7 2.7
3.8
Azerbaijan 156.6 741.8 12.3
3.3
Kazakhstan 170.6 431.5 7.1
3.6
United States 185.8 192.6 3.2
3.9
Romania 117.9 122.7 2.0
2.5
Others 839.7 1,218.6 20.1
17.6
4,765.4 6,040.8 100.0


Source: General Directorate of Banking and Foreign
Exchange, Treasury


Major foreign investors


Turkey's largest foreign investors include Telecom
Italia, Renault, Toyota, Fiat, Castrol, Enron Power,
Citibank, Pirelli Tire, Unilever, RJR Nabisco, Philip
Morris, United Defense, Honda, Hyundai, Bosch, Siemens,
DaimlerChrysler, Chase Manhattan, AEG, Bridgestone-
Firestone, Cargill, Novartis, Coca Cola, Colgate-
Palmolive, General Electric, General Motors-Opel, ITT,
Ford Motor Co., Lockheed Martin, Gillette, Goodyear,
Hilton International, Aventis, McDonald's, Nestle,
Mobil, Pepsi, Pfizer, Procter and Gamble, InterGen and
Shell.


Pearson

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