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Cablegate: 2003 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 03 ANKARA 004547

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: 2003 INVESTMENT CLIMATE STATEMENT FOR TURKEY -
PART I

Ref: STATE 128494


The following is the first of four cables transmitting
the 2003 Investment Climate Statement for Turkey:


1. OPENNESS TO FOREIGN INVESTMENT


The Government of Turkey (GOT) views foreign direct
investment as vital to the country's economic
development and prosperity. Accordingly, Turkey has one
of the most liberal legal regimes for FDI in 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, all
companies - regardless of nationality of ownership -
face a number of obstacles: high inflation, political
and macroeconomic uncertainties, excessive bureaucracy,
weaknesses in the judicial system, high and
inconsistently collected taxes, 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, if
fully and effectively implemented.


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. Legislation approved by
Parliament in June 2003 (Law 4875 on Direct Foreign
Investment) 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 June 2003 law also scrapped several additional
requirements, including a minimum USD 50,000 investment
requirement to establish a corporation, become partners
in an existing company, or open a branch office; the
requirement to seek permission from Treasury if the
capital increase would change the participation ratio
between the foreign investor and any local partners; and
Turkish companies were required to register with
Treasury any licensing, management, or franchising
agreements concluded with foreign persons.


Foreign investors are subject to restrictions on
establishment in certain sectors. 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).


Turkish law and regulation concerning investment climate
continues to evolve. We recommend checking with
appropriate Turkish government sources for current and
detailed information in this area. The following web
site provides the text of regulations governing foreign
investment and incentives:
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.


Turkey's legal system provides means for enforcing
property and contractual rights. The court system is
overburdened, however, which sometimes results 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), 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.
Pearson

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